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CA > SEC Filings for CA > Form 10-Q on 24-Jul-2014All Recent SEC Filings

Show all filings for CA, INC.

Form 10-Q for CA, INC.


24-Jul-2014

Quarterly Report


Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements 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 relating to the future are intended to identify forward-looking information. Forward-looking information includes, for example, the statements relating to the future made in this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), but also statements relating to the future that appear 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 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 managing the Company's sales force to enable the Company to maintain and enhance its strong relationships in its traditional customer base and to increase penetration and accelerate growth in customer segments and geographic regions where the Company currently may not have a strong presence or the Company has underserved, enabling the sales force to sell new products, improving the Company's brand, technology and innovation awareness in the marketplace and ensuring the Company's set of cloud computing, application development and IT operations (DevOps), 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 innovate and/or 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 of the Company's products to remain compatible with ever-changing operating environments, platforms or third-party products; the ability to successfully integrate acquired companies and products into the Company's existing business; the ability to adequately manage, evolve and protect the Company's information systems, infrastructure and processes; risks associated with sales to government customers; breaches of the Company's data center, network and software products, and the IT environments of the Company's vendors and customers; discovery of errors or omissions in the Company's software products or documentation and potential product liability claims; the failure to protect the Company's intellectual property rights and source code; events or circumstances that would require the Company 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; 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; potential tax liabilities; 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 rebalancing and facilities consolidations; successful and secure outsourcing of various functions to third parties; 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 the forward-looking information described in this Form 10-Q as believed, planned, anticipated, expected, estimated, targeted or similarly identified. 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 2015 and fiscal 2014 are to our fiscal years ending on March 31, 2015 and 2014, respectively.


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OVERVIEW
We are one of the world's leading providers of information technology (IT) management software and solutions. Our solutions help organizations of all sizes develop, manage, and secure complex IT environments that increase productivity and enhance the competitiveness in their businesses. We do this across a wide range of environments such as mainframe, distributed, cloud, and mobile. The majority of the Global Fortune 500 relies on us to help manage their IT environments.
Our objective is to be the world's leading independent software provider for IT management and security solutions to help organizations and enterprises develop, manage, and secure modern IT architectures, across mainframe, distributed, mobile and cloud environments. To accomplish this, key elements of our strategy include:
Innovating in key product areas to extend our market leadership and differentiation. Our product development strategy is built around three key growth areas, where we are focused on innovating and delivering differentiated products and solutions: application development and IT operations (DevOps), Management Cloud, and Security across multiple platforms.

Addressing shifts in market dynamics and technology. We will innovate to deliver new differentiated solutions that enable our customers to manage the challenges and capture the opportunities of disruptive technologies such as the ability to harvest big data, the shift to software-defined IT, the proliferation of mobile technologies, social access (or social credentials) authentication, and the always on, ubiquitously connected "Internet of Things."

Accelerating growth in our global customer base. We are focused on maintaining strong relationships with our core, large enterprise customer base, and will proactively target growth with these customers as well as new large enterprises we do not currently serve. In parallel, we are broadening our customer base to new buyer segments beyond the customer's Chief Information Officer and IT department and increasingly to geographic regions we have underserved.

Pursuing new business models and expanded routes to market. While our traditional on-premise software delivery remains core to our enterprise customers, we see Software-as-a-Service (SaaS) and managed services as increasingly attractive for our customers. This simplifies their decision-making and accelerates the value they can derive from new solution investments.

We have a broad and deep portfolio of software solutions with which to execute our business strategy. We organize our offerings in Mainframe Solutions, Enterprise Solutions and Services segments.
Mainframe Solutions products are designed mainly for the IBM System z mainframe platform, which runs many of our largest customers' mission-critical applications. We help customers seamlessly manage their mainframe as part of their evolving data center through flexible management approaches, cross-platform visibility and workload portability.

Enterprise Solutions products operate on non-mainframe platforms and include our DevOps, Management Cloud, and Security product groups. DevOps includes application delivery, application performance management and infrastructure management. Management Cloud helps customers optimize their investments, projects, resources and processes. Security delivers identity-centric security solutions to meet the needs of today's mobile, cloud-connected, open enterprise.

Services helps customers reach their IT and business goals by enabling the rapid implementation and adoption of our mainframe solutions and enterprise solutions.

Our traditional core customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We currently serve customers across most major industries worldwide, including banks, insurance companies, other financial services providers, government agencies, global service providers, telecommunication providers, manufacturers, technology companies, retailers, educational organizations and health care institutions.
We offer our solutions through our direct sales force and indirectly through our partners. We remain focused on strengthening relationships with our core customers--which we refer to as our "Platinum" customers, consisting of our top 500 accounts-- through product leadership, account management and a differentiated customer experience. We believe enhanced relationships in our traditional customer base of large enterprises with multi-year enterprise license agreements will drive renewals and provide opportunities to increase account penetration that will help to drive revenue growth.
At the same time, we continue to dedicate sales resources and deploy additional solutions to address opportunities to sell to new enterprises and to expand our relationship with existing non-core customers--which we refer to as our "Named" customers. In addition to this dedication of additional sales resources, we service some of these customers through partners. We believe we can grow our business and increase market share by delivering differentiated technology and collaborating with partners, including service providers, to leverage their relationships, market reach and implementation capacity. We are deploying new routes to market, and simplifying the buying and deployment process for our customers.
This customer focus allows us to better align marketing and sales resources with how customers want to buy. We have also implemented broad-based business initiatives to drive accountability for sales execution.


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Work is underway to deploy an updated global branding and marketing program for CA Technologies to significantly enhance our connection with new and existing customers, introduce the market to new areas of our capability and contribute directly to business growth and new customer acquisitions. Marketing efforts are key to our ability to expand our customer base, reach new segments and grow in key global markets.

EXECUTIVE SUMMARY
Our first quarter results are in-line with our expectations, strengthened by continued financial discipline and a strong performance in connection with renewals. New sales associated with renewals with our Platinum customer accounts performed well. Professional services performance unfavorably affected both revenue and bookings for the quarter. Lastly, we announced the divestiture of the CA arcserve data protection business (arcserve), further managing our portfolio and sharpening our focus.
A summary of key results for the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014 is as follows:
Revenue:
Total revenue declined 2% as a result of a decrease in subscription and maintenance revenue and a decrease in professional services revenue. The decrease in professional services revenue was primarily due to a decrease in the size and number of professional services engagements during the first quarter of fiscal 2015, including non-core engagements with government customers that are not directly related to our software product sales. The decrease in subscription and maintenance revenue in the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014 was primarily attributable to a decrease in prior period new product and mainframe capacity sales. We currently expect the percentage decline in professional services revenue to be greater than the percentage decline in total revenue for fiscal 2015 compared with fiscal 2014. This decline is primarily a result of the decrease in non-core professional services engagements with government customers that are not directly related to our software product sales.

As a result of prior period sales under-performance, we continue to expect a year-over-year decrease in total revenue for fiscal 2015 compared with fiscal 2014 due to the high percentage of our revenue that is recognized from license agreements with customers signed in prior periods that are being recognized ratably. Excluding the effect of foreign exchange, we currently expect the year-over-year percentage decline in total revenue for fiscal 2015 compared with fiscal 2014 to be similar to the year-over-year percentage decline in total revenue for fiscal 2014 compared with fiscal 2013.

Bookings:
Total bookings decreased 9% primarily due to a year-over-year decrease in professional services bookings and to a lesser extent, a decrease in subscription and maintenance bookings.

Mainframe solutions renewals decreased year-over-year. The decrease was partially offset by an increase in enterprise solutions renewals primarily due to the composition of our renewal portfolio being more heavily weighted to enterprise solutions renewals in the quarter.

Total new product sales, a subset of our total bookings, for the first quarter of fiscal 2015 was consistent with the first quarter of fiscal 2014. For the first quarter of fiscal 2015, mainframe solutions new sales including capacity were down in the high-single-digit percentage range. The decrease in mainframe solutions new product sales was primarily due to the composition of the renewal portfolio. Enterprise solutions new product sales increased by a mid-single-digit percentage as a result of new sales in connection with renewals within our Platinum customer accounts and good sales execution in the Europe, Middle East and Africa region during the first quarter of fiscal 2015.

We expect our fiscal 2015 renewal portfolio to decline by a high-single-digit percentage compared with fiscal 2014. Excluding the impact from a contract renewal with a large system integrator which occurred during the third quarter of fiscal 2014, we expect the value of our fiscal 2015 renewal portfolio to be consistent with the value of our fiscal 2014 renewal portfolio. For the second quarter of fiscal 2015, we expect renewals to decline compared with the second quarter of fiscal 2014 and as a result, we expect lower new product and capacity sales in connection with renewals.

Expenses:
Total expenses before interest and income taxes decreased compared with the year-ago period, primarily due to a decrease in cost associated with our fiscal 2014 workforce rebalancing plan (Fiscal 2014 Plan). The decrease was also attributable to the timing of selling and marketing expenses and a decrease in personnel-related costs, partially offset by an increase in product development and enhancements expenses. We expect an increase in the third quarter of fiscal 2015 for selling and marketing expenses, as a result of the timing of CA World '14.


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Income taxes:
Income tax expense for the first quarter of fiscal 2015 was $87 million, compared with an income tax benefit for the first quarter fiscal 2014 of $122 million. During the first quarter of fiscal 2014, we recognized a net discrete tax benefit of $181 million, resulting primarily from the resolutions of uncertain tax positions from final settlement of the examination of our U.S. federal income tax returns.

We expect a fiscal 2015 effective tax rate of 30%.

Diluted income per common share from continuing operations:
Diluted income per common share decreased to $0.48 from $0.72, primarily due to the income tax benefit of $122 million for the first quarter of fiscal 2014 compared with the income tax expense of $87 million for the first quarter of fiscal 2015.

Segment results:
Mainframe Solutions revenue for the first quarter of fiscal 2015 decreased slightly compared with the year-ago period primarily due to the decrease in prior period new product and mainframe capacity sales. The increase in operating margin for the first quarter of fiscal 2015 compared with the year-ago period was primarily the result of the timing of selling and marketing expenses and an overall decrease in personnel-related costs.

Enterprise Solutions revenue for the first quarter of fiscal 2015 decreased compared with the year-ago period primarily due to a decrease in new product sales in the prior fiscal year. This decline in prior year new product sales was primarily due to a decrease in sales of certain mature product lines, partially offset by an increase in sales of recently acquired products. Enterprise Solutions operating margin for the first quarter of fiscal 2015 increased compared with the year-ago period as a result of the timing of selling and marketing expenses and an overall decrease in personnel-related costs.

Services revenue for the first quarter of fiscal 2015 decreased compared with the first quarter of fiscal 2014 primarily as a result of a decrease in the size and number of professional services engagements during the first quarter of fiscal 2015, including non-core engagements with government customers that are not directly related to our software product sales, as well as the timing of the revenue recognition for some engagements that were associated with product sales for which the revenue will be recognized on a ratable basis. We expect the percentage decline in professional services revenue to be greater than the percentage decline in total revenue for fiscal 2015 compared with fiscal 2014. Operating margin for our Services segment decreased in the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014 as a result of lower utilization rates for professional services personnel due to the decrease in the number of professional services engagements.

Cash flows from continuing operations:
Net cash provided by operating activities increased $163 million compared with the year-ago period primarily due to a decrease in income tax payments of $165 million and a decrease in vendor disbursements and payroll of $45 million. These favorable effects were partially offset by a decrease in cash collections of $44 million and an increase in payments associated with the Fiscal 2014 Plan of $10 million.

QUARTERLY UPDATE
In May 2014, the Company appointed Amit Chatterjee as its Executive Vice President, Enterprise Solutions and Technology Group. Mr. Chatterjee will have overall responsibility for strategy and execution across the full portfolio of Enterprise Solutions businesses, from development to commercialization.

In June 2014, the Company entered into a definitive agreement to divest arcserve.


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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:
                                                  First Quarter Comparison
                                                           Fiscal
                                                                                       Dollar
                                                  2015 (1)              2014 (1)       Change       Percentage Change
                                                          (dollars in millions)
Total revenue                             $       1,069               $    1,095     $     (26 )            (2 )%
Income from continuing operations         $         212               $      330     $    (118 )           (36 )%
Net cash provided by operating activities
- continuing operations                   $         166               $        3     $     163              NM
Total bookings                            $         724               $      796     $     (72 )            (9 )%
Subscription and maintenance bookings     $         603               $      617     $     (14 )            (2 )%
Weighted average subscription and
maintenance license
agreement duration in years                        3.60                     3.10          0.50              16  %


                                                                     Change                               Change
                                                                      From                              From Prior
                           June 30, 2014       March 31, 2014       Year End        June 30, 2013      Year Quarter
                                                                (in millions)
Cash, cash equivalents
and short-term
investments (2)          $         3,255     $          3,252     $         3     $         2,461     $         794
Total debt               $         1,769     $          1,766     $         3     $         1,285     $         484
Total expected future
cash collections
from committed contracts
(1) (3)                  $         4,873     $          5,148     $      (275 )   $         4,780     $          93
Total revenue backlog
(1) (3)                  $         7,330     $          7,639     $      (309 )   $         7,295     $          35
Total current revenue
backlog (1) (3)          $         3,402     $          3,500     $       (98 )   $         3,371     $          31

(1) Information presented excludes the results of our discontinued operations.

(2) At June 30, 2014, March 31, 2014 and June 30, 2013, short-term investments were less than $1 million, respectively.

(3) 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 our 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 our Condensed Consolidated Statements of Operations.
As our business strategy has evolved, our management looks within total bookings at renewal bookings, which we define as 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 at total new product sales, which we define as sales of mainframe and enterprise solutions products, and mainframe solutions capacity that are new or in addition to products or mainframe solutions capacity previously contracted for by a customer. Mainframe solutions capacity and new product sales growth can be inconsistent on both a quarterly and annual basis. We believe the period-over-period change in mainframe solutions new sales and capacity combined is a more appropriate measure of performance. Starting this quarter, we will provide only total mainframe solutions new sales information, which will include mainframe solutions capacity.


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The amount of new product 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 sales may not be material to the change in our total bookings or revenue compared with prior periods. New product 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 excludes the value associated with perpetual licenses for which revenue is recognized on an up-front basis, SaaS offerings and professional services arrangements. . . .

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