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Summary

  • CA reported a modest fall in revenues as earnings fell sharply due to several ¨one-time¨ items.
  • Soft bookings and cautious outlook are not comforting.
  • Still too early to pick up for value investors.

Investors in CA Technologies (NASDAQ:CA) were not pleased with the company's latest results which reveal a continued slump in revenues.

As the company sees no improvements in the coming year, I don't find shares appealing at this point despite a strong balance sheet and a recent underperformance of the shares.

Fourth Quarter Results

CA Technologies reported fourth quarter revenues of $1.11 billion, down 2% compared to last year.

The company reported a 10% drop in non-GAAP earnings which fell to $274 million. On a GAAP-basis, earnings fell by 56% to $104 million. GAAP earnings were impacted by a range of factors as touched upon next.

Operational Review

CA was clearly not happy after reporting yet another revenue decline. North American revenues fell by 2% to $699 million. International revenues came in at $409 million which was down 2% as well. Revenues would have fallen by 4% assuming constant currency rates.

Worse, bookings fell by 15% to $1.24 billion for a book-to-bill ratio of 1.12. The fall in bookings was entirely due to fewer bookings at its domestic business. Despite the book-to-bill ratio exceeding one for the quarter, the total revenue backlog fell by a percent to $7.7 billion.

Despite the drop in revenues, GAAP expenses rose by 5% putting severe pressure on operating margins which fell by 6 percent points to 17% of sales as effective tax rates jumped from 7.4% to 40.6% of sales.

During the quarter, CA reported a $38 million decrease in capitalized software development costs and $55 million in software impairment costs. Higher external consulting costs and higher taxes explained the remainder of the fall in earnings.

Looking Into The Fiscal 2015

Revenues are expected to continue to fall for the coming fiscal year, anticipated to come in between $4.43 and $4.49 billion which represents a 1-2% drop in sales.

GAAP earnings per share are seen 8-12% lower, expected to come in between $1.79 and $1.86 per share. Non-GAAP earnings of $2.45 to $2.52 are foreseen, lower than consensus estimates of $2.56 per share.

Valuation

The company ended the quarter with $3.25 billion in cash and equivalents. Total debt stands at $1.77 billion, resulting in a net cash position of around $1.5 billion. Something to notice, CA holds roughly 40% of its cash balances within the US.

At $29 per share the company's equity is valued at $13.0 billion, or its operating assets at $11.5 billion. This values the company at 2.6 times annual revenues and 14 times earnings based on the guidance for 2015.

CA does pay a very compelling quarterly dividend of $0.25 per share, for an annual dividend yield of 3.5%.

Takeaway For Investors

The big problem for CA remains the fact that the future growth engines continue to underperform. The company's large mainframe business, which reported revenues of $613 million and operating margins of 55% over the past quarter, is operating in a long-term stagnating market.

The long term promising enterprise solution business and the service unit are actually the problem for CA. These businesses generate revenues of $405 million and $90 million, while posting operating margins of -2% and 1%, respectively over the past quarter.

As such CA has poor margins in the promising future businesses while mainframe activities will undoubtedly remain under pressure. Worse, the company is not showing topline growth despite the market opportunity growing at solid rates as a whole.

To spur revenue growth, CA is contemplating making $300-$500 million in acquisitions in the coming year as outlined in its recent investor presentation, yet past dealmaking has not resulted in the desired outcomes. The acquisitions of Nimsoft, Arcot and Layer 7 Technologies in recent years for a combined sum of $700 million has not resulted in any revenue growth. Future acquisitions are necessary to meet CA's long-term target of low single-digit revenue growth.

Even these ambitions in combination with a newly authorized $1 billion share repurchase program cannot convince me to initiate a stake in the business. CA has to show stable revenues and growth within its enterprise solutions business before shares might become appealing in my opinion.

I remain on the sidelines.

Source: CA Technologies - Not Appealing As The Underlying Business Is Still Shrinking