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Computer Associates Posts Profit, Settlement Expense

The company puts up a $10 million reserve to cover a potential deal with the Justice Department.
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Updated from May 25

Computer Associates

(CA) - Get CA, Inc. Report

swung to a better-than-expected profit in the fourth quarter before factoring in a $10 million offer to settle accounting fraud allegations with the government, the company said after the closing bell Tuesday.

The Islandia, N.Y., software company earned $89 million, or 15 cents a share, in the quarter ended March 31, compared with a loss of $106 million, or 18 cents a share, last year. Revenue rose 9.6% to $850 million, matching a forecast it issued earlier this month, but falling short of Wall Street's expectations of $861.2 million. Guidance appeared light, but was likely close to consensus once a number of accounting changes, including the expensing of stock options, was factored in.

CA shares were recently up 86 cents, or 3.4%, to $26.56.

The latest quarter included a gain of $60 million related to an asset sale and a charge of $10 million, which the company described as "an initial offer" made to the government in the wake of an accounting scandal that last month led to the

demotion of company CEO Sanjay Kumar. Several former top financial officers at CA have pleaded guilty to fraud, and the company has restated two years of financial results.

Computer Associates, which makes business software for mainframes and other large systems, said it "cannot predict the timing or outcome of the government investigation or the amount of any fine or penalty, which may be significant, that may be imposed."

One Wall Street analyst, speaking informally, said he didn't think $10 million would come close to covering an eventual fine. "You'd expect at least $100 million or $200 million, since the amount of money involved was about $2 billion," he said.

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Excluding charges, CA earned 18 cents a share in the fourth quarter of 2004 compared with 8 cents a share in the fourth quarter of fiscal year 2003, and a penny better than analysts expected.

The quarterly report was delayed by the intensive work needed to restate two years of financial results, a consequence of the company's admission that nearly $2 billion of revenue

had been illegally backdated to strengthen earlier quarters.

In a conference call with analysts, CA management said 2005 will be "an investment year," but the company didn't specify how large those investments might be.

Bookings for security software, not an area of strength for CA, increased 46% year over year.

Looking ahead to results for the current, or first quarter of fiscal 2005, the company told investors to expect revenue ranging from $865 million to $885 million. Analysts polled by Thomson First Call were expecting $897.7 million. Pro forma income will range from 17 cents to 19 cents per share; Wall Street was expecting 19 cents a share.

Guidance for the full fiscal year 2005 was somewhat muddled by accounting changes.

The company said pro forma earnings would range from 73 cents a share to 78 cents a share on revenue ranging from $3.5 billion to $3.7 billion. Analysts were expecting a profit of 95 cents a share on revenue of $3.8 billion.

However, in a call with analysts, CA mentioned several major accounting changes not included in the models built by some analysts who contribute to the consensus numbers.

In a note sent to clients shortly after CA's conference call, Lehman Brothers analyst Neil Herman said, "Please note that FY05 guidance reflects a negative $125 million revenue impact from a change in accounting for channel revenue and a negative 17-cent impact to non-GAAP EPS from a combination of the change in accounting for channel revenue and the expensing of stock options."

Herman went on to say that including those changes, guidance was equivalent to his estimates of earnings of 92 cents a share on sales of $3.7 billion. (Lehman Brothers does not have a current banking relationship with CA.) Other analysts, however, thought that guidance was actually in line with estimates once the accounting changes were factored in to the forecast.