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CA Inc. (CA - Analyst Report) reported third-quarter fiscal 2014 adjusted earnings (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) of 80 cents per share, which comprehensively beat the Zacks Consensus Estimate of 68 cents. On a year-over-year basis, earnings increased 33.7%.

Excluding special items (amortization, other gains, software development costs but including stock-based compensation) on a tax adjustment basis adjusted earnings came to 78 cents.

Revenues

Although CA’s revenues of $1.16 billion decreased 2.7% from the year-ago quarter, it marginally beat the Zacks Consensus Estimate of $1.14 billion. The year-over-year decline was primarily due to 1.5% decrease in Subscription and maintenance revenues (82.0% of total revenue) along with a 3.1% decrease in revenues from Professional Services (8.0% of total revenue) and 10.6% decline in revenues from Software and other Fees (10.0% of total revenue).

Moreover, on a segment basis, revenues from CA’s Mainframe Solutions remained flat on a year over year basis at $622.0 million. Revenues from Enterprise Solutions and Services decreased 6.1% and 3.1% year over year, respectively.

Enterprise Solutions sales decreased primarily due to lower sales of new products. On the other hand, Services revenues were hit primarily by lower professional services engagements and government customers.

North America and International revenues increased 48.5% and 1.7%, respectively, from the year ago period.

The company witnessed total bookings of $1.60 billion, which increased 27.1% from the year-ago period. The year-over-year increase in bookings was primarily attributable to increase in contract renewals.

The company inked 17 license agreements with contract values in excess of $10 million each in the third quarter of fiscal 2014 compared to 18 license agreements in the year-ago period.

Operating Results

CA’s adjusted gross margins (including stock-based compensation) declined 64 basis points (bps) on a year-over-year basis to 85.6% primarily due to lower revenues. Operating expenses as a percentage of revenues decreased 389 bps on a year-over-year basis, primarily due to lower personnel costs within selling and marketing expenses. A drop in operating expenses boosted CA’s adjusted operating margins.

CA’s adjusted operating margins (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) improved 326 bps on a year-over-year basis to 37.2%. The company reported adjusted net income (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) of $361.9 million or 80 cents, which improved from $273.6 million or 60 cents reported in the year-ago quarter.

Balance Sheet, Cash Flow & Share Repurchase

Cash, cash equivalents and investments came in at $2.98 billion, up from $2.80 billion reported in the previous quarter. The company’s total outstanding debt (long-term debt including current portion) was $1.77 billion. CA generated $429.0 million in cash from operating activities.

Moreover, during the reported quarter, CA repurchased around 4 million shares for $140 million and paid $113 million in dividends. The company's outstanding share count was 443 million.

Guidance

For fiscal 2014, the company expects total revenue to decline in the range of 1.0% to 2.0% to $4.52 billion to $4.57 billion (previously 3.0% to 2.0%). CA expects non-GAAP earnings per share from continuing operations to increase in the range of 21.0%–24.0% to $3.05–$3.12 (previously 17.0%–20.0% to $2.96–$3.03), better than the Zacks Consensus Estimate of $2.86.

The company expects cash flow from operations to decline in a range of 24.0% to 30.0% to $960.0 million to $1.04 billion.

Our Take

Although CA reported better-than-expected third-quarter results, the top line declined year-over-year. CA’s major revenue-generating segments were adversely affected during the reported quarter, with the exception of Mainframe Solutions, which remained flat on a year over year basis. The company witnessed robust growth in bookings. However, the number of license agreements signed decreased on a year-over-year basis.

We are positive about CA’s increased cloud exposure. A decent renewal rate, modest cash position and share repurchase also appear encouraging.

On the other hand, increasing competition from IBM (IBM - Analyst Report), Oracle (ORCL - Analyst Report) and Hewlett-Packard (HPQ - Analyst Report) and exposure to Europe remain the near-term headwinds.

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

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