Kumar Mildly Upbeat On CA Earnings

By Paula Musich  |  Posted 2002-01-22 Print this article Print

CA continued to reduce its reliance on mainframe software and services revenue in the most recent quarter as it posted a pro forma profit that squeaked past analyst estimates.

No matter how you slice it, Computer Associates International Inc. beat Wall Street estimates for its most recent quarter. The Islandia, N.Y., software company reported results for its fiscal 2002 third quarter results Tuesday using two dif-ferent accounting methods – GAAP (Generally Accepted Accounting Practices) and Pro Forma.
The GAAP results reflected revenues of $749 million and an operating loss of $231 million or 40 cents a share, while Pro Forma results were $1.45 billion in revenue and a profit of 71 cents per diluted share.
CA beat expectations for both, said CA Chief Executive and President Sanja Kumar. Most estimates for the quarter, which ended Dec. 31, 2001, set the profit between 68 and 70 cents per share in Pro Forma results. CA continues to provide results in both terms as it moves along the path of its new business model, under which it now accounts for contracted revenues over the life of the license, rather than booking revenues from a license agreement when it is signed. The new business model also emphasizes subscription-based pricing, shorter contracts and less reliance on large deals. Although Kumar was modestly upbeat in his comments on the third quarter and outlook for the fourth fiscal quar-ter, Charles Phillips, managing director at Morgan Stanley in New York saw the results as consistent with his expectations. "It was pretty much in line with what I was looking for," Phillips said. "They are doing what they said they were go-ing to do. Now they are starting to get a reputation for delivering what they say they will." Total deferred revenue recorded for the quarter was $554 million, up 28 percent over the previous quarters recorded deferred revenue of $466 million. CA also generated $354 million in cash during the third quarter, CA continued to reduce its reliance on mainframe software and services revenue in the quarter, with mainframe revenue making up 42 percent and distributed systems making up 47 percent. "We had reasonable mainframe business in the quarter. There were no super large deals – the deal size is coming down," Kumar said, in a conference call with analysts and the press. "Customers continue to embrace the Z platform, where theyre testing for Linux on the platform and adding capacity. We had really good distributed business, which con-tributed to the strong deferred revenue we generated. Were pleased with product performance worldwide." Enterprise management made up some 41 percent of CA revenue, while security, which had the strongest growth from the second to the third quarters, made up 11 percent of CAs revenues. CA saw its strongest results in its European operation. Kumar was quietly upbeat about the prospects for the calendar year for IT budgets and CA results. "We see modest growth for customers budgets for the year. The majority of our customers have some form of modest growth. Were looking for a steady calendar Q2, and stronger results for Q3 and Q4," he said. CA expects to generate revenues of about $770 million for the fiscal fourth quarter and an operating loss per share of about 4 to 5 cents on a GAAP basis. Pro Forma results for the fourth fiscal quarter are expected to be about $1.47 billion and operating earnings per share of 72 cents. The "very painful transition" to the new business model may finally be yielding better results for CA, believes Mor-gan Stanleys Phillips. "Looking at the amount of business they are booking on the new model, I think CA having to prove themselves every month has some goodness in it," he said. "At first there was some resistance to it. Now people are thinking it may not be such a bad deal after all." Kumar sees a more direct correlation. "It really is the reason were seeing the results we are in a difficult economic time," he said. "It is whats getting large and small customers to come around. In calendar 2001, GE, Merrill Lynch, Wal-Mart and Ford were able to do something unique because of it. But we need to help people better understand it. It is about more flexibility--getting away from capacity deals."

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