02 February 2007


BEA Systems develops integrated infrastructure software for large enterprises. Its products adhere to the promising service-oriented architecture (SOA) design methodology. BEA competes against powerhouses such as IBM and Oracle.

The company is currently facing two significant challenges. The first is that BEA is one of the companies alleged to have granted stock options improperly. As a result, BEA is conducting an internal review of how options were issued and dated. The BEA situation appears to be particularly serious because the company has chosen not to submit 10-Q reports while the probe is underway.

In general, a 10-Q must be submitted to the SEC within 35 days of the quarter's end, and failure to do so makes a company ineligible for stock exchange listing. Yet, BEAS still hasn't filed 10-Q reports for the quarters that ended 31 July and 31 October 2006. NASDAQ has warned the company twice that its share could be delisted from the national market system. The current agreement is that NASDAQ will allow the company to keep its listing on the condition that all financial statements and restatements, if needed, are submitted by 28 February 2007.

The other significant challenge facing BEA is operational. The preliminary (and incomplete) financial data released for the quarter ending 31 October 2006 led industry observers to fear that the company is losing market share to its well-heeled competitors.

The technology bubble that began in the late 1990's inflated BEAS's stock price to almost $90 per share in October 2000. When bubble burst, the price fell precipitously. By August 2002, the price was down to $5. The stock price rallied back to $15 in 2003, before collapsing again to $6 in 2004. By the fall of 2006, the stock price was $16 until the aforementioned market share concerns brought the price back down to about $12.

Our evaluation of BEA is obviously hampered by the lack of audited financial statements for recent periods and the distinct possibility that previously released financial statements will be materially revised. Although the historical financial statements cannot be considered reliable, they still still tell a story if we turn the clock back to 30 April 2006 -- the end-date of the last quarter for which a 10-Q was submitted. As shown below, our Overall gauge for BEA registered scores in the 60's from July 2004 through April 2005, signaling a recovery, but the score dropped to an discouraging 29 after the April 2006 quarter.

The individual gauge scores on 30 April 2006 were:

Cash Management: 11/25
Growth: 17/25 (strong)
Profitability: 12/25
Value: 0/25 (!)

Overall: 29/100

Cash Management: The Current Ratio was a reasonable 1.8, and the Long-Term Debt/Equity ratio was a comfortable 19 percent. Accounts Receivables were 71 days of Revenue and had been decreasing at a modest rate. Inventory is not a material measure for BEAS and has been excluded from the the scoring.

Growth: Revenue growth was 13 percent year over year, and CFO growth was a healthy 18 percent. However, Net Income growth was a tepid 3 percent. Revenue/Assets was 0.53, after several years under 0.50.

Profitability: ROIC was 18 percent and had moved up from 12 percent a couple of years earlier. Free Cash Flow to Equity was 24 percent, a level at which it had stabilized after earlier dropping into the teens. Operating Expenses had moved up to 84 percent of Revenue, hurt mostly by increasing R&D costs. The Accrual Ratio had moved down nicely to -6 percent, reflecting the strong Cash Flow from Operations.

Value: This gauge read a flat zero at the end of April 2006, when the stock price was $13.25, whereas the Value score had been a terrific 24 points a mere year earlier. The stock was up almost 100 percent over that period, which put great pressure on the valuation metrics. The P/E ratio was 37, more than double the P/E of the S&P 500 at that time. With Net Income up a mere 3 percent, the PEG ratio was a depressing 12. Price/Sales was up to 4.3

No comments:

Post a Comment