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| CA > SEC Filings for CA > Form 10-Q on 24-Jan-2013 | All Recent SEC Filings |
24-Jan-2013
Quarterly Report
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 third quarter of fiscal 2013 and we expect to introduce new products
and solutions during the fourth quarter 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.
EXECUTIVE SUMMARY
The following is a summary of the analysis of our results contained in our MD&A
for the third quarter of fiscal 2013.
Total revenue for the third quarter of fiscal 2013 decreased 5% to $1,195
million compared with $1,263 million in the year-ago period primarily due to a
decrease in subscription and maintenance revenue and to a lesser extent a
decrease in software fees and other revenue. For the third quarter of fiscal
2012, software fees and other revenue included $39 million in revenue under a
license agreement we entered into in connection with a litigation settlement
(refer to the "Software Fees and Other" section under Results of Operations for
additional information), which contributed three percentage points of the
decrease in total revenue. There was also an unfavorable foreign exchange effect
of $12 million for the third quarter of fiscal 2013.
Total bookings in the third quarter of fiscal 2013 decreased 2% compared with
the year-ago period to $1,261 million primarily due to a year-over-year decline
in software fees and other bookings, which are recognized as software fees and
other revenue. This was partially offset by an increase in professional services
bookings. Total new product and mainframe capacity sales in the third quarter of
fiscal 2013 declined by approximately 10% compared with the third quarter of
fiscal 2012. Within these bookings, mainframe new product sales decreased
primarily as a result of the aforementioned $39 million license fee received in
the third quarter of fiscal 2012. Mainframe capacity sales decreased, while
enterprise solutions new product sales were consistent with the prior period. We
continue to expect the value of our total fiscal 2013 renewals to decline by
approximately 10% compared with fiscal 2012. For the third quarter of fiscal
2013, our percentage renewal yield was in the low 90's.
Total expenses before interest and income taxes of $825 million for the third
quarter of fiscal 2013 decreased 3% compared with $850 million in the third
quarter of fiscal 2012. Total expenses for the third quarter of fiscal 2013
decreased compared with the third quarter of fiscal 2012 primarily as a result
of a decrease in selling and marketing, general and administrative and product
development and enhancements expenses. These decreases were partially offset by
an increase of $18 million in employee severance charges.
Income from continuing operations before interest and income taxes decreased $43
million, or 10%, in the third quarter of fiscal 2013 compared with the year-ago
period.
Income tax expense decreased $34 million for the third quarter of fiscal 2013
compared with the year-ago period as a result of the decrease in income before
income taxes and the timing of both favorable and unfavorable discrete items in
the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012.
Diluted income from continuing operations per share for the third quarter of
fiscal 2013 was $0.55, compared with $0.54 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 third quarter of fiscal 2013, our segment performance results were as
follows:
Mainframe Solutions revenue for the third quarter of fiscal 2013 decreased $60
million from the year-ago period primarily due to the aforementioned $39 million
license fee received in the third quarter of fiscal 2012 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. The increase in operating margin for the third
quarter of fiscal 2013 was primarily a result of a decrease in selling and
marketing expenses and general and administrative expenses.
Enterprise Solutions revenue for the third quarter of fiscal 2013 decreased from
the year-ago period due to an unfavorable foreign exchange effect of $4
million. Within Enterprise Solutions, there was an increase in revenue from our
security and ITKO products, which was mostly offset by a decrease in revenue
from our service assurance, automation and data management products. Primarily
as a result of the increase in expenses from severance costs, Enterprise
Solutions operating margin for the third quarter of fiscal 2013 declined from
12% to 11% compared with the year-ago period.
Services revenue for the third quarter of fiscal 2013 decreased compared with
the third quarter of fiscal 2012 due to a lower amount of billable time on
engagements during the quarter. Operating margin for Services decreased to 4% in
the third quarter of fiscal 2013 compared with 11% in the third quarter of
fiscal 2012 as a result the decrease in revenue and an increase in severance
costs.
Total revenue backlog of $7,488 million at December 31, 2012 decreased 7%
compared with $8,084 million at December 31, 2011. The current portion of
revenue backlog of $3,495 million at December 31, 2012 decreased by 2% compared
with the balance of $3,576 million at December 31, 2011. Revenue backlog in the
quarter was unfavorably affected by the decline of total bookings in the first
six months of fiscal 2013 and the increase in the percentage of bookings
recognized as software fees and other revenue in the first nine months of fiscal
2013, which is not included in revenue backlog at December 31, 2012. We expect a
continued decline in revenue backlog year-over-year through fiscal 2013 prior to
an expected increase in our renewals 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 third quarter of fiscal 2013 was $566 million, representing an increase of $170 million compared with the third quarter of fiscal 2012. The increase was primarily due to an increase in cash collections of $178 million, which includes an increase in single installment payments of $150 million. Due to our performance in the first six months 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.
QUARTERLY UPDATE
• In November 2012, the Company announced that its Board of Directors
unanimously adopted a Stockholder Protection Rights Agreement to replace the
Company's existing Rights Agreement, which expired on November 30, 2012.
• In December 2012, the Company's Board of Directors elected Michael P. Gregoire as the Company's Chief Executive Officer and a member of its Board of Directors, effective January 7, 2013. Mr. Gregoire is succeeding William E. McCracken who retired as Chief Executive Officer and a member of the Company's Board, effective January 7, 2013. Mr. Gregoire is a 25-year veteran of the software and IT services industries, most recently as President, Chief Executive Officer and Chairman of the board of directors of Taleo Corporation prior to its acquisition by Oracle Corporation in April 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:
Third Quarter Comparison Fiscal 2013 Versus Fiscal 2012
Percent
2013 2012 Change Change
(dollars in millions)
Total revenue $ 1,195 $ 1,263 $ (68 ) (5 )%
Income from continuing operations $ 251 $ 263 $ (12 ) (5 )%
Cash provided by operating activities -
continuing operations $ 566 $ 396 $ 170 43 %
Total bookings $ 1,261 $ 1,284 $ (23 ) (2 )%
Subscription and maintenance bookings $ 1,034 $ 1,035 $ (1 ) - %
Weighted average subscription and
maintenance license agreement duration in
years 2.97 3.53 (0.56 ) (16 )%
First Nine Months Comparison Fiscal 2013 Versus Fiscal 2012
Percent
2013 2012 Change Change
(dollars in millions)
Total revenue $ 3,492 $ 3,626 $ (134 ) (4 )%
Income from continuing operations $ 713 $ 727 $ (14 ) (2 )%
Cash provided by operating activities -
continuing operations $ 838 $ 729 $ 109 15 %
Total bookings $ 2,651 $ 3,121 $ (470 ) (15 )%
Subscription and maintenance bookings $ 2,043 $ 2,484 $ (441 ) (18 )%
Weighted average subscription and
maintenance license agreement duration in
years 2.98 3.48 (0.50 ) (14 )%
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Change Change
December 31, From December 31, From Prior
2012 March 31, 2012 Year End 2011 Year Quarter
(in millions)
Cash, cash equivalents
and investments(1) $ 2,548 $ 2,679 $ (131 ) $ 2,539 $ 9
Total debt $ 1,301 $ 1,301 $ - $ 1,309 $ (8 )
Total expected future
cash collections from
committed contracts(2) $ 5,083 $ 5,745 $ (662 ) $ 5,800 $ (717 )
Total revenue backlog(2) $ 7,488 $ 8,473 $ (985 ) $ 8,084 $ (596 )
Total current revenue
backlog(2) $ 3,495 $ 3,714 $ (219 ) $ 3,576 $ (81 )
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(1) At December 31, 2012 and March 31, 2012, investments were $195 million and less than $1 million, respectively. At December 31, 2011, investments were $181 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 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.
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. Within bookings, we also consider the yield on our renewals. We define "renewal yield" as the percentage of the renewable value of a prior contract (i.e., the . . .
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