Founded in 1974, Computer Associates International (NYSE: CA) is the world's third largest independent software company with sales of $6.3 billion and 18,000 employees. The company, which sells hundreds of software products, has taken a different tack than many of its competitors, choosing diversity over a narrow focus. Sanjay Kumar, Computer Associate's president and chief operating officer, spoke with The Motley Fool about the need for diversity in today's business market, the company's fastest growing businesses, and the impact the Internet is having on enterprise software vendors.

TMF: Why don't you start by telling our readers about the software Computer Associates offers and how it breaks out in terms of revenues.

Kumar: We really have three basic area of the business -- distributed systems, OS/390 mainframe systems, and professional services. The break down is about 50%, 40%, and 10%.

"We're also, by the way, the leader in storage and security today. Those are two big markets for us. People don't focus on us for storage -- they focus on a lot of pure play companies. If you look at the storage software business today and get the market share numbers, we have the largest share."

In distributed systems we're in two really big areas. One is management of networks and infrastructure, and the second is the development of the applications, the tools that we sell.

A majority of the distributed systems growth for us today is driven by the Internet, e-business, e-commerce, the whole Internet-related wave. The OS/390 business is highly diversified -- everything from high-end database products to application developments, to management tools, to network tools, but today it's driven by capacity expansion for the most part. Interestingly, what people don't focus on is the fact that the Internet is really driving huge consumption of mainframe systems. It seems bizarre to most people but anytime you go to, say, a retail brokerage Web site, nine times out of ten there's a big mainframe churning away on the backend. Our professional services division is brand new for us. It's 21 months old and gone zero to about 10% of the business. It focuses primarily what we call e-services.

TMF: Your business is focused around Fortune 1000 companies?

Kumar: We've clearly centered on large enterprises, but today we have 165,000 customers that run CA software. A good chunk of our business comes from, I'd say, the Fortune 10,000. It drops off sharply after that.

TMF: So it's flexible in that smaller businesses can afford it?

Kumar: Exactly. If you look back at the company five years ago we were a mainframe software company. Today 40% is mainframe software and 50% is distributed systems. We have focused along the way, branching out away from the traditional CA customer. They buy a lot, but that side of the market is not expanding. The new expansion is all the dotcoms, those kinds of companies.

TMF: So it's been an evolution from mainframe to client server, and now to the Internet?

Kumar: Absolutely. Our most profitable customers are our distributed systems customers. We have the relationships, we've got the marketing team, and we have a really large direct sales organization. About 70% of our business is direct and the rest is through the distribution channel.

TMF: You've been beefing up channel sales, right?

Kumar: Yes. It's gone from about 5% to about 30% in the last few years.

TMF: The goal to get that to about 50% within five years?

Kumar: Yes.

TMF: How about market share? In 1998, the estimated size of the global systems management software market was about $9.7 billion. In that year, you guys had around $5 billion in sales, so you had 50% share of that market?

Kumar: It's probably a little bit lower than that, but we have the largest share.

TMF: You're in the 40% range?

Kumar: We're in the 40% range in the overall systems management. We're also, by the way, the leader in storage and security today. Those are two big markets for us. People don't focus on us for storage -- they focus on a lot of pure play companies. If you look at the storage software business today and look at the market share numbers, we have the largest share.

TMF: The global systems management software business is expected to double to $18 billion in 2003, so the top side is tremendous for you guys if you maintain market share.

Kumar: Definitely. As new companies expand on the Web they can't afford the bodies to manage all of this stuff the way established companies can. That's what we do. We make it easier, cheaper, and safer to run large distributed computer networks. That's a business that's really blooming.

TMF: Sometimes investors like to see pure play companies because it's a simpler model to understand. What would your argument be for having a much broader product line?

Kumar: I think that last quarter's results in the market place are the exact reason that diversity is critical, at least for us. A number of companies had Y2K problems, a number of companies missed their numbers. I mean, take a world class company like Legato (Nasdaq: LGTO). Great company. We compete with them. There's nothing wrong with them. But they missed their numbers because of a handful of deals and it really cost them a lot.

"As new companies expand on the Web they can't afford the bodies to manage all of this stuff the way established companies can. That's what we do. We make it easier, cheaper, and safe to run large distributed computer networks. That's a business that's really blooming."

TMF: The same with BMC Software (Nasdaq: BMCS).

Kumar: Exactly right. These are great companies and we compete with them aggressively in all of those kind of things, but let's face it. Having diversity helps you ride some of those waves because you can push another part of the business to make it. We talked about that on our [recent] analyst call. Diversity has really helped. So our strategy is to maintain the overall growth but pick certain aggressive growth markets in which we can excel and help the street understand what those are. We will get rewarded for that.

TMF: What are those areas, the same as we talked about earlier?

Kumar: The majority of our new product expansion is in distributed systems.

TMF: You recently acquired Platinum Technology, your biggest deal ever. What strengths does that give you?

Kumar: Platinum give us strength on the data products side. For example, database tools for mainframes, data warehousing, repository products, and business intelligence tools for the Web. We're clearly focused on having more and more technology in products for Platinum. It also gave us some good services pieces.

TMF: A couple of years ago you talked about getting into services by buying Computer Sciences Corp. (NYSE: CSC). That didn't work out. Your service organization is growing, is it providing what you need?

Kumar: We're very committed to it. It started with 200 people 21 months ago and we now have about 3,500 people in that business. It's growing about 60% to 70% a year. It's done well. It's not growing fast enough for me, but it's done OK.

TMF: How big a part of your revenue mix will it become?

Kumar: It needs to get to about 20% or a little bit more. That would be a healthy mix.

TMF: Why is it important?

Kumar: Our service is focused exclusively on getting our products implemented faster. We're using our technology to solve problems. It's a faster way for CA to sell products and technology, that's what it comes down to. When customers buy products from us they're looking to install it in the fastest and most efficient way possible. My answer to them is, we'll do it for you. The faster we can deploy our technology the faster clients come back to buy more.

TMF: Give me a specific example of the Internet services you provide.

Kumar: Take a company like eToys (Nasdaq: ETYS). They're a new company, a hot start up. They want to get out on the Web so they turn to us for the management of Web security, Web server management, those kinds of things.

TMF: To analyze Computer Associates, what numbers are important to track?

Kumar: At the end of the day [investors] need to realize that diversity in the business helps you ride the bumps and waves. But we're also focused on a number of high growth areas like storage and security. I think people need to take time to understand the products behind the big categories.

Distributed systems revenue [for the last two quarter] was $900 million, but in that $900 million are two super hot markets -- storage and security. In security we're number one. It's not Network Associates (Nasdaq: NETA), or Axent (Nasdaq: AXNT). I think part of the CA story gets lost in the diversity and people tend to go for the pure plays.

Storage, security, and network management are three of the really hot growing markets. We need to be seen for the different kinds of dollars we produce. I mean, mainframe is not the hottest business in the market place. But it is an incredibly profitable business. It's an excellent cash flow generator. We'll generate $1 billion plus in free cash flow this year, and we get that because we're in these markets. So, it's a mix and that's what investors need to look at.

TMF: What's the biggest challenge going forward?

Kumar: We're focused on new markets but we have to get used to and manage the volatility.

TMF: Thank you.

Kumar: You're welcome.

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