“I am very pleased to be a part of the CA Technologies team,” said CA Technologies CEO Mike Gregoire. “While we are encouraged by improvements we saw in the business during our third quarter, including increased demand for our Nimsoft, Infrastructure Management and Service Virtualization offerings, we know that we need to do more to accelerate innovation, gain market share and better differentiate our solutions in the marketplace.
“We also know there is room for improvement in our cost of sales and in the speed and intensity with which we pursue our objectives,” he continued. “Over the next few months we will perform a detailed diagnostic of where we are, and lay out a plan on how to achieve our strategic and financial goals.”
REVENUE AND BOOKINGS
About 62 percent of the Company’s third quarter fiscal year 2013 revenue came from North America, while 38 percent came from International operations.
- Total revenue was $1.195 billion, down 4 percent in constant currency and 5 percent as reported. A $39 million single license payment the Company received in the third quarter of fiscal year 2012 added 3 percentage points to the decrease in the third quarter of fiscal year 2013 revenue.
- Total revenue backlog was $7.488 billion, down 8 percent in constant currency and 7 percent as reported. The current portion of revenue backlog was $3.495 billion, down 2 percent in constant currency and as reported. The Company continues to see a drop in backlog as contracts come off the balance sheet prior to an expected increase in the fiscal year 2014 renewals.
- North America revenue was $745 million, down 6 percent in constant currency and as reported. The single license payment contributed 5 percentage points to this decrease.
- International revenue was $450 million, down 2 percent in constant currency and 5 percent as reported.
- Total bookings in the third quarter were $1.261 billion, down 2 percent in constant currency and as reported. The single license payment in the third quarter of fiscal year 2012 added 3 percentage points of decline to fiscal year 2013 total bookings. The Company executed a total of 18 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $477 million. During the third quarter of fiscal year 2012, the Company executed a total of 12 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $452 million.
- The weighted average duration of subscription and maintenance bookings for the quarter was 2.97 years, compared with 3.53 years for the same period in fiscal year 2012.
- North America bookings were $685 million, down 11 percent in constant currency and as reported. The single license payment in the third quarter of fiscal year 2012 added 5 percentage points of decline from the year ago period.
- International bookings were $576 million, up 13 percent in constant currency and 11 percent as reported.
EXPENSES AND MARGIN
Year-over-year GAAP results:
- Operating expenses, before interest and income taxes, were $825 million, down 2 percent in constant currency and 3 percent as reported.
- Operating income, before interest and income taxes, was $370 million, down 10 percent in constant currency and as reported.
- Operating margin was 31 percent, down 2 percentage points from the prior year period.
Year-over-year non-GAAP results exclude purchased software and other intangibles amortization, share-based compensation, and certain other gains and losses. The results also include gains and losses on hedges that mature within the quarter, but exclude gains and losses of hedges that do not mature within the quarter.
- Operating expenses, before interest and income taxes, were $767 million, down 1 percent in constant currency and 3 percent as reported. The decrease in operating expenses was primarily due to lower general and administrative, sales and marketing and product development costs, offset in part by higher severance costs.
- Operating income, before interest and income taxes, was $428 million, down 9 percent in constant currency and 10 percent as reported.
- Operating margin was 36 percent, down 2 percentage points from the prior year period.
The single license payment added $0.05 to GAAP and non-GAAP earnings per share and 2 percentage points to GAAP and non-GAAP operating margin in the third quarter of fiscal year 2012.
For the third quarter of fiscal year 2013, the Company’s effective GAAP tax rate was 29.9 percent, compared with 34.9 percent in the prior year period. The Company’s effective non-GAAP tax rate was 30.7 percent, compared with 31.5 percent in the prior year period.
- Mainframe Solutions revenue was $622 million, down 8 percent in constant currency and 9 percent as reported. The single license payment in the third quarter of fiscal 2012 contributed 6 percentage points to the year-over-year decline. Operating expense was $248 million and operating profit was $374 million. Operating margin was 60 percent, up 1 percentage point from a year ago.
- Enterprise Solutions revenue was $476 million, flat in constant currency and as reported. Operating expense was $426 million and operating profit was $50 million. Operating margin was 11 percent, down 1 percentage point from a year ago.
- Services revenue was $97 million, down 5 percent in constant currency and 6 percent as reported. Operating expense was $93 million and operating profit was $4 million. Operating margin was 4 percent, down 7 percentage points from a year ago.
CASH FLOW FROM CONTINUING OPERATIONS
Cash flow from continuing operations in the third quarter was $566 million, compared with $396 million in the prior year. The quarter included an increase of $150 million in single installment payments year-over-year, primarily attributable to one single installment payment of more than $100 million.
- Cash, cash equivalents and investments at Dec. 31, 2012 were $2.548 billion.
- With $1.301 billion in total debt outstanding and a borrowing position of $140 million on the Company’s notional pooling arrangement, the Company’s net cash, cash equivalents and investments were $1.107 billion.
- During the quarter, the Company repurchased 3.4 million shares in the market for approximately $75 million.
- The Company is currently authorized to repurchase an additional $579 million of common stock through fiscal year 2014.
- The Company’s outstanding share count at Dec. 31, 2012 was 451 million.
- During the quarter, the Company distributed $114 million in dividends.
During the third quarter, the Company announced:
OUTLOOK FOR FISCAL YEAR 2013 Update
The Company reaffirmed its revenue and GAAP and non-GAAP earnings per share from continuing operations and cash flow from continuing operations guidance for fiscal year 2013. The following guidance consists of "forward-looking statements" (as defined below).
The Company expects the following:
- Total revenue growth in a range of negative 3 percent to negative 1 percent in constant currency. At Dec. 31, 2012 exchange rates, this translates to reported revenue of $4.58 billion to $4.67 billion.
- GAAP diluted earnings per share from continuing operations growth in constant currency in a range of 8 percent to 12 percent. At Dec. 31, 2012 exchange rates, this translates to GAAP reported diluted earnings per share of $2.00 to $2.08.
- Non-GAAP diluted earnings per share from continuing operations growth in constant currency in a range of 6 percent to 10 percent. At Dec. 31, 2012 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.36 to $2.44.
- Cash flow from continuing operations growth in a range of negative 8 percent to negative 4 percent in constant currency. At Dec. 31, 2012 exchange rates, this translates to reported cash flow from continuing operations of $1.39 billion to $1.45 billion.
This outlook also assumes no material acquisitions and a partial currency hedge of operating income. The Company continues to expect a full-year GAAP operating margin of 30 percent and a non-GAAP operating margin of 36 percent. The Company also continues to expect an effective full-year GAAP and non-GAAP tax rate to come in closer to the high-end of the 30 to 31 percent range provided at the outset of the fiscal year.
The Company anticipates approximately 449 million shares outstanding at fiscal year 2013 year end and weighted average diluted shares outstanding of approximately 457 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 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.
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 continuing operations and diluted earnings per share exclude the following items: non-cash amortization of purchased software and other intangibles, share-based compensation, fiscal year 2007 restructuring costs and certain other gains and losses, which 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. In fiscal year 2011, non-GAAP income also excludes recoveries and certain costs associated with derivative litigation matters. 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 continuing operations, respectively. These 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 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 U.S. dollars are converted into U.S. dollars at the exchange rate in effect on March 31, 2012, 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 the fiscal year ending March 31, 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, effectively rebalancing the Company's sales force to increase penetration in growth markets and with large enterprises that have not historically been significant customers, 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; the failure to adapt to technological changes and introduce new software products and services in a timely manner; competition in product and service offerings and pricing; the failure to expand partner programs; the ability to retain and attract adequate qualified personnel; the ability to integrate acquired companies and products into existing businesses; the ability to adequately manage and evolve financial reporting and managerial systems and processes; the ability of the Company's products to remain compatible with ever-changing operating environments; breaches of the Company's software products and the Company's and customers' data centers and IT environments; discovery of errors in the Company's software and potential product liability claims; the failure to protect the Company's intellectual property rights and source code; risks associated with sales to government customers; access to software licensed from third parties; risks associated with the use of software from open source code sources; access to third-party code and specifications for the development of code; third-party claims of intellectual property infringement or royalty payments; fluctuations in the number, terms and duration of the Company's license agreements as well as the timing of orders from customers and channel partners; the failure to renew large license transactions on a satisfactory basis; changes in market conditions or the Company's credit ratings; fluctuations in foreign currencies; the failure to effectively execute the Company's workforce reductions; successful outsourcing of various functions to third parties; events or circumstances that would require us to record a goodwill impairment charge; potential tax liabilities; acquisition opportunities that may or may not arise; 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, targeted or similarly expressed in a forward-looking manner. 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.