Computer Associates F4Q07 (Qtr End 3/31/07) Earnings Call Transcript

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 |  About: CA Inc. (CA)
by: SA Transcripts
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Computer Associates, Inc. (NASDAQ:CA)

F4Q07 Earnings Call

May 23, 2007 5:00 pm ET

Executives

Julie Cunningham - Vice President, Investor Relations

John Swainson - President, Chief Executive Officer, Director

Nancy E. Cooper - Chief Financial Officer, Executive Vice President

Analysts

Sarah Friar - Goldman Sachs

Philip Winslow - Credit Suisse

John DiFucci - Bear Stearns

Todd Raker - Deutsche Bank

Katherine Egbert - Jefferies & Company

Kevin Buttigieg - A.G. Edwards

Israel Hernandez - Lehman Brothers

Walter Pritchard - Cowen & Company

Brendan McCabe - CIBC

Scott Zeller - Needham & Company

Presentation

Operator

Good afternoon. My name is Cara and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 and full fiscal year 2007 earnings conference call. (Operator Instructions) Ms. Cunningham, you may begin your conference.

Julie Cunningham

Thank you and good afternoon, everyone. I am Julie Cunningham, Vice President of Investor Relations for CA. Joining me today are John Swainson, our Chief Executive Officer, and Nancy Cooper, our Chief Financial Officer.

As a reminder, this conference call is being broadcast on Wednesday, May 23, 2007 over the phone and the Internet to all interested parties. The information shared in this call is effective as of today’s date and will not be updated.

All content is the property of CA and is protected by U.S. and international copyright law and may not be reproduced, transcribed or produced in any way without the express written consent of CA.

We consider your continued participation in this call as consent to our recording.

During this call, non-GAAP financial measures will be discussed. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release and the supplemental information package on our website. In addition, we have posted a presentation to accompany this webcast. All of these documents are available at investor.ca.com.

Today’s discussion may contain forward-looking statements and actual results could differ materially. Please refer to our SEC filings for a more detailed discussion of potential risks.

Now I would like to introduce John Swainson.

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John Swainson

Good afternoon and thank you for joining us on our fourth quarter and fiscal 2007 year-end earnings call. I will cover the highlights of the fourth quarter and full year and address our priorities for fiscal 2008. Then I will turn the call over to Nancy to take you through the detailed financials.

After a challenging first half, we reset our plan and increased our focus on execution in all areas of the business. As a result, we exited the year with a solid performance and positive momentum going into fiscal 2008. I am pleased to report that total revenue, non-GAAP operating EPS, total bookings and cash flow from operations in fiscal 2007 met or exceeded our guidance

I am also pleased that we recently announced the final resolution and successful conclusion to the deferred prosecution agreement. This represents a significant milestone for CA.

Now let me review some of the highlights of the year. On the technology front, we refreshed virtually every one of our major product lines over the last 12 months and we are executing on our vision of enterprise IT management.

During fiscal 2007, we renewed 14 contracts in excess of $25 million each for a total value of $729 million. This compares to seven contracts in excess of $25 million for a total value of $259 million during the prior year. This indicates to me that our customers are recommitting to CA as a long-term strategic IT partner. These customers run some of the world’s largest and most complex IT operations. They are determined to make IT an engine for their organization’s competitive advantage and CA is helping them do that.

We are making it easier to buy CA products. We have organized our strategic products into 16 solutions to meet customers’ demand for better ways to govern, manage and secure their IT environments. Our integrated IT governance, business service management and security management solutions integrate and automate IT management to simplify complexity, reduce costs and help our customers achieve their business goals.

We formally introduced these capability solutions last month at CA World, where over 5,000 paying customers and partners converged, including more than 800 newly participating companies.

I would like to spend a few minutes on this important event. At CA World we engaged with our customers and partners to show them the spectrum of technologies we now have available and are bringing to market. We saw a significant increase compared to last CA World 18 months ago, as measured by attendance, the number of exhibitors, one-on-one customer meetings, and product training engagements.

We also inaugurated a new customer alliance program at CA World. This is a company-wide effort aimed at giving our customers a voice within CA and helping us build a strong, long-term partnership with them. The tremendous success of CA World validates our position in the marketplace and confirms that we’re on the right track. The high level of interest and demand demonstrates our customers’ need for enterprise IT management, a need that we believe we are uniquely positioned to deliver.

Back in November of 2006, we told you the success of the second half of fiscal ’07 would depend on how well the sales model is working, and it appears that we have good traction. Our direct sales organization is focused on selling new software, improving our enterprise account penetration, and improving the yields on renewals. Further, we’ve made significant progress in implementing our cost saving and restructuring initiatives. We’ve also made considerable progress over the past year in putting in place the business systems, processes and procedures that will improve our ability to analyze our business and enable us to grow and generate value for CA shareholders, customers and employees.

In fiscal ’08, we are continuing to execute on the following priorities: first, we are providing our direct sales organization with the resources they need to drive the business. Specifically, we are aggressively hiring more customer facing account directors and account managers even as we are bolstering the skills of our technical sales organization and investing in sales education, particularly in training our people to sell our 16 capability solutions.

Secondly, we are building on our relationships with partners to extend our reach. On this front, we are focused on growing our business with global systems integrators like Deloitte, Accenture, and Price Waterhouse Cooper. Collectively, our business with these partners nearly doubled last year. We are also increasing our efforts with distribution partners and are focused on partners who will make a larger investment in their CA business. And finally, we have recently introduced a storage and mid-market business unit to increase our focus on developing products for this important customer segment.

Thirdly, we are committed to product leadership with a focus on innovation. We are enhancing the content and delivery of our capability solutions by integrating new features, functionality and technology, by implementing new services methodologies, and by increasing our focus and support for partners.

We are also cultivating innovation at CA. At CA World, we introduced the Council for Technical Excellence. The council is an internal think-tank whose members are selected for their exceptional technical expertise. The council’s mission is to lead innovation and to advise on the technical issues of great importance to our customers and our business.

I can tell you this is an exceptional group of individuals who are determined to help CA set the pace for true innovation in our industry and I view them as an important step in supporting a culture of innovation at CA.

Fourth, we are continuing to invest in our business processes and putting in place systems that will help us scale and provide us the information we need to run the business. We will continue to roll out our worldwide ERP systems. Over the last four months, we’ve also implemented an opportunity management system for our sales force and we are using that to improve pipeline visibility and the predictability of our results. And we are continuing to focus on business process re-engineering throughout the organization for better efficiency.

Lastly, we are fostering a culture within our organization that focuses on results. To that end, we further increased the depth of our management team recently with several executive vice president appointments, including George Fischer, who was previously the head of sales in Americas, who’s been named the new general manager of worldwide sales; John Ruthven, who’s become the general manager of worldwide sales operations; Jacob Lamm, who was appointed the general manager of business services optimization in India development organizations; and Ajei Gopal, who was named general manager of our management and security development organizations. George, Jacob, and John are veterans of CA and a collective experience of almost 30 years with the company. Ajei joined CA about a year ago from Symantec, where he was the chief technology officer.

To conclude, we are optimistic about our position heading into fiscal 2008 and beyond. I am confident we have the right technology vision, products and senior management team to continue our momentum from the second half of ’07. It is this confidence that leads us to announce today our intention to repurchase up to $500 million of our common stock.

With that, I will turn the call over to Nancy and then I will return for some additional comments and we’ll open up for questions.

Nancy E. Cooper

Thanks, John. I’ll begin by reviewing our fourth quarter and full year financials. Then I will provide an update of our restructuring efforts and our capital allocation strategy. I’ll conclude with our outlook for fiscal 2008.

During this discussion, I will be referencing the earnings overview charts provided on our website. We have a lot to cover this afternoon, so let’s start.

Following a slow start to fiscal year ’07, we reset our plan to focus on our second half growth and after nine months as CFO, I feel good about the progress we have made and I am encouraged by the momentum with which we’ve begun fiscal 2008.

I’ll begin with bookings. As we noted in last quarter’s call, with respect to our portfolio of existing contracts, some of the renewals we had planned for the fourth quarter were closed in the third quarter. Therefore, as expected, the bookings that resulted from renewals in the fourth quarter were lower than the same period last year.

Fourth quarter total bookings declined 5% to $1.13 billion. However, for the full year 2007, total bookings increased 16% to $3.9 billion and exceeded our guidance of 12% to 15% growth.

The weighted average duration of new direct bookings in fiscal 2007 was 3.29 years, compared to 3.03 years in the prior year period. On an annualized basis, the year over year increase from these bookings was 10% in fiscal 2007.

Total revenue in the fourth quarter was $1 billion, up 7% from the prior year, or 4% on a constant currency basis. For the full year, total revenue was $3.94 billion, up 5% from the prior year, or 3% in constant currency. Aside from these currency effects, the increase in fourth quarter total revenue was primarily driven by a growth in subscription revenue, which grew 11% from the prior year period, or 8% in constant currency.

For the full year, subscription revenue was $3.07 billion, up 8% from the prior year or 7% in constant currency. Revenue from professional services in the fourth quarter increased 3% over the prior year period and increased 11% for the full year.

From a geographic perspective, North American revenue for the full year 2007 was up 6% over the prior year, while international revenue declined approximately 2% on a constant currency basis. We are focused on improving our execution internationally, as they are important drivers of our future growth.

On a non-GAAP basis, operating expenses for the fourth quarter were $830 million compared to $851 million in the prior year period despite negative currency impact. This lower expense level reflects lower expense for commissions, royalties, and bonuses, lower promotion expenses and progress on our expense management initiatives.

Cost of services for the fourth quarter grew more than revenue and we will be focusing on this going forward. For the full year, operating expenses were $3.16 billion compared to $3.05 billion in the prior year.

Non-GAAP operating income was $175 million for the fourth quarter compared to $91 million in the prior year period. For the full year, pretax operating income was $783 million compared to $724 million in the prior year period.

For fiscal year ’07, operating margin was 20%, reflecting a one point increase year over year.

Net interest expense for the fourth quarter increased to $15 million, compared to $10 million in the prior year period. For the full year, net interest expense increased to $60 million compared to $41 million in the prior year. This full year increase was primarily related to higher borrowing and the loss of interest income associated with our $1 billion tender offer.

Non-GAAP net income was $109 million for the fourth quarter, or $0.20 per diluted common share, a 54% increase per share over the prior year period. For the full year, non-GAAP net income was $499 million, or $0.88 per diluted common share, a 4% increase over the prior year.

Now, turning to GAAP results, the following items are excluded from our non-GAAP expenses: purchased software and intangible amortization, in-process R&D, and restructuring and other. When these expenses are included, total expenses before interest and taxes were $1.02 billion for the fourth quarter, up from $988 million in the prior year period.

For the full year, total expenses before interest and taxes were $3.73 billion compared to $3.61 billion in the prior year.

During the fourth quarter, we recorded restructuring and other expenses of $100 million, of which the largest portion was related to severance expenses of approximately $73 million. By the end of fiscal 2007, we reduced 1700 positions and as we indicated in last quarter’s earnings call, we focused aggressively on our cost saving initiatives in the fourth quarter. Therefore, fiscal 2007 restructuring and other expenses were $201 million.

While we expect additional restructuring expenses in fiscal 2008, we are confident that we will achieve our previous target of $200 million in annualized expense savings by the end of fiscal 2008.

GAAP net loss from continuing operations was $20 million for the fourth quarter, or a loss of $0.04 per diluted common share, compared to $39 million, or a loss of $0.07 per share in the prior year period.

For the full year, GAAP net income was $121 million, or $0.22 per diluted common share, compared to $160 million or $0.27 per share in the prior year period. GAAP net income for the full year was below our guidance, primarily due to the previously discussed higher-than-expected restructuring and other charges.

Now, turning over to cash flow; cash flow from operations in the fourth quarter was $521 million compared to $566 million in the prior year period. For the full year, cash flow from operations was $1.07 billion compared to $1.38 billion in the prior year. We exceeded our cash flow from operations guidance in part due to the positive impact of $90 million in lower-than-expected tax payments, the majority of which we now expect to pay in the first-half of fiscal 2008. We also had a year-over-year decrease in the fourth quarter in contracts that were billed and collected in a single installment.

Turning to the balance sheet, we ended the year with $2.3 billion in cash and cash equivalents and $2.6 billion of total debt, bringing our net debt position to $303 million.

Now let me discuss our capital allocation strategy. As John said earlier, we are proceeding with an accelerated share repurchase of up to $500 million. We plan to enter into the transaction shortly and finance it with existing cash.

I would like to reiterate that we remain committed to a balanced capital allocation strategy and our decision to continue our repurchase program reflects our confidence in CA’s ability to generate healthy cash flows to support our long-term business plan.

Now I would like to provide our current business outlook for fiscal 2008. We continue to see a healthy demand environment and lots of opportunity for CA products and solutions. We expect total revenue in the range of $4.05 to $4.1 billion, which represents 3% to 4% growth in constant currency. We expect non-GAAP operating EPS for the full year to be in the range of $0.94 to $0.98. This revenue and EPS guidance is based on today’s currency exchange rates and assumes no acquisitions, as well as a slightly dilutive impact of the share repurchase program.

We expect an average diluted share count of approximately $542 million shares, and a full year, non-GAAP tax rate of approximately 33%.

We expect GAAP EPS for the full year to be in the range of $0.75 to $0.79. GAAP EPS is based on no acquisitions and no additional restructuring beyond pretax restructuring charges of approximately $30 million.

We expect full year cash flow from operations to be in the range of $1.05 billion to $1.1 billion. There are several items that impact our fiscal year ’08 guidance and these are detailed on chart six on the earnings webcast presentation.

First, we expect a total of approximately $470 million in cash tax payments during fiscal 2008, and this reflects an increase of approximately $170 million year over year, of which $70 million we previously expected to pay in fiscal 2007.

Secondly, we expect a reduction of approximately $20 million, principally due to reduced interest income as a result of the share repurchase. Lastly, we expect restructuring payments in excess of $80 million in fiscal 2008.

Although we do not provide quarterly guidance, we currently do expect the following headwinds in the first quarter. First, we expect a decrease in cash collections of approximately $85 million compared to the prior year period. This is due to fewer single installment contracts and lower associated billings during the fourth quarter of fiscal 2007, as we improved our discipline in the early renewal process.

Secondly, we expect additional tax payments of approximately $50 million that were originally planned for the fourth quarter of fiscal 2007. Despite these first quarter expectations, we are confident in our full year guidance.

Now I will turn the call back over to John.

John Swainson

Thanks, Nancy. Before we take your questions, I would like to leave you with some key takeaways. With the recently announced completion of the deferred prosecution agreement, CA has emerged a much stronger company. We are moving forward with a renewed sense of enthusiasm and dedication to becoming one of the world’s most successful software companies. We will continue to demand a high level of transparency, ethical behavior and integrity from our entire organization. These requirements will not stop because we have met the requirements of the DPA.

By closing this chapter, we can devote our full attention, energy and passion to customers and to our business.

I would also like to add a few observations to the fiscal year ’08 guidance that Nancy provided. As I’ve said many times before, transformation at CA is a multi-year process that requires diligence and execution. We are making good progress and we are seeing signs of success. We rolled out the sales and commission plans in the first week of our fiscal year and we believe that our sales organization is off to a good start. We have clear evidence that our customers and our partners are seeing CA as a different company and someone they want to partner with. We are optimistic that these factors will translate to improved business this year and well into the future.

We have done much to improve CA over the past two years and set it on a course of sustainable growth. We are managing for the long term and while we have more to do in improving CA’s operations, we firmly believe we’ve entered a new fiscal year a stronger and healthier company with a bright future.

That concludes my prepared remarks. Let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Two questions for you; first of all, John, just in terms of the restructuring, do you feel you are at a point now where you have cleared out all the heads from the organization that you wanted to clear out in terms of cost reduction, or should we still expect to see more headcount cutting going on?

Secondarily, just on the buy-back, you talk about it being accelerated and up to $500 million. I guess what is the parameter we should put around “accelerated”, and what would stop you from doing the full $500 million?

Nancy E. Cooper

First on the restructuring, I had indicated we do anticipate some additional restructuring activities in fiscal year ’08. There are still more areas of the business that we think there are additional efficiencies. We also find that very encouraging in terms of meeting our comment on reducing expenses as we enter ’09 by $200 million, so there are more areas we can look at.

The second on the accelerated, as you know this kind of structure, the reason we say up to $500 million is it will vary based on the price that we enter into the transaction. So we just put that around it so you understand there is some level of volatility.

Sarah Friar - Goldman Sachs

But in terms of accelerated, is that something we’ll see you do over the next couple of weeks and then be done, or is it a month?

Nancy E. Cooper

What we were trying to say is shortly, yes you will see it happen shortly, and because it is an accelerated share repurchase for us, from an accounting point of view, it will happen at a point and then the execution of the transaction by the person we choose to do it for us will occur over a period of time.

Sarah Friar - Goldman Sachs

Understood. Okay, that’s helpful color. Is the $500 million, thereafter could we then see you put in place something that’s more of an ongoing $100 million a quarter, or what are your limitations there?

Nancy E. Cooper

There you are hearing me say our normal kind of capital allocation thought process, where we will first of course put our thoughts to whatever investments we may be required to make and then we do a regular assessment of how to deploy the cash after investments, be it in paying down debt or dividends or share repurchase, so kind of a normal business process.

Sarah Friar - Goldman Sachs

Got it. Okay, that’s helpful. Thanks a lot.

Operator

Your next question comes from Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

I’m just wondering if you could spend some more time just talking on sales force productivity and sort of what your expectations are. Billings came in above our expectations this quarter, and also just the duration but when you look at your sales force and how they are structured right now and the talk around the product lines as well, how do you see just the billings trending, the bookings trending when you look at ’09? Also, relating that back to subscription revenue as well? Sorry, ’08, not ’09.

John Swainson

We are continuing to focus on sales force productivity. We think we got a couple of good quarters from the sales force in the new structure in the second half of the year. That gives us a sense of encouragement that we are able to rely on the sales force for a greater volume of productivity in the future.

We have aggressive targets from a bookings point of view this year. We think that’s justified based upon the currency of the product line, the success we’ve seen with the sales force itself and frankly, the improved mood we are seeing with our customers.

So I think without getting into detail on bookings, you could surmise that we are expecting to have aggressive bookings in fiscal ’08. We’ve got a strong portfolio, strong products and we think strong customer demand.

Operator

Your next question comes from John DiFucci with Bear Stearns.

John DiFucci - Bear Stearns

Thank you. On the cash flow guidance here, you are saying that cash flow from operations is going to be negative again next quarter and obviously you have better visibility into that. You expressed confidence that for the year it will be a little bit better, or in the range of a little bit better than it was this year. Is there anything else that is being pushed into next quarter as far as payment other than these additional tax payments? Nancy, could you explain what is that all about? Why is the timing a little off there? Because you are not the only company that, at least that we cover, that has had that issue at the end of their fiscal year in March.

And then the last question is the restructuring costs. They were at $100 million this quarter. It was about $50 million more than you expected and obviously the pro forma number would have been a little different if you had done what you had expected. I’m just curious because it’s a big difference. Why was it so different? Did you separate a lot more employees or --

Nancy E. Cooper

Let me try to answer -- I think that you asked me two, maybe three questions, so if I miss one of them, John, just reiterate if you would.

First, on your question about first quarter cash flow. If you remember last year, our cash flow in the first quarter was around negative $46 million, and we definitely have two headwinds into this year being both that we are entering the year with less bookings, some of which is plus billings, some of which we find encouraging because it is somewhat the discipline we placed around the early renewal process, so we did that very consciously but it does end up -- it is just the timing in one quarter where your billings will be less and therefore your ability for cash collection, if you don’t have a billing, will be less.

The cash tax payments are two discrete items that you can have periodically where you are negotiating with the regulatory authorities and you really don’t have an ability to control when those get paid. It’s not one quarter to another because your negotiations are continuing. So when you take the combination of that and you compare it to last year, which was minus $46 million, we will be more negative than we were last year.

That’s kind of trying to give you that question.

John DiFucci - Bear Stearns

Just a follow-up to that, because last year, Nancy, you had a whole bunch, a list of things that were headwinds. You had a payment. You had to pay sales commission rates of I forget the exact number, but it was something like $50 million to $70 million that you had incurred due to the commission structure that was changed later. I forget, but there was a whole list of things.

It is just kind of surprising to see a negative number there. Because even what you list, you don’t have as many headwinds as you did last year, it seems.

Nancy E. Cooper

Well actually, when you add the two I just mentioned, they are actually quite large compared to what we had last year. Many of the things you are talking about was really a first half comment, that we had a lot of negatives in the first half. We are really trying to give you a heads up because even though we see these items in the first quarter, we have done a very comprehensive analysis of the full year and feel very confident about our full year CFFO guidance.

We tried to put together this earnings overview, chart number six, so that you can really see some of the factors that cause swings year to year, because cash flow, particularly cash taxes in cash flow increased year to year by $170 million, and some of those things are very lumpy, very hard to predict cash tax payments and that’s adding to this, John.

John DiFucci - Bear Stearns

Okay, that’s fair. And then on the restructuring costs, why were they so much larger than you anticipated at the beginning of the quarter?

Nancy E. Cooper

Well actually, I think that again is a very good sign for us because what that is is an indication that as we went through our budget process, we were able to do additional activities on restructuring in terms of aligning our business to be more efficient going forward. So we were able to do things on a more accelerated fashion than we previously thought we could. A lot of that is in Europe.

John DiFucci - Bear Stearns

But even so, you had given guidance for pro forma EPS similar to what you did, and to get to that you had an additional $50 million or $51 million in restructuring costs, so even if some of those things you wanted to do were accelerated, it implies that some of the things -- there were some unexpected expenses that arose during the quarter. Is that fair?

Nancy E. Cooper

We’re all talking outside of GAAP, on restructuring and other expenses?

John DiFucci - Bear Stearns

That’s correct, yes.

Nancy E. Cooper

Yes, we did have in the quarter -- there were some other items in there. In the full year, you will see the costs of having the DPA and special litigation committee falls in there, and that was around $20 million. And the other big thing we had was we did have a write-down of trademarks on one of the acquisitions we had. That was another item. And we also had a flow-through of the ’06 restructuring, so we had several things that would hit beyond what I was commenting on in the third quarter call, John.

John DiFucci - Bear Stearns

Okay, thanks a lot.

Operator

Your next question comes from Bryan Zachary with Deutsche Bank.

Todd Raker - Deutsche Bank

Good morning. This is Todd Raker. Two questions for you. I was hoping you guys could dive in with the revenue guidance for the coming fiscal year, if you could give us a sense in terms of product areas and what your expectations are, mainframe versus distributed, security storage, just qualitatively give us a sense for where you think the growth opportunities are for you guys.

John Swainson

Sure. We continue -- our mainframe business last year did well. It did slightly better than we expected, in fact. We continue to believe that our mainframe business will be plus or minus 1%, around zero, so it’s going to be basically flat. Our distributed business in general will be in the mid- to high-teens, as a general rule.

Specifically by business area, we are expecting business services optimization to continue to be strong, as it was last year. We are expecting systems management also to continue to be strong, as it was last year. We are expecting security to be a little stronger than it was in the second half of the year. We are expecting storage to continue to recover. Storage had been negative last year -- sorry, negative the year before last. It was slightly positive on a bookings basis this year and we expect that to continue, that trend to continue slightly.

I guess we are expecting to see growth, particularly around systems management and business services optimization and renewed growth in security.

Todd Raker - Deutsche Bank

Okay, and just a follow-up; given those statements, according to our calculations it looks like billings were down slightly year over year in fiscal ’07. How should we be thinking about that going forward?

Nancy E. Cooper

That is true, they were down just modestly in ’07. Obviously billings going forward are a function of some of the comments John made earlier, which is we have a very good renewal base going into ’08 and we have a very strong product set. So if you think about it, it’s a combination of redoing that strong portfolio we have this year and continuing to sell new products. So doing both of those, we will end up with creating billings growth, which is what we are all about.

So we have all the raw materials and on top of that, we’ve realigned the sales force so that we have two separately focused groups, one on selling new product and one on specifically renewing the portfolio at greater disciplines. We are aligning the resources in the company to support those activities.

I’ve been here a lot less time than John but I think we are in the best position we’ve been in in a long time.

John Swainson

I would stress one thing in this, Todd, and that is sustain and long-term -- two words that Nancy used that I think need to be focused on. Our goal is to have a sustainable long-term billings growth so that we can have a sustainable long-term cash flow growth. We are restructuring everything we are doing in order to make sure that is true.

Todd Raker - Deutsche Bank

Great. Thanks, guys.

Operator

Your next question comes from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies & Company

Good afternoon. A couple of questions; when you say that there might be further restructuring, are we talking about restructuring that is similar to what you’ve done recently, which is headcount? Or might it take another form? And then also, you’ve mentioned several times about M&A. You seem to be thinking about something there. Can you elaborate?

Nancy E. Cooper

Sure. On the restructuring, what you should think about is we are really systematically going through the business and trying to see if we are running it as efficiently as we can. We have not been able to tap every area within the company on that basis, so to give you a little bit more color, we mentioned we looked at Europe. Europe had been running on a country organization. We are moving that more to a regional organization.

There are other areas that we are looking at that might be run a little bit better on a more global fashion. So what you’ve got is a systematic view of the different parts of our business. You can imagine you can’t do everything all at once. You do at a rate and pace and that’s what I’m referring to.

On your second question, which was on M&A, we have a very articulated strategy now that we got a lot of positive response at CA World. A strategy will always have areas that will have white spaces. What you hear me saying is, and I don’t believe it’s inconsistent with what we’ve said all along, is we are on both a build and a buy. We will build it where we think that’s appropriate and there’s a lot of great technology out there. We will buy it where we find great technology that solidly fits within our strategy.

So I’m articulating we are not adverse to buying. It must fit the strategy and must be at the right terms.

Katherine Egbert - Jefferies & Company

Okay, and then separately, where do you think the weighted average duration for the new direct bookings goes over time? What’s the limit there?

John Swainson

I don’t see it changing materially from the historical pattern. There were a handful of deals this year. One in particular that was seven years in the third quarter that happened to skew that number a little higher. Our commercial terms have not changed. If we see an opportunity to have a very major customer recommit for a longer period of time than three years and it is in their interest and our interest to do that, we will of course look at it if the economics are good. That was the case this year in a handful of cases, but I do not see anything going forward that would change materially the term of about three years.

Katherine Egbert - Jefferies & Company

Okay, that’s helpful. Thanks.

Operator

Your next question comes from Kevin Buttigieg with A.G. Edwards.

Kevin Buttigieg - A.G. Edwards

Thank you. The question on the share repurchase program, I was a little bit surprised to see it come out dilutive, given that you would be reducing the share count obviously over the short term and then over the course of the entire fiscal year. I was just kind of surprised that it would not have more of a positive impact, given that you are paying for it completely with cash this time as opposed to the prior times, or the one year ago, which was financed significantly with debt.

Along those lines as well, you point out about 542 million in the diluted share count for fiscal year ’08. You ended this year with an average diluted share count in the fourth quarter of $551 million. Wouldn’t a $500 million share repurchase plan take you below that outlook for 542 million shares?

Nancy E. Cooper

The dilutive question is yes, absolutely. If we retire somewhere in the mid-teens kind of shares, if you did the math on that it would be accretive but we did have interest income that we will be forfeiting to be able to do this transaction, and it is just slightly dilutive and we believed it was the right use of cash to be able to do this thing.

The second on your question on the average diluted shares outstanding is the word average. What you’ve got there is you’ve got a combination of you are looking at two years on the comment of average. So what you’ve got is the average of the share repurchase we bought in ’07 versus the average of share repurchase in ’08. So what you’ve got is both timing of when we did the exercise and how you have to fold in that averaging of the share count. So it is not an explicit subtract it and you get it.

Kevin Buttigieg - A.G. Edwards

Right, but 551 --

Nancy E. Cooper

-- is when we go into ’09, though.

Kevin Buttigieg - A.G. Edwards

Right but you didn’t do any share repurchases in the fourth quarter of last year, right? The 551 was the average for the fourth quarter?

Nancy E. Cooper

But again, it does work out what I’m saying. You’ve got to take the average effect of different share repurchases over the year to do this.

Kevin Buttigieg - A.G. Edwards

Okay, and the --

Nancy E. Cooper

By the way, we do have some options exercise that will be to the good -- I mean, into the addition.

Kevin Buttigieg - A.G. Edwards

That seems like that would have to be the case, I guess is sort of what I’m looking at.

Nancy E. Cooper

Yes, Kevin I think you’re right. It’s the combination of both of those.

Kevin Buttigieg - A.G. Edwards

And then John, I did want to just pin you down a little bit more on the bookings growth comment that you had made a bit earlier in a response to an earlier question where you talked about the outlook for fiscal year ’08 being a bit aggressive. Just in the context of last year, you obviously had bookings growth of 16% on the positive side. That came against the prior year where it was down more than 20% or so, so it’s obviously a very big swing.

So when you are saying aggressive, could I ask you to be just a little bit more specific, vis-à-vis that extremely wide range?

John Swainson

Kevin, I’m not going to be more specific than that other than to say the obvious, which is that in our model to drive top line revenue growth, given a renewal base, we have to drive new business into the model as well, and we are going to -- we have put aggressive targets on our sales force but I am not going to give guidance on those targets because I don’t think it would be appropriate. We’ll obviously report them as we go through the year.

Kevin Buttigieg - A.G. Edwards

Okay and then, take me through your thought process on early renewals. In the third quarter obviously early renewals benefited cash flows, benefited bookings. I think you talked about feeling better about pursuing earlier renewals at that point in time compared to some of the prior quarters. Now, this quarter you talk about imposing greater discipline on the early renewal process. Just wondering what your thought process is and what you are looking at in terms of evaluating early renewals on a going forward basis.

John Swainson

In fact, our thought process has not changed between the third and fourth quarter. What we call an early renewal, just to get the semantics correct, or what we have been calling an early renewal historically, is a contract that renews more than six months past the end of the fiscal year. What we said in the third quarter was that we were employing greater discipline on the management of the renewal process to ensure that we maximize the yield. We did that both in the third quarter and the fourth quarter. We believe that we were able to get a higher yield out of the contracts that we renewed as a result.

So that’s what we were alluding to then. We did it again in the fourth quarter. We will continue to do that as we go through time.

Kevin Buttigieg - A.G. Edwards

Thank you.

Operator

Your next question comes from Israel Hernandez with Lehman Brothers.

Israel Hernandez - Lehman Brothers

Good afternoon. International in the quarter was down slightly on a constant currency basis. Can you provide a little granularity how that shapes up across Europe, Asia-Pacifica and the emerging markets? And what opportunities do you see to accelerate growth in fiscal ’08 and the international segments? Thank you.

Nancy E. Cooper

First of all, revenue is a lagging indicator for our business, so some of this you are going to see are changes or are things that were going on in Europe more than a year ago. We’ve made a lot of changes in terms of management teams and in terms of the focus we have and we are really actually quite encouraged about Europe and Asia’s prospects going forward. Europe is much larger than the rest of our international operations, so obviously most of this has to be referring to Europe.

For CA, that represents a nice opportunity for us as we’ve made these changes and over the next few years, we will start to see the benefit in some of the things we’ve put in place.

Israel Hernandez - Lehman Brothers

Thank you.

Operator

Your next question comes from Walter Pritchard with Cowen & Company.

Walter Pritchard - Cowen & Company

Hi, Nancy. I was wondering a view on the bookings for the year. I know you don’t give quarterly guidance but I know you also did change your quota plan to go to quarterly quotas and thereby potentially incenting a change in behavior. I’m just wondering if you could talk qualitatively around how you expect the year to play out in terms of bookings versus what you’ve seen in years past when you didn’t have that in place?

Nancy E. Cooper

We’re not going to start giving quarterly bookings targets but to give you some color in terms of what we find encouraging, and I believe John mentioned it earlier, to enter a year with all your quote out there and to be paying your salesmen on a 45-day basis, what you get there is people have not hesitation to start booking business and that’s the part that we find very encouraging in terms of getting business earlier in the year. So it’s more the support system we’ve put in place encourages people to book business all the time and to start booking it at soon as the year began. So that’s makes us feel like the year will be stronger earlier on.

John Swainson

Yes, but to be clear, we do not have people on quarterly quotas. We certainly have our management team against a set of quarterly objectives and we are trying to run the business on a cadence every quarter we make our number. But their commissions are not set that way. There are still annual commission plans. Their quotas are not set that way. There are still annual quota plans.

Walter Pritchard - Cowen & Company

And then Nancy, am I reading into it right, if I look at the taxes, it was 300 or so this year, 470 next year -- is 400 sort of the normalized number here, just to kind of use that over the last couple of years? I guess what I’m trying to get at is ’09, how should we model taxes?

Nancy E. Cooper

Right, well, Walter, you know, you’ve picked one of the hardest things to predict, and that is cash taxes. In fact, I’m told that most other companies do not do this.

What we tried to do, I looked back the last few years and there really is not one number you can pick, although I would say if you looked back five years it is somewhere between 300 to 400, but again I put a caution on the predictability, because you end up with -- tax planning inherently has discrete items that can make you have large swings in that, and that is part of what we are trying to explain in our CFFO this year.

Walter Pritchard - Cowen & Company

And just lastly on professional services, it seems like the revenue started to ramp up a little bit. It is only one quarter, so maybe not a trend but have you been building out and hiring headcount in PSO or is that just a seasonal impact?

John Swainson

Yes, we have. We have been building our professional services capability over the last two years, really. We will continue to build it at a modest rate. I wouldn’t expect that professional services would occupy a very large or very different role than it does today in the company, but as our business has been growing the need for people to implement our products has been growing, some of which we do ourselves and some of which we do with our partners.

Walter Pritchard - Cowen & Company

Great. Thanks a lot.

Operator

Your next question comes from Brendan McCabe with CIBC World Markets.

Brendan McCabe - CIBC

Just a quick follow-up on the tax, not to beat a dead horse but I thought I heard a couple of numbers so can you just go over, in 4Q07 it was at $90 million that you were expecting to have paid and then $50 million in 1Q08 that you --

Nancy E. Cooper

Good question. Let me try to do a little better job of clarifying it. I did say $90 million in the fourth quarter. Two items, two discrete items were 70 of the 90, were the ones that we were working with regulators and they did not get resolved in the quarter, so they moved into fiscal year ’08.

The other is a result of we did have slightly lower bookings, so the 70 is the headwind we have in the first quarter, or 50 of the 70 we believe will be a first quarter, 70 in total will be what hits the first half of ’08. Does that help at all?

Brendan McCabe - CIBC

No, that’s very helpful. And then also, accounts payable and accrued expenses looked like it was a benefit to cash flow. Is that just a timing issue?

Nancy E. Cooper

I think that was timing. We really put in a much more systematic accounts payable system here in terms of managing the days payable outstanding and when we pay and when we cut off payments within a quarter, so we do stop paying like most other companies do a couple of weeks before the end of the quarter, so I would not read it as much more than that.

Brendan McCabe - CIBC

Okay, and John, from the professional services standpoint again, is there a certain kind of profitability that is acceptable in that organization? Is something like even break-even fine for what you guys are trying to do with it?

John Swainson

Our goal is to run it at break-even. We are a products company. We are a software company. We have a services business that supports our product business. We would like it to be at a break-even basis with full accruals. It does not always get there, and so we’ve got more work to do on cost and efficiency and utilization and those kinds of things. But our expectation is that it will break even.

Brendan McCabe - CIBC

And then the last question is just with cash flow from operations, you guys mentioned a lot about how it kind of talks to your confidence and stuff. Should we go so far to read conservatism into that confidence or just stick with confidence?

Nancy E. Cooper

You know, if you just give guidance, you don’t want to start changing guidance the day you’ve given the guidance, so --

Brendan McCabe - CIBC

Yes, that’s a good call.

Nancy E. Cooper

We feel very confident. We feel confident that we made the guidance we gave last year and we have the same level of confidence about the guidance we are giving you now.

Brendan McCabe - CIBC

Great, thanks very much.

Operator

Your next question comes from Scott Zeller with Needham & Company.

Scott Zeller - Needham & Company

Thanks. A quick question about the product groupings; you mentioned that you are expecting renewed growth in security. Could you tell us where you get that confidence from? And perhaps from something you saw at CA World, some excitement around certain products? Thanks.

John Swainson

We are -- I am giving that to you from a couple of perspectives. One is obviously a view into our pipeline, and secondly a view into the product cycles themselves. We did have a refresh cycle in the second half of last year that had a slight negative impact on our identity and access management business. We think that we will see some positive results in that business and we think we are seeing those in our forecast now.

Scott Zeller - Needham & Company

Thanks.

John Swainson

I think that was the last question, so let me thank all of you for your time and attention. This has been a very important quarter for CA. We have completed our deferred prosecution agreement. I can’t stress how much and how important that was to our company. We’ve completed a year of transition that has been very significant. We’ve installed SAP in the U.S. We’ve made a number of changes in our financial organization and our financial processes, and we have had a very clean financial set of books this year. I think all of those things speak to the changes that we’ve made in the business financially and otherwise and speak to our confidence frankly going forward in the health of our business. So thanks very much and we look forward to updating you at the end of our first quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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