CSC shares jumped almost 20% immediately after its Q1 FY2013 earnings release and analyst conference, eventually closing the day up 16%.
The Q1FY2013 performance was not stellar, but was better (or less bad) than analyst expectations and marked a halt in the continuous deterioration CSC has treated us to in the past few quarters. Here are some highlights:
· Revenue at $3.96bn was essentially flat with Q1 FY2012.
· Earnings per Share (EPS) were US$ 0.26c, compared with analyst expectations of US$0.21c. This after 3 consecutive quarters of losses.
· Gross margin was up 1.2% after 2 consecutive quarters of shrinkage.
· Free cash flow was negative US$25million, compared with over US$400million negative in Q1 FY2012.
· New business won in the quarter was US$4bn up 70% on Q1FY2012.
· Unlike previous quarters, there were no surprises, exceptional items or tax adjustments to confuse everybody about the real state of the business.
· The company’s EPS guidance for FY2013 was increased to a range of US$2.10 to US$2.30.
· New senior executives have been named.
But more than the numbers themselves, the big positive was the attitude of the CSC management, Mike Lawrie and Paul Saleh, to the conference itself and especially to the questions. They gave the impression of honesty and transparency, which was so different from the confusing non-answers of the previous management era.
Comments on points that Mike Lawrie made in the question and answer session:
· A major cause of CSC’s “problem projects and contracts” was not that the lack of proper processes, but that the company had simply stopped using them. Input we have received suggests that a big problem was that CSC’s top management simply rejected any truths or facts that did not fit with what they wanted to hear, and they kept asking different people to re-do the work until somebody gave them the answers they wanted. This is also one reason CSC lost so many of its best project managers over the past few years.
· The inappropriate “regionalization” of global business processes created further problems. The Cassandra team will address this issue in a separate blog posting in the coming days.
· Mike Lawrie felt that CSC’s current problems did not arise overnight, but had been building up over the past 5 or 6 years. We agree, and ask once more why CSC’s highly-paid non-executive directors could not see what was clear to many CSC followers and employees, namely that Mike Laphen’s mismanagement was destroying CSC.
· Mike Lawrie was also complimentary about the quality and dedication of CSC’s employees. We hope this statement was sincere; it is a big change from his predecessor who gave the impression that he viewed the employees as a major part of the problem;
This financial report is all positive, but let’s not gets too enthusiastic yet. CSC has hit bottom (perhaps) with one quarter without surprises or disasters; the newly-appointed CEO and CFO seem to understand what needs to be done to bring CSC back to health, and have developed plans to achieve that. They are more articulate and convincing than their predecessors. But that is all that has happened so far. They need to be clearer about individual business unit results, and the quality of new business contracts. For instance we are aware of only one significant new deal this quarter, Alsthom. What are the others that make up the $4bln?
Another issue that CSC has to deal with is a reputational one in that it stands accused of supporting rendition flights for suspected terrorists. The news media have not forgotten and indeed The Guardian newspaper in the UK referred to it just this week: Last year iSoft was taken over by Computer Sciences Corporation, a US company accused of helping to organise covert US government flights of terror suspects to Guantánamo Bay and other clandestine "black sites" around the world.
Nevertheless these results are so much better than has been seen from CSC over the past 5 years. Let’s hope that Lawrie and Saleh’s achievements will match their good words and intentions. Time will tell.
Details of CSC’s Q1 FY2012 financial statements, accompanying slides and webcast of the Analyst call can be found on CSC’s website here.