CA undeterred by licence revenue hitches

By ADAM GIFFORD

Computer Associates chairman and chief executive Sanjay Kumar remains optimistic that his company's decision two years ago to change its accounting methods has positioned it to take advantage of fundamental shifts in the way software is sold.

The change halved its turnover to US$3 billion ($5.3 billion), spooked investors and sparked Securities and Exchange Commission and Justice Department investigations, which are still dragging on.

Under the Generally Accepted Accounting Practice (GAAP) rules used by most United States software companies, licence revenue for years ahead can be booked on the day a deal is signed, even if the money may trickle in over time.

That leads to a frenzy of sales activity towards the end of each quarter.

Computer Associates (CA) found a way to book its revenue a month at a time while still, it believes, conforming to GAAP.

Kumar told a customer forum in Melbourne last week that this allowed the company to achieve more consistent results and gave it greater flexibility in the way it did business - something it needed to do to accommodate technology shifts such as web services and utility computing, which were turning software into a service.

"Whether you buy the product for multiple years or whether you buy it month to month, the economics to Computer Associates are effectively the same," Kumar said.

"It is the reason we have been able to go to the second-largest airlines reservation company in the world and get paid based on bookings and not on the number of Mips or NT or Unix servers.

"It is one of the reasons we have been able to go to one of the largest telecommunications carriers in the world and get paid on the number of mobile users rather than Mips or servers or those kinds of things."

Kumar said the new licensing models, branded as FlexSelect, were a better way of doing business and would cause a fundamental shift in the industry.

He told the Herald the investigations by the SEC and the Justice Department were not affecting the business or customers.

"Ultimately things like cash talk. The fact that we have been doing US$1.2 billon cashflow the last few years - greater than $1 billion the last five - you don't make those things up. Cash is real.

"We have said publicly we are on target to make $1.2 billion again this year.

"We will beat our numbers four quarters in a row. We are one of the very few public companies who have moved up our estimates for the year."

Computer Associates Australia and New Zealand made a A$4.1 million ($4.38 million) profit on revenue of A$153.4 million in the year to last March, compared with a A$29.6 million loss on A$144.5 million the previous year.

Kumar said many CA customers still wanted to buy the software long-term so they could have certainty over their costs.

"It is good for us, because it gives visibility into future revenue. Deferred revenue, which two years ago was zero, is today US$3.5 billion.

"Lots of new customers are buying month to month because it manages risk better.

"This industry has a bad reputation for selling stuff that is difficult to implement.

"There is a group of customers who say, 'What better way to hold you accountable than to buy it month to month'. Customers will say, 'If it is not better in two more months, we're out of here'.

"Competitively I love it because I can go to a customer and say, 'I am competing with X, Y and Z, and my single biggest competitive differentiator is that you can hold me accountable'."

Kumar saw IBM as the main competition - "not on the products, but on services and the fact that they want to own it all".

Computer Associates had its roots in creating tools to manage large computer systems. It grew by acquisition, amassing a bewildering array of 1200 products.

Kumar said that stage of its life was over, and it had not made a major acquisition for three years, which had helped to bring some stability to the business.

"We focused on what we really are, which is a management software company."

The size of software deals had come down across the industry, and Kumar expected many software lines to become commoditised.

"You have to make your money off fewer and more sophisticated premium products."

CA has joined the industry trend of making its software more modular. This includes Unicenter, its flagship tool for managing large and complex systems.

"In the new Unicenter version three, we completely unbundled the core so now the core is modular. It is six pieces so you can buy each of the six individually."

* Adam Gifford travelled to Melbourne as a guest of Computer Associates.