CA Stability Still on Hold

Hitchcock of LongView has been critical of the company's recovery efforts for some time and would like to see the board's longest-tenured members replaced because, he claims, they did not exercise sufficient oversight. The rest of the board has already been replaced, along with the management cadre that worked closely with Kumar and founder Charles Wang.

CA is resisting the effort by LongView to remove the directors. A decision by the Securities and Exchange Commission on whether the matter can come to a shareholder vote is not expected until July.

In repeated interviews and public appearances, CA executives have stressed that since the scandal, the company has put in place strong internal accounting controls. But critics say the announcement that CA would miss its fourth-quarter targets calls their efficacy into question.

Here's why. The company made a number of acquisitions in calendar 2005, including software vendors Niku and Concord. Before being acquired, the companies had a fairly standard revenue model in which they sold software licenses and recognized the revenue up front. CA, though, has a complex subscription model in which revenue is recognized ratably, i.e., a bit at a time over the life of a contract.

As the companies were blended into CA, salespeople and customers negotiated to find the most advantageous terms. In the end, more contracts than CA expected were signed on what the industry calls "CA paper" -- the larger company's business model. And that meant revenue that would have been recognized in the fourth quarter won't be recognized until some future date -- thus, the miss.

It's worth noting, however, that the revenue isn't lost. It's merely postponed.

But that raises the question of why the company didn't know that much sooner. And it appears that the blame for the miscalculation is falling on Davis.

As if those problems weren't enough, analysts also worry that the company isn't moving fast enough to diversify itself beyond its core strength in mainframe software.

Credit Suisse analyst Jason Maynard reiterated an underperform rating Monday, saying, "Our primary thesis is that the mainframe is continuing to struggle, which will likely continue to affect CA's business. We view the recent management turnover as yet another issue for the company to resolve, which will only serve to prolong the turnaround." Credit Suisse has an investment-banking relationship with CA.

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