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CA boost profits, but see modest growth ahead

Second in command leaves the bridge

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Systems management tool and database provider CA, formerly known as Computer Associates, finished out its fourth quarter of fiscal 2010 on a high note, with sales up 7 per cent to $1.1bn and net income up 55 per cent to $101m. That's probably as good as can be expected given the state of the high-end server base that dominates CA's business.

For the full fiscal year ended March 31, CA's sales were up only 2 per cent to $4.35bn, but net income rose by 15 per cent to $771m. Again, pretty good numbers.

But apparently they were not good enough for Wall Street, which was also made jumpy by the fact that Michael Christenson, CA's president and chief operating officer, is resigning from the company and will be leaving at the end of May.

Christenson was hired by CA in 2005 and was named chief operating officer in 2006 and president in 2008; he worked with John Swainson, the former number two guy in IBM's Software Group who took over as CA's chief executive officer in late 2004 and was largely responsible for turning the former Computer Associates around after a $2.2bn accounting scandal relating to five years of fudging financials that resulted in company founder, Charles Wang, being ousted from CA and Swainson being brought in to change the company's name and knock the products and the books into shape.

When Swainson announced his retirement in September it left a power vacuum, and the company installed Bill McCracken, who ran Big Blue's printing and PC divisions (back when it had them), as executive chairman. In January, Christenson was passed over for the CEO job, and McCracken was installed instead. CA now says that it has no plans to put in a president and COO, and that Arthur Weinbach, who used to run payroll processor ADP, as its non-executive chairman.

CA has returned to its Computer Associates roots and has been on an acquisition tear in recent months. The goal is to make CA more relevant in an increasingly cloudy and decreasingly mainframe and Unix world.

CA paid $350m for cloud management tool maker Nimsoft back in March. In February, CA acquired application cloud service tool maker 3Tera for an undisclosed amount, and paid $200m in September 2009 for NetQoS. It has also snapped up Cassatt, a server virtualization management tool maker, and Oblicore, which makes tools for managing IT service levels, for undisclosed amounts.

CA would make a perfect acquisition target for a software-obsessed IBM or a just-plain-obsessed Oracle, but it is a bit on the pricey side, even after its shares got a 7 per cent chop today to just over $20 a share, dropping CA's market capitalization to $11.4bn. Even if you offset the $2.58bn the company has in the bank in cash and equivalents, and then tack on the $1.55bn in debt CA is carrying, the software house would be just too expensive for all but the biggest companies to acquire. Then consider the revenue backlog of over $8.2bn that CA has on its books, and CA is a very big target.

Given that IBM doesn't like to do big deals and is only earmarking, you can expect IBM and CA to do what they always do: clone each others' stuff and compete in the data center for every dollar, pound, euro, yuan, yen, and rupee. But with Larry Ellison, one of Oracle's founders and currently its chief executive officer, you can never tell what might happen next.

In a conference call with Wall Street analysts, McCracken said that CA's catalog of mainframe tools exceeded expectations in fiscal 2010, but he did not provide any figures to show how much of CA's biz comes from mainframes, or say what those expectations were. Given that IBM is expected to put a new System z11 mainframe into the field during the second half of 2010, and that the current System z10 is on its last legs, you'd expect for CA's mainframe biz to be soft.

Looking ahead, CA CFO Nancy Cooper said the company expects to grow revenues at between 3 and 5 per cent at constant currency in fiscal 2011, which translates into somewhere between $4.5bn and $4.6bn in revenues for the year. GAAP earnings per share are expected to do better, rising between 5 and 11 per cent, which works out to $1.56 to $1.64 per share.

This doesn't sound like a rip-roaring recovery, and hence Wall Street's reaction. ®

The smart choice: opportunity from uncertainty

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