Computer Associates International Inc had the misfortune to create most of the computer industry headlines over the festive season, delivering a shock profits warning that saw the shares tumble a whopping $13.25 to $48.50 on Friday. The company warned of lower-than-expected sales for the current quarter and blamed weak sales in Europe – but while analysts wanted to believe that this was simply a hiatus as it switched emphasis to client-server business software from mainframe applications, it is likely to say much more about continental Europe than it does about Computer Associates – after all, was Oracle Corp not blaming slowing European sales for a performance that failed to impress Wall Street just before Christmas (CI No 3,064)?. The effort to meet the Maastricht criteria for the single European currency is driving the French economy ever deeper into recession and the restructuring that is needed at some of its biggest companies is made impossible by the fact that unemployment figures for November showed a jump to a new record 12.6%, with well over 3m people on the jobless rolls. But it is accepted that France is having an exceedingly tough time and that it will only get worse this year – unless, as seems increasingly likely, the populace decides to take to the streets and demand a change of policy
Politically-inspired weakness
Most observers are looking to the German economy to make up for politically-inspired weakness in the rest of Europe – but when locomotives of the German economy like Siemens AG have to warn that they will be cutting their workforce by 6,000 this year, and creating that sort of number of jobs outside Germany at the same time (CI No 3,063), consumer confidence and a willingness to go out and spend the German economy out of trouble is likely to be the last thing on most people’s minds. Computer Associates, Islandia, New York, warned that it expected sales for its fiscal third quarter to the end of last year to be $1,000m to $1,100m where analysts had been looking for $1,200m – but it does expect to reach the average earnings estimate of 75 cents a share for the quarter before the charges of $598m for the acquisition of Cheyenne Software Inc. That was not enough to prevent the bloodbath in its shares as investors fretted that the company’s solid growth of recent years might be coming to an end. The company told analysts on Friday that it expects sales in the fiscal fourth quarter just started to hit $1,200m, and that it could achieve the earnings of 89 cents a share expected by analysts for the quarter. For the same period last year, it reported profits of $1.05 per share on revenues of $1,100m. President Sanjay Kumar said he was disappointed that European revenues were down but was encouraged by general client interest in new products – the transition to new client-server software would lessen dependence on the slower-growing main-frame software market, he said, adding that the transition had been going much more smoothly in North America than in Europe. We have to continue to do a better job of near-term execution in Europe and we have taken the appropriate actions to support our European business through this transition, he said. In the quarter to September 30, client-server soft-ware accounted for 31% of total sales of $990m and was the fastest-growing part of the business. Mainframe software accounted for about 63% of the total sales for the quarter.
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