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CA Inc. (CA) Q3 Earnings In Line, Revenues Miss Estimates

CA Inc. CA reported not-so-encouraging third-quarter fiscal 2017 results.

The company posted adjusted earnings (including stock-based compensation but excluding other one-time items) of 57 cents, which came in line with the Zacks Consensus Estimate.

On a GAAP basis, earnings came in at 50 cents compared with 52 cents reported in the year-ago quarter.

Quarter Details

CA reported revenues of $1.007 billion, which not only decreased 2.6% from the year-ago quarter but also missed the Zacks Consensus Estimate of $1.014 billion. The year-over-year decrease was primarily due to 1.3% decrease in Subscription and maintenance revenues (81% of total revenue) and 12.2% decrease in Professional Services revenues (7%). Also, Software fees and other revenues (12% of total revenue) decreased 4.8%.

Moreover, on a segment basis, revenues from CA's Mainframe Solutions were down a marginal 1% on a year-over-year basis to $546 million. Revenues from Enterprise Solutions decreased 2% on a year-over-year basis to $389 million, whereas Services revenues decreased 12% year over year to $72 million.

North America revenues decreased 4% on a year-over-year basis, whereas International revenues were flat in terms of local currency on a year-over-year basis. The company witnessed 1% increase in total bookings. Per the press release, bookings were up "due to an increase in enterprise solutions renewals, partially offset by decreases in mainframe solutions renewals and enterprise solutions new product sales."

Moving on, CA reported adjusted income from continuing operations before interest and income taxes (including stock-based compensation but excluding other one-time items) of $358 million, down 1.9% year over year. Non-GAAP operating income from continuing operations before interest and income taxes came in at $384 million compared with $390 million reported in the year-ago quarter. The decrease was due to lower revenues.

As a percentage of revenues, adjusted income from continuing operations before interest and income taxes was up 25 basis points (bps) to 35.6%, primarily due to lower operating expenses. Adjusted operating expenses decreased 2.7% year over year to $507 million, while as a percentage of revenues, it decreased 40 bps year over year to 40.4%.

CA's adjusted net income from continuing operations (excluding amortization and other gains but including stock-based compensation) was approximately $236.9 million. On a GAAP basis, net income from continuing operations came in at $208 million.

CA exited the quarter with cash and cash equivalents of $2.828 billion compared with $2.585 billion in the previous quarter. The company's total long-term debt (including current portion) came in at $1.950 billion. During the quarter, the company provided $517 million in cash from operating activities.

In the third quarter, CA did not repurchase any shares. Management approved a $650 million stock repurchase program as of Dec 31, 2016. The company also paid $107 million as dividends during the quarter.

Fiscal 2017 Guidance

CA updated its fiscal 2017 guidance. The company now expects total revenue to be flat on a reported basis and to increase in a range of flat to up 1% in constant currency (previous guidance was of an increase in a range of flat to up 1% both on a reported and constant currency basis), which translates to $4.01 billion to $4.03 billion (previously $4.03 billion to $4.07 billion). The Zacks Consensus Estimate for fiscal 2017 revenues is pegged at $4.036 billion.

CA now expects non-GAAP earnings per share from continuing operations to be flat to up 2% (previously an increase of 2%-5%). According to the company, "At December 31, 2016 exchange rates, this translates to reported non-GAAP diluted earnings per share from continuing operations of $2.42 to $2.47." The Zacks Consensus Estimate for fiscal 2017 is pegged at $2.34 per share.

The company now expects non-GAAP operating margin to be approximately 37%, down from the previous guidance of 38%. Non-GAAP effective tax rate is expected to be in a range of 28% to 29% (unchanged from the previous guidance)

The company now expects cash flow from operations to be in a range of -5% to -1% (previously in a range of -3% to +1%). Considering the exchange rates as of Dec 31, 2016, this translates to a range of $0.99 billion to $1.03 billion.

Our Take

CA reported dull third-quarter results. The year-over-year revenue comparison was also not favorable. The year-over-year decrease was primarily due lower-than-expected revenues from Subscription and maintenance, Professional Services and Software fees and other revenues. The company, also, provided a not-so-encouraging fiscal 2017 outlook.

Nonetheless, we believe that the increased efficiency offered by the wide range of products will attract customers across sectors, lending stability to the business model. We are positive about CA's increased cloud exposure.

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.

On the other hand, increasing competition from Oracle ORCL , International Business Machines IBM and HP Inc. HPQ and exposure to Europe remain the near-term headwinds.

CA's shares have yielded a negative 4.99% return for the past six months in stark contrast to the Zacks categorized Computer-Software industry's gain of 6.61%.

CA has a Zacks Rank #4 (Sell).

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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