Services Drag on CA's Fiscal 2000 Earnings

BOSTON (05/17/2000) - Computer Associates International Inc. reported record results for its fourth quarter yesterday, though it admitted that its professional services and European operations both underperformed.

"I wouldn't be telling the truth if I said I wasn't disappointed" in the performance of professional services, said Sanjay Kumar, president and chief operating officer of the Islandia, New York-based software giant.

Even though CA's professional services revenue for the period ended March 31 grew 24 percent, to $115 million, the growth was below CA's expectations and predictions.

In recent months, CA officials have denied rumors that new service contracts were slowing and that many members of its professional services staff were idle.

Kumar laid some of the blame on CA's Millennium Watch program, through which it offered free services to top customers over the Jan. 1, 2000, rollover period, writing off those expenses as a "goodwill" builder.

Another factor was CA's decision not to renew some services contracts it inherited from its acquisition of Platinum Technology International Inc. last June, "because we didn't think they were good business," Kumar said.

Wall Street analysts were also disappointed by CA's services growth. "I think the overall value of Platinum in expanding CA's services business was (unintentionally) exaggerated," said Damian V. Rinaldi, an analyst at First Albany Corp. in Boston. For example, he said, a major Platinum training contract "didn't produce the payback" that was expected.

CA's product and service diversity was undoubtedly a factor in helping the company achieve stellar results for the year, but the services slump is disquieting, said financial advisor M. Arthur Gillis, president of Computer Based Solutions Inc. in Dallas. "The lifeblood of a good software company is its professional services," he said.

Rinaldi said weaknesses in CA's professional services and European operations were offset by a steady growth in software sales and "good momentum from the integration of Sterling (Software Inc.)," which CA bought in March.

A planned doubling of its advertising budget is aimed at earning CA the same mainstream recognition as Oracle Corp., Kumar said.

The point is to gain entry to "corner offices" of large enterprises, he said.

He pointed to a recent experience in which the new CEO of a longtime CA customer had never heard of CA and thus requested that his procurement department do a credit check on the company.

Aside from the obvious benefits of such a campaign for CA, the move could make it easier for CIOs to buy software, Rinaldi said. "It's designed to remove a hurdle, so an IT director doesn't have to go to the board of directors or the CEO and say, 'I want to spend a couple million bucks with this software company no one's ever heard of.' Brand recognition will make it easier for the board of directors, who tend not to be too technically savvy, to sign a check for millions or tens of millions of dollars," Rinaldi said.

Rinaldi also downplayed CA's underperforming European operations. CA "is all over that from a management stance," he said.

Kumar said he is alternating with Steven Richards, who has headed CA sales and is now in charge of the company's European operations, spending several days a week in Europe revamping that business.

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