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Computer Associates F1Q08 (Qtr End 6/30/07) Earnings Call Transcript

August 01, 2007 | about: CA

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TRANSCRIPT SPONSOR

Computer Associates, Inc. (CA)
F1Q08 Earnings Call
August 1, 2007 5:00 pm ET

Executives

Sam Pattanayak - VP of Investor Relations
John Swainson - President, CEO
Nancy Cooper - CFO, EVP

Analysts

Phil Winslow - Credit Suisse
John Difucci - Bear Stearns
Sarah Friar - Goldman Sachs
Kirk Materne - Banc of America Securities
Katherine Egbert - Jefferies
Todd Raker - Deutsche Bank
Bob Stimson - WR Hambrecht
Brendan McCabe - CIBC
Kevin Buttigieg - A.G. Edwards

Presentation

Operator

Good afternoon. My name is Teresa and I will be your conference operator today. At this time, I would like to welcome everyone to CA's First Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Mr. Pattanayak, you may begin your conference.

Sam Pattanayak

Thank you and good afternoon everyone. I am Sam Pattanayak, 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, August 1, 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 which was filed on Form 8-K earlier today and the supplemental information package. In addition, we have posted a presentation to accompany this webcast. All of these documents are available on our website at investor.ca.com.

Today’s discussion may contain forward-looking statements subject to risk 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.

Also please note that during the first fiscal quarter, CA adopted FASD interpretation number 48 accounting for uncertainty in income taxes. The adoption of FIN 48 resulted in a reduction of taxes payable and an increase to retain earnings of approximately $11 million.

Further, effective April 1, 2007, the majority of the company's liabilities for uncertain tax positions were moved from current liabilities to non-current liabilities on our balance sheet.

Finally, two weeks ago, we published our fiscal year 2007 annual report online. The link to the interactive CA annual report can be found on investor.ca.com.

With that, I will turn the call over to John Swainson.

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John Swainson

Thanks Sam. Good afternoon everyone and thank you for joining us. I am going to begin today’s call by touching on a few of the highlights from our first quarter. Then I will talk about what our performance this quarter says about our progress in building a growing and competitive business with outstanding prospects. At that point, I will turn it over to Nancy Cooper, who will give you more details on the first quarter after which we will open up for questions. Then I will come back with a few closing thoughts.

By almost every measure CA performed well in the first quarter. Revenue bookings, EPS and operating margin all showed improvement from the same quarter a year-ago. At the end of the quarter where we typically have a high level of cash disbursements, our cash flow from operations while negative was better than we expected. And we made progress in improving our expense structure and controlling our costs.

In all, a solid performance by the CA team, who are focused on helping our customers govern, manage, and secure some of the largest and most complex IT environments in the world. For the past several years I've been talking to you about CA’s transformation and how it would be a multi year process. However, I also have promised that I would point out significant milestones along the way.

Today's result for the first quarter, are such a milestone, as they demonstrate our ability to execute on our objectives. In a quarter, where we completed the requirements after the third prosecution agreement we also delivered good business results and while I am pleased with our first quarter performance I am the first to admit there is still more we need to do. Our senior leadership team and our employees understand and support this effort. We are managing this business with a long-term view, and that view begins with a unique perspective on how information technology can be leveraged to benefit our customers.

As some of you will remember at our CA world event in November 2005, we introduced Enterprise IT Management or EITM, our vision of helping customers govern, manage, and secure their IT environments. At that time, it was a vision. But since then we've turned it into a strategy that unifies and simplifies the management of Enterprise IT and enables IT governance, management, and security.

We have been delivering on EITM and today we are taking it to new levels. At our most recent CA world this past April, we addressed how we would be taking EITM to market as we introduce 16 capability solutions based on industry best practices such as CobiT, and ITIL that cover everything from changing configuration management, to project and portfolio management, to service level management, identity and access management, another tools and technologies that improve our customer's core capabilities.

These solutions are designed to provide value and to integrate with one another and solutions from other vendors. They are not just single products but offering should hold the promise with improving our customer's core capabilities. They are built on the concept of unified service model which is a common view of an IT service across all the functions within an IT environment using CA's CMDB. So now are used to the idea of a common ledger for ERP or a common view of the customer in CRM.

Our customers want technology that helps them achieve a business outcome and we believe these solutions give CA a unique ability to do just that. Everyone we have talked to, our customers, our partners and the industry analyst agree that this is the right approach.

Recently we had a chance to vet this strategy at a conference with some 40 industry analysts who follow CA. With an interesting two days in which the analysts talked to CA's management team in depth about our strategy and our offerings. We discussed the capability solutions in unified service model and explained how our customers would benefit from CA's EITM approach.

We got more than a few probing questions and skeptical comments. But by the end of the conference we had effectively communicated our view that we can deliver, and are in the best position in years. We believe that CA is on the right track to lead the industry. In fact IDC counted on our strategy by noting that the new capability solutions fit well into the reformulated CA as a means to rationalize go-to-market positioning, and sales focus around our product portfolio.

And while I'm pleased by CA's assessment and the reaction of the industry analyst, I'm more pleased by the reaction of our customers. Over the past year, we have been changing the way we manage our product portfolio to serve our customers better. Let me take a few minutes to expand on three very important points.

First let me talk about the portfolio. Over the past two years, CA has acquired an integrated or built and shipped hundreds of new products, across our product line. The product line led by Clarity, Wily Interscope, Spectrum, the Unicenter family and our identity and access management products is generating excitement in the market is its strongest positions in years.

Our sales force is making good progress in moving from one based on transaction in financial selling, to one based on relationship and the selling the value of new software. The majority of our sales teams are compensated exclusively on selling new software and while we feel good about our progress, we're very focused on achieving industry benchmarks for sales productivity.

Second, is more effective penetration of the enterprise market. Currently, our direct selling effort concentrates on about 4,000 enterprise account prospects, to sell key products and improve our enterprise market penetration. With the excitement around our invigorated product portfolio, we also believe there are lots of opportunities for new sales; we're also doing a better job of working with business partners, both in our largest accounts in the commercial accounts side.

Third is effective management of our renewal process. CA has a large installed base, and to capitalize on this installed base, we have built a dedicated team in our sales organization to discharge with managing our renewal process. These business managers are looking at renewals in a disciplined and centralized way to maximize the long-term benefits to CA.

From the day I started at CA, I have been talking about the importance of building stronger relationships with our customers. Today, it is something that everyone in the company is focused on. As you know we realigned our sales force last year to enable us to get closer to customer. We significantly increased the number of account directors and account managers. We will maintain our focus on account facing sales people, while at the same time working on improving sales productivity.

We are making substantial investments in training our sales teams on our product solutions and on their selling skills. So we can become an even better partner with our customers and enable our customers to get more value out of the Enterprise IT solutions. I believe these efforts are showing very encouraging results, but I think our customers say it best, so let me give you two examples of how we are helping customers solve complex IT issues.

The first of these customers is Siemen’s Enterprise Communications in Brazil, who are using CA technology to maximize their efficiency as they manage networks for their customers. Fabio Narita, Siemens Business Services manager says “CA is an expert in Enterprise IT management and that CA has provided him IT management oriented to business development” and that’s a powerful statement.

Let me tell you a little bit of the story behind it. Late last year, we signed a contract with Siemens Enterprise Communications to extend their network management services and awarding the contract to us over three competitors Mr. Narita cited the importance of integration, to monitor the broad array of devices of different brands used by his customers. Our focus on our customers’ success helped us deliver value to Siemen’s.

Our solutions and our support will enable us to sustain and grow that partnership. CA Tools have helped Siemens and many other customers improve their network management service. Siemens network operations center manages more than 30,000 network elements in real time monitoring the behavior of each node in the customers’ communication network. CA Tools such as service tax and capacity management enabled Siemens to guarantee service level availability, managed values and optimize the availability and efficiency of their customer’s service.

The second customer I’d like to talk about today is Sony Pictures Entertainment, which is a leading producer and distributor of motion pictures and television programs worldwide. Everyday Sony is faced with two distinct challenges. First, how to produce new motion pictures and television content quickly in response to market need; and second, how to ensure the new films and television programs are not leaked before their official release. To tackle these challenges Sony needed to secure the distribution of valuable content across public networks by controlling access for staff and external stakeholders. They needed to ensure that users were correctly identified, authorized, and authenticated before any content was made available.

To accomplish this Sony turns to CA to deploy a single global identity and access management solution. The information needed to be integrated with Sony’s third party web solutions meaning that a single centrally managed repository was required to provide access rate information for any number of applications. As Heidi Kujawa, Director of Enterprise Applications of Sony explains; not only did CA SiteMinder and Identity Manager have the industry recognition and market leadership we wanted. It is also an open and integrated solution that work seamlessly with third-party products. This has allowed Sony to have a single solution to control identity management all while being able to add on average three new applications into the IAM service every six weeks. It also has helped Sony efficiently and effectively secure access to authorized users while enabling audit and compliance reporting mechanisms in support of corporate initiatives and government regulations. These are just two examples of how thousands of customers are looking to CA for help in solving their complaints

Thousands of customers are looking to CA for help in solving their complex IT issues and how we are maniacally focused on helping our customers govern, manage, and secure their IT networks. I believe that we have the right strategy for our market and the right approach for our customers and with every quarter it becomes more apparent that our products capability solutions in how we go to market are helping our customers become more competitive. And it's becoming clear that customers and the market we serve are taking another look at CA and what we can do to help them manage their complex IT environments.

Now let me turn it over to Nancy to take you through the details of the quarter.

Nancy Cooper

Thanks, John and good afternoon everyone. I'm pleased with our performance in the first quarter and the progress we are making in improving our business processes.

First quarter fiscal 2008 reflects our third consecutive quarter of solid business performance and I'm encouraged by our improved execution and early momentum in fiscal 2008. I will begin by reviewing our first quarter financials, then address our restructuring efforts and finally provide an update to our outlook for fiscal 2008. I'll begin with bookings.

First quarter total bookings increased 48% to $834 million. Their strong performance year-over-year was driven primarily by an increase in the number of large contracts which we renewed in the quarter as well as an increase in contract length.

During the quarter, we signed 10 license agreements greater than $10 million which aggregated to $202 million which is compared to four such contracts aggregating to $57 million in the prior year period. The weighted average duration of new direct bookings in the first quarter was 3.3 years compared to 2.5 years in the prior year period. When annualized, the year-over-year increase from new direct bookings was 22%.

Now at the beginning of this fiscal year, we had analyzed our portfolio of contracts with fiscal '08 maturities and started working on renewing them. We are pleased to see that in the first quarter, we renewed a number of these contracts. This approach should improve our bookings linearity for the year and provide us with more revenue opportunity in the current fiscal year. As a result of this approach and a slow start in fiscal 2007, we expect relatively easier year-over-year bookings comparison for the first half of this fiscal year and more difficult comparisons in the second half. We are expecting total bookings growth for the full year.

Total revenue in the first quarter was $1.025 billion, up 8% from the prior year, or 5% on a constant currency basis. Aside from currency benefits, the increase in first quarter total revenue was primarily driven by growth in subscription revenue which grew 12% from the prior year period or 9% in constant currency. Additionally, revenue from professional services in the first quarter increased 16% over the prior year period.

From a geographic perspective, North American revenue in the first quarter was up 5% over the prior year while international revenue increased 6% on a constant currency basis. On a non-GAAP basis, operating expenses for the first quarter were $769 million compared to $783 million in the prior year period. Excluding the negative impact of currency, operating expenses declined year-over-year by approximately $34 million or 4%. This reduction in operating expenses was principally driven by lower SG&A expenses which declined to $392 million from $429 million in the prior year period and reflects progress on our expense management initiatives.

Non-GAAP operating income was $256 million for the first quarter compared to a $166 million in the prior year period. In the first quarter, non-GAAP operating margin was 25% reflecting 8 points of improvement year-over-year. Net interest expense for the first quarter increased to $14 million, compared to $8 million in the prior year period. This increase was principally related to higher borrowings and loss of interest income associated with our share buy-back program.

Non-GAAP income was $159 million for the first quarter compared to a $104 million in the prior year period, a 53% increase year-over-year. This translates into a non-GAAP EPS of $0.29 compared to $0.17 in the prior year period, which is a 71% increase year-over-year on a per share basis.

Now let’s turn to our GAAP expenses, which include purchase software and intangible amortization and restructuring and others. Those items are excluded from our non-GAAP expenses. Including these items, total expenses before interest and taxes were $814 million for the first quarter down from $898 million in the prior year period. During the quarter, we recorded restructuring and other expenses of $12 million.

GAAP income from continuing operations was a $129 million in the first quarter or $0.24 per diluted common share, which is compared to the $35 million or $0.06 per share in the prior year period. The improvement in GAAP income was also favorably impacted as a result of purchase software from our Sterling and Platinum acquisitions becoming fully amortized.

Cash flow from operations in the first quarter was negative $13 million compared to negative $46 million in the prior year period. We exceeded our expectation for cash flow from operations in the first quarter, due in part to the timing of approximately $50 million in tax payments which we now anticipate will be made during the remainder of the fiscal year. Also in our last call, we highlighted first quarter head wins to collections compared to our first quarter a year ago from single installment billings. These z up being offset by some single installment contracts which were booked, billed and collected in the first quarter.

Turning to the balance sheet, we ended the quarter with $1.7 billion in cash, and cash equivalent and $2.6 billion of total debt, bringing our net debt position to approximately $850 million. In the first quarter we successfully executed our previously announced accelerated share repurchase program and repurchased $16.9 million common shares or approximately 3% of our total outstanding, this program will cost $500 million.

Now I would like to provide you an update on our full year outlook. While we are encouraged with our strong first quarter results, we are only in the first quarter of the year and have much to do on the full year’s execution. So we will continue to monitor our progress and are maintaining our previous total revenue guidance of $4.05 billion to $4.1 billion. We are increasing the high end of our previous non-GAAP operating EPS guidance for the year by $0.02 to $0.94 to a $1. Despite an increase in the full year tax rate for a non-GAAP income to approximately 35%.

This tax rate is a two percentage point increase from our previous outlook for the year translating to a headwind of almost $0.03 per share. We expect approximately 514 million actual shares outstanding and a weighted average diluted share count of approximately 543 million shares.

We are also increasing a high-end of our previous GAAP EPS guidance for the year by $0.02, to $0.75 to $0.81. GAAP EPS is based on no additional restructuring beyond pretax restructuring charges of approximately $35 million.

Finally, our previous full year assumptions for cash flow from operation remain unchanged. We are maintaining our outlook of $1.05 billion to $1.1 billion in cash flow. And now I will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

John Swainson

Operator, we are ready to take our first question.

Operator

Our first question comes from the line of Phil Winslow.

Phil Winslow - Credit Suisse

Hi guys, great quarter. I just wanted to focus a little bit on your businesses, distributed versus main frame. And John just wondering if you can give us a sense for just what you are saying are there from sort of a macro standpoint and mainframe land in particular. Are you starting to see less pricing pressure than you have been to, over the past several years or is this simply a good assembled mix growth and potential share gain coming through?

John Swainson

Thanks Phil. I think it’s a couple of things. There has been a lot of mix shift into the market place over the last couple of years that clearly helps increase the inventory. But I also think that we have, as we've said gotten much more disciplined in our renewals process. We have a worldwide team now that has centralized that process. We have better tools that help us understand how we're pricing these things. We have better tools that helps us understand what value we're delivering, or what products deliver that value. So I think we are doing a better job of renewing these things, and I think there are more mixes out of the derivative. So, I think it’s a combination of both.

Phil Winslow - Credit Suisse

Great. And then as far as when you do look at the, distributed piece of your business, why don’t you if you could just comment on that and just the outlook there?

John Swainson

Our distributed business is going well. We are very focused in the distributed business on selling new software that is software that we sell does not attach to a renewal. Historically, I think you probably know, we did most of our new sales in conjunction with the renewal and our goal is ship that. So, we do most of our new sales not in conjunction with our renewal or stand alone. We certainly made progress in that regard. In the first quarter, we are more to do, we would certainly not claim we are where we want to be. But we are pleased with the direction and we're seeing very good uptake from products like Clarity and some of our network management products and stuff like that.

Phil Winslow - Credit Suisse

Great. Thanks Guys.

John Swainson

Thank you.

Nancy Cooper

Thank you.

Operator

Our next question from John Difucci with Bear Stearns

John Difucci - Bear Stearns

I have two questions, one for Nancy, one for John. For Nancy, how much did the cash flow benefit from an increase in collections from single installment contracts booked, billed, and collected in the quarter. And I guess and I know you said it's negative from the quarter before but was there a delta, was it a net positive or net negative there?

Nancy Cooper

Well actually it’s kind of different dynamics this quarter than the last quarter. A year-ago if you remember my most of the comments I made in the last quarter call is we had kind of benefit of billings coming into the first quarter last year, which we collected in the first quarter which was round $85 million. But we ended up with first quarter ‘08 it was a similar amount but it was booked, billed, and collected in the first quarter. So they ended up being about the same amount year-to-year but we did have a similar amount in the first quarter.

John Difucci - Bear Stearns

Okay and just so I understand that these are specifically you’ll sign let’s say a three year deal, will you collect certain amount each year but in this case, these cases, these are deals we are collecting the entire amount up front, I am correct on that?

Nancy Cooper

That’s correct.

John Swainson

A typical pattern is about 40% upfront with the remaining two payments being 30% obviously. However, occasionally we've got customers who want to do it differently and occasionally we decide we want to do it differently. And in those cases we may collect 100% or some other percentage.

John Difucci - Bear Stearns

Okay thanks. And John just a follow-up here. Looks like the bookings, even product booking, I mean services accelerated, even we could take that out, it looks like there were they were also even on an annualized basis about 12% which looks pretty good. Revenue looks like it was stronger too from the international revenue than it was last quarter. I am just curious so and I know you don't break it out by bookings but if you can just give us some subjective information on just some across geographies how the U.S. did as far as business momentum versus Western Europe and Asia than emerging markets?

John Swainson

Well the U.S. did well I mean looking at bookings the U.S. continues to be the strongest part of our business but EMEA was well into the double digits which is a very positive sign as you know we have been talking about this for some quarters that we made some management and organizational changes there, we think those are bearing fruit. So we are quite encouraged by what we're seeing in terms of bookings role from our international business.

John Difucci - Bear Stearns

Okay, thank you.

John Swainson

Thank you.

Nancy Cooper

Thank you.

Operator

Our next question comes from the line of Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon everyone good quarter. Nancy, on the margin side, you had a very nice uptake this quarter and I realized you've gone through a lot of your cost reductions and so on; but are there other initiatives or other low hanging fruits that you think you will have over the next couple of quarters to keep driving improved margin performance?

Nancy Cooper

We have a number of initiatives as we keep looking in our business and comparing to competitions. So we think there are a number of things to do. In the first quarter of the year this is a business where we do have expenses that occur more in the second half. I mean a lot of our new product sales which will have the commensurate commissions coming with them, it will be more in the second half. Some of our promotion is more back-end weighted. And our services business will continue to grow over the year and we'll have expenses. Sarah, we have a lot of focus on continuing to improve performance and I don’t think that's going to obey it.

Sarah Friar - Goldman Sachs

Okay, great and then John it's a little bit of the question you were just asked, but there is a lot of concern right now given what's going on in the broader markets with credits, peers and so on, that CIO's might start to kind of hold back a little on budget. I mean, can you talk a little bit about here in the U.S. what you're seeing as you talk to your sales force very recently, is there any signs of folks getting a little bit nervous about our key spending?

John Swainson

We're not seeing it. I mean, I hate to generalize because we don't obviously compete in the entire IT marketplace, but the places we compete, enterprise governance and management security, all still appear to have a high priority inside of IT shops and I can sort of speak from first hand experience having been out in the last two weeks meeting with several state CIO's with probably half a dozen large customer CIO's. These are still -- these are companies who are still spending money, they are still very focused on spending money on things that improve their business, their security remains important for them, the whole governance area remains important for them, making sure that they get automation into their governance processes. These are all important topics and they seem to be spending money. So we haven't seen any abatement in that.

Sarah Friar - Goldman Sachs

Got it. And then on the fourth question on the mainframe. I mean we are definitely hearing kind of interesting finds of pick up and mainframe kind of across the board, freshly as people look at virtualization they are drawn back to the mainframe where they can do some of the things, sort of isolation of work loads and so on. Is that a trend that you feel that you're benefiting from and how many of those 10 contracts greater than $10 million had a big mainframe component?

John Swainson

Without knowing in detail, I would guess that all of them did.

Sarah Friar - Goldman Sachs

Okay.

John Swainson

And I think to your point, the mainframe has always been an excellent platform for running large diverse data intensive work loads. Those are the essence of what it means to run a corporation these days. And so, we think that yes, there is a renewed interest in the mainframe, it’s one that we're obviously, strongly encouraged by it.

Sarah Friar - Goldman Sachs

Okay. Great, thanks a lot.

John Swainson

Thank you.

Operator

Our next question comes from the line Katherine Egbert with Jefferies. Please make a correction. Our next question comes from Kirk Materne with Banc Of America Securities.

Kirk Materne - Banc of America Securities

Thanks very much. Nancy, just a quick question in terms of the guidance, I know you guys are being, want to be conservative and somewhat prudent here. But with the margins being up this quarter, I guess what should we be expecting in terms of margins going forward, I know you didn’t change any of the top-line guidance. Are there any sorts of seasonal factors in terms of how the spending should ebb in flow over the next few quarters that we should take into account, or I guess whether some upside surprises this quarter, you just don’t want to make assumption about for the next few?

Nancy Cooper

First Kirk, we are in the first quarter of the year, so in that definitely it’s a factor, but it really has to do with several of those things I mentioned earlier, which is our commissioned structure will be related to new product and a lot of that is backend loaded. Some of our promotional spend is more backend loaded. And our services businesses as it keeps growing have to send people to do it. So, that will be more backend loaded. And those are really the factors; I mean we're encouraged with the progress we're making. It’s just too early in the year to be concluding those kinds of things.

Kirk Materne - Banc of America Securities

Okay. And my second question is on, just pricing increase. I think you guys really try to put there on maintenance. Could you just give us some color on sort of the acceptance of customers around that, if gotten any push back on that and has that had any significant impact I guess on results already, or is that something you expect to see in a bigger way downstream?

John Swainson

It's certainly hard to quantify in any one quarter, Kirk, but we do think we are seeing a little bit of improvement and IT related to someone earlier, it's more in the area of we think the discipline that we’ve brought to our renewal’s process, the result of that discipline we think is slightly higher renewal yield, how much that comes from the pricing increase we put in place in the beginning of the year and how much comes from other things I would be guessing if I gave you a number, but we are encouraged by the progress that we are making in real’s

Kirk Materne - Banc of America Securities

Okay, fair enough, thanks very much.

John Swainson

Thank you

Operator

Our next question comes from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies

Hi, can you hear me this time?

John Swainson

Yeah

Katherine Egbert - Jefferies

Okay, let’s talk into a black hole before. I think this might just have been asked, but I wanted to know the impact of early renewals on the bookings number of the first quarter. Can you quantify that at all?

John Swainson

I can’t quantify at - the early renewal is a term that we use really to mean something very explicit and I am not sure if you mean that way either. We typically talk about early renewals, we talk about renewals that are six months outside of the calendar year period and this year we did very few of those, we did a little bit whether it made sense for the customer, when we did last time, we did it years past. As I mentioned before we’ve become much more disciplined in our renewals process.

One of the things that discipline brings is looking at the revenue impact of those renewals and obviously taking into account both the customers willingness to do that and it's impact on our finances. As you know, our financial model is one that is fairly influenced I would say by when you do a renewal and in general an earlier renewal is better, but an early renewal in fact can have a negative impact because of the risk spread on the existing revenue. So we think we've gotten better at doing this, we think we've gotten more discipline to doing it for the reasons that I have talked about before.

Katherine Egbert - Jefferies

Okay, thank you and then Nancy with you guiding EPS that have been guiding the tax rate up unless there is something unusual going on with other income. It implies that operating margin is going to be up for this year is that right?

Nancy Cooper

Year-to-year, Katherine?

Katherine Egbert - Jefferies

Yes.

Nancy Cooper

Year-to-year operating margin will be up.

Katherine Egbert - Jefferies

Okay great. And then last one, can you just talk about the linearity in your buyback going forward?

Nancy Cooper

Well, the first one of our buybacks are, it's in accelerated share repurchase. And the pattern of repurchase is really done by the banker we hired and is not we have no saying how that completed. And so what you should anticipate sometime in the third quarter that transaction will be completed but we got the economic impact in the quarter we've just finished.

Katherine Egbert - Jefferies

Okay, got it. Thank you.

Nancy Cooper

Thank you.

Operator

Our next question comes from Todd with Deutsche Bank.

Todd Raker - Deutsche Bank

Hey guys, nice quarter.

John Swainson

Thank you.

Nancy Cooper

Thank you

Todd Raker - Deutsche Bank

Two questions if you just look at your business portfolio today at security storage, distributed mainframe, can you give us some sense in terms of the relative growth profile of the four businesses and how do you see storage and security rates setting into the strategic direction as you’ve kind of outlined this new kind of product strategy?

John Swainson

Sure, well first was it's key direction is to help the world's largest IT users govern, manage, and secure their IT environments. And they do look at these things being a continuum. They obviously need to have the tools in place to help them know and plan what they are going to do, they need to have tools in place to monitor that, and that monitoring includes not only traditional devices like servers but also storage devices, also network devices, also applications and it also includes the security profile, particularly who has access, to what's shown on those devices, what permissions have you granted under what conditions, and when have you revoked them. So, we see these things as being very, very well interlocked.

Now from a growth point of view, we talked a little bit about the mainframe. Earlier, we think that we had pretty good growth in the mainframe; we had good growth in the distributed profile, our distributed products as well. The group we call BSO; Business Services Optimization, grew more strongly led by our clarity product. We had growth in networks management and it's really led our ESM product portfolio. We've had, we've struggled frankly in the storage business and we said in our previous calls that we expected that to start turning around. It seems to be, it's not where we want it yet, but XOsoft, which is our key product in that place did very well, particularly in the indirect channel. So I think we're not quite hitting on all cylinders yet but we're hitting on more.

Todd Raker - Deutsche Bank

Okay. And just on the bookings side, if you kind of give us a qualitative sense in terms of how much of the booking strength this quarter was kind of just accelerated timing of bookings? And are you more confident today than you were 3 months ago in terms of your ability to grow the bookings year-over-year and the ability to achieve a higher growth rate than expected?

John Swainson

Definitely. I think we have better insight into our book of business. We've done a lot of work to understand that over the last year. I think we’ve said more inside, we have better process for renewing our existing contracts, we have a better process for selling new software without having a contract renewal in place. So, I am confident in our ability to grow our bookings.

Todd Raker - Deutsche Bank

Okay. Great, thanks guys.

Nancy Cooper

Thank you.

Operator

Our next question comes from Bob Stimson.

Bob Stimson - WR Hambrecht

Hi, good afternoon John and Nancy. Hey, just a quick question. Can you guys just give us a little bit of help obviously with VMware and (inaudible) out there. We are trying to get a sense of how will virtualization impact pricing or what will that do to cycle times on the main frame? Does that consolidate the pricing because you will be using, print software on one mainframe and maybe just give us a sense of how that’s going to play out. Is that a good things to add thing, can you just give us a sense of how that market is going to play out?

John Swainson

I don’t actually don’t think its going to have much impact on the mainframe. I mean VMWare and other products tend to live in distributed clustered environments. Some people would argue that they do for those environments, what the mainframe operating systems have been doing in the mainframe for a long time. It's that mainframe has an operating systems called VM that’s been around for at least 30 years. I was a systems engineer on it about 28 years ago. So, you could argue that this is sort of mainframe stuff now coming into the distributed environment. I don’t think it’s going to have any impact frankly on the kinds of workloads that run in the mainframe.

I think it will however lead to more efficiency in distributed environments which have historically been incredibly inefficient. And I think you heard us and other people talking about the fact that, the average distributed to whether it’s Intel or UNIX-based machine may run which as little as 15% or 28% utilization and the promise that some of these utilization technologies whether they are from VMware or Microsoft or other people, these promise to allow you to have a higher level of utilization and the opportunity for us we think is to manage that in the context of the overall enterprise environment. Our value proposition is managing all the elements of the system as a system and so frankly we think we see a business opportunity, a good business opportunity here.

Bob Stimson - WR Hambrecht

Okay and then Nancy, just quickly the tax rate, just curious again this was up $0.03, I guess you call it the headwind, but can you just explain to us I mean you are accruing that number for the year, is that something in the international tax basket or how does that accrual kind of jump up and can’t that change again?

Nancy Cooper

Sure, I mean when it ended up, when we finalized the [DSR] structure, a couple of things changed, you always are in your international tax have some levels of changes that can be occurring and this is just our best estimate at this time that’s this $0.03 headwind.

Bob Stimson - WR Hambrecht

Great, thank you

Nancy Cooper

Thank you

Operator

Our next question comes from Brendan McCabe `with CIBC

Brendan McCabe - CIBC

Hi guys can you hear me?

John Swainson

Yes

Brendan McCabe - CIBC

Alright, two quick ones. CapEx I think it was a little lower than I was expecting, just wondering if this is a run rate or they should kind of walk up through the end of the year, that’s the first one. And then the second one is with the process and the insight that you talked about around bookings, do you think you will get to a point where you will start to enumerate your bookings expectations?

Nancy Cooper

Sure let me first do the CapEx and then I will turn it over to John on the bookings. I really think for full year we should still expect CapEx about flat year-to-year.

Brendan McCabe - CIBC

Okay

Nancy Cooper

140 you can have aberrations but we still think it’s around $200 million.

Brendan McCabe - CIBC

Okay.

Nancy Cooper

So that's about the same Brendan. And on the bookings repeat the question would you one more time.

Brendan McCabe - CIBC

Yes, just you talked about having more process around bookings and little more insight, I am wondering if you know, if you look at a couple of quarters do you think you get to the point where you putting up bookings got?

Nancy Cooper

Yes, I think right now you just have to wait until we feel we are in the mood, and the mood that would be…

Brendan McCabe - CIBC

The mood.

Nancy Cooper

The mood to do that. And I repeat we can really comment when that would be

Brendan McCabe - CIBC

But you think that's a goal that everyone's working towards?

Nancy Cooper

I would say the goal is what you heard John say before, you are going to hear us focused on new product sales and renewals done at the right kind of renewal process with getting more value on our pricing.

John Swainson

Brendan, if I can elaborate a little bit more. I mean, we clearly would like to give more visibility for you guys as we put the right processes and controls in place at CA, we are becoming more confident in and our ability to interpret this data and to manage this data and that means that at some point I think we will be confident in our ability to forecast it.

Brendan McCabe - CIBC

Okay.

John Swainson

But I think that until we are in that position it would really be that responsible for us to --

Nancy Cooper

Brendan, we are trying to go through what would help you all understand us better.

Brendan McCabe - CIBC

Yeah, that's great, that's great.

John Swainson

That is one thing we are really focused and what those things are.

Brendan McCabe - CIBC

So I mean hearing you say that of course we are going to back to that into our…

John Swainson

And I would also add that the timing is a lot better to do that now then it was even a couple of years ago. We've more or less completed our transition away from our old business models and new models so some of these things more like-to-like, quarter-to-quarter than they might have been in years past.

Brendan McCabe - CIBC

Right.

John Swainson

And as I said we've got a better sense what these numbers mean and the discipline in managing

Brendan McCabe - CIBC

Alright, great. Nice job.

Nancy Cooper

Thank you.

Operator

Our next question comes from Kevin Buttigieg.