May 19, 2004 4:00 AM PDT

BEA aims to turn it around

Scrambling to boost sales, BEA Systems next week will announce new products along with a plan for gaining an edge over competitors.

The company, which sells a suite of server software for running corporate transaction systems, will outline product plans at its eWorld customer conference in San Francisco. The initiatives are aimed at making BEA's Java-based software and development tools more widely used. The company intends to stave off increasing competitive pressure from IBM, Oracle and Microsoft.

News.context

What's new:
Next week, BEA Systems will lay out plans to stay competitive after a disappointing first quarter hurt its stock price and shook observers' confidence.

Bottom line:
Analysts say the company is fundamentally strong, but it needs to hasten adoption of its most recent product release to fend off growing competition from Microsoft, IBM and Oracle.

More stories on BEA

BEA, which last week announced lower-than-expected sales, is hoping to revive customer interest with several new products. The company plans to fill in the picture on Project Sierra, a set of educational programs and technical resources for designing a modern computing system called a services-oriented architecture. Also expected are details about an initiative to broaden the use of its WebLogic Workshop Java development tool, in part by submitting some of the code to open-source projects, according to people familiar with the company's plans.

And, BEA said, it will discuss products under development, including better management tools; a standards-based messaging product called an enterprise service bus; and the next version of its flagship WebLogic product line.

Analysts generally agree that BEA's technical vision has long been on target. But the company is finding that even cutting-edge technology does not guarantee growth in the highly competitive market for infrastructure software. Larger and better-heeled competitors, such as IBM and Microsoft, have broader product lines, which gives them more inroads to large corporate accounts, analysts said.

"(BEA's) product is great. Great. But it is not enough."
--John Rymer, analyst,
Forrester Research

"(BEA's) product is great. Great. But it is not enough," said John Rymer, an analyst at Forrester Research. To compete head-on with larger rivals, the company needs more relationships and products to sell corporate customers, he said. Oracle, Microsoft and IBM can undercut the price of BEA's Java server software by bundling their own application server suites with other products and services.

The disappointing financial results revived some long-standing questions about BEA's ability to thrive, but analysts said the company's advantages include impressive technology, a large installed base and strong industry partnerships.

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Although BEA met its overall revenue and income targets, financial results for its fiscal first quarter indicated that license revenue--a closely watched indicator of new business--slipped by 2 percent to $120 million, a number that fell below expectations. The company's stock was hammered on the news, falling more than 20 percent, and a number of financial analysts downgraded the stock. The company blamed the "disappointing" performance on poor sales execution in the Americas during a reorganization of its sales force.

The poor financial results "should be a wake-up call" to BEA's management, Rymer said. "I've felt for some time that BEA needed to use its $1 billion in cash to make big acquisitions?They can't count on organic growth anymore."

Market share reports from technology research companies, revealed last week, indicated that BEA's rivals are outpacing the company in revenue growth. IBM, which displaced BEA for the top spot in Java application servers in 2002, saw its revenue in Java server software climb faster than BEA's in 2003, and Oracle's revenues grew rapidly as well. BEA also faces competition from Microsoft's server software and development tools division.

Open-source Java server software and tools are gaining momentum, which appears to be cutting into BEA's core application server business, according to analysts. JBoss, which sells services around a freely available application server, has taken on outside investment to fund its push to acquire corporate customers. Also in the works are other open-source application servers called Jonas and Geronimo, based on the Java 2 Enterprise Edition (J2EE) standards.

The battleground
BEA and others are competing in the multibillion-dollar market for software to build and deploy business applications. BEA's WebLogic Platform suite includes an application server--the software needed to run applications--as well as a portal, integration software and a Java development tool. The company has sought to reduce its dependency on the WebLogic application server, which fueled its rapid growth in the late 1990s, by selling the WebLogic Platform suite of products.

When BEA launched WebLogic Platform 8.1 last summer, the company said its Workshop development tool would make Java programming easier and simplify the process of integrating multiple business applications--long a pain point with corporate customers.

The product strategy is showing signs of success. The company's customer base of Workshop developers has grown since its launch. BEA's revenue from licenses and services in integration software more than doubled last year to $147 million, according to research firm IDC. The company's fourth quarter, ended Jan. 31, was its best, bringing BEA's annual revenue to more than $1 billion.

And though BEA's competitors, notably Oracle and IBM, seem to be having success selling their own Java application server suites, WebLogic applications are not easy to displace because they are designed to do the critical back-end processing of business applications.

"One bad quarter does not cause too much concern unless it's coupled with other signals that they may be losing their strategic focus."
-- Richard Lynn, of BEA customer
Pfizer Pharmaceutical

"We're still comfortable with the strategic direction of the company?because you're investing in a platform," said Richard Lynn, vice president of global applications and architecture at Pfizer Pharmaceutical, which has accelerated its use of BEA's software and tools over the past year. "One bad quarter does not cause too much concern unless it's coupled with other signals that they may be losing their strategic focus."

At its eWorld customer conference, BEA intends to describe how it will expand its product line and to articulate its overall technology vision. According to descriptions of conference sessions, BEA will discuss tools built around Web services protocols to ease the management of WebLogic applications. The company will also detail "Diablo," the code name for the next version of the WebLogic application server, which is being designed to improve its clustering capabilities. Another product in the works is an enterprise service bus (ESB), code named QuickSilver, which is not expected to be completed until next year, according to a software executive who works at a BEA partner company.

BEA's service bus plans mirror efforts at IBM to build a standards-based integration software product. Several smaller specialized firms already sell ESBs, which are used for integrating systems. But new projects such as an ESB could spread BEA too thin, said the software executive.

"I think they're two years late with this," said the executive, who's familiar with BEA's ESB plans. "If this product already has the potential to be commoditized, why do they want to start building it now?"

Apart from expanding its product line, BEA has taken other steps to shore up its competitive position. The company, which has a strong partnership with Hewlett-Packard, in April signed an agreement with Veritas to make BEA and Veritas products work together smoothly for utility-computing-like data centers.

BEA earlier this year revamped its partner program to recruit more value-added resellers, distributors and third-party software providers to sell its WebLogic software. Addressing its missteps in the past quarter, BEA said its top sales executive in the Americas has left and it temporarily put Charles Ill, executive vice president in charge of worldwide sales, in charge of the Americas region.

In the past few months, it shifted around executives in charge of product development, designating an executive vice president in the products organization, Olivier Helleboid, to do long-term planning. BEA also intends to create industry-specific versions of its software to better match the way its consulting firm partners, such as Accenture, sell to corporate customers.

Moving forward
The moves, along with an anticipated increase in adoption of the latest version of WebLogic over the course of the year, should get BEA back on track after a disappointing quarter, BEA chairman and CEO Alfred Chuang said during the company's earnings call last week.

"Interest in WebLogic Platform for projects is now getting started for deployments later this year," Chuang said. "(We're) a very, very healthy company with an unbelievable balance sheet. We should be able to get back to our growth path pretty soon."

Analysts expect the following year to be important for BEA. As competition from larger rivals and open-source products heat up, BEA observers will be tracking how quickly its WebLogic Platform 8.1, which the company expects to fuel revenue growth, is being adopted by customers.

"This is not a tame management team. If you knock them down, they'll come up swinging," said Robert Becker, a financial analyst at Argus Research, which downgraded BEA's stock last week. "(But) while it's a solid company, they can't afford to miss a step."

 

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