BEA faces rough crowd

BEA Systems reported better than expected third quarter results, but all the company got was skepticism about the way it came up with its earnings tally, hackles about its software license growth and questions on why the company thinks it is worth $21 a share.

Simply put, BEA CEO Alfred Chuang is like the stand-up comic who is bombing in front of a hostile audience. Not every analyst is hostile, but skepticism is the rule not the exception. Usually when a company reports good earnings results when expectations are low there's a little love out there. It looks like Wall Street generally believes that:

• BEA isn't worth $21;
• It should have at least engaged Oracle in takeover talks;
• BEA's prospects aren't so hot.

First, the numbers. BEA reported third quarter revenue of $384.4 million, up 11 percent from a year ago. The company had earnings under generally accepted accounting principles (GAAP) of $56 milion, or 13 cents a share. Excluding items on the company's non-GAAP earnings calculation, BEA reported net income of $78.9 million, or 19 cents a share. Analysts were looking for earnings of 13 cents a share, according to Thomson Financial.

And the company even said it will report fourth quarter revenue between $420 million to $434 million. That's better than expectations too. Meanwhile, the company refiled its financial statements and put to rest a stock option probe.

What's not to love? Basically everything. And it's more than just Larry Ellison throwing the barbs. A look at the issues:

Third quarter licensing revenue was down 1 percent from a year ago. That growth drew a lot of comments among the Wall Street set. "We doubt if investors will continue to accord BEA a premium multiple unless it puts up higher license growth," said Merrill Lynch analyst Kash Rangan.

BEA's non-standard non GAAP calculation. When BEA released its non-GAAP results it excluded the kitchen sink. Citigroup analyst John Reilly Walsh said BEA's quarter was "solid but not as good as management pitched. Walsh wrote:

EPS was $0.14 based on standard pro forma adjustments (i.e. stock comp, etc); $0.18 per our est ($7M severance excl) and $0.19 per BEAS.

Other analysts have referred to BEA's result as "non standard non GAAP" results. There's an acronym waiting to happen.

And then there's the $21 a share question. On the earnings conference call, Katherine Egbert, an analyst at Jeffries, asked Chuang how he arrived at the $21 a share figure to value the company.

Chuang's answer:

Well, I think several things. One, now that we're up to date on all of our filings, I think all of our investors, also our financial analysts now, can come up and be able to see the significant improvement in profitability and see how all this will be able to translate into valuation. We did all the valuation very carefully alongside with our advisors, and looking at all the parameters.

The answer from Bill Klein, vice president of business planning and development:

And basically, we looked at the classical kinds of valuation techniques, trailing forward P/E multiples, comparable deals, DCF, synergy analysis. So, it's pretty typical, standard stuff and the numbers kind of triangulated all in a pretty common point.

The outlier is probably the synergy analysis, which I'm sure you seen and have read, supports numbers in the high 20's (BEA's analysis was specific to Oracle).

Do you buy it? Actually, let me rephrase that question since we're not buying BEA. Does Oracle buy it?