This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

JPMorgan Tech Conference: Computer Associates Forced to Play Defense

Mayday! Mayday!

You could almost hear the cries breaking out from the back of the room as Computer Associates (CA) CFO Ira Zar defended his company at the JPMorgan H&Q Technology Conference. He was addressing, point by point, the criticism his company has drawn in the last two days over its accounting in the wake of a scalding article by The New York Times.

But it wasn't just the accounting bombs that Zar had to defend. Surely, it would have been nice if someone had offered him a life preserver -- or just got him off the stage -- before he was reduced to addressing the Times' barb that CA uses "young, cute girls to basically resell maintenance contracts."

Still, that's what he found himself doing.

"It's a little disheartening to have to defend this," Zar told a room of investors who seemed unusually attentive -- think people driving by a car wreck -- at the 8 a.m. Pacific Time presentation. "We take great pride in our diversity and the leadership we show."

Zar went on to detail how women are in senior management positions at CA, and said a yet-unnamed female executive oversees the firm's European operations.

Of course, uncomfortable a topic as this must be for CA, anyone who's ever been to a software industry trade show knows that using "young cute girls" to sell software -- to sell anything -- is a tried and true practice. (We didn't coin the term "Booth Babes;" we merely offer it here as evidence.)

But the fact that Zar even had to talk about such things tells you something: CA's investment story, which has never been easy to understand, has now moved into an even less desirable category, despite analysts' vigorous defense of the company yesterday.

On Wall Street, stocks generally fall into three groups. There are story stocks that leave investors hanging on every word. There are stalwarts, those boring fuddy duddies that keep the profits rolling in. And then there are the companies with "issues." CA now clearly falls in the last category.

At the breakout session following Zar's formal presentation, investors peppered the CFO with questions about the company's accounting changes, which took effect last year. The gist of those changes is that the company now recognizes revenue from customers over time, over the life of a software contract, instead of recognizing most of it upfront.

As an example, before its accounting change, if the company sold a $100 contract, it recognized $80 of that immediately, and put the remaining $20 into deferred revenue, to be recognized over the life of the contract.

Now, under its new accounting methodology, it recognizes all of the $100 over time. On a one-year contract, for instance, it would recognize as revenue 1/12 of $100 dollars, or $8.33, each month. The company says this gives it more visibility into its business going forward, and its customers more flexibility in choosing how they buy and pay for software. Zar said that has made it easier for the company's sales reps to sell, because customers can bite off smaller chunks at one time.

But because of this change, the company has been issuing "pro forma, pro rata" numbers when it details its financial results. In English, that means it has gone back and re-crunched historical numbers to show them as if the company had been recognizing revenue in its new way all along. The company has done this, it says, so that investors can have a historical comparison for current results.

The only problem is, pro forma, pro rata numbers don't toe the line of generally accepted accounting principles, something investors usually like companies to do. So CA also shows "as reported" numbers, where it records the 1/12 of the $100 contract, to make sure everything's on the up-and-up. That, obviously, makes its overall revenue look smaller, which has led some observers to wonder whether the company isn't trying to hide slower growth.

Zar told investors that conclusion misses the point.

"It's not about an accounting change; it's a different way of selling software," Zar said.

"We can afford opportunities to clients that weren't there before," Zar said during an interview afterward. "I think the performance results speak for themselves." He was referring to the fact that CA issued a rare upside preannouncement in April. On May 22 it will report official results for the quarter ended March 31.

But judging from the questions investors kept throwing back at him -- like how these changes motivate the company's sales force, or how they affect pricing on the company's products -- they weren't sold on the concept. Somehow, they were still focused on the company's issues.

Asked whether CA would make the change again if it had a second chance, Zar didn't hesitate.

"Absolutely," he said. "This was absolutely the right thing to do for our business, and for the ultimate health of the company."

If nothing else, it has certainly gained the company the rapt attention of investors, who will watch rubber-necked to see if it can save itself.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,600.25 +243.38 1.40%
S&P 500 2,041.01 +28.12 1.40%
NASDAQ 4,713.1480 +68.8360 1.48%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs