CA Warning Points to Product Holes

After a turbulent few months, Computer Associates International Inc. (CA)s (NYSE: CA) first-quarter earnings will be as much as $55 million below original estimates. And one analyst says this could be part of a broader trend in the software industry that may lead CA to consider acquisitions.

The Islandia, N.Y.-based firm has confirmed that its first-quarter results will now be somewhere between $830 million and $850 million -- 3 to 5 percent below original guidance.

Investors took the news in stride. CA shares rose slightly in early trading this morning, up 3.75 percent to $25.46. Perhaps this was due to optimism about future bookings. In a statement, CA’s chief operating officer, Jeff Clarke, said the company's first-quarter direct bookings have grown 35 percent year-on-year and indirect bookings have grown around 40 percent.

Jasmine Noel, principal analyst at Ptak Noel & Associates believes a combination of factors is responsible for CA’s performance. “I am pretty sure that CA’s problems have affected them, but a lot of the software companies’ earnings are down,” she says.

Earlier this week, for example, BMC Software announced that its first-quarter earnings will be between $318 million and $328 million, below the estimated range of $345 to $355 million.Noel believes the software giants' financial performance reflects the fact that users are choosing specialized software vendors, many of which are startups, for in-depth analysis of their data. This means that an additional revenue stream has opened up in this market -- but despite widespread deployment of systems management software from the major vendors, such as IBM Corp. (NYSE: IBM),

Hewlett-Packard Co. (NYSE: HPQ), and CA, many users are looking elsewhere for additional software that plugs into these products.

“People are looking for very specific solutions that provide analysis on [software] products such as Tivoli [IBM], OpenView [HP], and UniCenter [CA]. They are not convinced that the large companies have these solutions for analysis yet,” says Noel.

That would seem to indicate that there is room for newer management products from giants such as CA and HP -- or that acquisitions may be in order.

A number of specialist software vendors and startups are now looking to exploit users’ need to drill down into their data. These include Collation Inc., ProactiveNet Inc., Quantiva Inc., and System Management Arts Inc. (Smarts).

Although CA is working on improved analysis software of its own, these startups are ripe for the picking, according to Noel. “It’s always possible that CA will buy one of these firms."Things have not exactly been rosy at CA recently. In April, CA CEO Sanjay Kumar stepped down as the tremors from the company’s accounting scandal reached the boardroom (see Kumar Leaves CA). The company also restated certain financials for fiscal year 2000 and 2001 after CA’s Audit Committee found that a total of $2.2 billion in revenue had been booked prematurely by quarter.

— James Ptak Rogers, Site Editor, Next-gen Data Center Forum