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BEA Systems: The King of E-commerce Infrastructure

De Facto Platform

Without question, BEA Systems {BEAS} is among the software elite. While Oracle {ORCL} leads in database software and Siebel Systems {SEBL} leads in CRM software, BEAS has become the de facto platform for building e-commerce because it dominates application server software. Application server software links front-end applications with back-end systems. In other words, application server software is the link between the sales on an e-commerce site and that company's database. According to research firm IDC, the application server market should grow 62 percent a year to $11.3 billion by 2004.

A telling sign of BEA's success in this crucial and explosive software market is that it keeps adding customers from diverse industries such as banking, airlines, manufacturing, retail, communications, securities trading, utilities, and even online-gaming at an astounding pace. Over the course of the company's first quarter of 2002, the company added a whopping 700 customers including the likes of Applied Materials {AMAT}, Verizon {VZ}, Network Associates {NETA}, Solectron {SLR}, and United Parcel Service {UPS}. In total, the company has over 10,000 customers and the overall diversity of its customer base is one of the key reasons that BEAS has been able to zig while most other companies have been zagging.

A Bright Spot in Dark Times

As doom and gloom permeates the air around Wall Street due to the weak economy and a plethora of company issuing earnings warnings, BEA Systems actually RAISED its earnings outlook. On May 15th, the company upped its earnings outlook for fiscal 2002 to the $.41 to $.43 per share range, two cents above prior estimates. While not raising revenue guidance as well for fiscal 2002, BEAS increased its earnings guidance because the company's higher-margin software licensing business is rising as a percentage of revenues at the same time its lower-margin consulting business is falling. Moreover, BEA's latest reported quarter, ended April 30, continued the company's impressive string of 22 consecutive quarters of record revenues. Keep in mind that only elite companies like Microsoft {MSFT} and Oracle have been able to boasts of similar streaks in their storied histories. In fact, BEA Systems resembles MSFT (even though it is not nearly as dominant as Microsoft) since application server software acts similar to an operating system for e-business.

Future at a Crossroads

Despite the fact that BEAS provides the de facto platform for building e-commerce on and has been able to continue to shine in tough times, there are still doubts about the company's long-term future. Simply put, BEAS must soon make a decision that will define its long term direction because the company's rapid growth during tough times is like blood in the water to a bunch of sharks. Either BEAS can continue to devote the lion's share of its attention to its core application server market and risk its market being eventually eaten away by technology giants such as IBM {IBM} (second in application server software), Sun Microsystems {SUNW}, and Hewlett-Packard {HWP} or it can diversify its business to encompass more of the application side and offer a more complete package to customers. If BEA chooses to play it safe and decides to focus strictly on its core market, it will likely continue its streak of record revenues for at least a few more quarters; however, there is a great possibility that either IBM, SUNW, or HWP will be able to surpass BEAS because they are able to bundle their application server software with their hardware. In addition, both MSFT and ORCL want a larger piece of the application server pie.

The significantly riskier path for BEA is to branch out more into the front-end side of e-business and compete with Art Technology {ARTG}, Vignette {VIGN}, Blue Martini {BLUE} and BroadVision {BVSN}. This way, BEAS would have more to bring to the table against its rivals while offering more value to its customers at the same time; however, the danger is such a move would create friction with a number of BEAS' customers and partners, including BroadVision, who have front-end applications of their own. Even though neither plan is without its share of risks, BEAS needs to pick one and stick with it to maximize that plan's effectiveness. One indication that the company could be leaning toward the latter path is the recent announcement it will offer customers an enterprise portal solution (allows companies to set up e-business portals for customers, employees, partners, and suppliers) along with its market-leading application server software. If the company is able to sustain its market lead over the next couple of years with its profit margins intact, BEA Systems could very well evolve into the Microsoft of e-business.