CA Inc. (CA) is scheduled to announce its first quarter 2012 results on July 20, 2011 after market closes, and we do not see much variation in the analysts’ estimates at this point.
Fourth Quarter Overview
The company reported fourth quarter 2011 adjusted earnings per share of 46 cents, in line with the Zacks Consensus Estimate. Results were driven by the growing demand for the company’s products, partially offset by the weakness in Europe.
The company reported revenues of $1.13 billion in the fourth quarter of 2011, up 4.9% from $1.08 billion reported in the year-ago quarter but fell short of the Zacks Consensus Estimate of $1.16 billion. The year-over-year growth in revenue was attributed to its continued focus on execution and enhanced portfolio solutions as well as new market opportunities.
During the quarter, the company witnessed solid demand for its virtualization and service automation, service portfolio management, Nimsoft solutions, as well as mainframe capacity, which was partially offset by softness in new mainframe product demand.
Moreover, on a GAAP basis, the company reported an operating income of $299.0 million, up from $231.0 million in the year-ago quarter. Excluding special items, such as purchased software amortization, intangibles amortization, restructuring and other costs, and including hedging gains and losses, non-GAAP operating income in the quarter was $337.0 million versus $256.0 million in the year-ago quarter.
During the fourth quarter conference call, management projected fiscal 2012 revenue growth in the range of 6% to 8%, which implies revenues in the range of $4.8 billion to $4.9 billion. Earnings on a GAAP basis are expected in the range of $1.79 to $1.86 per share, while non-GAAP earnings are expected in the range of $2.12 to $2.19.
Agreement of Analysts
Out of the seven analysts providing estimates for the first quarter, none revised their estimates over the last thirty days. Similarly for fiscal year 2012, none of the analysts revised their estimates over the last thirty days. However, for the fiscal 2013, one analyst made a downward revision over the last 30 days.
The limited estimate revisions also point to the fact that there were no major catalysts during the quarter that could drive results. Consequently, analysts are sticking to the estimates projected post fourth quarter earnings.
Some analysts believe that the recent ITKO acquisition would be beneficial for the company. Moreover, the analysts believe that the ITKO acquisition will drive growth for CA. Though some analysts suggest that the acquisition is highly priced yet it reflects the company’s desire to expand. The analysts are of the opinion that CA’s bookings and sales composition are too closely tied to its mainframe business, which is hindering growth.
Moreover, ITKO’s business model is slightly different from that of CA’s as the former specializes in sales rather than lead. On the other hand, the analysts are unsure about the risks associated with the integration of ITKO in the company’s portfolio particularly with CA’s sales team. In the near term, ITKO's size won't have a discernible effect on CA's growth.
CA is currently focusing on cloud computing as prospects in this segment are bright. However, the stiff competition that CA faces should also be kept in mind. There are many big and established players in the space, which will no doubt temper growth going forward.
Magnitude of Estimate Revisions
The magnitude of revisions is also minimal since the company reported its fourth quarter results. Overall, estimates for the upcoming quarter have declined from 49 cents to 47 cents in the last 90 days. However, no changes in the Zacks Consensus estimate were witnessed over the past 30 days.
For fiscal 2012, estimates have increased from $1.98 to $2.03 in the last 90 days. There has been no revision in estimates over the past 30 days. For 2013, estimates have increased from $2.12 to $2.24 over the past 90 days. However, estimates inched down by one cent over the last 30 days.
Recommendation
CA Inc. is one of the leading players in the information technology (IT) management software space. CA posted modest fourth quarter results, delivering encouraging growth in both the top and bottom lines. Increasing product demand trend and strong revenue backlog were the other positives in the quarter.
On the other hand, we are a bit concerned about the intense competition in the software & cloud computing space from big players, such as International Business Machines (IBM”>(IBM) and Hewlett-Packard Company (HPQ”>HPQ). This apart, its high debt balance and European exposure may pose some challenges going forward.
CA currently holds a Zacks #3 Rank, which implies a short-term Hold rating.
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