Computer Associates' Top Line Falls Short

Late traders are also disappointed by first-quarter guidance.
Publish date:

Updated from 7:20 p.m. EDT

Nearly a year after its disgraced former CEO left the company,

Computer Associates

(CA) - Get Report

can't quite put its accounting problems behind.

As Wall Street was focused on the company's fourth-quarter earnings Thursday, the software vendor filed a statement with the

Securities and Exchange Commission

saying that it may have to restate as many four years of earnings. The company said a number of contracts signed between 1998 and 2001 "appear to have been accounted for improperly."

And despite CA's attempt to exorcise the ghosts of its former managers, it seems that there are accounts waiting to be settled. "Based on its review, the company has determined that former members of senior management and others, who are no longer employed by the company, were involved in negotiating and approving these transactions," CA said in its filing.

Earlier, the giant software vendor delivered the fourth quarter it promised investors last month, but didn't quite match Wall Street's expectations for the top line. And weighed down by expenses connected with the Sarbanes-Oxley Act and higher taxes, the company's profit slipped sharply year over year.

But investors also found some pluses in the report and were not terribly harsh in reaction to the negatives. Following the announcement, shares of CA fell 46 cents, or 1.6%, to $28.20.

Net income was $17 million, or 3 cents a share, in the fourth quarter, down from $89 million, or 15 cents a share a year ago. Revenue was up 7% to $910 million, the company said after the closing bell Thursday.

Excluding items, the system software vendor earned 20 cents a share in the latest quarter. On the same basis, analysts polled by Thomson First Call were expecting a profit of 20 cents a share on sales of $918.2 million.

In early April, CA said it expected sales to range from $900 million to $920 million with an EPS of 19 cents or 20 cents. In a brief interview, Chief Operating Officer Jeff Clarke said the company delivered what it promised last month, and urged investors to note that subscription revenue (the equivalent of what other software companies call deferred revenue) earned in a quarter is recognized "ratably," which has the effect of reducing revenue on the income statement.

Indeed, CA's total deferred subscription revenue balance at the end of the fiscal year on March 31 was up 30% to $5.6 billion, compared with $4.3 billion at the end of fiscal year 2004.

The company generated about $738 million in cash from continuing operations in the quarter, compared to $588 million a year ago, an increase of 26%.

Expenses increased by 3.8% to $838 million. The comparison to last year also suffered a bit because the company received a benefit of $60 million, or 10 cents a share, related to discontinued operations.

Looking to the current, or fiscal first, quarter, CA said it expects a pro forma profit of 21 cents or 22 cents a share on revenue of $910 million to $930 million. Analysts were looking for a 23-cent profit and revenue of $932 million.

CA was deeply shaken by an accounting scandal that last year led to the resignation and subsequent indictment of CEO Sanjay Kumar and other top executives, who prematurely booked more than $2 billion in sales to bolster weak quarters. A year later, the company has not quieted all of its shareholder critics or convinced Wall Street that it can once again produce consistent returns.

Attempting to dispel that shadow, Computer Associates last month said it would double its annual cash dividend and buy back up to $400 million worth of shares in fiscal 2006. "These two actions indicate the confidence CA's board of directors and senior management has in the company's ability to grow and deliver shareholder value," CEO John Swainson said.

A settlement with the Department of Justice mandated CA, under threat of prosecution, to add more independent directors and take other measures to clean up its act. Under the so-called deferred prosecution agreement, CA also paid $225 million to defrauded investors and said it would fire all employees responsible for wronging and add independent directors to its board.

The company also agreed to appoint more independent, i.e., nonmanagement directors to the board, and has done so. However, eight of the 12 board members held their seats before Kumar left the company, and that, critics say, sets off alarm bells.

"All of the directors who were on the board prior to last April have a bias in relation to decisions the company made in the past. And the fact that they don't recognize that and step down raises more questions," says Gary Lutin an investment banker who is running an informational forum for CA shareholders.

For its part, CA management maintains that it has upheld the agreement and purged the company of the executives who committed fraud and changed the practices that allowed it to go undetected. "We've changed the management team, we have a new CEO, a new COO, a new CIO ...and a new chief counsel all within the last year," said Clarke.