Back to top

Image: Bigstock

CA Q2 Earnings In Line, Revenues Miss, Updates FY18 View

Read MoreHide Full Article

Shares of CA Inc. (CA - Free Report) slumped 3.9% in after-hours trading, yesterday, after the company reported not-so-encouraging second-quarter fiscal 2018 results.

The company posted non-GAAP (excluding stock-based compensation and other one-time items) of 62 cents, which came in line with the Zacks Consensus Estimate. Further, reported earnings also declined nearly 7% on a year-over-year basis.

CA's shares yielded a negative return of 6.4% in a year against the Zacks industry's gain of 33%.

Quarter Details

Although CA’s reported revenues of $1.034 billion increased 2% on a year-over-year basis, it missed the Zacks Consensus Estimate of $1.051 billion. On a constant currency basis, revenues were up 1% year over year. The increase can mainly be attributed to acquisition synergies (from Automic Holding GmbH and Veracode, Inc.) an increase in software fees.

However, the company notified that revenues and “velocity in sales outside of the renewal cycle of Enterprise Solutions products” was below expectations.

Revenues from Subscription and maintenance (80% of total revenues) increased marginally 0.2% and revenues from Professional Services (7% of total revenues) were flat year over year. However, Software fees and other revenues (13% of total revenues) surged 11.8%.

Moreover, on a segment basis, revenues from CA’s Mainframe Solutions declined 2% on a year-over-year basis to $539 million. Revenues from Enterprise Solutions increased 7% on a year-over-year basis to $420million, while Services revenues were flat year over year and came in at $75 million.

Both North America and International revenues increased 0.3% and 4%, respectively, on a year-over-year basis in terms of local currency. However, the company witnessed 1% slump in total bookings. Per the press release, “Total bookings decreased due to a decline in renewal bookings.”

Moving on, CA reported non-GAAP income from continuing operations before interest and income taxes of $392 million, down 4% year over year. As a percentage of revenues, non-GAAP income from continuing operations before interest and income taxes was down 200 basis points (bps) to 38%, primarily due to higher operating expenses.

Non-GAAP operating expenses increased 6% year over year to $642 million, while as a percentage of revenues, it increased 240 bps year over year to 62.1%. The increase in operating expenses was primarily due to expenses related to Automic and Veracode acquisitions.

The company’s non-GAAP net income from continuing operations was approximately $263 million as compared with $283 million reported in the year-ago quarter.

CA exited the quarter with cash and cash equivalents of $2.822 billion compared with $2.771 billion in the previous quarter. The company’s total long-term debt (including current portion) came in at $2.785 billion. During the quarter, the company provided $37 million in cash from operating activities.

During the quarter, the company repurchased 2.8 million shares worth $90 million. The company also approved $560 stock repurchase program as of Sep 30, 2017. CA paid $108 as dividends during the quarter.

Fiscal 2018 Guidance

CA updated its fiscal 2018 guidance. The company continues to expect total revenues to increase 4% in constant currency. Total revenues are now anticipated to increase 5% in reported basis. This translates reported revenues to $4.22-$4.25 billion at Sep 30, 2017 exchange rates. Previously the company anticipated revenues to increase 4% on a reported basis. The Zacks Consensus Estimate for fiscal 2018 revenues is pegged at $4.21 billion.

The company continues to anticipate non-GAAP earnings per share from continuing operations to be flat to 2% in reported as well as in constant currency basis. According to the company, “At September 30, 2017 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.42 to $2.48.” The Zacks Consensus Estimate for fiscal 2018 is pegged at $2.45 per share.

The company continues to expect non-GAAP operating margin to be in the range of 36-37%, Non-GAAP effective tax rate is anticipated to be in the range of 28-29%, unchanged from the previous guidance.

The company now expects cash flow from operations to increase in the range of 2-6% on reported and flat to 4% in constant currency basis. Previously the company projected cash flow from operations to be in the range of 1-5% on reported basis. Considering the exchange rates as of Sep 30, 2017, this translates to the range of $1.10-$1.15 billion.

Our Take

CA reported not-so-encouraging second-quarter results. However, it provided a positive view for fiscal 2018.

We are optimistic about CA’s acquisition strategy, which has enhanced its IT management, software and services portfolio. Moreover, we believe that the diversity of its products and the increased efficiency offered by the company will attract customers across sectors, lending stability to its business model.

CA has also adopted a “go to market” sales strategy. This brings together all the commercial functions including sales, marketing, brand management, pricing and consumer insight. The integration of the marketing functions helps to lower costs, consequently improving the bottom line.

Apart from pursuing growth through acquisitions, the company is leveraging cloud computing to enable organizations to source the best components — internal, external, private cloud, public cloud, mobile and more — to construct the most competitive business applications without wasting much time and resource.

The company is also focused on providing advanced management and security software required by organizations to take complete advantage of this evolution.

Meanwhile, increasing competition from Oracle (ORCL - Free Report) , International Business Machines (IBM - Free Report) and HP Inc. (HPQ - Free Report) along with exposure to Europe remain the near-term headwinds.

CA carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana. 

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.  

See the pot trades we're targeting>>

Published in