Computer Associates Meets Estimates, but Drops Guidance

The software company lowers full-year revenue estimates slightly.
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Updated from 6:19 p.m. EDT

Computer Associates International

(CA) - Get Report

, the software maker embroiled in aproxy battle and

Securities and Exchange Commission

investigation,on Monday reported first-quarter earnings results that beat Wall Streetestimates but lowered revenue guidance for the fiscal year.

The world's third-largest software maker reported a net loss of $65million, or 11 cents a share, in the first quarter, according to generallyaccepted accounting principles. That compares to a net loss of $238million, or 41 cents a share, in the previous quarter and a net loss of$342 million, or 59 cents a share, in the same period a year ago.

Excluding acquisition amortization, Islandia, N.Y.-based ComputerAssociates said it registered operating net income of $12 million, or 2cents a share, compared to a net loss of $141 million, or 24 cents a share,in the same period a year ago. That was better than the company's guidance,forecasting it would break even or earn 1 cent a share, and the break-evenfirst-quarter earnings expected by analysts surveyed by ThomsonFinancial/First Call.

Revenue rose 7% to $765 million from $712 million a year earlier, butdeclined $7 million sequentially. Wall Street was expecting revenue of$771.4 million and the company had guided to between $770 million and $775million.

In the fourth quarter, the company registered $3 million in pro formanet income, or breakeven on a per-share basis, on $772 million in revenue.

Computer Associates President and CEO Sanjay Kumar attributed thecompany's results to its new subscription model, in which the companyrecognizes software sales over the life of their contracts rather than allat once. "Our business model enables customers to make shorter-termcommitments and to pay for what they use, not what they expect to use," hesaid in a statement.

The company said its average contract length shrank to 2.75 years from4 years in the year-ago period. Annualized deferred subscription revenuefell to $117 million from $126 million in the year-ago period, which CAsaid reflected the weaker market. The company added $322 million in newdeferred subscription revenue, down 51% sequentially from $656 million inthe fourth quarter.

Some have charged that CA's new model, initiated in October 2000, hasenabled the company to hide slowing growth -- an allegation the company hasdenied.

Computer Associates said it expects second-quarter revenue to rangefrom $760 million to $775 million and earnings to range from 1 cent to 2cents a share.

Wall Street was expecting CA to report GAAP earnings of 2 cents a shareon $793.5 million in revenue in the second quarter.

For the full fiscal year, Computer Associates said it expects revenueto range from $3.1 billion to $3.2 billion, down from its original outlookin May of between $3.2 billion and $3.26 billion "since it appears that aneconomic recovery will take longer than originally expected." Earnings areexpecting to remain in the original range of 10 cents to 13 cents a shareon a GAAP basis.

Analysts were expecting full-year earnings of 12 cents a share on $3.22billion in revenue.

"It

the lower fiscal-year guidance is clearly a sign of weakness,"said Merrill Lynch analyst Peter Goldmacher, who has a neutral rating onCA. "It's maybe a tad worse than you could infer from the incomestatement." His firm hasn't done any banking with CA.

"The promise of a subscription model is more predictable revenue andthat's what we got," added Goldmacher. But that was tempered by the drop innew deferred revenue bookings on the balance sheet, he said. "I thinkthat's going to be a little disappointing to some folks," he said.

Computer Associates is facing its second

proxy fight with Texas investor Sam Wyly, who has endorsed aminority slate of five dissident candidates for the CA board of directors.Since Wyly's unsuccessful proxy battle last year, the company has comeunder investigation by the SEC and the U.S. Attorney's office, who arereportedly examining whether CA wrongly booked more than $500 million inrevenue in 1998 and 1999, while three senior executives enjoyed payoutstriggered by stock price milestones.

On a postclose conference call, Kumar said the company has not made anychanges in its revenue recognition policy between 1995 and 1998 and remainsconfident that its accounting was proper. He said he is hopeful thecompany can bring the investigation to a conclusion. "We realize it isweighing on the company's stock price," Kumar said.

Kumar called Wyly's plan "divisive" and said it proposes steps alreadytaken by the company, such as improving customer service and the CFOreporting to the board. " We think it's a plan that will clearly stall thebusiness," Kumar said.

Stephen Perkins, a Wyly-backed candidate and president of RangerGovernance, an affiliate of Wyly's investment firm, said he had concernsabout the drops of deferred revenue bookings and contract term. " Everytime I've run businesses I've wanted people to be committed to long-term,"he said.

It's true, Perkins said, "the market is having a tough time and techstocks are in the dumperand there are a lot of problems," then added, "but I don't think that's theexcuse thatshould be offered for this management team." He said Wyly'sslate is focused on creating an independent board of directors moreaccountable to shareholders whose responsibilities would include approvingthe hiring of a new chief financial officer.

Shares of Computer Associates dropped 4 cents, or 0.4%, to close at$10.21 Monday. In after-hours trading, Computer Associates shares rose to$10.88.