Can CA Get Back to Business?

Mulford hastened to add that his analysis does not indicate any attempt to mislead by Computer Associates, but represents a fault of the metric.

Indeed, CA's balance sheet is notoriously hard to decipher and at times the difficulties work against the company. On a price-to-earnings basis, Computer Associates might appear somewhat overvalued compared with its peers. Credit Swiss analyst John Rizzuto, for example, pegs the company at a P/E of 31 vs. 29 for comparable companies.

But a massive change in CA's business model makes P/E somewhat misleading. Four years ago, CA moved away from a typical software industry model under which it recognized license revenue (with the exception of maintenance fees) upfront. Now, it uses a subscription model, under which revenue is recognized ratably, that is, in segments over time.

Making the change all the more complex is the fact that CA's software agreements used to run as long as five years, which means that there is still a backlog of contracts that currently produce no license revenue, although they do contribute maintenance revenue. As a result, CA's income appears smaller than it is, and that inflates the P/E ratio, said Mulford. And the $4.2 billion stash of deferred revenue puts a solid floor under the company's performance for some time.

Asked how long it will take the old agreements to work through the system and simplify the accounting process, a CA spokeswoman said "We don't have specific information regarding this transition."

Accounting issues aside, CA performed well in the first quarter. Revenue from enterprise management, the company's core business, jumped 14% year over year, and CA, said IDC's Grieser, is solidly in second place in the sector, behind IBM(IBM Quote) and well ahead of third-place BMC(BMC Quote) and fourth-place Hewlett Packard(HPQ Quote).

"CA has the broadest and deepest product portfolio in the systems management industry," said Credit Suisse First Boston analyst John Rizzuto. "Based on the company's position, attractive valuations and growth rate, we believe the shares of CA are trading at too steep a discount to its peers," he wrote in a note to clients. (CSFB is seeking investment banking business with CA.)

However, CA can't rest on its laurels in system management. The rise of utility or on-demand computing, the ability to shift servers and other major computing resources on the fly from one task to another, is creating opportunities for CA's rivals to catch up, said Grieser. "CA lost time [while distracted by the scandal] and if they have a vision of the future of utility computing it's not at all clear to customers," he said.

Also encouraging was the company's strong showing in security, a relatively new market for CA, which more than doubled its revenue in the sector, albeit from a very small base.

So, what's not to like? "Customers have long memories," said Yankee Group analyst Andy Efstathiou. For years, co-founder and CEO Charles Wang was known as the hardest of hardball players, squeezing customers unmercifully. And although former CEO Sanjay Kumar worked hard to improve customer relations, the company's brand still suffers from Wang's legacy, Efstathiou said.

And, of course, the scandal that brought Kumar down turned a disliked company into a distrusted one.

Con Hitchcock, general counsel for the Amalgamated Bank's Longview Fund, was one of the more vocal investors prodding CA's board to clean up the company. Is he satisfied with the settlement reached between CA and the government last week? "This is a company that has managed to surprise investors with continued bad news in recent years. One hopes there are no more surprises," he said.