Beginning to revisit BEA.

We haven’t cov­ered BEA for many years but did fol­low them pretty closely dur­ing their ascen­dancy back in the 1999’s. Iron­i­cally their very suc­cess made them some­what unin­ter­est­ing to investors for a few years because they reached $1B in rev­enues so fast they were left with few mean­ing­ful growth prospects and had to work hard to repli­cate the same level of suc­cess each year.

Recently we just started to become a bit more inter­ested in the com­pany and started to look at them more closely again. They com­pany just reported and the results dis­ap­pointed most of the ana­lysts who have been rec­om­mend­ing the stock the last few quarters.

We’ve been out of the loop for some time so all the minu­tiae are lost on us. From our point of view the results and near-term guid­ance was pretty much inline with what we would have expected. BEA is a fairly large and com­pli­cated com­pany with enough mov­ing parts to defy easy analy­sis. A few mil­lion dol­lars either way should not make much of a difference.

Dur­ing their call man­age­ment talked about SOA mov­ing out of the exper­i­men­tal phase and into main­stream enter­prise deploy­ments. We agree that SOA is au courant but dis­agree that this is a recent fact. We would observe that main­stream mar­ket adop­tion started a few quar­ters ago in our view and has prob­a­bly been dri­ving BEA results since then.

Claims about the busi­ness of SOA being dri­ven by the busi­ness rather than I/T seem doubt­ful to us. BEA has fielded a BPM prod­uct that might be touch­ing there but we have yet to look at it in detail.

Ana­lysts are out today with down­grades cit­ing a range of rea­sons includ­ing the point that BEA is los­ing mar­ket share to Ora­cle and IBM. We can’t refute the claim but we don’t believe it. BEA does have a chal­lenge in that cus­tomers have lim­ited resources and Ora­cle has forced many of them to allo­cate a sig­nif­i­cant por­tion to nav­i­gat­ing the Fusion path to reach some con­verged appli­ca­tion archi­tec­ture. IBM, Ora­cle and BEA have all failed to attract new gen­er­a­tions Web 2.0 tech­nol­ogy devel­op­ers into their fold.

They com­pany spent quite a bit of time talk­ing about their new gen­er­a­tion prod­ucts like SOA360 and Workspace360. They are also focused on cre­at­ing fine-grained com­po­nents of their func­tional prod­ucts that sounds sen­si­ble. The idea of uni­fy­ing endeav­ors of devel­op­ment in Eclipse, busi­ness process man­age­ment and appli­ca­tion man­age­ment with Open­View is inter­est­ing but hard to visu­al­ize with­out more con­crete infor­ma­tion and code.

Man­age­ment touted new tech­nol­ogy (Guardian) that sounds very sim­i­lar to the IBM auto­nomic com­put­ing ini­tia­tive which as been around for quite some time with lim­ited impact.

One emerg­ing thing that is inter­est­ing is the increas­ing SOA and related soft­ware con­tent in the net­work lay­ers. BEA talked about some deals and has been work­ing in the com­mu­ni­ca­tion area for some time. Their micro ser­vice archi­tec­ture is said to allow very small imple­men­ta­tions of SOA to be dri­ven all the way to the edges of intel­li­gent networks.

So what’s for real in this net­work infra­struc­ture area? Does it help explain why Ora­cle bought Por­tal Soft­ware? We know SIP is becom­ing real and cre­at­ing new dis­rup­tive appli­ca­tions. Plenty of work is going on to drive 3G and IPTV appli­ca­tion networks.

We believe soft­ware infra­struc­ture that reaches out from behind a vir­tu­al­ized infra­struc­ture behind the fire­wall to deliver service-enabled appli­ca­tions out to devices at the edge of the net­work will be a very promis­ing place to be. We just can’t yet say that what BEA doing is going to really get them there.

So what is BEA worth? We took the time to punch some rough num­bers into our long-term val­u­a­tion model and came out to about where the stock is trad­ing now, $14. We will pub­lish the model later on but our assump­tions included a 15% long-term growth rate, oper­at­ing mar­gins of 12–15%, a 30x earn­ings mul­ti­ple and a 15% dis­count rate.

In con­clu­sion we can see peo­ple got ahead of them­selves on BEA, which seems like a com­pany that only just now is hint­ing at some inter­est­ing things. Cor­po­rate por­tals and the Plumtree acqui­si­tion cer­tainly did noth­ing for us. We have yet to delve into many of the newer prod­ucts but our nature is skep­ti­cal. For us this is some­thing that could be an inter­est­ing sit­u­a­tion a few months from now depend­ing on what the com­pany does.

So we would advise peo­ple to focus on other things now and stay tuned for more informa-tion on BEA as we fig­ure it out. Our best bet on the M&A side is that HP buys the com­pany and puts Alfred in charge of their over­all soft­ware busi­ness much as IBM has done with Steve Mills. (HP are you listening?)

Tagged as: BEA