Computer Associates 2006 Annual Report Download - page 60

improvement in professional services gross margin from 6% in fiscal year 2005 to 15% in fiscal year 2006 is
attributable to a more effective utilization of professional staff and increased professional services revenue.
Cost of professional services for fiscal year 2005 increased $5 million from fiscal year 2004 to $230 million mostly
due to increased revenue volume, partially offset by approximately $12 million of costs required to be deferred
because they were sold in combination with related software products, which requires that the total estimated cost of
such services be deferred and recognized ratably over the life of the related software contract period.
Selling, General, and Administrative (SG&A)
SG&A expenses for fiscal year 2006 increased $244 million from fiscal year 2005 to $1.60 billion. The increase was
primarily attributable to employee and other costs associated with the Concord, Niku, iLumin, and Wily
acquisitions of approximately $98 million, increased travel, training and relocation costs of approximately
$39 million, increased consulting costs of approximately $55 million related to our ERP implementation, legal
fees, Sarbanes-Oxley compliance programs, and increased marketing and promotion costs of approximately
$35 million mostly due to our new branding campaign and channel promotions. Partly offsetting these increases was
a reduction of $15 million associated with the Company’s decision in the fourth quarter of fiscal year 2006 to forego
its discretionary contribution to the Company-sponsored 401(k) plan. Through the third quarter of fiscal year 2006,
the Company had accrued $12 million, all of which was reversed in the fourth quarter of fiscal year 2006, resulting
in a $12 million reduction to SG&A expense in the fourth quarter of fiscal year 2006. SG&A expenses for the fiscal
years ended March 31, 2006 and 2005 included approximately $64 million and $60 million of stock-based
compensation expense, respectively. SG&A expenses for the fiscal years ended March 31, 2006 and 2005 included
credits to the provision for doubtful accounts of approximately $18 million and $25 million, respectively. The credit
in the provision for doubtful accounts is a result of the reduction in the prior business model accounts receivable.
Under our business model, amounts due from customers are offset by related deferred subscription revenue,
resulting in little or no carrying value on the balance sheet. In addition, under our business model, customer
payments are often received in advance of revenue recognition, which results in a reduced net credit exposure. Each
of these items reduces the need to provide for estimated bad debts.
SG&A expenses for fiscal year 2005 increased $35 million from fiscal year 2004 to $1.35 billion. The increase was
primarily attributable to an increase in personnel related costs. SG&A expenses for the fiscal years ended March 31,
2005 and 2004 included approximately $60 million and $77 million, respectively, of stock-based compensation
expense. In addition, in fiscal year 2005 we recorded a credit of approximately $25 million against the provision of
doubtful accounts, which is lower than the credit of $53 million we recorded in fiscal year 2004. SG&A for the fiscal
years ended March 31, 2005 and 2004 also included approximately $24 million and $30 million, respectively, of
legal expenses related to the government investigation and, for the fiscal year ended March 31, 2005, included
$31 million for consulting and other fees associated with our Sarbanes-Oxley compliance program. Further, in the
fourth quarter of fiscal year 2005, we realized a gain of approximately $8 million on the sale of an investment that
was included in SG&A.
Product Development and Enhancements
For fiscal year 2006, product development and enhancement expenditures, which include product support,
decreased $11 million compared to fiscal year 2005 to $697 million. Product development and enhancement
expenditures were approximately 18% and 20% of total revenue for fiscal years ended March 31, 2006 and 2005,
respectively. During fiscal year 2006, we continued to focus on and invest in product development and
enhancements for emerging technologies such as wireless, Web services and on-demand computing, as well as
a broadening of our enterprise product offerings.
Product development and enhancement expenditures for fiscal year 2005 increased $5 million from fiscal year 2004
to $708 million. Product development and enhancement expenditures were approximately 20% and 21% of total
revenue for fiscal years ended March 31, 2005 and 2004, respectively.
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