quickly went into damage control mode after an article published during the weekend questioned the company's accounting methods, but investors weren't impressed by a defense from the CEO as they sent the shares of the business software provider sharply lower by the close of regular trading Monday.
The company's stock lost 9% to $32.19 a day after a story published in
The New York Times
claimed that Computer Associates has used accounting trickery to overstate its financial results. The story cited more than a dozen former employees and industry analysts who alleged that the company's financial presentations may not be on the level. Computer Associates, which is based in Islandia, N.Y., hastily assembled a conference call to defend its business practices.
"The new business model causes a change in reporting, not a change in revenue, and there is a fundamental difference," Sanjay Kumar, CA's chief executive, said on the call. "The change in reporting contains one extra step as a result of the implementation of the new business model. The one extra step is the production and distribution of pro forma numbers from Computer Associates."
Analysts presented a united front in defending not only CA's methods, but their own rationale for interpreting the company's results.
"We ignore one-time charges and one-time events," said
Kimberly Caughey. "I'm glad they had the call. I'm glad the company cares about its image. I think the company is well-positioned for tough times." Caughey's firm, which hasn't done any underwriting for the company, has a buy rating on CA.
And she wasn't the only one crying foul about the article.
Sarah Mattson, an analyst with
Dain Rauscher Wessels
, called the article "a significant exaggeration of the situation. The perception of CA is that there is a lot of suspicion attached to it," she said. "The company's missed
its earnings projections a couple of times. That kind of creates a murkiness around them. The knee-jerk reaction is that there is something that they're hiding." Mattson, whose firm has a neutral rating on CA, also said, "There are some fundamental issues, but do I think they're evil? No."
The New York Times
, meanwhile, wasn't apologizing for anything. "We are confident in the thoroughness and reliability of our reporting," Toby Usnik, a spokesman for
The article was well-researched and cited extensive interviews with industry analysts, peers of Computer Associates and employees of Computer Associates both past and present."
At the heart of the matter is the company's use of pro forma figures in reporting its financial performance. Pro forma numbers, which often don't adhere to generally accepted accounting principles, are designed to provide investors and analysts with meaningful comparisons between current and prior periods. In the not-too-distant past, newly public companies, firms that had recently emerged from bankruptcy reorganization or companies with acquisitions that skewed comparisons with past quarters or years issued pro forma results.
Today, companies issue pro forma statements for a wide variety of reasons -- goodwill amortization, a one-time charge or executive compensation costs, in addition to the reasons mentioned before -- usually with the intent of making the results look better than they would using the rules of standard accounting. Computer Associates is far from being alone in providing investors with two or more sets of numbers, as the practice has become increasingly common among publicly traded companies.
The company's credibility on Wall Street took a serious blow last summer. On Monday, July 3, right before midnight, Computer Associates issued a statement warning that its revenue and earnings would badly miss analysts' expectations, a move that was notable because many market watchers and investors were either asleep or on vacation for a four-day holiday weekend. When the market opened on Wednesday, July 5, CA's shares were shredded, losing more than 40% of their value in a single trading session.
Less than four months later, Computer Associates introduced a new revenue recognition policy designed to offer its clients flexibility while improving both the visibility of the company's revenue stream and quarter-to-quarter revenue predictability. Though the model caused CA to alter the way it recognizes revenue, the company said the new approach wouldn't necessarily change the overall cash generated from operations. The company said the new model was designed to eliminate the back-end loaded nature of its business, where most license agreements are concluded in the final days of a quarter.
Then, earlier this month, CA issued a press release gushing that it had easily topped analysts' expectations for the latest fourth quarter. Using a "pro forma pro rata" calculation, the company said revenue rose to $1.44 billion from $1.39 billion in the same quarter a year ago. CA also said it would report earnings of 47 cents a share, beating the consensus forecast and up from 34 cents in the prior year.
Those results include the operations of
, two of CA's acquisitions. On a reported basis, CA indicated that revenue for the fourth quarter would total $732 million, down from $1.91 billion in the previous year. The company also said it would lose 29 cents a share, down from net income of $1.13 in the fourth quarter ended March 31, 2000.
Kumar said CA's numbers are legitimate, and he added that the company's accounting practices follow specific criteria. "We comply to generally accepted accounting standards; we have consistency in the way we recognize maintenance
revenue in our business," he said. Kumar added that he wasn't aware of any investigation by the
Securities and Exchange Commission
into the company's accounting principles.
"I didn't hear any new news on the call," Peter Goldmacher, an analyst with
, said after the company's presentation. "There's no incremental news." Goldmacher, whose firm hasn't done any underwriting for Computer Associates, has a neutral rating on the stock.
"Pro forma pro rata is meant to provide an apples-to-apples comparison" with the numbers of previous years, Goldmacher said. He pointed out that the pro forma numbers force some people to be skeptical of the figures because analysts, reporters and investors have to rely on the company to actually provide them with a method for understanding recent performance and comparing the results with prior periods.
For his part, Kumar acknowledged that those who follow and work for Computer Associates want to understand the company's performance. "Comparing revenue under the old business model to the new business model is simply not meaningful," he said. "It is unfortunate that people who chose to comment on this did not seek the advice and counsel of people who are well-equipped to comment on this, the technical accounting issues."