Thursday, November 15, 2007

BEA Systems or BEA Consulting?

Today, BEA announced their 3rd quarter results:
BEA reported third quarter total revenues of $384.4 million, up 11% from last year's third quarter. BEA reported third quarter license fees of $134.8 million, down 1% from a year ago, and services revenue of $249.6 million, up 18% from a year ago.

249 million in service revenue represents approximately 65% of the overall revenue, well beyond the norm. As if BEA wasn't facing enough challenges, they'll now have to answer the very difficult question of valuation. Should BEA be valued as a product company, a services company or a hybrid.

According to Google Finance, their current Price-to-Earnings is 46.31. This is out of whack relative to competition (ORCL, TIBX, etc.) and is even farther away from the valuations of service companies like Accenture, who P/E is 18.6.

Assume for a moment that speculators weren't holding up the BEA stock awaiting an ORCL acquisition; what would happen? What if... Wall Street called BEA on their revenue split and began to value them as a service company? If you were to use consulting valuation multipliers, you might see BEAS price drop to $7 per share, immediately erasing several billion dollars of market cap.

BEA is in a tough position, they need to show year-over-year growth and strong earnings. They were able to accomplish this by creatively finding revenue. This strategy may pay off in the short term, but this quarter over quarter pattern is looking less like a stop-gap measure and more like a business model.

Looking back 10 quarters...


"If it walks like a duck and quacks like a duck..."


Disclaimer - Do not make investments based on this information.

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