CA reels after expose on accounting practices
Reeling from a Sunday New York Times story accusing mainframe software maker Computer
Associates International Inc. (CA) of misleading accounting practices, the company's
executives punched back in a Web-broadcast teleconference Monday, calling the
article unfair.
CA changed its business model last year to allow for short-term licensing contracts
for its software. The move prevents dramatic price changes for its products
during a quarter, an effect Chief Executive Officer and President Sanjay Kumar
called the "hockey stick" phenomenon -- flat sales until the end of
a quarter when a company drops prices to book sales.
Kumar said its previous model "is not sustainable. We believe the new
business model will help alleviate the effect."
The new business model comes with accounting changes, however. Revenue for
licenses is recorded differently than "maintenance" revenue for upkeep
of software. Software companies record all license revenue up front, while maintenance
revenue is booked month by month as it is paid.
The Times charges CA of having used abstract accounting methods to shift revenue
from one category to another for years in order to show revenue growth. It also
pointed to a substantial difference between its pro forma, pro rata earnings
and earnings reported under generally accepted accounting principles.
Kumar said many other companies use pro forma accounting, including its competitors,
and that it more accurately reflects CA's finances. "Revenue under the
old business model and the new business model is not comparable," he said.
"As many analysts will say, the model is completely transparent and provides
better predictability."
CA's accounting firm, KPMG LLP, said the company has conformed to standard
accounting principles. Company officials are not aware of any investigation
by the U.S. Securities and Exchange Commission, said Ira Zar, chief financial
officer for CA.
The highly critical story also said CA moved to a new business model because
CA was running out of competitors to buy and could not shift revenue anymore.
Citing unnamed sources, the Times said CA inflated revenue growth in its Unicenter
client-server product by buying large competitors and reworking the contracts
of the newly acquired clients to show Unicenter sales at companies that actually
may not use the software.
The Times report said that CA books what typically would be considered maintenance
revenue from the newly acquired clients as new license Unicenter revenue, whether
or not the users actually make use of the Unicenter software. Therefore fewer
users may be using the company's flagship product -- which the company often
touts as key to the future of its business -- than the accounting practice may
lead observers to think, according to the article.
Kumar pointed to BellSouth Corp., Allstate Insurance Co. and other companies
using Unicenter to refute the claim.
T1Xpert Chief Operating Officer Tom Price signed on as a Unicenter client just
a few weeks ago. "We had looked around. We liked the CA name, and they
had a reliable reputation," he said.
Price declined to name the other vendors considered by his firm, which develops
software for the securities industry. He said CA's flexible licensing structure,
a key aspect of its new business model, was an attractive feature.
T1Xpert is in the process of installing Unicenter. Price said the installation
is going smoothly, and that his company has been happy with CA so far.
The story plays to some existing mistrust of the company within the computer
industry, said analysts. Three CA senior executives were ordered to pay back
$550 million to the company by a Delaware judge who found in a shareholder
suit that they had received excessive compensation. CA has also missed earnings
estimates on occasion, said Sarah Mattson, an analyst from Dain Rauscher Wessels.
"We were very skeptical about how it (the new business model) would be
received because it was so confusing," she said. "It's confusing because
it's completely new. Because there's no history to compare it to, they can construct
the numbers in way that's more favorable ... There's already a little bit of
distrust about CA in the market, and this kind of plays into it."
She has given the company a "neutral" rating for investors, having
downgraded it on March 2 from a "buy" rating. "That kind of highlights
where I think the company is relative to the competition. ... I think the stock
is pretty fairly valued at current levels."
Shares of CA were down $4.20 -- about 12 percent -- to $31.05 on the New York
Stock Exchange on Monday morning.
(Stacy Cowley in New York contributed to this report.)
ITworld.com
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