The following is a reprint of my January 18, 2007 RealMoney column.

Oracle’s (ORCL - Annual Report) agreement to meet BEA Systems (BEAS) half-way on price was hailed by InfoWeek as making Oracle a middleware powerhouse. “Among other things, BEA will add to Oracle its WebLogic and AquaLogic SOA and BPM tools, as well as its Tuxedo transaction processing monitoring software. BEA’s Java Virtual Machine technology also could push Oracle deeper into the hot market for virtualization software,” said the article.

Oracle has been leading the way in software industry consolidation, and this deal is another step in the process. When SAP (SAP - Annual Report) announced in October that they would be buying Business Objects (BOBJ), I hoped they were following Oracle’s lead. It is better business for SAP to integrate its software with that of Business Objects than to force its customers to do the integration.

In the past, there were just too many different application software vendors. The excess made competition stiffer than it needed to be and made it difficult for customers to integrate the different products. Oracle figured out that customers would be willing to accept the reduced competition in favor of reduced complexity.

Furthermore, software companies generate so much cash that these deals quickly pay for themselves. For example, Oracle’s free cash flow (the difference between the cash generated from operations and cash paid for new equipment) before acquisitions was $6.6 billion over the last 12 months. BEA has averaged another $200 million in free cash flow in each of the last three years. The combined companies will generate enough cash in the next 15 months to completely pay for the acquisition, leaving Oracle’s balance sheet as strong as it is today.

In my October article, I said a higher yield and growing free cash flow (at Oracle) compared with a lower, flat one (at SAP) is not much of a choice in my book. Since then, Oracle stock has continued to outperform, being down just 3.4% compared with a 12.6% decline in the S&P 500. SAP is down 9.8%.

An investor who likes the latest deal even more than I, of course, is Carl Icahn. I agree with James Altucher that piggybacking the best activist investors can pay off. Carl Icahn’s portfolio at Stockpickr lists a few other ideas.

Which brings me to the very first article I wrote for RealMoney, in which I said a cash flow upturn could carry Motorola (MOT - Annual Report) upstream. Motorola represents 25% of Icahn’s holdings.

In September I said “If Motorola can get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there, I estimate the stock would be worth nearly $23, more than 25% above the current price. Management could do that pretty much just by trimming R&D expenses to the 2004 level (which was all they needed to produce the previous hit product anyway).”

The obvious risk, of course, was that cash flow could move in the wrong direction. And it did. Free cash flow over the trailing 12 months ending in September was just $325 million, compared to the 2004 level of $2.5 billion. With the cash flow, the stock has also headed down – 19.1% since I wrote that article, compared with a 6.5% drop in the S%P over the same period.

At the new (lower) enterprise value, the free cash flow yield is just 1.2%. But turnarounds don’t happen in a day, and the CEO change only happened in late November. I don’t expect next week’s earnings report to be anything special, but I also think a return to pre-RAZR cash flow levels

And if it doesn’t, I expect Icahn will have lots to say about it.

With the much anticipated consumer slowdown now looking more likely it is becoming increasingly important for business to take up the spending slack. As I have mentioned before, that hasn’t been happening. Still, the GDP numbers are backward-looking by quite a bit so I thought I would take a quick look at what the enterprise software vendors are seeing in terms of pipeline.

Oracle (ORCL - Annual Report) says things are great.

Heather Bellini - UBS

Well, I just was wondering if you could comment on the pipeline this Q1 versus last Q1, given how well you outperformed last year?

Safra Catz

It’s significantly higher. I mean it’s really…

Heather Bellini - UBS

And that does mean Agile, right?

Safra Catz

No, no. And, in fact Agile shareholder vote will be in the middle of July, and none of this guidance includes Agile at all. So, assuming that we closed, let’s say sometime at the end of July, assuming a favorable shareholder vote which I do. It should be little bit higher, but Agile is a pretty small company compared to us. So, I think that the reality is the pipelines look extremely good. We took a brush through them and assumed lower closing rates than we usually use, and we still came up with this guidance.

(Excerpt from full ORCL conference call transcript)

BMC Software (BMC) is a little more circumspect.

Robert E. Beauchamp

We feel good about the pipeline in general for the rest of the year but the big deal pipeline is not as strong as say, for instance, last year’s pipeline in the second half. We had a really strong second half last year. This year, as we guided 90 days ago and again today, the first half of this year is a little stronger on a relative basis. So we are looking for a solid second half but not as many whales floating around out there in the second half of this year. That’s included in the guidance. There’s no change there. There’s nothing — there’s no new news there. That was in the guidance we gave when we set guidance originally.

(Excerpt from full BMC conference call transcript)

Business Objects (BOBJ) is reporting a good pipeline for its XI product upgrade cycle.

Adam Wood - Exane BNP Paribas

I just had two questions. The first one is on the services and gross margins. Obviously, a great performance there in terms of the improvement. Can you just help us to understand which side that comes from? We’ve seen it’s more on the actual [professional services business? And whether that type of margin profile is sustainable, going forward?

And then really just following up on a couple of your comments and a couple of your other questions, talking about the 65% of the installed base is now either migrating to or are on XI. I think from what we’ve heard from you in the past suggests that the percentage is higher in the Americas, and maybe even we’re getting to the stage when most of the installed base are either through or in that process. What should we expect from the Americas going forward? Should we maybe expect that geography to slow slightly as that upgrade matures? Or should we expect maintenance or even acceleration as they start to search and buy new products?

John Schwarz - Chief Executive Officer

Well that’s quite a breadth of questions. So let me start with the second part and I’ll ask you to restate the first one when I finish. Clearly, the migration process is moving along very well. We reported being around 50% of the population kind of in the process of migration in the last quarter. We’re running at 65% or better now. And if you look at the pipeline and the customers’ intention to buy and to migrate, it is a chock full off people who are lining up to execute.

(Excerpt from full BOBK conference call transcript)

And SAP says things are looking good.

The Americas came in with the eighteenth consecutive quarter of double-digit growth, which is quite a performance in itself. By the way, just to give you an indication and to give you a sense of the metrics, the U.S. has basically doubled over the last three years.

We continue to gain share against the competition in all of The Americas’ markets, including the U.S. We have the highest customer satisfaction in the Group. In fact, in The Americas, it’s an all-time high. And we see very strong performance in Latin America, in Canada, good SME performance across the board including in the U.S. And, therefore, this explains how we got to strong double-digit growth in The Americas.

If I look at EMEA, as you have seen already, very strong quarter, 17% in Software and Software-related Services. It was a balanced performance across the entire Continent. We had very strong performance in Russia, very strong performance here in the U.K., good performance in France, good performance in The Nordics and Germany came in single digit as predicted, and 7% is okay.

We see good overall economic environment. That helps, of course, the business as well. And in fact, what we do see is quite a lot of pent-up demand here in Europe. Many European companies are now trying to catch up when it comes to IT spending to what North American companies have done a few years ago. And in particular, that is noticeable in the small and mid-size business segment.

In Asia Pacific, extremely strong results in China and India, supporting also the strong growth in Japan. Asia Pacific Japan is clearly the growth engine for the Group in terms of growth rates. Actually, they do this in two ways; by their own organic growth, of course, but also by attracting investment from other regions into Asia Pacific Japan and, therefore, we can pull for more demand through what’s happening there.

(Excerpt from full SAP conference call transcript)

So altogether I would have to say that the outlook from software management teams looks decidedly more optimistic than the recent GDP data. Whether that optimism translates into the expected sales, and whether the sales growth related to 20% of GDP can overcome a slowdown in 65% of GDP (consumer) will be the next question for Wall Street to fret over.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

Stock market uber-blogger Charles Kirk said yesterday that despite the current rally, the U.S. market is looking Like A Bad Stock:

The U.S. market continues to act like a bad stock in a really great sector of the market. In other words, with the global boom worldwide and the gains seen across the globe, the U.S. market is moving higher along with everything else whether deserved or not. That’s also why we continue to see a huge migration toward companies that have international exposure. The more global the better and there’s good reason for that.

I thought the analogy resonated, and decided to dig a little for evidence in support of the idea. For this task I turned to some recent conference call transcripts of companies with global operations.

At least twice the growth overseas as in America for Autodesk (ADSK):

Revenue in America was $184 million, an increase of 8%. Revenue in the America was somewhat impacted by changes in backlog between years as well as the particularly tough compare in the first quarter of last year, which grew 39%.

EMEA revenues were $207 million, an increase of 26% as reported and 14% cost of currency. Asia Pacific increased 16% to $117 million. Revenues in Japan decreased slightly compared to last year, but increased significantly on a sequential basis consistent with historical trends.

(Excerpt from full ADSK conference call transcript)

Hewlett Packard (HPQ - Annual Report) also saw stronger growth overseas, but currency played a big role for them.

On a regional basis, revenue was up 11% in the Americas, up 14% in EMEA and up 16% in Asia Pacific. When adjusted for the effects of currency, revenue was up 11% in the Americas, 7% in EMEA and 13% in Asia Pacific.

(Excerpt from full HPQ conference call transcript)

BEA Systems (BEAS) is also seeing strength overseas:

As I mentioned, we saw a tough selling environment in the Americas. Our close rate in the first two months of the quarter was actually on track with plan, and then we were surprised when close rates weakened at the end of the quarter. Some large deals slipped out of the quarter. The slippage was generally due to poor execution on our part. A few of those deals have already closed in Q2.

Geographically, the Asia-Pacific region performed very well. We continue to see great performance out of China, Korea, and Asia. In Q1, China contributed more license revenue than any territory outside the United States, and we see no end to demand there. EMEA performed fairly well overall. We performed well in Italy, Northern EMEA and other places.

We’re seeing improvement in the U.K., and our new team there is trying to drive better results and better pipeline.

(Excerpt from full BEAS conference call transcript)

Finally, lest you think the issue may be confined to tech, Estee Lauder (EL) chimes in:

Geographically, our international business again led our growth this quarter. In Europe, the Middle East and Africa, despite coming off high single digit local currency growth last year, we grew net sales a solid 13% for the quarter. A few key businesses drove this performance, including travel retail and our largest market in the region, the United Kingdom, which posted healthy double-digit increases. Russia, one of our emerging markets, reported another outstanding quarter.

All countries in Asia-Pacific posted local currency sales increases, with the exception of Thailand. The increases generally reflect a strong economy in the region. Japan, our largest affiliate in the region, was up mid single digits in the quarter. New points of distribution in the region also added to sales growth.

In the Americas, net sales decreased.

(Excerpt from full EL conference call transcript.)

So all are in agreement: sales are better overseas. No wonder, then, that overseas markets have been stronger.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

An old adage for screenwriters is to leave the audience wanting more. The idea is that if a good story gets padded too much the audience will start to find it dull.

Which brings me to BEA Systems, Inc., (BEAS) which announced certain financial results for the fiscal first quarter ended April 30, 2007.

• Total revenues of $345.8 million were up 7% from last year’s first quarter. So far so good.
• Services revenue of $231.2 million was up 21% from a year ago. Better still.
• License fees of $114.6 million were down 13% from a year ago, which is bad because license fees are one of the important inidicators of future revenue for software firms.
• However, deferred revenues of $434.7 million were up 19% from a year ago, and these are another such growth indicator.

And that was about as far as the report went, since BEA is one of the many tech companies that can’t figure out how much it actually makes. Or, as it reports:

BEA is not providing full GAAP or non-GAAP financials for the first quarter due to the previously announced voluntary internal review of BEA’s historical stock option grants, which has been conducted by the Audit Committee of BEA’s Board of Directors with the assistance of independent legal counsel. The outcome of that review will require us to change our accounting treatment of certain stock option grants, which will have a material adverse effect on our results of operations for certain historic periods and may have a material adverse effect on our results of operations for the first quarter and certain subsequent periods.

And there is nothing quite so thrilling, of course, as a “world leader in enterprise and communications infrastructure software” (their words, not mine) being unable to calculate or communicate its own profits. Still, in this case it appears that by failing to provide information they may indeed have left investors just hungry enough for more.  The shares are higher in after-hours trading.

When I previewed the earnings report, I said their guidance for next quarter needs to beat the estimate of $0.14, but investors will probably be disappointed by anything short of a buyout. However, the conference call only updated revenue guidance:

We anticipate that revenues for the second quarter of our fiscal 2008 will be within a range of $353 million to $367 million, and that the license component of revenue will comprise 32% to 35% of total revenue.

(Excerpt from full BEAS conference call transcript)

That is about in line with expectations. And that, apparently, is good enough for now.

The Earnings Calendar is fairly light.

• Tuesday’s CPI is estimated at 0.5%, 0.2% ex food and energy.
• Wednesday’s Housing Starts are expected to come in at a 1.475 million rate.
• Industrial Production, also on Wednesday, is expected to rise 0.2%.

Earnings season is winding down but there are still a few important reports due.

• Applied Materials (AMAT - Annual Report) reports on Tuesday and is expected to earn $0.28 on $2.35 billion in sales. I’m stocked up on tequila.
• BEA Systems (BEAS) reports on Wednesday but has already preannounced. Their guidance for next quarter needs to beat the estimate of $0.14, but investors will probably be disappointed by anything short of a buyout.
• Hewlett Packard (HPQ - Annual Report) also reports on Wednesday, and preannounced in the other direction. Guidance for next quarter is as close to a lay-up to exceed current estimates (sequential decline and year/year deceleration) as one can typically find.
• Intuit (INTU) reports on Thursday. Both earnings and guidance are anyone’s guess, but the long and short of it is that we expect tax refunds will be put to work.

There are a few other companies reporting (Autodesk and Marvell among them) in which I am interested but don’t have anything pithy to say about.

MicroStrategy (MSTR) reported earnings:

First quarter 2007 revenue was $72.4 million versus $69.5 million for the first quarter of 2006, a 4% increase. Product support and other services revenue for the first quarter of 2007 was $55.7 million versus $46.4 million for the first quarter of 2006, a 20% increase. Product support and other services revenue increased primarily due to an increase in the installed base of technical support contracts. Product licenses revenue for the first quarter of 2007 was $16.7 million versus $23.1 million for the first quarter of 2006, a 28% decrease. The decrease in product licenses revenue was due, in part, to the absence of any license transactions in excess of $1.1 million during the first quarter of 2007.

First quarter 2007 income from operations was $14.7 million, or 20% of revenue, versus $21.0 million, or 30% of revenue, for the first quarter of 2006. Net income for the first quarter of 2007 was $9.8 million, or $0.75 per share on a diluted basis, versus $15.0 million, or $1.05 per share on a diluted basis, for the first quarter of 2006.

Analysts were expecting the company to earn $1.27 on $81 million in sales, so this was quite a miss. The license revenue they lost is both highly profitable and a key driver of future services growth. MicroStrategy thus joins BEA Systems (BEAS) among those hardest hit by the weak corporate spending on equipment and software.

The press release spent a good deal of time talking up the recent release of MicroStrategy 8.1 and how the company is promoting its use:

MicroStrategy plans to host a one-hour webcast, “Using Dashboards to Improve Corporate Performance: Top 10 Best Practices,” on May 16, 2007. Showcasing MicroStrategy’s Dynamic Enterprise Dashboards, the webcast will feature demonstrations, commentary from MicroStrategy customers Lowe’s Companies and Classic Residence by Hyatt, as well as insights from Wayne Eckerson, Director of TDWI Research, and author of Performance Dashboards: Measuring, Monitoring, and Managing Your Business. For more information and to register for the event, visit http://www.microstrategy.com/DashboardsTop10.

Unfortunately, this strategy doesn’t appear to be particularly effective:

In the first quarter of 2007, MicroStrategy held a series of events in 45 locations around the world to launch its Dynamic Enterprise Dashboards. More than 2,000 people attended the half-day events, which featured customer presentations and demonstrations of the new MicroStrategy dashboard capabilities.

If only a few of those in attendance had actually ponied up for the license fee, we’d be a little less cynical about this one.  Investors don’t reward companies based on how long the press release is. Until MicroStrategy starts putting up some numbers we don’t care about their symposia, webcasts or shindigs.

BEA Systems (BEAS) is down following an earnings preannouncement:

BEA Systems, Inc., a world leader in enterprise and communications infrastructure software, today announced certain preliminary financial results for its fiscal first quarter ended April 30, 2007. BEA expects to report first quarter total revenues between $342 million and $347 million, with license revenue expected to be in the range of $111 million to $116 million.

Analysts had been expecting the company to generate $389 million in revenues.

“This quarter we saw a difficult selling environment, especially in the Americas, and several large deals slipped out of the quarter. During the quarter, BEA made several changes in our sales organization, especially in aligning our sales force around new products. We believe these changes are positive for BEA in the long run, but implementing these changes caused some disruption in the short run,” said Alfred Chuang, BEA’s founder, chairman and chief executive. “Several geographies outside the US performed well. AquaLogic had another strong quarter, especially the AquaLogic BPM product, and we are very well positioned to continue our leadership position in the SOA market.”

We have noted that the economic slowdown has been particularly pronounced with regard to business spending on equipment and software. Meanwhile, rivals such as Oracle (ORCL - Annual Report), SAP (SAP - Annual Report) and IBM (IBM - Annual Report) have all been fairly upbeat.
With a chart like that one, it was pretty obvious that somebody was going to miss on revenues.

We have written so often on the overcapacity in flat panel displays that our regular readers are sick of hearing about it. So today we’ll let others do the talking.
TheStreet.com on Applied Materials (AMAT - Annual Report):

Applied Materials’ profit surged 81% in its fiscal fourth quarter, but the results came up short of Wall Street expectations.

And in a subsequent conference the call with analysts, the world’s No. 1 vendor of chipmaking equipment said its fiscal 2007 year would get off to a slow start.

CFO George Davis singled out flat-panel-display manufacturing as the prime culprit for the slowdown.

Barron’s Tech Trader Daily on Circuit City (CC):

Circuit City has been holding meetings with the Street recently in which it is warning that average selling prices for flat-panel televisions are falling faster than the company had expected.

Associated Press on Wal-Mart (WMT - Annual Report):

“We are implementing our most aggressive pricing strategy ever across core categories, such as toys and electronics,” Scott said in a prerecorded phone message.

John Menzer, head of Wal-Mart U.S. stores, said there were “huge sales increases” among the discounted toys and in some electronics.

“We’re seeing a big growth in our new categories such as flat panel TV’s, MP3 players, laptops and cell phones.

MarketWatch on Home Depot (HD - Annual Report):

Home Depot Inc. on Tuesday said that it would be “opportunistic” in selling consumer electronics this holiday season, as it looks to drive sales during the critical shopping period.

On its third-quarter earnings conference call, the home-improvement retailer said that it planned to use its large-scale buying power to offer low prices on consumer electronics such as plasma and flat-screen television sets.

The only surprise in all this is why anyone would be surprised. From one end of the food chain (equipment manufacturers) to the other (retail) the story is all about too much capacity and faster than expected price reductions.