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CA Inc. (CA - Analyst Report) reported second-quarter 2014 adjusted earnings (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) of 83 cents per share, which comprehensively beat the Zacks Consensus Estimate of 68 cents. On a year-over-year basis, earnings improved from 56 cents.

Revenues

Although CA’s revenues of $1.14 billion decreased 1.04% from the year-ago quarter, it marginally beat the Zacks Consensus Estimate of $1.11 billion. The year-over-year decline was primarily due to 1.9% decrease in revenues from Subscription and maintenance revenues (82.9% of total revenue) which more than offset the 2.11 % increase in revenues from Professional Services (8.5% of total revenue) and 4.3% improvement in revenues from Software and other Fees (5.6% of total revenue).

Moreover, on a segment basis, revenues from CA’s Mainframe Solutions segment and Services segment increased 0.8% and 2.11%, respectively, but failed to offset the 4.3% decline in revenues from the Enterprise Solutions segment.

The company’s mainframe revenues were positively impacted by higher sales of new products and mainframe capacity while Services revenues increased due to higher professional services engagements. However, Enterprise solution segment revenues were impacted by lower-than-expected sales of new products.

The company witnessed total bookings of $877 million, which increased 5% from the year-ago period. Revenues from North America remained flat while International revenues were down 3% from the year-ago quarter.

Operating Results

CA’s adjusted gross margins (including stock-based compensation) declined 49 basis points (bps) on a year-over-year basis to 85.9% primarily due to a lower revenue base. However, a 638 bp drop in operating expenses as a percentage of revenues on a year-over-year basis boosted CA’s operating margins.

CA’s adjusted operating margins (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) improved by 588 bps on a year-over-year basis to 39.1%. The company reported adjusted net income (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) of $375 million or 83 cents which improved from $258.8 million or 56 cents reported in the year-ago quarter.

Balance Sheet, Cash Flow & Share Repurchase

Cash, cash equivalents and investments came in at $2.80 billion, up from $2.46 billion, reported in the previous quarter. The company’s total outstanding debt (long-term debt including current portion) was $1.77 billion. CA generated $87 million in cash from operating activities.

Moreover, during the reported quarter, CA repurchased around 5 million shares for $145 million and paid $114 million in dividends.

Guidance

For fiscal 2014, the company expects total revenue to decline in the range of 3% to 2.0%. CA expects growth in non-GAAP earnings per share from continuing operations to decline in the range of 17.0%–20.0% to $2.96–$3.03.

Our Take

Although CA reported better-than-expected second-quarter results, the year-over-year comparison for the top line was down. Most of CA’s revenue-generating segments were adversely affected during the reported quarter, with the exception of services revenues which increased modestly. Moreover, the company witnessed an increase in license wins and moderate growth in bookings.

However, we are positive about CA’s increased cloud exposure. Decent renewal rate, modest cash position and share repurchase also appear encouraging.

On the other hand, increasing competition from International Business Machines (IBM - Analyst Report), Oracle (ORCL - Analyst Report) and Hewlett Packard (HPQ - Analyst Report) and exposure to Europe remains the near-term headwind.

CA currently has a Zacks Rank #3 (Hold).

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