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Analysts: BEA Systems shares to tread water

Wall Street opinions are mixed as the software maker cuts its estimates for the second half of the year and says spending on information technology will be weaker than expected.

Tech Industry
Wall Street analysts were mixed on BEA Systems Wednesday after the software maker cut its estimates for the second half of the year and said spending on information technology would be weaker than expected.

Executives for the San Jose, Calif., company said they now expect revenue for the third quarter to be flat from the second quarter, at around $260 million to $275 million. Fourth-quarter revenue will grow only by a low- to mid-single digit percentage sequentially from the third.

Based on those revenue levels, BEA should report pro forma net income per share for the fiscal year of between 39 cents and 41 cents. Analysts had been expecting the company to report revenue of $312 million for the third quarter and $349 million for the fourth, and to post earnings of 41 cents per share for the year, according to First Call.

Analysts, who have been trimming their estimates leading up to the BEA Systems earnings report, said they were expecting bad news and the company's outlook wasn't as bad as they expected.

Shares closed at $17.04, the stock's lowest closing price since November 1999. They hit a new 52-week low of $17 earlier in the day.

Most analysts reiterated their respective ratings, but trimmed their estimates, noting that BEA shares are likely to tread water for a while. "While we view the company very favorably in the long-term, we expect current adverse economic conditions and investor caution to prevent the stock price from appreciating significantly," said George J. Godfrey, an analyst at ABN AMRO.

BEA's software allows its customers to connect various software programs. It also links sales applications to back-end software like company databases. It leads its market right now, but is facing increasing competition from companies like IBM, Hewlett-Packard, Sun Microsystems and Oracle at a time when companies are cutting back across the board on technology spending.

For the second quarter, BEA reported net income of $23.96 million, or 6 cents per share, compared to $2.27 million, or 1 cent per share in the year-ago quarter. Excluding acquisition-related charges, employer payroll taxes on stock options and net gains on investments, the company reported a profit of $58.5 million, or 10 cents per share, compared to $25.7 million, or 5 cents per share, in the second quarter of 2000.

Revenue for the quarter was $267.8 million, in line with Wall Street expectations. Analysts had been looking for the company to record a profit of 10 cents per share on a pro forma basis, according to First Call.

BEA has been able to offset some of the spending slowdown by working through a backlog in orders, something that prompted slight concern among analysts. But they remained optimistic about the company's future.

"While there are several hurdles that BEA has to clear to maintain its momentum, we believe the company has a solid product foundation in WebLogic, an expanding distribution channel, and a large installed base into which to sell additional product," said U.S. Bancorp Piper Jaffray analyst Michael Marzolf. "We believe BEA will continue to command significant, if not leading, market share for its flagship application server."

But while analysts seemed confident that BEA would be able to weather the downturn in the economy, the lowered forecasts prompted a few analysts to tell investors to "stay on the sidelines."

"The deceleration (in growth) combined with lowered visibility and the valuation leads us to believe that the stock is likely to tread water," said Morgan Stanley's Vinay Shah, noting that BEA is currently trading at a price-to-earnings ratio 38 times his fiscal 2003 estimate.

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