Reportedly, CA Inc. (CA) is being sued by the U.S. Department of Justice (DOJ) for charging certain federal departments extra for its products and services since 2006.
Per the lawsuit, the DOJ alleged that CA had not disclosed its pricing policy changes during General Services Administration (GSA) contract negotiations which had cost the U.S. government an extra $100 million. CA has been a GSA vendor since 2002.
DOJ has alleged that CA was giving heavy discounts to its commercial customers compared to those under the GSA contract, when the federal contract terms entailed CA to provide full disclosure of its pricing policy. The disclosure clause provided for the GSA’s right to negotiate a fair price for government agencies. CA asserted that it had not changed its pricing policy throughout the contract term.
The DOJ allegation is in tune with Dani Shemesh’s allegations in 2009 when the former CA employee sued the company under the False Claims Act. Per the act, private parties are able to sue on the government’s behalf and share in any damages or fines thus received.
Although CA denied these allegations, if proven otherwise, it could dent the company’s reputation as a government contractor. A loss of position with the government could also affect future negotiations for government contracts and hurt its revenue growth prospects.
The company has not done well in the recently reported fourth quarter. CA’s major revenue-generating segments were adversely affected during the reported quarter due to lower-than-expected sales of new products. The company also provided a tepid outlook for fiscal year 2015.
Nonetheless, we believe that the breadth of its products and the increased efficiency offered by them will help attract customers across sectors, lending stability to the business model. We are positive about CA’s increased cloud exposure. A decent renewal rate, modest cash position and share repurchase also appear encouraging.
On the other hand, increasing competition from IBM (IBM), Oracle (ORCL) and Hewlett Packard (HPQ) and exposure to Europe remain the near-term headwinds.
Currently, CA has a Zacks Rank #3 (Hold).
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