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CA > SEC Filings for CA > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for CA, INC.

Form 10-Q for CA, INC.


26-Oct-2012

Quarterly Report


Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statement
This Quarterly Report on Form 10-Q (Form 10-Q) contains certain forward-looking information relating to CA, Inc. (which we refer to as the "Company," "Registrant," "CA Technologies," "CA," "we," "our" or "us"), that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-Q, the words "believes," "plans," "anticipates," "expects," "estimates," "targets" and similar expressions are intended to identify forward-looking information. Forward-looking information includes, for example, the statements made in this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), but also appears in other parts of this Form 10-Q. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions. 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.
A number of important factors could cause actual results or events to differ materially from those indicated by 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 this Form 10-Q and the Company's other 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 in this Form 10-Q as believed, planned, anticipated, expected, estimated, targeted or similarly expressed in a forward-looking manner. We do not intend to update these forward-looking statements, 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. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements. References in this Form 10-Q to fiscal 2013 and fiscal 2012 are to our fiscal years ending on March 31, 2013 and 2012, respectively.


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OVERVIEW
We are the leading independent enterprise information technology (IT) management software and solutions company with expertise across a wide range of IT environments. We develop and deliver software and services that help organizations accelerate, transform and secure their IT infrastructures to deliver flexible IT services. This allows customers to respond faster to business demands for new services, manage the quality of services, increase efficiency and reduce risk. Our products and solutions are designed to operate in a wide range of IT environments - from mainframe and physical to virtual and cloud.
We license our products worldwide. We serve companies across most major industries around the world, including banks, insurance companies, other financial services providers, government agencies, telecommunication providers, manufacturers, technology companies, retailers, educational organizations and health care institutions. These customers typically maintain IT infrastructures across platforms, from physical to virtual and cloud, and from multiple vendors. These environments are complex and critical to our customers' operations. As business demands increase and new technologies evolve, demands on IT continue to increase. Organizations expect more from technology and many want to use IT to gain a competitive edge. This means companies are using IT to deliver products to market faster, reach new customers and respond to changes in the competitive environment. To achieve their desired business outcomes and gain business advantages, many organizations are improving the efficiency, mobility and availability of their IT resources and applications by adopting next-generation technologies like virtualization and cloud computing and consuming IT as Software-as-a-Service (SaaS). They are also extending their legacy physical environments to virtual and cloud environments. Virtualization lets users run multiple virtual machines on each physical machine. Cloud computing is a shared pool of computing resources that can be accessed, configured and used as needed. With SaaS, customers can obtain software on a subscription, "pay-as-you-go" model.
While these technologies can reduce operating costs tied to physical infrastructure, this evolution in computing is a transformative opportunity that is also making IT environments more complex. Data centers are evolving to include mainframes, physical servers, virtualized servers and private, public and hybrid (a combination of public and private) cloud environments. We believe it is vital for companies to effectively accelerate, transform and secure all of their various computing environments, while being able to deliver new services quickly based on their business needs. Our core strengths in IT management and security, combined with our investments in innovative technologies, position us to serve a range of customers which we divided into three customer segments in the fourth quarter of fiscal 2012: (1) approximately 1,000 core large existing enterprise customers with annual revenue in excess of $2 billion (Large Existing Enterprises), which currently account for approximately 80% of our revenue; (2) enterprises with revenue in excess of $2 billion that have not historically been significant customers of ours (Large New Enterprises), a customer segment that we believe includes 4,500 potential new customers but where we intend to initially focus on approximately 1,000 of these customers selected based on our current geographical and vertical strengths; and
(3) approximately 7,000 enterprises with revenue between $300 million and $2 billion and in fast growing geographies like Latin America and Asia (Growth Markets). During the first quarter of fiscal 2013, we made organizational changes to allow us to focus better on our customer segmentation. Key aspects of these changes include: consolidating all disciplines associated with our Growth Markets initiatives into one general manager, consolidating our business operations into our finance team, enhancing the processes for evaluating sales opportunities by region and customer segment and increasing executive oversight over key transactions. In addition, we introduced new products and solutions during the second quarter of fiscal 2013 and we expect to introduce new products and solutions throughout the second half of fiscal 2013 that we believe should create selling opportunities across all customer segments. All these efforts are designed to accelerate new product sales outside of our contract renewal cycle. We believe by targeting these customer segments, we are more than doubling our total addressable market. Our customer segmentation initiative has taken longer than anticipated to gain traction. As part of this initiative, we have also developed a new management process intended to improve the visibility and quality of our pipeline. We believe that these initiatives will benefit our performance in the long-term. Our broad and deep portfolio of software solutions addresses customer needs across computing platforms. We deliver these solutions on-premises or, for certain products, using SaaS. During fiscal 2012, we began an effort to more fully realize the value of our intellectual property by strategically licensing and/or assigning selected assets within our portfolio. This effort is intended to better position us in the marketplace and allow us the flexibility to reinvest in improving our overall business.


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EXECUTIVE SUMMARY
The following is a summary of the analysis of our results contained in our MD&A for the second quarter of fiscal 2013.
Total revenue for the second quarter of fiscal 2013 decreased 4% to $1,152 million compared with $1,200 million in the year-ago period, primarily due to an unfavorable foreign exchange effect. Within total revenue there was a decrease in subscription and maintenance revenue, which was partially offset by an increase in software fees and other revenue. Excluding the foreign exchange effect, revenue for the second quarter of fiscal 2013 was flat compared with the second quarter of fiscal 2012. Due to our performance in the first half of fiscal 2013, the macro-economic environment in which we believe customers are elongating their sales cycles, and the expectation of delaying the closing of some transactions in our pipeline until later in fiscal 2013 and after fiscal 2013, we currently expect a year-over-year decrease in total revenue for fiscal 2013 compared with fiscal 2012.
Total bookings in the second quarter of fiscal 2013 decreased 14% compared with the year-ago period to $837 million primarily due to a year-over-year decline in enterprise solutions new product and mainframe capacity sales, and to a lesser extent subscription and maintenance renewals and professional services bookings. These decreases were partially offset by an increase in software fees and other bookings, which are recognized as software fees and other revenue. Total new product and mainframe capacity sales in the second quarter of fiscal 2013 declined by approximately 25% compared with the second quarter of fiscal 2012. Within these bookings, enterprise solutions new product sales and mainframe capacity sales decreased, while mainframe new product sales increased slightly from the year-ago period. Mainframe capacity sales were negatively affected by lower mainframe renewals because renewals are an important opportunity to sell additional mainframe capacity. Enterprise solutions new product sales were affected by lower than expected sales outside of a renewal. In addition, mainframe capacity and enterprise solutions new product sales were negatively affected by a difficult macroeconomic environment, in which we saw our customers become cautious with capacity purchases, elongate sales cycles and move deals outside of the quarter. We now expect our fiscal 2013 renewal portfolio to decline by approximately 10% compared with fiscal 2012. We expect our fiscal 2013 third quarter renewals to decrease year-over-year and our fiscal 2013 fourth quarter renewals to increase year-over-year. For the second quarter of fiscal 2013, our percentage renewal yield was in the high 80s, which is slightly lower than historical levels primarily as a result of two transactions. Total expenses before interest and income taxes of $815 million for the second quarter of fiscal 2013 decreased 6% compared with $867 million in the second quarter of fiscal 2012. Total expenses for the second quarter of fiscal 2013 decreased compared with the second quarter of fiscal 2012 as a result of $44 million in severance costs incurred in the year-ago period that were associated with our fiscal 2012 workforce reduction (Fiscal 2012 Plan). In addition, the year-over-year decrease in expenses was partially attributable to a favorable effect of foreign exchange on operating expenses and a decrease in commission expense within selling and marketing expenses.
Income from continuing operations before interest and income taxes increased $4 million, or 1%, in the second quarter of fiscal 2013 compared with the year-ago period.
Income tax expense increased $14 million for the second quarter of fiscal 2013 compared with the year-ago period as a result of favorable discrete items that occurred in the second quarter of fiscal 2012 but did not reoccur in the second quarter of fiscal 2013.
Diluted income from continuing operations per share for the second quarter of fiscal 2013 was $0.48, compared with $0.47 in the year-ago period, reflecting an increase in operating income as a result of the decrease in operating expenses and our repurchases of common shares.
For the second quarter of fiscal 2013, our segment performance results were as follows:
Mainframe Solutions revenue for the second quarter of fiscal 2013 decreased $36 million from the year-ago period primarily due to an unfavorable foreign exchange effect of $25 million and a decrease in subscription and maintenance revenue, which is attributable to a decrease in subscription and maintenance bookings due to lower new product and mainframe capacity sales in prior periods. Mainframe Solutions operating margin for the second quarter of fiscal 2013 was favorably affected by a decrease in severance costs associated with the Fiscal 2012 Plan, which were incurred in the second quarter of fiscal 2012, and from the favorable effect of foreign exchange.
Enterprise Solutions revenue for the second quarter of fiscal 2013 decreased $11 million from the year-ago period, due to an unfavorable foreign exchange effect of $14 million compared with the year-ago period. Within Enterprise Solutions revenue, there was a decrease in service assurance and data management products, partially offset by an increase in revenue from our SaaS, ITKO and security products. Enterprise Solutions operating margin was favorably affected by a decrease in severance costs associated with the Fiscal 2012 Plan, which were incurred in the second quarter of fiscal 2012. This decrease in expenses was partially offset by our additional investments in ITKO and Nimsoft products. As a result of the decrease in expenses, Enterprise Solutions operating margin for the second quarter of fiscal 2013 remained consistent with the year-ago period.


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Services revenue and expenses for the second quarter of fiscal 2013 were consistent with the second quarter of fiscal 2012. Operating margin for Services increased to 6% in the second quarter of fiscal 2013 compared with 4% in the second quarter of fiscal 2012 as a result of the slight reduction in expenses. Total revenue backlog of $7,460 million at September 30, 2012 decreased 8% compared with $8,067 million at September 30, 2011. The current portion of revenue backlog of $3,453 million at September 30, 2012 decreased by 3% compared with the balance of $3,546 million at September 30, 2011. Revenue backlog in the quarter was unfavorably affected by a decline in year-over-year bookings performance. We expect a continued decline in revenue backlog year-over-year through fiscal 2013 prior to an expected increase in our renewal portfolio in fiscal 2014. Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.
Cash provided by continuing operating activities for the second quarter of fiscal 2013 was $89 million, representing a decrease of $101 million compared with the second quarter of fiscal 2012. The decrease was primarily due to a decrease in cash collections of $142 million that was attributable to lower new product sales in the first quarter of fiscal 2013 that negatively affected billings for the second quarter of fiscal 2013. Due to our performance in the first half of fiscal 2013, the macro-economic environment in which we believe customers are elongating their sales cycles, and the expectation of delaying the closing of some transactions in our pipeline until later in fiscal 2013 and after fiscal 2013, we currently expect lower billings and collections for fiscal 2013 compared with fiscal 2012. As a result, we expect a year-over-year decrease in cash flows from operations for fiscal 2013 compared with fiscal 2012.

PERFORMANCE INDICATORS
Management uses several quantitative performance indicators to assess our
financial results and condition. Following is a summary of the principal
quantitative performance indicators that management uses to review performance:
                                           Second Quarter Comparison Fiscal 2013 Versus Fiscal 2012
                                                                                            Percent
                                                2013             2012         Change        Change
                                                      (dollars in millions)
Total revenue                             $         1,152     $   1,200     $     (48 )         (4 )%
Income from continuing operations         $           222     $     236     $     (14 )         (6 )%
Cash provided by operating activities -
continuing operations                     $            89     $     190     $    (101 )        (53 )%
Total bookings                            $           837     $     972     $    (135 )        (14 )%
Subscription and maintenance bookings     $           626     $     761     $    (135 )        (18 )%
Weighted average subscription and
maintenance license agreement duration in
years                                                3.11          3.59         (0.48 )        (13 )%


                                            First Half Comparison Fiscal 2013 Versus Fiscal 2012
                                                                                          Percent
                                               2013            2012         Change        Change
                                                     (dollars in millions)
Total revenue                             $       2,297     $   2,363     $     (66 )         (3 )%
Income from continuing operations         $         462     $     464     $      (2 )          -  %
Cash provided by operating activities -
continuing operations                     $         272     $     333     $     (61 )        (18 )%
Total bookings                            $       1,390     $   1,837     $    (447 )        (24 )%
Subscription and maintenance bookings     $       1,009     $   1,449     $    (440 )        (30 )%
Weighted average subscription and
maintenance license agreement duration in
years                                              2.99          3.44         (0.45 )        (13 )%


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                                                                   Change                           Change
                          September 30,                             From       September 30,      From Prior
                               2012          March 31, 2012       Year End          2011         Year Quarter
                                                             (in millions)
Cash, cash equivalents
and investments(1)        $      2,248     $          2,679     $     (431 )   $      2,382     $      (134 )
Total debt                $      1,294     $          1,301     $       (7 )   $      1,310     $       (16 )
Total expected future
cash collections from
committed contracts(2)    $      5,117     $          5,745     $     (628 )   $      5,630     $      (513 )
Total revenue backlog(2)  $      7,460     $          8,473     $   (1,013 )   $      8,067     $      (607 )
Total current revenue
backlog(2)                $      3,453     $          3,714     $     (261 )   $      3,546     $       (93 )

(1) At September 30, 2012 and March 31, 2012, investments were $162 million and less than $1 million, respectively. At September 30, 2011, investments were $179 million.

(2) Refer to the discussion in the "Liquidity and Capital Resources" section of this MD&A for additional information on expected future cash collections from committed contracts, billings backlog and revenue backlog.

Analyses of our performance indicators shown above and segment performance can be found in the "Results of Operations" and "Liquidity and Capital Resources" sections of this MD&A.
Total Revenue - Total revenue is the amount of revenue recognized during the reporting period from the sale of license, maintenance and professional services agreements. Amounts recognized as subscription and maintenance revenue are recognized ratably over the term of the agreement. Professional services revenue is generally recognized as the services are performed or recognized on a ratable basis over the term of the related software license. Software fees and other revenue generally represents license fee revenue recognized at the inception of a license agreement (up-front basis) and also includes our SaaS revenue, which is recognized as services are provided.
Total Bookings - Total bookings or sales includes the incremental value of all subscription, maintenance and professional services contracts and software fees and other contracts entered into during the reporting period and is generally reflective of the amount of products and services during the period that our customers have agreed to purchase from us. Revenue for bookings attributed to sales of software products for which license fee revenue is recognized on an up-front basis is reflected in "Software fees and other" in the Condensed Consolidated Statements of Operations.
As our business strategy has evolved, our management also looks within bookings at total new product and capacity sales, which we define as sales of products or mainframe capacity that are new or in addition to products or mainframe capacity previously contracted for by a customer. The amount of new product and capacity sales for a period, as currently tracked by us, requires estimation by management and has not been historically reported. Within a given period, the amount of new product and capacity sales may not be material to the change in our total bookings or revenue compared with prior periods. New product and capacity sales can be reflected as subscription and maintenance bookings in the period (for which revenue would be recognized ratably over the term of the contract) or in software fees and other bookings (which are recognized as software fees and other revenue in the current period).
Subscription and Maintenance Bookings - Subscription and maintenance bookings is the aggregate incremental amount we expect to collect from our customers over the terms of the underlying subscription and maintenance agreements entered into during a reporting period. These amounts include the sale of products directly by us and may include additional products, services or other fees for which we have not established vendor specific objective evidence (VSOE). Subscription and maintenance bookings also includes indirect sales by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts without these rights entered into in close proximity or contemplation of such agreements. These amounts are expected to be recognized ratably as subscription and maintenance revenue over the applicable term of the agreements. Subscription and maintenance bookings exclude the value associated with certain perpetual licenses, license-only indirect sales, SaaS offerings and professional services arrangements. The license and maintenance agreements that contribute to subscription and maintenance bookings represent binding payment commitments by customers over periods that range generally from three to five years, although in certain cases customer commitments can be for longer or shorter periods. These current period bookings are often renewals of prior contracts that also had various durations, usually from three to five years. The amount of new subscription and maintenance bookings recorded in a period is affected by the volume, duration and value of contracts renewed during that period. Subscription and maintenance bookings typically increases in each consecutive quarter during a fiscal year, with the first quarter having the least bookings and the fourth quarter having the most bookings. However, subscription and maintenance bookings may not always follow the pattern of increasing in consecutive quarters during a fiscal year, and the quarter-to-quarter differences in subscription and maintenance bookings may vary. Given the varying durations of the contracts being renewed, year-over-year comparisons of bookings are not always indicative of the overall bookings trend.


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Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized . . .

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