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

1 comment:

CSCer in UK said...

Laphen, Mancuso and Brady did not seem adequately prepared for the earnings conference. After announcing an unexpected loss and another case of management misconduct, they should have been ready for the pointed questioning from the analysts.

Yet they seemed surprised the analysts did not accept their confusing and evasive answers. Their attitude was also wrong. A little humility would have helped.

Laphen seemed to midjudge the mood of the analysts and their scepticism. Mancuso came over as patronizing ("I'm sorry you missed the thinking") and Brady used "put down" comments to two analysts who asked questions he did not like.

It was an embarrassment. I hope no senior executives from customers or prospects listened to it. It did not give a positive impression of CSC.