QandA: Ranger Governance Still Watching CA

Ranger Governance Computer Associates International

CRN: What has Ranger Governance been up to since last summer?

Perkins: There's been quite a bit of discussion internally about formulating our charter and seeing if it should change based on last summer's events and how we should direct our activities. But, it's probably best said that our interest in CA is continuing in the mode of monitoring their progress in making good on some of the commitments that they have made.

Fundamentally, we're just making sure that they are going to do what they said they were going to do and encourage them to make incremental progress toward the kinds of things that we think are going to be positive actions on their part that we brought up during the summer months.

CRN: Are you focusing just on CA at this point, or are you looking at other companies as well?

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Perkins: Most of our effort at this point has been on CA. There have been some, as I said, some general discussions, but I don't think we've gotten to the point where we've concluded anything that we're ready to put in print.

CRN: One of the complaints Ranger had about CA was some of their accounting practices, isn't that right?

Perkins: Absolutely, and I think if you really centered in on the issues it's the clarity of their accounting and whether [or not that really reflects their performance accurately. Whether pro forma at CA is an indication of good or bad, you can't tell [way one or the other. I'm not saying it's bad, I'm not saying it's good. I'm just saying it's very unclear. ... What are the growth indicators, in reality? What are the issues that should be addressed with regard to the balance sheet? What is happening with regard to these sales and the performance in cash flow? It's very difficult to feel like you can get an accurate picture of what's actually happening within the company.

CRN: Even with them reporting both standard GAAP (generally accepted accounting principles) numbers and pro forma numbers?

Perkins: Yes. I think if you took that, in and of itself, certainly [with the losses that they've posted in recent quarters, there is an element of fact that the new business model is going to pro rate recognition on their contracts as they go forward--and that's at the center of a lot of these issues--that it is going to impact revenue recognition. Not cash flow necessarily, which is a different issue, but certainly that's something that makes you look at standard GAAP reporting and say, 'Well, you'd better look a little deeper than that.' But if you look only at the pro forma [results that's probably not good either, so we're back to being confused.

CRN: Have you seen any indication CA has begun to address the accounting issues you were concerned with last summer?

Perkins: Only in very limited ways. I attended an investor and analyst briefing in New York in early December, and they shared some additional information that was beneficial but, frankly, it did not address all of the issues that we were talking about, particularly with regard to growth and acquisition of new customers, new products being sold to existing customers, and new customers being acquired in specific numbers. Those, related to specific dollars that you can track over time, would give a better indication of growth, as well as different numbers as far as renewal. Now, they are reporting on things such as mainframe sales, for example. I'd like to see them report on some things in addition to the segments they do now, but until they get there it's only very limited information and I don't think it's anything that would be able to answer the questions that many of the analysts have.

CRN: What other segments do you think they should be reporting on?

Perkins: Well, I think they should be looking very specifically at what I mentioned before: new product sales and new customer acquisition. Those in terms of numbers as well as revenues. They're giving average contract life now, and that's good. But it's like working with an equation and having part of the information you need in order to solve it. If you don't have all the information you can't solve the equation, and without that solution you don't really get to the point where you have the understanding of the accounting. And the accounting should be a reflection of the business that's being done and I think that's the main problem right now.

CRN: So do you think CA has been guilty of improperly booking revenue?

Perkins:No. I don't. I think it's more the classification. They've gone through full audits and they still report things according to GAAP. They're asking people--analysts and the market--to not evaluate that, to instead look at their pro forma figures, but those are unclear as well, and so it's not a matter of whether I think they are doing something wrong or not. I don't have any reason to believe at all that they're doing something improper with regard to GAAP, or pro forma for that matter. I just don't think there's clarity in the information.

CRN: So do these changes have to come internally, or would you like to see new regulations put into place that would more strictly regulate how this kind of accounting is done?

Perkins: Well, the best changes, in my opinion, are always those that are done in good faith by the companies without regulations being imposed. I think, without a doubt, with Enron and other companies undergoing some scrutiny that there will be some additional laws that will be passed that will make it more clear as to what qualifies and what doesn't for revenue recognition, but the type of information that I think I'm suggesting, those are going to depend upon how the business is conducted and the business model the company is operating under. If a company is disclosing more and more information and if they're healthy then I think the confidence from the investor point of view would go up and everybody would win. That may be slightly naive, but I believe it nonetheless.