CA, Inc. F1Q10 (Qtr End 06/30/09) Earnings Call Transcript

CA, Inc. (CA)

F1Q10 (Qtr End 06/30/09) Earnings Call Transcript

July 23, 2009 5:00 pm ET

Executives

Kelsey Doherty – SVP of IR

John Swainson – CEO

Nancy Cooper – EVP and CFO

Analysts

John DiFucci – JP Morgan

Todd Raker – Deutsche Bank

Gregory Shaw – Jefferies

Richard Sherman – MKM Partners

Walter Pritchard – Cowen

Stephanie Witter – Goldman Sachs

Michael Turits – Raymond James

Phil Winslow – Credit Suisse

Robert Breza – RBC Capital Markets

Presentation

Operator

Ladies and gentlemen, good day and welcome to the CA First Quarter 2010 conference call. Just a quick note that today’s conference is being recorded. At this time, I would like to turn the conference over to Kelsey Doherty. Please go ahead.

Kelsey Doherty

Thank you and good afternoon everyone. Welcome to CA’s First Quarter 2010 Earnings Call. I am Kelsey Doherty, Senior Vice President of Investor Relations for CA. Joining me today are John Swainson, our Chief Executive Officer, and Nancy Cooper, our Chief Financial Officer.

John will open this afternoon’s call with a high-level review of the quarter and a strategic discussion. Nancy will provide more detail regarding first quarter results and provide updated guidance. We then will open the call up for questions before John returns with some closing comments.

As a reminder, this conference call is being broadcast on Thursday, July 23, 2009, over the phone and the Internet to all interested parties. This information shared in the call is effective as of today’s date and will not be updated. All content is the property of CA and is protected by U.S. and international copyright law and may not be reproduced, transcribed, or produced in any way without the expressed written consent of CA. We consider your continued participation in this call as consent to our recording.

During this call, non-GAAP financial measures will be discussed. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release which was filed on Form 8-K earlier today as well as in our supplemental earnings materials, all of which are available on our website at investor.ca.com

Today's discussion will include forward-looking statements subject to risks and uncertainties, and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks.

And with that, I’ll turn the call over to John Swainson.

John Swainson

Thanks, Kelsey. Good afternoon and thank you for joining us.

Before I start, I would like to take the opportunity to welcome Kelsey to CA. Many of you already know her from her role as Head of Investor Relations at McAfee. She has more than 15 years of experience in Investor Relations and we are very pleased to have her on the CA team.

So, let us begin.

CA got off to a strong start in the first quarter. We are pleased that we grew revenue and both GAAP and non-GAAP earnings per share on a constant currency basis, increased operating margin on both a GAAP and non-GAAP basis and delivered cash flow from operations of $262 million, one of the highest first quarter totals ever.

Accordingly, we are updating our outlook for the full fiscal year, which we provided in May. While some of the update is due to the lessening of currency headwinds going forward, the update does underscore our continued focus on additional revenue opportunities and operating margin leverage. Nancy will give you the details in a few moments.

I am first going to talk about what we are hearing from our customers and how we are helping them get the most out of their IT infrastructures and then I will discuss where we see growth opportunities.

Over the past few months, I have talked with literally hundreds of customers around the globe. Two things continue to be clear: First, customers want to get more out of their IT infrastructure at a lower cost; and second, they want to be prepared to use IT to capture market opportunities as the economy improves.

They tell me that they have five things top of their minds: First, how do they improve productivity and do more with less? Secondly, how do they use technology to address a growing number of regulation, governance, and compliance issues? Third, how do they take advantage of new and promising technologies such as cloud computing and virtualization and integrate them with their existing infrastructure? Fourth, how do they better align their IT with their business? And last but not least, how do they achieve a rapid ROI on all their technology projects?

Let me give you a few examples of how CA is helping them achieve what we call Lean IT: Optimizing the value IT delivers to the business at the lowest possible costs.

NASDAQ, as you know, is the leading U.S. electronic stock market, which lists more than 3,200 companies and handles more than two billion share trades a day, and they approached us to help them reduce the manual labor costs and improve productivity in their IT operations. They told us they wanted to make IT more like an automated factory production line. We provided a proof of concepts centered on our CA Spectrum Automation Manager and supporting CA Services, which will substantially reduce their cost associated with running manual processes, at and the same time significantly increase productivity. I am very pleased that NASDAQ is a new customer.

MGM Mirage came to us to help them manage their IT resources and control IT costs, while at the same time, maximizing the results they delivered to the business and ultimately providing a better experience for their customers. MGM Mirage, as you know, are one of the world’s largest entertainment companies, and they have a large, complex IT infrastructure. They implemented an integrated CA Enterprise IT Management solution, which included our Service Desk, Spectrum, our Asset Management product, added along with a number of other CA products. Using these, MGM Mirage has been able to simplify the management of 100,000 IT assets, dozens of IT projects, and significantly reduced their IT problems.

Another example of a strategic investment that has yielded millions of dollars in savings is our engagement with BT, the UK-based provider of networked IT, communications and broadband services. BT needed to centralize its user authentication and authorization to key external and internal Web applications, and they were processing over 36 million of these a day. Using CA SiteMinder, BT was able to decrease IT administration, application development, password resets and the support of auditing and compliance. They were also able to improve their user experience. Since 2004, BT tell us that they have saved about 18 million pounds, or about 4.5 million pounds a year.

With the breadth of our portfolio and talent in the workforce, there are ample opportunities for CA to grow its top line. We currently capture about $4.2 billion in annual revenue. Our addressable marketplace is about $46 billion and we expect it to grow to about $61 billion by 2013. That’s a lot of headroom and we think we are well positioned to capture a sizable amount of that market share growth.

Here’s how: First, we have one of the largest and most loyal customer bases in the industry, on both mainframe and distributed platforms. We are building on that loyalty to increase our renewal yields and up-sell and cross sell more new software to those customers. This provides a great platform for growth and last year generated more than $1 billion in new product sales.

Secondly, we have in our Enterprise IT management software portfolio, one of the strongest portfolios in the industry. And while some of our competitors talk a good game, we are the only company that spans infrastructure management, governance, service management, security management, and application performance management. All of these are vital to succeeding in the current IT environment and the new environments that will include virtualization and cloud computing, which I will talk about in a minute.

Third, our products are mission critical to customers as they look to maximize the value of their IT investment, at the same time, contain costs. Many of our products pay for themselves in less than a year, and clearly, this is an outstanding return on investment.

Fourth, we are increasing the depth of our relationship with outsourcers and managed service providers, a very strategic initiative for us. This segment is about $2.5 billion of our addressable market now and will double by 2013. Many of these people will be key providers of cloud computing in the future.

And fifth, we are making the necessary technology investments to drive our long-term growth. Last year, we announced the formation of our Software-as-a-Service business unit and we are seeing their revenue growth contributing to our top line results. We are making steady improvement in our virtualization offerings and are ramping up our technology to support the internal and external cloud computing opportunities.

Recently, we purchased some of the technology assets of Cassatt, an early leader in cloud computing. In short, I believe that CA is well-positioned to manage the customer’s technology needs now and in the future.

Let me talk briefly about cloud computing. While many companies are talking about this, few have what it takes to make it a reality. The move to cloud computing is profound. It will literally change the way we think about IT. There are endless possibilities and benefits, but, at the end of the day, whether you are operating in an internal cloud or an external cloud, the applications and infrastructures have to be managed, governed, and the access and data has to be secure. This has always been important to enterprise customers, but will become even more important if they are to trust critical parts of their computing infrastructure to a cloud environment. CA has the technology and the experience to help customers do this, and I am convinced that will make it a great opportunity for us.

With that, let me turn it over to Nancy and then I will return for a few closing remarks.

Nancy?

Nancy Cooper

Thanks, John. Good afternoon, everyone; and thank you for joining us.

CA had a strong start to fiscal year 2010.

We improved on our top line, with 4% constant currency revenue growth; and our bottom line, where constant currency non-GAAP earnings per share grew 14%. We successfully managed our cost structure, improving non-GAAP operating margins by 300 basis points. Our balance sheet and cash position strengthened, with cash flow from operations reaching $262 million. And, finally, I am pleased to provide updated guidance, which reflects confidence in the remainder of fiscal year 2010.

So, for the first quarter, total bookings were $1.198 billion, up 22% in constant currency and 16% as reported. On a geographic basis, both our North American and International regions delivered double-digit bookings growth. Bookings benefited from continued strength in our application performance management, infrastructure, and service management products, as well as workload automation and mainframe. This was offset by a reduction in professional services and a softening in demand for products aimed at consumers and small and medium businesses, both of which have been pressured by the macro-economic environment.

In particular, we are pleased with nearly $400 million in Managed Service Provider or MSP partnerships, which we booked during the quarter. We have recently established a team dedicated to building these partnerships and, as evidenced by our first quarter results, they are quickly gaining traction. MSPs expand our go-to-market reach and provide additional growth opportunities for CA.

Our average duration increased during the quarter to 4.21 years, driven primarily by these MSP partners, who tend to sign significantly longer contracts. One of these contracts was greater than $100 million and had a duration of seven years. Normalizing the duration of MSP contracts to our standard three-year term, duration for the quarter was 3.43 years. While the duration of some of these deals affected annualized bookings, which were down 1% in constant currency and 5% as reported, closing longer engagements, which involve a disciplined approach to pricing, makes good financial sense for both parties.

Now, to our backlog results. As a result of our ratable model, bookings quarters like the one we just closed, drive growth in future years. And this can be seen in our backlog results. Year-over-year total revenue backlog grew 21% in constant currency and 13% as reported, with both the current and the non-current portions growing on a constant currency basis. This is the fifth consecutive quarter we have seen year-over-year constant currency growth in current revenue backlog, which grew 5% this quarter and was down 2% as reported.

Revenue backlog is the best means of deriving revenue estimates from a modeling perspective. We provide this information, including an amortization schedule, as part of our financial supplement, which is currently posted to our Investor Relations website.

Year-over-year, total billings backlog grew 32% in constant currency and 26% as reported. The split between our current and long-term billings backlog was driven by the timing of renewals and the billings associated with our existing contract portfolio. We continue to see DSO’s trending down year-over-year, reflecting our ability to collect from customers in a timely manner. And this was encouraging in this environment.

Turning to revenue, total revenue was $1.05 billion, up 4% in constant currency and down 3% as reported. This revenue growth, in combination with the revenue backlog numbers I just discussed, are positive indicators for the future of our business.

Subscription and maintenance revenue was $946 million, up 5% in constant currency and down 2% as reported. Subscription and maintenance revenue, which is completely ratable, was 90% of total revenue for the quarter.

Revenue from Professional Services was $71 million, down 17% in constant currency and 24% as reported. Revenue from Professional Services was 7% of total revenue for the quarter. Overall, this first quarter decline in Professional Services affected year-over-year revenue growth by 200 basis points. We continue to believe that as the economy stabilizes, we will see an improvement in performance of this business.

Revenue from software fees and others was $33 million, up 16% in constant currency and 14% as reported.

From a geographic perspective, North American revenue was $630 million, up 6% in both constant currency and as reported. International revenue was $420 million, flat in constant currency and down 14% as reported. We recorded an unfavorable foreign exchange impact on international revenue of $70 million during the quarter.

Now, I would like to turn to the remainder of the income statement, starting with our non-GAAP results.

In the first quarter, operating expenses were $688 million, flat on a constant currency basis and down 8% as reported. We were able to grow revenue year-over-year in constant currency at the same time we held expenses flat.

As I indicated, we continue to rationalize the cost profile of our business, shifting our expense mix to invest in R&D, where we can drive product innovation.

Our efforts include off-shoring development to lower cost regions; managing discretionary spend, including travel and the use of consultants; and continued facilities consolidation.

Operating income before interest and taxes was $362 million, up 12% on a constant currency basis and down 6% as reported.

For the quarter, our operating margin was 34%, an increase of 300 basis points year-over-year. Excluding the 3 percentage points of stock-based compensation, operating margin was 37%.

Net income was $229 million. Earnings per share was $0.42, up 14% in constant currency and 5% as reported.

Turning to GAAP results, which, as presented, include purchased software, intangible amortization, restructuring and other, and non-quarter related gains and losses on the hedges of operating income.

GAAP net income was $195 million, up 7% in constant currency and down 1% as reported, while earnings per diluted common share were $0.37, up 6% in constant currency and flat as reported.

Our effective GAAP tax rate for the first quarter was 37%. Our effective non-GAAP tax rate was 36%. We believe we are on a path to a tax rate aligned with industry norms, which is in the lower 30% range.

Turning to cash flow from operations. Cash flow from operations in the quarter was $262 million, which includes a single cash transaction of more than $100 million and was our highest first quarter cash flow in several years. This compares to $54 million in the first quarter of 2009. We are pleased that our ongoing cost control initiatives and a decrease in restructuring costs are contributing to improvements in this metric.

Before I turn to a review of our balance sheet, I would like to highlight that Moody’s Investors Service upgraded CA to a Baa3 investment grade rating at the end of June. This speaks to the improvements we have made over recent years and the strength of our underlying business model.

CA ended the quarter with $2.98 billion in cash and cash equivalents and $1.92 billion of total debt, bringing our net cash position to a little over $1 billion dollars. As a reminder, we have approximately $636 million in maturities due in December of this year and we expect to pay these obligations down at maturity with cash on hand.

Given changing circumstances, namely the strengthening of our balance sheet, the ability to meet future obligations, and improvements in both our debt ratings and the broader capital markets, we believe it is time to be opportunistically in the market with our stock repurchase program. We have just under $250 million in approved authorization to repurchase stock.

Now with that, I’d like to update our guidance for fiscal year 2010. Given the recent foreign exchange volatility, we are providing guidance on a constant currency basis, which we believe better illustrates the operational performance of the company. As a reminder, the currency headwind on earnings per share for the remainder of the year is expected to moderate compared to the previous fiscal year.

Guidance for the fiscal year 2010 is as follows.

Total revenue growth is expected to be at the high end of the previously-issued range of 2% to 4% in constant currency. At current exchange rates, this translates to a reported revenue of $4.3 billion to $4.4 billion. The range on non-GAAP operating margin increases to 32% to 33%, or 34% to 35% when adjusted for stock-based compensation. We continue to expect our GAAP and non-GAAP tax rate to range between 35% and 36% in this fiscal year. This represents a 100 basis point to 200 basis point improvement over fiscal year 2009.

GAAP diluted earnings per share growth increases in constant currency to a range of 18% to 26%. At current exchange rates, this translates to reported GAAP diluted earnings per share of $1.48 to $1.58. Non-GAAP diluted earnings per share growth increases in constant currency to a range of 6% to 13%. At current exchange rates, this translates to reported non-GAAP diluted earnings per share of $1.60 to $1.70.

And cash flow from operations is expected to grow at 12% to 19% in constant currency. At current exchange rates, this translates to reported cash flow from operations of $1.3 billion to $1.4 billion.

Except as previously stated, guidance reflects June foreign currency exchange rates, assumes no material acquisitions, and includes a partial hedge of operating income. We expect approximately 517 million actual shares outstanding and a weighted average diluted share count of approximately 533 million shares. Guidance does not include any impact from future stock repurchases.

So, once again, thank you for joining us this afternoon. I am very pleased with our first quarter results and look forward to seeing many of you during the coming quarter.

And with that, we’ll turn the call over to Kelsey, and John and I will take your questions.

Kelsey Doherty

Thank you, Nancy.

As the operator is polling for questions, I would like to inform you that CA is presenting at the 2009 Citi Technology Conference on Thursday, September 10. In the interest of time, please limit yourself to two questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) First up, from JP Morgan, we have a question from John DiFucci. Please go ahead.

John DiFucci – JP Morgan

Thank you. John, you have been putting up good numbers here for a while now, which I guess is good as testament to the execution of your team here. We know renewal rates have been improving, which certainly helps. I guess two things here, one, what were renewal rates for the quarter and also looking forward, you talked a lot about – on the products side about the future and it all does make sense as it comes together, but today, when I talk to people out in the field, they always throw out acronyms and the only two they throw right now are ROI and TCO. And so they are really looking at things that can help them just manage more efficiently today versus a vision of the cloud tomorrow.

I was just wondering if you could talk a little bit about what CA has to offer today. I know you have put together I think a pretty impressive team under the product development side of CA and perhaps just tell us a little bit about how you are addressing what is needed out there today.

John Swainson

Sure. Let me answer the short piece first. I mean, the renewal rates are, as I indicated I think in our last call, we expected them to be declining to the low 90s, that is where they were this quarter. There was one anomalous situation, but other than that, we are very happy with the way the renewal portfolio – the way the portfolio is being renewed, sorry I said that clumsily.

Now, onto the more complex question, there is no doubt about the fact that customers have taken a very tactical view of purchasing over the last six to nine months. And they have bought things where they could see a very quick payback and things that have a longer-term benefit, even if they were incredibly strategic, have been deferred. We are seeing some change in that, John, we continue to see – you know, our Wily product does very well in terms of fast time to value. It continues to be our strong – the strongest product in our portfolio.

But we are starting to now see some of the more strategic products ticking back in again. So, for example, our Clarity family of products did quite well this quarter and project and portfolio management is sometimes viewed as a more strategic investment by customers. Our infrastructure management and service management products both did well. Our mainframe family of products did well.

So, you know, we are seeing customers focus on things that will, in the long term, make the money, and will set up their infrastructure to really scale for what they believe is going to be the growth ahead. So, as pragmatic as they have been, we are seeing more strategic thinking start to creep in.

John DiFucci – JP Morgan

Okay, thanks. And if I might, just one quick follow-up for Nancy. Nancy, even if you adjust for the $100 million single-cash transaction this quarter, cash flow was still I think like three times of what you did last year. I don't know – I guess first, can you remind us if there were any large transactions last year? And then also, looking forward, should we be looking at cash flow a little differently than CA? You have consistently, I think, even surprising some people on the upside over the last several quarters, is there something, just some efficiencies in the model that just don't show up as quickly, although you are showing it somewhat in the income statement, it just appears to be a little more pronounced in the cash flow statement?

Nancy Cooper

Sure, John. The difference year-to-year is the $100 million, there was a level last year, but we really polled out the delta between the two years, but the cash flow was really – from many different dimensions, improved. We had a stronger recurring billing, which means that you are certain to see the benefit from building up the backlog from the past. We had a good book of business in the quarter. We took down disbursements. Our DSO, I mentioned, came down, which means you are going to get more cash in the period. Our restructuring came down. So, from many different fronts, the company is just performing very well.

Kelsey Doherty

Next question, please.

Operator

That will come from Todd Raker at Deutsche Bank.

Todd Raker – Deutsche Bank

Hey, guys, can you hear me?

John Swainson

Yes.

Nancy Cooper

Yes, Todd.

Todd Raker – Deutsche Bank

I have two quick questions for you. First, a very nice quarter.

Nancy Cooper

Thank you.

Todd Raker – Deutsche Bank

When do you guys think we will start to see annualized bookings growth turn positive. It sounds like it should be here in the next 6 to 12 months. Is that fair?

Nancy Cooper

So, Todd, let me just step back a second. I just want to remind you that annualized bookings, if you think about it, it is really a combination of two things: what is up for renewal, and new license sales. And if you think about the renewals, so that is two-thirds of it, you are talking about one book of business in fiscal year 2010 compared to a different book of business in fiscal year 2009.

So then what really becomes important is that one-third in there and that sales of new license and that was up and grew in mid-single-digits and it was by the products that John just articulated, which we were very pleased about in this economy. And so I will step back to the last earnings call, because annualized bookings is not good for modeling, we increased our disclosure in the supplemental to give you the revenue backlog. That is what you should use for modeling and if you look at the current portion of the revenue backlog, you can see that grew 5% on constant. And so we were quite pleased with the result.

Todd Raker – Deutsche Bank

Okay, and that the second question, you guys highlighted your strength in mainframes. Two questions. Can you give us a sense for mainframe growth versus distributed as we look out over time? And then it looks like we are getting very weak mids [ph] performance from IBM. So can you give us a little bit clarity in terms of why mainframe is still strong?

John Swainson

Well, as I think I said every quarter that I have been here, mainframe for CA – the mainframe cycle for CA is disconnected and smooth from IBM’s cycle. Remember that we renew on average our contracts over the course of three years, a little bit more, but use three years as a round number. IBM came into this cycle the February of last year. So they order roughly 18 months into the cycle. We are about halfway through our renewal since they announced their cycle. So we have touched less than half of the customers who have large mainframes. So we are just on a different cycle than they are. Now that being said, if you look at history, what you will see is every 36 months or so, they have another one of these and I am not good at predicting the future, but I am good at looking at the past and I would say that by the time or before we get through the last wave, they will be onto another wave and hopefully that will be good for us too.

So we continue to see strength from mainframe renewals in total and we see – continue to see capacity be strong. We have done some things to help ourselves in that by the way. We have announced a program we call Mainframe 2.0, which is a whole set of products and a whole way of dealing with those products that we think is very good and very competitively differentiates us from our competition. So, there is lots of reasons for optimism in the mainframe business here.

Kelsey Doherty

Thank you. We will take our next question, please.

Operator

That comes from Katherine Egbert at Jefferies.

Gregory Shaw – Jefferies

Yes, this is Gregory Shaw for Katherine. Regarding the EPS guidance that you have, does that assume a particular level of stock repurchases, and if so, could you give us some indication of that?

Nancy Cooper

Sure. No, we have not assumed any level of stock repurchases in the guidance we gave you.

Gregory Shaw – Jefferies

Okay. And then regarding the FX hedging, could you remind us what the approximate hedging is that you are doing and just from an accounting perspective, you know, how that accounts for the delta between what the constant currency results are and the reported results.

Nancy Cooper

Sure. We hedge about 60% of our overseas profits and what that amounted to in the quarter was about a $0.02 benefit from currency and in our long-term guidance – not long term – in our full-year guidance, around $0.07.

Kelsey Doherty

Great. Thank you very much. We will take our next question, please.

Operator

That will be Richard Sherman at MKM Partners.

Richard Sherman – MKM Partners

Hey, guys. Could you just maybe talk a little bit about the security outlook here and how federal is shaping up for you as it relates to security as well as your other high-growth businesses, networking, application management, et cetera? Thank you.

John Swainson

Hi, this is John. We had – the strongest area for us in the last quarter was application performance management, mainframe was also very strong. Security was kind of flattish. Federal was up in the high-single digits on an as-reported basis, slightly better than that overall. Financial services was very strong. So we had a pretty good quarter. The federal business for us is kind of tied to the federal calendar, so we would expect to have weaker federal business in the first quarter and perhaps a stronger business in the second quarter. We are very pleased obviously at the strength in financial services.

Kelsey Doherty

Great, thank you. We will take our next question, please.

Operator

That comes from Walter Pritchard at Cowen.

Walter Pritchard – Cowen

Hi, Nancy, I was just wondering you talked about the derivative backlog and showing the growth area and one thing I did notice is the billings backlog, both constant currency and reported, looks like it was down on the current account year-over-year by about 1% constant currency. I was just wondering if you could help – and it looks like you also sort of raised capital guidance, which billings seems like the – showed the top line impact during the cash flow. If could you just help reconcile that and just talk about why that account was down year over year?

Nancy Cooper

Sure, Walter, I would be happy to. First, let me tell you the magnitude of what currency does for that year-to-year comparison. We are talking about a $10 million difference between first quarter 2009 and first quarter 2010 and then if you think about – we mentioned the cash payment in the cash flow discussion. Basically, that would affect your current. So then you have got to look at your non-current, which was up 70% year over year and that bodes very well for our future, because every quarter, a chunk of that is going to go into current.

Walter Pritchard – Cowen

And would you – and I guess just as a follow-up, as we look at that, based on what you know about your business and sort of how you are guiding this here, do you expect that that amount to be billed current will show growth as we go through the year, or do you think that is going to continue to decline just based on what you know is going on?

Nancy Cooper

Yes. I mean, obviously, if your non-current is growing 70%, you have a very strong backlog that quarter by quarter, will flip into current.

Kelsey Doherty

Great, thanks. We will take the next question, please.

Operator

From Goldman Sachs, this is Sarah Friar.

Stephanie Witter – Goldman Sachs

Hi, this is Stephanie Witter for Sarah. The margin performance you guys have posted is obviously continuing to be quite impressive. Can you talk a little bit about what might be still available to you on the cost side or where you are kind of looking to invest?

Nancy Cooper

Sure, Stephanie. We still have plenty of opportunities to improve on costs. A number of times, you have heard me mention that we have a great quantity of IT applications, almost 1,000 of them. And as we keep rationalizing that portfolio, you can imagine that. Right now, we're running all legacy systems and putting in newer systems. That will get rationalized and it also will mean our people will get a lot more efficient. So we feel between that and continued facilities consolidation, there is continual room for improvement.

Stephanie Witter – Goldman Sachs

Okay, and so I guess the next question is kind of longer-term, has this impressive margin performance kind of increased your expectations for how high margins can go?

Nancy Cooper

You know, you have to remember, when we gave the 34% to 36%, which included two points of stock-based compensation, we ended the year at 33%. So sure, we are very encouraged; and if you think about a software model, our mainframe business is a maintenance business, that is a very high margin business and we are much earlier in the lifecycle on our distributed products. So as they continue to grow their maintenance base that they have, you have a natural lift to your operating performance. So we feel quite encouraged.

Kelsey Doherty

Great, thank you very much. We will take the next question, please.

Operator

That will go to Michael Turits at Raymond James.

Michael Turits – Raymond James

Hey, guys. Two questions. One is a sort of follow-up I think that Todd started out. What is really going on in terms of the delta between mainframe growth versus distributed growth? You know, last year, mainframe was going faster and distributed was dragged. What are you seeing in this quarter? And then, I have a follow-up.

John Swainson

It is always a question of what is up for renewal and we did see pretty good growth in our distributed business, but – we saw growth in our distributed business today, which I'm not sure everyone would say. We saw a very good growth in our mainframe business, and that was largely because there were some large mainframe deals up for renewal. I would expect that over time, our mainframe growth would moderate and our distributed growth would kick back in, but right now, the mainframe has continued to do very well and that is kind of the strength of the model, but it is a little bit counter-cyclical to the rest of what is going on in the industry.

Michael Turits – Raymond James

It would seem that distributed has been down in prior quarters. So can you describe the trajectory, how has distributed reaccelerated, what is going on?

John Swainson

Well, I don't have prior quarters in front of me. Distributed was up this quarter, it was up in high-single digits. Mainframe was up more than that. We would expect over time that those two would flip. We don’t think it is a natural circumstance that mainframe would be faster growing than our distributed business. If you look at all the market projections by IDC and everyone else, they would tell you that – you know, maybe mainframe – actually IDC has taken their mainframe growth estimates top by a couple of percent, and their distributor growth estimate down. But still, mainframe is a slower-growing business than distributed.

That being said, roughly half of our business is mainframe, the other half is distributed, we would expect to see more growth from distributed. The distributed business has been more impacted frankly by the economy, for us and everyone else. So over time, as I said, I expect to see distributed continued to grow and grow more quickly and mainframe growth to moderate back to low- to mid-single digits.

Michael Turits – Raymond James

And then international bookings were flat constant currency. This is the first time in a while they haven't been negative. What – it seems as if from other sources that Europe is still weak. So what is starting to go right for you on the international side?

Nancy Cooper

Well, I think it is the discipline that Mike has brought to the sales process that you have heard about a number of times, is we find very encouraging in terms of using the pricing yield on the renewals. That has really improved in the last few quarters and that will give you lift on the revenue and also the – just reorganizing the sales force, it was started in the US and now we are starting to get traction in Europe.

Kelsey Doherty

Great, thank you. One last question, please.

Operator

Phil Winslow at Credit Suisse.

Phil Winslow – Credit Suisse

Hi, guys. My questions have been answered, but John, I just wonder if you have any comments on virtualization and what you think the opportunity for CA is there. Obviously, we have seen (inaudible) and it had some additional virtualization management tools that is in there, modeling et cetera. How do you see sort of CA potentially (inaudible) over time?

John Swainson

Well, we see virtualization and cloud as being part of a continuum that needs to be managed very efficiently. Customers need to be able to see into their whole infrastructure, the virtual part and the non-virtual part and figure out what is going on, so that they can ultimately manage, govern, and secure it. Historically, like people have done, this is kind of in cylos [ph], I don't think that works anymore. I don't think you can manage virtualization in the cylo way. I think you have to manage it across the enterprise. And that is where we see the dislocation effect likely to kick in. Already, we're talking to customers who want to do sort of large-scale internal or external clouds and they are having a realization, they just can't manage those things the same old way they used to. That is the opportunity in a nutshell.

Phil Winslow – Credit Suisse

Thanks, guys.

Kelsey Doherty

Thank you, Phil. Great. Next question, please.

Operator

That will come from Robert Breza at RBC Capital Markets.

Robert Breza – RBC Capital Markets

Hi, John. I was wondering, you talked about in your remarks about the managed service provider, the base and establishing a dedicated team. Can you talk to us about how big that market you think can be for CA and what could be a realistic growth rate going forward?

John Swainson

Well, I think I said in my prepared remarks that it is a couple of billion dollars today, going up to about $5 billion in the next three or four years. We get something like $600 million out of that today and we see a great opportunity as some non-traditional players start to move into that space. People like the telcos, who have historically been a provider of obviously of telecom services, now becoming providers of a much more integrated service, including computing services.

And as they do that, they have to build a service delivery platform, they want to build a service delivery platform, they want to buy the pieces of that service delivery platform for people they don't compete with, and we are not in that business, unlike some of our major competitors. So it is a great opportunity for us to be the provider of the infrastructure for this upcoming cloud-based computing infrastructure, both to the customer side and to the infrastructure provider side.

Robert Breza – RBC Capital Markets

Thank you. Nice quarter.

John Swainson

Thank you.

Nancy Cooper

Thank you.

Kelsey Doherty

I think that is our last question and John will wrap up.

John Swainson

Well, thanks, Kelsey. So let me summarize.

We are very pleased with this quarter’s performance and obviously this quarter is a good start for a full year. As you are all aware, execution is the key to success, and in the first quarter, the CA team executed.

The demand for enterprise software is going to grow significantly as complexity continues and new technologies like virtualization and cloud computing become greater forces in the marketplace. We think this is a great catalyst for us as our customers look to manage their IT infrastructure wherever it resides, because we can do that on an end-to-end view.

As Nancy has said, we have more leverage in our cost structure and while we have made great progress and we are very proud of that, there is more we can do. And lastly, CA has a large, addressable marketplace. We have a deep product portfolio and we believe we have the opportunity to capture significant market share.

Thank you.

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