CA's Solid Quarter Pays Off

The stocks is up sharply as the company posts a GAAP profit and reports higher revenue.
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Updated from July 23

A solid quarter with an unexpected return to profitability was paying off for shares of

Computer Associates

(CA) - Get Report

Thursday.

In recent trading, CA's shares were up $2.80, or 12.6%, to $25.04.

While maintaining hold ratings on the stock, both First Albany and Deutsche Bank raised earnings estimates for the company.

The software company reversed a year-ago loss for its fiscal first quarter Wednesday on higher-than-expected revenue boosted by currency rates and a transition to a subscription-based business model. The company raised its earnings guidance for fiscal year 2004, but left its revenue outlook unchanged.

The Islandia, N.Y.-based software company reported GAAP net income of $10 million, or 2 cents a share, in the first quarter ended June 31, compared to a net loss of $65 million, or 11 cents a share, in the same period a year earlier. That included a gain of 2 cents a share related to the sale of certain fixed assets and a loss of 2 cents a share from restructuring. The company had predicted it would post a GAAP loss of 3 cents a share to 4 cents a share.

Excluding charges, Computer Associates said it earned operating income of 14 cents a share in the first quarter compared to pro forma net income of 2 cents a share a year earlier. Wall Street analysts were forecasting CA would earn 9 cents a share in pro forma earnings the first quarter, according to Thomson First Call, and the company had guided to earnings between 9 cents a share and 10 cents a share.

Computer Associates, the world's fourth-largest independent software company, said revenue rose 6% to $813 million from a year earlier and 1.5% from $801 million in the previous quarter. That exceeded the analysts' estimate of $803.3 million and the company's forecast in the range of $795 million to $810 million.

"We are obviously very pleased that we achieved profitability on a GAAP basis sooner than expected," CA Chairman and CEO Sanjay Kumar said in a press release. "This was made possible by a steady increase in revenue and continued efficiencies in our business."

In addition to higher sales, lower costs also pushed Computer Associates into the black. Selling, general and administrative costs declined 10.8% from the same quarter a year ago. Interest expense declined 51.6% as the company has paid down its debt.

Kumar said the company's costs, which have fallen due to a restructuring, have hit bottom for the most part.

Computer Associates said it expects second-quarter revenue to range from $805 million to $825 million and second-quarter pro forma earnings, excluding charges, to range from 13 cents a share to 15 cents a share. Wall Street analysts were expecting pro forma earnings of 10 cents a share on revenue of $823.2 million. GAAP earnings are expected to come in at 1 cent a share to 3 cents a share.

For the full year, Computer Associates expects revenue to range from $3.275 billion to $3.425 billion, representing no change from prior guidance. It raised operating earnings guidance to 55 cents a share to 60 cents a share, up from 41 cents a share to 46 cents a share. Wall Street estimates pegged 2004 earnings at 45 cents a share on sales of $3.4 billion.

Still unresolved is a more-than-year-old investigation by the

Securities and Exchange Commission

and U.S. attorney's office into the company's past accounting practices.

Shares of Computer Associates slipped 28 cents, or 1.2%, to close Wednesday at $22.24. In after-hours trading, shares climbed to $23.90.