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CA says its quarter "rocks"; investors agree

Investors applaud Computer Associates' news, but analysts question how long the party will last.

Shares of software giant Computer Associates International surged ahead 10 percent in morning trading Tuesday, as the software company bucked the trend of depressing news and told analysts it would report stronger-than-expected results for its fourth quarter.

CA trumpeted the news Monday, sending out a release proclaiming, "CA says new business model rules, Q4 rocks." The company expects to see earnings for the fourth quarter, excluding special charges and one-time charges, of 47 cents per share, up from the 34 cents per share it posted a year ago. Revenue should be about $1.44 billion, the company said. The company will report fourth-quarter earnings May 22.

Wall Street was expecting the company to report earnings of 43 cents per share, with revenue around $1.42 billion, according to First Call.

Shares were up $3.59 to $33.18 in afternoon trading.

CA makes mainframe software and network management tools. The company said a shifting business model, which included a change from enterprise licensing to subscription licensing, helped fuel its growth.

"Our new business model, which continues to be embraced by customers, has become an even greater competitive advantage for CA," CEO Sanjay Kumar said in a statement.

This will be the second quarter in a row that the company has topped estimates. In October 2000, the company 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 one lump sum, smoothing out its sales.

While Wall Street's reaction to the announcement was generally positive, a few analysts questioned how long the upswing would last. CA has a history of profit misses and is still tainted by a pre-announcement released July 4 last year.

"While we are pleased that the company was able to meet consensus expectations, we do not have a great deal of comfort with the model and still harbor concerns regarding the health of the mainframe business," wrote Merrill Lynch analyst Peter Goldmacher. He said he was maintaining his "intermediate-term neutral" and "long-term accumulate" ratings on the stock.

The shift in accounting made it difficult to draw comparisons, analysts said.

"While results are encouraging given the current environment, we continue to believe that it is difficult to gauge the true strength of CA's business...particularly during the very early stages of the company's business model transition," said Goldman Sachs analyst Anne M. Meisner. She raised her earnings estimates for 2001 to $1.61 per share from $1.58 per share but maintained a "market performer" rating on the stock.