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

1 comment:

Anonymous said...

This post is most interesting and shows again the issue with a company more interested in cutting costs rather than increasing revenue. Its always possible to cut cost, but once your costs reach zero, you tend to have zero revenue.

Cost restraints and travel bans are all very well for the short term, but implemented for ever just kill the possibilities for sales, especially those big make-a-difference sales that may take 18months to close.

All this is surely the chickens coming home to roost of an aggressive but introverted management style.