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CA, Inc. (NASDAQ:CA)

Q1 2007 Earnings Conference Call

August 14, 2006 5:00 pm ET

Executives

John A. Swainson - President, Chief Executive Officer

Michael J. Christenson - Chief Operating Officer, Executive Vice President

Bob Cirabisi - Interim Chief Financial Officer

Olivia Bellingham - Vice President, Investor Relations

Analysts

John DiFucci - Bear, Stearns & Company

Philip Olsen - UBS

Michael Turits - Prudential

Walter Pritchard - SG Cowen & Company

Sarah Friar - Goldman Sachs

Jason Maynard - Credit Suisse First Boston

Todd Raker - Deutsche Bank

Presentation

Operator

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the CA quarter one year 2007 fiscal results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session.

(Operator Instructions)

Ms. Bellingham, you may begin the conference.

Olivia Bellingham

Thank you, Operator, and good afternoon, everyone. This is Olivia Bellingham, Vice President of Investor Relations. The purpose of today’s call is to discuss our first quarter fiscal 2007 results. Joining me are John Swainson, our Chief Executive Officer; Michael Christenson, our Chief Operating Officer; and Bob Cirabisi, our interim Chief Financial Officer.

As a standard procedure, let me read our safe harbor provision.

This conference call is being broadcast over the phones and via live webcast open to all interested parties. 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 express written consent of CA. We consider your continued participation in this call to a consent to our recording.

During this call, non-GAAP financial measures will be discussed. Reconciliations to their most directly comparable GAAP financial measures are included in the earnings release and the supplemental financial information package, both of which are available on our website at investor.ca.com.

Today’s discussion may contain forward-looking statements. Consistent with all of our public statements, there can be no assurances that these forward-looking statements will prove accurate, and actual results could differ materially from forecasts and estimates. Please refer to our SEC filings for further elaboration of the risks involved.

In accordance with SEC regulations, all future guidance and material information will be publicly disseminated to any interested party.

Now, let me turn the call over to John. John.

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John A. Swainson

Thanks, Olivia, and good afternoon, everyone. Thank you for participating in our first quarter conference call.

Before Mike Christenson takes you through our Q1 performance, I will give you an update on the ongoing transformation of CA and the progress we are making in achieving our goal of being the industry’s leading management software company.

Clearly we have had some challenges and bumps in the road over the last few months, but we are addressing them and moving forward. Over the past quarter, we have built a stronger management team, included an internal review of our past and current employee stock options programs and made appropriate restatements to our financials.

Today, we are announcing the first phase of a $2 billion stock repurchase program. We also announced that we are initiating a cost-reduction program and a restructuring plan that will yield approximately $200 million in annualized savings when completed. These are the first steps in a long-term program of expense reductions that will span a multi-year period.

We are focusing on taking actions that will make us the most efficient and competitive management software company in the industry, and will provide us with the most value to our customers. We believe the actions we are taking today will drive bottom-line results and yield the greatest return to our shareholders.

I would like to also welcome Nancy Cooper as our Chief Financial Officer, effective tomorrow. Nancy is joining us from IMS Health, the world’s leading provider of market intelligence to the pharmaceutical and health-care industries, where she was the Chief Financial Officer.

Nancy has broad experience as a CFO in the technology industry, and with public companies. She has a successful track record in developing and leading high-performance teams and brings an exemplary combination of business judgment, professional skills, and integrity to CA.

I would also like to express my appreciation and thanks to Bob Cirabisi, who stepped in as the interim CFO during a critical time for the company and will now be resuming his role as CA’s corporate controller. Bob steered us through some challenges and helped us resolve the restatement and stock option issue and get our financial statements in order.

In addition to Nancy’s hiring, we have made some other significant management additions. Jim Bryant has joined CA as our Chief Administrative Officer. Jim is responsible for getting CA the best in class benchmarks across our business structure in leading business transformation, information technology, and facilities and administration.

Also, we promoted Al Nugent from his role as general manager of our enterprise systems management unit to chief technology officer. Replacing him as GM of enterprise system management is Dr. Ajei Gopal, who joined CA from Symantec where he was most recently the CTO.

We now have a complete management team in place, one that is ready to lead this company and is willing to be accountable for producing the results we expect and our shareholders deserver.

As you know, two weeks ago we filed our 10-K for fiscal 2006. With that filing, we concluded our internal review of stock option grants. Our conclusion was that the company should have recognized additional, non-cash stock-based compensation expense in connection with certain grants of stock options that were made during the years 1996 to 2002, and that were not communicated in a timely way to employees.

From 2002 onward, we did not find any issues with the company practice, and we believe our financial statements as filed now reflect currently generally accepted accounting principals with respect to equity compensation.

During the past several quarters, we have initiated many new projects. Specifically, we went live on our new SAP system in North America in April, a project that was well-managed and implemented and will benefit the company going forward. We are continuing that rollout around the world over the next years.

In addition, in the past several quarters, we have made a number of acquisitions and continue to develop our internal processes. We believe that each of these initiatives will further the goals of improving our financial processes, rounding out our product portfolio, and assuring that we are operating efficiently and effectively.

Let me assure you we remain committed to getting strong returns on all of our investments, improving our margins to a level more consistent with that of our peers, and establishing a best-in-class cost structure that delivers on the returns that we expect. That means workforce reductions, facilities and office consolidations, and other expense cuts across many parts of the business. Mike Christenson will give you the details of the plan and its effect on our financials in a few minutes.

It also means that we are continuing to focus on growing our core business of developing, selling, and supporting software to help our customers manage their IT environment. In the past 12 months, we have completely refreshed our product line, including security, storage, business services optimization, and enterprise systems management, across both the mainframe and distributed platforms. We expect to see positive results from these new products now, and over the next several years.

As a result, we now believe that we have the richest and most diverse set of management and security products in the industry. We are committed to managing this portfolio properly and are well-positioned for future growth. We are maximizing the economic value of our legacy products and defending our customer base with those products.

Let me say a few words about the industry. The recent consolidations have validated our enterprise IT management strategy, and we believe the industry now recognizes and is moving towards the vision that we have been talking about for the last couple of years. The need to unify and simplify the management of users, assets, and applications across diverse IT environments.

CA has a great head start on this. We believe we are years ahead of our competitors in building an integrated set of products and solution offerings for enterprise IT management.

Investors often ask me about CA’s progress in going broader and deeper within our existing customer base. Let me give you an example of a recent success at a leading risk and insurance conglomerate.

A subsidiary of this conglomerate had been a CA customer for eight years, using our Unicenter network and systems management products. Several years ago, their IT team became the primary support center for all of the parent company, and in parallel one of their executives became the CTO for the entire conglomerate.

In that role, he was charted with standardizing their systems with one management vendor who could successfully consolidate event, problem and change management across the company’s global data centers.

In a sales cycle spanning just five months, the CTO ultimately chose CA as their single data center management vendor over all of our competition, based on our history of working together, as well as our vision and our tightly integrated service availability solutions, featuring Unicenter network and systems management as the foundation.

The result was that through Unicenter as the manager of managers, working with the Unicenter database products, job management, service desk and asset management, as well as the CA spectrum, e-health and Wily products, the customer will have a single, operational view into the availability and performance of their multi-server, multi-device, multi-application, multi-technology data centers.

This is just one example of how CA can make a difference in our enterprise IT customer environments and in their business. It is an example of CA going broader and deeper within our large enterprise accounts. It is an example of success we are having with both our acquired products as well as the ones we have developed ourselves.

Importantly, all of the products that were sold in this multi-year, multi-million dollar transaction are distributed solutions as opposed to mainframe products, and these are the kinds of success stories we are working on to deliver at CA every day.

Now, let me turn the call over to Mike Christenson.

Michael J. Christenson

Thanks, John. I will start by reviewing our financials. I will then provide you with the details of the restructuring, and finally, I will give you an update on our stock repurchase plan.

Total revenue in Q1 was $956 million, up 3% from a year ago. From a geographic perspective, North America was up 7% and revenue from our international operations was down slightly.

Q1 subscription revenue was $739 million. That is up 5% from a year ago. Subscription revenue accounted for 77% of total revenue in Q107 compared to 76% in Q106.

Q1 bookings for total products and services grew 16% to $558 million, which was good performance in our seasonally smallest quarter. Direct product bookings grew 14% to $384 million. Indirect bookings grew 4% to $72 million. We continue to expect total bookings to grow in fiscal 2007. However, as you know, bookings on a quarterly basis can be volatile and can be significantly impacted by large transactions.

Total expenses for Q1 were $905 million compared to $827 million in Q106. The increase was primarily attributed to:

  • Higher personnel costs of approximately $35 million -- this is mainly a result of our recent acquisitions;
  • Higher cost of professional services of $12 million, in line with the $15 million increase in professional services revenue;
  • An $11 million restructuring charge related to last year’s restructuring;
  • An increase in commissions, royalties, and bonuses of $9 million -- this is primarily due to higher bonuses for acquisition-related retention payments and an increase in the number of non-sales individuals compensated through annual bonus plans; and lastly
  • An increase in product development expense of $7 million due to recent acquisitions and lower capitalized development costs.

Our GAAP earnings per share in Q1 was $0.06. Q1 non-GAAP operating EPS was $0.17. A reconciliation of GAAP to non-GAAP is contained in our earnings press release.

Now I will turn to our cash flow statement.

Q1 cash flow from operations was a negative $46 million. This was a positive $93 million in last year’s Q1. This year-over-year change was the result of:

  • An approximate $90 million reduction in our accounts payable balance;
  • $18 million of higher cash tax payments; and
  • An $18 million contribution to our 401K plan, which we have historically made in the fourth quarter of the prior year.

We also completed the previously announced purchases of MDY and Cybermation for a combined $95 million net of cash. As we have stated previously, we expect the pace of acquisitions to slow significantly throughout the balance of the year.

Billings for the quarter were $779 million. This is an increase of 16% over the $672 million reported and the prior year period. Approximately one-third of the growth in billings came from acquisitions made in fiscal 2006.

I want to point out that the distinction between acquisition growth and organic growth will become less meaningful over the next few quarters, as these products become integrated with CA products and as we pass the anniversary dates of our fiscal 2006 acquisitions.

There were no significant differences in the number or value of large contracts paid up-front in the first quarter of fiscal 2007 when compared to fiscal 2006.

Turning to our balance sheet, we ended the quarter with $1.522 billion in cash and marketable securities, and $1.811 billion of total debt. So our net debt position is $289 million.

Now I would like to give you the details of the restructuring program we announced today. As John mentioned, we are in the process of developing cost reduction and restructuring plans. Our objective is to improve the efficiency of our operations and to significantly reduce our cash operating expenses.

We estimate that these programs will require a charge of approximately $200 million, and will reduce our cash operating expenses by approximately $200 million annually.

The charge will cover the cost of workforce reduction expenses, such as severance payments and out-placement assistance, and facilities consolidation. The reduction in operating expenses will come from workforce reduction, lower facilities costs, tighter travel policies, and a reduction in consulting expenses.

At the end of the first quarter, we had approximately 16,000 employees. Our expectation is that we will reduce this workforce by approximately 1700. Approximately half of the 1700 will be in the U.S., the balance will be in our international operations, and roughly 300 of those are in consolidated joint ventures.

We expect to take the majority of charges for the plan in the second and third quarters of this year. The actual cash outlays for the cost of the plans will be spread over the next four quarters. The expense reductions will begin in the third quarter of this year, but the full, $200 million annual run-rate reduction will be achieved in late fiscal 2008.

Now I would like to address our stock repurchase programs.

This quarter, we repurchased 7 million shares of common stock for $157 million. You will recall that on our last call in June, John announced that we would replace our existing $600 million per year plan with a $2 billion share repurchase in this fiscal year. We will begin the first step of this new plan this week, with the commencement of a $1 billion tender offer. The details will be announced in the next few days.

We will continue to assess the best way to execute the balance of the program and remain committed to completing it by the end of fiscal year 2007.

Finally, let me address our outlook for fiscal 2007. As you recall, at the end of June, we provided our outlook for fiscal 2007. We expected revenue of $3.9 billion, GAAP EPS of $0.44 per share, non-GAAP EPS of $0.83 per share, in each case assuming $590 million shares outstanding, and cash flow from operations of $1.3 billion.

Our fundamental assumptions behind that outlook have not changed. However, we are not prepared on this call to adjust this outlook for the impact of the cost reduction and restructuring plans, or the share repurchase program.

We expect that on our Q2 earnings call, after we have refined these plans and completed the first phase of our share repurchase program, we will update this outlook and provide more details so you can see the performance of our operations, the impact of the cost reduction and restructuring plans, and the share repurchase program.

With that, we will now open the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from John DiFucci with Bear, Stearns.

John DiFucci - Bear, Stearns & Company

A question on the restructuring. Mike, the press release implies that the fiscal ’07 previous guidance for non-GAAP EPS and cash flow assumes the restructuring that was announced today in it, even though it was given previously. Is that correct?

Michael J. Christenson

I am not sure I understand your question, John. Could you try that one more time?

John DiFucci - Bear, Stearns & Company

Yes, there is a line in the outlook in the press release, and I was not quite sure when you explained it just now. I will just read the sentence, it says the outlook, which is the same that you gave previously, it says “The outlook also assumes that the company will take steps to achieve certain cost savings, including the fiscal year 2007 restructuring plan announced today.” So I am assuming that the previous guidance that you just went through, which you had given previously, now takes into account, for the non-GAAP numbers, anyway, this new restructuring plan. Is that correct?

Michael J. Christenson

I will try and restate it slightly. The $0.83 plan that we gave in the fourth quarter did assume that we could achieve certain cost savings. The plan we are announcing today and in the process of development assumes additional savings, some of which might have already been included in the $0.83 outlook, so there is a little bit of an overlap and we will give you those details at the end of the second quarter as we refine the bigger $200 million goal.

John DiFucci - Bear, Stearns & Company

One other quick question -- I realize that the new CFO does not start until tomorrow, Ms. Cooper, but by chance, and I think I know the answer, I am assuming she has not had a chance to look at any of these numbers yet. Is that an accurate assessment?

Michael J. Christenson

As far as I know, that is accurate.

John DiFucci - Bear, Stearns & Company

Okay. Thanks a lot, guys.

Operator

Your next question is from Philip Olsen with UBS.

Philip Olsen - UBS

Quick ones -- first, in the 10-Q, you indicate that you expect to complete the registration of your 2009 and 2014 notes during the current quarter. Just to get a little bit of feedback, maybe, on any guidance you have gotten from the SEC, or what makes you comfortable that will actually be completed right now?

Michael J. Christenson

We filed and it is in the hands of the SEC, so it is up to their timing. To my knowledge, we have not been notified of any kind of a review at this stage, so it is all subject to the SEC.

Philip Olsen - UBS

But if I am not mistaken, this is the third amendment to that filing, so I am just trying to get a sense of why you feel more comfortable that they will sign off on it now versus when you initially filed back in December.

Michael J. Christenson

Bob Cirabisi will help you with that.

Bob Cirabisi

Prior filings did not contain the required pro forma financial statements of recently acquired companies -- this one does. It has both [statements] that we believe is now necessary for it to go effective.

Philip Olsen - UBS

Okay, great. Next, on to the share repurchase program. Over the $2 billion program that you articulated, what percentage of that do you expect to be funded with new debt and how much do you intend to fund out of cash on hand? Just trying to get a sense of where you would like to see pro forma leverage going forward.

Michael J. Christenson

As you know, we are only -- today about the $1 billion portion, and our expectation is that somewhere between a half and three-quarters of that plan will be funded with borrowings under a bank facility. The balance will come from cash on hand and cash flow.

Philip Olsen - UBS

Should I assume that a similar ratio for the full $2 billion plan? I guess what I am trying to get at is where would you like to end the year, either from a total debt level or net debt or leverage constraint? There seems to have been an increase in your financial tolerance, or at least financial tolerance for financial risk. I am just trying to get parameters on how low or how high you would be prepared to see leverage go.

Michael J. Christenson

I think all you ought to look at at this point is how we are funding the first half of the tender. You will see how we fund the second half of the share repurchase program when we make that announcement.

Philip Olsen - UBS

Thank you.

Operator

Your next question is from Michael Turits with Prudential.

Michael Turits - Prudential

A couple of questions. First, in the $0.83, what kind of reduction, what kind of assumptions are there for non-GAAP expenses, whether you want to give it to me your relative to last year, or however you want to give it.

Michael J. Christenson

There are no -- the difference between those two numbers is cash flow, just the non-cash expenses that we do not reflect in the operating data.

Michael Turits - Prudential

No, I understand that. My question is not GAAP to non-GAAP -- my question is what are your expectations or assumptions for expenses in fiscal ’07, total expenses? You can give it to me in a dollar amount or up a percent from last year -- just some notion of what is baked in there.

Michael J. Christenson

You can multiply $0.83 by 590 million shares and subtract it from $3.9 billion of revenue.

Michael Turits - Prudential

Yes. There are a few other variables, that is why I was asking. Okay, other question -- there is a similar question in a way, but much more complicated on cash, on the $1.3 billion. Can you give us some of the assumptions we cannot get off of the income statement? The base assumptions about depreciation, stock-based comp, what are you going to be paying in cash taxes, or contributions toward capital? It does seem that if you normalize, you have a pretty good increase in cash flow, up about 6% from last year, so obviously more than the increase in the change in EPS.

Michael J. Christenson

You know, Michael, we have made, as you know, we made the decision to simplify our outlook. We are focusing on just a few core metrics -- revenue, EPS, GAAP and operating, and CFFO, and we have set those targets on an annual basis, so in terms of the individual components, we are not prepared to give you the individual components. I think you can look at our supplement and see the historical trends and you should be able to come pretty close to getting those numbers right.

Michael Turits - Prudential

Okay, let me try one more, since I was not successful in the first one, my fault, I guess. Obviously the issue last year with the amount of commissions expense. Can you tell us something, what is happening in terms of your move to restructure commissions going into this year, how much you think you are going to be able to bring them down, and what the effect has been on retention?

Michael J. Christenson

I will not comment on how much we are adjusting them, because they are obviously tied to the revenue numbers. As I said on our last call, our objective was not to reduce the overall incentives, or even the nature of the incentives for the sales organization. It is in our interest to have well-paid salespeople who are delivering for the company.

What I can tell you is that the changes we have made to date have been well-received, and the realignment of the sales organization that is underway has also been well-received, so we have not seen a significant change in our turnover levels versus last year.

Operator

Your next question is from Walter Pritchard with Cowen and Company.

Walter Pritchard - SG Cowen & Company

Two questions from my end. One, I am wondering, Mike, if you could clarify on the $1.3 billion in cash flow, if that excludes any restructuring outlays but includes some of the savings that you will see from that restructuring?

Michael J. Christenson

It actually includes a small amount of savings that were incorporated into the budget when we prepared our plan at the end of last year. It is our expectation that now that we have developed this larger program that some of the areas will roll those previous initiatives into the large plan. Again, it is not a meaningful percentage of that 200.

Walter Pritchard - SG Cowen & Company

Then the outlay from severance and so forth is excluded from the 1.3?

Michael J. Christenson

That is correct.

Walter Pritchard - SG Cowen & Company

Okay, and then, John, on the product line, along with the headcount reductions and so forth, any rationalization of the product line incremental to what you have already begun associated with this plan here?

John A. Swainson

We are continuing to look at how we optimize the product line. We are continuing to look at bringing together pieces of the product line into more unified packages, more organized packages. We have not done anything dramatically different than we have done over the last 18 months because we are still on the same path. We have done a lot of things in the product line over the course of the last quarter, including a number of new releases, and we have a number of releases planned for the next quarter as well.

You should not expect to see dramatic changes, but rather continual progress in creating a more unified and simplified set of product offerings.

Walter Pritchard - SG Cowen & Company

Great, thanks very much.

Operator

Your next question is from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Maybe just a bigger picture question to start with, John. CA has obviously been through multiple restarts, multiple restructuring -- what is different this time around that gives you the confidence that you are really setting the company up to move forward successfully? Do you feel that you have either more help in doing the restructurings, that you have gotten deeper -- I would just love a little bit of color on that front.

John A. Swainson

As I said in my remarks, we hit some potholes over the past course of the last couple of months, and couple of quarters. I am not sure those should be completely unexpected in a transformation as big as the one that CA has been going through. Remember what we have been doing.

We have changed our product line. We have implemented new IT systems. We have revamped our marketing strategy completely. We have revamped our sales force completely. We have brought in a new management team, and so I think, while I do not want to excuse any degree of poor performance -- and clearly we had some poor performance last year -- I think you have to view some of these things as part of the journey.

I would tell you that on a broader and bigger scale, the message that we are communicating to customers about helping them transform their IT environment is being extremely well-received. The wins we are getting in the market place, such as the one that I elaborated in my remarks, are duplicated on a wide basis. We are getting good traction in the market, and I will tell you that we will continue to fix any historical problems as we find them.

The stock option stuff related to a period up to 11 years ago. When we found it, we fixed it. If we find other problems, we will do the same with that. That has not deterred us from making sure that our message resonates in the marketplace with our customers.

Sarah Friar - Goldman Sachs

Fair enough. Then, just on the stock repurchase, a quick question, Mike, on how you will do it, in terms of as we counted, and maybe it is just a question around the cost of the debt that you have to take on, but we were having difficulty making it an accretive stock repurchase. As you do your calcs and think about it, do you see it as being accretive? Can you maybe help us think about what is the cost of debt that you might have to take on to do it?

Michael J. Christenson

It is accretive. I think that one of the things that makes it a little bit more of a challenge is if you use average shares outstanding, so depending on the timing and the amount and the price we pay, it can cause some meaningful swings in how you calculate the accretion for fiscal ’07.

When we do the adjustments and look through those averaging, it is an accretive transaction for us.

Sarah Friar - Goldman Sachs

Can you give us a sense for the cost of that at this stage? Or maybe just a range, at least?

Michael J. Christenson

It will be bank borrowing, so it will be LIBOR-based bank borrowings, and as soon as that facility is put in place, it will be an exhibit to our ten, our filing, our 10-K.

Sarah Friar - Goldman Sachs

Just one final one, a quick one, if I may, just following up a little bit on Walter’s question around restructuring the different lines of business, any portfolio rationalization, the revenue guidance that you have given us -- I realize your revenues are a little bit of an output from your bookings, but would you expect that will stay intact or might you pare away some of that if you decide to exit during this business part of the restructuring?

Michael J. Christenson

There will not be any significant business lines or product lines that we will be exiting. There are a couple of very small joint ventures that we are taking a look at. They might have a very, very modest -- we are talking $10 million, $15 million type of joint venture, but that would be it.

Sarah Friar - Goldman Sachs

Okay, great. Thanks a lot.

Operator

Your next question comes from Jason Maynard with Credit Suisse.

Jason Maynard - Credit Suisse First Boston

Just a question for John a little bit here. John, maybe walk us through a little bit more in detail some of the assumptions that you are thinking about in terms of new bookings to achieve this guidance. I know you are not providing specific billings guidance going forward, but just in general, how do you think about your different lines of business to achieve the updated guidance you provided for fiscal ’07?

John A. Swainson

Well, we are not providing bookings guidance either, but let me talk in general about the company and how we see the various lines of business doing.

We saw last year, and continue to believe this year, the security business will grow at double-digits. Our security business is primarily driven by identity and access management, and that business has been going well for us. Our business services optimization business unit also grew last year at double-digits. We expect that to continue on the strength of our offerings around our configuration management, configuration change management products, our service desk products and things like that.

Our enterprise systems management business, which is our largest business, is going to be sub-double-digits in terms of size. It is a more mature business. We believe it will show positive growth this year, and our expectation is that it will grow faster than its marketplace.

The storage business will continue to struggle a little bit. We expect it to do better. We are expecting it to be at least on par with last year, but it has had a difficult time. The acquisitions of MDY, Exosoft, and iLumin, we have recently made we think will bolster that business and allow us to perform better in that space.

Last but not least, our CA products area continues to be the place where we manage the rest of our portfolio, and we tend to manage that portfolio on an EDAR basis, and I alluded to this in my remarks. We look to optimize the spending and our customer retention in that portfolio.

You can expect that we understand that that is a slowly declining portfolio, and our view is that we are balancing that against the faster growing parts of the business to come up with a business that has the kind of growth rates that we talked to you about.

Jason Maynard - Credit Suisse First Boston

Just as a follow-up, on the ESM business, that is obviously the largest business, but it has also been the area where you have had some of the bigger challenges over the last year or so, just given the mainframe composition.

John A. Swainson

No, no -- ESM is about half-mainframe and half-non-mainframe, and grew at 8% or 9% last year.

Jason Maynard - Credit Suisse First Boston

The mainframe piece still looks like one of those business areas that I think whether you go across IBM or BMC, a business line that has some challenges, with a little bit weakening IT spending environment. Do you assume that business then improves year over year?

John A. Swainson

No, we assume it is going to be about the same. Last year, our mainframe business declined at 1%. That was consistent with the expectations that we tried to set for you at the beginning of the year. That is consistent with our expectations for this year as well.

Jason Maynard - Credit Suisse First Boston

Okay, fair enough. Thank you.

Operator

Your next question comes from Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank

Two questions. John, can you just touch on the spending environment and what you guys are seeing from a macro perspective? Growth was pretty solid this quarter. How much of that was just product refresh or new launch versus any change in the actual end market?

John A. Swainson

I would like to believe that it was the clarity of our message, our ability to communicate that message to customers effectively in the face of clearly a more challenging spending environment, so I do understand that the customer spending has become more difficult. On the other hand, I think we have done a better job of telling our story and I think the results sort of speak to that.

Todd Raker - Deutsche Bank

The second question I have for you, if you look at what is happening competitively within software, there has been a significant amount of consolidation. You guys have been acquirers. With the stock buyback program, it looks like your flexibility around acquisitions is going to be fairly limited here in the near-term. Just walk me through the decision to repurchase stock versus continuing to acquire for growth.

John A. Swainson

When we looked at it, at things in the marketplace that we would be interested in acquiring, and looked at that in the context of having just spent $1.5 billion on 14 different acquisitions, our assessment was that there was not as much of an opportunity for us in the acquisition arena over the next 12 to 18 months.

As you know, we are almost debt-free, meaning we have as much cash as we have debt, and we are generating $1.3 billion of cash, so we are making the decision here that we are going to essentially return this year’s cash to shareholders. Eighteen months from now, we are likely to be back in the same place with the balance sheet in good shape, and we will be back in the acquisition business. Hopefully at that point, there is something out there to acquire.

Right now, we are glad we got the things we got when we acquired them. They fit very well into our portfolio. They were all things we really needed. There are not any things that we need right now, where there is a fit in the marketplace.

Todd Raker - Deutsche Bank

Okay, thanks, guys.

Olivia Bellingham

Operator, we will just take one last question, please.

Operator

All right. Your final question comes from [inaudible] with Morgan Stanley.

Unknown Analyst

Thanks for taking the question. I just want to get a little bit more color on the last comment you made about the balance sheet looking similar today 18 months from now. Are you guys going to try to use free cash flow over the next year or so to reduce whatever you are drawing for the share repurchase? Is that how you guys are thinking about reloading the balance sheet?

John A. Swainson

That is exactly it. If you look at -- if we borrow from banks to fund this initial tender, our goal is to repay that with all of our free cash flow over the next period of time, call it less than a year. We have a couple of maturities than coming up in ’08 that we would also repay, so our expectation is 18 months from now, we are back and have repaid all this debt.

Unknown Analyst

With the OA maturities, are you thinking more about completely repaying them? Are you thinking more about refinancing them and keep a similar amount of leverage on the balance sheet?

John A. Swainson

In all likelihood, we will be able to do that one from cash flow.

Unknown Analyst

Getting rid of that debt, in other words?

John A. Swainson

Just repaying that piece.

Unknown Analyst

So, just to reiterate, $750 million at most is what you are guiding to for the debt portion of this $1 billion, and with $1.3 billion or so of free cash over the course of the year, we should look for that balance to be paid down?

John A. Swainson

Well, yes, but do not forget our intention is to do another $1 billion repurchase in some manner or another during this fiscal year, so you will have to factor that into your outlook as well.

Unknown Analyst

Right, but from what I understand, you are not saying you are not going to add another $1 billion or so, you are going to use some of that free cash flow, at least to work down this first draw-down, if I am understanding you correctly.

John A. Swainson

We are going to do $1 billion very shortly. Before the end of the year, we will do another $1 billion. During that, over the course of that period of time, our expectation is we are generating $1.3 billion, so the answer is we are going to repay whatever debt we incur to fund all of these repurchases as quickly as possible. Even if they were completely funded with debt, which they will not be, we would pay it in fact in less than 24 months.

Unknown Analyst

Great, thanks for the color.

John A. Swainson

Thanks. Let me wrap up. As I said, we are confident in our strategy of transforming the way the world manages IT by unifying and simplifying the management of assets, users, and applications across increasingly diverse IT environments. I believe it is the right strategy and it is resonating with customers. Over the course of the last quarter, we have rebuilt and completing the rebuilding of our management team. We have implemented our ARP system in North America and are rolling it out around the rest of the world. We are focused on building a best-in-class cost infrastructure. We have a thoughtful capital allocation strategy in place, and we believe it is now a question of execution.

Thank you very much. We look forward to talking to you in a quarter.

Operator

That concludes today’s CA quarter one year 2007 financial results conference call. You may disconnect at this time.

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Source: CA FQ1 2007 Earnings Conference Call Transcript (CA)
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