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CA Technologies (NASDAQ:CA)

Q1 2012 Earnings Call

July 20, 2011 5:00 pm ET

Executives

William McCracken - Chief Executive Officer, Director and Member of Compliance & Risk Committee

Kelsey Doherty - Senior Vice President of Investor Relations

Richard Beckert - Chief Financial Officer and Executive Vice President

Analysts

Philip Rueppel

Scott Zeller - Needham & Company, LLC

John DiFucci - JP Morgan Chase & Co

Philip Winslow - Crédit Suisse AG

Walter Pritchard - Citigroup Inc

Kevin Buttigieg - Collins Stewart LLC

Michael Turits - Raymond James & Associates, Inc.

Israel Hernandez - Barclays Capital

Kirk Materne - Banc of America Securities

Gregg Moskowitz - Cowen and Company, LLC

Operator

Good day, everyone, and welcome to the CA Technologies First Quarter 2012 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.

Kelsey Doherty

Thank you and good afternoon, everyone. Welcome to CA Technologies' First Quarter Fiscal 2012 Earnings Call. Joining me today are Bill McCracken, our Chief Executive Officer; and Rich Beckert, our Chief Financial Officer. Bill will open the call with an overview of the quarter. Then Rich will review our first quarter results and our full year fiscal 2012 guidance. Bill will return to conclude, and we will take your questions.

As a reminder, this conference call is being broadcast on Wednesday, July 20, 2011, 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 the earnings release, which was filed on Form 8-K earlier today, as well as in our supplemental earnings materials, all of which are available on our website at investor.ca.com. Today's discussion will include forward-looking statements subject to risks and uncertainties, and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks. So with that, let me turn the call over to Bill.

William McCracken

Thanks, Kelsey, and good afternoon to everyone. Thank you for joining us. Our customers tell us IT has become the primary vehicle that they use to adapt their business to changing market demands and become more competitive. This evolution is being driven by virtualization, cloud implementation and SaaS applications, allowing business models to change in days and weeks instead of months and years. While these technologies increase flexibility, they can also introduce significant management complexity. 18 months ago, we called this evolution and built our strategy around it when many others were asking the question is it real? Now, 18 months later, it's clear. It's real. And the rate and pace of adoption is exceeding industry estimates. We believe our years of experience and core strength in traditional IT management and security, combined with significant investments in our portfolio, will position us as the standard in the industry.

Now let me turn our progress against this strategy with our Quarter 1 results. Our first quarter showed operational improvements, reflected in revenue growth, a 2-point year-over-year improvement in our non-GAAP operating margin and double-digit growth in non-GAAP earnings per share. However, we did not get as fast a start on the year from a revenue perspective as I had expected, particularly outside the Americas. For the quarter's results from continuing operations, revenue grew 4% in constant currency, more than half of which was organic. While we remain comfortable with our full year guidance of 6% to 8% revenue growth in constant currency, we had expected better top line performance in the first quarter. We continued to see good revenue growth in North America, up 9% in constant currency. This was offset by our international region, which was down 2% in constant currency. EMEA remains our execution challenge, and cost the company approximately 1 point of revenue growth during the quarter.

Performance in EMEA continues to vary widely by country, and the sales force continues to use the ELA renewal event to sell new products. We have been successful at selling outside the renewal cycle in North America and that is how we have consistently achieved mid to high single digit revenue growth each of the last 7 quarters. We have not yet accomplished that in EMEA. We will change this. Successfully selling outside the renewal cycle in EMEA will be driven by several things. The most important of which are moving additional people with a track record of execution to the region, accelerating the introduction of new products from our acquisitions, adding new sales incentives, and changing the leadership. As a result, I recently made the decision to replace our EMEA general manager. We believe this new executive has the knowledge and experience to unlock the value of our operations in that region.

The balance of our first quarter results were good. Non-GAAP operating margin was 36%, a 2-point improvement over last year's first quarter. We are carefully managing our cost structure and focusing the portfolio on strategic priorities. Non-GAAP EPS was up 23% in constant currency, driven by operational improvements, a lower year-over-year tax rate and reduced share count. Cash flow was slightly up in constant currency, which keeps us on track to accomplish our full year outlook. This total was affected by $111 million year-over-year increase in cash taxes, which included a significant tax payment during the quarter.

Finally, current revenue backlog, a good indicator of our expected subscription and maintenance revenue growth, grew 4% in constant currency year-over-year and 10% as reported. Underlying the performance, total new product sales in mainframe capacity were up in the low teens during the quarter. New mainframe product sales were up more than 15% year-over-year. Mainframe capacity was up slightly year-over-year. As we have said, we continue to expect the new IBM mainframe to be a slow, steady tailwind as we cycle through our renewal portfolio. We had good traction with our mainframe competitive replacement program. During the quarter we closed 11 competitive replacement deals, including Federated Mutual Insurance, a provider of insurance and risk management solutions and Telefônica Brazil, one of the world leaders in telecommunications sector. As a reminder, the size and timing of the underlying renewal portfolio varies, and can affect trends in both new product and capacity sales.

In Enterprise Solutions, new sales were up low teens. Identity and Access Management new product sales, including Arcot, grew more than 70%. Customers making significant purchase in the quarter include Cox Communications, a broadband communications and entertainment company and BNP Paribas France, a European leader in global banking and financial services. Service Assurance, including Nimsoft, was up mid-teens. We added more than 65 new logos to this business, including OppenheimerFunds. In addition, Nimsoft added more than 45 new logos, including Cervalis, a premiere provider of IT infrastructure solutions, and we now have more than 410 managed service provider partners worldwide.

Virtualization and Automation and Service Portfolio Management were down more than 15%. This performance in the first quarter follows a good finish to last year, and we are in the process of rebuilding our pipeline. However, under Virtualization Automation, there was some strong performance. During the quarter, our automation suite for physical, virtual and cloud infrastructures was up more than 40%. In fact, Logicalis U.S.A., an international provider of integrated information and communications technology solutions and services, selected CA Technologies as its cloud automation and management platform. Next week, we are announcing a number of new updated cloud products and solutions that help our customers more easily use and provide cloud services. Our new solutions will drive cloud computing adoption by improving time-to-market and lowering operational costs.

Before I turn the call over to Rich, I would like to review our segment results. I am pleased that our first quarter financial statements provide additional transparency for the company. First, Mainframe Solutions revenue was $646 million, up 1% in constant currency and 5% as reported. Mainframe remains a great and profitable business for us, reflecting our 3 decades of market leadership. Mainframe Solutions operating margin for the first quarter was 57%, up 3 points from last year's fiscal first quarter. This was driven by revenue growth and continued focus on operational efficiencies in that segment. Our Enterprise Solutions business revenue for the first quarter was $427 million, up 9% in constant currency and 14% as reported. We continue to invest significantly in this segment of the business to position the company as a leader in both the hybrid cloud market, as well as mid-market IT management as a service. These investments, both in technology and go to market, are reflected in the 11% operating margin in the fiscal first quarter. While this is a 4-point improvement over last year's operating margin, we recognize it is below industry standard as we have consciously invested 4 percentage points of margin in this segment to accelerate our strategic initiatives. We are also continuously focused on operational efficiency. I would like to note that in the second quarter, we will be incurring GAAP and non-GAAP expense of approximately $35 million to $45 million, in connection with the workforce reduction of up to 500 employees. This action is a continuation of work we are doing to optimize our business, by reallocating resources and divesting nonstrategic parts of the business. You will recall that last year, we divested our Information Governance and Internet Security businesses. Now, we are moving resources to align with our strategy, allowing us to intelligently invest in growth technologies and regions. Despite this incremental expense and the expected acquisition of Interactive TKO, we will hold our expectation for fiscal 2012 non-GAAP operating margin at 34%, with the expectation that this workforce rebalance and other cost efficiencies will allow us to improve operating margin over time. We will discuss this in more detail next week at Investor Day when we provide our multiyear financial outlook.

Finally, turning to Services. Services revenue was $90 million in the first quarter, up 9% in constant currency and 15% as reported. First quarter Services margin was 2% compared to 5% last year. We saw a more than 50% increase in newly contracted engagements, some of which we staffed with external consultants, which added cost. We run our Services business to delight our customers and enable implementation.

And now, let me turn the call over to Rich to provide some more detail on the quarter.

Richard Beckert

Thank you, Bill, and good afternoon, everyone. Before I review first quarter results, I'd like to make some comments on our segments. Mainframe Solutions include only revenue from mainframe products. Enterprise Solutions includes revenue from all other products. Services revenue is from implementation, consulting, education and training services. Segment expense includes direct cost, as well as shared costs, which are allocated based on revenue and expense allocation percentages. Further details are available in today's press release in the footnote of Table 4 posted to our Investor Relations website.

Now, let me turn to the remainder of our first quarter results. Please note that all our growth rates are year-over-year unless otherwise indicated, and all results are from continuing operations. First quarter renewals were up approximately 15%. This was due primarily to the timing of 2 large deals that closed in the quarter, but had been expected to be renewed later in fiscal 2012, and an increase in contracted duration of a few current quarter transactions. We continue to expect our fiscal 2012 renewal portfolio to be down approximately 20% year-over-year, with second quarter currently expected to be down approximately 35% year-over-year. I will talk about the dynamics driving quarterly and annual fluctuation in our renewal portfolio in more detail next week at Investors Day. As a result, we do not focus on year-over-year comparisons of bookings as they are not indicative of the overall health of our business. We do focus on our renewal yield. This quarter, our renewal yield was uncharacteristically low, at just over 80%. We had 2 large deals with contracted renewal rates that were unusually low, reducing the overall average. Excluding these 2 transactions, the renewal yield was in the low 90% range, consistent with previous quarters. We also focus on current revenue backlog, which was $3.7 billion, up 4% in constant currency and 10% as reported. Total revenue backlog was $8.5 billion, up 6% in constant currency and 11% as reported. Total revenue for the quarter was $1.16 billion and grew 4% in constant currency and 9% as reported. This includes a positive foreign exchange impact of approximately $45 million.

From a non-GAAP perspective, non-GAAP operating income before interest and taxes was $417 million, up 15% in constant currency and as reported. For the first quarter, our non-GAAP operating margin was 36%. Non-GAAP diluted earnings per share was $0.55, up 23% in constant currency and 22% as reported, including a $0.02 tailwind from currency. Our effective non-GAAP tax rate for the first quarter of 2012 was 31.6%.

Turning to cash flow from operations in the quarter, which was $143 million, up 2% in constant currency and 17% as reported. This includes a year-over-year increase in cash taxes of $111 million, which while expected, still yields a difficult year-over-year compare due to the timing of cash tax payments. In addition, cash flow was favorably affected by improved customer collections. Single installment payments were $64 million in the first quarter compared to $90 million in the first quarter of fiscal 2011. Total billings backlog was $5.1 billion, up 10% in constant currency and 15% as reported. DSOs were slightly down year-over-year.

Turning to first quarter GAAP results. First quarter GAAP operating margin was 29%. GAAP operating income was $228 million, up 3% in constant currency and as reported, and GAAP earnings per diluted common share was $0.45, up 7% in constant currency and 5% as reported. In addition to the items affecting our non-GAAP results, the GAAP results were unfavorably affected primarily by the loss on our hedging program, and to a lesser extent, increased stock-based compensation expense year-over-year. Our effective GAAP tax rate for the first quarter was 31.5%.

Now, moving to the balance sheet. We ended the quarter with approximately $1.6 billion in net cash. During the first quarter, we purchased approximately 6.4 million shares of stock for a total of $150 million. This leaves approximately $630 million available under our current authorization.

Now, let me turn to guidance. As has been our practice, guidance is based on June 30 exchange rates, includes a partial hedge of operating income, and updates our expectations for share count. Guidance is the following, and includes the effect of the expected acquisition of Interactive TKO. Total revenue growth is expected to be in the range of 6% to 8% in constant currency. This translates to reported revenue of $4.9 billion to $5.0 billion. Non-GAAP diluted earnings per share growth in constant currency is expected to be in the range of 6% to 10%. This translates to reported non-GAAP diluted earnings per share of $2.14 to $2.21. GAAP diluted earnings per share growth in constant currency is now expected to be in the range of 5% to 9%. This translates to reported GAAP diluted earnings per share of $1.79 to $1.86. Cash flow from operations is expected to grow 3% to 5% in constant currency. This translates to reported cash flow from operations of $1.48 billion to $1.51 billion. Underlying this guidance, we expect GAAP and non-GAAP tax rates to be 31% to 32% in this fiscal year. At the end of the year, we expect approximately 489 million shares outstanding and a weighted average diluted share count of approximately 497 million shares. Finally, we expect our non-GAAP operating margin to be 34% for fiscal year 2012.

With that, I'll turn the call back over to Bill.

William McCracken

Thanks, Rich. As I said at the outset of this call, our customers are looking to IT to help them become more competitive. Virtualization, cloud implementation and SaaS applications can transform businesses, but only if they can be effectively managed and secured. Building on our 35-year leadership in IT management, we made the call 18 months ago to become the standard in this new era, and we are making good progress. Now, it comes down to execution. Going forward, our focus will be: Building a healthy business in EMEA based on sales outside of renewal; continuing to improve sales productivity and expanding routes to market for managed service providers, partners and new sales models; leveraging our acquired and organically built technologies to accelerate penetration in cloud computing, virtualization management and SaaS; creating capacity for growth by continuously disinvesting the less productive parts of the business; and driving ongoing performance across our key performance measures.

We look forward to seeing you at Investor Day, which will be held at the Palace Hotel in New York City at 7:45 a.m. next Friday, July 29. And with that, Kelsey?

Kelsey Doherty

Thank you, Bill. Attendance at CA Technologies Investor Day requires registration, which can be found on our Investor Relations home page at investor.ca.com. The event will also be available live via webcast. As the operator is polling for questions, I would like to inform you that CA Technologies is presenting at the Oppenheimer 14th Annual Technology & Communications Conference on Tuesday, August 9 and the 2011 Citi Technology Conference on September 7. In the interest of time, please limit yourself to 2 questions.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

The first question will come from Philip Rueppel with Wells Fargo.

Philip Rueppel

First of all, thanks for providing the additional segment detail. That's helpful. My question is around Europe. This appears to be a recurring theme of underperformance. Could you give us a little more granularity? Is it specific product area? Specific countries? And talk about was there any execution progress seen during the quarter? And I guess finally, your outlook, at least seems to anticipate some improvement there throughout the year. What gives you confidence around that, given the sort of uncertain macroeconomic outlook?

William McCracken

Yes, Phil, good set of questions actually and then obviously as you would expect, that's been a real focus for us. In that we have spent significant time over the last couple of quarters dealing with that. The primary thing that has driven that lack of performance is the difference between what's happened in North America and what's happened there. And that is the freestanding sales when we're selling outside the ELA renewal. And that hasn't been driven in EMEA the way it has in North America and has provided a tremendous difference in the performance. We did see some improvement in the quarter, in that their bookings were up 40% in the last quarter. We're doing some other things too though, that I think will drive and give us confidence that we're going to see a pretty significant turnaround there. And that is that we're taking people to that region that have proven performance in marketing, in the freestanding environment. We're putting new sales incentives in place and the most important piece is we put a new leader in place. That leader has been chosen. We took a good time to interview and select that leader, unable to announce who it is because he's currently in a position and we can't do that. But we expect him to join in the quarter. So yes, we're confident that we will get a turnaround but obviously, he needs to be on the ground working with that. I would ask if there's anything else you would add, Rich?

Richard Beckert

Phil, this is Rich. I think 2 things, just to echo. We had, actually a pretty decent mainframe in the capacity range in the quarter. And also, Services was actually fairly strong, considering they have had somewhat of a weak performance on the product side. The services side actually started to show us some decent momentum, so there are some encouraging spots there.

Philip Rueppel

Just kind of along those scenes. I mean, selling outside the renewal cycle. Are you confident that there isn't really a market issue or a customer issue within Europe that prevents that? And it really is execution and is it more a resource issue? Do you have enough feet on the street? Or were the incentives just not aligned in the past?

William McCracken

Yes, Phil, I don't think it's a macroeconomic issue for us. It's our execution. And we do have the resource on the street that we need. I think that the key things that give us good confidence on the product side is the products are selling well in other parts of the world, but also our competition's selling in Europe. So we know that we are losing share in Europe. So the products sell. The products that we offer sell very well. We just need to engage that part of our business. And we haven't done it there as we have in the rest of the world. Those things give us confidence that we'll turn this thing now.

Operator

And we'll take the next question from John DiFucci with JPMorgan.

John DiFucci - JP Morgan Chase & Co

Follow me on my question here. I look at annualized subscription and maintenance bookings, comes in around $210 million, which is comparable to what you did last year. Which was by all accounts, a difficult quarter. And annualized subscription and maintenance bookings were down about 7% on a constant currency. I recognize and appreciate, Bill, you saying upfront it wasn't what you wanted it to be but you also -- I think, Rich said that renewals were up 15% due to a couple of large deals and some longer-term deals. But if renewals were up 15% and annualized subscription and maintenance realized hasn't taken everything but is just about everything, was down 7%. I guess what does that say about new business? And is that all just EMEA?

Richard Beckert

So let's talk about the bookings. So you're correct, it's up 18%. The renewal piece of that was up 15%, John. We didn't plan on that being down 15%, just to be clear. And as you said, when we have to do a more back-to-normal length, that we went back to 3.3 year versus a 2.9 year which was unusually low last year. So that does kind of answer your where are we on from the renewals and the bookings. From how did the corporation do? If you look at North America, we yet again, have actually a fairly strong -- and Latin America was also fairly strong. So it really does start to cycle through that EMEA is the part of the business that we are going to continue to work on and it did pull down the overall growth rate for the company.

John DiFucci - JP Morgan Chase & Co

But Rich, did the -- I mean because if you look at the annualized subscription in maintenance bookings, they were down 7% on a constant currency year-over-year. And I realize, renewals were up 15% because of a couple of large deals and longer terms. But still, I would assume that even if you back that out, that would've been positive. If not even. My other question there had to do with new business. Does this say that new business from your selling new business, existing products, new products, was actually down year-over-year?

Richard Beckert

New business was actually up in the quarter, both low double digit. So this wasn't really the -- remember we had anticipated being down in our renewals in the quarter. So coming down 15%, we had told you last quarter. So coming down 7% like the way did the math is down but not down as far as we had anticipated. But no, we're actually up, John, in the new business. And when you back out EMEA, it's really an okay rate. EMEA clearly pulled the total down. You're correct.

William McCracken

John, the thing that keeps coming back into this for us is our PNCV was double-digit growth in this quarter, which was very small for us, especially when you consider in the light of where we are in EMEA. The thing that's going to continue to ripple through is a lot of things were product, bookings, PNCV or whatever, is Europe. If they would would've been at the percent of what normally would be North America, the values that you're looking at would change dramatically. So the good and the bad of this, the good is it's EMEA. The bad is it's EMEA. And that's really what explains a lot of it, John.

Operator

We'll take the next question from Phil Winslow with Crédit Suisse.

Philip Winslow - Crédit Suisse AG

Just wanted to dig in a little bit more on the mainframe side. Obviously, IBM has put up some very strong gross MIPS numbers over the past several quarters and I know you'd talked about sort of a long-duration cycle here, call it also, lower beta. But what are you seeing in terms of just the price environment, just also net MIPS growth and kind of how do you anticipate that trending as we think about the remainder of the cycle?

William McCracken

Yes, we do see a slow tailwind with respect to the IBM mainframe piece. Capacity is up again for the second quarter in a row, up in the mid-single digit area. The new mainframe sales was up in the mid-teens. So we saw good movement there with respect to that. And I think probably most encouraging for us too is that we had 11 competitive replacements in the quarter as well and started to see some movement in new products from the Chorus line that we've talked about in the past as well too. So we see good indicators out to the mainframe and we were pleased with the quarter.

Operator

The next question comes from Walter Pritchard with Citi.

Walter Pritchard - Citigroup Inc

Rich, for you, just one question around the single installment payments. You mentioned that it was $64 million this year. It was $94 million a year ago. And I think the press release talks about an increase in collections year-over-year of $150 million and then talks about a large payment of $22 million. I guess I'm just trying to get to the bottom of whether single installment and sort of upfront payments were actually a headwind or tailwind this year on cash for this quarter versus last year on cash flow.

Richard Beckert

Okay. No, what we actually had was a single installment wasn't up. It was actually about even. Even if you pull forward with one deal, the $22 million deal that we had talked about, which is just a deal that would've happened this month, that happened within the last month. So no, we were basically flat. The real changes, if you recall in Q4, we had a tax payment that was now paid in this quarter. So that's if you would normalize that, we actually had a pretty decent CFFO.

Walter Pritchard - Citigroup Inc

Okay, great. And then just around the growth. Let me get differently, of asking the same question that others have been asking here. If I look at your Enterprise Solutions business, which I think grew by about $51 million year-over-year and if I look at your disclosure about acquired versus organic growth. It looks like around 2% of the growth was acquired and I think all the acquisitions have been in Enterprise Solutions. And so I guess the message that comes away to me from the numbers is that Enterprise Solutions, on an organic basis, isn't growing and I'm just wondering if I'm doing that math wrong or if that is indeed what's going on in that ES business?

William McCracken

No. We actually have growth inside of that number. Clearly, both the Wily, NetQos, that product line is growing in a very healthy way. So there's a lot more to it. You have to also remember we have services in our number set so I don't know if you've had the chance to look through the segmentation, but we actually have decent growth rates that we think are in line with competition for the quarter.

Richard Beckert

Yes. And I think in that area, especially the new technology areas, we had significant growth in those. We have some large legacy products in that group as well that increases the base dramatically. So it camouflages a lot of the significant growth that occurs in these moves. So when we look at Nimsoft, I mean averages in excess of 70% growth in the quarter. That's true for the other acquisitions we've made. So we're getting good penetration on the new technologies. And what you have to look at is everything, with the exception of mainframe, was in that and we had a lot of large legacy products in there.

Operator

The next question comes from Gregg Moskowitz with Cowen and Company.

Gregg Moskowitz - Cowen and Company, LLC

Rich, as you pointed out, it is very unusual to see a renewal yield around 80% for CA. Could you perhaps give a little more insight as to what occurred with those 2 large accounts? For instance, are they using another vendor for part of their mainframe management? Are they moving some workload off the mainframe altogether? Is there a chance you can get some of this business back? Any color there would be helpful.

Richard Beckert

Gregg, so the 2 different stories then. The first one was the customer 3 years back before the economic downturn thought they were going to have a significant increase in MIPS. As the outcome, when it was time to renew, they didn't need the increase in MIPS and so now they're now back to a much more modified growth rate. And that's what drove that first one down. The second one was a little different. There's actually 3 transactions. We closed 2 of the 3 in Q4. The third one closed this quarter. If you collectively add them all together, we actually got a higher dollar per day revenue from that customer. So again, it was really more a statement of the way that ELA is standing out there without other new products in. So we were not uncomfortable with either one of those transactions in the quarter.

Gregg Moskowitz - Cowen and Company, LLC

Rich. My follow-up question, if I could, is around virtualization. And broadly speaking, we've certainly seen continued strong adoption globally of server virtualization and when you look at VMWare, specifically they've grown license revenue now by an average of about 40% year-over-year over the past 4 to 5 quarters. So I was just wondering if you guys could elaborate on the 15% year-over-year decline in Virtualization and Service Automation. And more importantly, what you expect for that business going forward.

William McCracken

Yes, you bet. Two things on that primarily. One again, we have 1 or 2 very large legacy products in that group. Autosys would be one of those, it is very large. And being more of a product, it didn't grow at that rate. If you take a look at the automation suite within that, it's up over 40%. And so the new products that we have in that area are growing at and beyond what we think the market growth rates are. And again, because of the segmentation being put together with the combination of our legacy products and the new products at times can camouflage what's really going on at the more detailed level.

Operator

We'll take the next question from Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc.

Back on Europe, you talked about an over execution issues and yet there've been plenty of companies that have been reporting issues in Europe and the patently the macro situation there is bad. So I guess the question is what makes you expecting this is under your control and that it's not a demand or macro issue there?

William McCracken

Well, I guess Michael, what we said is from my perspective, I'm not blaming it on the macroeconomic issues. There are some there, I understand that and others have seen those. However, having said that, at what the market is doing there and what we're doing with respect to that market, we have growth within that. So our focus is fix our stuff and then we'll deal with the pieces beyond that. But I think we have the uplift there that we need to take our outlooks to where we have said. And so I think from our focus point of view, we'll focus on what we can fix and the other pieces frankly we're not that focused on them at this time.

Michael Turits - Raymond James & Associates, Inc.

I have a very different kind of question, maybe it takes off a little bit from what Gregg was asking. In Virtualization and let's call it Cloud Management, you have some interesting products there in suites.There's lots of people offering solutions there from VMware to your big forward competitors to startups. Can you just talk a little bit about what really differentiates what your strategy is? Because there's lots of people that have solutions that look very similar. So maybe you could do that for us and tell us why that ought to grow here.

William McCracken

Yes. Michael, I guess a couple of items. One is, we're fairly unique in that marketplace in that we're working across all the platforms that are there. And we have a broader span of all the requirements that go from mainframe, right through security distributed into the SaaS implementations. And we are platform agnostic. So we're unique from that point of view in breadth, as well as going across all the platforms. We have uniqueness in many of the products that we have with respect to that as well to and the capability that they have in that area. And I think that the growth that we've demonstrated in those areas is a part of what is setting us apart. Second thing I guess I would mention is the Gartner report, that came out on IT operations management, set up the big four. The only one that gained share last year was us. That's IBM, HP and VMC and ourselves and the fact we grew at 50% above the market growth rate in that. So I think that even from the outside industry sources, it says we're penetrating there greatly. However, having said that, Gartner also said a lot of the growth outside of the big four did come from the other organizations. So that's occurring at the same time.

Operator

We will take the next question from Kirk Materne with Evercore Partners.

Kirk Materne - Banc of America Securities

I guess just in Europe, Bill. You mentioned that you didn't think it was a revenue mix issue. Can you just talk a little bit about -- are the products you've acquired the last couple of years, are they now ready to go in Europe? Do you have the right marketing people over there? I mean, is it really just the sales people not focused on selling outside the renewals? I'm just trying to get a sense on whether the products in Europe is where it should be relative to the U.S. right now?

William McCracken

Yes, good question. On two pieces there. First of all, we didn't have some of the performance-based people that have sold those products in Europe. We're moving those to Europe. That's one thing that we are doing. So that is the first thing that we did. The second thing is those products are localized and we are reintroducing those into the market now with the introduction of the sales incentives, as well as the people that have demonstrated that they can over-perform in those market areas. So those are 3 things that I think are moves that we needed to make to push up our performance there.

Kirk Materne - Banc of America Securities

And then just a quick follow-up, I just want to look at the enterprise operating margins. There's clearly room for you guys to expand those over time. Yes, I guess my question is within that area, even within virtualization as you mentioned, there's some legacy products in there that can hold down the overall sort of growth mix. Are you guys done sort of pruning, I guess, products that you don't think are core longer-term for you? Do you still have to do that? I guess to get leverage out of that business? Or do you think the product mix, I guess on the enterprise side is about right and it's really just about top line growth at this point?

William McCracken

No, we're going to continue to, near term, prune in that area. We will continue to optimize across that because in time and over time, in some of those legacy products, the customers themselves will want to migrate to things, and we give them those migration paths and move them across that way. But for us, as we've been doing over the last year and into this year, which is where we just announced taking the charge this -- now second quarter, it's a constant process. That's why we put the charge at both GAAP a non-GAAP because it's a standard way of business for us. We continue to optimize this business and we'll continue to do that.

Operator

The next question comes from Kevin Buttigieg with Collins Stewart.

Kevin Buttigieg - Collins Stewart LLC

Rich, I was wondering if you could help us think a bit about the renewal portfolio for the rest of the year? You mentioned -- you reiterated that it will be down about 20% for the full year, down about 35% year-over-year in the second quarter. As I recall, you did fairly well in the second quarter a year ago, a little bit worse in the third quarter a year ago and then bounced back in the fourth quarter a year ago. So does that suggest that the renewal rates should be a little bit better in the third quarter? And then I guess a lot worse in the fourth quarter? Is that the right way to think about it for the rest of the year?

Richard Beckert

Well, as you know, we don't necessarily guide by quarter. But that said, I'll remind you that in Q4 last year with a very large deal with a outsourcer. And then Q2, we had a large deal with the federal government. So it made for tough compares. But to your point, overall we'll still be down 20%.

Kevin Buttigieg - Collins Stewart LLC

Okay. So the 2 deals that had renewed early in the quarter, any characteristics about them that brought them into the first quarter?

Richard Beckert

That's a good question. The customer themselves asked to have those pulled forward. The reason for that, a lot of times they want to make sure that they don't come to end of job, especially if they have other competitors that they want to make sure that our renewal and their renewal are timing out the same time. So that's not unusual, it wasn't coming out of the year. So notice, it wasn't coming out FY '13 or anything. It was just a different quarter within the year, which is why John had asked the question earlier, is expected to see us down 15% and you see us down 7% when you normalize everything.

William McCracken

And Kevin, I think the key there too is we're following the buying pattern of the customer. And so in some cases, we're selling new things in and because we are moving into some of these new technologies, they're making -- let's just get this whole thing forward, put the new with it and go from there. So we just follow the buying pattern the customers wants and both those were in the current fiscal year.

Operator

We'll take the next question from Scott Zeller with Needham and Company.

Scott Zeller - Needham & Company, LLC

Another question about the Enterprise Solutions group and the products and growth rates. We've already called out a couple of areas of strengths and then there are a couple of other areas in legacy that are not as strong. Is there a way you could give us sort of broad stroke growth rate for things that have been acquired in the last say 3 to 4 years? If you look at sort of the newer assets versus more legacy assets in Enterprise Solutions?

Richard Beckert

Yes, I think 2 things. One is the growth rates there are strong. They are all double digits and many are well up in the 30%, 40% and 70% range. What we will do though, on your question is, Scott, we're going to spend a bit more time on that next week on Friday, on the Analyst Day to give you a better insight on that as well, too.

Operator

We'll go next to Israel Hernandez with Barclays Capital.

Israel Hernandez - Barclays Capital

My question was just asked but maybe with respect to the operating margin, which it did come in a little bit better than our expectations. You're holding the line on margins for the full year outlook. Can you comment on where and when we could possibly see some further upside to those margins going forward? I know you're making a lot of investments here in the near term but I'd like to see when we could start to expect to see some more leverage.

Richard Beckert

Great. So, Israel, we will talk about that again next year on Analyst Day, a week from tomorrow. But if we just kind of reiterate a little bit, inside this 34% margin, we'll be absorbing ITKO, which is about 1/2 a point headwind to us. We'll be absorbing that $35 million to $45 million realignment of costs and the workforce. And all of that will all come out in 2Q. You'll see those benefits start to come back in Q3 and Q4. And at the same time, we will be investing though, in areas like APJ and on organizations like NIMSA. So overall, we think we will be pretty well-positioned leaving the year, which is part of the reason why we're doing that.

William McCracken

As I said in my remarks at the beginning too, those optimization things in this year go with what Rich said for the year. But as I've said there too, going forward, they do provide opportunity for uplift in the margin over time.

Operator

And That does conclude our question-and-answer session for today. I'll turn the call back over to management for any additional or closing comments.

William McCracken

Let me, first of all, thank everybody for getting on. To wrap up, I would like to I guess make a couple of points. First of all, it's execution. And primarily, it's execution in EMEA for us to get focused on what we do there to bring that strong because that added to what we're doing, we can put us in a very strong position. We're going to continue to drive our productivity across all the pieces of our business which we started and which we will continue with, and we're going to drive the penetration of our new technologies, which is getting very good traction in the marketplace. And coming off of the first quarter, we've got good confidence in the year this year so we're looking forward to working through the rest of this year and do what we set out to do. Thanks to all of you again.

Operator

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

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