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Executives

Jonathan Doros - Investor Relations

Michael Gregoire - Chief Executive Officer

Richard Beckert - Chief Financial Officer and Executive Vice President

Analysts

John DiFucci - JP Morgan

Walter Pritchard - Citigroup

Matt Hedberg - RBC Capital Markets

Aaron Schwartz - Jefferies

Philip Winslow - Credit Suisse

Michael Turits - Raymond James

Gregg Moskowitz - Cowen and Company

Mark Moerdler - Sanford Bernstein

Kirk Materne - Evercore Partners

Abhey Lamba - Mizuho

CA Technologies, Inc. (CA) F3Q 2014 Earnings Call January 21, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen, and thank you for your patience. You've joined the CA Technologies Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. Jonathan Doros with Investor Relations. Sir, you may begin.

Jonathan Doros

Thank you, and good afternoon, everyone. Welcome to CA Technologies Third Quarter Fiscal Year 2014 Earnings Call. Joining me today are Mike Gregoire, our Chief Executive Officer; and Richard Beckert, our Chief Financial Officer. Mike and Rich will offer some prepared remarks and then we will open up the call for a Q&A session. These prepared comments were previously recorded and this conference call is being broadcast on Tuesday, January 21, 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 Technologies and is protected by U.S. and international copyright law and may not be reproduced or transcribed in any way without the express written consent of CA Technologies. 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 our 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 ca.com/invest.

Today's discussion will include forward-looking statements subject to risks and uncertainties, and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks. Please note that our fourth quarter quiet period begins at the close of business on March 14, 2014.

Before I turn the call over, I'd like to highlight that for modeling purposes our year-over-year currency headwind on revenue guidance is expected to be roughly 1 point for the full year. In addition, starting in the first quarter of fiscal year 2014, the measure of segment expenses and segment profit was revised to treat all costs of internal software development as segment expense in the period the costs are incurred. As a result, the company adds back capitalized internal software costs and excludes the amortization of internally developed software costs previously capitalized from segment expenses. Prior periods segment expense and segment profit information have been revised to present segment profit and expense on a consistent basis. Also, in fiscal '14, the costs relating to the fiscal 2014 board approved rebalancing initiative announced in May are excluded from the company's segment expenses and segment profit.

So with that, let me turn the call over to Mike.

Michael Gregoire

Good afternoon, and thanks for joining us. We had a solid third quarter driven by strong renewal business, disciplined cost control and good progress towards our long-term goals. Third quarter revenue outperformed expectations. We are increasing the midpoint of full year revenue guidance range once again. Non-GAAP operating margins during the third quarter was 39%. We are raising our full year non-GAAP operating margin guidance to 37% from 36%.

As you know from a separate press release we issued today, we have made change in our executive team. George Fischer, Executive Vice President Worldwide Sales and Service is leaving CA Technologies after a 20-year career with the company. Adam Elster, who has been running our Mainframe and Customer Success organization will lead Worldwide Sales and Service effective immediately. I have had a chance to work closely with Adam for the past year and I believe he will be an excellent sales leader who will accelerate the transformation of our sales organization, reach new customers and drive growth. He is ideally suited to this new role. He has run development teams, customer success and support, service and sales on a global basis. His business and operational skills are more important than ever as we move to a more operationally key service oriented sales model. Adam also has a deep understanding about all aspects of our company and knows how to put them to work for our customers.

As I stated through my first year here at CA, we need to move to nail the core fundamentals that make software companies great. To that end, we are focused on three primary goals. Developing and delivering innovative products, increasing market and brand awareness and accelerating our sales velocity. The first goal is rooted in strong organic software development but it also includes prudent acquisitions and the integration of products into solutions that help make our customers more competitive.

Last quarter we spoke about organic development and the launch of CA Nimsoft Monitor Snap, a feature rich solution. It is free for up to 30 devices. In the 100 days since the product was introduced, 5000 customers in 147 countries downloaded Nimsoft Monitor Snap. We are tracking well ahead of our goals for downloads, installations and pipeline generation. Following on this success, we plan to expand this strategy of freemium and try and buy software to other CA product families, giving the customers the opportunity to test our software and learn more about the value we deliver.

We believe the proper use of these models will help us lower our cost of sales and sell more software to more customers. Another example of organic software development is CA Cloud Storage for System z which we launched during the quarter at the Amazon re:Invent conference. This solution allows mainframe customers to safely, securely and efficiently backup their mainframe data to Amazon Web Services at a fraction of the cost of on-premise tape or disk. Cloud storage for System z is just one of many proof points of our continued commitment to the innovation on the mainframe platform.

While organic development over the next 12 to 24 month is at the heart of our innovation strategy, we need to increase investments and innovations in markets that will drive growth in three years and beyond. To that end, we are shifting more of our R&D spend to longer term investments that will provide us with the IP to be a technology leader in future years. Some of this spend is purely organic with investments in areas such as mobility and analytics. But we are also beginning to make some external investments to help give us insight into new software technologies that fall within our addressable market.

During the third quarter for example, we invested with venture capital firm IDG Ventures India to give CA early visibility in to the many enterprise software startups in India. We are considering investments in other regions that offer similar ROI opportunities. We are making progress in recruiting the right talent and making the appropriate R&D investments to maintain and gain leadership positions in high values areas of the IT stack such as DevOps, identity management, mobility and analytics based IT business management. Look for some key product announcements in February for both mobility and security.

A good example of the progress we are making in DevOps. As you know we made two key acquisitions in the past couple of years to take a leading position in this rapidly growing market. ITKO for service virtualization and Nolio for release automation. We have seen good growth from both products year-to-date. One of our major customers is Lloyds Banking Group in the U.K. I shared the stage CA Expo in London last October with the bank's Chief Technology Officer who talked about Lloyd's success with our CA LISA solution.

What started as a single project has grown into a multimillion-dollar investment to standardize on our service virtualization solution throughout the enterprise. Our service virtualization wins this quarter were spread across multiple industries, including newer verticals such as energy, manufacturing and healthcare. These are just a few of the many proof points that show customers are recognizing CA as the clear leader in DevOps and are partnering with us to develop and deploy applications with greater speed and quality.

We also had a healthy renewal business in the third quarter, which is a testament to the value our customers place on their existing software investments with CA. This included a four-year deal worth more than $300 million with a large systems integrator, which included new sales of product such as Nimsoft Monitor. We added nearly 200 new logos during the quarter, bringing our total for the trailing 12-months to more than 580 new logos, and we saw strong performance from our two most recent acquisitions. Layer 7, which provides API management and security, and Nolio, which I mentioned earlier.

We implemented a new integration framework and execution model to make sure we continue the market momentum in both of these highly innovative companies. While I am encouraged by our performance in Q3, our marketing and sales execution is still not consistent. This is evident in our mid-single digit decline in new products and capacity sales during the quarter. We also need more consistent positive performance in our international businesses. Our recent experience has been that some regions beat their plan one quarter and then come up short the next.

As a result of our performance so far this year, we currently expect our FY '15 revenue growth rate and non-GAAP operating margin to be similar to what we are seeing in FY '14. As you have heard me say before, one of the keys to driving sales and growth is world class marketing. So we are putting a major focus on increasing our brand and market awareness, and this takes time. More IT buying decisions are being made by the business line and IT together and they do a lot of research before they even reach a vendor. As a result, a strong brand is more important than ever.

The reality is, there is a significant gap between what the market thinks CA does than what we actually do. To close this gap, we are building a stronger, more contemporary CA brand. As well as a demand engine that will emphasize new customer acquisition. If you were travelling recently, you might have seen the new, CA at the Center, banner ads at selected airports around the world. These ads feature testimonials from customers such as British Telecom, Rackspace Hosting and many others. The British Telecom ad, for example, shows how BT employs our identity management solution to authenticate every consumer that accesses online content, such as British premier football.

The Rackspace ad shows how the company leverages the CA application performance monitoring tools to ensure the uptime of its 24*7 customer services. This is a multimedia campaign that targets senior IT and business decision makers not only with airport banners, but also with visual, social and mobile ads. You can find a link to a summary of our brand campaign the Investor Relations webpage.

Marketing also made a significant contribution to the pipeline compared to last year and drove a substantial year-over-year increase in lead volumes. That brings me to our third goal, accelerate our sales velocity, especially new sales. There is no silver bullet to new sales growth but it's something that we need to get right to drive our long-term growth. Our success will come from strong, consistent execution across development, marketing and sales. We are seeing some signs of improvement in our sales execution. During Q3 for example, we had an impressive multimillion dollar win with Energy Future Holdings, a new enterprise customer. The deal combined our security, service assurance, and automation solutions to reduce risk and drive operational efficiencies. This transaction was highly competitive. We beat out IBM, Oracle and point solution vendors and demonstrated the potential of CA when we understand our customers business challenges and leverage our differentiated IP.

As I said before, building a sales model that will accelerate our growth is an evolutionary process, and I am confident Adam will provide the leadership we need to improve or execution and increase our sales velocity. Our plan to improve sales execution has three key elements. First, we need to consistently execute strategic account planning in both our direct sales force and our partner sales force. Second, we have to increase our focus on new sales and expanding our customer base. We can't drive long-term growth unless we sell more products to new and existing customers. And third, we need to sell the value of our software without the reliance on a renewal.

A critical part of extending our customer reach and accelerating sales velocity of course, is our partners. We have a thriving ecosystem of partners who have build great franchises around CA products, such as products in portfolio management, identity management and mainframe solutions. During the quarter CA signed an agreement with Northrop Grumman, a leading global security company and an IT solution provider, that will help Northrop Grumman expand its cloud-based services in the healthcare, civil government, and state and local markets. The company will use CA CloudMinder to provide customers with a secure, cost effective identity and access management station.

In addition, global systems integrators, including Wipro and Tech Mahindra, are building practices around CA LISA service virtualization for their customers. We are also strengthening the talent on our partner and alliances team. Earlier this month, we named Alyssa Fitzpatrick as our new leader of Global Alliances and Partners for CA. She joined us from McAfee and brings leadership experience needed to execute programs that will grow our revenue and advance our long-term strategic position.

I am excited about the opportunity we have in front of us. We have laid the foundation for a great software company through investments in organic engineering and the talented people that are fueling differentia products. We are strengthening our brand and marketing and we are improving our sales efforts to sell more software to more customers, directly and through partners. Now we need to accelerate the velocity of our execution.

With that, I will turn the call over to Rich to review our third quarter financials and full year guidance. Thank you.

Richard Beckert

Thank you, Mike. Before we get started with the quarter review, let me let me remind you that all comparisons are year-over-year and in constant currency unless otherwise indicated. This afternoon, I'm going to focus my comments on the key business drivers and performance indicators for the quarter. The balance of our financial details can be found in our supplemental and press release.

Q3 total revenue was $1.16 billion, down 2%. Mainframe grew 1%. Enterprise Solutions declined 5% and Services grew 4%. On an as-reported basis, Q3 renewals were up approximately 50% and include the impact from a four-year system integrator renewal. Excluding that large renewal, our Q3 renewals were up high-single digit as reported. We continue to expect fiscal 2014 renewals as compared to fiscal 2013 to be at high-single digit as reported, excluding the large customer renewal that closed in Q3. As a result, we expect our Q4 renewals to be down year-over-year as reported. Our Q3 renewal yield was in the low 90s.

Within our Q3 results, total new products and capacity sales were down mid-single digit as reported. Our Q3 new product sales performance was mixed by region and customer segment. New sales associated with renewal opportunities performed well in both North America and Latin America. North America sales outside the renewals also performed well. However, overall EMEA and APJ performance was below our expectations. In our mainframe segment, capacity declined more than 15% as reported and new product sales were down more than 20% as reported. Our new mainframe product sales and capacity growth can vary on a quarterly basis. We expect our mainframe revenue growth to be in line with historical trends.

Enterprise solutions new product sales were up low-single digits, primarily due to new sales attached to renewals and the performance of our recently acquired products, Layer 7 and Nolio. New service engagements were up 3% as reported. From a balance sheet perspective, current revenue backlog was flat. This reflects a combination of our year-to-date sales performance offset by a favorable year-over-year impact from a large system integrator renewal that is now entering our current backlog.

Q3 non-GAAP operating margin was 39%. Our segment operating margins were 62% for mainframe, 15% for enterprise solutions, and 4% for services. As Mike noted, we are raising our full year non-GAAP operating margins to 37% from 36%. Please note that we expect typical Q4 seasonality in the business along with the full impact from many of the investments we have made in the last few months.

Turning to GAAP. Our operating margin came in at 29%. Q3 non-GAAP diluted earnings per share was $0.84, up 33%. Remember 26 points of growth are driven by the completion of the federal income tax exam. GAAP diluted earnings per share was $0.51, down 7%. Our Q3 non-GAAP tax rate was 14%, reflecting the completion of examination of our federal income tax returns for fiscal years, 2005, 2006 and 2007. Our GAAP tax rate is 27%.

Our Q3 CFFO of $429 million was affected by the items we outlined during our investor presentation in May. Let me walk you through the year-over-year headwinds. $73 million incremental cash taxes. This includes the current year impact of the transitioning to a more balanced quarterly cash tax payment schedule. Fiscal '14 rebalancing payment of $19 million; and a reduction in capitalized software development of approximately $40 million. Single installment cash payments were down slightly year-over-year.

Current billings backlog was up 3% and impacted by similar dynamics as our current revenue backlog. We ended Q3 with approximately $1.07 billion in net cash. During the third quarter we paid $113 million in dividends and repurchased more than 4 million shares for approximately $140 million. We are authorized to repurchase an additional $167 million of common stock which is expected to be completed by the end of fiscal 2014.

Turning to guidance. Updated guidance is based upon exchange rates on the last day of the preceding quarter, which was December 31, 2013. This includes a partial hedge of operating income. Total revenue is now expected to be negative 2% to negative 1% in constant currency, an increase from our prior guidance of negative 3% to negative 2% in constant currency. This translates to reported revenue of $4.52 billion to $4.57 billion. Non-GAAP diluted earnings per share growth is now expected to be in the range of 21% to 24% in constant currency, an increase from our prior guidance of positive 17% or positive 20% in constant currency. This translates to reported non-GAAP diluted earnings per share of $3.05 to $3.12.

GAAP diluted earnings per share is expected to be in the range of negative 3% to flat in constant currency, an increase from our prior guidance of negative 7% to negative 4% in constant currency. This translates to reported GAAP diluted earnings per share of $2.01 to $2.08. Cash flow from operations is expected to be in the range of negative 30% to negative 24% in constant currency. This translates to reported cash flow from operations of $960 million to $1.04 billion. Guidance does not include the effect of any future material acquisitions.

Underlying this guidance, we expect our GAAP and non-GAAP tax rate to be 14%. At the end of the year, we expect approximately 439 million shares outstanding and a weighted average diluted share count of approximately 448 million shares. For modeling purposes we would like to provide you our initial expectations for fiscal year 2015. Excluding the impact from the large customer renewal this quarter, we expect our fiscal year 2015 renewal portfolio to increase low to mid-single digits compared to fiscal year 2014. As a result of our fiscal 2014 performance, we expect our fiscal 2015 revenue growth rate to be similar to fiscal 2014. We expect our fiscal 2015 non-GAAP operating margin to also be similar to fiscal 2014.

And now I will turn the call back over to Jonathan and we will take your questions.

Jonathan Doros

Thank you, Rich. As the operator is polling for questions, I would like to inform you that CA Technologies is presenting at the I would like to inform you that CA Technologies is presenting at the Stifel Technology, Internet, and Media Conference on February 11; The Raymond James Institutional Investor Conference on March 4; the Morgan Stanley Technology, Media, and Telecom Conference on March 5th; and participating in the Pacific Crest Emerging Technology DevOps Panel on March 4. In the interest of time, please limit yourself to two questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John DiFucci of JP Morgan. Your line is open.

John DiFucci - JP Morgan

A question for Mike and then a follow-up for Rich. Mike, you said that Nimsoft Monitor Snap, it sounds like you are getting good momentum with the free downloads and pipeline generation. But are you yet -- because this is sort of, this is an experiment to look at and now you are going to be doing it with some other product too. Are you yet seeing any traction as far as paid purchases of Nimsoft or is it still just too early to tell?

Michael Gregoire

No, John, it's a great question. We are seeing, as they move through pipeline progression, we are in a state with less than 10 but more than 5 transactions where we are moving from free to some level of paid purchase, or an evaluation where we are in the final stages of a selection.

John DiFucci - JP Morgan

Okay. Great. And that’s what's giving you confidence to certify this model more broadly?

Michael Gregoire

It's more than that. When I take a look at how technology buyers buy, by the time they are getting ready to purchase something, they have done a fair bit of research already by reading white papers, by going to company websites. It's just a progression of people buy. And I think we have absolutely fantastic products and if we can get them to touch and feel them, see how they work, see the Christmas of the user interface, the ease of use, I think that puts in a situation where we are more competitive, not less competitive. So it's all in the evolution. And what I think happens as people try to buy software, so the more opportunities we have where a net buyer can really see the value with their own data set, in their own environment. I think that puts us at a higher competitive advantage.

So we are definitely looking at that for Nimsoft service desk sometime in the first half of this coming year. And we are also doing something similar with our perpetual products. Like if you want to do a try and buy with ITKO, we set up a lot of different proof of concepts. I would say more than 20% and probably less than 50% of almost all of the purchases happen by the customer touching and feeling and seeing the application at work. And that leads to some spectacular results. We featured Lloyds in the press release here. You know that was a very small transaction, a mezzanine transaction that turned into a multimillion dollar, standardized platform for a very well respected, very technical savvy company.

John DiFucci - JP Morgan

Great. Thank, Mike. And I might, Rich, and maybe Mike, you might have some color on this too. Rich, you said Q4 renewal portfolio was going to be down year-over-year, I think.... [Technical Difficulty]

Operator

Thank you. Our next question comes from Walter Pritchard of Citi. Your line is open.

Walter Pritchard - Citigroup

Just, actually maybe a question where John was going, just trying to get a sense on the renewal side. First you had this large SI transaction in the quarter. I am trying to get a sense of, was that a transaction that was expected to close in Q3 or is that a transaction that you expected to close sometime next year and it happened earlier.

Operator

Ladies and gentlemen, please remain on your line, we are experiencing technical difficulty. Please remain on your line for just a moment. Mr. Prichard, if you could hold your question for just a moment. Yes, sir. We are in middle of a question from Mr. Pritchard. Mr. Pritchard, you can proceed with your question, sir.

Walter Pritchard - Citigroup

Can you hear me now?

Michael Gregoire

Sorry, Walter, we got disconnected, I apologize.

Walter Pritchard - Citigroup

Okay. So I guess the question, two questions. First, just related to the $300 million systems integrator contract that you signed in the quarter. I am wondering was that a contract that you expected to close sometime in 2015 or was that a contract that you had in your pipeline and was part of what you are thinking in terms of renewal portfolio this year?

Michael Gregoire

It was going to happen this year. It naturally would have expired in Q4. But the customer and us came to an agreement early. And that’s a transaction that we are very happy with. That included net new product. It's a very powerful systems integrator that does an awful lot of work and a lot of their product portfolio in the cloud is featured using our product. So that was a big win for us. And it also -- it's a big body of work to get a contract like that done. I am very happy to have that done in Q3 so we can focus on the other larger contracts in Q4.

Walter Pritchard - Citigroup

And them Mike, Mike or Rich, just related to the renewal portfolio and you have given some preliminary guidance for fiscal '15. Could you talk about what you are expecting in terms of the renewal portfolio for fiscal '15 and when should we expect the revenue and billing backlog starts to stabilize and maybe even go positive.

Richard Beckert

Okay. How are you, this is Rich. So excluding the large system integrator we expect next year to be low to mid-single digit growth for the renewal backlog. And as you saw, currently the revenue backlog turned to zero this quarter, a little bit of a false positive because of the large system integrator. So it might pop down to slightly negative but as we continue to grow and expand you will see that pickup moving into next year.

Operator

(Operator Instructions) Our next question comes from Matt Hedberg of RBC Capital Markets. Your line is open.

Matt Hedberg - RBC Capital Markets

Mike, in your prepared remarks, it sounded like -- well, first of all, we are going to hear more updates from a product perspective in February. But I am wondering, maybe you can give us some hints as to where you guys could go on analytics, that certainly remains top of mind for a lot of IP buyers we talk to.

Michael Gregoire

Sure. It's early days for us in analytics, but there is two projects that we have ongoing right now. Both of these projects are being run out of our Silicon Valley R&D center. One of them is taking a look at all of the log data that we have, primarily with our APM product, and a lot of the IM and Nimsoft product. And looking for correlations into how to get to predictive downtime and help systems operations people predict and take corrective action earlier. The other area is in our mobility application, which we are going to be launching in the back half of the calendar Q1, and there is a number of analytics that are built into that application, but I would like to take it to a higher level. In the same way that every application you know four or five years ago stopped separating the application from the reporting, we are getting to that place with analytics. I think it's going to be very commonplace to have analytics built into just about every product in the same way that you can't build a product without a highly usable user interface.

So this is technology and a platform and a methodology that we are feathering through all of our products. And I think it's going to be standard commonplace, not just for us but just about everybody in the industry.

Matt Hedberg - RBC Capital Markets

That’s great. And then, Rich, enterprise margins were impressive, 15% this quarter. I guess a two point question. Can you remind us again, longer-term where you think enterprise margins could go? And then second, should we expect a sequential decline in the fourth quarter in the enterprise segment similar to what we have seen in the last few years.

Richard Beckert

Right. So a couple of things. One, you have the historic Q4, you know you have more things coming due, as an example commissions. So that will put downward pressure on that. But you have to remember at the beginning of the year we removed $100 million worth of sales, and that will flow through going out over time. So as we build out -- we don’t give guidance by individual piece parts, but as you'll recall we said, in a business as large as that we should get into the high teens over time. It's just a question of when we get there. And that will be a balance between the top line growing and us becoming more efficient as we go to market with all the things that we have laid out in this evolution that we are working on.

Operator

Thank you. Our next question comes from John DiFucci of JP Morgan. Your line is open.

John DiFucci - JP Morgan

Yeah, just a question on the renewal portfolio. Rich, you said Q4 renewals, that renewal portfolio will be down year-over-year. So I guess that will have a negative effect on the year-over-year bookings growth. I guess if you can talk and Mike if you have any color on this, talk about your efforts of building that pipeline outside the renewals cycle. Because that will, at least in the optics will probably will be more important next quarter.

Richard Beckert

Sure. So if you recall, in the beginning of the year we moved roughly 10% of the sales force from overlays into direct quota carriers. And they all went to non-ELA accounts. So as we move through that evolution, you will continue to see us build that out rest of the year. And takes a while for that relationship to start and so as those relationships are happening, in fact North America had a pretty good quarter outside the renewals cycle in this quarter. So what we need to see is that to happen consistently in places like Europe in order for us to really move the needle year-over-year. I don’t know, Mike, if you would add anything to that?

Michael Gregoire

Yeah, I'd echo what Rich said as in other strategies we are putting on place. First of all, it's been long time talking but we are definitely doing, separating the renewal from the going after net new accounts. And the same management structure is responsible for both. We hang around the renewal far too often. And you are seeing us evolve quarter by quarter, stripping that down. Coupled with that, when I take a look at the total sales population, how many of those sales professionals carry direct quota, the ratio has got to go up. And we have done that already throughout the year and once again as we evolve, John, we are going to continue to do that. I want to have more sales professionals that have targeted accounts that are necessarily based on the renewal or they are separated from the renewal.

And then it just comes to sales hygiene. When we are selling and we have some of our net new products, we are demonstrating a lot more discipline from having those net new high value products discounted at the same rate as some of our more mature value-oriented products. It's always frustrating to me and there is a telltale sign when we are doing a large renewal and one of our value products just starts to show up in the sales cycle towards the end of our renewal period. And we are just being very disciplined that that product is not going to get stuffed into the renewal. There is just too much value in there and we have to show the value of that product so we can continue to invest in it.

These are the kinds of things that we have been working on each and every quarter and we continue to evolve. And we are going to continue to do that all throughout 2015. With Adam on board and his background is a tight operator, I think we are going to see pretty dramatic improvements into our sales efficiency and effectiveness. We have four models in our company. We execute very very well one of them, which is enterprise licenses. We have to sell SaaS. We have to sell all of our products to net new customers and when you take a look at our partner ecosystem, I think there is work to be done to accelerate our partner ecosystem.

So I am very pumped up with some of the changes we are making in sales. I like an evolutionary approach as you well know, but now is the time to start taking a look at multiple things happening at the same time instead of single threading some of our changes.

Operator

Thank you. Our next question comes from Aaron Schwartz of Jefferies. Your line is open.

Aaron Schwartz - Jefferies

I had a question on the large SI deal we made in the quarter. I think you said that was a $300 million plus deal over four years. And so if we just assume the best way to look at that is sort of a straight line over the four years in terms of what is added into the backlog numbers. If I make that assumption, it seems like current revenue backlog now, excluding that deal would have been flat sequentially, September to December. Which I think is rare for you given the seasonality, you usually see some growth there on an absolute dollar basis. If that is the right assumption for the treatment of that deal, can you just walk through what you are not seeing to increase that current revenue backlog in a seasonally stronger period?

Richard Beckert

Well, we had said earlier it did give you a slight false positive, which is what I had said earlier. So you will see that get back down which is really why the revenue backlog should really start to build in the first part of next year. We are actually quite happy with the renewal yield that we have been getting out of our renewals. You see that's been in the low 90s all year. It's first time we have had that consistently in the low 90s. And you see that benefit showing up in the subscription line. So Aaron I think we are on track as far as how we are doing the renewals. As Mike talked about earlier, it's really getting us to sell outside the renewal cycle and to consistently have our total new sales grow.

In the quarter, we were happy that ES did grow in the quarter, both with the renewals and standalone, but it was really driven primarily by the Americas, both North and South America. We need to see that around the world on a lot of things that you just heard Mike talk about is to go drive just that.

Operator

Thanks. Your next question comes from Phil Winslow of Credit Suisse. Your line is open.

Philip Winslow - Credit Suisse

Just a question on the enterprise solutions segment. We saw another recent revenue rate, year-over-year decline there. And I understand there is obviously a big gap sometimes in rev rec and billings, but what do we need to see to start to turn that enterprise solutions line around and get that back to growth and then I will just have one quick follow up after that.

Richard Beckert

As we had just said, we really need Europe predominantly to be able to sell consistently across the board. What we see is in certain quarters, particular countries do well. We don’t tend to have them hitting on all cylinders. And even though they are participating very well in their renewals, so that the 90s, low 90s, they are sharing in that, what we are not really getting is enough net new outside of the renewal cycle. So in a place like Asia this quarter tend to have a lower renewal cycle then they show up as a lower overall growth rate. So I think the things that we are currently working on to move quota carriers out into these areas, we will see that turn a lot of the new products that Mike talked about earlier and that we will announce over the next couple of quarters, also will drive that.

Michael Gregoire

And then Phil, it comes down to basic blocking and tackling. There are things that from an execution of view that I think we can do better at. And it's one of the reasons why I wanted someone who had a very strong operational background that knows how to run things of complexity and will do that all day, every day, in the senior sales position. Because I look at some of our account planning and it's not nearly as sophisticated as that needs to be. We are a company with a broad portfolio that competes with other companies with broad portfolios, but we also compete with single point products. We have to seal the right sales team at the right time and we should know that before we engage. And some of those decisions need to be made quicker, they need to be made faster. And Europe is a great example where we are probably not as crisp on that as we should be. And I think we can make some material improvements in how we execute across the board.

Operator

Our next question comes from Michael Turits of Raymond James. Your line is open.

Michael Turits - Raymond James

Yes, strong quarter. Questions first on the SI deal and then on cash also. On the SI deal, I just wanted to make sure we understand the structure. Is this a standard structure where it's paid essentially, as cash annually over the period and rev rec over the period, and make sure we understand the impact on the income statement of this quarter. And then I had a question about the cash flow.

Richard Beckert

I think Mike, I'll make sure I understand your question. It's a normal four-year transaction. The payments flow in a very even manner, so it's not front loaded or anything like that. And in fact I would tell you that this deal closing one quarter earlier really didn’t even impact the cash that we were expecting for the year. So that really is going to flow in a normal manner. It is all ratable revenue. So I hope I answered that question. We are happy with the renewal we had. As Mike said, we are happy with the new product that went in with that as well. So all in all, it was a very good partnership between the two companies. We left that renewal with a strong partnership than before we started that renewal process.

Michael Turits - Raymond James

And then on cash flow, there are two parts. One, you raised the guidance on the income statement but not on cash flow for this year. And also as we start to look into next year on cash flow, there were a lot of unusual items in this year's fiscal '14's cash flow. Can you just give us some idea what the primary puts and takes are? On this year if we wanted to try to look at next year on an apples to apples basis.

Richard Beckert

Sure. So if you were to normalize everything out so far, cash flow is roughly flat in Q3 and year-to-date. Just to remind people, the cash flow headwinds for taxes hit the $178 million and the rebalancing year-to-date is at $81 million. And as you recall we have the capitalized software that you can see coming off and that’s another $18 million year-to-date. So as those things either end because we will have finished our taxes through -- in fact we finished that piece of that in Q3 here, the rebalancing will go the rest of this year and into part of the early half of next year. And then you will have an ease in compare with the software cap. So that is a benefit and you will see the overall CFFO go up year-over-year.

Now that being said, we want to remind you though that, and it gets back really to the earlier question, until we see our transactions outside the renewals happening on a consistent basis, we really want to be prudent with where the economy is. We want to be prudent with how we talk about CFFO going forward. So we think we have struck at the right balance. We are comfortable with the current guidance that we have given. And by design the headlights we talked about for '15, you will hear what our guidance is in May.

Operator

Thanks. Your next question comes from Gregg Moskowitz of Cowen. Your line is open.

Gregg Moskowitz - Cowen and Company

Most of my questions have been asked. I just had a question for Rich. Over the past two quarters, your operating margins have been trending around 40%. Just wondering if you would talk to the increments on that that are planned for fiscal '15 with regard to your guidance for roughly 37% margins next year. Thank you.

Richard Beckert

Right. So what we talked about for headlights. Remember, I am going to give guidance in May. So the headlights that we gave out the pieces off was really to talk about, you should expect the margin similar to the margins that we -- our new margin that we just posted. And I think that really hopefully addresses the question you are asking, right.

Gregg Moskowitz - Cowen and Company

It is. And then a quick follow up. If you could talk to what percentage, Rich, of your new logo bookings perhaps go into FFO as opposed to subscription.

Richard Beckert

I don’t have that level of detail but the way you should think about, by definition if it’s a new logo, they are normally going to be standalone transactions. They won't have had any ELA before because it's a new logo. So be definition it will all flow there. Now remember inside of that FFO you have our entire SaaS portfolio which is growing year-over-year and sequentially. So they both all fall into that category. Over time it might start as a few hundred thousand dollar transaction, when the bigger transaction shows up that will no longer be viewed as a new logo. And at that we might start to introduce other products that maybe we will go out [ph]. Is that helpful?

Operator

Our next question comes from Mark Moerdler of Sanford Bernstein. Your line is open.

Mark Moerdler - Sanford Bernstein

Most of my questions were asked, one quick one. Mike, any sense on when do you think you will start to see product sales on the enterprise side start to improve from all the new products that you bring into market. When it will be visible?

Michael Gregoire

Well, we see it already in North America and we had a very nice quarter in Latin America. And we have some issues outside of, both in Asia and in Europe where we do a really good job at ELAs. The company does that on a global basis better than any company I have ever seen. It's just that the way that software is being build today and the relationships we have with customers are changing very rapidly. And I think that across the board we consistently need to understand how to sell SaaS, how to sell net new products to net new customers, how to sell net new products to existing customers and take advantage of our partner network. You know the partner network has thousands of sales professionals all over the world that not only know how to take our software but also add their own incremental value to it. And I think that we can do a lot more with those partners on a global basis.

So we are in a transitionary period of how customers buy and the kind of products and the way those products are delivered. And we just need to accelerate our own understanding of that and get our marketing, get our products and our sales working together in concert all day, every day, where it's not so lumpy. So I think we are well on our way. We understand what we have to do. We have to get to the work of doing it. Now once again, I would like to take a very evolutionary approach to sales. What I don’t want to do is disrupt the 500 large customers that we have, that have significant operations with us. They like their sales professional that they deal with. I want to keep that as stable as possible. A lot of this has to do with moving to the new open wide space. There are literally thousands of customers between 300 million and 2 billion that we don’t deal with very well. We need to have a marketing program in place, we need to have sales professionals that know how to hunt in that particular segment.

And then once again, we have to be very disciplined with our partners. It's always a mistake when you have a direct CA sales person and a partner at the same account. And I got to say from experience, it happens far too often. We need to have our direct sales force in the place where nobody is or have our partners in a place where we are not and try to sell more. Is that helpful, Mark?

Mark Moerdler - Sanford Bernstein

No, that’s very helpful, and I do appreciate it. One quick for Rich. How much of the cash is in the U.S. at this point?

Richard Beckert

41%

Mark Moerdler - Sanford Bernstein

Excuse me?

Richard Beckert

41%.

Operator

Our next question comes from Kirk Materne of Evercore Partners. Your line is open.

Kirk Materne - Evercore Partners

I guess, Mike, just to follow up on a point you're making about some of the smaller customers. Do you think, I guess right now the sales model, do you have the requisite, say, telesales model in place to do things like a freemium model. If you want to experiment with that? I guess if you saw some success with Nimsoft Snap, just for example, do you have the right go to market mix? Because that is a little bit of a different type of sales model than your traditional model. So if you saw success in that...?

Michael Gregoire

I think you are 100% right on. We have it but we need to expand it. And that’s part of the plans that we have going forward of getting the right amount of headcount into these kinds of techniques of getting higher quality leads with lower cost sales engine. When you take a look at our total population in sales and how many of them carry direct quota, we still have some work to do there.

Kirk Materne - Evercore Partners

Yes, it did. Thanks. And is that incremental expense, I guess when you think about your initial fiscal '15 guidance or is that -- can you reposition a lot of what you have on board already?

Michael Gregoire

No, I think this is repositioning. When I take a look at across the board, some of these new techniques are getting lead generation, they cost a lot less then the way we currently do it. The way we currently do it today I think is very bespoke, very expensive. It is one of the reasons why we are so attracted to having Lauren come on board to run marketing. As she has build digital marketing channels before and she has also brought in a number of people that she has worked with in the past. So they are not learning on the job. This is all about experience marketeers that really understand digital, that can get information into our sales force automation system and then have the right kind of sales professional go after the particular opportunity.

We are getting much much better at doing that. I think our sales force is starting to understand the value of being able to do that. They are not wasting their time on sales campaigns that have low probability of close. So I think across the board I would see traction on a global basis and it just takes a little bit more time than most people would like and we are going to be at this all in FY '15.

Richard Beckert

The only thing I would add to that, Kirk, we spend a lot of the money you hear us talking about, was getting some of our systems up to speed so that we can now have a lot of these things track electronically. So that’s a lot of the incremental investment that we did in the back half of the year, everything Mike just said.

Kirk Materne - Evercore Partners

Great, thanks. And Rich, just one quick follow up for you. You mentioned the renewal portfolio will be up low to mid-single digits in '15, if you excluded the large customer this quarter. I guess if you are looking at it more on a reported basis, will that be up or is it down? I'm not trying to gauge the exact size, I'm just trying to get directionally, as we build our models out.

Richard Beckert

I am not sure I follow your question.

Kirk Materne - Evercore Partners

Sorry, I guess if you included the large customer, is it down year-over-year in fiscal 2015?

Richard Beckert

Correct.

Kirk Materne - Evercore Partners

Okay. Thanks.

Richard Beckert

And as you know whenever we talk about the large system integrators, we always back those out of our discussions as we showed back in last May, when we showed you the bar chart. We do that on purpose because they are an anomaly.

Operator

The last question comes from Abhey Lamba of Mizuho. Your line is open.

Abhey Lamba - Mizuho

Mike, in the past you've talked about plans to reduce or eliminate commissions on renewal contracts. What are your latest thoughts on that and is that being contemplated for fiscal 2015 comp plans?

Michael Gregoire

Yes, we continuously look at how do we get the most amount of value and pay and incent our workforce most appropriately. And the way we look at it, the more complex the transaction, the more you should get paid. The least complex the transaction, the least incentive dollars. So that’s philosophically where it heads at. You take a look at this renewal for the large system contractor, that was an extraordinarily well run pursuit. It required great efforts from our legal team, great efforts from our finance team, great efforts from the sales and product team. And the quarterback behind that is the sales and the management team. And they are into every cent that they get paid in commission on doing a transaction like that.

Now, if somebody is just trying to pickup nips on a renewal, you know that’s exciting. And they should not get paid nearly as much as some of the more complex transactions. As we start looking through our sales force segmenting, taking a look at their talent base, what they are good at, what it is we need, what they want to do with their career, we are getting a lot more granular with respect to commissions. And I am pretty happy with how we are looking at this.

Abhey Lamba - Mizuho

Thanks. And very quickly, Mike, you've spent a lot of time in talking about sales outside of renewal cycles especially in Europe and Asia, where it seems like they seem to be lagging behind North America for a couple quarters now. Is that something market dynamics on those regions or do you think you need to make some senior management changes in those regions within your organization to move those regions ahead?

Michael Gregoire

You know I think the leadership team we have there is more than capable of making the transition. I think it's a combination of understanding the market, getting the right product specialist in place and then taking advantage of the digital marketing. So I think they well understand what our expectations are. There is no shortage of effort and I think with the support we are getting from the rest of the company and seeing how we are able to make these transactions happen in North America, you know as you well know enterprise software is a very reference based business. Having these big reference accounts for sales outside the renewal, help us on a global basis. If you just take a look at the script that we used today, I think we had no less than five or six customer testimonials. You can't walk into a major airport right now and not see a customer testimonial of CA and what we do for customers. All of that is going to additive to helping some of our regions that are struggling a little bit, figuring out how to sell outside the renewal. But make no mistake about it, we are going to be able to sell outside the renewal, make no mistake about that.

Operator

Thank you.

Michael Gregoire

Well, with that I could like to conclude. Thank you everyone for their time on a very snowy afternoon here in New York. We are continuing to make progress on our organic product delivery. I am very happy with the product portfolio and what the team has been able to do over the last year. I think we would see that continue on going into Q4 and into FY '15. We are definitely making the right kind of evolutionary progress in sales. I am very excited to have Adam on board, to be able to work with him. And try to move us further down the field with respect to what we are trying to get done in selling to some of these white spaces where we just don’t have enough traction. So with that I will let you go. We are going to have a really strong Q4 and do our best efforts to make sure that FY '14 ends the way we want it to. Take care and all the best.

Operator

Ladies and gentlemen, that does conclude your program. Thank you for your participation, and have a wonderful day. You may now disconnect your lines at this time.

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