BEA: A Little Down In The Valley

When Alfred S Chuang took over as chief executive of software maker BEA
Systems three years ago, he inherited one of the great Silicon Valley success
stories of the 1990s. Started in 1995 by Chuang and two other former Sun
Microsystems executives, BEA had rocketed to nearly $1 bn in annual revenues by
2001. It dominated the fast-growing market for software that serves as a
foundation for websites and complex run-the-business applications, with a 34%
share. And it appeared ready to take a seat alongside the software industry's
giants.

Then BEA stalled. Fierce price competition from rivals coupled with sluggish
overall demand led to the stagnating revenues of the past three fiscal years.
IBM now has 41.3% market share of the $3.5 bn market for application servers,
compared to 27.5% for BEA, according to market researcher Gartner. BEA's
situation is hardly desperate-it has $1.6 bn in the bank and a base of more
than 16,000 customers. But if Chuang can't find a way to get his revenues
growing strongly again, his company could suffer the fate of other software
pioneers such as Novell Inc and Sybase-onetime leaders that were outmaneuvered
by more effective competitors. Like them, BEA is in danger of fading in
importance and becoming an also-ran rather than fulfilling what once looked like
its destiny as a true industry powerhouse.

Can Chuang get BEA going again? The odds are stacked against him. That's
because his own leadership is partly to blame for the severity of the company's
problems. He has been unwilling to make BEA's prices more competitive with
those of its top rivals-IBM and Oracle Corp, according to analysts and former
execs. And while he has begun diversifying BEA's product portfolio, he hasn't
put more aggressive sales and marketing programs in place to build those newer
businesses rapidly. At the same time, at least six of BEA's top execs have
abandoned ship in the past six months, including the chief technology and
marketing officers. Two interviewed by BusinessWeek said they had become
frustrated with Chuang's leadership. Former CTO Scott Dietzen would not reveal
why he left but he acknowledged the company's predicament: "BEA has the
opportunity to be successful and resume its growth, but it's going to be a
challenging road."

Damn the Torpedoes 

Rather than reassessing his strategies in the face of widespread evidence
that they're not working, Chuang is determined to stay the course. He takes
great comfort in the fact that BEA has weathered the tech downturn relatively
well compared with some of the 1990s' other software upstarts, such as Siebel
Systems. He believes that his aggressive investments in research and development-$140
mn for the fiscal year ended in January, up 87% from 2001-will eventually pull
the company out of its slump. "In the end, we are not a sales and marketing
company," says Chuang. "We differentiate ourselves in the marketplace
by being a very, very innovative company."

But that focus alone has never proved successful in creating large and
powerful software companies. Consider Oracle, SAP, and Microsoft. They focus on
operational expertise and selling-in addition to technology. Indeed, it is
typically at the $1 bn revenue mark that tech companies either develop a
balanced approach to doing business or start to struggle. Often that transition
includes a change of management philosophy or a change at the top. "It's
the point where you go from being just a technology company to a sales and
execution company," says analyst Joanne Correia of Gartner, who thinks
Chuang needs help. "Alfred is a strong technologist, but they really need a
strong businessperson over there." Chuang insists that he's up to the
job. Members of BEA's board of directors declined to comment.

In spite of the tumult, Chuang has been able to hold on to many talented
engineers. During the downturn, the company only had one round of layoffs-of
300 people. In fact, Chuang has nearly doubled employees devoted to R&D, to
about 700, while sales staffing has stayed about the same.

The problem is, those investments in technology talent haven't yet shown up
in strong topline growth. In the fiscal quarter that ended October 29,
software-license sales slipped by 10.4% to $114.9 mn, even as total sales, which
include maintenance fees, grew 4.8% to $264 mn. Analysts expect more trouble in
the current fiscal quarter, which ends in January. Software sales are expected
to be $130 mn, down 9% from a year ago, says Jason D Brueschke of Pacific Growth
Equities LLC. He forecasts overall sales of $283 mn, up 2% from a year ago, with
net income of $39.8 mn, down 7% from a year ago. BEA's stock is trading around
$8.75 per share, almost 40% below its 52-week high and a long way from the $90
per share of its glory days in late 2000.

But innovation is no longer a trump card for BEA. While analysts say it still
has the best products, the gap has narrowed to a sliver. And the history of tech
has shown that a company with slightly better products almost never beats out a
rival with a much cheaper offering. With so many aggressive competitors closing
in, time is running out for Chuang to come to grips with that brutal reality.

By Jim Kerstetter in San Jose, Calif., with Jay
Greene in Seattle In BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc