BEA Q3 Earnings Report

Income Statement Summary

License revenue came in at 136.4 million, which was below consensus estimates of $140M but within management’s guidance of $130 to $146 million. Q3 license was up 30 basis points quarter over quarter and up 12.4% year over year. Total revenue was $347.6 million, up 2.4% quarterly and up 19.3% from a year ago. This met analyst expectations of $348.7 due to stronger than expected contribution from the services line.

Due to the ongoing investigation of potential options backdating, BEA was not able to release full quarterly financial numbers. Beyond the license and total revenue numbers, BEA did state that the “interest and other income” line was $9.5 million. During the call, management said BEA continues to improve the efficiency of their operations, implying improvement over last quarter’s 20.1%. Management also gave the pro forma tax rate of 33.5% and GAAP tax rate of 36%

If we assume a 20.6% operating margin, we arrive at operating income estimate of $71.6 million. To this we add the given “other income” line of $9.5 million which results in a pro forma estimate of pre-tax income of $81.2 million. Using the given pro forma tax rate of 33.5% we can determine the appropriate taxes of $27.2 million. Deducting this number from the $81.2 million, we find a pro forma estimated net income of $54 million. Divide this by the shares outstanding of 414.7 million and the pro forma estimated EPS comes to $0.13.

This estimated EPS is a penny below Wall Street’s estimate of $0.14 due to a higher than expected tax rate.

Balance Sheet Summary

BEA holds $1.406 billion in cash and short term investments, up from last quarter’s $1.368 billion. DSO’s came in at 71 days, up from last quarter’s 68.5 days.

Deferred revenues were down over $18 million, from last quarter’s $356 million to $378 million. This was attributed to the natural trend to see negative growth in deferred revenues from quarters one through three, and an increase in quarter four. The change in deferred was due to the timing of support contract renewals and the license component was negligible.

Cash Flow Summary

Cash flow from operations was up slightly from $50 million to $52 million quarter over quarter.

Guidance

Management guided investors to expect total revenues in the fourth quarter to be between $378 million and $392 million. License revenue was indicated to be 42%-45% of total revenue, implying a range of $159 million to $176 million. CFO Mark Dentinger pointed out that additional expenses will be incurred for the ongoing options investigation, somewhere around $2 million in the quarter. Furthermore, management indicated that there would be a one time expense of around $9 million paid out for employee bonuses.

The non GAAP tax rate was indicated to be 29.5%.

Stock Option investigation update

BEA initiated, under their own discretion, an internal investigation to ensure historical grants of stock options were not inappropriately backdated. No timeline for completing this action was given, although CEO Alfred Chuang indicated he hoped to have a breakthrough by the end of December.

Commentary

This was a disappointing quarter for the company, especially given the buzz around SOA and AquaLogic. While a $4 million license line miss isn’t egregious, the stock was down around 7% in the aftermarket, indicating investors had bid the stock up in anticipation of better news today.

What was buried in the call was a strange situation where a seven-digit deal was flipped from a license deal to a support deal in the 11^th hour by BEA’s auditors. Evidently a long time customer had a significant deal on the table with BEA and the auditors initially blessed the revenue as license revenue. After the deal was signed, the auditors reversed their opinion and categorized the revenue as support revenue which moved to the deferred line and not the license line.

Europe was also singled out as having a softer than expected quarter. The EMEA sales team is now headed by the former country head for Germany, a person who was responsible for turning that country around.

The tax rate was also higher than expected. Last quarter’s guidance indicated a 29% non GAAP tax rate, and this quarter produced a 33.5% rate.

The combination of the higher tax cost, the deal that flipped from license to support and the weakness in the license line produced an estimated EPS miss of one penny.

AquaLogic gained most of the good news spotlight, coming in at about 20% of license revenue. However, this is exactly the same way AquaLogic was characterized last quarter which implies AquaLogic grew the same rate as license overall – about 0.3%! Given the hype surrounding AquaLogic and SOA, we expected a higher percent contribution to license revenue.

This disappointing quarter raises some questions about BEA, who has been successful in portraying themselves as the pure-play leader in the SOA space. Does this signal execution issues at BEA or does it suggest a pause in SOA adoption?