"CA Technologies delivered another solid performance in the third quarter," said Mike Gregoire, CA Technologies chief executive officer. "We outperformed on revenue and are pleased with our renewals business and disciplined approach to cost control. We also saw good traction with our recent acquisitions Layer 7 and Nolio, which both had strong performances.
“While I’m encouraged by our performance in Q3, we need to continue to improve our execution across development, marketing and sales,” Gregoire continued. “Based on our results so far this year, we expect our fiscal year 2015 revenue growth rate and non-GAAP operating margin to be similar to fiscal year 2014.
“We are driving significant improvements in our products and go-to-market, including the release of organic innovation such as CA Cloud Storage for System z and the launch of a new ad campaign in select airports around the world as well as online.
"With two months to go in the fiscal year, we are more focused than ever on delivering great products, increasing market awareness of CA and our capabilities, and accelerating the velocity of our efforts to sell more software to more customers," Gregoire concluded.
REVENUE AND BOOKINGS
- The increase in the Company's third quarter bookings was positively affected by a year-over-year increase in renewals, primarily driven by a four year contract renewal with a large system integrator for more than $300 million.
- The Company executed a total of 17 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $874 million. During the third quarter of fiscal year 2013, the Company executed a total of 18 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $477 million.
- The weighted average duration of subscription and maintenance bookings for the quarter was 3.68 years, compared with 2.97 years for the same period in fiscal year 2013.
EXPENSES AND MARGIN
- GAAP and non-GAAP operating expenses were positively affected by lower personnel costs, primarily within selling and marketing.
- GAAP and non-GAAP operating margins in the third quarter were positively affected by a decrease in personnel expenses. GAAP operating margin also was negatively affected by a decrease in software capitalization.
- Non-GAAP EPS was positively affected by $0.16 due to a lower effective tax rate. The Company recognized a year-to-date net discrete tax benefit of approximately $184 million in fiscal year 2014, primarily from the resolution of uncertain tax positions upon the completion of the examination of U.S. federal income tax returns for fiscal years 2005, 2006 and 2007.
Starting in the first quarter of fiscal year 2014, the measure of segment expenses and segment profit was revised to treat all costs of internal software development as segment expense in the period the costs are incurred. As a result, the Company will add back capitalized internal software costs and exclude amortization of internally developed software costs previously capitalized from segment expenses. Segment expenses also exclude the effects of the Company’s fiscal year 2014 rebalancing plan. Prior period segment expenses and profit information have been revised to present segment profit and expenses on a consistent basis.
- The increase in Mainframe Solutions operating margin was primarily driven by a decrease in selling and marketing expenses in the third quarter of fiscal year 2014.
- Enterprise Solutions revenue for the third quarter of fiscal year 2014 decreased compared with the year-ago period primarily due to lower new product sales in prior periods. Enterprise Solutions operating margin for the third quarter of fiscal year 2014 increased compared with the year-ago period primarily as a result of a decrease in selling and marketing expenses.
- The decrease in Services revenue was primarily due to lower professional services engagements, including those with government customers.
CASH FLOW FROM OPERATIONS
- Cash flow from operations in the third quarter was $429 million, compared with $566 million in the prior year. The decrease year-over-year was due to a decrease in cash collections and a number of expected factors including higher cash taxes, payments related to the rebalancing actions announced on May 7, 2013 and a reduction in capitalized software development costs, offset by lower cash disbursements.
- Cash, cash equivalents and investments at December 31, 2013 were $2.982 billion.
- With $1.772 billion in total debt outstanding and $138 million in notional pooling, the Company’s net cash, cash equivalents and investments position was $1.072 billion.
- In the third quarter of fiscal year 2014, the Company repurchased more than 4 million shares of stock for $140 million.
- The Company is currently authorized to repurchase an additional $167 million of common stock and expects to complete the program by the end of fiscal year 2014.
- During the third quarter of fiscal year 2014, the Company distributed $113 million in dividends to shareholders.
- The Company’s outstanding share count at December 31, 2013 was 443 million.
CHANGE IN EXECUTIVE MANAGEMENT
Adam Elster, who led the Mainframe and Customer Success group for the past two years, has been named Executive Vice President and Group Executive, Worldwide Sales and Services, effective immediately. He replaces George Fischer, who is leaving the company after 20 years at CA (see separate press release for details).
OUTLOOK FOR FISCAL YEAR 2014
The Company updated its fiscal year 2014 guidance for revenue, GAAP and non-GAAP EPS, and GAAP and non-GAAP operating margin. The following guidance contains "forward-looking statements" (as defined below). It takes into account the change in business practice regarding internally developed software costs, the costs and payments associated with the rebalancing initiative announced on May 7, 2013 and the resolution of the U.S. tax matter mentioned above.
The Company expects the following:
- Total revenue to decrease in a range of minus 2 percent to minus 1 percent in constant currency. Previous guidance was a decrease of minus 3 percent to minus 2 percent. At December 31, 2013 exchange rates, this translates to reported revenue of $4.52 billion to $4.57 billion.
- GAAP diluted earnings per share to range from minus 3 percent to 0 percent in constant currency. Previous guidance was a decrease of minus 7 percent to minus 4 percent. At December 31, 2013 exchange rates, this translates to reported GAAP diluted earnings per share of $2.01 to $2.08.
- Non-GAAP diluted earnings per share to increase in a range of 21 percent to 24 percent in constant currency. Previous guidance was an increase of 17 percent to 20 percent. At December 31, 2013 exchange rates, this translates to reported non-GAAP diluted earnings per share of $3.05 to $3.12.
- Cash flow from operations to decrease in a range of minus 30 percent to minus 24 percent in constant currency, unchanged from previous guidance. At December 31, 2013 exchange rates, this translates to reported cash flow from operations of $960 million to $1.04 billion.
Outlook for cash flow from operations is being negatively affected by costs associated with the rebalancing of resources during the fiscal year, an increase in cash taxes, and an increase in operating cash outflows relating to product development and enhancements expenses for fiscal year 2014. In fiscal year 2013, cash flow from operations did not reflect $165 million of capitalized software development costs that appeared as an investment activity in our Statement of Cash Flows.
This outlook also assumes no material acquisitions and a partial currency hedge of operating income. The Company expects a full-year GAAP operating margin of 25 percent and non-GAAP operating margin of 37 percent, an increase of one point from previous guidance. The Company expects a fiscal year 2014 GAAP and non-GAAP effective tax rate of approximately 14 percent.
The Company anticipates approximately 439 million shares outstanding at fiscal year 2014 year-end and weighted average diluted shares outstanding of approximately 448 million for the fiscal year.