CA Makes Headway

Investors bid the shares higher on Friday as the software outfit offered an encouraging sales outlook

CA, Inc. (CA) CEO John A. Swainson had said in November, 2005, that it took a long time for the company to get screwed up, it would take a long time to get it "unscrewed up", and it would take even longer for people to recognize it (see, 11/21/05, "Computer Associates: Clearing A Cloud"). Now the Islandia, N.Y. software company formerly known as Computer Associates has offered an encouraging outlook on sales -- and investors bought its stock on Feb. 2.

CA said its sales grew to $1 billion during the three months ended Dec. 31, up 1% in constant currency compared to the same period of 2005. For fiscal 2007, the company expects to exceed previous revenue guidance of $3.9 billion. The mean analyst forecast had been for $3.93 billion, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

"I am pleased with our third quarter performance," Swainson said in a press release late Feb. 1. "We made progress executing on our second half plan."

Since taking the helm in 2005, Swainson has been trying to turn around the company that had crumpled years ago under the weight of accounting scandals. He's been putting new rules in place, getting rid of trouble-makers, and chatting with disgruntled customers. He's encouraging salespeople to focus on their customers' needs, by paying commissions that last over the life of services contracts. (Before, Computer Associates had paid up front commissions based on the size of the contracts customers signed.)

Such efforts show signs of making headway. During the December quarter, CA renewed six license agreements valued in excess of $40 million for an aggregate value of around $472 million, with one contract valued at over $100 million. The average CA contract length grew to 3.7 years compared to 3.5 years during the prior year period.

But nothing comes for free. During the recent quarter, CA recorded $32 million of charges related to things like severance costs and office closings. The company still expects to spend around $150 million on its restructuring plan during the remainder of fiscal year 2007 and 2008. Including items, CA's income from continuing operations sank 7% year over year to $52 million during the quarter.

The market is giving the company credit. Investors bid up the stock 6.9% to $26.73 per share near closing time on the New York Stock Exchange Feb. 2. But Wall Street players remain cautious.

"CA's restructuring efforts are on track, and results for the quarter bear that out," Morningstar analyst Norman Young said in a research note. If the company can prove itself with several consecutive quarters that show stability, Young said he will revisit his above-average risk rating.

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