CA, Inc. (NASDAQ:CA)
F3Q10 (Qtr End 12/31/09) Earnings Call
January 28, 2010 4:30 pm ET
Bill McCracken - CEO & Chairman
Kelsey Doherty - SVP of IR
Nancy Cooper - EVP & CFO
Mike Christenson - President & COO
George Fischer - EVP of Global Sales and Marketing
John DiFucci - JPMorgan
Phil Winslow - Credit Suisse
Abhey Lamba - ISI
Katherine Egbert - Jeffries
Todd Raker - Deutsche Bank
Michael Turits - Raymond James
Sarah Friar - Goldman Sachs
Scott Zeller - Needham & Company
Good day and welcome to the CA third quarter 2010 earnings results conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Kelsey Doherty, Senior Vice President of Investor Relations. Please go ahead.
Thank you and good afternoon everyone. Welcome to CA's third quarter fiscal 2010 earnings call. I am Kelsey Doherty, Senior Vice President of Investor Relations for CA. Joining me today are Bill McCracken, our Chief Executive Officer and Chairman and Nancy Cooper, our Chief Financial Officer. Also in the call and available to answer questions are Mike Christenson, President and Chief Operating Officer and George Fischer, Executive Vice President Global Sales and Marketing.
Bill will open the call with an overview of this third quarter and Nancy will provide detail on our performance. Then we will take your questions before returning with our closing comments.
As a reminder, this conference call is being broadcast on Thursday January 28, 2010 over the telephone and the Internet. 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 or transcribed 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.
CA’s discussion will include forward-looking statements subject to risks and uncertainties and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks. As many of you know CA’s Board of Directors announced the unanimous election of Bill McCracken as CA’s Chief Executive Officer.
Bill has a long carrier in the technology industry having spent more than 30 years at IBM, where he had numerous Senior Executive positions including General Manger of IBM’s Printing Division. In addition, he served as President of IBM’s PC Company in EMEA and Asia Pacific and as General Manager of Marketing, Sales and Distribution for IBM PC Company. In 2005, Bill joined CA’s Broad of Directors and became non Executive Chairman in 2007. Bill has served as Executive Chairman of CA since September of last year. For the past five months, Bill has been working closely with the Executive Leadership teams and has been increasing involved in the day-to-day operations in management of the company.
So with that, let me turn the call over to Bill.
Thanks, Kelsey and good afternoon, everyone. I’m very pleased to speak with you in my new role as the Chief Executive Officer at CA. But before Nancy and I detail our third quarter results, let me first give you some insight on how I got to be the CEO of CA. Earlier this week, Gary Fernandes, CA’s Lead Independent Director and Head of the CEO search committee asked me if I would consider continuing to lead CA as the CEO. I can tell you this. I was humbled by the search committee’s confidence in me. And I had to make some tough decisions during my forty year carrier. But to be honest this was not one of them. I told Gary and the committee that I would be honored to be considered. Let me tell you why.
I have had the privilege of leading this company as Executive Chairman for the past five months, after serving on the Board since 2005 and as the Chairman since 2007. I’ve got to know this management team much better. Met many of the CA's 13,000 employees and seeing first hand their passion for CA and its customer. I’ve seen the outstanding work that has gone into our aggressive new strategy, which positions CA in the emerging world of cloud computing and virtualization. I’ve seen this team realign the entire company around our strategy. We invigorate EMEA in our services organizations with new talent and inject a new winning attitude across our company.
And I worked alongside them as they delivered the strong quarter we’re discussing with you today. Throughout of all, I’ve seen what this team can to, what it is capable of achieving. And most importantly, the commitment to building the market’s best enterprise management products to serving our customers and to building a great company.
So when the Board offered me the job, I accepted. With that let’s get into the overview of the third quarter results. Obviously we are very pleased. Revenue for the period was up cash flow was strong and we again improved operating margins. And another important indicator revenue backlog was up both total revenue backlog and short-term. Non-GAAP EPS was flat with the prior year, which I realize seems a bit odd given that we increased both revenue and operated margin.
This is a result of our lowered third quarter fiscal 2009 non-GAAP tax rate, setting us up for a difficult year-over-year comparison. That difference netted out to approximately $0.04 and Nancy will talk about that in more detail in a moment. So for the highlights of the quarter first while early stages we made progress getting our EMEA and services business back on track, with the help of a strong renewal base EMEA reported good growth while services bookings are improving and with the strongest since we re-architected that business.
In both cases, we made management changes brought on new talent and more tightly align to sales models. Second, security, our identity in access management business reported record new product sales. Last fall's product releases in access control and data loss prevention contributed to these results. We continue to view the issues of identity and access management faced by our customers as significant gaining factors to successful migration to virtualization and the cloud. CA’s expertise in this area will give us the competitive advantage in helping our customers solve these complex issues.
Third, clarity, our project and portfolio management solution had one of its best quarters ever with more than 40 new customers added in North America alone. What excites me even more about the impress of the number of wins was the success we had with our clarity software as a service offering, which accounted for just under 50% of the new North America clarity customers. This progress in software as a service clearly opens up new customer for CA and expands our reach. We’re definitely starting to see an upward trend here.
Fourth, Mainframe 2.0 and our initiatives design to change mainframe management continue to drive momentum in the business. Since this introduction in May mainframe software manager, the first deliverable in the mainframe 2.0 initiative has been deployed by more than the 150 customers, such as ANZ Bank and BNP Paribas.
And finally our application for business recorded a strongest quarterly performance ever. CA Wily now manages the world’s most mission-critical business services, including nine of the world’s top ten banks. The world’s top ten telecoms and the world’s top four entertainment companies.
We also made significant progress during the quarter and building out of virtualization and cloud computing capabilities, both in acquiring technology that increases the debt of our offerings and 4G strategic relationships.
In November we’ve closed the acquisition of NetQoS a leading provider in network performance and service delivery management solutions. Not only did we’ve receive technology vital as successful delivery of Cloud Services we also got an immediate contribution to the top line growth.
Two weeks ago we also announced our acquisition of our Oblicore a leading provider of service level management software for enterprises and service providers. Oblicore supports and strength CA’s ability to set, measure and optimize service levels to meet business expectations across enterprise and cloud environments.
Our approach makes sense to customers like Qualcomm, the world leader in next generation mobile technologies where CA is providing technology in support of Qualcomm’s virtualization strategy. We will continue to make acquisitions and develop organic technology to build out our capabilities in this quickly developing market. On the business side we announced a strategic partnership with salseforce.com to deliver Agile Development Management in the Cloud on the Force.com Platform. These initial solutions are part of the strategy to extend leadership in the IT governance market by delivering solutions as the service.
As you can see we have accomplished a great deal this quarter and quickly moving ahead as we look to CA World in May to showcase our best in new technology and thought leadership.
Let me now turn the call over to Nancy, who will provide details on the third quarter results. Nancy?
Thank you, Bill, and thank you, everyone, for joining us this afternoon. As Bill mentioned, we had a very good third quarter. Many of you have asked me about bookings as an indicator of the business. Many of you have asked me about bookings as an indicator of the business. At this point roughly two-thirds of CA’s booking are renewals of contracts with various durations. This is carefully managed portfolio that does not usually lend itself to year-over-year comparisons. This quarter the renewals booking came in as scheduled, we are pleased with the metrics underlying those transaction and we had very strong sales of new products.
Let me give you some details. Our renewal yield essentially the same store sales metrics that indicates whether we are holding pricing was in the low 90% range, while renewal yields fluctuate slightly, this number before we add new capacity and new license sales is exactly where we would expected it to be at this point in the fiscal year.
Next, new software licenses, we are working to provide more visibility into our new product sales as we rollout SAP globally. What I can't say is that new product sales including capacity, grew single digits year-over-year both in constant currency and as reported. Our distributed new sales grew double-digits lead by application performance management, infrastructure management, and identity and access management.
Following our smaller base sales of new mainframe products outpaced distributed growth, this was offset by mainframe capacity which was down year-over-year driven by the mix of business in our renewal portfolio. And finally, new standalone transaction, how successful was our sales force in selling new software licenses that were not linked to renewal, the number of standalone transactions this quarter increase by low double-digits year-over-year, this is very encouraging.
As I mentioned renewals from multi-year contracts can be lumpy while we are pleased with total booking, which were up 5% in constant currency and 10% as reported. This lumpiness is reflected in our geographic results. We had a lighter renewal portfolio in North America and a stronger renewal portfolio in EMEA and Latin American, which affected these regions.
North American bookings were down 12% in constant currency and as reported, while international booking were up 38% in constant currency and 52% as reported. EMEA renewals included three deals for more than a $190. Average duration of subscription and maintenance bookings was 3.2 years. Annualized subscription and maintenance bookings were $373 million, down 1% in constant currency and up 4% as reported.
Finally and most importantly our revenue backlog is the best means of determining future revenue estimates and the most usual metrics for modeling our results. So let me give you backlog detail. Year-over-year total revenue backlog of $7.9 billion increased 9% in constant currency and 13% as reported, both of the current and the non-current portions of backlog grew on a constant currency and as reported basis.
Turing to revenue, total revenue was $1.128 billion up 4% in constant currency and 8% as reported. Subscription and maintenance revenue was 1 billion up 4% in constant currency and 9% as reported. Revenue from professional services were $74 million down 20% in constant currency and 15% as reported. Overall, this third quarter decline in professional services negatively affected year-over-year total revenue growth by just over a 100 basis point.
Revenue from software fees and other was $54 million, up 45% in constant currency and 50% as reported. This growth reflects a strong quarter in application performance management and revenue from NetQoS. From a geographic perspective North American revenue was $655 million, up 7% in constant currency and 8% as reported.
International revenue was $473 million, down 1% in constant currency and up 9% as reported. We recorded a positive foreign exchange impact on international revenue of approximately $48 million during the quarter. Third quarter results include approximately 10 million in revenue from the acquisition of NetQoS.
Now I would like to turn the remainder of the income statement starting with our non-GAAP results. Operating expenses were $754 million, up 1% on a constant currency basis and up 7% as reported; this year-over-year variance in as reported results was driven by a weakening of the U.S. dollar, strategic initiatives and increased commissions. Operating income before interest and taxes was $374 million, up 9% on a constant currency basis and 11% as reported.
For the quarter, our non-GAAP operating margin was 33%, an increase of one percentage point year-over-year. Excluding a two percentage points of stock based compensation, our non-GAAP operating margin was 35%. Earnings per share were $0.43, down 2% in constant currency and flat as reported.
As Bill mentioned, we had a difficult year-over-year comparison from a tax perspective. Our non-GAAP tax rate fluctuated quarter-by-quarter last fiscal year reflecting the impact of discrete tax items. This fiscal year our improved visibility allows us to apply a consistent 35.5% non-GAAP tax rate quarter-to-quarter. When compared to the prior year, third quarter non-GAAP EPS was adversely affected by approximately $0.04 due to the low non-GAAP tax rate in the prior year period.
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 31%, GAAP operating income was $351 million, up 11% in constant currency and 14% as reported. While, earnings per diluted common share were $0.49, up 22% in constant currency and 26% as reported.
Our effective GAAP tax rate for the third quarter was 21.6%, when compared to the prior year, third quarter GAAP earnings per share were positively affected by the low rate this quarter by approximately $0.04. As we’ve discussed on prior occasions, the GAAP and non-GAAP tax rates applied different methodologies to reflect the impact of discrete items resulting in a divergence quarter-to-quarter between the two rates. However, we believe the full year GAAP and non-GAAP tax rates continues to be aligned between 35% and 36% for this fiscal year. In addition, we believe that longer term we are on a path to a tax rate aligned with industry norms, which is in the lower 30%.
Turning to cash flow from operations, cash flow from operations in the quarter was $342 million compared to $292 million in the third quarter of fiscal 2009. This is up 36% in constant currency and 17% as reported. For the third quarter, gross receipts related to single installments for the entire or substantial portion of the contract value were $74 million compared with $89 million in the third quarter of fiscal 2009. Year-over-year, total billings backlog of $4.6 billion grew 14% in constant currency and 18% as reported. DSOs were essentially flat year-over-year.
Now, I would like to turn to a review of our balance sheet. CA ended the quarter with $2.6 billion in cash and cash equivalents and $1.5 billion of total debt brining our net cash position to approximately $1.1 billion. During the quarter, we closed the acquisition of NetQoS for approximately $2 million.
We also successfully issued $750 million of ten-year senior notes at five and 3/8th and utilize the proceeds to pay down $500 billion of the $750 million drawn on the company’s $1 billion revolving credit facility. The company also paid down approximately $636 million of debt, which matured in December with cash on hand.
Included in this debt payment was approximately $460 million in convertible debt, which when settled in cash reduced the company’s diluted share outstanding. Finally, we purchased approximately 1.8 million share of stock for a total of $40 million. This leaves just under $160 million in remaining approval and we continue to be in the markets.
With that I’d like to reaffirm our guidance for fiscal year 2010. We continue to provide guidance on a constant currency basis, which we believe best illustrates the operational performance of the company. Our guidance range presented this afternoon reflects the following factors; the first of these is currency fluctuation. In addition, we anticipate incremental fourth quarter expenses of approximately $20 million to $25 million related to real estate and other costs. These expenses will be included in both our GAAP and non-GAAP result. We believe we have the potential to reduce costs through boarder adoption of alternative work strategies and work from home programs.
We recently closed two acquisitions. For the remainder of fiscal year ’10, we expect the combination of NetQoS and Oblicore to be approximately $0.01 dilutive to both GAAP and non-GAAP EPS. For fiscal year ’11, our expectation is that both acquisitions will be approximately $0.02 dilutive to GAAP and $0.01 dilutive to non-GAAP EPS. And finally, please note that we anticipate increased interest expense following the debt placed in the third quarter.
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 revenues of $4.3 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 100 to 200 basis point improvements over fiscal year 2009. GAAP diluted earnings per share growth in constant currency is expected to be in the range of 18% to 26%. At current exchange rates, this translates to reported GAAP diluted earnings per share of $1.46 to $1.57.
Non-GAAP diluted earnings per share growth in constant currency is expected to be in the range of 7% to 15%. 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 of $1.3 to $1.4 billion except as previously stated guidance reflects December foreign exchange rates and includes a partial hedge of operating income. Guidance does not include the impact of any future material acquisitions.
We expect approximately $513 million actual shares outstanding and weighted average diluted share count of approximately $533 million shares. Please note that the share guidance provided this afternoon reflects the impact of our convertible notes which were paid down in December and will reduce our fourth quarter weighted average diluted share count by approximately 18 million shares from the third quarter calculation. Guidance does not include any impact from future stock repurchases.
So once again, thank you for joining us this afternoon. I’m pleased with our third quarter results and we look forward to taking your questions.
Now, I’ll turn the call over to Kelsey.
Thank you, Nancy. As the Operator is polling for questions, I would like to inform you that CA is presenting at the Pacific Crest Data Center Conference and the Goldman Sachs Technology and Internet Conference on February 24 in San Francisco. The UBS Software Conference on March 4 in San Francisco; the Raymond James Institutional Investors Conference on March 9 in Orlando; and the Jefferies Global Technology Conference on March 10 in New York City.
We would also like to invite you to our product portfolio overview being held on March 11 at our offices in New York City. RSVPs are required; please contact CA's IR team if you're interested in joining us. And finally, please mark your calendars for CA World, which start May 16 and it’s being held in Las Vegas. Registrations will be forth coming.
Operator, please open the call for questions.
(Operator Instructions). And we’ll take our first question from John DiFucci with JPMorgan.
John DiFucci - JPMorgan
Thank you. Well, congratulations Bill, and just wanted to say congratulations to you and I was wondering if you can tell us is there anything, you’ve been involved in the strategy for CA for a while now, but is there anything as CEO in this role that you see as opportunity for you to sort of comment and perhaps show some improvement and any areas?
Thanks John. This team has been very involved now for coming on to year in the strategy the board has been involved that I was in my role as Chairman of the Board, now over the last five months, I’ve gotten the chance for see it how close with this team and focusing more on even the market opportunity is driving that right club right virtualization management. And I think it's just has as position perfectly for where we want to go for the opportunity and it builds offer where we’ve been. So, I think just going with this team as we’ve done, if you seen in this quarter and pushing that forward we’re excited about where we are John.
John DiFucci - JPMorgan
Okay, thanks and I’d agree about your comments about the team. And I have question for I guess Mike and George looks like bookings were strong this quarter both year-over-year, which is looking at bookings to generally look pretty strong here. I guess whether any very large deals this quarter and I guess Michael last quarter I think on the call had would mentioned you saw some strong renewal periods over the next couple of quarters and you still feel that way coming to the March period?
We do in terms of overall bookings we saw very nice growth in new software licenses, which was good to see as I mentioned we saw nicely bounded as we came of out of September and those flashed it all the way through the fall. So, we’re pleased about that we have seen the turn of the corner and services. Although our services revenue was down our services bookings were awesome we’ve seen that rebound and geographically EMEA and Latin America rebounded nicely from a weaker September quarter. In terms of the renewal book, as I described in the last call the renewal book in the second half of the year is bigger that it was in the first half of the year and the renewals are scheduled roughly equal between the third and fourth quarter. So, everything is coming in as planed the renewal yields are in the low 90s so we feel very good about the business across the board.
Hi, John this is George Fischer, just a kind a comment on the macro IT economy seems to be a wakening too and more importantly for us. So, when we’re involved in POCs on new product side, we are doing very well competitively. So, we’re getting some good traction both with security and service insurance and (inaudible) will less also this quarter creative lot of excitement around the network management component. So, lot of good activity pipelines are strong.
John, as I mentioned in the last call and I can repeated again here, the pipelines have grown each week since September and that continues through the month of January we have the biggest pipelines we’ve had in a very long time and they cover the commitments that Nancy is made in terms of our guidance. So, we’re still pretty good about the business going in to the rest of this quarter and into next year.
Next we will go to Phil Winslow with Credit Suisse.
Phil Winslow - Credit Suisse
Hi, guys and just wonder if you gives us some comments on what you say in your distributed business and you mentioned your continued strengthen and mainframe, but curious what do you’re seeing just in the quarter and distributor with the pipeline looks like you have been, build is more of strategic level questions obviously one of the big focus at CA has been lifting just the top line growth rate of the company, what do you see the things or the primary drivers about the might be different then before you took over? Thanks.
Hi, Phil, this is George Fischer. Like just mentioned the John we’re getting some very good strength across of the distributed product line particularly on the security front with identity management and access also network management anything to do with service assurance where you have that with we have lots of applications that are network reliance we’re very, very strong. So, good growth and again the security we were very happy to see double-digit growth across security let shows the customers are opening up the volitions enterprise engagements also both security and service assurance are showing some traction for cloud ennoblement. And that’s a big stepping stone for us and is very exciting to see that activity.
Phil Winslow - Credit Suisse
So, on the strategy piece I think you see this quarter on and as reported at 8% and constant currency of 4 we started to drive some of that growth we’ve been talking about and it comes also notable things some was mentioned by Mike a minute ago he and George made significant management changes and with Tom and EMEA and in the service organization they’ve realign those to drive more there so we see more coming from that part of our business we expect that to continue. So I think just on business as usual we see the growth starting to come back cap of the business the way we want it.
In addition to that some of the acquisitions we’ve made contributed that very well it goes late of the opportunity in the marketplace, it builds with our strength and as that incorporates into the significant development organization we put to place in place of the last three years we’re able to take advantage of that capability those people and put together that capability will always go we build in to marketplace allows us to growth with the real opportunities to start grow emerge. With add to what George and Bill said last quarter mainframe new license sales were our number one contributor and the biggest gainer. In terms of the distributed portfolio the biggest contributors were application performance management infrastructure management and identity and access management in that order and the biggest gainer year-over-year in the distributed portfolio where identity and access management service management and clarity. So if you look at that we’ve touched on nearly everything in the portfolio had some good story in that quarter and we see the pipelines showing that continuing in through this quarter.
And next we have Abhey Lamba with ISI.
Abhey Lamba - ISI
Thanks, Nancy can you talk about we see a good acceleration in your current revenue backlog goes. What are the drivers behind that to see that growth and should we see that acceleration to continue?
We’re very encouraged by that and I think it's really function and what you’ve just heard we’ve got solid sales in new products and we’ve got some of that you’ve heard nicely start to articulate in application management and infrastructure management as security I mean we’ve got strong performance and we have the one that we’re impacted by the recession identity and asset management the clarity are come back and coming back strong. So those are really positive aspects for us and we’re seeing reflected in the backlog.
Abhey Lamba - ISI
How should we think about IBMs upcoming Mainframe platform should a type of our businesses more Colombia impact on the mainframe bookings?
Unidentified Company Representative
As we said in the past our mainframe business comes into two areas, we sell new products to customers new and existing customers and we saw capacity to our customers. What we have seen over the last three years is that the biggest driver for us is the contracts that are coming up for renewal for individual customers and their capacity requirements which have driven by their business the actual hardware cycle has really not had a material impact in our quarter-to-quarter or even year-over-year business its more driven by the customer dynamics. And just to add the other dynamic with our mainframe 2.0 releases we’ve been very competitive replacing competitors products has company’s consolidates we were very strong market share in general and doing a very good job of servicing the platform.
And next we have Katherine Egbert with Jeffries.
Katherine Egbert - Jeffries
Good afternoon and congratulations. I have a question on the yield Nancy you said its over 90% and was there last quarter as well, is that a new bard that we should think about in terms of you’ve been and also are giving up anything in terms in order to get that up so high?
The reason to yield is below 100% is we’ve given the customers from price benefit on the renewal they’ve removed some product or they’ve reduced their capacity in that order. In the last year or so it had almost no capacity reduction but we’ve had price reduction as the machines get bigger, the customer has more processing power in the mainframe environment, we give them a bit of a price benefit so that the price performance of that platform has improved for the customer. They expected and we want to live with that. So we’ve offset that by the growth of the overall platform. So what they’ve gained in price, we picked up in capacity and that it’s been a grower for us.
Okay. And then I just have one quick question for Bill. How long is your contract as CEO?
Don’t have a contract yet, the Board is working on that and we hope to get that posed probably next week.
And next we have Todd Raker - Deutsche Bank.
Todd Raker - Deutsche Bank
In your commentary you talked about how the company is well positioned for cloud and virtualization opportunities. Can you give us some insight in terms of where you think CA is differentiated and what you think competitively, how do you penetrate those opportunities?
Yeah, I think when we look at where this industry is going, it is going now into the virtual and cloud use where we have been for a couple of decades where our strength is, where we have our IT customer as they exited today do the kinds of things we need to do. As we move into that cloud the thing is probably talked about most by everyone of our customers both larger and small is how do you secure that in that environment. So the identity access management area that we’ve talked about earlier when I was speaking and others as well.
It truly becomes one of the main things that we need to focus on it this into that products that are put out there software-as-a-service are big and more important areas then we’re able to move into those area as well too. So what we see is what we’ve done going forward put up positions us for where we need to be to work on both with skills that we’ve acquired in the past skills that we have in our development organization to increase virtualization management as it grows into the industry and especially as moving in the cloud in the area that we’ve been strong in.
The big advantage we have is we manage a lot of physical environments. So we manage the incumbency of the physical into the virtual. So we give a heterogeneous view of physical and virtual. So we manage both and also all of the network relying applications. As Bill said, no one is going to go to the cloud and what security is excellent and the network is running. So we’re very strong and gaining market share in both those areas and you just can’t get to the cloud without getting that done.
Next we have Michael Turits with Raymond James.
Michael Turits - Raymond James
I have two questions, one of the strategy level for to Bill and then one for Nancy. So either strategically some of the discussion has been around how much of the growth company CA should be and what need to do in terms of acquisition have aggressive and how close as far from the existing business is those acquisition should be could you give us view on that Bill?
Yeah, I think you can see I think over the past quarter is now moving in the past quarter and as we look forward. We constantly look at to (inaudible) that’s the reason we do what’ve done. I mentioned earlier in our weak quarter over $600 million a year and our development for utilization for the last three years and build a tremendous development capability that thing this year before. That now coupled of with the types of acquisitions we make, when we look at the (inaudible) to the brings cloud time to technology capabilities in the former people towards. When we look at NetQoS that we did in this past quarter half the quarter that we did in the past quarter when you put those together what it does as we combined and make and buy and puts us in the market place first allows us to compete and have to be a leader as we go in to that market opportunity.
Michael Turits - Raymond James
Nancy at the beginning of the year you talked as your bookings expectations for fiscal year end I think you’ve said that excluding on our adjusting for the duration of large deal in the prior year that it more would be after a couple of points in terms of bookings and probably on the (inaudible) basins that might be down a couple of points that’s the roughly just actually that we’re on?
Michael what you’ve heard Mike say as you can expect the renewal portfolio in third quarter that be approximately with the same way in the fourth quarter and the most important thing on that portfolio is suggested point we’re bringing to it in always schedules at digit plan and that’s what it's really getting of the (inaudible) started in the 90s where they use to be substantially below that. But we feel that very controlled for managing just the way we launch, you can hear we were very encouraged by our new product sales that they are growing in the pipeline is very strong. We’ve heard Mike earlier say that our services chocking, we feel very encouraged that they have come back.
Hey Michael, let me add one thing what Nancy said, because I’ve seen the way other people described this and I wanted to make sure we’re clear. When we described a yield of below 90s that does not include any additional capacity or any new product, very important, because I’ve heard people using the term run rate. Virtually all of our deals have an improvement in run rates, because we’ve included new product and we’ve included additional mainframe capacity. So we described a yield, that’s our maintenance yield on a maintenance agreement, capacity products to product. It’s very important that we make that distinction.
Michael, I thought it be really expulsive we talk about a yield in 90s. We’re talking about a future revenue run rate over 100%.
Yes, when you include new product in additional capacity.
Next we have Sarah Friar with Goldman Sachs.
Sarah Friar - Goldman Sachs
Thanks for taking my question. A couple of things, you mentioned a little bit about wanted to drive more standalones software sales, so not that kind of big recurring deals that we’ve gotten and used it. Lets took at possibly behind that, is that customer driven, is it you are into (inaudible) you go to market and how much were blend do you think that ultimately becomes at a more steady state level?
I think the biggest advantage for us is that there’s a lot of customers out there that have very specific performance that match up to what we’re selling today. And as our coverage model matures, we’re covering more accounts and they are very pleased with the technology that we’re delivering. So we’re getting big traction on the POCs, we’re getting very good traction as you noticed from the (inaudible) and reviews on the customers relation. So we’ve got a lot of good stuff to people who want and we found that when we meet the new customers, they are very appreciative of both the support capability we have and the technology and it’s going quite well. So I also think there’s a very big opportunity for us in the emerging markets. So we have great growth opportunities, you’ll notice just in Latin America this last quarter was exclusive growth. So we’re finding, we’ll recover clients, they have needs, they are very much centered on what we’re selling and it goes really well. We’re not waiting for renewal time it’s not just our renewal, customers are very actively engaged looking what we have and they are using ops to change their capabilities, so it’s very positive.
Sarah Friar - Goldman Sachs
Can I just follow up really briefly with Bill, congratulations, Bill? You’ve been asked a lot about your philosophy overall, some are going to ask one more dimension of that which around use of cash, which I think partially heard your answer too from an M&A standpoint. But generally in a co buyback per dividend more M&A, how do you think about, how CA evolved from here given the cash flow characteristics?
Let me make a comment and have Nancy to speak with this well too. But as I said before, make and buy are important considerations for us. And we confidently survey the market place from both points and view, because when we talk about the market opportunity, when we talk about our leadership in the market opportunity, for us that by definitions as you be first to market. So therefore we look at what does that for us and try to use our assets in the best way we can that is the assets we own entirely and the assets we have in the form of cash to be able to go do the acquisitions that we think contributive directly. Let me just stop at that and Nancy do you want to comment beyond that.
So we have a very discipline capital allocation program and we’re very encouraged that we follow this build buy and we’ve do the analysis as Bill mentioned. And then we look at our remaining cash, we do to your mind of that 48% of our cash is in the US it’s not all the cash and we look at every quarter weather the right thing is to buy more shares or do something with the dividend and you can see we’re in the market right now as we speak buying back shares and we are buying against about 40 million a quarter.
And next we have Robert Rezza with RBC Capital Markets.
Thank you this is actually (inaudible) sitting in for Rob. Congratulations, Bill again. My question is around the virtualization opportunity, is there some way for you to quantify some of the large virtualization providers, so with dollar worth of virtualization software. What is your market opportunity for your management software that a $0.10 in the quarter, anyway to quantify that?
Let me just comment briefly and let Nancy then take the primary piece on that, but we think that’s a growing market place, we think it’s big in a growing market place and that we play into that as it continues to grow.
Think about it this way, what people are virtualized as what you’ve heard George says just staring on there, the physical device is right and as I said to virtualized there are going to be many more images out there that they are going to have to mange and that basically is our software. And so I think we’re in very early stages of a rapidly growing type market and maybe George can give you a comment on kind of what you’re seeing out there.
Yeah, what’s going on is that there is been some (inaudible) of how many applications have been virtualized, so there is a demand for management software to leverage both the (inaudible) and some of the other platforms that are out there. So we’re enabling applications portability and we’re driving more and more capacity and unlocking the values of these efforts in the data centers. So people are looking to increase their capacity, lower their costs. So we’re writing that alone. Of course, you also have a lot of emerging platforms from Cisco are given lot of work with the various venders that have virtualization and network appliances. So virtualization is a catalyst to lot of this growth, but it’s right in our suite bottom of data center managing these applications and systems.
And next we have (Inaudible).
Hi thank you, good afternoon and thank you for taking my question, two quick ones. You guys spoke about, I think George mentioned like the biggest pipeline, is that broad based across all product lines or there’s any product of service going on which is more specific in your description?
Hi it’s Mike, it’s similar to the ranking that we experienced in the third quarter. So at the top of the pipeline, we would put mainframe closely followed by applications performance management, the infrastructure management portfolio and then identity and access management. So what we’re seeing and I think Nancy touched on this briefly. In the last few quarters, customers have been very sensitive to return on investment and how fast do they get their payback. So we were emphasizing our very fast payback technology, things like application performance management. What we’ve seen in this quarter and we see in our pipeline is they are starting to think more about structural investing and push out those paybacks and putting in the more sophisticated technology. So it was a little concentrated at the top, the APM type products a quarter ago, but we’re seeing nice expansion across the whole list now.
Thank you this is helpful. Just one final one, 40 new customers in North America, are these are newer or these displacements?
I think you’re addressing at the growth in the clarity product, some of them are competitive placements, but I think what we’re most pleased about is we’re seeing some to Mike comments we are seeing some growth in the portfolio management market and SaaS is enabler opened up new areas for us to sell to. So we had a good economic model and could enter with new customers with SaaS. So it’s pretty encouraging and also across all the pipeline, we’re working with customers, in some cases that have not worked with CA in the past and the technology is very appealing, the covering model is working and we got the new logos and it’s very, very encouraging.
And that’s the important point. Those were new enterprise logos for that product for CA.
And will take it from Scott Zeller with Needham & Company.
Scott Zeller - Needham & Company
Hi thanks, the commentary on identity access management was interesting. Can you tell us a little bit more about what people are trying to do there, is it just single sign on project are people going deeper than that?
Hey, it’s George Fischer. Well there is two things that are encouraging about it, one is securities been a critical strategy and we built a very solid product line and it’s a huge competitive advantage again some of our competitor, they don’t have security. The second piece is that’s an indication of the customers who are opening up their wallets and going for a larger, bigger enterprise projects. So around in identity management knowing who is accessing the cloud, who is accessing the application, so it’s identity management, its world based product and it’s also leveraging our data leak, which is a huge opportunity for us, understanding who has access, where the data is and governing that whole process. As you know, we have our SiteMinder product too, which is affectively the market leader for access control across the market and we saw as budgets opened up people expanded capacity sales on that. So strong market leadership and what I would kind call cut the woods back towards security and then some nice growth and some very aggressive enterprise projects that are preparing companies to go to the cloud.
Let me add to that, this is Mike. What you’ll also see is the beginning of the return on investment from the acquisitions that we’ve made over the last year. So if you look at our security portfolio, access control, identity management, web access control, in each of those areas we’ve done a small-to-medium size acquisition to expand the capabilities of the product and we’re starting to see good traction for that significantly improved product.
No, let me ramp up with a couple of points as we do. I guess first is, we're really pleased with our third results, we’ve built great momentum. And with announcement today of the CEO I’ve been engaged here with this leadership team for the last five months on the day to day base. And we know where we want to go, we’ve seen significant market opportunity and we don’t have a transition now, we just keep going and doing what we were going to do. And then I think finally, I would say that we’ve try to be very powerful and very disciplined about the way we invest in the future. And we’ve talked about that a bit today with respect to make versus buy and how we plan to do that. So with that, thank you very much.
And that does conclude today’s conference. And we thank you for participating.
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