Note: All financial results have been adjusted to reflect discontinued operations.
“We achieved our objectives for earnings per share, cash and margin for the second quarter,” said Bill McCracken, chief executive officer, CA Technologies. “However, we were not pleased with one area, new product sales, relative to our expectations. As a result, we have revised our revenue outlook to reflect the shortfall in new product sales and the macroeconomic environment. But we also have raised the bottom end of our earnings per share guidance to reflect continued operational efficiency and discipline.
“In the second half of the 2012 fiscal year, we will focus on improving new product sales by expanding our product penetration, improving execution in EMEA and driving consistent performance in our acquired companies. We remain convinced that our strategic direction and supporting investments are the right ones, and are confident that we will meet our revised outlook. We also are mindful of making the right choices to maximize shareholder returns and will continue to return cash through stock repurchases and dividends.”
REVENUE AND BOOKINGS
During the second quarter, the Company saw demand for its security management solutions, along with mainframe capacity. Just over 3 percentage points of revenue growth in constant currency and 8 percentage points as reported were driven by organic products, while 2 percentage points in constant currency and 2 percentage points as reported came from the products and services from the acquisitions of Base Technologies, Hyperformix, Inc., Torokina, ITKO and Arcot Systems, Inc. About 61 percent of the Company’s revenue came from North America, while 39 percent came from international operations.
- Total revenue was $1.2 billion, up 5 percent in constant currency and 10 percent as reported.
- Total revenue backlog was $8.07 billion, up 4 percent in constant currency and as reported. The current portion of revenue backlog was $3.55 billion, up 3 percent in constant currency and 4 percent as reported.
- North America revenue was $735 million, up 10 percent in constant currency and 11 percent as reported.
- International revenue was $465 million, down 1 percent in constant currency and up 10 percent as reported.
Bookings year-over year:
- Total bookings in the second quarter were $972 million, down 4 percent in constant currency and 3 percent as reported.
- The Company signed a total of 10 license agreements with contract values in excess of $10 million each, for an aggregate contract value of $321 million. During the second quarter of fiscal year 2011, the Company signed a total of 14 license agreements with contract values in excess of $10 million each, for an aggregate contract value of $361 million.
- The weighted average duration of subscription and maintenance bookings for the quarter was 3.59 years, compared with 3.47 years for the same period in fiscal year 2011.
- North America bookings were $664 million, flat in constant currency and as reported.
- International bookings were $308 million, down 11 percent in constant currency and 8 percent as reported.
EXPENSES AND MARGIN
Year-over-year GAAP results:
- Operating expenses, before interest and income taxes, were $867 million, up 11 percent in constant currency and 10 percent as reported.
- Operating income, before interest and income taxes, was $333 million, down 6 percent in constant currency and up 10 percent as reported.
- Operating margin was 28 percent, flat with the prior year period.
Year-over-year non-GAAP results, which exclude purchased software and 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 $822 million, up 12 percent in constant currency and up 17 percent as reported.
- Operating income, before interest and income taxes, was $378 million, down 7 percent in constant currency and 2 percent as reported.
- Operating margin was 32 percent, down 3 percentage points from the prior year period.
For the second quarter of fiscal year 2012, the Company’s effective GAAP tax rate was 27.8 percent, compared to 24.5 percent in the prior year. The Company’s effective non-GAAP tax rate was 31.5 percent, compared to 33.3 percent in the prior year.
GAAP and non-GAAP EPS were unfavorably affected by $44 million in costs, or about $0.06 per share on a GAAP and Non-GAAP basis, associated with a planned workforce reduction of approximately 400 positions announced during the quarter. The affects of the expenses incurred by the workforce reduction were offset by revenue growth, positive currency fluctuations, a reduced share count and lower interest costs.
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 $655 million, up 2 percent in constant currency and 7 percent as reported. Operating expense was $308 million and operating profit was $347 million. Operating margin was 53 percent, down from 57 percent a year ago. Excluding the effects of the costs of the workforce reduction, Mainframe Solutions operating margin would have been 56 percent.
- Enterprise Solutions revenue was $449 million, up 9 percent in constant currency and 14 percent as reported. Operating expense was $422 million and operating profit was $27 million. Operating margin was 6 percent, down from 8 percent a year ago. Excluding the effects of the costs of the workforce reduction, Enterprise Solutions operating margin would have been 10 percent.
- Services revenue was $96 million, up 16 percent in constant currency and 22 percent as reported. Operating expense was $92 million and operating profit was $4 million. Operating margin was 4 percent, up from 3 percent a year ago. Excluding the effects of the costs of the workforce reduction, Services operating margin would have been 5 percent.
CASH FLOW FROM CONTINUING OPERATIONS
Cash flow from continuing operations in the second quarter was $190 million, compared to $129 million in the prior year. Cash flow was favorably affected by improved collections, especially in North America, and lower cash taxes. In addition, cash flow was unfavorably affected by higher disbursements, primarily driven to higher payroll resulting from acquisitions and increased commission expense.
- Cash, cash equivalents and marketable securities at Sept. 30, 2011 were $2.38 billion.
- With $1.31 billion in total debt outstanding and approximately $60 million in notional pooling, the Company’s net cash, cash equivalents and marketable securities position was $1.01 billion.
- In the second quarter, the Company repurchased approximately 9.7 million shares of stock, for approximately $200 million and distributed about $25 million in dividends.
- The Company’s outstanding share count at Sept. 30, 2011 was 489 million.
During the second quarter the Company announced:
- The appointment of Marco Comastri as president, Europe, Middle East and Africa (EMEA). Comastri joins CA Technologies with an outstanding track record in the IT industry, having helped drive growth at such companies as Microsoft, IBM and, most recently, Poste Italiane.
- The availability of 10 new and updated products and solutions that advance the Company’s strategy for enabling cloud-connected enterprises and helping customers realize the business value of agility.
- The completion of the acquisitions of privately-held Interactive TKO, Inc. (ITKO) and Watchmouse B.V. (WatchMouse). The acquisitions expand the breadth of solutions CA Technologies offers enterprises and service providers for using and providing cloud computing to rapidly deliver business services.
- The availability of CA Mainframe Application Tuner, which combines two application performance management (APM) tools with new integration capabilities to help IT organizations proactively pinpoint and resolve performance issues that could reduce user productivity and consume extra system resources.
- The appointment of Jens Alder to its Board of Directors. Alder currently serves as chairman of Sanitas Krankenversicherung, one of Switzerland’s largest health insurers and RTX Telecom A/S, a telecommunications component and handset producer based in Denmark.
OUTLOOK FOR FISCAL YEAR 2012
The Company adjusted its outlook for fiscal year 2012. The following guidance represents "forward-looking statements" (as defined below).
The Company expects the following:
- Total revenue growth updated to a range of 5 percent to 6 percent in constant currency, compared to the previous outlook of 6 percent to 8 percent. At Sept. 30, 2011 exchange rates, this translates to reported revenue of $4.7 billion to $4.8 billion.
- GAAP diluted earnings per share growth updated to a range of 6 percent to 9 percent in constant currency, compared to the previous outlook of 5 percent to 9 percent. At Sept. 30, 2011 exchange rates, this translates to reported diluted earnings per share of $1.78 to $1.83.
- Non-GAAP diluted earnings per share growth updated to a range of 7 percent to 10 percent in constant currency, compared to the previous outlook of 6 percent to 10 percent. At Sept. 30, 2011 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.13 to $2.18.
- Cash flow from operations growth continues in a range of 3 percent to 5 percent in constant currency. At Sept. 30, 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 28 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 approximately 478 million shares outstanding at fiscal year 2012 year-end and weighted average diluted shares outstanding of approximately 491 million for the fiscal year.
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 second 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. Non-GAAP adjusted cash flow excludes pre-fiscal 2010 restructuring and other payments. Free cash flow excludes capital expenditures. 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
Certain statements in this communication (such as statements containing the words "believes," "plans," "anticipates," "expects," "estimates" 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; 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. 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.