BEA Systems--Hunt Report
Don Mosher and Judith Williams
BEA was a challenge. Distributed computing was alien territory to us. The enterprise app server market is an emergent one, and market share estimates vary wildly. Please poke holes--particularly on the competitive advantage BEA enjoys as we suspect that the market is on the verge of a major "disruption."
We're posting the Hunt in two parts: The first gives an overview and the pertinent financial data and ratios. The second deals with G&K characteristics.
BEA SYSTEMS (BEAS)--Part I
I. Overview
Mission: To enable the transformation of business into e-business with the most comprehensive, integrated, innovative and powerful e-business infrastructure software available.
Founding: Founded in 1995, BEA went public in April 1997. BEA’s management team all started at SUNW. The company’s genesis is not in a product, but in a marketing concept and a perceived need. Bill Coleman, founder and Air Force Academy grad with penchant for order, asked himself: “What’s the biggest problem I know?” The answer for him was a means for companies to run legacy applications and systems in today’s distributed computing model.
At SUNW, the motto was “The network is the computer.” Coleman, with his eye on the emergent model of distributed computing, asked: “If there are operating systems for desktop computers—why not for e-business?” Implicit in the question is Coleman’s view of BEA’s future: “BEA will be to e-commerce what Microsoft is to client/server….We will be the platform for the e-commerce buildout, just as Windows was the platform for the PC client/server buildout.” [Private memo to a RuleBreaker seminar] boards.fool.com
Product offerings:
WebLogicServer—an applications server using J2EE
e-Link—links sales automation, say, on a SEBL app to an Oracle database on the back end or to a Clarify in a call center
Enterprise Java Bean--EJB components assembled and customized to create applications in 7 common e-commerce functions (order-taking, customer management, shipping, etc.)
WebLogicCollaborate—Web architecture product
WebLogicIntegration—allows data to move freely among applications and systems
Evolution: BEA started as a technology company that produced “middleware,” which acts as a translator between the different types of hardware and software used in managing manufacturing, inventory, financial, and other mission-critical business operations. But BEA has now positioned itself as a platform company through some strategic acquisitions, and the definition of “middleware” has morphed with each expansion of BEA’s product line and mission.
Key Events:
Tuxedo (1996)—a transaction processor developed originally by Bell Labs but bought by Novell. “If you own the transactions,” Coleman says, “you own their hearts and minds…. In a client-server system, each client and each server has an operating system—often Windows for the client and Unix for the server.” Tuxedo’s “middleware” solution becomes, in effect, a platform software or operating system for a client-server environment.
PeopleSoft integrates and bundles BEA Tuxedo with all its future releases (1996)
Unisys becomes BEA reseller for BEA Tuxedo products and standardizes on BEA Tuxedo for its $1b Information Systems Group
Java licensed (March, 1998)
WebLogic, makers of Java-based Web-application server, acquired (September 1998)
Rebranding September 1999—BEA repositions itself as “THE e-commerce transaction” company and commits $20M to the effort
The Theory Center acquired (November 1999), with over 80 applications for personalization of services and e-commerce tasks like inventory and invoicing
Workflow Automation, software development company, acquired (March 2000)
The Object People acquired (April 2000)
Bauhaus Technologies, IT and e-commerce consulting company, acquired (October 2000)
Dell deal to preinstall WebLogic on many of its servers (May 2001)
SEBL announces it will build its e-business applications on top of WebLogic platform (June 2001)
# of employees (regular): FY’00, 1938; FY’01, 3005; Q1’02, 3274
This chronology testifies to the ability of BEA’s management to deliver. According to the Fortune 500 Index, BEA was the fastest company to achieve a $1b run rate (in Q4, ending 1/31/01), after 21 consecutive quarters of record revenues.
II. Market
Size: application server market—$2.2b in 2000 (IDC 7/9/01). Giga Information estimates growth to $9.0b within a few years. Taking a wider lens, 90% of all e-commerce in 1999 involved B2B (Dept. of Commerce). Gartner Group predicts BEA will remain the market leader in Web applications providers through 2004.
Share: Twice its nearest competitor’s and getting bigger
1999 (Giga): 32%--compared to 16% for IBM
2001 (Giga): 48%--compared to less than 20% for IBM and no others with more than 10%
Coleman, in the private memo for the Rule Breaker seminar, said BEA had captured 70% of the market, with IBM still having less than 20%. This figure is considerably less than IDC’s numbers for 1999 and 2000 (7/9/01), which give BEA 18% ($394m revs.) and IBM 15% ($337m revs.), with SUNW at 8% ($175m revs.) and Oracle at 7.9% ($172m revs.). The discrepancy in numbers lies in the figures that went into the revenue pot. IDC uses total revenues. IBM and Oracle deploy the platforms mainly to generate in-house service revenues while BEA outsources much of this work to build its value chain. PaulPhilip rebuttal and source:
boards.fool.com
biz.yahoo.com
IBM reported 53% YoY growth for WebSphere in its last quarter in 2000, whereas BEA reported 168% YoY for WLS’s quarter ending January 2001 and 200% YoY growth for 2000. Contrary to IDC’s conclusion, BEA is growing its share and revenues faster than IBM is.
Customers:
9,400 customers ranging from old stalwarts like General Electric to Amazon.com. Sales cycle is lengthy and products are mission-critical, involving complex decision making with respect to the implementation of a distributed or Web-based computing environment.
BEA, dealing in a mass market, but not a consumer mass market, is largely invisible. But transfer money at an ATM from one account to another and you’re likely using BEA. Ditto if you buy an airline ticket online. You’ll find BEA at E*Trade, DirecTV, Amazon, Schwab, Boeing, PeopleSoft, Kaiser Permanente, Nokia, Qwest, and United Airlines.
BEA has signed more than 1,500 customer and channel partnerships and alliances to promote, sell and service its products (10K). BEA sells direct and through these alliances.
Competitors:
ORCL: Oracle has the edge in caching and Akami deal is promising, but there is monumental catching up to do to gain significant share
IBM: WebSphere is Java-based, but it raises the Innovator’s Dilemma, cannibalizing or marginalizing legacy systems
MSFT: Microsoft’s .Net is the most dangerous potential competitor, but obviously has no present share or presence
III. Financials
Sales
BEA revenues come in various forms: They charge for setting up platforms, for servicing them, and sometimes (as with E*Trade) take a percentage of the customer’s profits. Approximately 40% of BEA revenues come from outside the Americas, and no single customer accounts for more than 10% of BEA’s business. [Q1’02 figures are for the quarter ending 4/30/01).
FY’00 464,410
Q1--85,575; Q2--103,212; Q3--126,454; Q4--149,169
FY’01 819,760
Q1--153,682; Q2--186,021; Q3—224,014; Q4--256,043
Q1’02--257,163
Margins (pro forma)
Steady improvement in trends, except for obvious reasons Q4’01 versus Q1’02. Improving margins have meant that profits are increasing at a faster pace than revenues.
Gross:
FY’00 77.7%
Q1 79.2%; Q2 78%; Q3 77.3%; Q4 76.9%
FY’01 74%
Q1 72%; Q2 72.1%; Q3 73.4%; Q4 77.0%
Q1’02 78.2%
Operating:
FY’00 11.1%
Q1 6.8%; Q2 8.5%; Q3 11.4%; Q4 15.0%
FY’01 16.3%
Q1 8.6%; Q2 13.8%; Q3 17.2%; Q4 21.8%
Q1’02 17.9%
Profit:
FY’00 8.1%
Q1 4.4%; Q2 5.8%; Q3 8.2%; Q4 11.5%
FY’01 13.3%
Q1 8.0%; Q2 11.8%; Q3 14.0%; Q4 17.1%
Q1’02 14.0%
EPS (pro forma)
FY’00 .11
Q1 .01; Q2 .02; Q3 .03; Q4 .05
FY’01 .25
Q1 .03; Q2 .05; Q3 .07; Q4 .10
Q1’02 .08
Sales growth rates
License fees have strong growth but not as strong as service fees until Q1’02 (but this may be an anomaly). FY’01 licenses fees grew by 63% whereas service fees went up 100%. Service, however, started lower (Q1’00, 29,669 versus 55, 906).
FY’00 61%
Q1 46%; Q2 53%; Q3 56%; Q4 82%
FY’01 77%
Q1 80%; Q2 80%; Q3 77%; Q4 72%
Q1’02 72%
Balance sheet
Cash and equivalents (under lease terms, includes about $330k of restricted cash for option to purchase San Jose property)
FY’00 803,060
FY’01 945,927
Q1’02 912,525
LT Debt (almost all in convertible notes with potential dilution effects. Amounts are substantial, but 10K does not address the issue as it is considered anti-dilutative for the current period)
FY’00 578,489
FY’01 596,432
Q1/02 568,539
% LT debt of capitalization
FY’00 56.5%
FY’01 46.9%
Cash flow analysis
BEA throws off a ton of cash and all the ratios/margins are going in the right direction. Revenues are, however, subject to seasonality, with Q4 being stronger than Q1.
Free Cash Flow (10K and 10Q)--cash from operations less acquisition of property and equipment
FY’00 77.4m
FY’01 190.0m
Q1’02 81.54m
Flow ratio (10K and 10Q)—[(current assets-total cash)/(current liabilities-short term debt)]
FY’00 .73
FY’01 .69
Q1’02 .57
Cash king margin (FCF/sales)
FY’00 16.7%
FY’01 23.2%
Q1’02 31.7%
Investment analysis
ROE (TTM): 9.09
ROIC—25.3%
WACC—13.9%
[beta, 2.02; tax rate, 30%; market return, 8%]
Price/sales (TTM): 14.85
Price/cash flow (TTM): 82.84
IV. Stock information
Market cap: 12,637.57
Shares outstanding: 394.185m
Float: 212.90m
% owned by insiders: 5.9% [need to verify]
% owned by institutions: 65.4% by approximately 550 institutions (5/31/2001)
52-week high: 89.50
52-week low: 20.19 |
