CA: Relatively Stable, But Eventually Need Better

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CA: Relatively Stable, But Eventually Need Better

Rating  BUY Price Target $39.00 Price $31.67

CA reported F3Q results largely in line with modest expectations, though bookings were well below consensus estimates (but above our number). F15 cc guidance was left largely intact, though the bottom line will be better (due to a lower tax rate). Initial F16 guidance calls for revenue to decline on a cc basis even with the renewal portfolio increasing. Details. Non-GAAP EPS of $0.67 on revenue of $1.091B compared to consensus numbers of $0.60 and $1.092B, while bookings of $1.067B beat our estimate of $1.037B, but was much lower than what we view as a misleading consensus estimate of $1.400B. F15 guidance was left largely intact. Initial F16 guidance is for revenue to decline on a cc basis and for margins to be similar to F15. Underlying Business Momentum Seems to be Building, But Not Yet in Numbers. Our field data along with better new business growth relative to renewals suggests underlying business momentum, but revenue continues to decline slightly, which is expected to persist into next year. This could portend better results than anticipated at some point over the next year. We’ll have to wait and see. A 3.2% dividend yield in a volatile market should make this wait palatable for some. Bookings Explained. Bookings are largely driven by the timing of renewals, rather than a simple year-over-year calculation. We explain this further herein. Valuation/Risks We continue to rate CA a Buy with a $40 price target based on our DCF. Risks include achieving sufficient ROI, business model complexity, and diminished growth in the mainframe market.