Can CA Get Back to Business?

After more than two years devoted to surviving a $2.2 billion accounting scandal, Computer Associates(CA Quote) is finally ready to get back to business.

The company's core system management business is solid, it has a balance of $4.2 billion in deferred revenue, and most importantly, the Islandia, N.Y., software giant is no longer living under the shadow of a business-shattering criminal indictment. "CA has done remarkably well during this period of uncertainty," said International Data Corp. analyst Tim Grieser.

But CA is hardly home free.

A legacy of self-inflicted wounds that goes back even further than Sanjay Kumar's failed reign as CEO still troubles customers; CA's complex accounting makes it difficult to value accurately; and the company still does not have a permanent CEO or chief financial officer. Moreover, the distraction caused by the scandal and the ensuing purge of senior executives and board members has CA without a clear vision of the future.

On Wednesday, the new management team made its first significant post-Kumar move, announcing a restructuring plan that will reduce its work force by 800 people worldwide. The cuts will save the business software maker $70 million annually once the plan is fully implemented.

That's probably a good start for "the new CA," but there's plenty more to do.

Consider the company's June quarter, its most recent. Net income increased more than sixfold to $53 million, or 9 cents a share, from $8 million, or a penny a share, while revenue increased 9% to $860 million.

And free cash flow, considered by many analysts to be a crucial metric, jumped from $140 million last year to $259 million in the first quarter of fiscal 2005.

Sound terrific? Sure, but at least some of those numbers bear a bit more examination.

"The cash flow number isn't as strong as it appears," said Charles Mulford, a professor of accounting at the Georgia Institute of Technology. The reason? Only $45 million of the $119 million swing in free cash flow is due to a real increase in profitability. The rest, said Mulford, can be attributed to nonrecurring swings in operating assets and liabilities.