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THE DAY AHEAD: CA&#039&#039s credibility an easy target

COMMENTARY--Computer Associates officials hosted a Webcast to squash worries about the company's accounting and business prospects, but execs skipped over a big part of the picture: Why is CA such an easy target in the first place?

The answer to that question is relatively simple. CA (NYSE: CA) has a major credibility problem. Taking on CA's credibility is like a Major Leaguer playing tee-ball--it's just too easy. The company has issued profit warnings on holidays and paid its top executives top dollar for bottom-of-the-barrel stock returns. And even when times are good for CA, its penchant for profit warnings always keeps you from getting comfortable.

Shares of CA slipped Monday after a weekend report in The New York Times questioned the company's accounting methods. A few quarters ago, CA changed its business model--and accounting--so it could book more subscription revenue, minimize back-end loaded quarters and provide Wall Street with better predictions.

The New York Times maintained that CA was using fuzzy math to make itself look better. Armed with new accounting, cocky CA recently announced that its new business model "Rocks!" and said its fourth quarter would top estimates with earnings of 47 cents a share on sales of $1.44 billion.

Many analysts are on board with CA's new "pro forma pro rata" reporting, but they also admit that it's a bit confusing. CA has split its revenue total into an actual revenue figure and a "residual value" total, also known as sales in the pipeline or backlog. Naturally, all previous financial results have been reported on a pro forma, or hypothetical, basis.

In a recent research note, Wit SoundView analyst Jim Mendelson walked through CA's fourth-quarter preannouncement. He noted that there were some missing pieces of the accounting puzzle, but "on balance, the numbers look good--how good exactly is difficult to tell." That's a common refrain on Wall Street, which for the most part supported CA Monday.

CA's CEO Sanjay Kumar, defended the company in every way possible. For the not-so-short version, visit the company's Web site, where you can find CA's rebuttal to the Times, details of its new business model and a FAQ.

It's interesting stuff, but the debate over CA's business model and accounting is academic. The real issue here is that CA has to deal with another blow to its credibility. If another software company made the accounting change, the press, analysts and investors would probably take it in stride. But since it's CA, you're naturally inclined to look for skeletons because of its spotty track record.

"The company 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," said Merrill Lynch analyst Peter Goldmacher, who rates CA a "neutral." "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."

Gee, we wonder why:

 In 1999, CA chief Charles Wang and two other senior officers divided $1.1 billion in CA stock, or 3.75 percent of the company at the time, after reaching a pay-for-performance target. Less than two months after reaching the payoff, CA said sales would not meet previous forecasts, and the stock was hammered. A shareholder suit challenged the size of the management pay bonanza, forcing Wang and his colleagues to return $558 million of their ill-gotten gains.

 The big payday made Wang BusinessWeek's best paid CEO in 1999, but put him at the bottom in terms of relative stock return. Wang, now chairman of CA, pocketed $655 million including options, but CA shares fell 72 percent in 1999. Over a three-year period ending in 2000, Wang made $698 million, but shares fell 63 percent. Kumar also made BusinessWeek's overpaid list.

 CA has a history of profit warnings. Any given quarter could be a miss for this software company. Officials hope CA's new business model will make earnings more predictable, but don't hold your breath. The most notorious CA profit warning hit the wires just before midnight on July 4, 2000. The shady timing of the profit warning only brought more attention to CA's profit warning since it irked the press.

In many ways, CA is still plagued by sketchy investor relations. The company's overkill response to the Times story only makes you wonder what's really going on. Quite a contrast to CA's "CA SAYS NEW BUSINESS MODEL RULES; Q4 ROCKS" headline.

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