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"We continue to focus on building and integrating our solutions portfolio to meet the needs of customers and we are encouraged by their positive reaction to our Enterprise IT Management (EITM) vision," said John Swainson, CA's president and chief executive officer. "However, we are not satisfied with our cost structure and we are implementing an expense reduction plan to improve the Company's efficiency and competitive position. These are the first steps in a long-term program to achieve a best-of-breed cost structure."
First Quarter Results
Revenue for the first quarter was $956 million, an increase of 3 percent over the $927 million reported in the similar period last year. The increase in revenue was primarily attributed to growth in subscription and professional services revenue.
Subscription revenue for the first quarter was $739 million, an increase of 5 percent over the $702 million reported in the first quarter of last year. Subscription revenue accounted for 77 percent of total revenue in the quarter, compared to 76 percent in the first quarter of fiscal year 2006.
Total product and services bookings in the first quarter were $558 million, up 16 percent from the $480 million reported in the same period a year ago. Direct product bookings grew 14 percent, to $384 million. Indirect bookings grew 4 percent to $72 million.
Total expenses for the first quarter were $905 million, up 9 percent, compared to the $827 million reported in the same period last year. The increase in expenses was driven by higher personnel costs primarily resulting from recent acquisitions, increased cost of professional services associated with higher revenues, greater commissions, royalties and bonuses expense due to acquisition-related retention payments and an increase in the number of non-sales individuals compensated through annual incentive compensation plans and charges associated with the Company's 2006 restructuring plan.
The Company recorded GAAP net income of $35 million for the first quarter, or $0.06 per diluted common share, compared to net income of $97 million, or $0.16 per diluted common share, in the prior year comparable period.
The Company reported non-GAAP net income of $104 million for the first quarter, or $0.17 per diluted common share, compared to $136 million, or $0.22 per diluted common share a year earlier.
For the first quarter, CA reported a use of cash flow from operations of $46 million, compared to $93 million in cash flow generated from operations reported in the prior year period. The decline in cash flow from operations was the result of increased disbursements to vendors associated with a concerted effort to reduce the Company's payable cycle, 401(k) contributions not pre-funded in fiscal year 2006 and increased commission payments related to the fourth quarter of fiscal year 2006.
Cost Reduction and Restructuring Plan
CA also announced a fiscal year 2007 cost reduction and restructuring plan designed to significantly improve the Company's expense structure and increase its competitiveness. The plan's objectives include a workforce reduction of approximately 1,700 positions, including 300 positions associated with consolidated joint ventures, and global facilities consolidations and other cost reduction initiatives, which CA expects to deliver about $200 million in annualized savings when completed in late fiscal year 2008.
The Company expects to incur pre-tax restructuring charges of approximately $200 million associated with the workforce reductions and facilities consolidations, with the majority of these charges to be incurred over the next two quarters. The Company also expects to implement other programs over the remainder of its fiscal year to further reduce costs throughout the organization including tighter control of travel and a reduction in the use of consultants.
The Company estimates that approximately half of the workforce reductions will take place in North America.
"CA's senior management is focused on making the Company's cost structure competitive with that of its peers and aligning it with CA's strategic market opportunities and initiatives," said Michael Christenson, CA's chief operating officer. "The initiative we announced today reflects our ongoing commitment to improve the efficiency of our operations, reduce our operating expenses, improve our rate of return on invested capital and deliver a stronger bottom- line performance."
The balance of cash, cash equivalents and marketable securities at June 30, 2006 was $1.522 billion. With $1.811 billion in total debt outstanding, the Company has a net debt position of approximately $289 million.
The Company expects to commence the first phase of its $2 billion stock repurchase program through a tender offer that will price and launch this week. CA plans to repurchase $1 billion in common stock in the first phase through a combination of cash on hand and bank financing and will provide further information when it commences the tender offer.
CA is considering various options to execute the second phase of the program and will provide further details when appropriate. The Company expects to complete the full $2 billion share repurchase plan by the end of fiscal year 2007.
During the quarter, the Company repurchased approximately 7 million shares of its common stock at an aggregate cost of approximately $157 million.
Outlook for Fiscal Year 2007
On June 29, 2006, the Company provided a full-year outlook for total revenue of $3.9 billion, GAAP earnings per share of 44 cents, non-GAAP earnings per share of 83 cents, and cash flow from operations of $1.3 billion. The outlook has not been adjusted to reflect the $2 billion common stock repurchase plan for fiscal year 2007 or the impact of any related financing activities. The outlook also assumes that the Company will take steps to achieve certain cost savings, including the fiscal year 2007 restructuring plan announced today. These steps will have related, non-operating costs that will have a negative effect on GAAP earnings per share and cash flows, which have not been reflected in the June 29, 2006 outlook as the timing of the costs and related payments has not yet been determined. The Company will quantify the effect of these actions on its full-year outlook and adjust guidance accordingly on its second quarter earnings conference call.
This press release and the accompanying tables should be read in conjunction with additional content that is available on the Company's website, including a supplemental financial package, as well as a webcast that the Company will host at 5 p.m. ET today to discuss its unaudited first quarter results. The webcast will be archived on the website. Individuals can access the webcast, as well as this press release and supplemental financial information, at http://ca.com/invest or listen to the call at (800) 729-6829. The international participant number is (706) 679-5227.
Table 1 CA, INC. Consolidated Statements of Operations (in millions, except per share amounts) (unaudited)
CA (NYSE: CA), one of the world's largest information technology (IT) management software companies, unifies and simplifies the management of enterprise-wide IT. Founded in 1976, CA is headquartered in Islandia, N.Y., and serves customers in more than 140 countries. For more information, please visit http://ca.com.
Non-GAAP Financial Measures
This press release includes financial measures for per share earnings and cash flows that exclude the impact of certain items and therefore have not been calculated in accordance with U.S. generally accepted accounting principles (GAAP). Non-GAAP "operating" earnings per share excludes the following items: non-cash amortization of acquired technology and other intangibles, in process research and development charges, the government investigation and class settlement charges, restructuring and other charges, and the tax resulting from the repatriation of approximately $584 million of foreign cash and interest on dilutive convertible bonds (the convertible shares, rather than the interest, are more dilutive, thus the interest is added back and the shares increased to calculate non-GAAP operating earnings). Non-GAAP taxes are provided based on the estimated effective annual non-GAAP tax rate. Non-GAAP adjusted cash flow excludes the following items: Restitution Fund payments, restructuring payments, and the impact of certain non-recurring tax payments or tax benefits. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. By excluding these items, non-GAAP financial measures facilitate management's internal comparisons to the Company's historical operating results and cash flows, to competitors' operating results and cash flows, and to estimates made by securities analysts. Management uses these non-GAAP financial measures internally to evaluate its performance and they are key variables in determining management incentive compensation. The Company believes these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making. In addition, the Company has historically reported similar non-GAAP financial measures to its investors and believes that the inclusion of comparative numbers provides consistency in its financial reporting. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this press release to their most directly comparable GAAP financial measures, which are attached to this press release.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this communication (such as statements containing the words "believes," "plans," "anticipates," "expects," "estimates" and similar expressions) constitute "forward-looking statements." A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the risks and uncertainties associated with the CA deferred prosecution agreement with the United States Attorney's Office of the Eastern District, including that CA could be subject to criminal prosecution or civil penalties if it violates this agreement; the risks and uncertainties associated with the agreement that CA entered into with the Securities and Exchange Commission ("SEC"), including that CA may be subject to criminal prosecution or substantial civil penalties and fines if it violates this agreement; civil litigation arising out of the matters that are the subject of the Department of Justice and the SEC investigations, including shareholder derivative litigation; changes to the compensation plan of CA's sales organization may lead to outcomes that are not anticipated or intended as they are implemented, and the commissions plans for fiscal year 2007, while revised, continue to be reviewed; CA may not adequately manage and evolve its financial reporting and managerial systems and processes, including the successful implementation of its enterprise resource planning software; CA may encounter difficulty in successfully integrating acquired companies and products into its existing businesses; CA is subject to intense competition in product and service offerings and pricing and increased competition is expected in the future; if CA's products do not remain compatible with ever-changing operating environments, CA could lose customers and the demand for CA's products and services could decrease; certain software that CA uses in daily operations is licensed from third parties and thus may not be available to CA in the future, which has the potential to delay product development and production; CA's credit ratings have been downgraded and could be downgraded further which would require CA to pay additional interest under its credit agreement and could adversely affect CA's ability to borrow; CA has a significant amount of debt; the failure to protect CA's intellectual property rights would weaken its competitive position; CA may become dependent upon large transactions; general economic conditions may lead CA's customers to delay or forgo technology upgrades; the market for some or all of CA's key product areas may not grow; third parties could claim that CA's products infringe their intellectual property rights; fluctuations in foreign currencies could result in translation losses; and the other factors described in CA's current report on form 10-Q. CA assumes no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.
This press release is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any shares of CA common stock. CA has not yet commenced the tender offer described herein. On the commencement date of the tender offer, an offer to purchase, a letter of transmittal and related documents will be filed with the Securities and Exchange Commission, will be mailed to stockholders of record and will also be made available for distribution to beneficial owners of shares of common stock. The solicitation of offers to buy shares of CA common stock will only be made pursuant to the offer to purchase, the letter of transmittal and related documents. When they are available, stockholders should read those materials carefully because they will contain important information, including the various terms of, and conditions to, the tender offer. When they are available, stockholders will be able to obtain the offer to purchase, the letter of transmittal and related documents without charge from the Securities and Exchange Commission's website at www.sec.gov or from the information agent Innisfree M&A Incorporated at 877-750-9497 (U.S. & Canada) 412-232-3651 (other countries) or 212-750-5833 (Banks & Brokers). Stockholders are urged to read carefully those materials when they become available prior to making any decisions with respect to the tender offer.
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(1) The Company added that its annual outlook for 2007 has not been adjusted to reflect the $2 billion repurchase plan. This outlook also assumes that the Company will take steps to achieve certain cost savings, including the recently announced fiscal year 2007 restructuring plan. These steps will have related non-operating costs that will have a negative effect on GAAP earnings per share and cash generated from operating activities, which have not been reflected in the above outlook as the timing of such costs has not yet been determined.
Refer to the discussion of Non-GAAP measures included in the accompanying press release for additional information.
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