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CA Technologies (CA)

Q2 2013 Earnings Call

October 25, 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

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

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

James Wesman

Abhey Lamba - Mizuho Securities USA Inc., Research Division

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

Matthew L. Williams - Evercore Partners Inc., Research Division

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

Sitikantha Panigrahi - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the CA Technologies Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Kelsey Doherty. You may begin.

Kelsey Doherty

Thank you, and good afternoon, everyone. Welcome to CA Technologies' Second Quarter Fiscal Year 2013 Earnings Call. Joining me today are Bill McCracken, our Chief Executive Officer; and Rich Beckert, our Chief Financial Officer. These prepared comments were previously recorded. This conference call is being broadcast on Thursday, October 25, 2012, over the telephone and the Internet. 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 our 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. Please note that our third quarter quiet period begins at the close of business on December 14, 2012.

Before I turn the call over, I'd like to highlight that, for modeling purposes, our year-over-year currency headwind on revenue guidance is expected to be roughly 2 points for the full year.

So with that, let me turn the call over to Bill.

William E. McCracken

Thanks, Kelsey, and good afternoon, everyone. Thank you for joining us. I'd like to start this afternoon by providing some detail on CA Technologies' second quarter results and our revised annual and long-term guidance. I will then turn the call over to Rich for a more detailed review of the financials and updated guidance before we open the call for questions.

Let me start by saying that our second quarter was short of our objectives in several areas. Obviously, we are disappointed in our performance. Because we do not expect the macroeconomic environment to recover quickly and we therefore expect that our marketing transition will be elongated, we are lowering our guidance for the year. I will walk you through the quarter, what has changed in our outlook, what did not work well and some things that did work well.

Before I do that, let me turn to our expectations as we entered fiscal year '13. We knew the fiscal year '13 renewal portfolio would be down year-over-year. We also knew that we would be reorganizing the sales force, and we were sensitive that the economy might be a headwind this year. Having said that, there are 2 critical aspects of our business that are not performing to plan.

First, underlying our performance, new product and capacity sales did not come in as expected, particularly new sales outside of the renewal. New product and capacity sales were down approximately 25%.

Second, as we have outlined, our sales force reorganization has been slower to gain traction than we had expected. Clearly, I'm not satisfied with our sales execution and transition to segment marketing, which is a key to our future growth.

Finally, I would be remiss in not mentioning the weakening global economic outlook which has impacted our performance. In fact, we saw sales cycles elongate and deals slip out of the quarter. This trend exacerbated our efforts to sell to new customers under the segmented marketing model.

As we told you when we announced quarter 1, we are closely inspecting the pipeline and managing progression from a segmented view. This is new. This inspection improved the visibility into and quality of pipeline, but shifted the expected time of closing of some transactions to future quarters. All of this was exacerbated by the macroeconomic climate.

The result, as Rich will review in greater detail, is that we are reducing our full year expectations for revenue in constant currency growth to negative 3% to negative 1%. This results in updated cash flow guidance of negative 8% to negative 4% in constant currency.

However, we will continue our focus on cost and expense control through the second half of the year and expect our non-GAAP operating margin, which we raised last quarter, to be 36% for the full year. As a result, we are updating our outlook for non-GAAP EPS growth to 6% to 10% in constant currency.

Before addressing the plan for the balance of the year, let me place our second quarter results in perspective. First, there were headwinds that we knew we would have to contend with during the quarter. With the renewal portfolio down year-over-year and the mainframe portion down even more, we expected capacity sales to be down. This, coupled with an uneven macro environment where buyers are being cautious, resulted in capacity being down approximately 60%.

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