BEA Faces Challenges, Possible Acquisition Amid Organizational Turmoil

When BEA revealed major organizational changes last week, the San Jose, Calif.-based software company--one of the most influential vendors in the Java application platform market--compounded confusion about its already shaky channel efforts and created even more uncertainty about its future.

"I am worried about [BEA]," said Joe Lindsay, CTO of eBuilt, a Costa Mesa, Calif., solution provider. "They have great technology, but they often leave me scratching my head wondering what is going on and how do I work with them."

A rash of executives have left BEA in the past month, including Chief Architect Adam Bosworth and CTO Scott Dietzen, two well-respected technology gurus; Scott Edgington, vice president of channel and worldwide alliances in charge of ISVs; Rick Jackson, vice president of products and solutions marketing; and Eric Frieberg, senior director of product marketing.

And under the restructuring unveiled last week, BEA Chairman, President and CEO Alfred Chuang appointed former head of services Tom Ashburn to lead a new organization called Worldwide Field Operations, which consolidates the company's sales, marketing and services functions. Chuang also took charge of the Product Leadership Team to drive BEA's software strategy and named BEA veteran Mark Carges to succeed Dietzen as CTO.

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In a memo on Monday that announced the changes to employees, Chuang remained optimistic, perhaps because he now steers the Product Leadership Team. "Innovation has always been a priority at BEA," Chuang said in the memo. "Creating the Worldwide Field Organization to focus on customers will allow me to return more of my attention to products and innovation."

But Chuang also announced on Monday that BEA would miss its fiscal 2005 second-quarter revenue projections, falling short of its forecast of $265 million to $275 million. Merrill Lynch analyst Jason Maynard predicted in a report this week that BEA's license revenues would be weak for the quarter. BEA is scheduled to report second-quarter financial results Aug. 12.

Michael Dortch, a principal business analyst for the Robert Frances Group, said he's not entirely sure why BEA has seen a mass exodus recently. However, he pointed to two big market challenges for BEA. "[Executives] have looked into the future, and they see that the combined pressures of commoditization and open-source versions of what BEA sells," Dortch said. "If BEA doesn't have a transition strategy to that model, the only alternative [for executives] is an exit strategy."

While no one is formally predicting a total demise for BEA, the company's executive churn and current business prospects have the makings of a major meltdown for the vendor that was once the darling of the Java application server industry. It's unlikely that a company with more than $700 million in cash will simply disappear, yet BEA's management troubles could determine whether the company will be acquired. If that happens, partners could find themselves shut out completely or part of a larger company's channel ecosystem. Analysts view Oracle and Hewlett-Packard as potential buyers.

Dortch said his clients are starting to get concerned about whether the situation at BEA "is just a blip or the shape of things to come." But if things continue as they are, Dortch said he's concerned that IT decision-makers "are either going to start looking at alternatives [to BEA] or are going to be bombarded by competitors trying to raise the fear, uncertainty and doubt level. And I can't see that being good for BEA or its partners."

Kevin Faulkner, BEA's vice president of investor relations, said BEA's restructuring was designed to allow the company to focus all of its attention on its top asset, the WebLogic software suite. He downplayed the executive departures. "Any time you have changes like this, there are people who don't agree with the direction, and they will go somewhere else," Faulkner told CRN earlier this week.

For now, solution providers said their BEA business remains relatively strong, but they are worried about the present climate at the company. Sam Jankovich, president and chief revenue officer at Decatur, Ga.-based Enterpulse, said BEA is facing a host of challenges, such as aggressive recruiting of prized technologists like Bosworth and Dietzen.

"The [venture capital] money has heated up over the last year, and there are more opportunities out there," Jankovich said. "There are few survivors [of the post dot-com boom], and BEA has been one of them. People are recruiting their top talent like crazy." BEA also faces a tough software market, and customer transition to its latest WebLogic Platform, version 8.1, has been slower than expected, he said.

Still, Jankovich said he sees BEA winning some significant multimillion-dollar deals, and Enterpulse recently closed a $3 million deal with BEA. "But, unfortunately, there just aren't as many big deals out there," he added.

Indeed, financial analysts have criticized BEA's reliance on big deals as a primary reason for the software vendor's current situation. Companies with revenue based on $1 million-plus deals "are more exposed to the risk of downside revenue surprises and, as such, deserve a discount valuation," investment research and management firm Sanford C. Bernstein and Co. said in a recent report.

"While in the past [BEA] focused on generating a large volume of small deals, the company's exposure to large deals has increased substantially in recent quarters as [it] looks to push beyond the application server into platform sales," the report said.

So without an expansion strategy for penetrating the small- and midsize-business market--where there is still money to be made--BEA could be writing its own death sentence. And BEA has yet to outline an SMB plan.

Marc Maselli, president of Back Bay Technologies, a Needham, Mass.-based solution provider, noted that BEA faces a tough market and, as a result, said that acquisition might be the best thing to happen for the beleaguered company.

"Expansion of the application server into new accounts has dwindled, leaving the tack of upselling [WebLogic] portal and WebLogic Integration into incumbent app-server accounts as the bulk of sales we see at [Back Bay]," Maselli said. "Unlike [BEA's] competitors, who have other revenue streams, license revenue is BEA's lifeblood, and they have no recourse or fallback without it. They need to boost direct as well as channel license revenue in the coming quarters, either on their own or by being acquired by a larger organization with a bigger sales force and more tools at its disposal."

Another drag on BEA has been its channel strategy, which until a few months ago had been--for lack of a better word--a mess since former channel chief Rauline Ochs departed in April 2002. Earlier this year, BEA seemed to get back on track when it refocused its channel efforts by deciding to work with a smaller group of partners. The reasoning was that the vendor could give those partners as much attention as possible in helping them sell solutions based on BEA software. BEA also added several new VARs and tapped Agilysys as a distributor, which it hopes will recruit new partners to sell the BEA software.

Enterpulse's Jankovich said he's happy with the progress he's seen in BEA's channel efforts, though it has been slow. "This channel thing is going to take, in my opinion, another good 18 months before it makes any big difference," he said.

Enterpulse is one of the select partners that receives ample attention from BEA. But other solution providers said that even though they're doing a substantial amount of BEA business, they're seeing little support from the vendor's channel organization. One BEA partner said his company's revenue from providing services on BEA software has grown 15 percent year over year--without any help from BEA.

"I think their partner program has been the worst I've seen in a year and a half of any company," said the partner, who requested anonymity. "It has been horrific."

Given BEA's current business outlook, it might behoove the software vendor to consider working closely with whomever wants to sell its products, which would help boost license revenue. Even partners that no longer get much support from BEA say they continue to see demand for its products and are happy to sell licenses if it means services revenue for them.

But if increasing uncertainty about BEA's future saps customers' willingness to buy--as some analysts are predicting it will--the vendor could face serious ramifications from its decision to limit its partnering efforts.