CA shares in free fall

Summary:Shares of Computer Associates (NYSE:CA) fell 18 points, or 31 percent today as Wall Street freaked out after the software maker warned that sales and earnings would likely slow in the next several quarters.Even though the company managed to beat Q1 earnings estimates by one cent, shares of CA, which closed at 57 on Tuesday, opened down more than 18 points after being delayed for nearly one half hour.

Shares of Computer Associates (NYSE:CA) fell 18 points, or 31 percent today as Wall Street freaked out after the software maker warned that sales and earnings would likely slow in the next several quarters.

Even though the company managed to beat Q1 earnings estimates by one cent, shares of CA, which closed at 57 on Tuesday, opened down more than 18 points after being delayed for nearly one half hour. Ten securities firms downgraded their ratings on CA which late Tuesday reported that its earnings rose 25 percent and revenues climbed 18 percent in the first quarter. However, the market was unnerved after the company warned that it was concerned about the ripple effect that economic turmoil in Asia was having on its corporate customers and potential near-term harm to its business.

It also said some customers were deferring software purchasing decisions as they focus on fixing Year 2000 date-change issues, especially on mainframe computers.

Net income for the quarter that ended in June was $194 million, up 25 percent from the $156 million in the year-ago period.

Executive windfall
The latest results exclude a massive one-time after-tax charge of about $675 million to cover the windfall of stock options issued to top executives under a management-incentive plan approved by shareholders in 1995.

June quarter results translated into 34 cents per diluted share, excluding the charge, compared with 28 cents in the year-ago quarter, an increase of 21 percent. The figures take account of a three-for-two stock split last November.

Analysts had expected earnings of 33 cents per share in the most recent quarter, according to First Call, which surveys broker estimates.

Revenues rose 18 percent to $1.05 billion from $890.7 million reported in the previous year's first quarter.

"While our operating units in Asia had more challenges than usual this quarter, our other units, particularly in North and Latin America, stepped up well to compensate," Sanjay Kumar, president and chief operating officer said.

Despite the company's concern about Asia and the impact of Year 2000 purchasing delays, Kumar said that the company "remain(s) quite optimistic about our overall competitive positioning and our longer term business fundamentals."

Long-term deals catch up
Charles Phillips, an analyst with Morgan Stanley, said the problem may have less to do with Y2K and Asia and more to do with the way the company books deals.

"Our sense is that the company has aggressively converted its large customers to multi-year enterprise licenses. These deals tie customers into long term arrangements and the sales force doesn't have to resell and renew the maintenance contracts each year. The deals make business sense and lock competitors out of the account," Phillips said in a report issued Wednesday morning.

"However, once these customers have stepped up to enterprise deals, they usually don't need a lot more product until the contract is up. Much like the database vendors, CA may have pulled in multi-year deals at a faster rate than underlying demand. Based on past patterns, CA's mainframe software opportunity isn't completely toast but it will need three of four quarters of rebuilding the pipeline supplemented by customers coming up for renewals. The mainframe business probably posts year over year declines for the rest of the year and then rebounds modestly in F2000."

Incentive program
Four years ago, shareholders approved the executive incentive stock option that could be triggered only when certain stock performance targets were met.

In subsequent years, the stock has surged. Computer Associates announced that the program had been set in motion in May. The company's market capitalization has more than tripled to more than $30 billion from $9 billion in 1995.

At the time the bonus plan was announced, the company said its chairman, Charles Wang, stood to gain 60 percent of the jackpot, or roughly 12 million shares.

Reuters contributed to this report.

Topics: Software, Hardware

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