BEA profits hit by stock option revision

BEA Systems, the software company that has been stalked by Oracle, on Thursday restated nine years of accounts to reflect $424m of understated employee option charges, almost wiping out its reported profits for the entire period.

At the same time, however, the embattled software company reported a rebound in its profit margins in the latest quarter, potentially strengthening its hand as it tries to make its case for resisting Oracle’s recent $7.1bn bid.

The profit numbers were the first BEA has reported since the middle of last
year as it has been embroiled in an internal investigation into stock option backdating.

Like many other technology companies, the software maker said it had not treated options issued to employees at below market value as an expense.

Had it done so, the extra non-cash charges would have reduced earnings in the years between 1997-2006 to $32m, it disclosed.

However, Alfred Chuang, chief executive officer, said that BEA’s latest figures pointed to a “significant improvement in profitability” that justified the rejection last month of Oracle’s $17-a-share bid.

BEA’s board said at the time that it would not consider a bid below $21 a share.

For the latest quarter, BEA reported that its operating profit margin had risen to 17 per cent from 11 per cent a year before, reflecting tight cost control as revenues advanced 11 per cent to $384m.

BEA also issued an optimistic forecast for earnings in the current quarter.

At the mid-point of its target range, the company’s profit margin on a pro forma basis would be 27-28 per cent ahead of Wall Street forecasts, Mr Chuang said.

While representing a strong recovery after a slump in BEA’s performance earlier in the year, the latest figures did not point to an across-the-board recovery.

Sales of new software licences – a key indicator of a software company’s health – dropped by 1 per cent from a year before, to $134m.

While an improvement from the 9 and 13 per cent declines of the preceding two quarters, it showed that sales of BEA’s fast-growing AquaLogic line of software had yet to make up for its declining WebLogic brand.

BEA put its improved profit performance down to control of general overhead costs and lower expenses related to sales.

Also, economies of scale had worked to its advantage as more of its revenues had fallen to the bottom line given the heavily fixed-cost nature of its business, executives said.

BEA’s claim that the figures supported its argument for at least $21 a share in a takeover came a day after Oracle had hinted that it was no longer even prepared to pay the $17 it had originally offered.

Speaking to financial analysts, Larry Ellison, Oracle chief executive, indicated that falling technology stock prices on Wall Street had reduced the value of the company.