CA Surpasses Estimates in 4Q

Zacks

CA Inc. (CA) reported fourth quarter 2012 adjusted earnings per share (EPS) of 52 cents, surpassing the Zacks Consensus Estimate of 49 cents.

Revenue

Total revenue in the reported quarter came in at $1.2 billion, up 5.3% from $1.1 billion in the year-ago quarter. The company witnessed improvement in demand for its services and learning, virtualization and service automation, security and mainframe solutions, offset to a considerable extent by the softness in mainframe capacity and service assurance. About 4 percentage points of revenue growth was driven by constant currency while 3 percentage points was due to organic products.

Moreover, the company also generated 2 percentage points from recent acquisitions. Region wise, 63.0% of the company’s revenue in the fourth quarter came from North America while the remaining 37.0% came from International operations.

Revenue Segments

As per revenue segments,Mainframe Solutions revenue was $629 million, up 2.0% year over year. Enterprise Solutions revenue was $466 million, up 10.0% year over year. Services revenue was $93 million, up 13.0% compared with the year-ago quarter.

Bookings

The company witnessed total bookings worth $4.663 billion, down 5% year over year. Bookings improved as a result of renewals, which generally impacted revenues by $500 million with a large IT outsourcer.

Moreover, bookings for North America were $2.859 billion, down 12.0% in constant currency. Bookings for North America for fiscal year 2012 were positively impacted by the large contract renewal. The company reported International bookings of $1.804 billion, up 9.0% compared with the year-ago period.

Operating Results

Income from continuing operation was $211.0 million, up 12.8% from $187.0 million in the year-ago quarter. Income from continuing operations increased as revenue growth was almost in line with the operating expense growth. Moreover, the company also exercised good fiscal discipline and cost control.

Net income on a GAAP basis in the reported quarter was 45 cents per share versus 37 cents per share in the year-ago quarter. Excluding special items, such as software amortization, intangible amortization, restructuring and other and hedging gains/losses, non-GAAP net income in the fourth quarter stood at 52 cents per share versus 39 cents in the prior-year quarter.

Balance Sheet and Cash Flow

CA Inc. generated cash flow from continuing operations of $776.0 million compared with $634.0 million in the year-ago quarter. Cash, cash equivalents and marketable securities were $2.7 billion versus $2.5 billion in the previous quarter.

Guidance

For fiscal 2013, the company expects total revenue to grow in the range of 2% to 4%. This translates to reported revenue of $4.85 billion to $4.95 billion. The company reported GAAP diluted earnings per share growth in the range of 10.0% to 14.0%. This translates to GAAP reported diluted earnings per share of $2.07 to $2.14.

Non-GAAP diluted earnings per share are expected in the range of $2.45 to $2.53. Cash flow from continuing operations is expected to be in the range of $1.56 billion to $1.59 billion.

Our Take

CA Inc. posted decent fourth quarter results exceeding the earnings estimates. Revenue also improved on a year-over-year as the company witnessed improvement in demand for its services. However, the product demand trend was moderate in the reported quarter. This apart, the company has implemented some fiscal discipline to improve its operating performance.

We believe that the company provided decent fiscal 2013 guidance. On the other hand, we are apprehensive about intense competition in the software & cloud computing space from big players such as IBM Corp. (IBM) and Hewlett-Packard Company (HPQ). In addition, its high debt balance, reduction in tech spending by government agencies and European exposure may pose some challenges going forward.

The company has a short-term Zacks #3 Rank. (Hold rating).

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