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Computer Associates net loss narrows

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CIOL Bureau
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Ilaina Jonas

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NEW YORK: Computer Associates International Inc. on Tuesday said its fiscal

third-quarter net loss narrowed and it expects to report a profit sometime in

fiscal 2003.

"We clearly saw a steady quarter," chief executive Sanjay Kumar

told analysts during a conference call. "December was a good month for us,

and a strong month. But we did not see any massive spending burst on the part of

customers." Under generally accepted accounting principles (GAAP), the

world's No. 4 software maker posted a net loss of $231 million, or 40 cents a

share, compared with a net loss of $342 million, or 59 cents a share, in the

year-ago quarter.

Revenues dropped to $749 million from $783 million last year. But the company

said last year's revenues were helped by a large deal that paid upfront. The

company is trying to phase out its dependency on large deals that are paid for

all at once and replace them with deals whose payments are spread over the life

of the contract.

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The company said its average deal size this quarter fell to $280,000 from the

previous quarter's $295,000 and the number of deals, were up 25 per cent to 26

per cent from last year.

The Islandia, New York-based software maker said that excluding charges and

under its year-old new accounting method, it earned $417 million, or 71 cents a

share, for the quarter ended Dec. 31, compared with pro forma earnings of $247

million, or 42 cents a share, in the year-ago quarter.

Analysts had generally expected earnings of 60 cents a share, with estimates

ranging from 52 cents to 62 cents a share, according to 14 analysts polled by

Thomson Financial/First Call. Computer Associates said pro forma revenues rose

to $1.452 billion from $1.404 billion a year ago. The sales and services not

included in the quarter are recorded as residual revenue to be recorded as

revenue at a later date.

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The company cut $85 million of its selling, general and administrative

expenses from last quarter's expenses.

Total deferred revenue recorded in the quarter increased to $554 million from

$466 million. Added to the existing deferred revenue, the portion of the sales

that are recorded on its balance sheet but not its income statement, deferred

revenues reached 2.85 billion, up 28 per cent on an annualized basis.

For the fiscal fourth quarter, ending March 31, Kumar said he expects results

to be about the same as the fiscal third quarter, with a pro forma operating

profit of 72 cents on pro forma revenues of $1.470 billion. Under GAAP, the

company expects to post an operating loss between 4 cents and 5 cents a share,

on revenues of $770 million.

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Kumar said he expects the company to see a profit, under GAAP standards,

sometime in fiscal 2003, beginning April 1. Pro forma, pro rata results reflect

the company's performance as if all the company's contracts -- some signed

several years ago -- had been operating under the new accounting system.

"I don't think either model accurately states the health of the

business," Merrill Lynch analyst Peter Goldmacher said. "I think pro

forma pro rata overstates it and I think as reported understates it. What these

guys are trying to do is going to take time to work out. It's just going to take

a couple of years. The nature of the change is such that it will take a while to

see how the market accepts it."

Computer Associates described its mainframe sales as "reasonable"

as the strength of continued growth in sales of IBM mainframe capacity began to

seep down into software sales. "Overall I think it was a very solid

quarter," John McPeake, Prudential analyst, said " It's a combination

of the strength and the underlying mainframe platform. "

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Compuware Corp., whose mainframe software license sales account for 82 per

cent of its license revenue, versus Computer Associates 47 per cent, told

Reuters revenue from mainframe software licenses in its fiscal third quarter

rose to $98 million from $61.6 million the prior year.

"These companies are bearing these fruits slowly, but one of their key

profit drivers are doing well," McPeake said. BMC Software, which has

already said it would beat original estimates, also is a major mainframe

software maker.

"All the companies have gone through a period where it was really

difficult," said Vinnie Muscolino, managing director of David L. Babson

Co., a Boston-based, investment fund, which manages $70 billion in assets.

"They're putting in much more achievable business plans and setting up the

business model for upside instead of downside."

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Still Muscolino said his group has shied away from Computer Associates stock.

"I think they've come along way from two, three or four years ago," he

said. "But there's still some investor skepticism."

Shares of Computer Associates on Tuesday closed down $1.08, or 3 per cent, to

$34.90 before the release of the results. Since falling after the attacks on the

World Trade Center, shares of Computer Associates are up 54 per cent and have

outperformed the S&P 500 index by 33 per cent.

(C) Reuters Limited.

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