Thursday, 29 December 2011

Is CSC heading for the cliff edge?

We wrote in our November 11 posting on this blog (CSC posts a loss – a massive one) that we had serious reservations about CSC’s EPS guidance given the risks and uncertainties it is carrying.  However, we did not expect a $1.6billion write-off arising from the NHS contract and yet there is still no assurance that CSC has put all the bad news behind it.

This must call into question the future and maybe even the survival of CSC.

What will its clients think of the events of the past 9 months, and of this latest unexpected large  write-off? Will they question the long-term viability of the company?  Will they feel confident that CSC will have the funds to make the investments needed to win and deliver the long-term client contracts which have been its strengths for so long?

Or will clients and potential customers think it more prudent to award such contracts to other companies in view of their doubts and the uncertainties surrounding CSC’s future?

Lack of confidence in a corporation’s future can become a self-fulfilling prophesy if major customers decide not to risk being dependent on a company which is viewed as shaky.  This will cause a drop in new business which then further undermines confidence in the company.

CSC needs to secure the confidence of its client base before it goes over that cliff edge.  
posted by Littlejohn

Tuesday, 27 December 2011

CSC warns of a $1.5bn write-off and withdraws its EPS guidance

Yet more bad news for CSC shareholders!

We recently wrote about CSC’s “failing fundamentals” and it has not taken long to get another of these shocks which are becoming the norm for CSC.

Today,  CSC disclosed in a regulatory filing that it may have to write off all of its $1.5bn investment in the troubled NHS contract. It also withdrew its earnings guidance to Wall Street and saw its share price immediately fall by 8% .  

Details are given in the Wall St Journal:

and also in PC World:

and in PCAdvisor : which highlights the arrogance of CSC management who are quoted as stating that  "government has no right to cancel the contract".

Recently CSC’s Q2 FY12 earnings call and its 10Q SEC filing of November 9 referenced risks relating to the NHS report, but did not the impression there could be a massive write-off in just a few weeks time. Was this why Messrs Laphen and Mancuso’s answers and comments during the earnings call seemed so evasive?

Will CSC now tell us :

1.       Why has the NHS situation seemingly deteriorated so significantly since CSC gave an update on November 9?  Were Messrs Laphen and Mancuso overly optimistic in their assessment of the situation at the earnings call? Or were they out of touch with the reality of the situation?   Or were they  misleading investors and the government of the UK?

2.      In view of this collapse of the NHS contract, what is the real value of the iSoft acquisition and of the Lorenzo software today?  Can we expect further goodwill write-offs due to reductions in their underlying value?

3.      The many people and journalists who over the past 3 years warned that NHS was doomed to failure are being proved correct. Why were the warnings ignored for so long by CSC management?

4.      Why is no CSC executive being held accountable for the NHS failure? Why is the European President who was personally responsible for the NHS still in place?

Earlier this month, we said that

The major financial uncertainties surrounding CSC (shareholder lawsuits, SEC investigations, customer disputes, NHS etc) would scare off any buyer.

Today’s announcement by CSC just underlined this point.

Thursday, 15 December 2011

CSC – no takeover as its “fundamentals are failing” and a credit rating downgrade

Jim Kramer’s “Lightning Round” of  December 13 suggested that the hoped-for take-over of CSC won’t happen as its “fundamentals are failing”.   I agree.  The major financial uncertainties surrounding the company (shareholder lawsuits, SEC investigations, customer disputes, NHS etc) would scare off any buyer unless they could acquire at a rock bottom price low enough to cover all of the related risks.  I can’t see the shareholders agreeing to sell at bottom price,  so CSC is likely to remain independent for a while.

Meantime, Morningstar has downgraded its credit rating of CSC by two notches from A- to BBB, its second downgrade this year, citing the high uncertainties, falling margins and a deteriorating cash situation. CSC has issued $500m debt this fiscal year but has $1billion of debt falling due in 2013.

Morningstar points out that CSC has certain advantages, including its long-standing relationships with large clients.  Historically one of CSC’s differentiators was its reputation for reasonableness in its dealings.  It consistently tried to do “the right thing” by clients in handling disagreements and disputes. Bringing in lawyers and quoting the letter of its contract was a last resort rather than an opening gambit. However, reports of its stance in its dispute with the UK NHS suggest that CSC is changing its ethos to a harder approach of “compliance with the letter of the contract”.  If this is correct, CSC’s relations with long-term clients could follow the same downward direction as its relations with many of its employees.  

To the above can be added J P Morgan’s rating of “Five Stocks To Absolutely Avoid” as discussed here in The Street:-

While it is interesting to note that many analysts, who by the way are paid, mega-bucks and have enormous resources and tools at their disposa; for getting their advice right, are finally spotting the “Blindingly Obvious” as per the great sage Basil Fawlty, Cassandra has shown through detailed and in-depth analysis and reporting, see posting in June 2011, that this has been a stock to avoid. However, it is better late than never, as at long last the long suffering investors whether pension holders, or indeed CSC’s 0wn employees who are sitting on value less stock options will perhaps see some action to correct what has been a dire and long lasting situation.

Posted by Long John and Friends

Monday, 12 December 2011

The Times Newspaper of London Blasts CSC

With due thanks to Tony Collins and the Campaign4Change team>

CSC criticised again in The Times

By Tony Collins
The Times has followed up its three pages of coverage of the NPfIT yesterday with an article in which the chair of the Public Accounts Committee, Labour MP Margaret Hodge, criticises one of the programme’s main suppliers CSC.
Hodge tells The Times she was surprised to learn that CSC was hoping for a revised NHS deal – worth about £2bn – after it failed to deliver fully functional software to any of 166 NHS trusts in England.
CSC has said in a filing to the US Securities and Exchange Commission that, based on events to date, it does not does not anticipate that the NHS will terminate its contract.
CSC gave a series of reasons in its SEC filing why the UK Government may retain CSC and its NPfIT contracts, though it conceded that the outcome of its talks with the Department of Health, is uncertain.
CSC also said it has cured or is in the process of curing the alleged events of default. It asserted that failures and breaches of contract on the part of NHS have caused delays and issues; and it said that if the NHS wrongfully terminated the contract on the basis of alleged material breach, CSC could recover substantial damages.
Hodge told The Times:
“Any private sector company that cares so little about the public interest that they are prepared to extract this kind of money from the public purse should not be given the right to work for the Government again.
“If they are going to take such a private sector attitude to it that they don’t give a toss about the public interest they should be treated like a cowboy builder.”
CSC says it has made a significant investment in developing systems for the NHS and has demonstrated a strong and continuing commitment to improving the quality of healthcare in England. It says it has a demonstrable track record of successful and widescale delivery to NHS within the National Programme and beyond.
The Times also reported that Christine Connelly, the Department of Health’s former CIO, was bought a £416 first-class train ticket for a visit to a hospital at Morecambe, and was flown to San Francisco and Seattle at a business-class rate costing £8,278.80.
American “cowboys” blamed for NHS fiasco – The Times
CSC confident on £2bn deal says The Times

Thursday, 1 December 2011

CSC grants senior executive bonuses for just turning up and try cover it up

One of our correspondents has alerted us to an interesting development in CSC’s executive compensation approach which the company has tried to keep quiet about.

In the past, this blog has published details of CSC’s remuneration policies, whereby its top executives were handsomely rewarded for non-performance.  As CSC declined further, this philosophy became “executives’ rewards for failure”.

The SEC 10Q filing relating to the quarter to 30 September 2011 disclosed a new concept… further rewards for two senior executives without any link at all to performance or achievements.

Peter Allen  (Acting President, Managed Services Sector and President, Global Sales and Marketing)   and William Deckelman (Vice President, General Counsel and Secretary)  have been granted a special bonus of a full year’s base salary. What they have to achieve to receive this award is……..nothing, except to  be with CSC on  1 September 2012.

Details of the awards can be found in CSC’s 10Q filing

Additionally it is interesting to learn that CEO Michael Laphen wanted Messrs Allen and Deckelman to keep quiet about this bonus. He wrote to them :

“You are encouraged to keep the existence of this Award confidential. You may of course discuss it with your direct management, family and financial planner, but you are required to refrain from discussing it with any other current or former CSC employee”.

Life as a CSC employee is difficult right now, but its top management is certainly looking after itself and making sure the tough times are kept as far from its executive suites as possible.

Thursday, 17 November 2011

CSC takeover rumors again, but let’s not get excited yet

The Wall St Journal (WSJ) today reported fresh rumors about a possible buy-out of CSC,

The rumors involve private equity institutions as potential acquirers. This may seem like an opportunity from heaven for the long-suffering CSC shareholders, but let’s not get excited yet.  

There were similar rumors a few years ago and CSC is said to have refused bids of around $60 per share in the belief that remaining independent would generate greater shareholder value.

Things are different today. CSC’s market capitalization is only about 40% of what it was when these bids are said to have occurred. The company has a weaker market position than 5 years ago.  It has lost ground in terms of market and technology positioning.  It has become a vanilla-flavored “me too” player, overtaken by many competitors. It has a weak top management team.

A private equity buyer would de-list CSC from the NY Stock Exchange. This could be an excellent move, as it would give CSC the opportunity and breathing space to address the strategic issues it faces without being hampered by the need to publish  quarterly earnings.

But before we get that far, there are two key questions. First, how much would an acquirer be willing to pay for CSC?  The issues noted in the previous paragraph, allied to CSC’s poor financial performance, will have a negative impact on the price.  So we should not expect a large premium over the current share price.

But more important could be the uncertainties surrounding CSC. What will be the outcome of the class action lawsuits? What will be the outcome of the SEC investigations which now include Australia? What will be the outcome of the UK NHS IT discussions? In the US the Federal and Commercial infrastructures are intertwined and relaint on one another. How can a possible suitor unravel these if they intend to break up the company as has been rumoured? What are the prospects of the Public Sector business in the current economic climate?  How many of CSC’s executives are capable of doing what is needed to turn the company round?   Can employee morale and enthusiasm, see  be re-kindled to the levels needed for a successful transformation?   These are uncertainties that could make an acquirer “kick the tires” to use the WSJ expression…. then decide the risks are too great and to withdraw at least until the outcomes of these situations are clearer.

Tuesday, 15 November 2011

CSC…….What a difference a week makes

One week ago, just ahead of its Q2 FY12 earnings conference, CSC stock price was almost $33.
So what differences have we seen arising from the Q2 FY2012 results and the unconvincing performances of Messrs Laphen and Mancuso at the earnings conference?  Here are three differences one week has made:

·         The share price has slipped again, this time by almost 25% to below $26.

·         The Bloomberg index of the analysts’ target price for CSC stock over 12 months has slipped to $29.85

·         CSC’s  credit rating has been put on negative watch by S&P, who are not convinced by CSC’s earnings guidance for the rest of FY2012.

Things have to be quite bad for a financial writer to quote the impending departure of Mike Laphen (and hopefully his management philosophy with him) as a reason for optimism. For full details of Stephen D Simpson’s article, which  describes why CSC has problems “left, right and center” can be found on:

The departure of CFO Mike Mancuso is also overdue, even ignoring his performance at the earnings call and the fact that the analysts now seem to be skeptical of anything he says.  How can a company keep a CFO who has presided over 5 profit warnings/earnings misses, two major cases of intentional  accounting irregularities,  an SEC investigation, an Audit Committee investigation, class action lawsuits and having to inform the SEC that the company’s financial reporting could not be relied upon?  And all this in a period of less than 3 years.  Perhaps CSC’s Board of Directors has decided it needs to continue with Mancuso because there is no internal candidate with the skills to handle the position on an interim basis and because it feels the new CEO must be part of the selection process for a permanent CFO.

CSC also needs to signal a change in its approach to and re-establishment of its credibility with the analyst community.  It should begin by appointing an experienced Head of Investor Relations with a track record of success and credibility in the role.  VP of Investor Relations Bryan Brady’s problems in the area of interpersonal skills came through clearly last week, as well as his seeming not to have adequately prepared Messrs Laphen and Mancuso for the conference.  When the company is in struggling, it does not help to have self-inflicted difficulties with the analyst community.

Saturday, 12 November 2011

CSC’s $2.7billion Goodwill impairment charge – why it matters.

CSC wrote off almost $2.7billion of goodwill in Q2 FY12.   
Here is CEO Mike Laphen’s explanation at the November 9 earnings call:

“We have taken a noncash goodwill impairment charge (….). In our estimation, a key contributor to this charge is the fact that our stock price, which has been under pressure from both market declines and the uncertainties surrounding the MSS challenges, depending CSC investigation, the NHS program and U.S. federal budget deficits. Although we expect these uncertainties eventually to be resolved, our low stock price has persisted for a sufficient period to create a discontinuity between market price and the book value. And it is this discontinuity that necessitates the adjustment to goodwill”.

This  explanation focuses on the financial approach, as if the charge is driven by unavoidable accounting requirements and market factors outside CSC’s control . It does not explain what the impairment charge means in a business layman’s terms.  Here is another way of looking at it:

Over the years, CSC has acquired a number of businesses whose goodwill values  (*) totalled $4.5 billion , which is broadly what CSC  paid for them.  CSC’s management of these acquired businesses has reduced the goodwill values to some $1.8billion based on the company’s  best assessment of the situation today.   CSC hopes to improve this situation in the future , but for now it is obliged to write off the $2.7billion goodwill value it has destroyed.

Management’s poor performance has driven CSC’s share price to the point where the market value of the goodwill of CSC in total stands at $3.4billion (**) today. Continuing to value goodwill of just one part of CSC (ie those businesses which came to the company via acquisition) at $4.5billion would be absurd. Thus the need for a $2.7billion impairment charge to reduce goodwill relating to acquired businesses to a more realistic $1.8billion.

 (*) Goodwill can be defined as the underlying value of the intangible assets of a business, including their capabilities, know-how, intellectual property,  employee skills, client base, future earnings potential etc  
(**) Being CSC market capitalization less its net tangible assets

posted by Littlejohn

Friday, 11 November 2011

CSC Posts a loss - a massive one

Good Will Accounting

CSC in its latest quarter reporting has posted a loss due to 'annual review of Goodwill' a catch all for anything the management want to book to to keep the results up. But time has run out on them. Read on.

CSC Q2 FY12 earnings call– The problem is us. We have missed their thinking.

CSC produced its fourth consecutive earnings shock in their Q2 FY12 call of November 9.   Not that you would have understood that from the comments of CEO Mike Laphen and CFO Mike Mancuso which confused me and seemed to confuse the investment analysts too.  One analyst talked about “more confusing signals from you guys”.  Another asked for clarification on a key point and was told by Mike Mancuso that he had “missed their thinking”.  CSC seems to be in a mess,   maybe this is simply because I have also “missed their thinking”.

CSC reported a second-quarter net loss of $2.88 billion, or $18.56 a share, including goodwill impairment and claims settlement charges totaling almost $3billion.  This blog commented on the claims settlement in our posting of  26 August 2011 . The Goodwill impairment charge is described as a non-cash charge driven by CSC’s market capitalization level, an accounting thing, not really a business thing. We shall make a separate blog posting on this topic later. 

CSC said that, excluding those items and costs related to the ISoft acquisition, they made a profit for Q2 FY12 of 94-cents a share, beating the 68-cent analyst estimates, based on 1%  year-on-year revenue growth. This explanation is about as convincing as Mike Laphen’s  grasp of reality.  Reality is that CSC posted a loss of $2.88billion.   The goodwill impairment and claims settlement charges are due to and under the responsibility of CSC management. They are not one-off  items beyond their control.  CSC also announced that the accounting irregularity disease in CSC Nordic has now spread to Australia and that the SEC investigation has been extended to that country.

Mike Laphen gave his well-worn speech about how the company is poised for great success, they just have to solve a few one-off problems. He talked about being “encouraged” by the new business wins in the commercial sector.  He said “ Our strategic repositioning and the investments we had made to our sales and go-to-market capabilities over the last year are now delivering solid results”.  I am not sure anybody believes his speeches of “success just around corner” after the events of the past 12 months.  I do not.  Even CSC’s self-declared 94-cents per share earnings equated to a pre-tax profit margin below 3%  with just 1% revenue growth.  Hardly “solid results”.

CSC also dropped its FY2012 earnings guidance from $4.70 - $4.80 per share to $4.05 - $4.10 per share. Here again, I seem to “miss their thinking” and judging by their questions, so did some of the analysts on the call.

·         I am not convinced that it is right to continue to assume the high levels of NHS revenue and margin for Q3 and Q4 as outlined in a framework Memorandum of Understanding (MoU)  which has not been signed and for which CEO Mike Laphen admitted there is "no assurance" that an agreement with the NHS will be reached soon.

·         CSC  talks about seeing  market softness in Germany, which is Europe’s strongest economy. What about the potential risks in UK, France and Italy given their sovereign debt issues, economic austerity measures and the Euro crisis?

·         How will CSC climb to an EPS of $1.40 in Q4, given the factors above and the well known risks in the US Federal sector ?

So it was another thoroughly miserable day for CSC shareholders. A few years ago CSC was talking about double-digit future revenue growth as the reason for remaining independent and turning down $60 per share acquisition offers.  Earlier this year the shareholders started to wonder if we would see the days of $60 per share again. Today we wonder if anybody would be interested in buying CSC at any price given its present condition.

CSC non-executive directors must stand up and be counted. They must ask themselves what is the value to the company of continuing with Messrs Laphen and Mancuso at the helm even in the immediate term. The company is in crisis. They are not equipped to deal with it.  Their already damaged credibility was not enhanced by their performance at the Earnings Conference.  The prospect of another 12 months of their leadership is not reassuring.

posted by Littlejohn

Thursday, 27 October 2011

CSC Class Action Continues

The class action filed against CSC continues. Those who have something to say that may be enlightening might want to contact the lead law firm filing the case Labaton Sucharow.
Contact details are:

Labaton Sucharow LLP
140 Broadway
New York, NY 10005

tel: 212-907-0700
toll-free: 888-753-2796
fax: 212-818-0477
toll-free settlement helpline: 888-219-6877
300 Delaware Avenue
Suite 1225
Wilmington, DE 19801
tel: 302-573-2540
fax: 302-573-2529

Saturday, 22 October 2011

Mike Laphen's rewards for failure at CSC

CEO Mike Laphen's massive lifetime rewards for failure at CSC
Mike Laphen's departure from CSC is overdue given the disastrous results of his period of "leadership", but he is being royally rewarded for his repeated failures.
CSC has submitted an 8K filing to the SEC outling the terms of his departure and the Succession Agreement it has signed with him.
Mr Laphen will receive:
� earned base salary, annual bonus for a completed fiscal year, and benefits under the Company's employee benefit plans for all of FY2012
� a pro-rated annual incentive award for FY2012,
� a severance payment of two times the sum of (i) base salary plus (ii) target annual incentive award estimated at $6.75 million
� COBRA premiums for 18 months following the Retirement Date.
Mr. Laphen will be also entitled to retirement benefits resulting in an estimated annuity of $81,000 per month for life
Full details of the SEC filing are disclosed on
 And no, it is not a typo. He really will get $81,000 per month for the rest of his life.
Shareholders have seen the value of their investment drop by 50% during Mr Laphen's tenure. Employees have lost their jobs or had their salaries reduced during this time.
So there are no prizes for guessing their views on Mr Laphen's severance package, unless they think a cost of around $40million for his departure is good value for CSC.
posted by Littlejohn

Saturday, 15 October 2011

CSC Denmark Heading For Disaster

>CSC (Denmark) heading for disaster?
That is the headline of the Danish Computerworld publication of October 14th,  describing CSC Denmark's financial situation as "disastrous"  with an accumulated deficit of over US $65million, a solvency ratio below 3%  and no profits for the past 5 years.
The article also refers to a rift between the management and the employees, the recent strike action and the alleged accounting irregularities. Additionally the flagship Tax and Customs project is in big trouble with a government official saying that CSC is wilfully hiding the true state of the project from the customer,  Shades of CSC's failed NHS project in the UK??.
The full Computerworld article can be found on:
CSC could take away the concerns about the financial viability of their Denmark operation by simply injecting fresh capital. So why are they not doing this? Are they not prepared to stand behind their Danish subsidiary and guarantee its viability?
To misquote Marcellus in Shakespeare's Hamlet "Something seems rotten in the state of CSC Denmark".

Thursday, 6 October 2011

NHS IT Programme according to Times of London

The Times on 23 September had the headline “Connecting to Nowhere”.
It said:
“The comically misnamed Connecting for Health will continue to honour its contracts with big companies and to swallow taxpayers’ money for some time to come: up to £11bn on current estimates. The figure demonstrates the truly egregious scale of the previous Government’s incompetence on this issue: this vast sum seems to have been committed irrevocably, even though the project has never achieved its objectives.
“The story is a dismal catalogue of naivity, ambition and spinelessness. NHS managers and officials …were [not] brave enough to question the direction of travel at crucial moments when IBM and Lockheed pulled out of the project early on. Whitehall was sold a grand vision by consultants, software and technology companies charging grandiose fees. It signed contracts that appear to have been impossible to break when the promised land did not appear. Yet no one seems responsible. No one has been sacked. Most of the officials involved have long moved on…
“There have been spectacular failures in the private sector too. But businesses, with tighter controls on spending, tend to halt things earlier if they are going wrong. Many prefer off-the-shelf systems such as SAP or Oracle, which are tried and tested. They know that it is cheaper to adapt their processes, not the software.
“This newspaper is in favour of serious investment in technology, which could play an important part in economic growth. The NHS debacle has done enormous damage to this country’s reputation for expertise in IT systems. The lessons for the future are clear. Governments must hire people who can make informed and responsible procurement decisions. Patients, in every way, are going to end up paying the price.”

Sunday, 2 October 2011

Russ Owen MSS Chief at CSC new role

One of our commentators has found the full text of Russ Owen's 'role change'. We think it worth giving this information, which is all in the public domain, a post to itself.

Did CSC fraudently conceal from investors the true state of the NHS contract?

 CSC is facing a (or is it another?) class action lawsuit which alleges that its Board fraudulently concealed from investors the true situation of the NHS contract.
According to an article in The Guardian, a respected UK broadsheet newspaper, CSC knew as early as May 2008, through reports and testing, that the Lorenzo package was "dysfunctional and undeliverable". It states that a member of the CSC project review team wrote directly to CEO Michael W Laphen telling him that the project was on a "death march".
Full details on
Will CSC tell us exactly what action Mr Laphen took when he received this news?

Sunday, 18 September 2011

CSC Loses yet another Global President

If you read the CSC web site and look up the list of global management there is an interesting omission from the normal list of roles. The one that is missing is that of Corporate Vice President for HR. Until last month this role was held by Denise Peppard who seems to have vanished.  Why after just 16 months at CSC has Ms Peppard left? Why has not public statement been made about this loss of a very person at a very significant time for CSC? Did she jump? Was she pushed? Did she see the bullying and micro-management we have reported on, and gave up?

Given that earlier this month Russ Owen the President of MSS was removed from his post at CSC (see earlier post), and that Denise Peppard has ‘disappeared’ from CSC, have Stalinist type purges started at CSC?  Who is next?

As has been well established CSC has been mismanaged for years, with services being criticised across the globe, with significant figures like the Prime Minister of the United Kingdom, Mr. David Cameron, saying they will not do business with the company. As profitability is in decline, the share price collapses, and staff complain about lack of  training and investment, see WikiCSCleaks blog, it is all looking rather like Stalin and his Politburo has taken over CSC. But Stalin never had to worry about investors and shareholders. However, they seem to be rallying and are about to make their presence felt.  Watch the news on 22nd September for latest developments when the Class Action suit is filed.

Saturday, 17 September 2011

Is CSC heading for another quarter of poor results?

In removing Russ Owen from his position as President of CSC's Managed Services Sector (MSS), Mike Laphen has sent a message to the organization that he will not tolerate failure from anybody..... except from himself of course.

If Mr Owen was removed solely because of the Q1 (June 30) results,but the rest of the financial year's outlook is acceptable, why wait two months then act in September?. His removal in September suggests he has been unable to get the fiscal year outlook back on track.

Interestingly Mr Owen 'stood down' on September 16, just when CSC buiness units submit their last Q2 (Sept 30) financial forecast to Corporate headquarters. Could his fate have been sealed by his submitting a profit forecast below what Mike Laphen wanted?.

These factors suggest that  CSC's Q2 (to September 30) results for the MSS sector could well be poor, as they were in Q1. Will there be any tax credits or other one-off financial accounting credits to recover the situation this time?

The whole Outsourcing/MSS industry sector has been experiencing profitability pressure for some years now as it matures and commoditizes.  CSC has consistently cut and/or deferred planned and needed service delivery and technology investments to protect "this quarter's profit", but each time at the cost of mortgaging its future a bit more. Perhaps CSC's  disappointing results are now reflecting the consequences of this approach. Maybe this is where the rubber hits the road, or where something more unpleasant hits the fan.

Friday, 16 September 2011

Russ Owen President for Managed Services takes the blame at CSC

CSC has just announced that Russ Owen is the scapegoat for its Q1 profitability issue. See below announcement from Mike Laphen.

No doubt Owen must bear his share of the responsibility for CSC's problems, but he was in a difficult position given Mike Laphen's propensity for micro-meddling and his continual cancellation of investments in the Managed Services sector over the years.
Mike Laphen needed to divert attention from his major contribution to CSC's mess and this is what we see. .
It is unfortunate Mr Laphen felt the need to use the phrase  "Russ Owen will... step down" just to make sure everyone understands he has been fired from the job. Given Russ Owen's long service and all he has contributed to CSC, it would have been nice to have used a more elegant phrase. But elegance and dignified treatment of employees has never been something Mike Laphen has been noted for.

From: Mike Laphen - Chairman President and CEO
To: CSC Employees
Date: 16.09.2011 16:44
Subject: Leadership Change in Managed Services Sector

Today we announced that Russ Owen, who has led our Managed Services Sector (MSS), will step down as President of MSS, and assume the role of President, Strategic Account Development, effective immediately. In this capacity, Russ will focus on strengthening service performance and quality in specific accounts.

Peter Allen, in addition to leading Global Sales and Marketing, will assume the role of acting President of MSS, responsible for CSC’s Managed Services practices, including World Sourcing, Applications, Global Infrastructure and Enterprise Services, Market and Product Strategy, and Cloud and Software Services. As we advance CSC’s position in the global IT services market, MSS will play an important role by growing our applications business and ensuring service and delivery commitments and excellence.

Peter, who has also formerly served as group President of Strategy and Business Development for MSS, brings extensive expertise across the full spectrum of IT services. His intimate knowledge of our clients and the IT marketplace is a valuable asset as we bring greater innovation and competitive advantage to our accounts, and deliver on our profitability and growth goals.


Another CSC project in trouble due to poor performance

NHS IT is not CSC's only public sector project in trouble. The US Air Force plans to halt a multimillion-dollar computer modernization project being handled by CSC because of poor performance by the company,
Another one to add to CSC's growing list of issues and failures!!

Thursday, 1 September 2011

The Timeline of Events on CSC Results

As there has been so much posted over the last two years about the ups and downs of CSC financial results we have prepared the following timeline which shows that either CSC Management have let events run away with them, or worse. We'll leave the reader to judge which it is.
1. May 2010 - FY09 Q4 announcements include tax credit that improves earnings by $36m. No growth in most businesses, some growth in US. 
Note this is the year that includes $90mln of 'mistated' earnings in Nordics and is also when the two expat leaders of Nordic business are removed from their posts.

2. November 2010 - Mike Mancuso CSC Finance President announces Nordics accounting problems total $40million, are now fixed.

3. 9th Feb 2011 - Associated Press "CSC shares tumble after company cuts forecast. In that forecast Mike Laphen CEO and Chairman says "... Due to sluggish pace of new business won".

4. 12th Feb 2011 - accounting irregularities of $80mln announced.

5. 2nd May 2011 - CSC gives profits warning and restates results.

6. 11th May 2011 - David Cameron, Prime Minister of UK says in Parliament "... There no plans to sign any new contract (for NHS IT) with CSC."

7. 16th June 2011- CSC reports Nordic accounting irregularities of $91mln. CSC had previously reported these irregularities were $40 mln, then  $80mln.

8. 10th August 2011 - Mike Laphen says " a very solid business with excellent prospects", and announces Q1 FY2012 EPS of $1.18 compared to Analyst consensus of 70 cents. Without that one-time tax credit the EPS would have been only about 43 cents per share, some 27cents below expectations.
9. 10th August 2011 - Form 10-Q states that recovery of CSC balance sheet position is "probable" on settlement of dispute with US Govt

10. 24 th August 2011 - CSC reports special charge of $250mln in FY2012  on settlement of dispute with US Govt

How many more changes in financial results are likely? Given the above there are probably more to come. Only time, and investors patience will tell.

Friday, 26 August 2011

CSC settlement of dispute with US Government.... why yet another shock ??

Our previous blog mentioned that CSC would take a charge of $250m in Q2 FY2012 relating to its August 24 2011 settlement of a contract dispute with the US Government dating back to FY2007.

On August 10 2011, CSC said  in its Q1 FY2012 Form 10-Q SEC filing that it was "committed to vigorous pursuit of its claimed entitements (in this dispute) and believed that recovery of at least its net balance sheet value is probable".  CSC also stated that its position had been supported by outside counsel and reiterated as recently as May 20, 2011. 

CSC did give a caveat that they could not be sure of the outcome and that its position "is subject to the ongoing evaluation of new facts and information which may come to the Company's attention". This seems a normal and prudent proviso, but nothing alarming.

(Full details of this 10-Q filing can be found on the CSC website or on )

 So on August 10 2011 CSC gave the impression of being reasonably confident that there would be no significant write off arising from this dispute. Then just two weeks later, CSC announces a settlement which entails a $250million write-off, probably turning a Q2 FY2012 profit into a significant loss. And they announce it as if it is some kind of achievement for the company!! 

James Schaeffer, CSC President, North American Public Sector said in announcing the settlement. "We are pleased to be able to reach an equitable agreement with the Government while preserving our important role in a critical government program".

We have to ask what happened in the final two weeks of a 5 year old dispute to turn "vigorous pursuit of entitlements" into something which looks like capitulation or being out-negotiated?  What new facts and information came to light? What new evaluation was made? On August 10, we are led to believe that the balance sheet position was probably safe. Just two weeks later, we have  an "equitable agreement". which creates a write-off of $250million. 

Am I the only person perplexed by these events? Or is it just another in the long series of unpleasant surprises CSC shareholders have been getting recently?

Thursday, 25 August 2011

Just How Much Bad News Can CSC Continue to Get Away With?

CSC will take a Q2 FY2012 charge of approx $250Million  for dispute settlement
CSC announced on August 24th 2011 a settlement of a contract dispute with the US Government.
Details are given in CSC's Form 8K filing with the SEC:

The company currently estimates the financial impact of the settlement as a $250million or $1.15 EPS. Before this announcement, the Analyst consensus estimate of CSC for Q2 was a profit of $0.69 per share(source: Google Finance). So is it now a loss of $0.46 per share?. 
CSC are "pleased" by the settlement. As a shareholder, I am not. It is yet another piece of bad news falling out of the sky. Can CSC tell us when the good news they keep promising will actually start?? 

It would also be useful to know what charges CSC will have to make in the contract dispute/renegotiation, with the UK Government over the NHS contract, and what likely charges are due for the failing services in Nordic countries following the strikes and lock outs, which hit the services from mthe Copenhagen data centres.

Monday, 15 August 2011

CSC First Quarter Results - Comments and Analysis

CSC - "a very solid business with excellent prospects"
 This was Mike Laphen's description of CSC at its Q1 FY2012 earnings call of August 10th 2011. It shows that nothing much has changed. The company still tells shareholders that it is on the verge of success, there are just a few issues to sort out, and the future will be bright. Just the same as always.
How many times have we heard this message in the past?  Unfortunately, each time an outstanding issue is sorted out, a new and sometimes bigger issue seems to appear. We knew about the NHS situation, the Nordic accounting irregularities, the SEC investigation, the Audit Committee investigation, the lack of revenue growth, the Class Action lawsuit and the Long-term Investor Investigations. We can now add MSS (outsourcing) segment business performance to the list of issues.
The business highlight of the Q1 results release was the collapse of the MSS segment profitability from 10% ($175million) in Q4 FY2011, to just $9million in Q1 FY2012. In constant currency, Q1 FY2012 MSS revenue was 6% down on the same quarter of the previous year, which is a possible cause for concern given the annuity nature of MSS. The explanations given for this profitability collapse seem plausible, workforce rationalization, impact of the strike in Denmark, higher than planned project costs (again), and so on. But maybe we are beginning to see the impact of the lack of service delivery investment over the years? Read the comments from this blog to see how CSC has over years; curtailed travelling so that senior managers cannot visit the widely scattered workplaces to review work and acutally 'manage', and  cut out training which must have inevitably reduced the skills of its work force.
It seems that what the business performance failed to deliver was compensated by the accounting performance. Tax planning initiatives created an exceptional one-time credit of $85million in Q1 FY2012, which turned a poor pre-tax profit of $101million into a healthy profit after tax of $186million. One would normally expect a tax charge of about 25% or about $26million  for the quarter, so the delta impact of this credit was some $110million or almost 60% of the net profit.

Readers may recall that in FY2009, CSC similarly benefitted from a one-time tax credit of $166million. Just how many of these tax credits are there and where are they coming from? Is CSC now a finance house instead of IT Services provider?
The CSC balance sheet shows the book value of the company as $7,500million, while its market capitalization is only $4,600million. So why is the market value of CSC so much lower than its historical book value?  One indicator  is CSC's poor P/E ratio, (its share price expressed as a multiple of the annual earnings per share), which reflects the market's view of the company's future prospects. CSC's P/E ratio is only 6.20, while competitor Accenture, for example,  is 17.20, almost 3 times more. This means the market has much more confidence in Accenture's future performance than it does in CSC`s. This is corroborated by historical performance. Today, a CSC share is worth about 40% less than it was 5 years ago, while an Accenture share is worth over 95% more.
According to Michael  Laphen, CSC is "a very solid business with excellent prospects", Its share price has suffered because of a "severe overreaction in the market....which is so volatile that if you pop up with a surprise you'll get severely penalized for it"   This reassurance will no doubt come as a relief to worried shareholders.
Back in 2006, the then CSC Board of Directors reportedly turned down a takeover bid in the "low $60's" as they felt it undervalued the company. Since then, the CEO has changed, but most of the non-executive directors are still in place. Do they ever reflect on the wisdom of that decision? With CSC stock now below $30, what would the shareholders rather have? Mike Laphen's reassurances of a rosy future or the chance to accept a $60 takeover bid?