Malcolm,
In regard to BEAS valuation and profit margins. One, at current estimates BEAS's consensus current P/E for 2001 is 73. But BEAS also has over $200 million in deferred revenues on the books. These are revenues that are collected, the product sold, that are in the bag, but not yet counted as revenue or income. So that 73 comes down maybe 10 to 20 points if these deferred revenues were immediately recognized. Compare that to a Broadcom who recognizes everything, little to no deferred revenues. Not quite an apples to apples comparison until you adjust for the accounting methods.
Second, as for the ROE, I never look at ROE. What I look at, as does Paul Johnson, and he did a seminal article back in 1994 on the networking arena and the ROIC of certain companies, with CSCO at the very top of the chain, identified as the gorilla, is looks at ROIC. If you look at BEAS' ROIC you get a very high number. You might also want to look at BEAS' free cash flow which is also enormous. Companies are valued on free cash flow, not operational cash flow and not on earnings. As a quick example compare AOL's free cash flow to Time Warner. When you do this, you find, that basically, AOL should hold a higher valuation than Time Warner.
In any event, I'm not saying that is cheap under traditional metrics, but it does look reasonable under gorilla metrics and given BEAS' potential which is years on end of 50%+ growth. But as I've stated on the Fool, BEAS seems fairly valued right now assumign IT IS A GORILLA. If not a gorilla I would not buy at this price. On a valuation basis, Seibel right now is about the cheapest gorilla I have ever seen. So I'd go with Seibel on a valuation basis. I just get more enjoyment out of BEAS and think BEAS has the potential to eventually be larger. But just my opinion as Seibel is an awesome company as well.
In regard to BEAS' margins, I believe they are much higher than 2%. Operating margin was something like 20% this quarter and rising every quarter. The eventual stated goal for BEAS is 40% operating margins. I don't know if they will achieve this but they certainly have the potential to do so.
In regard to "are there other guys who program in Java" this is maybe the most misunderstood point. The answer is yes, millions. But it doesn't matter one iota. Let me explain:
For Microsoft you might as wel ask But arn't there other guys who program in assembler, or C, or machine language?" YES, millions of people. Even school children (I taught myself assembler in high school, in the early 80s). DOS was programmed in Assembler. Everything MSFT did was programmed in Assembler. The Apple OS was programmed in assembler. Assembler, like JAVA, are just computer languages. Assembler was not proprietary to MSFT and JAVA, or J2EE (the Java variety being used by BEAS) is not proprietary to BEAS. In fact IBM, Vignette, ARTG, BVSN, all utilize the same J2EE in their software packages. IT IS JUST A PROGRAMMING LANGUAGE. If J2EE is proprietary to anyone, it is to Sun.
What makes a software gorilla is what is programmed on that language and how it is marketed to create a value chain and high switching costs. J2EE is popular because of its universiality and interoperability. But what BEAS does with it is what makes it look like a gorilla. It builds proprietary modules on top of J2EE this modules are used to integrate a corporations entire software infrastructure.
In this case, once you get a BEAS application server up and running, and you start using the proprietary modules to link your back office to your front office and to all your legacy applications you gain some very high switching costs. The costs increase as BEAS has dominant marketshare and a dominant number of ISV (independent software vendors) who are not only writing software to work on top of the BEAS platform and modules but some of them are actually writing new modules that work on top of the BEAS modules which enable the applications.
I have not found any market share figures yet besides BEAS 55%, IBM 33% (which btw, the company that did this study also predicted last year, that by this time IBM and BEAS would each have 25% market share. Seems they were a tad off), but as an example, Charles Schwab, a staunch IBM client chose BEAS, VISA, who was formally running on an IBM platform for 30 years is building their new all web infrastructure on BEAS. But I need to look closer to see which verticals BEAS dominates and which IBM dominates. But the verticals that BEAS dominates, BEAS really dominates, and these include most of the fortune 10,000 (not 1000, 10,000).
Well, I'm obviously excited about the gorillapects of BEAS here. I feel almost like it is 1988 or so again, and with my gorilla training I can pick out MSFT. The world is never that predictable and I could indeed be wrong. But in doing your DD keep this point in mind J2EE (Java) is a programming language. It is not proprietary (except may to Sun, and Sun doesn't make its money off of it). It is no different from assembler, COBAL, C+, BASIC, etc. It is what is built on top of it that makes the product and how it is marketed and with what switching costs and value chain that make a gorilla.
I think what you will find is for example, if you go to a job web-site and do a search for J2EE programmers, what you will find is 60-70% of the positions are for BEAS' platform. What you will also find is BEAS far and away leads in ISVs and far and away leads in market share. The one quality that gave BEAS this headstart is its scaleability, a feature which I believe is patented and unmatched. This led to the first mover advantage, the gaining of critical marketshare, and the compounded of the value chain and network effect.
If you believe that there are costs involved with a software vendor both supporting BEAS and some other application server, just as there were for a software company supporting both Windows and the MAC OS, then you have to conclude the industry will need to standardize on one dominant system. If so that system will be BEAS' product. From here BEAS has enormous opportunity to expand its offerings in the future.
But this is my initial take on BEAS. Not a Hunt report per se. I just don't have the time at the moment to do the necessary research (job hunt, pressure to churn out another article for pay, and simply spend more time with the wife and dog. But I'll try to get one out within a week or so).
Tinker |
