Wall Street Beat: BEA offers peek into market psyche

BEA accounting inquiry shows investors are willing to forgive and forget

Market reaction to BEA Systems' stock options backdating inquiry this week provided a clue to investor psychology, while RealNetworks and Microsoft offered a look at the future of aspects of the software and services business.

BEA Wednesday announced that an internal review found that most options granted for nine years, up until last June, were improperly recorded. The company expects to restate earnings, which will include putting previously unrecorded expenses of US$340 million to US$390 million on the books.

CEO Alfred Chuang and other executives will repay gains from "mispriced options," BEA said, but added: "Following the review, the audit committee and the board of directors expressed their continued confidence in the leadership and integrity of Mr. Chuang and the current executive leadership team."

BEA shares closed Thursday at US$13.01, up US$0.48 for the day. Brokerages Piper Jaffray and JMP Securities both raised their ratings on the company.

Why the joy? It seems that company observers and IT investors like closure more than they dislike the idea of companies having to restate earnings.

This has been a pattern in many of the stock options inquiries -- numbering well over 100 -- that have occurred. Though government inquiries into Apple Computer Inc. options practices are ongoing, company shares bounced up after an internal inquiry expressed confidence in CEO Steve Jobs.

Though the spectacle of well-paid executives getting richer via improperly recorded options grants may strike some as unseemly, it seems the market as a whole wants to forgive and forget.

Investors, however, were hard on RealNetworks, after the company Wednesday reported earnings. The company, which offers music subscription services through Rhapsody, added 100,000 users in the last quarter and recorded a more-than 50 percent gain in revenue, to US$125.6 million. But guidance for the year fell short of expectations. Company shares plunged by US$1.70 to close at US$8.97 Thursday. The guidance for the year suggests that Real's growth will be impaired by a general preference over downloading songs via complete systems such as Apple's iTunes and Microsoft's Zune, rather than subscribing continuously to a service.

Meanwhile Microsoft's shares closed at US$29.46 Thursday, up by US$0.06 ahead of its financial analysts meeting in New York, which began as the market closed.

Though Microsoft shares have faltered recently, they started climbing steadily last June, in the run-up to the Vista launch. Now, sales reports indicate that Vista is being snapped up faster than XP was. However, the financial meeting was scheduled to last only one hour, and Microsoft said ahead of time that it would not alter its earnings guidance for the year. Many analysts are saying that Microsoft won't see the full effect of Vista revenue until late in the year, or even next year. So despite a boost this week, company shares in the medium term may not rise as quickly as they did in the last two quarters of 2006.

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Marc Ferranti

IDG News Service

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