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.