Computer Associates Inc had a beautifully simple business model: buy ailing software companies and milk their maintenance revenue stream till it ran dry. It turned the company into the world’s number three software company, with a reputation for consistently high growth and profitability. But it also earned it some cutting jibes. Every ecosystem needs a […]
Computer Associates Inc had a beautifully simple business model: buy ailing software companies and milk their maintenance revenue stream till it ran dry. It turned the company into the world’s number three software company, with a reputation for consistently high growth and profitability. But it also earned it some cutting jibes. Every ecosystem needs a scavenger, was how Oracle Corp chief executive Larry Ellison summed up the company back in 1993 – coincidentally just about the time Computer Associates decided to re-mould its reputation as a vendor of new, rather than dying technology. The focus of that makeover has been the client-server systems management suite, Unicenter, a product that encompasses much of the functionality of its old mainframe products in this area. Backed by a large and aggressive sales force, Unicenter truly has become a market leader in the client-server systems management software arena.
Passed up opportunities
To further establish the new-look Computer Associates, the company has also started doing a different kind of acquisition, this time of hot, growing companies such as network backup specialist Cheyenne Software Inc. Meanwhile, it has passed up opportunities to buy older, flagging concerns such as Dun & Bradstreet Corp’s D&B Software. The transition seemed to be going smoothly until the last quarter, when the old and the new business models clashed. After years of turnover growth that rarely strayed from the 15% to 25% range, the company’s third quarter to December 31 fell flat. Revenue, at $1.05bn provided growth of only 5%. Seeing the slowdown coming, Computer Associates was able to tighten expenses during the quarter, which meant its net profit was close to target. But Computer Associates and the Wall Street analysts that watch the company have been pouring over more detailed numbers, trying to decide if there is something endemic within Computer Associates’ operations that could have caused the downturn, or whether the company will bounce right back in the next couple of quarters. What is clear is that the company has had problems selling Unicenter in Europe. Not only are customers less enthusiastic about the product in the region, but Computer Associates’ salesforce seems more content selling mainframe systems software. And those that do sell it seem to ignore the mainframe business. The upshot during the third quarter was that while US revenues grew 33%, Computer Associates’ international revenues dropped by 21% or $110m as a result of a $200m shortfall in Europe. Mainframe software revenues in the region were particularly weak, falling 30%, resulting in a downturn in company-wide mainframe software sales of 8% quarter-on-quarter. In contrast client-server revenues were up 25% excluding Cheyenne’s contribution. Chuck Phillips, an analyst at Morgan Stanley, estimates that Unicenter revenues are rising at around 30% – with the US contributing 70%. There is another factor at play here: greater competition. Since IBM Corp bought Tivoli Systems Inc last year, the company has been pushing what many analysts say is a technically stronger product than Unicenter. And in contrast to the mainframe arena where Computer Associates has largely eliminated much of the competition other than IBM, there are plenty of other client-server systems management vendors such as OpenVision Technologies Inc and Unison.Software Inc. Despite the poor quarter, Computer Associates is not altering its game plan. It will ramp up its sales and marketing resources in Europe in an attempt to address the shortfall, and it will also push ahead over the next few months with the roll out of its Unicenter/TNG, The Next Generation, which is a more widely applicable and faster- performing version of the product. The next few quarters will determine whether Computer Associates has come through its transition successfully or whether it is going to need to go shopping again to buy itself some legacy brands.