E-mail
del.icio.us
Technorati
DiggBad news for BEA Systems Inc. [BEAS] In disclosing its first quarterly financial numbers in more than a year, the middleware maker beat Wall Street forecasts in reporting net income of $56 million, a hefty 59% hike in earnings from the year-ago period, and revenues of $384.4 million, a respectable 11% increase. Are investors impressed? Nope. In early afternoon trade, the company's shares are down 1.5% to $16.44. Note the stock is priced a lot closer to the $17 a share, or $6.6 billion, Oracle Inc. [ORCL] recently offered for BEA than the $21 a share, or $8.2 billion, price the latter has set on itself.
BEA executives clearly were hoping the results would bolster their case of the higher valuation, and they pushed that line for all they're worth in the conference call. In response to an analyst question about how the company calculated that $21 valuation, BEA president and CEO Alfred Huang said that "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."
That's a head fake. And some analysts on the call weren't buying it. Bear, Stearns & Co. analyst John DiFucci, for example, zeroed in on BEA's cash flow as the fundamental measure of the company's worth, rather than the other usual valuation metrics used by the company: discounted cash flow, P/E multiples, growth rates, comparable mergers, synergy analysis. Here's an exchange between DiFucci and William Klein, vice president of business planning and development:
John DiFucci, Bear Stearns: "OK. And just one last question, I guess for Bill, since you sort of brought it up. Don't you think, when people are looking at valuation, they consider all those multiples you threw out there, but cash flow is really what is pre-eminent on most serious investors or even anyone looking to buy the stock or the company? So, we've actually had all that already. So is that something that you believe, based on cash flow, is that where that $21 came from? I guess that's the question."
Bill Klein: "Well, like I said, cash flow is one of the models we used. In addition to that, we looked at both forward and trailing P/E multiples, growth rates and. ..."
DiFucci: "But don't you think those trailing, those P/E multiples are really just used as a proxy for cash flow and then that's a sort of thing that people are going to focus on?"
Klein: "Well, I think the point is the earnings that we were unable to report were significantly higher than what was publicly available in the market."
DiFucci: "But you were able to report or at least give us the operating cash flow number."
Klein: "Right, but at the same time, we reported earnings that were over 500 basis points higher than what the street consensus numbers were. So I think that did have a pretty significant impact in a lot of people's models."
DiFucci: "OK. Thanks a lot."
Indeed. As of July 31, BEA had $1.2 billion in total cash, cash equivalents and short- and long-term investments, roughly the same it had at the end of January. It's not burning the stuff, in other words, but it's not minting it, either.
Meanwhile, don't expect a quick end to the fight with Oracle. In the call BEA chief financial officer Mark Dentinger suggested the company will continue for the next several months to shell out for financial and legal advice in connection with the unsolicited offer and and to keep BEA investor Carl Icahn at bay.
"The advisory fees are an interesting area, because we're in a particular, a unique situation of having both a hostile bid for the company and a shareholder activism, a highly profiled shareholder activism circumstances," Dentinger said. "So we are absorbing these, and we don't believe that both of these circumstances can continue for the long run. So, as I indicated, I do believe that they will probably continue into early next year at least, but while they are here we believe it's not part of our permanent cost structure."
The siege continues. - Alain Sherter
See Nov. 15 press release from BEA Systems
See conference call transcript from Seeking Alpha
See Nov. 16 post from Tech Trader Daily
