Bill McCracken - CEO
Nancy Cooper - EVP & CFO
George Fischer - EVP & Group Executive, Worldwide Sales Operations
David Dobson - EVP & Group Executive, Customer Solutions Group
Todd Raker - Deutsche Bank
Michael Turits - Raymond James
Gregg Moskowitz - Cowen
Kirk Materene - Rafferty Capital Markets
John DiFucci - JP Morgan
Matt Hedberg - RBC Capital Market
Philip Winslow - Credit Suisse
Katherine Egbert - Jefferies
Derek Bingham - Goldman Sachs
Israel Hernandez - Barclays Capital
CA, Inc. (CA) F1Q11 (Qtr End 06/30/10) Earnings Call July 21, 2010 5:00 PM ET
Good day everyone and welcome to the CA Technology’s First Quarter 2011 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Kelsey Doherty, Senior Vice President of Investor Relations. Please go ahead, ma’am.
Thank you and good afternoon everyone. Welcome to CA Technology’s first quarter fiscal 2011 earnings call. Joining me today are Bill McCracken, our Chief Executive Officer and Nancy Cooper, our Chief Financial Officer.
Also on the call and available to answer questions are David Dobson, our new Executive Vice President and Group Executives, Customer Solutions Group and George Fischer, Executive Vice President and Group Executive, Worldwide Sales in Operations.
Bill will open the call with an overview of the quarter. Then, Nancy will review our first quarter results and update full year guidance. Bill will return with the discussion of its operational priorities and we will then take your questions. As a reminder, this conference call is being broadcast on Wednesday, July 21st, 2010 over the telephone and the Internet.
The information shared on 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 expressed 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. Please note as we told on the last earnings call, all non-GAAP operating measures will be reported excluding share based compensation expense on an ongoing basis. Prior period non-GAAP metrics also reflect this change for comparative purposes.
Reconciliation to the most directly comparable GAAP financial metrics 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 were available on our website at investor.ca.com.
Today’s discussion will include forward-looking statements subject to risks and uncertainties and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks. So with that, let me turn the call over to Bill.
Thanks Kelsey and good afternoon, everyone. Thank you for joining us. June 30th marked the end of my first full quarter as CEO of CA Technologies and I am pleased that we met our revenue, operating margin, earnings per share and cash flow plan for the quarter. During the quarter, we focused on execution to unlock value, accelerate growth and establish our company as the industry leader in I.T. management and security for virtualization and cloud.
We also continued to invest in our core strengths in managing and securing main frame and distributed environments. We are making progress and we believe we will meet our update of financial expectations for the full year.
During the first quarter, we re-aligned our organization to make our business even more customer-centric and focused, brought in new senior talents to complement our management team, divested non-strategic I.T. governor’s products from the portfolio.
Started the process and re-branded the company, began realizing value from our newly acquired technologies and announced more than 20 new products to more than 5,000 customers and attendees at our successful user conference CA World.
From a financial prospective, revenue grew 3% in constant currency which is right where we thought we would be. Operating margins were down as expected. This was a result of expenses related to CA World and acquisitions closed last fiscal year.
Non-GAAP EPS was down 1% in constant currency and finally cash flow was in line with our expectations although down for the quarter. This was primarily a result of a decrease in upfront single installment payments. We achieved these results even though our renewal portfolio was approximately half of what it was last year. Renewal yields were in the low 90% range. These results combined with continued growth in the current portion of the revenue backlog on a constant currency basis are why we are confident in our full year outlook.
However, we also realized there was more we can do especially when we look at new product sales performance during the quarter. We saw growth in the dollar value of stand alone sales of new products meaning sales not attached to renewal.
Year-over-year, stand alone sales were up more than 30% and contributed to the more than 50% constant currency growth in our software fees and other revenue line. This quarter, standalone deals improved our front revenue and underscored the value of our product portfolio. However, improvements in standalone sales were not enough to offset the negative impact, the lighter inventory renewals had on our ability to drive new product sales.
Quarters with lighter renewal inventories generally result in lower new production sales as renewals are an important opportunity to sell new products. As a result, new product sales excluding mainframe capacity were down mid teens year-over-year.
At the same time, standalone sales which typically features shorter contract lends in combination with the lighter renewal portfolio contributed to a significant decrease in average contract duration. During the quarter, our average contract lends was 2.9 years. The lowest it has been more than 12 quarters and down from 4.2 in the prior year period.
This change in duration is reflective of customer preferences but is also influenced by our renewed portfolio causing duration to fluctuate quarter-to-quarter. Adjusting for the change in average duration, first quarter new product sales excluding capacity were up high single digits on an annualized revenue basis and help drive growth in our current revenue backlog.
While we are encouraged by the underlined fundamentals of the business this quarter, we are focused on ways to improve free standing sales, help customers in new and emerging growth markets and become an even more strategic partner to our customers.
We believe that by focusing on these key areas, we will further improve execution and accelerate new product sales. With that, let me turn the call over to Nancy to talk further about our results and our updated outlook. Nancy?
Thank you Bill. To start with, please note that all growth rates are year-over-year unless otherwise indicated. Now to the quarter. As Bill said, we saw a constant currency growth in our total revenue backlog and even more encouraging in the current portion of this backlog despite a decline in new product sales.
Let me explain, total new product sales tell only a part of the story this quarter. To fully understand the impact of new product sales on backlog and future revenues we also look at the contact duration of the new product sales in each period.
Adjusting for this difference in duration on annualized revenue basis new product sales excluding capacity were up, high single digits. This explains why our current revenue backlog prove during the quarter. Current revenue backlog is an important leading indicator of future revenue and a reason we are confident in our full year revenue expectations.
Total revenue backlog at the end of the quarter was $7.7 billion, up 2% in constant currency and flat as reported. The current portion of backlog grew 4% on a constant currency and 2% on as reported basis.
Current revenue backlog growth was driven by new distributed software sales of Service Assurance where we believe we have the most complete and compelling stack in the industry.
NetQoS grew new sales by more than 40% in the quarter. We also saw growth in project and portfolio management where customers believe our solutions are best in class. This was offset by declines in virtualization and service automation and identity and access management. We announced availability of five new virtualization management products at the end of the first quarter which have yet to contribute to our results.
And we are in the process of rebuilding our pipeline in identity and access management which delivered sequential quarters of record performance in the back half of fiscal 2010.
Sales of new mainframe products as well as capacity were down year-over-year. Mainframe sales correlate to the underlying renewal portfolio which as you know was lighter this quarter. We anticipate that mainframe new product sales and capacity will accelerate in the back half of the year, driven by more robust portfolio of renewals.
Total revenue for the quarter was $1.09 billion and grew 3% in constant currency and 5% as reported. This includes a favorable foreign exchange impact of approximately $15 million. We did see a slight sequential decline in total revenue from the fourth quarter which is attributable to currency. 2% of our revenue growth in constant currency was from products, primarily acquisition and 1% from services.
Subscription and maintenance revenue was $961 million, up 1% in constant currency and 2% as reported. Revenue from software fees and another was $52 million, up 51% in constant currency and 58% as reported.
This reflects contributions from NetQoS and CA Wily. Revenue from professional services was $78 million, up 11% in both constant currency and as reported. This quarter, we focused on completing services projects. However, we did see a deceleration in new services engagement which was a function of the underlying business.
Now, I’d like to turn to the remainder of the income statement starting with our non-GAAP results. Operating expenses were $724 million, up 8% on a constant currency basis and 10% as reported. This included cost associated with CA World and from acquisitions that closed in fiscal year of 2010. These incremental expenses are reflected in almost every expense line item. Operating income before interest and taxes was $367 million, down 6% on a constant currency basis and 5% as reported.
For the quarter, our non-GAAP operating margin was 34%; a decrease of three percentage points reflecting previously discussed investments in CA World and acquisition dilution. Non-GAAP earnings per share from continuing operation was $0.45, down 1% in constant currency and flat as reported. Our non-GAAP tax rate for the quarter was 33.5%
Turning to GAAP results, GAAP operating margin was 30% compared to 31% in the first quarter of last year. GAAP operating income from continuing operations was $324 million, down 8% in constant currency and flat as reported.
While earnings per diluted common share from continuing operation was $0.43, up 7% in constant currency and 16% as reported. Our effective GAAP tax rate for the first quarter was 28.3%.
Cash flow from operations in the quarter was a $117 million compared to $262 million in the first quarter of this fiscal 2010. First quarter cash flow operations was effected by a year-over-year decrease in single installment payments which were $90 million in the first quarter of fiscal 2011 compared to a $164 million in the prior year period.
In addition, cash flow was affected by the year-over-year increase in expenses. Cash flow varies quarter-to-quarter and we remain comfortable with our full year 2011 expectations. Total billings back log of $4.5 billion was up 7% in constant currency and 4% as reported.
DSO’s were up but we are confidence they will return to normal. Looking at our balance sheet, CA ended the quarter with approximately $2.5 billion in cash and cash equivalents and $1.6 billion of total dept, bringing our net cash position to approximately $918 million.
Between the middle of May, when our newly authorized $500 million re-purchase program was announced in June 30th, we purchased approximately two million shares of stock for a total of $40 million.
Between July 1st and July 20th, we re-purchased an additional one million shares for $20 million. This leaves approximately 440 million in remaining approval on the new program and we continue to be in the market. With that, I’d like too reaffirm guidance for revenue, operating margins and cash flow and increase our GAAP and non-GAAP earnings per share outlook for fiscal year 2011.
We continue to provide guidance for growth rates on a constant currency basis which we believe best illustrates the operational performance of the company. With the exception of earnings per share, changes in the dollar amount of the ranges reflects currency fluctuation only as we have not changed our expectations regarding growth rates from guidance given in May.
In addition, guidance presented this afternoon includes approximately $0.6 of dilution and earnings per share from the acquisitions closed during fiscal year 2010. As a reminder, it is been our practice to provide guidance based on June 30th exchange rates which include a partial hedge of operating income. Guidance is as follows.
Total revenue growth is expected to be in the range of 3% to 5% in constant currency. At June 30th exchange rates, this translates the reported revenue of $4.4 to $4.5 billion. The range on non-GAAP operating margin is expected to be 34% to 35% which is flat to up 1 percentage point from fiscal year 2010.
We expect our GAAP and non-GAAP tax rates to range between 33% and 34% in this fiscal year, flat to one point improvement over fiscal year 2010. Growth in non-GAAP diluted earnings per share from continuing operations is expected to be in the range of 7% to 14% in constant currency.
This reflects a two point or $0.03 increase to the top end of the range provided in May. At June 30th exchange rates, this translates the reported non-GAAP diluted earnings per share from continuing operations of the $1.82 to a $1.94.
Growth in GAAP diluted earnings per share from continuing operations is expected to be in the range of 5% to 13% in constant currency. This reflects a two point or $0.03 increase to the top end of the range provided in May. At June 30th exchange rates; this translates to reported GAAP diluted earnings per share from continuing operations of a $1.51 to a $1.63. And cash flow from operations is expected to grow at 2% to 7% in constant currency.
At June 30th exchange rates; this translates to reported cash flow from operations of $1.38 to $1.45 billion. This includes approximately $50 million in restructuring cash payments where the expense was incurred in the fourth quarter of last year. These payments will reduce cash flow by 3% and is one of the reasons why our non-GAAP earnings per share and cash flow from operations growth differ in fiscal 2011.
For the full year, we expect approximately 510 million actual shares outstanding and a weighted-average diluted share count of approximately 511 million shares. This does not include the effect of any future stock repurchases.
Guidance does not include the effect of any future material acquisitions. Before I turn the call back to Bill, I would like to provide additional color on the remainder of the year and the second quarter. As we have said, our full year renewal portfolio is approximately 10% lighter as compared to the inventory of renewals in fiscal year 2010.
It is also weighted towards the back half of the year. Specific to the second quarter, our inventory of renewals is approximately three quarters of last year. Due to the correlation between renewals and cash, we would expect cash flow to be stronger in the second half of this year.
We understand that currencies continue to fluctuate. So I will provide some additional color on CA Technology’s currency exposure. We hedged approximately 80% of our forecasted cash flows for six currencies, the euro being the largest component. This results in a partial hedge of approximately one third of our operating income. Therefore as a rule of sum, a $0.03 decrease in the euro affects our revenue by $12 million and our EPS by approximately $0.01 for the remainder of the fiscal year.
Using June 30th exchange rates, our quarterly revenue is negatively impacted by about $30 million when compared to original guidance. With that, I will turn the call over to Bill to conclude.
Thank you Nancy. I’ve spent a lot of time talking to customers over the past three months. And as a result, I’m even more confident in our long term direction. At CA World, I saw firsthand the reaction of our customers to the direction we are taking the company and the products that are backing up that strategy.
With our strategy clearly defined, we now have one focus, execution. Operationally, our priorities are: increasing the number of free standing sales with new products and getting them in the hands of our customers, responding to customer demand in growth geographies and growth accounts and continuing to align the organization to be more responsive to customer needs and emerging trends.
Specifically, we will grow free standing sales with new products by driving sales for the new products we introduced at CA World in May, adding new sales leadership and new quarter bearing sales people and developing and delivering new services offerings.
Second, we see demand outside our current markets and are building our global emerging markets business. Our approach includes a channel and partner strategy. We recognize that these markets will approach us and consume technology differently than our traditional customer base. This is why we purchase Nimsoft with more than 300 MSP partners and continue to invest in our software as a service capabilities.
While these initiatives will take a few quarters to show meaningful growth, we expect most of the heavy lifting and investment which has already built into our plan to be complete this year and results to start to show in fiscal year 2012.
Third, we are continuing to re-align the organization behind our strategy, creating a new customer solutions group for CSG lead by David Dobson and design to move CA Technologies from our products and quick approach to one driven by needs of customers. We are now focused on market position and improving share to leveraging our portfolio and expertise. This year is about execution.
You will see immediate impact in some areas and in others; it will take some time but is about realizing our potential, unlocking our value and growing CA Technologies. We know clearly what we have to do and we are doing it. So with that, I’ll turn it back to Kelsey and we look forward to your questions.
Thank you Bill. As the operator is polling for questions, I’d like to inform you that CA Technologies is presenting at the 12 annual Pacific Crest Technology Leadership Forum on August 9th in Vail, Colorado.
The Oppenheimer Annual Technology Media And Telecommunications Conference on August 11th in Boston, the 2010 Citi Global Technology Conference on September 7th, in New York City and the Deutsche Bank 2010 Technology Conference on September 14th in San Francisco.
In addition, we will be hosting virtualization events with Deutsche Bank on August 12th in Boston and in New York City. Please contact CA Technologies investor relations if you are interested in attending. In the interest of time, please limit yourself to two questions. Operator, please open the call for questions.
Thank you. The Question-and-Answer Session will be conducted electronically. (Operator Instructions) We’ll go to our first question from Todd Raker from Deutsche Bank.
Todd Raker - Deutsche Bank
Just diving into the new products can you highlight in virtualization, I get in management authentication has been down. Clearly, there was an impact in terms of contract lengths but two questions for you.
One, you talking about rebuilding the pipeline in identity management, can you gives us a little bit more insight in terms of what happened there in the dynamic? And if you look at some of the emerging opportunities around virtualization and automation, where do you think you stand in terms of market share?
Has the market just not really kicked in here or is it that you guys don’t have kind of production ready products into the market yet and the road maps are there but the products aren’t there yet. Thanks.
Thanks Todd. I’m going to have George answer most of that question. George?
Well, we are coming off two very strong quarters with IAM across the globe. So we had great results for IAM. We continue to see great competitive wins and we announced quite a few products envisioned at CA World.
So we are getting good growth on that. So we don’t think that’s an issue and that’s just a continuing process. In addition, across the pipeline, the new virtualization products that we announced at CA World are growing. And as you know, virtualization management continues to be in high demand.
On the mainframe side too, you see with, as our renewal portfolio gets very much stronger in the second half of the year. We continue to see a growth in the pipeline for mainframe products also. And we announced a series in new products in CA World there and you know as you know coming soon is the new "z" platform. So there’s some excitement around pipeline there also. So we are confident on the security piece because as you also know, there is consistent demand for security and service assurance or anyone that’s move into the crowd.
And Todd, you really hit it on the second part of what you’ve said. We announced those five new products at CA World. That was the back end of the quarter. And so, the GA really in most cases rolled into this quarter. So we will see that build over the next quarters. We’ll see from this quarter but over the third and fourth quarter this year, we should see that kick in.
Todd Raker - Deutsche Bank
Yeah. Just on the stock by back for Nancy, is there anything that prevents you guys from accelerating sometime in your current pace? Whether it would be cash fitting overseas versus the U.S. or it’s clearly, you’re buying more back but is there anything that prevents you from accelerating the rate at which you’re buying back?
Well, we have 46% of our cash in the U.S. and you can was $2.5 billion of cash we have lost in liquidities.
We will now go to our next question from Michael Turits with Raymond James.
Michael Turits - Raymond James
Obviously, this question, the renewal portfolios is important both for you shows up in a particular base and now you have been stressing that it pull in a lot of additional new product sales.
So are we, is this the drop? Is this the low point in that portfolio both let’s say over the last couple of years and then over the next year or two?
Sure, Michael. It is the lowest quarter we’ve had in the last 12 quarters. I did indicate on the call that second quarter will be 75% of last year. But then our renewal portfolio grows in the second half of the year by over double-digits. So, what we’ve got here is a low first half and a much better second half.
Michael Turits - Raymond James
And then another question, subscription revenues were up just 1% constant currency, they were up 2% constant currency last quarter and they have been up around 4% in prior quarters.
But seems that the subscription revenue is decelerating at the same time you’ve had a big pickup in your software fees. Is this something systematic? In another words are you shifting the type of sales from subscription to license software fees in a appropriate way?
So what you have here is, it is a reflection of the lower renewal inventory and as we mentioned that, when you annualized the revenue on new software sales, its single digit. You can see it showing up in the current portion of our revenue backlog which grew 4% constant currency.
And so, what you are seeing is the impact of second half of last year from EMEA flowing through subscription but looking forward you look at the current portion of the revenue backlog and that’s up 4%.
And Michael I think the other thing too is that we are going to new product sales, some of that comes in as a perpetual as well too. So that has an effect on other also.
Thank you. That will come from Gregg Moskowitz with Cowen.
Gregg Moskowitz - Cowen
Thank you and good afternoon. First question is for I guess either Bill or George, somewhat recently you brought on new management in Europe and I believe last quarter you saw the strongest level of new software sales in Europe in two years.
So keeping in mind the renewal portfolio and seasonality in Q1, how did Europe perform over the last three months relative to your expectations? And secondly how are you thinking about Europe over the remainder of fiscal 11?
George, why don’t you take it?
Sure, hey how are you doing? Well as you said EMEA’s portfolio, I like the broader portfolio is lighter the first half but we had very good results in terms of standalone. So as we talked about last time, we made some important changes to management and to sales over there.
And in fact as planned we’ve been adding sales people, country managers in UK, France, and Germany. So, where we make those changes and they have gelled up, we are getting really good progress both on execution and everything that we are talking about, those metric surround us and standalone sales, customer stat, etcetera.
We still have ways to go on that and we are very confident that it’s achieving plan. Despite the challenging economy, we’ve got great opportunity to grow across EMEA.
So, Gregg I think what George said, the things we’ve done are moving forward well but we do have mixed results coming out of Europe. I think it’s been generally talked about with other folks as well too.
Gregg Moskowitz - Cowen
Okay, and then just secondly, how are Nimsoft bookings this past quarter. And can you talk specifically about Nimsoft on demand. And what you are seeing with MSP’s? Thanks.
Very solid double digit growth, they added close to 40 new MSP’s, so great acceptance. The product is being well received across the markets and we continue to see great customer satisfaction and adoption at all sorts of new customers where we typically didn’t work with.
So, customer logo growth and great satisfaction. So, that product is being planned and we think that’s going to continue aggressively.
Our next question will come from Kirk Materne with Rafferty Capital Markets.
Kirk Materene - Rafferty Capital Markets
George, earlier you mentioned that the pipeline from main frame deal seems to be inching up a little bit and IBM is obviously launching the next "z" series or announcing, I guess later this week.
Could you just talk a little bit more about what’s causing the pipeline to creep up? Is it people taking up myths in terms of existing contracts that you already have? Is it you all believe you are going to take some share? I’m just trying to get a sense on what’s in the dynamics all around them if it’s generally more capacity going in or it’s something you all might be doing on or out?
Well, it’s a series of things. One is well as we’re very comfortable when IBM announces major changes to the platform. It creates an excitement in the market place you’re seeing that. We don’t normally tie that, those capacity changes because obviously we have multi-year contracts etcetera but it does creates some focus and the price performance level of what IBM is delivering is very, very good.
In terms of pipeline, there is two types of pipeline for us. As Nancy mentioned, the renewal portfolio will continue to expand the inventory through the next few quarters. So that drives both capacity and product. And at CA World, we announced a series of products. One called Chorus where it’s a whole new way to manage main frame tools sets, getting good customer reception.
So, the number of tools we have available, the vigor in the platform. And then in addition, we are doing some very specific software replacements in software rationalization.
Our services organization is created a software rationalization practice and we’re doing some pretty good size replacements there, taking advantage of vendor consolidations. So I think it’s across the board and we are hopeful that as the renewal portfolio expands, it’s going to look very good over the next few quarters.
Kirk Materene - Rafferty Capital Markets
And just one follow-up. Can you all just talk a little bit about and there has been some commentary from other companies recently just on the federal procurements cycle getting tighter, can you just talk your, I guess your outlook for that, heading into September? I’m not sure what’s your user expectations were generally if they’re fiscal year ends.
Can you just talk about maybe your view on that and sort of how that I guess messes in with your guidance for the September quarter?
Sure Kirk. I’ll take that. I’ve got, first of all we have a global public sector business. So it’s not just the U.S. public sector which is obviously the largest but we’ve got good response around the world on the public sector business. As you know, those sales cycles can be fairly long but we’re quite used to that and have the appropriate teams for that.
We just got probably the largest NetQoS order with the defense agency this quarter it was never booked. So there is a high demand in the public sector for network management in various infrastructure and they’re catching on to a lot of big projects around virtualization.
So it’s right in our sweet spot. So, we expect the next two quarters for public sector to continue to be robust. And as you know, we have a dedicated public sector organization for both state in the local and federal.
So we know the ins and outs. And we also have a fairly strong relationship set with the integrators too. So we’re tending also to get into larger projects. But it’s difficult to manage those sale cycles. It’s very good business for us.
We will now hear from John DiFucci with JPMorgan.
John DiFucci - JP Morgan
Bill, it was mentioned in the press release and I think implied in your prepared remarks that you are going to continue to make changes at the company’s operations to improve execution and accelerate the sale of new products. Just wondering if you could expand a little bit on and what are some of the things or at least what are the areas that you expect to make changes in?
I sure can John and I am going to use this. I will make some comments and I am going to use the opportunity to introduce David though for a little bit as well too, because I think he can add some additional comments around that but, you know as it breaks into a couple of pieces.
You heard George talking about the continuing changes he is making in the management structure and the sales organization as it’s related to EMEA and other geographies. He’d mentioned before, I think last quarter as well too.
We increased our investments what we call our growth geographies by about 20% - 25% this year. We are seeing strength coming from those as a result of that but that continues and there will be additional appointments that George will make in that area and then the reorganization that we did that was significant for us to align us with the market is what I would like David to talk a little bit about because we have brought David in to run that but what brings significant experience in the software industry to do that? So David if you would?
I look forward to having discussions with you on a go-forward basis when I can probably get into a little bit more detail of the businesses. I am finishing off my eight day, but let me tell you that the formation of the customer solutions group is really another example of how we are aligning our organization to be able to execute the strategy that we’ve called.
So a little bit of the background, CA has traditionally been organized around product groups and product sales and the fundamental change is really quite simple. We have taken the opportunity to align my group and my team around selected customer markets and segments.
So to give you a quick overview of what they are, we are organized around our mainframe customers, our security business our large enterprise data center, segments and customers and very importantly Bill commented on in his remarks.
We have formed a team and a new team to focus on these growth markets and customers that we have typically not focused on. So that’s a wonderful opportunity for us to extend the capabilities and technologies we have to a new set of customers.
So my team has end-to-end accountability, for our business in those selected customer segments and clearly I am working very closely with Ajei Gopal who runs now our technology and development team.
And then intersecting George’s sales and go-to market team to be able to deliver on the market requirements my team is just sensing and Bill will do that, a very heavy focus on execution.
So in short term my team has a focus on the execution of our growth strategies that we have called in our strategy to improve our ability to develop and deliver solutions for the market more quickly.
Clearly I mean he is spending a lot of time and has been on looking at our share and participation in these selected markets, considering as how we improve that as well as tapping into this new growth markets opportunity. So delighted to be part of this team and look forward to executing on the strategy.
And John I’ll take maybe one last comment that with respect to that too is that what it gives me which I particularly like is that it gives me now two senior executives, both are accountable for the total business buy out.
One looking at it from a customer solution point of view, the other looking at it from a geography and a delivery point of view. So, I think it just brings us together in a better way with entire market place.
John DiFucci - JP Morgan
Okay. Just a quick follow-up to that Bill, you just went through restructuring. You let some people go and will there will be a this sounds like actually, I guess new or a reallocated spending, I just want to understand is the net spend going to change in a positive way or is the net spending going to go up or down or stay the same or?
Well, the spending in not going up which is why we could reconfirm guidance. What you are hearing here is making sure the way we run the business is with increasing focus to deliver the results we’ve committed to in the value.
We’ll now go to Matt Hedberg with RBC Capital Market.
Matt Hedberg - RBC Capital Market
Nancy, in your prepared remarks, you talked about new product sales excluding capacity and adjusting for the change in average duration in the high single digits I believe? Could you drill to that a little bit more and I guess I’m wondering on the linearity of that. Can you talk about, did that accelerate throughout the quarter and how is that trending into the July month already here? Thanks.
So Matt, I think what you are asking the duration when some 4.2 to 2.9 years in the quarter which is a 30% difference which is what we use to annualize it and came up with revenue growth in high single digits.
That duration change tends to fluctuate every quarter and it’s a function of two things, the customers whose renewal contracts are scheduled and the number of free standing sales which tend to have slightly shorter duration.
So both of those were what will fluctuate during the quarter and drove this down to 2.9. What I think you can see that high single digits translated into a 4% constant currency revenue growth in the current portion of our revenue backlog.
So we are encouraged at pre-standing sales which grew 30% contributed to that growth.
Matt Hedberg - RBC Capital Market
And then on the mainframe side, you guys instituted a price increase July 1st and obviously the mainframe 2.0 initiatives is still fairly early, can you give us some updated assumptions on feedback from customers there and then on the price increase I again it’s early but a couple comments and that will be helpful? Thanks.
Sure Matt. I’ll take the first side of that. The excitement around some of the new announcements both from us and IBM now, really around there some excitement about that platform. So we continue to see people investing and using that to exploit the technology.
And for that reason, we’re very bullish about where it’s going to go over the next two quarters. But primarily for us, it’s very straight forward without any speculation at all as our renewal portfolio expands out; we have many opportunities to sell there. But the mainframe 2.0 initiative has been successful for us in the fact that we’ve been able to visit in Iraq with the majority of our users.
And as part of that, we get to refresh the features and make the products easier to use etcetera. So when we make those contacts, we also get an opportunity to build pipeline for new opportunity and that’s been great. And that part of the reasons we’ve been able to have the pricing we have because our customers frankly are getting good value from the products.
That question will come from Phil Winslow with Credit Suisse.
Philip Winslow - Credit Suisse
Most of my questions have been answered. But just wanted to get your perspective for what you are seeing for pricing on the mainframe? Past multiple quarters, you talked about in the relative stabilization, has that continued and it is kind of a vertical standpoint obviously financial services, government healthcare I saw some big mainframe users, do you see any changes in the industry? Thanks.
Let me first answer that your question about how price increases impact us. We have multi-year contracts and when each one of those contracts comes up for renewal we will negotiate in that 5% increase. So you will see it’s a phased approach over three years. Now I will turn it over to George for your second part of your question.
Yeah. I have not seen any major changes in the distribution of verticals or using the technology and the typical large users that have always been able to, whether its government or some of the large outsourcers that use technology very effectively.
So I see those trends continuing and again there is some excitement about IBM’s investment in the "z" platform and we are anxious to see how that drives activity and again that’s not always directly correlated quarter-by-quarter but we see some enthusiasm for that and we’ll be picking that up through quarters three and four.
We will now go to Katherine Egbert with Jefferies.
Katherine Egbert - Jefferies
The new product sales were up high single digit, how much of that was from the companies you acquired in fiscal 10?
We are encouraged by our acquisitions I mentioned earlier that, 2% of our gross product was primarily driven off the acquisition so that was good and service assurance had growth in the high 20% on this annualized revenue basis. So we feel it was growing plus it was also very complementary to our other products and now we feel we have one of the best weeks in the marketplace on service assurance.
Katherine Egbert - Jefferies
And then I think I heard you say, you are going to hire sales people this year in sales leadership. How many people are you going to hire and where are you going to hire them?
Yeah, just to be clear on that. This is the plan that we discussed all along, so it’s not outside of the expense envelope that Nancy discussed earlier in the call. We have an opportunity to pickup a lot of competitive hire, so we’ve had a good hiring run in North America and as I mentioned earlier in the call, we’ve added some very good key leadership in EMEA and also are adding folks over there.
In addition as part of the plan, we’ve added some channel in alternate loop leadership, that’s allowing us to recruit and enable some partners to exploit the strategy that Bill outlined in the alternate market side.
So, selective but CA is a good place to work right now and we’ve had an opportunity to hire talent away from our competition and we are going to continue to do that.
We will now go to Derek Bingham with Goldman Sachs.
Hi, good afternoon, it’s (inaudible) on behalf of Derek Bingham. My first question is on the global public sector referenced earlier. How much of that contributes to CA and are you seeing any difference between the government persisting behavior in the U.S. versus Europe?
Yeah. I think that what we can say about government purchase behavior, it’s consistent and expensive regardless of some of the economies. In our market specifically we have traditionally sold the very large mainframe users, we are seeing mainframe usage because of those applications but also as governments upgrade their networks and they also harness the cloud in other network and line applications, they’re investing heavily into network management, virtualization and of course security is a big issue in the public sector so.
We are seeing very much an interest for a technology that’s in our sweet spot and its growing well. One of the advantages we have, we had coverage model to address the public sector for some time where we have folks that are very well versed in how to call on a government, how to manage the process and how to work also with integrators globally. But I would say certainly that the United States continues to be a great opportunity for us.
And George hit on a good point. Well, let me just expand it slightly too and that is that with the new technology platforms that are rolling out which we’re leading the way on with virtualization and the cloud implementations, from a government point of view, they’re driving us business are to try to do more with less.
And that technology we are providing now is the path way for them to get that done. So I think that they helps us and it sends the revenue our way as we implement this strategy.
Okay. Great. And just to a follow-up on that, clarify it, have you guys not seen any change in government spending now versus six months ago?
Yeah. I would say that with the exception like I said, we go in for our largest orders ever in NetQoS in the first quarter. I don’t see anything that’s widely different and that’s probably because of the defense in the civilian agencies that we work on. And we have been involved more in EU and EMEA activities than we ever had before.
So, I wouldn’t attribute anything that we’re seeing to spend trends. Ours is just coverage model focus and the product are much more salient to what these governments are looking for.
(Operator Instructions). We’ll now go to Israel Hernandez with Barclays Capital.
Israel Hernandez - Barclays Capital
With respect to your question to virtualization management, you had a number of product announcements over to last few months; can you just speak to how you feel, maybe opportunities going to progress over the course of the next 12 to 24 months?
Do you think this is going to be kind of slow drawing key or do you think there is an opportunity here to immediately kind of move the needle in terms of new bookings. And specifically, what is the edge here that CA brings to the table relative to primarily the VMware is obviously doing a lot of good things here on the management side? Thank you.
You really almost to answered the question in your last comment. What the VMware sells and does, we manage. And so, that is the demand of I think they’ve seen that they’re pushing into the market place. That is what we announced it was five new products to go at that market place and that’s what we’ve said we are going to do when we were talking to you in the past as well too is that our strategy; we are not going into hyper visor area. We are going into virtualization management.
So we are sitting on top of what they are doing and I think you’ve seen the demand is generated as a result of that coming off what they’ve said. So as we entered this market, as we’ve been in the market with our products from the past, as we move them into the virtual and the cloud areas but now with these new introductive products, it gives them the tools to manage those things we’re riding on that growth in the market. George, can you cover a bit?
So at CA World, we had the opportunity to roll out the five new products and we hit the ground running with our service assurance. We’ve been doing a lot of virtualization monitoring. We had for some time the capability to view VM instances.
So we’re very pleased that obviously we have a heterogeneous position for all the stuff but the quarter that VMware had, that’s what we’re seeing. We’re seeing that companies are adopting virtualization of infrastructure and now they are moving to applications and it’s a combination of both Cloud and in-house applications.
In addition, we acquired Triterra and we have several blue chip companies that are adopting that to manage both public and private clouds. So we’re seeing this virtualization item just continue to be top line and it’s what people are buying right now and it’s right in the sweet spot for us as a management company.
Great. Listen, thanks to all of you. I really appreciate the time you’ve taken with this afternoon. As we have said, we have been making a lot of changes here. We are focused clearly on execution.
We are absolutely satisfied and the feedback from our customers. We are on the right strategy. We’ve done a lot as we have said to you, we move through this. We have more things we are doing those. We know how to do them and we will get those done. So look forward to talking to you in another quarter.
Thanks all of you.
Ladies and gentlemen, that does conclude today’s conference call and we do thank you for your participation today.
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