uploads///UntitleCA_Operating Margin

Can Rising Operating Costs Impact CA Technologies’ Margin?

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Feb. 22 2018, Updated 9:00 a.m. ET

Cause of decline

CA Technologies (CA) continues to face pressure on its margins due to higher operating expenses. In fiscal 3Q18, its operating margin on a non-GAAP (generally accepted accounting principles) basis stood at 38%, almost flat YoY (year-over-year). Rising operating expenses are responsible for the flat margin growth.

In the chart above, you can see the operating margin on a non-GAAP basis for the last five quarters. The margin over that period remained nearly flat.

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Its operating expenses in fiscal 3Q18 increased 12.4% YoY, driven by the high cost of product-related expenses, including product development, enhancements, maintenance, licensing, and professional services. Product-related costs, which make up 40% of its operating costs, rose 9.1% YoY. Selling and marketing expenses increased 6.7% YoY.

Segmental margin analysis

CA’s margin gained from strong growth in all segments. Its Mainframe Solutions segment, which is designed for the International Business Machines’ (IBM) Z Systems platform, remains the company’s most profitable segment. The operating margin for the segment stood at 64% in fiscal 3Q18 against 61% in the prior year’s quarter. Lower corporate overhead costs have resulted in this margin increase.

Likewise, in fiscal 3Q18, the operating margin of the Enterprise Solutions segment was 11% compared to 14% in fiscal 3Q17. The declining margin was mainly affected by costs related to acquisitions. The Services segment saw a 3% margin growth against an operating loss due to a decline in personnel-related costs.

In order to remain competitive, the company continues to spend heavily on product development and maintenance, which could be headwinds for margin growth. However, strong product pipelines coupled with a healthy IT (information technology) spending environment around the globe may offset these headwinds moving forward.

The company anticipates an operating margin on a non-GAAP (generally accepted accounting principles) basis for fiscal 2018 of 36%–37%.

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