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BEA's Beguiling Earnings

As my Foolish colleague Seth Jayson pointed out recently, far too many companies are pulling the corporate equivalent of a Jedi mind trick when reporting results. Instead of hitting you with the cold, hard facts, they dazzle you with huge percentage gains that put their firms in a healthy, radiant light-saber glow.

I won't go so far as to accuse BEA Systems (Nasdaq: BEAS  ) of trying to distort reality in yesterday's earnings report. But hype is still hype. Sure, earnings were up 35% year over year. And sales were up 7% over the same period to $281.7 million, a first-quarter record. These are all impressive stats. It's just that none of them say much about BEA's overall health.

The real story, you see, is in how BEA achieved record sales and massive earnings growth. License revenue was down for the fifth straight quarter to $116 million from $120 million in the year prior. That means higher services revenue is 100% responsible for BEA's growth. There's nothing inherently bad about that, but it does suggest that BEA's days as a growth company are rapidly coming to an end. Or are they? Management's guidance has led some on the Street to conclude that license revenue could recover a few percentage points next quarter. I'll believe that when I see it.

The truth may be that BEA will never again be the kind of growth stock it once was. But it won't go down without a fight. R&D spending recovered mightily during the quarter to 14.4% of total revenue, up a full percentage point from the year prior. Gross and operating margins also expanded slightly. Perhaps signs like those are what convinced Private Capital Management to snap up 41 million shares.

Indeed, any rational check of the financials might lead to the conclusion that BEA is on sale. Consider: The company has $2.11 per stub in net cash, putting the forward price tag for ongoing operations at 15.1 times earnings, a healthy discount to the market's average P/E. The problem is that the firm's expected growth rates are also well below that same total. The Street has BEA boosting earnings by 11% this year and an average of 10% annually out to 2010. That doesn't exactly make for a steep discount.

If you're going to invest in BEA, don't pay attention to headlines. Focus instead on what you're actually getting: a once-great tech titan with a track record for buying well that must now innovate on its own to forge a turnaround. Unfortunately, that's as speculative a bet as you're going to find.

For more techie Foolishness:

Fool contributor Tim Beyers likes his stocks cheap and his liquor cheaper. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.

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