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CA Inc. (CA) reported second quarter 2012 adjusted earnings per share (EPS) of 49 cents, surpassing the Zacks Consensus Estimate of 46 cents.

Revenue

Revenue of $1.20 billion increased 10.0% from $1.08 billion reported in the year-ago quarter. During the second quarter, the company witnessed strong demand for its security management solutions and significant improvement in the mainframe business.

Moreover, the upside in revenue was also driven by organic products growth. About 61.0% of the company’s revenue came from North America, while international operations contributed the remaining 39.0%.

Subscription and Maintenance revenue increased 8.8% year over year to $1.02 billion. Professional Services revenue came in at $96.0 million, up 21.5% from the prior-year quarter. Software Fees and Other revenues increased 17.1% to $82.0 million from $70.0 million in the year-ago quarter.

On a geographical basis, North America generated revenues of $735.0 million, which increased 11.0% year over year. International revenue (excluding America) was up 10.0% annually.

Bookings

Total bookings in the second quarter decreased 4.0% to $972.0 million. During the second quarter, the company signed a total of 14 license agreements with contract values in excess of $10.0 million each, for an aggregate contract value of $361.0 million.

Operating Results

Operating income in the second quarter stood at $190.0 million, up from $129.0 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 was $255.0 million versus $248.0 million in the year-ago quarter.

Net income on a GAAP basis in the reported quarter was 47 cents per share versus 43 cents per share in the year-ago quarter. Excluding special items, such as software amortization, intangible amortization, restructuring and other and hedging gains/losses, non-GAAP net income in the second quarter stood at 49 cents per share versus 46 cents in the prior-year quarter.

Balance Sheet and Cash Flow

CA Inc. generated cash flow from continuing operations of $190.0 million compared with $129.0 million in the year-ago quarter. Cash, cash equivalents and marketable securities were $2.292 billion versus $3.124 billion in the previous quarter. In the reported quarter, the company repurchased approximately 9.7 million shares for approximately $200 million and paid approximately $25 million in dividends. 

Guidance

For fiscal 2012, the company expects total revenue growth of 5.0% to 6.0% in constant currency, versus the previous outlook of 6.0% to 8.0%, which translates into total revenue of $4.7 billion to $4.8 billion. GAAP diluted earnings per share are estimated in the range of $1.78 to $1.83.

Non-GAAP diluted earnings per share growth is projected in the range of 7.0% to 10.0% in constant currency, which translates to reported non-GAAP diluted earnings per share of $2.13 to $2.18.

Conclusion

CA Inc. posted decent second quarter results, exceeding the earnings estimates. Revenue also improved on a year-over-year basis. However, the product demand trend was moderate in the reported quarter. Keeping in mind the quarter’s revenue backlog, we believe the company provided conservative fiscal 2012 guidance.

We further believe that CA Inc.’s endeavor to return value to share holders through share buybacks and dividend increases will boost investor sentiment. On the other hand, we are apprehensive about intense competition in the software & cloud computing space from big players, such as International Business Machines (IBM) and Hewlett-Packard Company (HPQ). In addition, its high debt balance and European exposure may pose some challenges going forward.

The company has Zacks #3 Rank, implying a Hold recommendation in the short term.

 
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