Executives
Kelsey Doherty - SVP of IR
John Swainson - CEO
Nancy Cooper - EVP and CFO
Mike Christenson - President and COO
George Fischer - EVP of Global Sales and Marketing
Analyst
Phil Winslow - Credit Suisse
Michael Turits - Raymond James
John DiFucci - JPMorgan
Katherine Egbert - Jeffries
Abhey Lamba - ISI
Todd Raker - Deutsche Bank
Sarah Friar - Goldman Sachs
Richard Sherman - MKM Partners
Scott Zeller - Needham and Company
CA, Inc. (CA) F2Q10 (Qtr End 09/30/09) Earnings Call October 22, 2009 4:30 PM ET
Operator
Good day, everyone and welcome to the CA second quarter 2010 earnings results conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Kelsey Doherty, Senior Vice President of Investor Relations. Please go ahead.
Kelsey Doherty
Thank you, and good afternoon, everyone. Welcome to CA's second 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. Also in the room and available to answer your questions are Mike Christenson, President and Chief Operating Officer and George Fischer, Executive Vice President Global Sales and Marketing.
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 second quarter results and than provide updated guidance. We will then open the call for questions before John returns with some closing comments.
As a reminder, this conference call is being broadcast on Thursday October 22nd, 2009 over the phone and the Internet to all interested parties. The information shared in this 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 concept 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 detailed discussion of potential risks.
And with that, I'll turn the call over to John Swainson. John?
John Swainson
Thanks, Kelsey. Good afternoon and thank you for joining us. Overall we're pleased with our second quarter performance and comfortable with where we are positioned for the remainder of our fiscal year. In the second quarter we grew both our top and bottomline on constant currency basis. We continued to control expenses and drive efficiencies, increasing GAAP operating margin by two percentage points and non-GAAP operating margin by three percentage points. And we continued to make investments in people and technology that will drive our business long term. While bookings were down, this was not a surprise to us and Nancy will give you more details in a few minutes.
For the six months, CA's performance was very good. Revenue grew 2% in constant currency; non-GAAP operating margin improved three percentage points and GAAP operating margin improved two percentage points including our first half investments in research and development and sales talent to drive future business; Non-GAAP earnings per share was up 11% in constant currency; cash flow from operations was very strong, up 62% in constant currency; our net cash position was $1.1 billion at the end of September, providing CA with a great deal of financial flexibility and we repurchased $50 million in our own stock during the quarter. We plan to continue the program in the current quarter.
Now let me talk about why we're so confident about our ability to execute in the second half. Over the past month I've been traveling in North America, Latin America and Europe and I've talked to more than 200 customers. The tone of these conversations is changing. While CIOs is still cautious, they are starting to think differently about how they spend their IT budgets.
For the past year, the only new projects that were being funded were those that had immediate or near immediate business impact. Sales cycles became longer and the level of approval required was substantial. With some encouraging signs in the economy, CIOs are more willing to consider new technology projects that will reduce complexity, better align IT with business priorities and automate their IT environments to drive greater efficiencies.
I get lot of questions about cloud computing and virtualization and what benefits they can bring. CIOs have started to look to the future. As I've said in past calls, cloud computing is quickly becoming the technology industry's new paradigm and CA is committed to making the investments both organically and through acquisitions to be a leader in this area.
While cloud computing has many benefits, it also adds considerable complexity and security issues to the enterprise. Whether you are operating an external cloud through a managed service provider, running an internal cloud or in some cases doing both, no amount of economic benefit can offset the business impact of losing critical data or degrading the customer experience.
So an example of the kind of acquisition that we're doing to augment our cloud management capability is the recently announced definitive agreement to acquire NetQoS, a leading provider of network performance management and service delivery solutions. NetQoS's technology enables companies to understand how they were using network bandwidth at an application level and then set priorities to insure that the most important tasks are performed with priority.
Combined with CA's eHealth, SPECTRUM and Unicenter products, it gives CA the strongest network management suite in the industry. This is a vital capability of customers and service providers ought to take advantage of unified computer networks which is an essential element of cloud infrastructure. Equally important to our customers is addressing the question of identity management and security.
Just this week we announced at the RSA conference in London a series of new product releases designed to help strengthen IT security, lower the cost of managing compliance and improve enterprise-wide IT risk management. These releases are the combination of internally developed capabilities and technology through the acquisition of Orchestria earlier this year and Eurekify late last year.
Our internal invasion machine is running at full throttle providing new and upgraded products to the marketplace. In addition to the security announcements I just talked about this month, we will announce additional new and enhanced enterprise IT management products designed to address key growing markets. These offerings are designed to help customers achieve unprecedented application visibility across distributed and mainframe systems insuring the greatest return from virtualized environments and better managing sustainability and carbon footprints.
This is the second major set of product announcements that we've made this year. As we are seeing the benefits of the upgrades and process changes that we made to our core development teams over the last couple of years. Managing energy usage sustainably is also a very big issue now with our European customers and is likely to be become more important in the US in the next year.
To help customers deal with management reporting aspects, we recently announced CA's eco software, a comprehensive set of energy, carbon and sustainability management solutions based on CA's SPECTRUM and clarity products. While this market is still relatively small, some estimates say that it will grow to more than $2 billion in the next three or four years as carbon reduction laws are enacted around the world. I'm proud to say that we are already seeing some success.
Tesco, the UK's biggest retailer and the world's third largest grocery retailer has selected CA to help fulfill its commitment to reducing its carbon foot print by 50% globally. CA ecoSoftware will help Tesco streamline the process of data management helping to reduce errors in operational expenses and improve their ability to communicate major milestones.
The last area I would like to talk about is the mainframe. CA's mainframe business unit had another very good quarter with customers purchasing database and testing tools, security and performance management solutions. These are signs that both our Mainframe 2.0 message and our Mainframe 2.0 deliverables that were rolled out earlier this year are an excellent fit with customer base, a base in need of a new approach to Mainframe Management.
Our Mainframe engagements are helping us win business with other areas of the customer's IT enterprise. Let me give you an example. The [Regens] Group operates the largest group of Blues Cross and Blue Shield companies in the Northwestern United States providing health insurance products to some three million members through our network comprised of over 40,000 providers. Regen is a long time CA Mainframe customer with Mainframe managing mission critical applications that affect their billings, payments, claim processing and account receivable.
Our credibility as a provider of mission critical Mainframe software has enabled us to expand our footprint into the distributed computing space with them as well. Just this last September, Regen purchased CA SiteMinder, eHealth, SPECTRUM, service desk, CMDB and service catalog and engaged CA's services team to help them replace the whole host of incumbent products from BMC that were not delivering the value that Regen required. Regen did an exhaustive evaluation and concluded that CA was the only systems management vendor who could deliver on the promise of making IT more effective and improving service levels.
With that, let me turn it over to Nancy for more in-depth look at the numbers. Nancy.
Nancy Cooper
Thanks, John. Good afternoon, everyone and thank you for joining us this afternoon. We had a solid second quarter and as John has highlighted, our constant currency revenue growth in combination with disciplined approach to managing the cost profile the business leave us well positioned for the second half of fiscal year 2010. I'm going to start the review of our financial performance with bookings.
As you remember, second quarter was expected to be down in a very difficult year-over-year compare and it was. Total bookings were 947 million down 37% in both constant currency and as reported. North America bookings were down 40% in constant currency and 41% as reported. While international bookings were down 30% in constant currency and 29% as reported. Average duration was 3.3 years, down from 4.1 for the same period last year.
Annualized bookings were $262 million, down 23% in constant currency and 22% as reported. There were a number of factors that affected bookings in the second quarter. As I indicated previously, we knew the second quarter was a difficult compare. Fiscal year 2009 second quarter bookings included a very large deal with a managed service provider valued at more than 400 million. Excluding that deal, total bookings were down 10% on a constant currency basis and 11% as reported, while North America was up 5% in constant currency and 4% as reported.
We also had a light inventory of both contract expirations and larger deals in the second quarter of this year. Particularly in Europe, this was expected as lumpiness is a natural part of our inventory of renewals. We continued to see weakness in our services and products for small and medium sized and consumer businesses which have been impacted by the macroeconomic environment.
In services, we have recently taken steps to drive improved performance through a focus on profitability, better alignment with our sales team and additional services offerings to drive more revenue. And finally, from a geographic perspective, we were very encouraged by the bookings growth in both Latin America and APJ. Our results showed good progress due to go-to-market changes that we've been implementing in these regions. They also seem to be benefiting from improving market sentiment.
In Europe, where we are seeing a better tone, we are looking to drive CA specific initiatives that will allow us to take advantage of a macro recovery and a strong renewal portfolio in the back half of the year. Many of these initiatives are things we've seen work quite well in North America and can be translated to Europe. These include three things. Adding new sales and product specialists to the team, and we are having great success hiring software talent. Reallocating the sales capacity across a larger number of target customers and we're sharpening our focus on products with a fast return on investment.
We've also enhanced our management of the region with our recent Europe implementation of SAP. More sales expertise, better alignment and deeper insights should provide a natural tailwind in the back half of this fiscal year. Our success in North America gives us the experience and confidence to believe that this is an execution model that works.
Moving on to our backlog results. Year-over-year total revenue backlog of $7.7 billion increased 9% in constant currency and 10% as reported. With both the current and the non-current portions growing on constant currency basis, this is the sixth consecutive quarter. We have seen year-over-year growth in current revenue backlog on a constant currency basis, which grew 2% this quarter on a constant currency basis and 3% as reported.
We believe that revenue backlog is the best means of determining revenue estimates from a modeling perspective. We provide this information including an amortization schedule as part of our financial supplement which is currently posted on our Investor Relations website.
Year-over-year total billings backlog of $4.5 billion was up 14% in constant currency and 16% as reported. We continue to see DSO's trending down year-over-year reflecting our continued ability to collect from customers in a timely manner.
Turning to revenue, total revenue was $1.072 billion, up 1% in constant currency and down 3% as reported. From a geographic perspective, North American revenue was $628 million, up 3% in constant currency and 2% as reported. International revenue was $444 million, down 2% in constant currency and 10% as reported. We recorded a negative foreign exchange impact on international revenue of $42 million during the quarter.
Subscription and maintenance revenue was $973 million, up 4% in constant currency and flat as reported. Subscription and maintenance revenue which is completely writable was 91% of total revenue for the quarter. Revenue from professional services was $71 million, down 21% in constant currency and 24% as reported. Revenue from professional services was 7% of total revenue for the quarter.
Overall, the second quarter decline in professional services affected year-over-year revenue growth by more than 200 basis points. Revenue from software fees and other was $28 million, down 27% in constant currency and 26% as reported. This reflects a difficult year-over-year comparison and underperformance in our small and medium-sized and consumer business channels. We are encouraged that revenue, excluding services and small and medium-sized and consumer businesses was up 3% in constant currency and down 1% as reported.
Now I'd like to turn to the remainder of the income statement starting with our non-GAAP results. In the second quarter, operating expenses were $705 million, down 3% on a constant currency basis and 7% as reported. We are pleased that we have been able to grow revenue year-over-year in constant currency at the same time expenses decreased.
Operating income before interest and taxes was $367 million, up 8% on a constant currency basis and 6% as reported. For the quarter, our non-GAAP operating margin was 34%, an increase of 300 basis points year-over-year. Excluding the three percentage points of stock-based compensation, our non-GAAP operating margin was 37%.
Please note that we expect margins to be in the 32% to 33% range fiscal year 2010, which reflects the back-end loaded nature of our annual expense structure. Earnings per share were $0.42, up 8% in constant currency and 5% as reported. We continue to experience a currency headwind of approximately $0.01 during the second quarter.
Both GAAP and non-GAAP operating expenses in the second quarter included in an approximate $0.01 impact of costs related to John's retirement. We expect the majority of the balance of these expenses of approximately another $0.01 to be incurred over the second half of the year.
Turning to GAAP results, which as presented include purchased software, intangible amortization, restructuring and other and gains and losses on hedges that do not mature in the quarter. GAAP operating margin was 32%. GAAP net income was $218 million, up 14% in constant currency and 8% as reported. While earnings per diluted common share were $0.41, up 11% in constant current as reported.
Our effective GAAP tax rate for the second quarter was 31.2%. Our effective non-GAAP tax rate was 35.5%. We continue to believe that longer term, we are in 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 $120 million. This compares with $218 million in the second quarter of 2009. For the six months ending September 30, 2009, cash flow from operations was $382 million compared to $272 million in the year ago period. An increase of 62% in constant currency and 40% as reported year-over-year.
Now I'd like to turn to a review of our balance sheet. CA ended the quarter with $3 billion in cash and cash equivalents and $1 .9 billion in total debt bringing our net cash position to approximately 1 billion. As a reminder we have approximately $636 million in debt maturities due in December of this year and we expect to pay these obligations down at maturity with cash on hand.
During the second quarter, we purchased just over two million shares for a total of approximately $50 million. This leaves just under $200 million in the remaining approval and we continue to be in the market.
With that, I'd like to update our guidance for fiscal year 2010. Given the recent foreign exchange volatility, we continue to provide guidance on a constant currency basis which we believe better illustrates the operational performance of the company.
As a reminder, the currency headwind in the first half of the year becomes a tailwind. Previous forecast indicated that we would be at the high-end of our guidance range. At this point, we are forecasting revenue growth of 2% to 4% in constant currency consistent with what we said at the beginning of the year. This update is based on continued softness in services and are small and medium size and consumer businesses. At the same time, we are raising the high-end of both our GAAP and non-GAAP diluted earnings per share guidance to 18% to 27% and 6% to 14% in constant currency, respectively. Therefore guidance for fiscal year 2010 is as follows.
Total revenue growth is expected to be in the range of 2% to 4% in constant currency. At current exchange rates, this translates to reported revenue of $4.3 billion to $4.4 billion. The range on non-GAAP operating margins is expected to be 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 to 200 basis point improvement over fiscal year 2009.
As a quick reminder, certain discrete items positively impacted our third quarter 2009 GAAP and non-GAAP tax rates reducing these rates to 30% and 29%. These discrete items are not expected to recur in third quarter of 2010. GAAP diluted earnings per share growth in constant currency is expected to be in the range of 18% to 27%. At current exchange rates, this translates to reported GAAP diluted earnings per share of $1.47 to $1.58. Non-GAAP diluted earnings per share growth in constant currency is now expected to be in the range of 6% to 14%. At current exchange rates, this translates to reported non-GAAP diluted earnings per share of $1.60 to $1.71.
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 $1.3 billion to $1.4 billion.
Except as previously stated, guidance reflects September foreign exchange rates and includes a partial hedge of operating income. Guidance does not include the impact of any material acquisitions. We expect approximately 517 million actual shares outstanding and a weighted average diluted share count of approximately 535 million shares.
Please note that share guidance provided this afternoon includes assumptions regarding the impact of our convertible notes which come due during the December quarter and reduces share count in that quarter by 23 million shares. Guidance does not include any impact from future stock repurchases.
So, once again, thank you for joining us this afternoon. I am pleased with our first half results and we look forward to taking your questions.
I'll now turn the call over to Kelsey. Kelsey?
Kelsey Doherty
Thank you, Nancy. As the Operator is polling for questions, I'd like to inform you that CA is presenting at the Goldman Sachs Data Center Techtonics Conference on November 11th in New York City and the Credit Suisse Annual Technology Conference on December 2nd in Scottsdale, Arizona. I'd also like to invite you to our sales go-to-market and customer panel event hosted by George Fischer. The event is being held on December 10th in New York City. [RS] VP's are required to please contact CA's IR team if you're interested in joining us.
Operator, please poll for questions now.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Phil Winslow with Credit Suisse.
Phil Winslow - Credit Suisse
Hi, guys. Just wondering if you could give a little more clarity on the distributed versions of your Mainframe business, just what sort of trends you're seeing in it? As we think about just the renewal cycle in your Mainframe business sort of where do we stand in that and how do you expect that to trend over the course of next few quarters?
Nancy Cooper
Sure, Phil. We're very much encouraged by both our distributed and mainframe cycles. Mainframe 2.0 has been very well received. We think deciding to invest in the Mainframe has been a distinguishing decision on our part and was very much the right thing. On distributed, we've been very much encouraged by the reception we've got on the key platforms in our distributed business, particularly in light as we think they are foundational for the trends we're seeing in virtualization in the cloud. On the Mainframe...
John Swainson
I just add that as we've talked on these calls before, our Mainframe renewal cycle tends to follow about a three-year pattern. It's been roughly 18 months since IBM announced the z10 family. So we're about halfway through that total process of renewing our mainframe customers. So we expect to see the continuation of strength in the Mainframe renewals through the next four or five quarters.
Phil Winslow - Credit Suisse
Then also just real one longer term question just be. When you think about growth and you focus on your growth strategy, how should we expect just a balance of organic versus acquired growth?
Nancy Cooper
Sure. Our long-term guidance for topline growth has been 6% to 8% with one to two points of that from acquisitions Phil.
Operator
We'll move on to Michael Turits of Raymond James.
Michael Turits - Raymond James
First of all, it seems that the subscription have been included pretty nicely at 3%, pretty close to 4%, which is high-end of the range. But I was (inaudible) SMB professional service to drag things down. Those two segments have been kind of weak for some time. What's the strategy there? Do you just let (inaudible) go down for a while and [compose] the business, what do you do with SMB? Is there something you've committed to that, how do you turn it around?
Nancy Cooper
Let me just level set the subscription and maintenance revenue grew 4%. What we had is when we combine that with our core business with the perpetual, it ends up being 3%. And I'll turn it over to Mike to talk about what we're doing in services.
Mike Christenson
Michael, as you know, last year and really through the beginning of this year, we made a decision in the soft market to avoid what I call price sensitive non-implementation services. And that's what kind of took down our bookings last year and we continue to see that through the first couple of quarters this year. With the improved tone in the market that we've been seeing really since the month of September started and we got back from the European holidays and so on, we want to make sure that we're not missing any revenue opportunities. So we've begun to more aggressively manage the services businesses.
First, we've tightened the alignment with sales. You know, obviously, sales sells the services so we have made sure that that connection is a little more aggressive than we have had in the past. Number two as Nancy mentioned on the call, we want to get a bigger share of the implementation related business when we sell software. Sometimes the customer does it, sometimes they have another partner who does it and we've tried to be a little more aggressive in getting our share of that business.
The third is we are driving faster implementations with our standard implementation offerings and what this does is it converts the bookings to revenue a little bit quicker than you might otherwise. And then last, we have been focusing more on selling some of our non-implementation services offerings. Some of the things that we deemphasized last year now the customer budgets are starting to loosen up, we want to make sure we get our share of that business.
Nancy Cooper
Great, Michael, do you have a follow-up question.
Michael Turits - Raymond James
I do. Absolutely. On a linearity on cash flow for the year, you did 28% in the mid-point of your range in the first half of fiscal '10 which is good. It's actually above the last couple of year or so. You look like you're in good shape relative to the full year target. How do you see linearity in the third quarter? Typically, you've done 35% to 50% in the first nine months here. How do you feel about where you should end up with (inaudible) linearity?
Nancy Cooper
Sure. Michael, we feel very comfortable with our full year guidance of $1.3 billion to $1.4 billion. And remember, you've heard Mike mention a number of times that we're managing the portfolio to get the right economics. So you don't want to predict what the linearity is in the quarter because you want to make sure you're managing this for the right outcome.
Kelsey Doherty
Next question please.
Operator
We will move to John DiFucci with JPMorgan.
John DiFucci - JPMorgan
I was wondering if you could give us a little bit of clarification, because in the press release and I think you have said a few times here in your prepared remark that you're seeing some improvement out there. But when you look at bookings, even if you exclude that large deal from last year and you look at cash flow, they're both down year-over-year. Realizing I know your average term is three years or a little bit more, but I mean the bookings number looks a little soft relative to what you've been doing.
Even like last quarter which, the environment out there was certainly as difficult as it was this quarter or around that, you actually showed improvement in both cash flow and bookings. So if you could comment on that please.
Nancy Cooper
Sure, let me just give you a kind of number set, and then I'll turn it over to Mike and George. If you take out CSC, you'll see that bookings were down 10% year-over-year. And then if you normalize for the duration that divides that in half. And then the commentary which I'll turn over to Mike and George is on the nature of the portfolio which we're carefully renewing.
Mike Christenson
John, as you know, we schedule these big renewals and manage it on a portfolio basis. And this was a quarter where, you know, it was a little bit lighter than last year. We have a nice ramp going into the December quarter and the March quarter. So, again, it was a little light on deal size. We were very pleased with our renewal yield. This was of the 10 quarters with our new portfolio management system. This was the highest yield that we've had since we put that process in place.
George Fischer
Hi, John, this is George Fischer. Yeah, I just wanted to comment a little bit on the confidence in the second half pipelines across the geographies, they're very solid and we're very comfortable that we're well positioned to execute in the second half of the year.
John DiFucci - JPMorgan
If I can follow-up on that George or Mike. When I look at Europe that looks real surprising. Nancy talked about some of the initiatives you have going on there, but I think bookings were down 30% year-over-year, again maybe if you can comment on, seeing as you do have some different initiatives going on there I would assume that you weren't happy with that and perhaps the yield there wasn't as good as you had hoped. But if you could comment on that and let us know at least in that region how things look for the pipeline in the second half.
Mike Christenson
I'll start and then I'll pass it over to George who was most recently there. It was the weakest region in the September quarter. That is typically the case, but it was a little weaker this year than it has been historically. On the other hand, the tone again since people have gotten back from their summer holidays in the month of September and early October has been very good.
We had the team in last week to review first half performance and plans for the second half. And I can tell you as George said the commit which is the rollup of our managers and what they believe they can do in the second half of the year is up and increasing and the pipe which is the feedback that we get directly from the front line sales rep is up and increasing. And both of them cover the plan that we've committed to here.
As Nancy mentioned, we've had kind of a strategy in North America that we began rolling out more aggressively in EMEA, which is pushing more of our sales resources to the front to forward to cover more of our target accounts more aggressively. We've focused them on the products that we know will sell in this market and that is the products that gave up customer a fast pay back.
And then, again, as Nancy mentioned, we've been recruiting what George and I call fast ramping sales professionals. And those are proven performers from our competitors who have a familiarity with our products and their market, so that they hit the ground running. I'll let George kind of give you some color from his last visit.
George Fischer
Yeah, I definitely want to confirm the tone is improving, the pipelines are improving and many of the products that are very best right now are on the top of mind of CIO's across EMEA, so it's a good tone and it's improving. We have been very fortunate, we've been able to aggressively attract some very qualified technical sales and marketing talent, and we're now adding that into the market now and it's looking very good as Mike said for better coverage across a broader set of clients.
Kelsey Doherty
Next question please.
Operator
That will come from Katherine Egbert from Jeffries.
Katherine Egbert - Jeffries
I have a question for George. George, what is it that you think you're missing in the product portfolio? What would you and do you think you're missing in the product portfolio, what would you and your team love to have?
George Fischer
Well, when you ask someone in sales what they always want more, but right now I am more comfortable than ever that our product lines not only bolt with quality but right in the sweet spot of this intersection in the cloud it's great for us being able to manage networks and infrastructure in a fantastic way is what people are looking for to get into the clouds.
So across the Board with Mainframe, security, infrastructure management, some of our governance products, we've never had more to offer for the environment. Of course, as you know, it's been a tough economic environment. All of these products really resonate with CIO's are looking to optimize service levels but also cutting costs. So I'm pretty pleased with what's happening with the integration and quality and what I have to offer today.
Katherine Egbert - Jeffries
Then Nancy, what are you assuming for an exchange rate in the December quarter and then how much of the revenue guidance going back then a little bit is due to currency?
Nancy Cooper
Katherine, all exchange rates are assumed to be the September 30th rate. And so what we did is we gave you guidance with the numbers we're reporting based on those rates. As I said earlier, it is helpful that what was a headwind for the first half of the year will be more helpful in the second half of the year.
Kelsey Doherty
We will take the next question please.
Operator
We'll will move on Abhey Lamba with ISI.
Abhey Lamba - ISI
Mike, can you talk about when we look at your renewal portfolio in the second half, are they evenly spread out for the rest of the year or rather more weighted in one quarter or another. What are your expectations for contract length for the rest of the year? And then I have a follow-up please.
Mike Christenson
Today they are evenly spread between those two quarters. However, I do believe that there is a possibility that some of those March quarter customers may want to come into the December quarter, that's just a guess at this point. I think that given all that's gone on in this year people are starting to look at year-to-year planning and I would guess that some might come in a little early. In terms of the general scheduling, roughly 60% of the year's portfolio is in the back half. So, you know, and again they're evenly spread.
Abhey Lamba - ISI
Nancy, quickly, can you talk about mainframe and distribution segment margins? If we look at your competitors margins, we get basically negative margins for your distribution business which fairly seems low. Any color on that would be helpful.
Nancy Cooper
We don't breakout the contribution margins for mainframe and the distributed. But I really think our investment level is quite different than our peers. We have views this as a really good opportunity in the mainframe and we actually increase our development spending by about 10% in 2010. And we really think that was forward looking in terms of initiatives like Mainframe 2.0, which is really facilitating utilization of a very sticky platform.
And when we talk to our customers, they're making us believe that was exactly the right decision to make. So we are very encouraged with our performance on the mainframe. Turning over to distribute then, there are two things to think about. We've been rationalizing our distributed platform for the last couple of years and we'll continue to do that. And the second thing, if you think of any business software business model, it is a function of how much maintenance is in that business model. And what we have here is in our distributed business it really started in the 05, 06 timeframe and so we're at the very beginning of large building maintenance business which is very profitable.
Great, before we go to the next question actually Mike wanted to follow-up from first.
Mike Christenson
No, it was actually, Nancy hit it on the distributed initiative. I wanted to make the point where we're taking a good hard look at where are the growth opportunities with our distributed product portfolio and make sure we look at them as growth opportunities and fund them appropriately, but where are just hard core maintenance opportunities where our challenge is efficiently keep that technology running, keep those customers generating a return on that investment, but it doesn't need to be the level of spending for that we would typically see for a growth product.
Kelsey Doherty
Next question please.
Operator
We'll take our next question from Todd Raker with Deutsche Bank.
Todd Raker - Deutsche Bank
First question I was hoping you could update us on the CEO search process.
John Swainson
Hi, Todd, it's John. I'm probably the most appropriate one to do the update. The Board committee has met a number of times, they have met with a number of outstanding candidates. I understand from talking to them that they are very pleased with those discussions which are continuing and when there is something to announce, they will announce it.
Todd Raker - Deutsche Bank
Then from a broader perspective, John, since you've met with so many customers this quarter. There seems to be a sense of the IT spending environment is stabilizing getting healthier, yet you guys seem to be backing off the high-end of guidance range. Can you just talk about what you're seeing from a spending perspective and how you think the next 12 months may play out?
John Swainson
Well, let me remind you of a couple of things. What we're backing off of can be attributed to two things, one is services as Nancy said 200 basis points attributable to that and the second is in the small and medium business segment where we have products like ARCserve, which in that segment clearly is not seeing the improvement yet that we're seeing in our larger enterprise customers.
Having said that, what we saw in the first half of this year was people may have had a budget, but they are sure that weren't spending it. What we've seen in the last month or two as Mike said after they kind of came back from vacation realized that the economy was starting to improve, we've seen a different tone in the discussions. They are starting to have more strategic discussions with us about products that perhaps have a slightly more strategic horizon than something that pays back in the last year. So that's the thing that encourages us a great deal in addition, obviously, to the opportunity that comes when we have a portfolio renewal event which is also an opportunity to go to a customer and have a discussion about what else we can sell them.
The strong portfolio renewal that we got in the second half and the strengthening economy are both things that gives us some confidence here.
Kelsey Doherty
Next question please.
Operator
We'll hear from Sarah Friar with Goldman Sachs.
Sarah Friar - Goldman Sachs
In that SMB area it's always been a little bit of a struggle for CA, you're clearly much more high-end enterprise focused are you trying to decide whether or not that's still an area you want to go after and thinking it's through go-to-market strategy on it or ultimately is that just less interest and so therefore you're letting it atrophy a little? I'm just wondering how much is your decision versus a customer decision right now?
John Swainson
Well, we don't let $100 million, $200 million markets atrophy. But there are different dynamics going on in the marketplace, Sarah. I'll turn it over to Mike for his comments. We're just not quite seeing the same demand from the small customers that we are seeing from the large customers. And I think that's got to do with the economy more than anything else.
Mike Christenson
I would agree with that Sarah. I would also add that we describe it as small to medium size business. It's probably more accurately described as low price point. These are much lower end technologies than the core products that CA sells into the enterprise market. So that, you know, those lower ticket products have had a lot of pressure really across the whole market. We always look at it, we always make sure that we're investing appropriately and as John said, you know, preserving or growing these investments.
Today, particularly, with respect to ARCserve, there is some very interesting opportunities as the market evolves, you know, cloud based storage and so on that we want to make sure that we are positioning these investments, you know, not for what they have been doing, but what they are capable of doing and that's been where our time has been spent in reviewing both of those businesses.
Sarah Friar - Goldman Sachs
Just to confirm though, it sounds like you're still committed that that's not a divestiture error or anything, that is still something you view as a growth driver longer term.
Mike Christenson
What I would say is we are still committed to both of those businesses. They are good, healthy, profitable businesses for us. We believe there are some emerging growth opportunities that we could use those assets to take advantage of going forward.
Kelsey Doherty
Next question please.
Operator
Richard Sherman at MKM Partners has that question. Richard, your line is open.
Richard Sherman - MKM Partners
Any update on the brick region, how things are going in kind of India, China, some of the higher growth emerging market, I wanted to check in on that.
George Fischer
Yeah, hi, this is George Fischer and John will follow-up with some more color. He has just returned from some of those areas. But we're very pleased with what we've been doing with Latin America in the last few years. We're getting substantial growth in the public sector and financial sectors of Brazil. Some very good step forward. We also have a very good business throughout the Mexico region, so good coverage there.
In APJ, we've seen some uncharacteristic strength in Japan, some growth areas, and then very nice work through specific region in Australia. I think John can comment than Mike on India also very good. So we were encouraged with the interest and improving economy in those areas and also the traction on some of the products that are very best are selling well in those areas.
Mike Christenson
Yeah, let me add, India remains our biggest single growth market. And while our business area is relatively small, we do expect significant growth to continue there. The economy, as you know, did slowdown to a slight degree, but GDP growth remained positive. It looks like it is starting to ramp back up again and we think that that's an encouraging sign.
We have not chosen to make a large number of investments in Eastern Europe and Russia at this time. We continue to look at the most effective way to do that. We haven't found a model that works for us yet. I am encouraged to tell you that our relationship with the Indian outsourcers and Indian IT companies continues to be very strong. And both domestically within India as well as around the world, we're doing a lot of work with Tata and Wipro and those companies.
Richard Sherman - MKM Partners
Then maybe just a follow-up, if you could give us an update on SMB market, I was kind of a little bit lost here. How much is SMB impacting your growth rate as a number of basis points that you're being hurt by SMB? Then I was kind of lost on lower price point products. I mean to me the price point seems somewhat irrelevant relative to the end market that you're servicing. You can sell low price point products to very small customers or very large customers. Maybe if you could drill in on the SMB market. Are you having weakness in the SMB market or is it just some of your smaller products aren't selling as well? Then when would SMB likely recover as you look in your pipeline?
Mike Christenson
It's Mike, I'll let Nancy comment on the number of element. Our direct sales force, so when we make the distinction between small and medium size businesses and the price point conversation I introduced a moment ago, our direct sales force is focused on selling very sophisticated enterprise class solutions to big enterprise customers. That's a very different market and that's the core strength of CA; security, systems management, governance for enterprise customers.
These what you could call small to medium size business, lower price point or volume products are typically less than 5,000, 2,000, 1,000 software sales through distributors, value-added resellers, and so on. It's a very different sales process. You're right, it is a broader market, so it can go into the enterprise, but it covers really the whole universe.
And when we look across what people are focused on, what our customers are spending money on, they continue to spend money where they are spending it on big strategic solution sales, but they have been deferring more aggressively those smaller ticket Internet threat protection products or backup products that are just smaller, smaller ticket more broader market coverage volume distribution type products.
Nancy Cooper
Rich, that's why earlier when I made the comment, our core business is growing at 3%. So you look at reported as one and the impact of these businesses that Mike just described plus services took it down to 1.
Kelsey Doherty
The next question will actually be our last question and then we'll wrap it up.
Operator
That will come from Scott Zeller with Needham and Company.
Scott Zeller - Needham and Company
On the NetQoS acquisition wanted to see how that will be sold in the field, will it be a perpetual sale?
Nancy Cooper
Yes, we would intend to that company runs its current business on a perpetual basis as does most of the industry for those kinds of products. One of the good things we have about CA is we are going to be able to preserve the perpetual nature and be more competitive being able to do that.
John Swainson
Let me close by saying again that we're very confident in our ability to achieve the second half and full year targets you have heard us talk about today. Looking ahead for the next six months, we've got a strong healthy renewal portfolio that represents significant opportunities for new sales. We have a strong new license sales pipeline. We have a broad portfolio of innovative products that are very focused on optimizing the effectiveness of IT and helping customers deliver IT as service as lowest possible cost.
CA has built a competitive cost structure and we have a determination to continue to make improvements in that structure. And we have a sales force that is striving to make their customers successful using our technology. On a personal note, this is my last earnings report as CA's CEO. As all of you know, I'm retiring at the end of the calendar year. I'd like to thank you for your continued support of CA. The company has come a long way in the last five years.
Together the 13,000 employees of CA have accomplished much. Taking a company that was battered and struggling to one that is now the clear leader in the enterprise IT management software market. I'm very proud to have been part of that effort and I can assure you that I am leaving behind a strong and focused team. When I leave CA's management team in a few months, I will become one of you, a CA shareholder with high expectations for future performance. Thank you very much.
Operator
Again, that concludes our conference. We thank you for joining us today.
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