Monday, 12 November 2012
CSC Results - Is it the beginning of a real turn-round or window dressing for a sale?
CSC shares jump 17% after its Q2 FY2013 earnings release, analysts upgrade their outlook . Is it the beginning of a real turnround or just window-dressing for an early sale?
CSC shares jumped 17% and several analysts upgraded their outlook on CSC amid positive comments on its Q2 FY13 earnings release and analyst conference call.
The Q2FY2013 financial performance exceeded analyst expectations, confirming the Q1 halt in the continuous deterioration CSC has treated us to in the past. The company also increased its FY2013 EPS earnings guidance for the second consecutive quarter.
CEO Mike Lawrie and CFO Paul Saleh gave a good showing at the Analyst conference call, fielding the questions with confidence and giving answers that made sense. Such a contrast from CSC analyst conference calls of the past!
Here are some highlights of the results:
* Revenue at US$3.85bn was down 2.8% (0.5%in constant currency) from Q2 FY2012.
* Earnings per Share (EPS) were US$ 0.83c, compared with analyst expectations of US$0.47c.
* Free cash flow was US$237million positive, compared with over US$250million negative in Q2 FY2012.
* New business won in the quarter was US$4.2bn.
* The company’s EPS guidance for FY2013 was increased by US$0.20 to a range of US$2.30 to US$2.50.
It all looks pretty good at first sight. And it is a change from the shocks and constant deterioration of the past.
Mike Lawrie attributed the improvement to the measures and plans he put in place a few months ago. These include the cost take-out program, the drastic pruning of the management layers, the application of project management disciplines, the focus on problem contracts, a new operating model and fresh management talent which has been brought into CSC.
But before we join in the general enthusiasm, we need sustained performance improvement. The news coming out of CSC is not all good and we could be seeing short-term financial improvement to entice bidders for an early sale .
Here is a different interpretation of the results:
* CSC revenue continues to stagnate and contract while competitors grow.
* The US$0.20 increase in the FY2013 EPS guidance means simply that not all of the Q2 over-performance will flow through to the full year. It does not mean Q3 and Q4 profit will increase by a single cent. In fact, Mike Lawrie has implicitly dropped Q3 and Q4 EPS guidance by $0.16.
* The profit increase comes from reduced costs, which could simply be a direct consequence of the large restructuring charge in Q4 FY2012.
* A significant contributor to the improved cashflow is the low level of investment. CSC has invested less than US$200million in outsourcing contracts, property and equipment, acquisitions and software development in each of the last 2 quarters. It makes cash flow look better, causes short-sighted analysts to applaud, but can compromise the future, as long-term CSC shareholders know only too well.
There are troubling stories about CSC’s style in dealing with employees, not to mention governments, as disclosed in our 9 November blog entry re the sale of CSC Italy. Time will tell how much substance there may be behind the stories and, if true, what long-term damage they may cause.
We hear of some employees chosen for termination based simply on their salary level, irrespective of excellent performance records; of inappropriate and in some instances cowardly behaviour (in that they leave it junior HR staff to deal with long serving or senior staff) by senior managers towards employees who are being terminated; of high levels of employee absence among parts of the workforce and of organizational paralysis due to fear and confusion. We hear of the forced postponement of a planned round of redundancies because CSC had once again overlooked European legal requirements surrounding involuntary termination; was this due to lack of knowledge, management incompetence or was it an unsuccessful attempt to simply ignore unwelcome constraints in laying off unwanted employees?
Is CSC creating the right organization and workforce for its future, or is it just getting rid of “expensive” employees to improve short-term profit?
Where is reality situated, between the improved results and impressive words on the one hand and the abrasive management style on the other hand? Will we see a sustained move back to CSC’s former position as one of the global leaders in IT services? Or are we just seeing cynical short-term improvement measures to attract a buyer , and allow Mike Lawrie and his management team to earn a lot of money, before CSC collapses again.
Posted by Busy Bee at 07:24