Sunday, 29 May 2011

CSC Contract with UK NHS now under severe scrutiny and likely to be canceled

In Prime Ministers Question Time in the Houses of Parliament today the Primie Minister said that no mmore contracts will be signed with CSC until the Audit Office has carried out a complete scrutiny of the company. An MP also asked that no more money be spend on NPfIT as it was a waste of money. 'CSC has failed with Lorenzo' he said. See this link for what was said. Start at the 28th minute.

Here is the text of was said in Parliament. It is taken from Hansard the UK Parliament's record of debates:-

Mr Speaker: Closed question, I call Mr Richard Bacon.

Computer Sciences Corporation
Q12. [54967] Mr Richard Bacon (South Norfolk) (Con): What discussions he has had with the Minister for the Cabinet Office and the Secretary of State for Health on the performance of Computer Sciences Corporation in installing Lorenzo software within the national programme for IT in the NHS.

The Prime Minister: We are very concerned that the NHS IT projects that we inherited were of poor value for money, an issue we raised repeatedly in opposition. According to the National Audit Office, even in 2008, delivery of the care records system was likely to take four years more than planned. Since coming into government, we have reviewed the projects with the intention of making the best of what we have inherited. In part, as a result of our work, the Government have cut £1.3 billion from the cost of the national programme for IT in the NHS, including planned savings of at least £500 million from Computer Sciences Corporation.

Mr Bacon: Does the Prime Minister agree that the NHS IT programme will never deliver its early promise, that in particular CSC has failed with Lorenzo and that, rather than squandering £4.7 billion that is still unspent, the solution is to negotiate a way forward that frees up billions of pounds for the benefit of patients?

The Prime Minister: I agree with my hon. Friend that we are absolutely determined to achieve better value for money. Let me reassure him that there are no plans to sign any new contract with Computer Sciences Corporation until the National Audit Office report has been reviewed and until the Public Accounts Committee meetings and the Major Projects Authority reviews have taken place. The Department of Health and the Cabinet Office will examine all the available options under the current contract, including the option of terminating some of, or indeed all of, the contract.

Friday, 27 May 2011

CSC Q4 FY11 Earnings Conference . Credibilty and $100million missing??

CSC Q4 FY11 Earnings Conference . Credibilty and $100million missing??

If you were perplexed at the end of CSC's May 25 webcast on its Q4 FY11 results, so was I.
(You can find the press release, slides and listen to the webcast on CSC's website .
References to slide numbers below refer to the slides used by CSC to accompany the webcast).

The Q4 and thus the whole of the FY11 financial statements are described by CSC as "preliminary and unaudited" due to the ongoing investigations into the Nordic accounting irregularities. This means one cannot rely on the numbers....but we have not been able to rely on CSC's numbers for some time now.

The Audit Committee of CSC's Board of Directors began an independent investigation into matters relating to MSS and the Nordic region on 2 May 2011 . This is welcome news, but why did it take the non-executive directors over 12 months to launch an independent investigation into the Nordic irregularities? Would they have done so if the SEC had not launched an investigation? Or rather is it a positive sign that the non-executive directors are finally beginning to question what CEO Michael Laphen tells them? And does the inclusion of MSS, ie Managed Services, in the scope of their investigation mean there could be similar problems outside Nordic?

Then we have the FY12 earnings guidance, which has left me, and many other people, puzzled, as there seems to be a gap of up to $100m of earnings per share (EPS) or net profit.

CSC gave the following guidance for FY2012 (their slide 17)

Revenue $16.5bn - $17.0bn
Operating margin 8.75% - 9.25%
Tax rate 32%
EPS $4.70 - $4.80m

The midpoint of their guidance, and assuming the costs below Operating margin (ie Corporate G&A, Interest Income & Expense and Other costs) grow by 3% in FY2012, gives a Net Profit after Tax of around $845million in FY12. But CSC's guidance EPS of $4.75 per share yields a net profit of only $745million.

So it seems that about $100million of profit has "disappeared", or $100m of costs have "appeared" between Operating margin and Net profit. CFO Michael Mancuso was specifically asked about this during the earnings call, but gave a dismissive answer that CSC's numbers are correct. The $100million difference could be:

1. A mistake in CSC's calculations
2. A possible restructuring charge of $100million planned in 2012.
3. More Nordic-like surprises to come to the tune of $100million.

It is difficult to understand why CSC did not want to clarify this $100million difference as it stands out so clearly. There may be a simple explanation. But their refusal to give a clear answer to a simple question may cause people to think that CSC does not want to say what the $100million represents. If this is the case, why not??

If CSC's objective in presenting their Q4 FY11 financial statements was to confuse people, they certainly succeeded!!.

I did figure out from the presentation that 2011 revenue did not grow, that profit was down, the order book has shrunk. the Nordic irregularities have not been finalized, the NHS program is in a critical condition and there is uncertainty in the US Federal Sector, which for so long was the mainstay of CSC's profitability. That's not what CSC actually said, but that's what it all means. Some financial analysts tried to clarify matters in the Question & Answer session, without too much success. The Q&A session would be better described as an "Analysts asking questions and CSC declining to give clear answers" session.

CSC is in serious trouble. The numbers are poor and deteriorating. They have significant operating issues to work through which are not improving. Yet their management does not seem to be willing to acknowledge this. They tell us that their strategy is sound and they have everything they need to be successful (see their slide 19). Once again, the evidence suggests otherwise. How much longer will shareholders,clients and employees will keep buying the message that success is just round the corner? CSC management needs to get real about the situation and re-establish their credibility by showing that they are aware of the reality and that they are prepared to face it and work through it.

Created by Littlejohn

Friday, 6 May 2011

CSC's chickens coming home to roost?

Following on from its February announcement, last Monday CSC gave its second profit warning for the fourth quarter ending March 31, 2011.

The market commentator *The Motley Fool" wrote:

The relative sizes of the revenue and EPS shortfalls suggest expenses are out of control, which may indicate service delivery challenges

The data supports Motley Fool's opinion. CSC's Q4 Earnings per Share (EPS) guidance until just 3 months ago was $1.81 to $1.86 per share. In February this was reduced to $1.57 per share. Last Monday it was further reduced to $1.12 per share, making a 40% drop in 3 months. Additionally CSC disclosed that its order intake for the quarter will be $2billion below its previous guidance.

Unlike Motley Fool, we do not believe CSC's expenses are out of control. The front-line employees and managers in CSC's business units know exactly where they are up to with expenses, as well as with revenue and service delivery issues. The problem is that CSC's Corporate and European management has chosen to ignore the warnings the front line has been giving them because it was not what they wanted to hear.

Warning lights have been flashing on the NHS program, on revenue levels and on service delivery standards for some time. But the CSC top management has simply rejected the warnings from their field managers calling them unacceptable and treating them as mere excuses for inability to meet targets. Thus CSC top management does not undertake an objective business assessment of the intelligence they get. Without an objective analysis of the situation they cannot develop effective corrective actions. Instead increased challenges and targets are handed out to an already stressed and demoralized workforce. The field knows these new targets, like the old ones, are unachievable, but they have learned that trying to explain this to the CSC top management is pointless, as they will not listen.

CSC is in serious difficulty. Continuing along the path of the past 3 or 4 years will just continue and accelerate the trend of unsatisfactory performance we see today. CSC's fortunes will only improve when its top management analyses its situation objectively as a basis for realistic corrective actions, rather than dictating what they want to hear and handing out abitrary and unrealistic targets to its business units.

Post created by Littlejohn