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CA defends its accounting practices

Software maker Computer Associates defends its financial practices after a published report accuses the company of using "accounting tricks" to inflate sales figures.

Software maker Computer Associates on Monday defended its business and accounting practices after a published report accused the company of using "accounting tricks" to inflate sales figures.

CA denied various points made public in a New York Times article that questioned everything from the company's accounting methods to its new subscription-based licensing model to the viability of its core products. The company made its comments during a Web broadcast on Monday scheduled specifically to clarify what CA termed "misleading and erroneous" media reports.

On Sunday, The New York Times published an article that questioned whether CA is reporting legitimate revenue and profit growth. The newspaper, which citied unnamed sources and industry analysts, said CA has consistently overstated revenue and earnings for years.

CA's software manages large corporate mainframe systems and networks. The company, based in Islandia, N.Y., also sells software for data storage and computer security.

Last October, CA announced it would move to a subscription-based accounting method, allowing it to report revenue in small doses over the life of a contract as opposed to in one lump sum, smoothing out its sales and helping it to better predict incoming revenue. The subscription strategy gives customers flexibility with their software contracts and payment terms, CA says.

The Times article said it is unclear how CA is reporting revenue and that big acquisitions have been a key accounting maneuver used by the company to fuel revenue growth.

While it is typical for many companies to highlight pro forma results--essentially a way to exclude special charges that can hurt a company's bottom line--the report said there is a gap between CA's expected "pro forma pro rata" results and results as stated in the Generally Accepted Accounting Principles (GAAP) format, the accounting format required by the Securities and Exchange Commission in official filings.

During the Webcast Monday morning, chief executive Sanjay Kumar said the company has already explained the new business plan and that using the pro forma pro rata numbers is merely a better way to measure financial results against previous quarters booked under the old model. In the new model, sales typically booked up front in the month the contract was signed are being realized in equal monthly amounts over the term of the contract.

Kumar said that what the company is doing under the new business plan is changing the way it reports revenue, not making any changes to revenue.

Just two weeks ago, CA wowed Wall Street after it told analysts that fourth-quarter results are expected to be stronger than expected. At the time, the company trumpeted the news with a statement that proclaimed, "CA says new business model rules, Q4 rocks."

CA said a recently implemented business plan helped fuel its growth.

However, the Times article noted that under general accounting standards, CA is expected to report fourth-quarter revenue of $732 million, showing a decline from its previous quarter. But CA disputed this point and said the article created a misleading impression of the company's overall revenue by comparing reported revenue with the prior year's quarterly results without mentioning other important facts and changes due to the new business model.

Kumar explained that while the company's reported revenue is expected to be $732 million, CA also anticipates approximately $1.3 billion of residual value under the new model. Residual value, which is sometimes called "backlog," is essentially the amount contractually committed to by a customer that has not yet been recognized in revenue but will be in future quarters.

Kumar said the article failed to acknowledge that many financial analysts have applauded the company's move to the new business plan. To date, about 90 percent of CA's customers have migrated to the new model, but not all have immediately signed up under the month-to-month contract.

During a question-and-answer period, one analyst asked if executives knew of any formal investigation occurring about its accounting methods. CA executives said they are not aware of any such investigation and have not been contacted.

Toward the end of the press conference, Kumar offered an apology and said the company worked very hard to help everyone understand CA's new model, and will continue to do so.

"We're not perfect as a company," Kumar said. "We continue to do things better and better."

A report issued Monday by Merrill Lynch said CA "continues to struggle from a credibility perspective on the street, and this is not the first time CA has had to defend itself from these sorts of allegations. These kinds of issues continue to be a drag on the company's focus at a time when re-establishing sales growth is of paramount importance." Merrill reiterated its "neutral" rating on CA's stock.

SG Cowen Securities analyst Drew Brosseau is one who likes CA's new accounting model. In a research note, he indicated that the "new model more closely tracks cash flow." Prudential Securities and Deutsche Banc Alex Brown also defended CA's business.