CA strong despite turmoil, analysts say

Computer Associates International Inc. (CA) heads into its annual CA World user conference, beginning this weekend in Orlando, under a cloud of scandal and bad news -- but analysts say the company is fundamentally strong, and that it has recently done an excellent job of developing compelling technologies.

Most of the headlines about CA in the past few months have focused on its obstacles and mishaps. First there was the fallout from a scathing New York Times article questioning the company's accounting practices; then CA revised its preliminary fourth-quarter results, blaming a typo for overstated fiscal year 2000 earnings. When CA released its fourth-quarter report, the results were hard to interpret: The company claimed a pro forma net operating income of US$274 million for the quarter, but had a $410 million net loss using generally accepted accounting principals.

On Monday, CA said in a filing with the U.S. Securities and Exchange Commission (SEC) that its top executives, including Chairman Charles Wang and Chief Executive Officer (CEO) Sanjay Kumar, received no performance-based bonuses or stock option awards during the 2001 fiscal year. The pair have also agreed to forgo cash bonuses in the 2002 fiscal year. Last November, CA revamped its business model and changed the way it reports revenue; CA said that change caused the company to show a net loss for 2001, which in turn prompted the bonus withholding.

Looming over everything for the past few weeks has been shareholder Sam Wyly's surprise proxy bid to replace CA's entire board of directors and restructure the company, which he wants to break into four independent units focusing on storage management, security management, systems management, and knowledge management.

To win control of CA, Wyly needs the support of a majority of shareholders participating in a vote at CA's annual shareholder meeting on Aug. 29. With slightly more than 30 percent of the company's shares held by those who have already rebuffed Wyly and aligned with CA's current management, Wyly's bid is unlikely to succeed, but it has nonetheless cast a spotlight on CA's weaknesses and put the company's management on the defensive. In late June, CA filed suit against Wyly, charging that his takeover bid violates the terms of a non-compete agreement he signed when he sold Sterling Software International Inc. to CA in 2000.

A spokesman for Ranger Governance Ltd., which Wyly is using as a vehicle for his proxy bid, said no one associated with the bid will be attending CA World. "We'll find a way to get our message out," he said, declining to offer further details. In a conference call last week, Ranger officials said the bid team will have a "presence" at CA World.

"The bid will be in the background of a lot of people's minds at CA World is my guess, at this point," said Hurwitz Group Chief Analyst Evan Quinn, who plans to attend the show. "There's still a bit of fear and paranoia, but more of a sense of cover than you might have thought a few weeks ago. I think you'll see more jokes about it than wringing of hands."

Quinn said he's unconvinced of the merits of Wyly's criticisms and plans for CA. He's particularly critical of a customer study commissioned by Ranger and conducted by Penn, Schoen & Berland Associates Inc. Ranger says the study shows high levels of dissatisfaction among CA's customers, but the study's methodology has been heavily criticized by CA and a variety of analysts, including research firm Gartner Inc.

"There's no way you could attach any statistical significance to that report," Quinn said. "(CA) hit at the underlying research technique. They hit that right in the shins -- and, coming from a research firm, I think appropriately so."

Aberdeen Group Inc. analyst Valerie O'Connell, managing director of the research firm's enterprise systems management group, also blasted Wyly's proxy bid.

"This guy is running a circus. I'm pretty disgusted with the whole thing," she said. "If his plan is to add shareholder value by dividing the company into four parts and selling them off, that shows a remarkable lack of understanding of CA's business. They have profound technology that's shared across product lines. (If you) break it up into four parts, who gets the good technologies?"

O'Connell, who also plans to attend CA World, said CA has done a top-notch job lately of updating old products and introducing competitive new ones.

"They haven't been very splashy about publicizing what they've done well. I'd like to see them do a better job of tooting their own horn," she said. "They've done a really good job of integrating their technology and re-architecting their core offerings. These are some really superb products."

O'Connell cited the work CA has done to update Unicenter, its enterprise management software package, as an example of the company's successful adaptation to changing business needs. At last year's CA World, CA's mantra was that it's ready to become a key e-business software vendor. O'Connell says it's making good on that pledge.

Gartner analyst Michael Blechar said he agrees. "In most of the technologies I cover, CA is a market leader, and they're continuing to do quite well," said Blechar, Gartner's vice president of Internet and e-business application technologies.

"In the past, CA had a reputation for acquiring technology at the end of its life and extending the life of the technology. To some degree that was a good thing," Blechar said. "But in the past their reputation was that they didn't enhance it enough. We have seen substantial turnaround in the last two to three years."

CA has been upping its research and development investments, and customer satisfaction levels have been rising, according to Blechar. He also sees CA finally creating its own new technology, instead of merely polishing old applications. He cited the company's Jasmine ii Portal information management software as "leading-edge technology," and noted that its Cool:Plex and Cool:Joe application development technologies "are getting great reviews so far, for increasing productivity."

Last month, CA said during a meeting with analysts that it will focus on six core technology and product areas: security, storage, enterprise management, application development tools, and visualization and knowledge management technologies. Analysts hailed the announcement as a positive move for CA, and several said they expect the company to use CA World to elaborate on its plans in those areas.

"The six product areas is an attempt at clarity that's much needed at CA. It gives us outsiders an easier lens to see what they're offering," said Hurwitz Group's Quinn. "(They've created) the segmentation. Now you get to see it up close if you go to CA World."

Blechar, who is not attending the show, also expects CA to address its evolving strategy. "I expect you're going to hear about alliances, distribution channels, how CA functions as an ASP (application service provider), and the new roles it's taking," he said.

As CA continues repositioning itself as an e-business vendor, the company is entering new niches of the IT market -- and in each of those niches, Blechar said he thinks the company will either win big or wipe out.

"Clearly, these are new directions for CA. The question on the technology side is, with Jasmine and their new Java tools, can they compete against Microsoft (Corp.), IBM (Corp.), Sun (Microsystems Inc.), and the others? The jury is still out," he said.

"Because of their alliance partners and their distribution channels, I think that everything they deliver in terms of new products will build a credible market share. The real question is, for any given one of these markets, will they go from being sort of a minor player to being a leader. And I think the answer is going to come market by market. In each market, they'll either win big enough to be top five or they'll remain niche," he predicted.

Quinn agreed that CA is expanding its range.

"In the last two years, CA has been moving -- albeit carefully -- away from a more conservative approach and beginning to compete with some more late-breaking technologies. ... They're beginning to compete head-to-head with BEA (Systems Inc.) and IBM and beginning to get into some of those bids," he said. "Jasmine has done pretty well for them. A few years ago, they might not have had a portal product come to market in time to be a competitor.

"They do a good job of executing primarily within their installed base. I think most of their business is going to continue coming from within their installed base. The good news is, they have a pretty significant installed base," Quinn said.

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