The story remains frustratingly consistent at CA, Inc. (NASDAQ:CA). In a software investing world, where share price performance is often correlated pretty closely with revenue growth and margins, CA scores strongly on the second metric, but consistently poorly on the first. The basic investment thesis at CA hasn't really changed much in several years now - the mainframe business is an excellent source of high-margin revenue and cash flow, but the company just cannot seem to generate enough growth in the Enterprise business. Talking about improved go-to-market strategies and more consistent sales execution hits the right buzzwords for the sell-side community, but it's hard to say that the implication in CA's price of little-to-no growth unfairly maligns the company.
When A Beat Doesn't Feel Like A Win
CA did report fiscal fourth-quarter earnings ahead of expectations, but the company's bookings and guidance for fiscal 2015 tempered any celebrating over the quarter that was.
Revenue declined 2% in constant currency terms, beating the sell-side average by almost 2%. Mainframe revenue was flat on a constant currency basis, while Enterprise declined 4% and Services declined 7%. More concerning was the 15% decline in bookings, though Mainframe renewals were in the mid-to-high 90%'s.
Although CA did see a year-on-year gross margin decline (down 130bp) and an operating income decline of 15%, this number too was about 2% higher than expected. Mainframe earnings declined 6%, while the Enterprise business reversed a small profit into a loss. Segment margin for the Mainframe business remains well above 50%, making it an especially profitable business.
Still Waiting For The Transformation To Begin
Any good fan of schlocky sci-fi/horror movies knows that you should expect some lag time between the transformative event (drinking the potion, being bitten by a critter, et al) and the actual transformation. So too with CA, but the wait is getting a little tedious. CA has spent more than $1 billion since 2009 on M&A deals, including Nimsoft in service assurance, Arcot Systems in security, and ITKO in service simulation, but the impact on the Enterprise business remains frustratingly slow to arrive.
CA remains a strong company in the mainframe space, where its solutions go deep into customers' IT systems, making replacement a time and money-consuming consideration. CA has done a good job of carving out its place in areas like workload automation, app performance management, development tools, and so on, with major companies like IBM (NYSE:IBM), BMC Software (NASDAQ:BMC), Hewlett-Packard (NYSE:HPQ), and Oracle (NYSE:ORCL) often the only serious contenders for market share.
In principle, CA has been thinking of Enterprise in pretty logical ways - looking to areas like service assurance, security, IT service management, and app delivery/performance management as key opportunities. But while the company talks about opportunities in cloud deployments and SaaS environments, ServiceNow (NYSE:NOW), New Relic, and AppDynamics seem to be winning the on-the-ground deals.
If there's a bright side to this situation, it's that name/capability recognition seems to be one of the issues - enterprises still know and think of CA as a mainframe company, and don't seem to be aware of what the company can offer through its Enterprise/SaaS capabilities. With management sending a clear message about improving its go-to-market strategies and sales execution, that would seem to be a good solution to the problem.
I would also note that the company announced a new head of its Enterprise Solutions business, Amit Chatterjee. Normally, this kind of turnover could be seen as a bad thing, but between CA's performance in Enterprise and Chatterjee's background in cloud/SaaS, I would think this could only help the company's efforts.
Waiting For Growth, Or Waiting For Godot?
From a capabilities standpoint, I don't think CA is doomed or out of the race. The company has definitely failed to adapt to the evolving needs and realities of enterprise IT like IBM or Oracle, but I think the underlying capabilities are still there. Granted, I've thought the same about TIBCO (NASDAQ:TIBX) too, and that company has struggled to consistently get back on a growth track.
Management didn't please investors with its outlook for fiscal 2015, as the midpoint of revenue guidance came in just a hair below the prior average estimate. The revision to EPS expectations was slightly worse (about 2%), but not terrible. Even so, so the question is front and center as to whether this company can grow again - based on the stock's current valuation, the answer seems to be "no", as today's price seems to factor in less than 1% annual growth in free cash flow over the long term.
The Bottom Line
If CA really does have the right tools and technologies for the new enterprise IT world (including cloud and SaaS) and the problem heretofore was just poor marketing, then CA is a fixable situation and a potential value. I've learned my lesson with low-growth software companies, though, that return to growth can be a long, frustrating, and uneven process. CA will pay you to wait (the dividend yield is over 3%), and the company's cash flow can easily fund the dividend, buyback, and additional acquisitions, but this is the sort of stock that will leave investors grinding their teeth in frustration, only to sell and then finally see the hoped-for return to growth or private equity buyout.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.