“We had a good quarter on many measures and continued to make solid progress against our long-term goals,” said Bill McCracken, chief executive officer, CA Technologies. “However, we are not done. We remain focused on continuing to execute on our strategy and making further operational enhancements including driving new product sales and increasing sales productivity.
“The $2.5 billion enhanced capital allocation program announced today is the culmination of significant work evaluating ways to optimize our balance sheet, while maintaining the financial flexibility needed to build our business and enhance our competitive positioning,” McCracken continued. “We believe we’re on a path to achieve a balanced approach to return even more cash to shareholders, while still investing in our future.”
REVENUE AND BOOKINGS
The Company received a final license payment in the third quarter of $39 million under a license agreement entered into in connection with a 2009 litigation settlement with a software company. The payment reflects the final amount owed, which was scheduled to be repaid in fiscal years 2013 and 2014. The company made the final payment at its discretion, without any discount or concession by CA Technologies.
During the third quarter, the Company saw demand for its virtualization and service automation products, security solutions including products from Arcot Systems, Interactive TKO (ITKO) products, mainframe solutions and professional services. About 8 percentage points of revenue growth in constant currency and as reported were driven by organic products, while about 2 percentage points in constant currency and as reported came from acquired products. About 63 percent of the Company’s revenue came from North America, while 37 percent came from international operations.
- Total revenue was $1.263 billion, up 10 percent in constant currency and as reported. The single license payment contributed 3 percentage points of revenue growth, all in North America.
- Total revenue backlog was $8.084 billion, up 2 percent in constant currency and as reported. The current portion of revenue backlog was $3.576 billion, up 2 percent in constant currency and 1 percent as reported.
- North America revenue was $791 million, up 15 percent in constant currency and as reported.
- International revenue was $472 million, up 3 percent in constant currency and as reported.
- Total bookings in the third quarter were $1.284 billion, up 2 percent in constant currency and 1 percent as reported. The single license payment contributed 3 percentage points of growth to bookings, all in North America.
- The Company renewed a total of 12 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $452 million. During the third quarter of fiscal year 2011, the Company renewed a total of 15 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $456 million.
- The weighted average duration of subscription and maintenance bookings for the quarter was 3.53 years, compared with 3.20 years for the same period in fiscal year 2011.
- North America bookings were $766 million, up 1 percent in constant currency and as reported.
- International bookings were $518 million, up 4 percent in constant currency and 2 percent as reported.
EXPENSES AND MARGIN
Year-over-year GAAP results:
- Operating expenses, before interest and income taxes, were $850 million, up 5 percent in constant currency and as reported.
- Operating income, before interest and income taxes, was $413 million, up 22 percent in constant currency and up 24 percent as reported.
- Operating margin was 33 percent, up 4 percentage points from the prior year period.
Year-over-year non-GAAP results, which exclude purchased software and other intangibles amortization, pre-fiscal year 2010 restructuring costs, and certain other gains and losses (including recoveries and certain costs associated with derivative litigation matters and share-based compensation expense), and which include gains and losses on hedges that mature within the quarter, but which exclude gains and losses on hedges that do not mature within the quarter:
- Operating expenses, before interest and income taxes, were $788 million, up 4 percent in constant currency and as reported.
- Operating income, before interest and income taxes, was $475 million, up 21 percent in constant currency and 23 percent as reported.
- Operating margin was 38 percent, up 4 percentage points from the prior year period.
Both GAAP and non-GAAP operating expense increases were primarily driven by costs associated with acquisitions and expenses resulting from increased Services engagements, and product development and enhancement costs.
For the third quarter of fiscal year 2012, the Company’s effective GAAP tax rate was 34.9 percent, compared with 39.1 percent in the prior year. The Company’s effective non-GAAP tax rate was 31.5 percent, compared with 31.7 percent in the prior year.
GAAP and non-GAAP EPS were favorably affected by about $0.05 per share by the single license payment. In addition, GAAP and non-GAAP EPS were positively affected by currency and a reduction in share count. The single license payment also had a positive impact of about 2 percentage points on both GAAP and non-GAAP margin.
Beginning in the first quarter of fiscal year 2012, CA Technologies began reporting segment results in three areas: Mainframe Solutions, Enterprise Solutions and Services.
- Mainframe Solutions revenue was $682 million, up 9 percent in constant currency and as reported. The single license payment contributed 6 percent points of growth to Mainframe Solutions revenue. Operating expense was $277 million and operating profit was $405 million. Operating margin was 59 percent, up from 54 percent a year ago.
- Enterprise Solutions revenue was $478 million, up 11 percent in constant currency and 12 percent as reported. Operating expense was $419 million and operating profit was $59 million. Operating margin was 12 percent, up from 9 percent a year ago.
- Services revenue was $103 million, up 16 percent in constant currency and 17 percent as reported. Operating expense was $92 million and operating profit was $11 million. Operating margin was 11 percent, up from 10 percent a year ago.
CASH FLOW FROM CONTINUING OPERATIONS
Cash flow from continuing operations in the third quarter was $396 million, including the $39 million single license payment, compared with $492 million in the prior year. Cash flow from operations reflected a decline in cash collections, including a reduction in single installment payments. The Company reiterated its fiscal year 2012 outlook for cash flow from operations.
- Cash, cash equivalents and marketable securities at Dec. 31, 2011 were $2.539 billion.
- With $1.309 billion in total debt outstanding and approximately $120 million in notional pooling, the Company’s net cash, cash equivalents and marketable securities position was $1.110 billion.
- In the third quarter, the Company repurchased approximately 9.6 million shares of stock, for $200 million and distributed $25 million in dividends.
- The Company’s outstanding share count at Dec. 31, 2011 was 480 million.
CAPITAL ALLOCATION PROGRAM
The Company announced that its Board of Directors has approved a capital allocation program that targets the return of up to $2.5 billion to CA Technologies shareholders through the fiscal year ending March 31, 2014.
The Company’s capital allocation program plans to return approximately 80 percent of expected cumulative free cash flow to shareholders through fiscal 2014. This includes a planned increase in the annual dividend from $0.20 to $1.00 per common share and the authorization to repurchase up to $1.5 billion in CA Technologies common stock, including $232 million remaining under the Company’s current share repurchase authorization. Approximately $500 million of the planned repurchase is expected to be an accelerated share repurchase pursuant to an agreement executed in the Company’s fiscal fourth quarter ending March 31, 2012.
For more information, see separate news release announced today.
During the third quarter:
- The Company held CA World, a user conference that had about 5,000 attendees including 135 sponsors and nearly 350 exhibitors, and announced key initiatives and 12 solutions centered on Business Service Innovation – a customer value proposition that helps support customers as they transition from simply managing IT to delivering critical business services.
- Infraserve, an Australian provider of Infrastructure-as-a-Service (IaaS) solutions, announced it is offering a new Platform as a Service (PaaS) solution powered by the CA AppLogic® turnkey cloud computing platform. ViaWest, one of the largest privately owned data center and managed services providers in North America, also announced it is using CA AppLogic and CA Process Automation as the backbone of its new Xen-based KINECTed™ Cloud – Innovator service.
- The Company was named one of the top two market share leaders in the worldwide cloud systems management software market* by IDC, a leading provider of global IT research and advice.
- CA Technologies announced CA Access Control for Virtual Environments, a new solution that extends its identity and access management (IAM) security expertise, and complements and protects VMware® virtual environments.
- The Company was ranked ninth out of 500 in Newsweek’s 2011 Green Rankings. Newsweek ranks the 500 largest publicly traded U.S. companies on their environmental footprint, management and disclosure.
OUTLOOK FOR FISCAL YEAR 2012
The Company updated its outlook for fiscal year 2012. The following guidance represents "forward-looking statements" (as defined below). Updated guidance includes the impact of the single license payment, which was not included in previous guidance.
The Company expects the following:
- Total revenue growth of 6 percent in constant currency, compared with the previous outlook of 5 percent to 6 percent. At Dec. 31, 2011 exchange rates, this translates to reported revenue of about $4.8 billion.
- GAAP diluted earnings per share growth raised to a range of 11 percent to 13 percent in constant currency, compared with the previous outlook of 6 percent to 9 percent. At Dec. 31, 2011 exchange rates, this translates to reported GAAP diluted earnings per share of $1.86 to $1.90.
- Non-GAAP diluted earnings per share growth raised to a range of 11 percent to 13 percent in constant currency, compared with the previous outlook of 7 percent to 10 percent. At Dec. 31, 2011 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.21 to $2.25.
- Cash flow from operations growth continues in a range of 3 percent to 5 percent in constant currency. At Dec. 31, 2011 exchange rates, this translates to reported cash flow from operations of $1.44 billion to $1.47 billion.
The Company expects a full-year GAAP operating margin of 29 percent and non-GAAP operating margin of 34 percent. The Company also expects a full-year GAAP and non-GAAP tax rate in a range of 31 to 32 percent. The Company anticipates 463 million shares outstanding at fiscal year 2012 year-end and weighted average diluted shares outstanding of 486 million for the fiscal year.
* IDC, Worldwide Cloud Systems Management Software 2011-2015 Forecast Update and 2010 Vendor Shares, Doc #231493, November 2011.
This news release and the accompanying tables should be read in conjunction with additional content that is available on the Company’s website, including a supplemental financial package, as well as a webcast that the Company will host at 5 p.m. ET today to discuss its unaudited third quarter results. The webcast will be archived on the website. Individuals can access the webcast, as well as this press release and supplemental financial information, at http://ca.com/invest or listen to the call at 1-877-561-2748. The international participant number is 1-720-545-0044.
Non-GAAP Financial Measures
This news release, the accompanying tables and the additional content that is available on the Company's website, including a supplemental financial package, includes certain financial measures that exclude the impact of certain items and therefore have not been calculated in accordance with U.S. generally accepted accounting principles (GAAP). Non-GAAP metrics for operating expenses, operating income, operating margin, income from operations and diluted earnings per share exclude the following items: non-cash amortization of purchased software and other intangibles, share-based compensation, pre-fiscal year 2010 restructuring and certain other gains and losses, which includes recoveries and certain costs associated with derivative litigation matters and includes the gains and losses since inception of hedges that mature within the quarter, but exclude gains and losses of hedges that do not mature within the quarter. Prior to fiscal year 2011, non-GAAP income also excludes the interest on convertible bonds. The effective tax rate on GAAP and non-GAAP income from operations is the Company’s provision for income taxes expressed as a percentage of pre-tax GAAP and non-GAAP income from operations, respectively. Such tax rates are determined based on an estimated effective full year tax rate, with the effective tax rate for GAAP generally including the impact of discrete items in the period such items arise and the effective tax rate for non-GAAP income generally allocating the impact of discrete items pro rata to the fiscal year’s remaining reporting periods. Adjusted cash flow from operations excludes restructuring and other payments. Free cash flow excludes purchases of property, equipment and capitalized software development costs. We present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than US dollars are converted into US dollars at the exchange rate in effect on March 31, 2011, which was the last day of our prior fiscal year. Constant currency excludes the impacts from the Company's hedging program. The constant currency calculation for annualized subscription and maintenance bookings is calculated by dividing the subscription and maintenance bookings in constant currency by the weighted average subscription and maintenance duration in years. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. By excluding these items, non-GAAP financial measures facilitate management's internal comparisons to the Company's historical operating results and cash flows, to competitors' operating results and cash flows, and to estimates made by securities analysts. Management uses these non-GAAP financial measures internally to evaluate its performance and they are key variables in determining management incentive compensation. The Company believes these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making. In addition, the Company has historically reported similar non-GAAP financial measures to its investors and believes that the inclusion of comparative numbers provides consistency in its financial reporting. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this news release to their most directly comparable GAAP financial measures, which are attached to this news release.
Cautionary Statement Regarding Forward-Looking Statements
The declaration and payment of future dividends is subject to the determination of the Company’s Board of Directors, in its sole discretion, after considering various factors, including the Company’s financial condition, historical and forecast operating results, and available cash flow, as well as any applicable laws and contractual covenants and any other relevant factors. The Company’s practice regarding payment of dividends may be modified at any time and from time to time.
Repurchases under the Company's stock repurchase program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through solicited or unsolicited privately negotiated transactions or otherwise. The program, which is authorized through fiscal year 2014, does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion.
Certain statements in this communication (such as statements containing the words "believes," "plans," "anticipates," "expects," "estimates," “targets” and similar expressions) constitute "forward-looking statements" that are based upon the beliefs of, and assumptions made by, the Company's management, as well as information currently available to management. These forward-looking statements reflect the Company's current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to achieve success in the Company’s strategy by, among other things, increasing sales in new and emerging enterprises and markets, enabling the sales force to sell new products, improving the Company’s brand in the marketplace and ensuring the Company’s set of cloud computing, Software-as-a-Service and other new offerings address the needs of a rapidly changing market, while not adversely affecting the demand for the Company’s traditional products or its profitability; global economic factors or political events beyond the Company's control; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, industry or business sector; failure to expand partner programs; the ability to adequately manage and evolve financial reporting and managerial systems and processes; acquisition opportunities that may or may not arise; the ability to integrate acquired companies and products into existing businesses; competition in product and service offerings and pricing; the ability to retain and attract qualified key personnel; the ability to adapt to rapid technological and market changes; the ability of the Company’s products to remain compatible with ever-changing operating environments; access to software licensed from third parties; use of software from open source code sources; discovery of errors in the Company's software and potential product liability claims; significant amounts of debt and possible future credit rating changes; the failure to protect the Company's intellectual property rights and source code; fluctuations in the number, terms and duration of our license agreements as well as the timing of orders from customers and channel partners; reliance upon large transactions with customers; risks associated with sales to government customers; breaches of the Company’s software products and the Company’s and customers’ data centers and IT environments; third-party claims of intellectual property infringement or royalty payments; fluctuations in foreign currencies; failure to effectively execute the Company’s workforce reductions; successful outsourcing of various functions to third parties; potential tax liabilities; and other factors described more fully in the Company's filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described herein as believed, planned, anticipated, expected, estimated or targeted. The Company assumes no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.