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CA exults in first-quarter results

After announcing a better-than-expected first-quarter loss, Computer Associates tells analysts to raise their second-quarter expectations.

    Computer Associates International told analysts to raise their second-quarter expectations following a better-than-expected first quarter.

    "In one word, it was fantastic," said Sanjay Kumar, president and CEO of Computer Associates. "Our quarter was a spectacular performance in what is a very difficult environment."

    After the market closed Monday, the maker of software for mainframes and client-server systems reported a first-quarter net loss of $342 million, or 59 cents per share. On a pro forma basis that excludes amortization costs and revolves around a business that gradually records revenue over the life of a software contract, rather than all at once, CA earned $323 million, or 55 cents per share.

    Analysts surveyed by First Call produced a consensus forecast calling for a pro forma profit of 48 cents per share for CA's first quarter, with individual estimates ranging from 46 cents to 48 cents per share.

    In the same quarter last year, the company's pro forma earnings were $201 million, or 33 cents per share, on revenue of $1.32 billion--when calculating it on the business model it now uses. If CA were using its current business model a year earlier, the company would have posted pro forma earnings of $201 million, or 33 cents per share, on revenue of $1.32 billion.

    Kumar told analysts to increase their second-quarter estimates by 4 cents per share. First Call consensus currently predicts a profit of 49 cents per share for CA's second quarter, which ends Sept. 30.

    CA shares lost 41 cents to $33.11.

    Recent weeks have seen attention focused on CA because of a proxy fight launched by Texas billionaire Sam Wyly, who has cited news reports and surveys indicating dissatisfaction with the company's shift in how it recognizes revenue. CA critics have charged that the company's new business model is a way of hiding a slowdown in growth.

    But CA executives on Monday credited the new business model--under which companies essentially rent software for a limited time rather than buying it outright forever--for boosting sales.

    "Our clients have been very supportive of us...doing business in this new way," Kumar said.

    First-quarter results indicate Wyly's proxy fight means little to companies buying CA's software, analysts said. "I don't think the customers care, quite frankly," said John McPeake, analyst with Prudential Securities.

    Companies are buying more hardware that requires CA software, analysts said. IBM last week reported a 44 percent year-over-year growth in quarterly shipments of mainframe processing power, and many companies are consolidating their servers. Those factors boosted CA's results, McPeake said.

    The company is also beating competitors with its systems-management software, said Kimberly Caughey, analyst with Parker/Hunter. "I think they're really taking market share with their Unicenter product," she said. "I think the new sales model helps them."

    CA's pro forma revenue in the first quarter totaled $1.44 billion. About 95 percent of the company's pro forma revenue in any given quarter comes from contracts signed in earlier periods, UBS Warburg analyst Kevin Buttigieg estimated.

    "So they (pro forma revenues) obviously don't represent current business conditions," Buttigieg wrote. "Current quarter contract signings--contracts signed in the current quarter and either recognized as revenue or deferred to the balance sheet--are a better indication of current operating performance."

    Those "current contract signings" totaled $1.22 billion in the first quarter, below Buttigieg's estimate of $1.28 billion. But that's not likely to hurt CA's stock price in the near term, Buttigieg said.

    "With First Call and the (ticker) tape focused on the pro forma numbers, contract-signing expectations ill-defined, and management likely to put an optimistic spin on the business in front of the Aug. 29 proxy vote, the stock could trade up modestly even in the face of weak contract signings," Buttigieg wrote.

    The value of contract signings in the latest quarter has fallen largely because contract life spans are getting shorter, not because the company is doing less business, executives said. And deferred revenue isn't the only way to evaluate CA, said Ira Zar, chief financial officer.

    "It shouldn't be looked at in isolation," he said.