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CA > SEC Filings for CA > Form 10-Q on 25-Oct-2013All Recent SEC Filings

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Form 10-Q for CA, INC.


25-Oct-2013

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 re-balancing 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, application development and IT operations, Software-as-a-Service, mobile device management 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, evolve and protect managerial and financial reporting 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; events or circumstances that would require us to record an impairment charge relating to the Company's goodwill or capitalized software and other intangible assets balances; 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, workforce re-balancing and facility consolidations; successful outsourcing of various functions to third parties; 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 2014 and fiscal 2013 are to our fiscal years ending on March 31, 2014 and 2013, respectively.


Table of Contents

OVERVIEW
We are a leading provider of enterprise information technology (IT) management software and solutions. We help customers maximize their existing technology investments and recognize the potential of new technology to drive innovation. We transform IT to simplify complexity, free up resources and focus on service quality. We also secure IT to reduce the risk of improper access and fraud. We do this across our customers' choices of platforms - from mainframe and distributed to virtual, cloud and mobile, and across technologies and vendors. We deliver solutions across the complete service lifecycle, which ranges from portfolio planning and service modeling in pre-production to service assembly, automation, assurance and management in production. This specialized customer-centric and practical approach helps customers manage and maintain IT systems and deliver new, innovative services with speed and agility, while bridging the gap between what businesses want to compete more effectively and what IT can deliver.
Organizations are looking to IT to gain a competitive edge through faster delivery of products, services and applications, new customer acquisition, and agile responses to market change. To achieve these desired business outcomes, many organizations are improving the efficiency and availability of their IT resources and applications by: adopting server virtualization and cloud computing; delivering an experience that embraces social media and the proliferation of smart devices; leveraging application development and IT operations to speed application release cycles; and looking at the flexibility inherent in the variety of Software-as-a-Service (SaaS) offerings available in the market. While these technologies and new business models can reduce operating costs tied to physical infrastructure and increase agility, they also push IT into more complex and hybrid computing environments comprising mainframes, physical servers, virtualized servers and private, public and hybrid (a combination of public and private) cloud environments.
To address these challenges, we believe it is vital for companies to effectively accelerate IT innovation and 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 wide range of customers. We have a broad and deep portfolio of software solutions to address customer needs across computing platforms, from mainframe and distributed to virtual, cloud and mobile, and across the service lifecycle. We deliver many of these solutions on-premises and are continuing to transition and offer many of our products through a SaaS delivery model. We organize our offerings into our Mainframe Solutions, Enterprise Solutions and Services operating segments. Beginning in fiscal 2014 we combined our Large New Enterprises and Growth Markets customer segments into a single sales coverage model to better capture market opportunities which may include smaller transaction sizes as we seek to expand our relationships with these new customers. This is in addition to our Large Existing Enterprises customer segment. These efforts are designed to accelerate new product sales outside of our contract renewal cycle. We continue to dedicate sales resources and deploy additional solutions to address opportunities to sell to new customers. In May 2013, the Company's Board of Directors approved a re-balancing plan (Fiscal 2014 Plan). The Fiscal 2014 Plan includes streamlining the Company's sales structure to eliminate redundancies while maintaining its focus on customers. In addition, the Company is consolidating its development sites into development hubs to promote collaboration and agile development process. We believe we can grow our business and increase market share by delivering differentiated technology and working through partners. We believe our customer segments allow us to better align our go-to-market initiatives with how customers want to buy. We have also implemented broad-based business initiatives to drive accountability for execution. We believe that these initiatives will benefit our performance in the long-term and allows us to sell to new customer accounts.


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EXECUTIVE SUMMARY
For the second quarter of fiscal 2014, revenue declined primarily as a result of a decrease in subscription and maintenance revenue caused by a decrease in prior fiscal years' new product and mainframe capacity sales. Within total revenue, there was a decline in enterprise solutions revenue, partially offset by an increase in mainframe solutions revenue. Total bookings increased primarily as a result of an increase in mainframe renewals. This increase was partially offset by a decrease in mainframe and enterprise new product sales. Total expenses were positively affected by lower personnel costs within selling and marketing expenses, a decrease in commissions and other operational efficiencies; however, we expect to increase our research and development spending and increase our investment in marketing in the second half of fiscal 2014. Cash flow from operations decreased year-over-year due to a number of expected factors including payments associated with the Fiscal 2014 Plan, an increase in tax payments and an increase in operating cash outflows relating to product development and enhancements as a result of the decrease in amounts capitalized for internally developed software costs.
A summary of key results for the second quarter of fiscal 2014 compared with the second quarter of fiscal 2013 is as follows:
Revenue:
Total revenue declined 1% as a result of a decrease in subscription and maintenance revenue. The decrease in subscription and maintenance revenue was partially offset by an increase in software fees and other revenue and professional services revenue.

We continue to expect a year-over-year decrease in total revenue for fiscal 2014 compared with fiscal 2013 due to our sales underperformance in fiscal 2013 and the high percentage of our revenue that is recognized from license agreements with customers signed in prior periods that are being recognized ratably.

Bookings:
Total bookings increased 5% primarily as a result of a year-over-year increase in renewals within subscription and maintenance bookings, partially offset by a decrease in professional service bookings and software fees and other bookings.

Subscription and maintenance bookings increased primarily due to higher mainframe renewals.

Our new product and mainframe capacity sales, a subset of our total bookings, decreased by a high single digit percentage.

Mainframe new product sales decreased more than 40%, while enterprise solutions new product sales decreased by a high single digit percentage. The decreases were primarily due to an uneven consumer spending environment as well as a decline in sales from certain mature product lines. Mainframe capacity sales increased more than 30%, partially related to an increase in mainframe renewals.

We continue to expect the value of our fiscal 2014 renewals to increase by a high single digit percentage, excluding a large customer renewal that is expected to occur in the second half of fiscal 2014. We expect a majority of the increase in renewal value to occur in the second half of fiscal 2014.

Expenses:
Total expenses before interest and income taxes decreased 4% primarily due to a decrease in personnel-related expenses, driven mostly by the lower number of employees within selling and marketing. This was partially offset by an increase in product development and enhancements expenses due to the decrease in the amount capitalized for internally developed software costs.

Product development and enhancements expenses are expected to increase in future periods as the amount capitalized for internally developed software costs decreases. While this would ultimately result in lower future amortization expense for these assets, we do not expect a material effect in fiscal 2014.

We currently expect an increase in product development and enhancements expenses in the second half of fiscal 2014 as compared with the first half of fiscal 2014 as we continue to focus on hiring new employees that have skills to enable us to better focus our resources on developing software products.

We also currently expect an increase in selling and marketing spending in the second half of fiscal 2014 compared with the first half of fiscal 2014 as we focus on new marketing initiatives.

Income taxes:
Income tax expense for the second quarter of fiscal 2014 and fiscal 2013 was $106 million and $105 million, respectively.

We expect a fiscal 2014 effective tax rate of 14%.

Diluted income per common share:
Diluted income per common share increased to $0.53 from $0.48, primarily due to the decrease in expenses.


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Segment results:
Mainframe Solutions revenue increased primarily due to an increase in new product sales in the first quarter of fiscal 2014, an increase in mainframe capacity sales in the first half of fiscal 2014 and improved renewal yields. The increase in operating margin for the second quarter of fiscal 2014 was primarily a result of a decrease in selling and marketing expenses, driven mostly by the lower number of employees.

Enterprise Solutions revenue decreased primarily due to a decrease in new product sales in prior periods. The increase in operating margin for the second quarter of fiscal 2014 was primarily a result of a decrease in selling and marketing expenses, driven mostly by the lower number of employees.

Services revenue increased primarily due to an increase in professional services engagements resulting from prior period bookings. Operating margin for Services increased as a result of operating efficiencies associated with the Fiscal 2014 Plan.

Cash flows from operations:
Net cash provided by operating activities decreased 2% primarily due to the payments associated with our Fiscal 2014 Plan of $39 million and an increase in income tax payments of $31 million, partially offset by an increase in our cash collections. In addition, there was an unfavorable effect on cash flows from operations of approximately $30 million due to the decrease in the amount capitalized for internally developed software costs.

We expect a year-over-year decrease in cash flows from operations for fiscal 2014 compared with fiscal 2013 due to payments associated with the Fiscal 2014 Plan of over $100 million, an increase in tax payments and an increase in operating cash outflows relating to product development and enhancements as a result of the decrease in amounts capitalized for internally developed software costs.

QUARTERLY UPDATE
In August 2013, Lauren P. Flaherty joined the Company as its Executive Vice President and Chief Marketing Officer. Ms. Flaherty previously served as Chief Marketing Officer of Juniper Networks, Inc. and Nortel Networks Corporation and prior thereto spent more than 25 years at International Business Machines Corporation in a number of senior positions.

In August 2013, we issued $250 million of 2.875% Senior Notes due August 2018 and $250 million of 4.500% Senior Notes due August 2023, for an aggregate principal amount of $500 million.


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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                                        Percent
                                                2014                  2013          Change           Change
                                                       (dollars in millions)
Total revenue                        $       1,140                $    1,152     $       (12 )          (1 )%
Net income                           $         240                $      222     $        18             8  %
Net cash provided by operating
activities                           $          87                $       89     $        (2 )          (2 )%
Total bookings                       $         877                $      837     $        40             5  %
Subscription and maintenance
bookings                             $         713                $      626     $        87            14  %
Weighted average subscription and
maintenance license
agreement duration in years                   3.32                      3.11            0.21             7  %


                                            First Half Comparison
                                                    Fiscal                                   Percent
                                             2014                2013          Change         Change
                                                    (dollars in millions)
Total revenue                        $      2,268            $    2,297     $      (29 )          (1 )%
Net income                           $        575            $      462     $      113            24  %
Net cash provided by operating
activities                           $         98            $      272     $     (174 )         (64 )%
Total bookings                       $      1,701            $    1,390     $      311            22  %
Subscription and maintenance
bookings                             $      1,347            $    1,009     $      338            33  %
Weighted average subscription and
maintenance license
agreement duration in years                  3.22                  2.99           0.23             8  %


                                                                   Change                            Change
                          September 30,                             From        September 30,      From Prior
                               2013          March 31, 2013       Year End           2012         Year Quarter
                                                              (in millions)
Cash, cash equivalents
and investments (1)       $      2,799     $          2,776     $        23     $      2,248     $       551
Total debt                $      1,779     $          1,290     $       489     $      1,294     $       485
Total expected future
cash collections
from committed contracts
(2)                       $      4,935     $          5,173     $      (238 )   $      5,117     $      (182 )
Total revenue backlog (2) $      7,241     $          7,774     $      (533 )   $      7,460     $      (219 )
Total current revenue
backlog (2)               $      3,382     $          3,563     $      (181 )   $      3,453     $       (71 )

(1) At September 30, 2013 and March 31, 2013, investments were $9 million and $183 million, respectively. At September 30, 2012, investments were $162 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.


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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 our Condensed Consolidated Statements of Operations. Generally, as we look at our total bookings, we break them into two subsets consisting of renewal bookings (bookings attributable to the renewable value of a prior contract, i.e., the maintenance value and, in the case of non-perpetual licenses, the license value) and total new product and capacity sales.
As our business strategy has evolved, our management 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. 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 maintenance value and, in the case of non-perpetual licenses, the license value) realized in current period bookings. The renewable value of a prior contract is an estimate affected by various factors including contractual renewal terms, price increases and other conditions. Beginning with the first quarter of fiscal 2014, we no longer consider price increases after December 31, 2012 as part of the renewable value of the prior period contract. Previously, the renewable portion of a contract would have to be renewed at the previous amount plus the amount of any price increases to be deemed to be renewed at 100%. Management made this change because it believes it provides a truer measure of our ability to renew the renewable value of a prior contract. We estimate the aggregate yield for a quarter based on a review of material transactions representing a substantial majority of the dollar value of renewals during the current period. There may be no correlation between year-over-year changes in bookings and year-over-year changes in renewal yield, since renewal yield is based on the renewable value of contracts of various durations, most of which are longer than one year.
Additionally, period-to-period changes in subscription and maintenance bookings do not necessarily correlate to changes in cash receipts. The contribution to . . .

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