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CA dives on 1Q warning
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July 5, 2000: 6:14 p.m. ET
Computer Associates blames failed deals; analysts downgrade stock
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NEW YORK (CNNfn) - Computer Associates shares plunged Wednesday following its announcement earlier this week that fiscal first-quarter earnings will fall far short of expectations.
By the close Wednesday, shares of Computer Associates (CA: Research, Estimates) had plunged 21-11/16, or 42 percent, to 29-7/16.
The software provider warned investors late Monday that profits for the three months ended June 30 will fall short of expectations. Sanjay Kumar, the company's chief operating officer, said on a conference call Wednesday morning that he expects the company's earnings per share to be between 11 cents and 16 cents, or between 26 cents and 31 cents when a one-time gain is included. Those numbers fall far short of analysts' expectations of 55 cents a diluted share, according to a First Call poll.
 "Our expectation, going into the quarter, is that we would make our numbers," Kumar said.
"Our products were performing well. However, it became apparent, after preliminary results that we would be short."
Kumar said that he expects revenue for the fiscal first quarter to be between $1.25 billion and $1.3 billion. Last year, the company turned in revenue of $1.22 billion.
Kumar cited three reasons for the shortfall: a failure to close a number of large deals worth between $10 million and $50 million; weakness in the mainframe business; and soft international sales.
"The OS/390 business [Computer Associates' software for mainframes] from what was our expectation of its performance in the quarter was weak," Kumar said. "Our early indications are that with the new IBM hardware cycle coming up later in the year ... clients are nervous about major changes in architecture and pricing of the mainframe platform." Kumar said this weakness, in turn, "will inevitably" hurt Computer Associates' distributed systems software sales.
The international business units' "numbers did not pan out," Kumar said, based on what the company's sales management team expected.
"Europe missed a number of deals and probably was more impacted by the sales reorganization and the Sterling integration occurring simultaneously," Kumar said. In February, Computer Associates acquired Sterling Software for $4 billion in stock.
Kumar said Computer Associates is moving toward turning the company around and plans to target a growth rate of 20 percent or $1.92 billion in its second quarter, compared with last year's second-quarter revenue of $1.61 billion. Current expectations called for a 25 percent growth rate.
"Organizationally, we have made some management changes in Europe," Kumar said. He said he also tapped a new executive vice president of sales operations to improve weak areas of sales "to bring them up to speed."
Mainframe softness felt elsewhere
While Kumar was addressing investor concerns, BMC Software (BMCS: Research, Estimates) warned Wednesday it will earn less than half of what analysts had expected for the Houston-based firm, also blaming weakness in the mainframe business.
Its shares plummeted 11-5/16, or 32 percent, to 24-3/16, hovering near its 52-week low of 22.
BMC said its preliminary estimates of total revenues for its first quarter ended June 30, are in the range of $365 million to $375 million.
"We experienced weakness in our mainframe business at quarter end. We attribute the shortfall in mainframe license revenues to a lack of a sufficient number of customers committing to enterprise license transactions," President and CEO Max Watson said.
The company estimated that its net income will be between $47 million and $51 million, or 18 cents to 21 cents per share. Analysts polled by First Call were looking for 46 cents a share.
Analysts react
Ahead of Kumar's remarks, Credit Suisse First Boston's Wendall Laidley downgraded the stock to "buy" from "strong buy," saying: "The company no longer supports our investment thesis of improving fundamentals, increased visibility and attractive valuation."
Several analysts downgraded Computer Associates' stock after its conference call, based on Kumar's remarks.
Banc of America Securities' Paul Dravis sliced CA's rating to "market performer" from "buy."
"We are lowering our rating...as we await evidence of recovery in the IBM OS/390 mainframe market and improved traction in the European sales organization," Dravis said in a research note.
Dravis also said he is reviewing his second quarter revenue estimate for the company, which had been about $2 billion, after Kumar forecast that the second quarter total would be around $1.92 billion.
Morgan Stanley's Chuck Phillips also lowered his rating on CA stock to "outperform" from "strong buy."
"Our downgrade is based on the company's preannouncement for contract revenue of $1.25 bilion-$1.3 billion. Our estimate was $1.65 billion," Phillips said in a research note.
"We now expect EPS of 15 cents a share, excluding amortization and charges. Our previous consensus level EPS estimate was 55 cents a share," Phillips said.
 Sarah Mattson of Dain Rauscher Wessels also cut the company's stock to a "buy." In an interview on CNNfn's In the Money program Wednesday, Mattson said she takes a long view of the stock's performance. [220K WAV or 220K AIFF]
"I think long term, the opportunity for CA is still there," Mattson said. "CA sells software which helps companies manage systems, applications, network storage, and these issues are becoming very, very important for companies as they move their business online for e-business."
"I think that CA -- if the company can execute -- has a real opportunity still, but again my perspective now is not necessarily six months, but probably 12 months down the road," Mattson said. 
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Computer Associates
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