CA Q4 Earnings Call Transcript

123jump.com Staff
21 May, 2009
New York City

The business software company reported quarterly revenue declined 5% to $1.04 billion. Net quarterly income rose 1% to $72 million aided by strong expense controls. Earnings per share was flat at 13 cents, same as a year-ago quarter. The company generated revenue of $4.27 billion in fiscal 2009.

CA, Inc. ((CA))
Q4 2009 Earnings Call Transcript
May 13, 2009 5:00 p.m. ET

Executives

Joseph Doncheski - Vice President of Investor Relations
John Swainson – Director & Chief Executive Officer
Nancy Cooper – Executive Vice President & Chief Financial Officer

Analysts

Sarah Friar – Goldman Sachs
Michael Turits - Raymond James
Abhey Lamba - UBS
Walter Pritchard – Cowen and Company
John DiFucci - JPMorgan
Todd Raker - Deutsche Bank
Philip Winslow - Credit Suisse
Katherine Egbert - Jefferies & Company

Presentation

Operator

Good day and welcome to today’s CA''s fourth quarter and full fiscal year 2009 earnings conference call. Today’s call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to Mr. Joe Doncheski, Vice President of Investor Relations. Please go ahead, sir.

Joseph Doncheski

Thank you and good afternoon everyone. Welcome to CA’s fourth quarter 2009 earnings call. I am Joseph Doncheski, 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, May 13, 2009 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 expressed 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 as well as in our supplemental earnings materials, all of which are available on our website at investor.ca.com.

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.

As part of our ongoing efforts to streamline our financial presentation and promote transparency, we are again providing some additional detail in our supplemental disclosures as follows. We have broken down the non-current portion of our revenue backlog into three components, giving better insight into how these amounts flow into future revenue. We are also providing a roll forward of our revenue backlog for additional clarity. And finally, given the foreign exchange volatility in fiscal 2009, we are now providing additional constant currency detail in our supplemental information.

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

John Swainson

Thanks Joe and good afternoon everyone. I am very satisfied with CA’s performance during the last quarter. Our results reflect the hard work we have been doing over the last four years to become a more innovative, cost-effective and customer-focused organization. They tell a compelling story.

In FY09, we increased our non-GAAP EPS by 30% over FY08, our cash flow from operations by 10%, our total bookings by 11% and we showed a five percentage point improvement in our non-GAAP operating margin. We met or exceeded our annual outlook for revenue, bookings, EPS and cash flow from operations.

Even in a good economic environment these numbers would be impressive but in the current economy they are even more so as they reflect our outstanding focus, cost management discipline and execution. We were able to grow annual revenue modestly on a constant currency basis which speaks not only to the resiliency of our ratable business model but also more importantly to the value that our customers see in our products. They view our solutions as key to helping them get more value out of their IT infrastructure.

Let me give you a couple of examples. In the fourth quarter we closed a large; multi-million deal with Acxiom, one of the world’s largest providers of interactive marketing services. Acxiom turned to us to help them refocus their IT resources to deliver the services they needed to drive their business. In winning this contract we stressed our concept of Lean IT which calls for maximizing IT value while minimizing IT costs. Our solution enables Acxiom to monitor and manage every facet of their IT environment; networks and infrastructure, application performance, mainframe, projects and security.

What was particularly gratifying about this win was that we beat an incumbent vendor, BMC. Any time a customer chooses you over an incumbent it speaks volumes about the quality and completeness of your offering. Partnerships with customers like Acxiom work well when we offer them ways of reducing their costs and at the same time increasing the value of IT to their business.

On average, 70% of IT budgets are spent on just managing operations and keeping the lights on with only 30% left for grow or transform initiatives. If we can help bring down the cost of managing IT systems by just a few points and funnel that money into driving business growth it will help our customers significantly change their value proposition.

Another impressive CA win was at Cablevision, who are one of the nation’s largest cable companies serving 4.7 million households and 600,000 businesses in the New York metropolitan area. To be successful, Cablevision needs its network infrastructure operating at optimal levels 24/7. Downtime for the network infrastructure is just not an acceptable option. Neither is overspending on IT. Cablevision found that its existing software and services solution provided by IBM was just too costly so they turned to CA and our eHealth and Spectrum offerings to proactively manage and monitor their network.

Infrastructure changes that once required a service call to IBM are now automated. When you are dealing with managing a network as extensive as Cablevision’s, that ability can add up to big savings. By implementing Lean IT at Cablevision we are helping to make their network and operations more efficient while at the same time saving them big dollars.

Another important win in the quarter was of a large U.S. pharmaceutical customer that asked for help in prioritizing their spending on IT projects in order to meet their IT budget. Using CA’s Clarity Project and Portfolio Management Solution, the CIO was able to quickly identify the 20 lowest priority projects that were costing too much and weren’t linked to his current business priorities.

Now I know all of you spend a lot of time tracking the IT needs of the financial industry and trying to gauge how the recent turmoil and consolidation will affect the industry in general and CA in specific.

In the fourth quarter, I am pleased to tell you that we closed a substantial number of renewal deals in the financial services sector with some of the industry’s biggest players. We did see a couple of deals slip to the first quarter but both closed in the first week of April. I am particularly pleased that we were able to maintain pricing discipline in all of these renewals which enabled us to comfortably extend some contracts past our normal three year duration guideline. Why did they end up renewing with us? The answer goes back to the depth of our portfolio. CA offers the network and infrastructure management, security and application performance management solutions vital to running their business both on mainframe and distributed platforms.

Our government business also continues to do well. We closed a Wily deal with the Department of Veteran Affairs and a mainframe contract with the U.S. Navy Federal Credit Union. We also closed a large transaction featuring eHealth with DISA and we continue to see considerable opportunities in this sector for FY10.

Let me take just a few moments to highlight our mainframe business. The mainframe market is thriving as companies worldwide continue to host their most critical applications and data on this platform. During FY09, we saw healthy growth in the mainframe bookings compared to the prior fiscal year. At CA World last November we unveiled Mainframe 2.0, an innovative initiative that leverages web-based technology to change the way the mainframe is managed.

And recently we launched the May Mainframe Madness, a month-long campaign that features major product announcements, intensive communication with customers and other high profile marketing activities. Over 130 CA products will be upgraded to use Mainframe 2.0 technology and over 40 have already been upgraded.

With respect to CA’s EITM distributed portfolio, in the fourth quarter we saw the strongest demand for Wily which manages application performance and for our eHealth and Spectrum network and infrastructure offerings. All gained considerable share in the marketplace. In late April we rolled out 13 new and enhanced EITM products aimed at helping CIOs achieve Lean IT. The launch included products across our entire portfolio from network and infrastructure management to application performance management, from security and compliance management to project and portfolio management.

Lean IT provides our IT customers with two very important benefits; greater automation of processes and the optimization of IT resources and a better visualization capability. Another Lean IT promise is focusing on reducing the time to value. Our products generally pay for themselves within a year.

So what are we learning from our customers? Well, we are learning that we are on the right path. We are focused on the things they are focused on. We think the concept of Lean IT and its supporting security, network and infrastructure management, application performance management, project and portfolio management, all the products that we deliver today to drive IT value and lower IT costs are unique in the marketplace.

To maximize this market opportunity and accelerate our revenue growth we are increasing our development spending in FY10 on some of these key product priorities by $48 million focusing particularly on growth technologies like virtualization, cloud computing, software as a service and service-oriented architectures. When you are on the right path it pays to double down.

And so, before I turn this call over to Nancy, I want to spend a few minutes talking about how CA is viewing the future. I am certainly not going to make a prediction about when the recession will bottom out and when recovery will begin. There are lots of opinions out there and they are all different. What I can tell you with strong conviction is that technology and the benefits technology provides will help lead the way out. It just makes sense.

In this challenging economic environment everyone is forced to figure out how to make every dollar count and that is as true for CA as it is for our customers. Now, there are some of our competitors whose reaction to this environment has been to batten down the hatches and ride out the storm. That has not been our strategy. Now of course, we have always been looking for ways to improve our business execution. That is a journey we have been on for over four years. I strongly believe that this environment gives CA a great opportunity to build a better and stronger company.

We have a strong balance sheet and strong cash flows that are going to enable us to invest in three critical areas while others are re-trenching. First, is our decision to increase our spending in development to drive growth, especially in the key products that we think will be the growth leaders for CA in the future.

Second, we will continue to be smart about buy versus build. Particularly in this market environment we are watchful for opportunities to acquire companies who are leaders in their market or sub-markets. Companies like Wily or Niku or Concord or Netegrity where we can take great technology and invest to make it even better.

And third, we are going to invest in our people particularly in sales and technical sales to make sure that our team is prepared to effectively sell the innovative products that we offer and will bring to market over the next few years. This investment will take the form of hiring the most qualified individuals in the industry, leading-edge education programs and more resources directed to product-related announcements, sales collateral and advertising.

The key to our strategy is growth through innovation. The companies that drive innovation are the ones that will succeed in the marketplace now and in the future. For every downturn there will be an upturn. Organizations that invest today will be the first to seize the opportunities when they arise.

So with that, I would like to turn it over to Nancy to take you through the numbers, the outlook and our investments in FY10.

Nancy Cooper

Thanks John. Good afternoon everyone and thank you for joining us. We have a lot to cover this afternoon so let’s get started.

We are pleased with our full-year performance. Fiscal ’09 was a year characterized by strong operational performance across the company. We were able to grow revenue 1% on a constant currency basis in this difficult environment. This top line growth along with the efficiencies we have achieved in our business enabled us to grow our non-GAAP earnings per share 30% and to deliver on our commitment of 400 to 500 basis points of margin improvements with a full year non-GAAP operating margin of 31%, up five points from last year.

This performance resulted in us being on the high side of our full-year guidance for EPS and exceeding our guidance for CFFO with our 10% growth, a great conclusion for the year. In addition, in this tough environment, both S&P and Fitch upgraded CA to investment grade, one of the few upgrades that occurred.

To give you color on this performance let’s start with our bookings for the year. We started the year on a high note with first half bookings of $2.5 billion and continued that momentum into the second half with bookings of $2.7 billion. This translates to total bookings of $5.25 billion which grew 15% in constant currency or 11% as reported and were the highest we have been at in several years. This is within our updated second quarter guidance range of 10% to 15% growth. As you may recall, we increased our original guidance of mid-to-high single digit growth after closing a five-year, multi-hundred million dollar system integrator deal at the end of the second quarter. When normalizing this deal for average duration, bookings growth would have been 11% on a constant currency basis or 6% as reported and within original guidance.

As a result of the large SI deal, fiscal year ’10 bookings will show a decline in the first half and particularly in the second quarter followed by acceleration in the second half due to a return to a more normal, historical distribution. Adjusted for currency and normalized for the same deal, look for bookings to be up a few points in fiscal year ’10 or slightly down as reported. Bookings benefited from the continued strength in our mainframe business as well as modest growth in new software license sales on a constant currency basis.

Our professional services bookings were down and were significantly impacted by the economy and our decision to select more profitable engagements. We see this continuing until the economy strengthens. We are encouraged that nearly 50% of bookings were driven by deals greater than $10 million. These are customers who have increased their commitment to our software offerings over the long-term whether it is through the large system integrator deal in the first half or through financial services and government deals in the second half. We were happy that certain customers committed to CA for longer terms in the current environment.

While the duration of some of these deals impacted annualized bookings, which were flat in constant currency or down 4% as reported, our improved pricing discipline allowed us to enter these relationships on terms that are beneficial to both parties.

Application performance management, network and infrastructure management and the mainframe continued to post strong performance in the quarter and were our growth leaders for the full year. Whether customers were looking to improve the way they manage their mainframe environment and reduce costs which is particularly important in a difficult economic climate, or achieve a quick return on investment on their IT dollars, they continue to seek out CA and purchase our solutions.

As the numbers show, this was a strong year for total bookings. This performance will also allow us to continue to grow in future years as evidenced by our backlog numbers. We are pleased that our total revenue backlog grew 16% in constant currency and up 8% as reported. Both the current and non-current portions of our revenue backlog grew on constant currency basis and this positions us for success in the coming years. Also, our total billings backlog grew 33% in constant currency and up 25% as reported. It is important that these balances continue to grow as they represent revenue and cash that will be recognized in future periods.

While we are discussing the backlog, I would like to take a moment to talk about the expanded supplemental disclosure that Joe spoke to earlier. Now, this is important for you to understand CA’s financials. The bookings metric is influenced by many variables such as deal length and the amount of contracts coming up for renewal in a given period. Because of this, we expanded the non-current portion of the revenue backlog to provide better insight into how the timing, duration and size of bookings contribute to revenue backlog and future revenue. Adding the aging detail to our commentary on bookings will simplify the modeling of how bookings contribute to current and future year revenue. We would encourage you to focus on the new data within the supplemental for your revenue modeling.

Let me state that CA is committed to continuing to refine and update the presentation of our financial information so that everyone has a clear view of our performance and results.

Now let’s discuss our quarterly numbers. Total revenues were $1.04 billion, up 2% in constant currency but down 5% as reported. Subscription and maintenance revenues were $913 million, up 3% in constant currency and down 4% as reported, ending the year with growth building in this revenue line on a constant currency basis.

Revenue from professional services was $84 million, down 11% in constant currency and down 18% as reported. As I said a few moments ago, professional services revenue was affected by the economy and our decision to concentrate on more profitable engagements which resulted in a six point improvement in professional services margins in the quarter.

As far as geographical performance goes, North America grew 7% in constant currency and up 6% as reported while international was down 4% in constant currency and down 17% as reported. We are very pleased with our North American results and encouraged by the strength in EMEA’s bookings in the fourth quarter.

Now let’s review the income statement and our non-GAAP results. Operating expenses were $721 million, down 6% in constant currency and down 13% as reported. We continue to see benefits from our ongoing expense management initiatives and a path to further savings in the coming fiscal year.

Operating income before interest and taxes was $314 million, up 24% as reported. Our non-GAAP operating margin increased 700 basis points to 30% as reported inclusive of three points of stock-based compensation or 33% when excluded.

To finish our non-GAAP results, net income was $169 million; up 44% and earnings per share was $0.31, up 41%, both on a reported basis. The tax rate in the quarter was 45%. We also delivered on our commitment to improve our full year, non-GAAP tax rate to 37%.

Now let’s turn to our GAAP results, which include purchased software, intangible amortization, restructuring and other and gains or losses on hedges of operating income. In the fourth quarter, total expenses before interest and taxes were $855 million, down 3% in constant currency and down 9% as reported. Restructuring and other expenses were $96 million in the quarter and $102 million for the full year. In the fourth quarter we were able to accelerate certain initiatives which resulted in an additional $52 million in charges above what we anticipated in the third quarter.

The income statement charges announced in the fourth quarter reflect the completion of our 2007 restructuring plan. Finishing our GAAP results, net income was $72 million, an increase of 1% as reported or $0.13 per diluted common share which is flat on a reported basis when compared to the prior year’s period. In the fourth quarter, GAAP earnings per share were reduced by $0.06 due to the additional $52 million in restructuring expenses.

The GAAP tax rate in the quarter was 57% while the full year tax rate was 37%. We feel well positioned to improve tax in future years as a result of the initiatives we took in fiscal year ’09.

Turning to cash flow from operations. In the fourth quarter cash flow from operations was $648 million and for the full year cash flow from operations was $1.2 billion, up 10% as reported exceeding the high end of our guidance. Cash flow strength was primarily driven by lower disbursements related to our improved cost structure. Our ability to collect in this environment remains steady as we saw a decline in DSO’s on both a sequential and a year-over-year basis and consistent with our year-to-date performance, cash collections from single installments continued to decrease on an absolute basis as well as on a percentage of total product bookings.

Now, I would like to discuss our balance sheet which continues to strengthen. We ended the quarter with $2.7 billion in cash and cash equivalents, evenly split between domestic and international balances and $1.9 billion of total debt bringing our net cash position to $776 million. As a reminder, we have approximately $636 million in maturities due in December of this year. We remain comfortable with our ability to pay these obligations down with cash on hand when they mature.

And now, let me turn to our outlook for fiscal year ’10. Guidance contemplates two things. First, given the significant foreign exchange volatility in fiscal year ’09 we are going to provide guidance on a constant currency basis, which shows the operational performance of the company. Reported numbers are in the press release.

Secondly, as you have heard John mention earlier, our strategy is resonating with our customers and we have the opportunity to capitalize upon this by investing more now for future growth. This decision causes our operating margin improvements to moderate and impacts our growth and EPS by four percentage points or $0.06 per share but with the market opportunity we see, we have taken the opportunity to invest now for future growth to achieve the long-term model we shared with you at Analyst Day in December.

Total revenue growth is expected to range from 2% to 4% in constant currency. At current exchange rates, this translates to reported revenue of $4.16 to $4.24 billion. This includes a negative 1% impact from professional services. Including a $48 million increase in development spending, we expect non-GAAP operating margin to be 31% to 32%. When adjusted for stock-based compensation this is 33% to 34% at the low end of our long-term guidance and we continue to look for improvement.

In fiscal year ’10 we will begin installing SAP in EMEA and this will enable the next step up in our improvement in operating margin. We have deployed initiatives that will allow us to improve our contract process, our IT initiatives, all of which bode well for future cost improvement.

As a result of the work we have done on tax we are starting to see the reduction of our tax rate. In fiscal year ’10 we will see it decrease to 35% to 36% and believe we are on a path to the 30% to 32% we gave in long-term guidance.

As a result, non-GAAP EPS growth is expected to range from 5% to 12% in constant currency. At current exchange rates this translates to reported non-GAAP EPS of $1.51 to $1.61. GAAP EPS growth is expected to range from 17% to 25% in constant currency. At current exchange rates this translates to reported GAAP EPS of $1.39 to $1.49.

Cash flow from operations growth is expected to range from 12% to 18% in constant currency. At current exchange rates this translates to reported cash flow from operations of $1.25 to $1.32 billion.

Our cash flow from operations is showing the resilience of our growing billings backlog. This also includes approximately $50 million in cash restructuring payments. Except as previously stated, guidance reflects current exchange rates, assumes no material acquisitions and includes a partial hedge of operating income. We expect approximately 517 million actual shares outstanding and a weighted average diluted share count of approximately 536 million shares.

So, overall we had a solid fourth quarter and a very good year especially in this environment. The process and focus we have put in place over the last four years have resulted in strong operational performance and we are well positioned to move forward and capitalize on the opportunities before us.

And with that, we will open the call up for Q&A.

Question-and-Answer Session

Operator

If you would like to ask a question, please do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that’s “*1” if you would like to ask a question. And we’ll go first to Sarah Friar with Goldman Sachs.

Sarah Friar – Goldman Sachs

Terrific. Thanks so much for taking my question. Ma’am, good job on the quarter. On the cash flow guidance for next year those are pretty healthy numbers you are putting out there. X’ing out clearly restructuring a little bit next year, I presume the tax expense also comes down. What else kind of gives you that confidence right now on those sorts of growth rates which I think is a little bit ahead of net income growth?

Nancy Cooper

Well Sarah, what you have if you look at our billings backlog you are going to see it has an 8% growth rate so that is good. We also have taken more, as you heard me cost and expense out so that is good. So overall, the underlying operational performance of the company is driving that growth.

Sarah Friar - Goldman Sachs

Got it. That’s great guidance. And then John, maybe a longer-term question, knowing what you know about CA today and all the kind of execution issues you have fixed over the last couple of years, what do you think kind of normalized bookings growth can look like? Is it still high single digits that you are targeting? Anything that has shifted in your opinion over the last couple of quarters?

John Swainson

No, when we look at the model for the company that we outlined for you in December we feel very comfortable that’s still the right kind of model with a little bit of acquisition built into that obviously. We are more comfortable, as Nancy said, today that we are closing in on that model and we can see things like the operating margin actually getting there sooner than we might have thought even six months ago.

Sarah Friar - Goldman Sachs

Right. So even though with the cost cuts you still feel very good about the execution and you haven’t gotten too thin I guess from a sales perspective?

John Swainson

No. Furthermore, we feel good enough that we can put more money into key R&D and sales hiring initiatives to actually start building some of these things up.

Sarah Friar - Goldman Sachs

Terrific. Okay I will leave it there. Thanks again for taking my question.

Operator

And we’ll go next to Michael Turits with Raymond James.

Michael Turits - Raymond James

A couple of questions. First, John, can you give us any more granularity on mainframe? What is the approximate growth rate in terms of mainframe bookings especially on an annualized basis? And what is happening with capacity renewals? Are you seeing any slowdown in the upgrades in terms of capacity renewals? There have been some reports of that from your competitors.

John Swainson

The answer is no, we are not seeing any slowdown in capacity renewals. We saw sort of low double digits bookings growth for the full year on mainframe which was very encouraging. It does bounce around a little bit quarter to quarter depending on the deals that you get in that particular quarter and the mix of those deals. But we feel good in general. IBM has put something like 20% on a compounded basis more MIPS into the marketplace since the beginning of this cycle and we are continuing to see that.

As you recall, Michael, our average duration is about three years. We are really only about half-way through touching the customers that have our mainframe products. So we have another 12 to 18 months at least to go of renewing those customers with that increased capacity expectation and we have every reason to believe that that will set us up well for the next stage of the cycle.

Furthermore, we have done a lot of things in terms of product for the mainframe. This month we are releasing the first of our Mainframe 2.0 products. We have got some very innovative cost analyzer products coming into the marketplace. We have got a lot of things that are really going to change the game in terms of the mainframe and we think bodes very well for future growth prospects.

Michael Turits - Raymond James

A quick one for Nancy. Where did the cash restructuring outlays end up for fiscal ’09?

Nancy Cooper

Just a little over $100 million.

Michael Turits - Raymond James

Okay, great. Thanks very much.

Operator

And we’ll go next to Abhey Lamba with UBS.

Abhey Lamba – UBS

Thanks. Nancy, thanks for providing those additional metrics, very helpful. Now, your revenue to be recognized beyond three years has become a bigger portion of your revenue backlog in the past few quarters. Can you talk a little bit about the drivers behind that and also do you expect the mix to remain in the current shade or is this mix going to evolve or that part should go down or up from here?

Nancy Cooper

Abhey, we are actually quite pleased because in this very challenging economic environment we closed both a large system integrator deal and we closed some large financial services deals at terms that were good for us and good for the customer. And so, what you are seeing there is with increased pricing discipline we can lock in more of the revenue for the future and we find that very encouraging in this environment and particularly doing that with financial services companies.

Abhey Lamba – UBS

How should it evolve in terms of the contract length? It seems like the biggest driver here. And so, lastly, John can you please elaborate on your comments about being smart about buy versus build? Should we expect you to be more acquisitive and what type of acquisitions would you be looking at? Thanks.

John Swainson

First of all, as we have continued to say our target for a contract duration continues to be three years. It will very much depend on the mix of customers. Systems integrators in particular want the assurance of longer-term relationships, five and sometimes even seven years. Most customers tell us they are still comfortable with three years. There are some though where we can get good economics that we could go to five.

In terms of acquisitions, obviously, I can’t comment much but I can say that look we haven’t done much acquisition in the last year or two so anything that we do now would be more than we have done. We have just seen valuations come to a point where it looks very attractive to us. Our model is always to analyze build versus buy and in the last couple of years that has shifted much more towards build but now it is coming back to a much more normal cycle where in fact we think we can buy some stuff. As I was trying to emphasize in my remarks we are not looking to buy sort of random stuff. We are looking to buy companies that have great technology that are somehow constrained in their market or sub-market because they can’t invest enough in R&D, they can’t invest enough in distribution and we can bring them in, integrate them with our products, put them into our very strong sales organization and see dramatic growth in terms of how they are able to do.

The ability to scale the R&D and the sales organization in some of these companies which again make up great technology but they just can’t reach the market. That is something we see is very interesting.

Abhey Lamba – UBS

Thank you.

Operator

And we’ll go next to Walter Pritchard with Cowen.

Walter Pritchard – Cowen and Company

Hi, two questions. Could you just talk a little bit about -- you highlighted investing and maybe reversing a bit kind of your mantra around costs over the last couple of years? I’m just trying to understand exactly where you are looking to invest and just had one follow-up on the numbers.

John Swainson

We have been taking costs out of a lot of different places over the last few years, Walter. We have taken it out of sales, we have taken it out of G&A and we have taken it out of R&D, particularly more of the support side of R&D. We see an opportunity to invest in things that are going to drive growth so the $48 million that we are talking about is going directly into things that will be high growth products for us in the future. Things like adding virtualization management, cloud computing provisioning, these are going to be high growth markets in the future for us and we are putting very significant amounts of money into those areas.

Walter Pritchard – Cowen and Company

And just Nancy, on the bookings side, you have sort of qualitatively given us some ideas around new contract value. Could you just give us some sense what you saw this quarter on that front?

Nancy Cooper

It continued to be a lot around the third of our total bookings so again we were very encouraged to continue with the sell of new software license sales in this environment and it points to the reason why we decided, John saw one more validation point on investing more for the future growth.

Walter Pritchard – Cowen and Company

Great, thanks. And thanks for additional disclosure here in the supplemental.

Operator

And we’ll go next to John DiFucci with JPMorgan.

John DiFucci – JPMorgan

Thank you. First question is for John. John, the top line constant currency guidance is a little bit below your longer term goals of 6% to 8% and we understand the whole macroenvironment and what is happening out there. It looks like you had some new products come out and it looks like there will be others coming out. At the same time, we see the international business looks to be pretty weak this quarter and the last couple of quarters looked to be relatively weak here and now you have SAP that’s going to be rolling out in EMEA. I’m just wondering what you are thinking going forward there? What are your thoughts are or what is inside that guidance on revenue?

John Swainson

I think there are a couple of things that are going on. There are lots of things that are going on here. As Nancy said there is a little bit of headwind on services so we got to factor that into the equation. We are seeing strong bookings growth in EMEA in the quarter and I think that will help. Remember this is the first step to our three-year journey to our long-term model and we do think we are on a good path. Nancy hasn’t given you any guidance for any acquisitions that we might do in this and I think she said that but that is just by way of reminder, her model did have some acquisition related growth in it. So that is not in this yet nor is necessarily the impact of these investments that we are making now which will take 12 to 18 months to roll into the product line but that is not in it yet either. So, we continue to believe very strongly that the high single digits kind of growth range for revenue is where we can be and where we will be in a couple of years.

Nancy Cooper

John, if you look at our revenue backlog you will see that we are encouraged by the acceleration we started seeing in the fourth quarter. Our revenue growth after being flat all year was 2% in constant currency and if you look at the revenue backlog you will see 3% in constant currency for the next 12 months. You take that and add we still have new license sales this year which will help that growth. There will be a little hit from services but both those other factors will be helpers. And John gave you the indication we are seeing customer reception of our products which gets you from where we are which is improving to that long-term growth.

John DiFucci – JPMorgan

Okay and John, you mentioned you were pleased with the bookings out of EMEA this quarter. Should we start to see that flow through a little bit better on the revenue coming from international? You never had a huge presence in Asia Pac so I’m assuming you still don’t but when will we see the international business start to look a little better?

John Swainson

I think you will see an improvement this year. You are right, Asia Pac for us is really Australia and Japan with New Zealand being a minor part. So we don’t have big presence in other places. India is growing fast but it is still relatively small. The growth in EMEA bookings will translate into revenue over the next few quarters.

John DiFucci – JPMorgan

Okay, thanks and just a quick follow up for Nancy. You say in the guidance there is a partial hedge for operating income this year and I’m just curious, what are you doing there? Is it a partial hedge for the year similar to what it was last year or are you looking to perhaps looking at more of a rolling 12 months hedge?

Nancy Cooper

John, before I answer that let me add one other thing to think about for long-term growth. We have mentioned a number of times our focus on improving our pricing and we are getting quite encouraged in terms of how we are seeing our ramp up on our renewal portfolio improving every year and that is another dynamic that is going to help that long-term growth.

Turning to your question on the hedging of operating income it is still like fiscal year ’09 is a hedging program for the year. Not over the year. It is within the year. It is hedging of about 60% of our operating income in the four major currencies we are in.

John DiFucci – JPMorgan

Okay. I am sorry but you just brought up a question I get asked all the time. You mentioned Nancy, a ramp up in improving the renewal portfolio. Are you seeing renewal yields, which would be the amount of money relative to what was signed last time? Are you seeing any change in that? I know you don’t normally give the numbers but are you seeing that improve over the last year? Is it the same? Is it getting better?

John Swainson

John, it’s John. It has been improving over the last three years. You are right. We don’t break this out but let me give you some direction on it. It was in the low 80s in ’07. It improved to the mid-80s in ’08. It was in the low 90s this year and we don’t see any reason why that cannot continue to improve somewhat. There is a theoretical point at which it becomes hard but I think there is still a little bit of yield. And then on top of that, those numbers don’t include what we are able to sell new in addition or part of that renewal. So a renewal is a really good opportunity to go back to the customer and talk to him about why he should take more of our stuff and maybe kick out some of the BMC stuff. And so, we do that too and if you add those numbers in it gets well over 100%.

Nancy Cooper

And John, the numbers on the improvement may be smaller but when you think about the bookings they apply to two-thirds of the bookings. So a small number on a large base is still significant.

John DiFucci – JPMorgan

Okay, thanks. That’s very helpful.

Operator

And we’ll go next to Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank

Hey, guys. Two quick questions for you. In terms of the contract length if we look at fiscal ’10, what should we think about that number doing? Clearly, it was influenced by the large deal in Q2. But it looks like it is trending up fairly consistently.

John Swainson

Todd, it bounces around a lot. It was about 3.6 for this last quarter. It was as high as 4.2 in the second quarter. It bounced down to 3.1. So yes, it has been trending up a little bit. It was 2.98 at the year ending ’08. But we still think that 3 is a good planning number. I don’t have any scientific way of giving you a better number at this point.

I would make one more point. I accept the fact it is an important number for you to judge total bookings but I would also urge you to heed what Joe said about looking at the supplemental package because I would argue that the importance of booking in terms of building your waterfall has diminished radically as we have now given you the amount that is flowing off of the balance sheet and onto the income statement for the next period.

Todd Raker - Deutsche Bank

And the second question, if we look at the model longer term when should we see billings growth start to accelerate?

Nancy Cooper

Actually, if you look at constant currency, billings growth accelerated in the fourth quarter to 8%.

John Swainson

Let me add a bit more. There is a lot of dynamic at play in a billings number which is one of the reasons that we de-emphasized it as a metric. You have been with us long enough Todd to recall that at one point we used it fairly extensively as a proxy in our ratable model. You rightly pointed out it is not a perfect proxy and we accept that. Now, having said that, this year in particular if you go look at our supplemental again and look at some of the deferred balance accounts you will see that both deferred revenue and deferred cash to be collected, both went up by $500 million and $550 million respectively which again gives you an indication of that money that could have been billed in some scenarios that we chose not to.

Another indication of that is as Nancy said the amount of cash that we chose to take upfront as part of our deals as a percentage of the total bookings have also dropped on both a relative and an absolute basis.

Todd Raker - Deutsche Bank

Okay and then just a minor question here for Nancy. On the supplemental, what is the difference between the billings number you guys are showing and then the cash collection from billings? There seems to be a pretty consistent $300 to $350 million difference annually.

Nancy Cooper

That is days sales outstanding, which we in the quarter improved both sequentially and year-to-year.

Todd Raker - Deutsche Bank

Okay. All right. Thanks, guys.

Operator

And we’ll go next to Philip Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

Hi, guys. Most of my questions have been answered but John, I was just wondering if you could give a little more color on kind of comparing your distributed business and your mainframe business and the trends that you saw between the two this past quarter. And also, if you could just comment more on the pricing trends you saw in Mainframe 2.0 that would be great.

John Swainson

As I said, mainframe continues to be very strong and we were encouraged by the pricing discipline that Nancy talked about and by our ability to maintain that discipline. The distributed environment was more subject, frankly, to the economy although we did see some good improvement in some of the products, particularly those products where we could really demonstrate a very clear value proposition. It in fact was not as strong as mainframe which is where it really pays to have a very diverse portfolio as we went through the economic times.

You have heard me say in the last year or two, our distributed portfolio has been growing in the low double digits and our mainframe portfolio is a little slower than that and last year, in fact for the full year it was kind of reversed. It is interesting. The economy clearly impacted new projects which tend to be tied to things like new license sales.

Philip Winslow - Credit Suisse

Got it. Thanks, guys.

John Swainson

Just to complete the thought. Our new software license for the year was still up on a total year-over-year basis.

Operator

And we’ll go next to Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies & Company

Hi. Can you answer a question about how you did you do specifically in financial services in the quarter? You mentioned a couple of deals that slipped to April. Did you renew 100% of those deals?

John Swainson

Well, all but two. We renewed everything that we had expected to renew but two. In one case there was a pricing negotiation that we weren’t prepared to compromise on and it took a little bit longer but we got done by the end of that week. The week ended, as you recall, on a Tuesday night. I remember that well because I was sitting here until midnight. And the other deal was actually closed that night but the time zones were wrong and because we are very diligent about these things we recorded it the next fiscal year.

Katherine Egbert - Jefferies & Company

Can you give us a sense what worked pretty well in the quarter here? (Inaudible). It sounds like March was probably the best month in Q4. How is April, how is May so far for you? Are you seeing sort of any improvement?

John Swainson

I had trouble hearing your question, Katherine but I think you were asking me to give guidance on the first quarter which I am reluctant to do.

Katherine Egbert - Jefferies & Company

That is what I was asking. I’ll try another one. As far as the M&A, can you tell us what your criteria for purchasing companies are? How much dilution will you tolerate? Do you think public or private valuations are better? Thanks.

John Swainson

No, I can’t because the answer is, it depends. But let me go back to what I said before. We are looking for companies that have great technology that are somehow constrained by their market position or their access to capital or their access to a sales organization or they have some constraint. And as you know well there are lots of constraints out there right now. There are more constraints than there have ever been.

Katherine Egbert - Jefferies & Company

Okay, thanks. Good job.

Operator

And as a reminder, it is “*1” if you would like to ask a question. And we’ll go next to Israel Hernandez, Barclays Capital. Mr. Hernandez, your line is open and there is no response. At this time, we have no further questions. I would like to turn it back over to Mr. John Swainson for any additional or closing remarks.

John Swainson

Thank you very much. Let me conclude with a couple of points. As I said earlier successfully navigating this environment requires focus and execution. In FY09, we dealt with an uncertain economic climate by tuning out the noise and focusing on our business and executing day in and day out. We will make even more improvements in the coming year and we still believe that we can be even more efficient, cost effective and focused. We are delivering our product portfolio and focusing more on helping deliver Lean IT to our customers. We believe we have the best and most comprehensive network management, infrastructure management, security application performance management and project and portfolio management software in the business.

Finally, the key to this strategy is growth. As I said, like our other competitors we have not decreased our R&D spending. Instead, we are making the necessary and vital investments in key technologies like virtualization; cloud computing, SaaS and SOA with a promise of delivering innovative products and solutions to improve our customers’ overall IT position. Thank you very much.

Operator

And this concludes today’s conference. Thank you for your participation.