CA's Q3 Earnings And Revenues Beat Estimates, Increase Y/Y

CA Inc. (NASDAQ:CA) reported impressive third-quarter fiscal 2018 results, wherein both the top and the bottom lines came ahead of expectations.

The company posted non-GAAP earnings (excluding stock-based compensation and other one-time items) of 75 cents, surpassing the Zacks Consensus Estimate of 60 cents. Further, reported earnings witnessed a year-over-year increase of 19%.

Quarter Details

CA’s reported revenues of $1.093 billion increased 9% on a year-over-year basis and topped the Zacks Consensus Estimate of $1.077 billion. On a constant currency basis, revenues were up 7% year over year.

Management noted that the company recorded its highest quarterly revenues in four years and the revenue growth rate was the highest in the last six years.

Revenues from Subscription and maintenance (77.1% of total revenues) increased 3.2% and revenues from Professional Services (7.3% of total revenues) were up 11.1% from the year-ago quarter. Software fees and other revenues (15.6% of total revenues) surged 44.1%.

Moreover, on a segment basis, revenues from CA’s Mainframe Solutions increased 1% on a year-over-year basis to $552 million. Revenues from Enterprise Solutions jumped 19% on a year-over-year basis to $461 million, while Services revenues increased 11% to reach $80 million.

North America and International revenues increased 6% and 13%, respectively, on a year-over-year basis. However, the company witnessed 10% slump in total bookings.

Moving on, CA reported non-GAAP income from continuing operations before interest and income taxes of $410 million, up 7% year over year. As a percentage of revenues, non-GAAP income from continuing operations before interest and income taxes were flat year over year at 38%.

Non-GAAP operating expenses increased 10% year over year to $683 million, while as a percentage of revenues, it increased 60 bps year over year to 62.5%.

The company’s non-GAAP net income from continuing operations was approximately $314 million compared with $263 million in the year-ago quarter.

CA exited the quarter with cash and cash equivalents of $2.971 billion compared with $2.822 billion in the previous quarter. The company’s total long-term debt (including current portion) came in at $2.787 billion. During the quarter, the company generated $315 million of cash flow from operational activities.

During the quarter, the company repurchased 1.6 million shares worth $53 million. As of Dec 31, 2017, the company has approximately $507 million remaining under its current stock repurchase program. CA paid $106 million as dividends during the quarter.

Fiscal 2018 Guidance

CA updated its fiscal 2018 guidance wherein it raised the expectations for non-GAAP earnings per share but kept all other projections unchanged.

The company now anticipates non-GAAP earnings per share from continuing operations to increase in the range of 2% to 5% on a reported as well as on constant currency basis. Previously, it had expected the figure to be flat to down 2%. This was driven by a change in the non-GAAP effective tax rate. According to the company, “At December 31, 2017 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.54 to $2.60.” The Zacks Consensus Estimate for fiscal 2018 is pegged at $2.46 per share.

The company continues to anticipate total revenues to increase 4% in constant currency and 5% on a reported basis. This translates to revenues in the range of $4.22-$4.25 billion at Dec 31, 2017 exchange rates.

The company continues to expect non-GAAP operating margin to come in the range of 36-37%. Non-GAAP effective tax rate is now anticipated to be 25%, following the revised tax rates as a result of the reform.

The company continues to project cash flow from operations to increase in the range of 2-6% on a reported basis and be flat to up 4% on a constant currency basis. Considering the exchange rates as of Dec 31, 2017, this translates to cash flow in the range of $1.10-$1.15 billion.

Bottom Line

CA fared well in third-quarter 2018. Management continues to be optimistic about its mainframe business.

Apart from experiencing “long-term renewal yields and healthy new sales” the company’s Mainframe segment’s margin also witnessed benefits from lower corporate overheads. The company’s Enterprise Solutions segment also witnessed higher margins backed by increased revenues and efficiency.

Management is banking on the products launched during the quarter. The most notables were CA Continuous Delivery Director or CDD, which is meant for overall monitoring of DevOps Workflow, CA BlazeMeter API Test which targets testing teams of agile projects and CA Trusted Access Manager for Z that is meant for mainframe security.

These launches are a testament to the company’s continued investments and innovation. Management believes it is well equipped to address increasing security-related concerns.

Additionally, the company’s last year acquired businesses, Automic and Veracode, are also performing well, with the latter recording its highest bookings during the third quarter.

Furthermore, management is optimistic about its Net Promoter Score, a measure of customer loyalty, which improved from the year-ago quarter.

Zacks Rank and Stocks to Consider

CA has a Zacks Rank #3 (Hold).

Some of the better-ranked stocks in the broader technology sector are Micron Technology, Inc. (NASDAQ:MU) , The Trade Desk Inc. (NASDAQ:TTD) and Lam Research Corporation (NASDAQ:LRCX) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term EPS growth rate for Micron, The Trade Desk and Lam Research is projected to be 10%, 25% and 14.9%, respectively.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>