Beleaguered CA getting overhaul

CEO Charles Wang is looking to make the company less dependent on the mainframe market and make it more competitive.

3 min read
At Computer Associates' annual users conference last year, chief executive Charles Wang dazzled the crowd with a spectacle of dry ice, explosions, and a magician dressed like a bumble bee.

This year, Wang could use a little more magic to jump-start the nation's third-largest independent software maker on Wall Street.

In March, CA was forced to drop a $9.8 billion bid to buy Computer Sciences after it was unable to get the company to agree to the deal. The hostile takeover attempt, highly unusual in the technology industry, was marked by lawsuits, verbal barbs, and impassioned pitches to shareholders. CA had hoped to bolster its business with Computer Sciences' services business.

CA suffered another disappointment today, as its stock plummeted more than 31 percent after the company warned of rough quarters ahead, largely because of the Asian economic crisis and order delays related to the Year 2000 computer bug.

Shares in the company fell sharply to 39.125 in midday trading, down 17.875--a new 52-week low. The stock has traded as high as 61.9375 and as low as 41.6667 during the past 52 weeks.

"We are concerned about the ripple effect of the Asian economic turmoil on our multinational clients, and its potentially adverse impact on our near-term business," Sanjay Kumar, CA's president and chief operating officer, said in a statement. "This, coupled with deferred software purchasing decisions as customers deal with their Y2K projects and mainframe hardware transitions, leads us to believe that our revenue and earnings growth will slow over the next several quarters."

Founded in 1976, CA makes enterprise management software for multiplatform computing. Its strength is an installed base of nearly 100 percent of Fortune 500 companies. Wang, whose family fled Communist China in the 1950s, started CA with four employees and one product. It is now a $4.7 billion company.

But he faces challenges. As Hoover's Guide, a business publication, put it: "With the mainframe computer expected to go the way of the Nehru jacket, Wang is doing a little tailoring."

Wang has said that his goal is to make CA less dependent on the mainframe market.

CA posted earnings for its latest quarter that were in line with Wall Street's expectations, even beating the consensus by one penny per share. But that wasn't enough to satisfy Wall Street analysts, at least four of whom downgraded their ratings on the stock after this morning's announcement.

"The past is irrelevant with technology stocks," said Chris Mortenson, an analyst with BT Alex Brown. "The only thing people care about is the future, and Wall Street never underreacts to bad news."

Mortenson maintained his "buy" rating for the company but lowered his fiscal 1999 earnings estimates to $2.23 per share from $2.40. He also dropped his fiscal year 2000 estimates to $2.58 from $2.80.

"When [CA's customers] are looking for ways to control spending, whether it's Y2K or Asia, they don't cut spending across the board," Mortenson said. "They reevaluate and see what they can delay, and [CA's] mainframe business falls into the delayable category."

Competition in the mainframe business might be a more serious concern than Asia or Year 2000 glitch issues, added Neil Cooper, an analyst with Cruttenden Roth. Companies such as Tivoli, an IBM unit, have slashed prices and are cutting into CA's market share.

Analysts also are concerned about CA's shorter license agreements, which have changed the company's revenue stream.

"There's an issue with their licensing agreements," Cooper said. "They are getting shorter commitments, down from five years to three years."

Added Paul Dravis, an analyst with NationsBanc Montgomery Securities: "They expected to book a lot more five- and seven-year deals, but now they are getting two- and three-year contracts. Companies want shorter commitments."

Dravis downgraded CA's stock to "hold" from "buy." He also trimmed his earnings estimates for fiscal 1999 to $2.25 from $2.42 and to $2.55 from $2.81 for fiscal 2000.

Other investment banks also downgraded or lowered their earnings estimates on CA, based on the company's warnings that future revenue and earnings could be flat or take a dip.

SoundView Financial Group maintained its "short-term buy" and a "long-term hold" ratings on CA, but trimmed EPS estimates to $2.25 from $2.42 for fiscal 1999 and lowered earnings estimates to 2.60 from $2.81 for fiscal 2000.

Bear Sterns and ABN AMRO also cut their recommendations on the company today. Bear Sterns downgraded the stock to "neutral" from "buy," while ABN AMRO cut the stock to "hold" from "buy."