EUR 850.00 For Business Accounts Only

Morningstar | CA Reports 1Q Results; We Expect Takeover by Broadcom to Close; Shares Fairly Valued

CA Technologies reported its first-quarter results but decided not to host a conference call because of its pending acquisition by Broadcom. We do not anticipate any regulatory hurdles, given the lack of synergies between the two firms, though it would not surprise us if the current geopolitical climate and trade tensions between the U.S. and China delayed the closing. Still, we are adjusting our CA fair value estimate to $44.50 to reflect our conviction that the deal will close at Broadcom’s proposed price. Although CA faces secular growth headwinds in the mainframe market due to the legacy nature of the platform, we maintain our narrow economic moat rating on CA because of the mission-critical nature of its products. Meanwhile, CA's other major segment, enterprise solutions, boasts similar switching costs to the mainframe business. However, this market is more competitive and margins are dilutive relative to the mainframe business, although overall, we remain comfortable with our negative moat trend outlook. With shares trading close to Broadcom’s proposed takeover price of $44.50, we see shares as fairly valued and would look for other undervalued technology names.

For the quarter, ASC 605 revenue rose 3% year over year to $1.05 billion (increased 1% in constant currency). Total revenue was boosted by international revenue and foreign exchange tailwinds during the quarter. International revenue grew 1% in constant currency but 6% in reported terms. The firm’s portfolio of products continues to garner praise, and we see the company as remaining relevant to customers. To that end, during the quarter, CA was ranked as a market leader in project portfolio management, API management, and agile planning tools.

Under ASC 605, non-GAAP operating margins expanded 400 basis points year over year to 41%, reflecting good expansion in the enterprise solutions business. Still, the segment's margin remains dilutive to the overall company and well below the mainframe solutions' mid-60% operating margin.