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Computer Associates beats expectations

Computer Associates International has once again turned in financial results showing a wide gap between revenue calculated using standard accounting principles and pro-forma revenue figures.

Under its own pro-forma calculations, adjusted to reflect the new business model the company adopted in late 2000, CA generated $1.44bn (£1bn) in revenue during its second fiscal quarter of 2002.

The company posted pro-forma operating earnings of $0.61 per share, beating analyst estimates. Analysts polled by Thomson Financial/First Call forecast pro-forma earnings of $0.52 per share.

Product revenue of $1.37bn (£95m) on a pro-forma basis comprised the bulk of CA's revenue for the quarter, with professional services generating revenue of $72m (£50m). Total pro-forma revenue for the six-month period ended in late September was $2.73bn, up from $2.43bn in the six-month period of the previous year.

Pro-forma net operating income for the quarter was $359m (£249m), up from $229m in the year-ago quarter.

Under generally accepted accounting principles, CA generated revenue of $734m (£510m) and an operating loss of $0.16 per share. The company had a $291m (£202m) net loss for the quarter and a $633m (£439m) net loss for the last six-month period, on an as-reported basis. In the year-ago six-month period, CA posted $161m in net income.

CA's revamped business model recognises product revenue on a rateable basis, booking contracted revenue over the life of a licence, rather than all at once when the licence is signed. The new model provides greater stability and future visibility for financial results, according to CA.

Because CA began reporting pro-forma results under the new business model during last year's third quarter, this quarter marked the last for which there are no comparable results, CA chief financial officer, Ira Zar said in a conference call.

CA still relies heavily on its flagship Unicenter enterprise infrastructure software suite: Enterprise management software sales accounted for 41% of CA's second-quarter new contract sales. Sales of "e-business transformation and integration" software, including tools for application development and lifecycle management, made up 20%, while storage product sales were 19% and security product sales were 11%.

Enterprise portals are much hyped by CA and its competitors as a "killer app" for companies searching for money-saving technologies, but sales are still slow. CA's portal and knowledge management portfolio, including its Jasmine Portal package, accounted for just $17m (£11.8m) in new contract sales during the second quarter, 3% of CA's $575m (£399m) total.

CA's average employee headcount has dropped 14% from the year-earlier period, declining from 21,000 in 2000 to 18,100 in 2001 for the quarter. It will soon decline even further: CA said last week it is cutting 900 employees worldwide, 5% of its workforce. Severance packages for the affected workers will cost up to $20m during the third quarter, CA said.

Professional services sales were one weak spot during the quarter, according to Zar. The $72m (£50m) CA brought in was $8m (£5.6m) to $9m below expectations, he said. Last year during the second quarter, CA generated $154m (£107m) from services (under both pro-forma and as-reported calculations).

Although the 11 September attacks caused an industry-wide slowdown, their effect on CA's results is hard to calculate, said chief executive officer, Sanjay Kumar during the conference call. "In what I call the Boston-Washington corridor, it just wasn't acceptable to be doing business," he said.

Business had begun returning to levels before the attacks, but Kumar said: "in the last week [buying has] taken a step back, given the distractions of the news". He expressed confidence, however, that CA's broad product portfolio and flexible new business model will allow it to weather any post-attack economic ills without significant financial ramifications.

Kumar also upped CA's near-future financial forecast, for the second quarter in a row. CA now anticipates pro-forma earnings per share of $0.61, he said - a significant increase over the $0.50 earnings per share consensus estimate of analysts polled by Thomson Financial/First Call. Last quarter, Kumar increased CA's second-quarter earnings forecast to $0.53 per share, $0.04 higher than analysts had predicted.

Ahead of the second-quarter financial report, shares of CA ended up $0.02 at $27.92 in trading on the New York Stock Exchange.

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