Computer Associates 2005 Annual Report Download - page 11

CA 2005 PAGE 09
TO MY FELLOW SHAREHOLDERS,
In his letter, John Swainson articulated our technology strategy and growth vision. He also discussed
how fiscal 2005 was a year of transition and investment at CA , with senior management taking
a fresh look at every aspect of our business -- from the markets where we want to compete to the
solutions we want to sell to the way we allocate our investment dollars. I’d like to take this
opportunity to explain how we are executing to make CA a more efficient, effective and, ultimately,
more successful company.
Chief Information Officers use “return on invested capital” or
ROIC as a key metric in deciding
whether to make technology investments. At CA , we use the same metric to determine how
we allocate operational and financial resources.
ROIC represents the return that CA delivers to our shareholders and bondholders on the money
they have invested in our company. It is calculated as cash flow from operations divided by invested
capital (equity and debt). At a minimum, the return we generate on the capital we put to use (our
ROIC ) must exceed the amount we pay to get the capital (known as weighted average cost of capital, or
WACC ) in order to justify making those investments. Our ROIC is approximately 19 percent versus a
WACC of approximately 13 percent . We think this is a very good return, but we believe we can increase it.
MAKING THE RIGHT INVESTMENTS
I will take you through some specific examples of how we are doing that.
The lifeblood of any software company is its ability to provide innovative, reliable solutions to its
customers. The challenge is to determine whether to develop those solutions in-house, partner
or acquire. The technology industry is littered with companies that made costly, wrong calls.
CA invests over $650 million per year in R&D to develop products in-house. With a growth strategy and
vision in place, we are now following a clear rationale for ensuring that this large
R&D
investment drives future success. We are allocating the largest investments in systems and security
management for the enterprise -- the company’s strongest growth areas. That said, we also will
make appropriate investments in our mature products that -- while not having explosive growth rates –
have large, loyal customer bases and are highly profitable.
We also are looking at the most efficient places to locate our development activities. While the
bulk of our software design will continue to be done in the United States, we will seize opportunities
to grow in lower cost areas of the world and in areas where particular skills and expertise are
readily available. For example, locating some development efforts associated with maintenance and
upgrades of current products in countries like India provides us with access to a large talent pool
at a much lower cost. The savings we realize can mean the difference between continuing a product
or sunsetting it. We have opened a center in the Czech Republic devoted entirely to mainframe
Letter from Chief Operating Officer Jeff Clarke
COO Jeff Clarke explains to CA
employees the importance of return on
invested capital.