Kelsey Turcotte – Senior Vice President, Investor Relations
Michael Turits – Raymond James & Associates
CA, Inc. (CA) Raymond James European Investors North American Equities Conference Call September 10, 2013 4:45 PM ET
Michael Turits – Raymond James & Associates
Okay we’re going to get going right away to the last presentation. I’m Michael Turits infrastructure software analyst at Raymond James. And we’re very pleased to have CA Technologies here Kelsey Turcotte, who is SVP of Investor Relations, Kelsey and I have worked together for many years, and I have worked with CA for many years.
CA is a leading company in systems management, data management and now we could certainly add to that cloud management, why not. And is involved in a lot of areas in addition including application development so called DevOps and is now running under the head of a new CEO from last years Mike Gregoire.
So I will give it to Kelsey to take it from there. Kelsey thanks for your presence.
Yes, good morning thank you for joining us. I would sometimes refer to this as more of an interactive type of conversation. So, I know there is a breakout after this, but if you have questions, I might be happy to answer any that you might have and there is no mic in the room, but I can repeat any questions for you and then go ahead and answer. So interruptions are very welcome.
So as Mike mentioned, I'm SVP of Investor Relations, I work closely with our CEO and CFO. This is the obligatory very small font cautionary language which we will go through quickly. I don’t know how many of you are technology investors, or more generalist investors, so going to switch back and forth between more technical speak and the high level view of the company. And I promise not to use any acronyms, typically that confuses everybody including me.
So as Mike mentioned, we are a sizeable software company, we are approximately $4.6 billion in revenue. Approximately two-thirds of that revenue comes from mainframe and mainframe management and balance comes from what we refer to as enterprise solutions or distributed business as well as our small services business.
And we are a very cash generative business, fiscal 2013 our cash flow from continuing operations was $1.4 billion which actually supports a capital allocation plan which compares an annual dividend of a $1 per share, which is in the software industry one of the highest yielding stocks available.
We have approximately 36 years of experience, managing IT across multiple computing platforms as Michael alluded to in the openings. And I think the key to our differentiation is the broad and deep set of management products. We work with customers to reduce complexity and drive business value. And we are really the hydrogenous provider, we are agnostic and that we don’t care what the underlying hardware is, we work with any vendor and in some of our most complex customers and that’s a key to providing the services in the insight that they need.
Oh that’s lovely that didn’t turn very well. Well apologies, but many of the time I'm asked about our customers, and our core customers really are these large global banks, federal agencies, top financial services companies, and organization that have very complex underlying infrastructures and process a lot of data. These companies have typically have mainframes as the core of their original infrastructure, as the industry as evolved from distributed to internet now into this concept of cloud computing, we have evolved rate with our customers.
I think the core of – easiest to way to explain what we do, is we really manage, monitor and secure that underlying infrastructure. And as I mentioned the mainframe is the core of that. Sometimes for individuals who aren’t as familiar with what we do and to helpful to create a little bit of a live example. So I don’t how many of you have an iPad with you, my guess is lot. And I know that many of you interact with your financial institution in an application format.
Every time you touch that application you are driving a transaction that goes from that iPad through a distributed environment hits the mainframe and comes back. So many times people sit down and say to me well isn’t the mainframe dying and the truth is all of the transactions are actually driving an increase in the capacity over millions of instructions per second that these mainframes are actually processing, which is helping to keep that business very stable.
So as Mike mentioned, we now have a new CEO, in addition to a very strong financial profile as you saw at the outset, we have a very strong balance sheet. As I mentioned, it’s a very cash flow generative business and when Mike initially took the helm in January many of you might know – have known Mike from his days at Taleo.
One of the things that he told both Wall Street and actually the company and our employees was that he was very attracted by that balance sheet and the power of the cash flow in the business. So he actually did spend some time discussing in addition to that attractive attribute some other things that he really looked at in joining the company and the things that he believes that he can leverage to drive the company forward.
So among those things we mentioned in the previous slides the profile of our customers and the next generation in the opportunity to grow this business is going to be in introducing new technologies of those customers, as well as targeting net new customers. These are customers of approximately $300 million to $2 billion whose needs are frequently met either through managed service providers or directly from CA through software as the service model. And we can discuss that a little bit later.
On products, we have more than 600 patents at the company a lot of that are basically as a result of our history, but it’s a competitive differentiator. And we have more than 600 patents under review. It’s a organization of a global stature with research and development throughout the globe. And 24-hour typical seven days a week support and services which obviously is a key differentiator when you look at some of the point product providers in our business.
And then finally the employee base, which I had just had alluded to. We’re approximately 14,000 in size and a lot of these employees have a rich history and particularly the research and development segment in the industry.
So when I look at this slide, Mike has actually driven several initiatives since joining the company which have all been focused on retooling or rescaling the organization. In May, we announced a significant what we refer to as rebalance of the organization.
As part of that process, we actually auctioned approximately – up to 1,200 employees, we are in the process of during a significant site consolidation. And we are looking at really the process of accelerating research and development enabling what is commonly referred to as agile software development, which is the process of actually creating a short spurt of development which allow for a lot of interaction and customer input.
The goal of this all of this is to make sure that we bring the right talent onboard and that the company really is forward thinking and starts to the change the culture of the organization and the skill set that we have.
I mentioned the site consolidation, one of the key things we have done is actually to create development hubs around the world of which they are approximately half a dozen and they are located in a lot of places you would expect, out Silicon Valley actually our buildings on the 101 for those of you for the U.S. you might recognize it. Austin, Texas, Framingham we have a significant development site for mainframe there. The Czech Republican and as you would imagine we have presence in India.
So that consolidation is really designed to drive the synergies I mentioned before and really accelerate the rate and pace of which we develop differentiated technologies to the market. The key message that Mike has been driving both internally and externally and that focuses is really driving how we take advantage of next-generation computing.
So don’t forget the mainframe is at the core of many of our customers businesses, but as they look at cloud and software, the service delivery models, we need to be there and we are. So we’re looking at new models as I mentioned and new innovation. So Mike talks about differentiated technology and as he’s looked at, putting his stamp on the business, he absolutely started with the research and development teams.
I don’t know how many of you have experience with Mike as he ran a public company in prior, I think it’s possible many of you have, he is actually technologist that heard. He knows how to code, he’s worked with software throughout his career. So that’s an area focus with him that comes very naturally. And while we had many of these initiatives in place when he joined, there is nothing like the focus of the CEO to accelerate performance and really create on a sense of urgency around the technology.
So many of the products that we have introduced lately have software as the service component, are designed to help our customers reach the cloud. We have a brand in the market which is called Nimsoft and that’s a software as a service delivery model for service desk, as well as monitoring. In the security space which I will talk about in a minute, we’ve been delivering products like Cloud Minder and we actually introduced in the process of rolling out different features and functionality on mainframe. So many of you are familiar with the mainframe, green-screen environment in which much of the programming has been done in the past.
CA Technologies has introduced a product called Chorus it’s unique in the marketplace and it totally changes the paradigms of mainframe management, removes that green-screen technology and creates an entirely new Web2.0 Interface. This is helping customers to attract new talent to the platform and keep it – and help it to keep it vital. And as I mentioned, much of this technology and particularly in the SaaS market is about acquiring new customers to the company. And that something that the organization has been very focused on.
So as I mentioned, and I will briefly talk about before we turn to the product categories and how are we going to move, and some of these financial implications of what we’re going to do. I mentioned that Mike started his focus initially on research and development, obviously that’s a very important component, it takes longer. So that process of accelerating the development piece is critical to the company’s success. He has followed that on by actually some major changes in marketing.
That logical next step is new customer acquisition, how do we really create a CA Technologies brand. How do we leverage some of these more newer and more interactive means of going to market? We brought in a new CMO at the end of July. Her name is Lauren Flaherty, she come to us actually from Juniper in prior to that a rich history at IBM. She is a proven track record of driving things like product differentiation creating strong brands and while she is new to the company that is launched ourselves trade into many of does initiatives in over time. You will see a new and revitalized ca.com website. You will start to see an increase in branding.
All of this is critical to reaching that new customers and attracting them to CA. We have been very good and interacting and selling net new products into our customer base. Many of those customers I showed you already. And that’s really been CA’s bread and butter. It hasn’t required to significant marketing initiative and due to the fact that we really know that customer base about 80% of our revenue comes from approximately 1000 customers. And that core customer base as I mentioned as been very strong and very loyal to CA. But this new marketing initiative is going to be absolutely focused on that new customer and building that brand.
And finally and will discuss in a little more detail later Mike has made some changes to our sales force and he is looking to drive more efficiencies out of that go-to-market model. But he has talked a lot about the power of the sales force he comes from a much smaller company and his view as a competitive differentiator, as he says scaling up requires a lot of investment to build out that type of go-to-market global model and CA already has it. With the right products in the portfolio a differentiated approach to technology, we can really continue leverage that go-to-market vehicle much more effectively.
So I’m frequently asked about CA very complex portfolio, where you are focused. So these five areas all the area of technology focused for us and again as I mentioned, we are entirely software organization. I spent some time talking about the mainframe, so I won’t linger there. But the following four areas of focus are in enterprise solutions business or distributed business. And they are either designed to help customers take advantage and reduce the complexity and underlying infrastructures; leveraged new technologies like the Cloud, or in some cases help CIOs better manage many complex products.
So in the IT business management space our focus is on project, and portfolio management and service task. And we have introduced net new technology there that actually creates an executive interface with an iPad. So it consolidates all of that information, managed in our product and portfolio, our technology and presented as an interactive tool which links strategy to business process.
In security, we do identity and access management, differentiated from the traditional anti-virus technology, we’re all about understanding content and who has access to it. I don’t know how many of you log on to your corporate account in the morning, and put in one single password and one single identity, we do and then CA behind the covers or underneath the covers through our technology actually manages our access to all the applications involved in running our business.
Obviously simplifying and making the workforce more efficient, in this business we also provide an authentication tool similar to the token that many of you may carry, but it’s delivered in a software version and we continue to push into the space. Many organization name the biggest risk in taking advantage of this next generation cloud computing is about security and this security business is our fastest growing area with the industry growing and security growing in a low double digit.
Mike alluded to the third category in enterprise solutions business, its application delivery or shortened I'm promised no acronyms but I'm going to throw one here, DevOps and this is about really sort of helping our customers create the next frontier of store fronts which are now applications and doing that more quickly to create a competitive differentiation, so application delivery focuses on virtualizing not to be confused with virtualizing on servers, but virtualizing the testing process through a series of algorithms in pre-deployments.
So if you have an application, you have to test it and what this does is it creates essentially a virtualized environment to do so and we just created a – we just finished the purchase of Noleo which is complementing our application development technology turned and actually automates the deployment of that application, reducing much of the risk that would be inherent in human interaction. And then the complementary technology that actually really makes our application delivery technology more effect is in service assurance. And service assurance is really the bread and butter what we do. It’s the software that does the non-insuring of infrastructures it does the monitoring in performance analysis on application.
So you can imagine that if we understand how an application is performing in a live environment our ability to feed that application performance back into the testing cycle create a close loop that is much more efficient and effective.
Before I move on I wanted to just mention that along the bottom here you will see that obviously we are looking at consolidated CA platform or I mentioned the [indiscernible] delivery which is going to be very important and strategic in our business.
One of the things that we recently did was we’ve introduced technology to manage mobile devices. That was a driver between behind a very large and significant transaction in our first quarter and again its natural synergy for us extending the platform that we manage and you will more from us revolving around content and as we move forward we have several different product introduction in the back of the year – balance of the year. But this is net new platform and net new product category for CA that again leverage is our history.
So what is other means from a financial perspective, many of you in the way my recognizing some of your various familiar with our financial model, but this is really the focus one of the things that Mike and executive teams shut down to do, was really understand all the components of our product portfolio, understand the profitability of those underlying businesses, to make strategic decisions about where to invest and perhaps look at other opportunities to accelerate these businesses and right size the investment that we’re doing in current technology.
This is the classic mainframe, or the classics software profitability analysis. And really what it shows is that, our business runs the game it of profitability, obviously mainframe being the most mature technology it’s almost entirely maintenance and the operating margins in that business go from approximately 55% to 60%, that’s the range. But as you move to the balance of the portfolio, it presents multiple different profiles.
As I mentioned service assurances is our largest business and that goes all the way down to development DevOps that new in business and which we are doing a lot of developing. And our initial and it’s a much smaller business going very quickly, but we’re investing there.
So if you see along the left-hand side, Mike and the team have really been focused on defining these product categories and understanding how we manage them to improve the financial performance and profitability of the company. And as you took a look at our enterprise solutions, we ran high single-digit operating margin there, the low double-digit and there is opportunity to drive improvements in that, in the margin profile of that business.
I mean, much of what we are doing as reflected on the previous slide is really moving the development dollars, for supporting existing products to much more innovation and development and expense on moving into adjacencies and then looking at where the pick is going – pardon me North American, I reference, but much more investment in transformational and next-generation technology. What does this mean? Well an existing products it’s about version consolidation. We have products in the mainframe for example where we have upwards of seven different versions that are currently used to by customers.
As you imagine that’s very complex it’s difficult and expensive to support and it really precludes customers from migrating to next generation technologies which enhance value. So Mike at our user conference in the spring was very clear with the customer there. There were going to be working with those customers to migrating to a small number of versions and that’s [indiscernible] of the portfolio, which again will reduce that expense and allow us to investment these next generation businesses.
This is a big area focus for the company right now, it obviously going to help drives incremental expenditures in the adjacent fees the business and the transformational pieces, and its really part of I mentioned the rebalance that we did significant piece of that rebalancing work was related to acceding individual who were not necessary the right skill set for the company and brining on people who really bring the right skill set to allow us to investing the next market.
So the next few slides frequently I am asked about sales and this slide is just a vectorial version of the things we are going to be investing and marketing. So I mentioned Lauren and she can be very focused on building brand awareness improving lead generation, supporting these new delivery models and demonstrating product differentiation to the market.
Mike is very focused on improving marketing. We can just by approving marketing absolutely increase the efficiency of the sales force and if we can up the level of effective leads that they receive from the marketing team, it’s a big area obviously as I mentioned. So after that you have marketing, you have products, if you agree differentiated products and do a selective marketing you allow much more efficiencies in sales.
Mike’s view on our sales force has been that of an evolutionary approach not revolutionary, better products should improve sales effectiveness and efficiency and make that customer experience easier. So I think he is doing this in almost – I have mentioned to some investors it feels a little bit like a domino effect.
So this year what we did was we took a approximately $100 million part of our sales force, again that rebalance allowed us to do that, we removed layers of management, the triangles on the bottom are pictorial representation of the fact that we actually collapsed tier segments into one and then we have at the top our traditional large enterprise base.
So just to be clear triangle to the right our focus really isn’t small and medium business, as I mentioned before we took the large new enterprise business and the gross markets and created one segment and that’s that $300 to $2 billion segment and then at the top in the green is our traditional large customer that we looked at before.
This has allowed us as part of this change in the sales force to increase quarter tearing [ph] reps remove sales overlays, decrease specialist coverage and much more effectively leverage the channel. Those MSPs, Telco those are the types of organization which we already have very significant and rich relationships, but can and do currently serve as a distribution channel for us to access those net new customers and we are going to continue to really focus on that as part of some of the evolution and changes in the business.
So in closing, because I think I'm starting to push up against my time limit. These are absolutely the core principals that Mike has brought to the business. I don’t know how many of you know him, but he’s a hard charging guy. And he’s really stressed these principals for the team. Driving innovation as I mentioned in differentiated technology, absolutely executing consistent execution as to create a value creation, our employees for you and for our customers.
Doing so with speed not recklessly, but thoughtfully, but really increasing the velocity of all that we do to deliver this technology to the market. And then finally driving accountability, making sure the decisions are made, that the executives are held responsible for them and we’ve started to make some changes in some of those underlying executive areas. Approximately 10% of the Vice President and SVP population was removed to rebalance. Mike is all about driving process improvement and enhancement and really increasing that bad effectiveness as we go forward.
So I think I'm running out of time and I don’t want to be disrespectful. If there are any questions, I’m happy to take them. I’ll be here.
Michael Turits – Raymond James & Associates
Any questions? We are up against time, so let’s just leave the build up. Thank you very much Kelsey.
Michael Turits – Raymond James & Associates
[indiscernible] breakout session in the room behind us. Thanks.
Absolutely thank you to your time.
Michael Turits – Raymond James & Associates
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