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CA Technologies (CA)

Q3 2012 Earnings Call

January 24, 2012 5:00 pm ET

Executives

Kelsey Doherty - Senior Vice President of Investor Relations

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

Richard J. Beckert - Chief Financial Officer and Executive Vice President

Analysts

Scott Zeller - Needham & Company, LLC, Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Kevin M. Buttigieg - Collins Stewart LLC, Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to CA Technologies' Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ms. Kelsey Doherty. Ma'am, you may begin.

Kelsey Doherty

Thank you and good afternoon, everyone. Welcome to CA Technologies' Third Quarter Fiscal 2012 Earnings Call. Joining me today are Bill McCracken, our Chief Executive Officer; and Rich Beckert, our Chief Financial Officer. As a reminder, this conference call is being broadcast on Tuesday, January 24, 2012, over the telephone and the Internet. The information shared in this call is effective as of today's date and will not be updated. All content is the property of CA Technologies and is protected by U.S. and international copyright law and may not be reproduced or transcribed in any way without the express written consent of CA Technologies. We consider your continued participation in this call as consent to our recording.

During this call, non-GAAP financial measures will be discussed. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release, which was filed on Form 8-K earlier today, as well as in our supplemental earnings materials, all of which are available on our website at ca.com/invest. Today's discussion will include forward-looking statements subject to risks and uncertainties and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks. So with that, let me turn the call over to Bill.

William E. McCracken

Thanks, Kelsey and good afternoon to everyone. Thank you for joining us. I hope you have had a chance to review our press releases announcing our third quarter fiscal 2012 earnings and our enhanced capital allocation program. I'll start this afternoon with a brief overview of our third quarter performance. I'll then talk to you about our capital allocation strategy, which we first discussed with you at Investor Day in July and then indicated in October that we would provide you an update this quarter. I will conclude with a review of our progress driving sales growth and margin expansion. Rich will then provide details on the quarter and guidance for the remainder of fiscal 2012. We'll then take your questions.

In the third quarter, we saw growth in revenue and EPS and operating margin expansion, even after adjusting for a single license payment we received. As noted in our release, the unsolicited early single payment from a software company relates to a license agreement we entered into in connection with a litigation settlement we first announced in February 2009. This payment was not included in annual guidance provided by the company in October because we expected it in fiscal years 2013 and 2014.

Headlines from the quarter, which reflect year-over-year growth rates include: revenue growth of 10% in constant currency and as reported. The license payment added about 3 points to this growth. Non-GAAP operating margin was 38%, including approximately 2 points from the license payment. Non-GAAP earnings per share growth was 28% in constant currency. The license payment added 10% to this growth. Cash flow from operations, including the license payment, declined 19% in constant currency and 20% as reported. As we had anticipated, cash flow for fiscal 2012 is weighted towards the fourth quarter and this afternoon, we confirmed our cash flow guidance for the year. Our current revenue backlog grew 2% in constant currency and 1% as reported.

While we had a good quarter on many measures and continued to make solid progress against our long-term goals, we know we are not done. We remain focused on executing our strategy and driving further operational improvements, including new product sales, execution in EMEA, greater sales productivity and continued work on our expense structure.

Now let me go to our enhanced capital allocation program, starting with some background. As you recall, in July, we said as part of our long-term guidance, that we expected to return 40% to 50% of our free cash flow to shareholders in the form of share repurchases and dividends. As I mentioned in October, management and the board were continuing to evaluate ways to optimize our balance sheet, while maintaining the financial flexibility we need to build our business and continue to improve our competitive positioning. We believe our enhanced capital allocation program announced this afternoon puts us on a path to achieving a balanced approach to return more cash to shareholders, while still enabling us to invest in our future. This is a logical extension of the strategic and operational priorities we outlined at Investor Day.

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