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CA Inc (CA) Q1 Earnings and Revenues Beat, Updates FY18 View

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CA Inc. (CA - Free Report) reported encouraging first-quarter fiscal 2018 results. The company posted adjusted earnings (including stock-based compensation but excluding other one-time items) of 55 cents, beating the Zacks Consensus Estimate of 50 cents.

On a non-GAAP basis, earnings came in at 61 cents compared with 64 cents reported in the year-ago quarter.

CA's shares yielded a negative return of 8.6% in the last one year underperforming the Zacks industry's gain of 26%.

Quarter Details

CA reported revenues of $1.025 billion not only increasing 3% on a year-over-year basis on a reported basis, but also surpassed the Zacks Consensus Estimate of $1.003 billion. On a constant currency basis, revenues were up 4% year over year. The increase can mainly be attributed to acquisition synergies and an increase in software fees.

Revenues from Subscription and maintenance (80% of total revenue) decreased 1.1% and revenues from Professional Services (7% of total revenue) decreased 2.6% year over year. However, Software fees and other revenues (13% of total revenue) surged 38.5%.

Moreover, on a segment basis, revenues from CA’s Mainframe Solutions declined 3% on a year-over-year basis to $536 million. Revenues from Enterprise Solutions increased 12% on a year-over-year basis to $414 million, while Services revenues decreased 3% year over year to $75 million.

Both North America and International revenues increased 3% and 2%, respectively, on a year-over-year basis in terms of local currency. However, the company witnessed 48% 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 $383 million, down 2% 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 37%, 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 180 bps year over year to 62.6%. The increase in operating expenses was primarily due to expenses related to Automic and Veracode acquisitions.

CA’s non-GAAP net income from continuing operations was approximately $256 million as compared with $269 million reported in the year-ago quarter.

CA exited the quarter with cash and cash equivalents of $2.771 billion compared with $2.971 billion in the previous quarter. The company’s total long-term debt (including current portion) came in at $2.788 billion. During the quarter, the company provided $298 million in cash from operating activities.

CA approved a $650 million stock repurchase program as of Jun 30, 2017. The company also paid $107 million as dividends during the quarter.

Fiscal 2018 Guidance

CA updated fiscal 2018 guidance. The company now expects total revenue to increase 4% in constant currency as well as in reported basis. This translates reported revenues to $4.12–$4.17 billion at Jun 30, 2017 exchange rates. Previously the company anticipated revenues to increase in the range of 2–3% on a reported basis and to increase in the range of 3–4% in constant currency. The Zacks Consensus Estimate for fiscal 2018 revenues is pegged at $4.14 billion.

CA now anticipates non-GAAP earnings per share from continuing operations to be flat to 2% in reported as well as in constant currency basis. Previously the company expected non-GAAP earnings per share to be 3–5% on reported basis and to increase in the range of 2–4% in constant currency. According to the company, “At June 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 $2.19 per share.

The company now expects non-GAAP operating margin to be in the range of 36–37%, (previous guidance 36%). Non-GAAP effective tax rate is expected 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 1–5% on reported and flat to 4% in constant currency basis. Previously the company projected cash flow from operations to be in the range of (2%) to 2%. Considering the exchange rates as of Jun 30, 2017, this translates to the range of $1.09–$1.14 billion.

Our Take

CA reported stellar first-quarter results and provided an encouraging fiscal 2018 guidance.

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 them 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, thereby 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.

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