Computer Associates Is Latest Casualty Of Enronitis Amid Report Of U.S. Probe
BY J. BONASIA
INVESTOR'S BUSINESS DAILY
A reported federal probe into the accounting practices of Computer Associates International (CA) sent shares of the software titan tumbling 17% Wednesday.
A Newsday report said the U.S. Attorney's office in Brooklyn, N.Y., and the FBI launched a preliminary probe of the company.
The piece cited unnamed former employees. They said the inquiry centers on whether the firm properly distinguished revenue between software sales and services.
"This company has been mired in controversy for years," said Mike Trigg, an analyst with Morningstar Inc. "They've alienated shareholders with confusing accounting methods."
The Islandia, N.Y., firm is the No. 4 independent software vendor after Microsoft (MSFT), Oracle (ORCL) and SAP (SAP).
Assistant U.S. Attorney William Muller wouldn't comment "one way or another with respect to matters under investigation."
FBI spokesman Joseph Valiquette also would not comment on the Newsday report.
Company officials say they have no knowledge of an inquiry.
Not Contacted
"We have not been contacted by the authorities regarding any investigation, and do not know what if anything is being investigated," said spokesman Robert Gordon. "The reporting of our financial results has always been in accordance with all applicable accounting principles."
Gordon says the company looks forward to defending itself "against hearsay and . . . unwarranted concerns."
Computer Associates has come under fire in the past for its accounting of long-term contracts. In October 2000, it began to report revenue two ways - as a pro-rata portion of long-term contracts, and all upfront. That let investors see it both ways.
CEO Sanjay Kumar says the change was meant to take the firm out of the vicious software sales cycle. That cycle led to price cuts at quarter's end to meet sales goals.
2001 Proxy Fight
"We had to get out of this," he told IBD last year. "In the old business model, all the revenue is recognized upfront. So you don't know if you'll miss a quarter until the very end."
Last summer, Texas billionaire Sam Wyly waged a bitter proxy battle for control of the company. He claimed questionable accounting tactics inflated earnings. But shareholders voted against Wyly in his bid to take over the board.
The New York Times ran a critical piece in April. It said Computer Associates' new accounting overstated sales. And in May, the company announced a typo in its preliminary financial results.
This month, Moody's Investors Service put its debt under review.
Trigg says all the confusion over the company's accounting raises investor concerns about how much new software is being sold.
"The question with CA is, are they growing?" he asked.
Computer Associates' historic strength has been mainframe software sales. That market has slowed greatly. The company has since moved into data storage and security, both highly competitive.
"There are so many risks surrounding this stock that we aren't comfortable recommending it," Trigg said. But he's not warning investors to sell shares, as no investigation has been confirmed.
Analysts say the questions about Computer Associates aren't comparable to those at Enron. Enron used off-the-books financing to obscure huge losses and debt.
Jim Mendelson of SoundView Technology Group says CA's pro rata accounting is actually more conservative than generally accepted accounting principles.
Mendelson has a strong buy rating on Computer Associates. He says it has been "the company that people love to hate" amid some 70 acquisitions in 20 years.
"I don't think there is any fraud," Mendelson said. "This company generates a sizable amount of cash. And there's no off-balance sheet financing to my knowledge."
Jonathan Rudy of Standard & Poor's says the company's executives have made extra efforts to describe their new business model since the proxy fight. He maintains a hold rating on the stock.
"Cash flow is improving. They're paying down debt and growing nicely," he said. "I consider them healthier now than they were three or four months ago."
Kim Caughey, analyst with Parker/Hunter Inc., says she's not surprised by any effort to clarify accounting in light of Enron.
"Anyone's books are up for grabs at this point," she said. "The pressure isn't just on software companies or Computer Associates. Everybody is under greater scrutiny in this environment."
Caughey says the more conservative approach better reflects CA's business than the old accounting method. She gives CA her highest buy rating, but says Kumar and his staff should do more to explain the new model.
"This is a difficult concept, and let's face it, accounting doesn't exactly make the investor's heart go pitter patter," she said.
BY J. BONASIA
INVESTOR'S BUSINESS DAILY
A reported federal probe into the accounting practices of Computer Associates International (CA) sent shares of the software titan tumbling 17% Wednesday.
A Newsday report said the U.S. Attorney's office in Brooklyn, N.Y., and the FBI launched a preliminary probe of the company.
The piece cited unnamed former employees. They said the inquiry centers on whether the firm properly distinguished revenue between software sales and services.
"This company has been mired in controversy for years," said Mike Trigg, an analyst with Morningstar Inc. "They've alienated shareholders with confusing accounting methods."
The Islandia, N.Y., firm is the No. 4 independent software vendor after Microsoft (MSFT), Oracle (ORCL) and SAP (SAP).
Assistant U.S. Attorney William Muller wouldn't comment "one way or another with respect to matters under investigation."
FBI spokesman Joseph Valiquette also would not comment on the Newsday report.
Company officials say they have no knowledge of an inquiry.
Not Contacted
"We have not been contacted by the authorities regarding any investigation, and do not know what if anything is being investigated," said spokesman Robert Gordon. "The reporting of our financial results has always been in accordance with all applicable accounting principles."
Gordon says the company looks forward to defending itself "against hearsay and . . . unwarranted concerns."
Computer Associates has come under fire in the past for its accounting of long-term contracts. In October 2000, it began to report revenue two ways - as a pro-rata portion of long-term contracts, and all upfront. That let investors see it both ways.
CEO Sanjay Kumar says the change was meant to take the firm out of the vicious software sales cycle. That cycle led to price cuts at quarter's end to meet sales goals.
2001 Proxy Fight
"We had to get out of this," he told IBD last year. "In the old business model, all the revenue is recognized upfront. So you don't know if you'll miss a quarter until the very end."
Last summer, Texas billionaire Sam Wyly waged a bitter proxy battle for control of the company. He claimed questionable accounting tactics inflated earnings. But shareholders voted against Wyly in his bid to take over the board.
The New York Times ran a critical piece in April. It said Computer Associates' new accounting overstated sales. And in May, the company announced a typo in its preliminary financial results.
This month, Moody's Investors Service put its debt under review.
Trigg says all the confusion over the company's accounting raises investor concerns about how much new software is being sold.
"The question with CA is, are they growing?" he asked.
Computer Associates' historic strength has been mainframe software sales. That market has slowed greatly. The company has since moved into data storage and security, both highly competitive.
"There are so many risks surrounding this stock that we aren't comfortable recommending it," Trigg said. But he's not warning investors to sell shares, as no investigation has been confirmed.
Analysts say the questions about Computer Associates aren't comparable to those at Enron. Enron used off-the-books financing to obscure huge losses and debt.
Jim Mendelson of SoundView Technology Group says CA's pro rata accounting is actually more conservative than generally accepted accounting principles.
Mendelson has a strong buy rating on Computer Associates. He says it has been "the company that people love to hate" amid some 70 acquisitions in 20 years.
"I don't think there is any fraud," Mendelson said. "This company generates a sizable amount of cash. And there's no off-balance sheet financing to my knowledge."
Jonathan Rudy of Standard & Poor's says the company's executives have made extra efforts to describe their new business model since the proxy fight. He maintains a hold rating on the stock.
"Cash flow is improving. They're paying down debt and growing nicely," he said. "I consider them healthier now than they were three or four months ago."
Kim Caughey, analyst with Parker/Hunter Inc., says she's not surprised by any effort to clarify accounting in light of Enron.
"Anyone's books are up for grabs at this point," she said. "The pressure isn't just on software companies or Computer Associates. Everybody is under greater scrutiny in this environment."
Caughey says the more conservative approach better reflects CA's business than the old accounting method. She gives CA her highest buy rating, but says Kumar and his staff should do more to explain the new model.
"This is a difficult concept, and let's face it, accounting doesn't exactly make the investor's heart go pitter patter," she said.
