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.

10 comments:

Anonymous said...

CSC is publishing strong results, the CEO is talking about a bright future, the Analysts are upgrading the stock and talking about CSC in glowing terms. The only problems are negative comments coming from CSC staff. This is not a description of CSC today, but a reminder of what was happening at CSC in 2008/2009.

It looks like history is repeating itself at CSC in 2012. The only difference is that Lawrie is a charismatic and accomplished public speaker, while Laphen definitely was not.

But it is still style over substance at CSC, and short-term results are the only important matter.

CSC is heading for another crash unless Lawrie manages to sell it quickly and push the problems onto the buyer.

Anonymous said...

This story of employee treatment sounds like Misys all over again under Mike Lawrie. The people of CSC need to get ready - its going to be a bumpy ride. Its all smoke and mirrors - and you will be cut based on salary rather than ability. Of course, the leadership team will make out like bandits. Mike is adept at preparing companies for sale, not 'turning them around'. It all just looks good on paper. Where o where are the great leaders that companies need?

David said...

Interesting the point about growth versus the competitors.

One of the Indian companies I now deal with - HCL Technologies - is reporting near 30% Revenue CAGR (50% is in its infrastructure outsourcing division). This includes huge success in the USA and is a 10 year trend ongoing that has taken them to $4.3bn of revenue.

They of course don't suffer from the plethora of Business Prevention Officers that stifle sales but the key thing is putting their employees first - yes it sounds trite - all companies claim it but its true, HCL actually do it, they have the highly innovative Employee First Customer Second program.

This is the kind of innovation that CSC used to be famous for in the long gone days of CSC Index.

Anonymous said...

The previous comment (by David) about HCL smells like advertising. However bad Misys and CSC may be, they don't hold a candle to Indian bodyshops like Wipro, Infosys, TCS, HCL, Mindtree, IBM Global Services, Etc.

Mike Lawrie killed Siebel, has done irreparable harm to Misys, and now has his claws in CSC.

You're right, the window dressing probably means that Mike wants to chop off a piece of CSC. This is what he does; he does not create anything.

What makes Mike Lawrie dangerous is his casual practice of
misleading the uninitiated--Convincing resources into believing LIES are
TRUTHS.

See Mike Lawrie's work with Open Source:
zdnet.com/blog/healthcare/how-big-a-place-for-misys-open-source-in-healthcare/3781


Anonymous said...

Mike Lawrie does not create anything, he turns off the water, cuts off the branches, polishes the deadwood, sells them for firewood, and jumps to another tree just before the one he's on, dies.

Anonymous said...

I was made redundant by CSC in Australia.. my performance was excellent and had had multiple rewards for this work. I was offered a project to work on 20 mins before I was called into a meeting with my manager to be made redundant. It was due to restructuring I was informed. Basically my job has gone to India. There is plenty of work available just Australian staff aren't as cheap as Indian. It is interesting that comments are being made that they might not be paying out redundancies anymore either.. I suspect the above posts are true, this is purely to make the shareholders happy and to sell of CSC.. SO thanks Mike Lawrie for all the mails to CSC staff to be motivated and go the extra nine yards.. I did, and got made redundant.

Anonymous said...

You are not on your own in Australia ... I too had excellent performance feedback from my clients ... but it is water off a ducks back to CSC ... CSC do not even read employee appraisals!

Career development is a laughable fantasy in CSC ... they do not even train people ... their purpose in life is to make money; fair enough they have that in common with most companies - but CSC are different in that they despise their employees as a necessary evil and dispose of them at the earliest possible opportunity.

I cannot understand for the life of me why part of the company name is "Sciences"; they have absolutely no interest in computing science, only in profit by whatever means.

They have destroyed my interest in business computing when it was vibrant before their arrival.

And they do nothing for their clients either ... their method is to derive as much money as possible for delivering as little as possible - exactly the opposite of the clients expectations!

Clients beware ... CSC are toxic ...

Anonymous said...

I think window-dressing. Because CSC Sold their Australian unit, Paxus, to a to South African company, Adcorp, for $73M.

We all know Mike Lawrie's patten of behavior: We're used to his deception.

I think Mike Lawrie is in the wrong field, he should have been a politician.

Anonymous said...

CSC have no interest in the welfare of their staff.. especially if that person can be replaced with a cheaper person elsewhere in it's cooperation. Mails go out to the staff still ask them to do more for CSC and that everything is looking great.. however this is not the case, Moral is shot to pieces, Christmas parties were cancelled to save money.. So long as the "YES" mismanagers make their golden eagles and massage the ego's of the directors then CSC will be sold off by the shareholders and Mike Lawrie will have deemed to have saved CSC.. yet the damage to the grass root workers is never mentioned. Just keep the shareholders happy eh, and to hell with the staff.

Anonymous said...

This has been a large swing from the CSC Australia of some 7-8 years ago where staff relations were a lot better.

Unfortunately, senior US management did not listen to valued staff earlier and have since made claims that have resulted in the company being devalued over time.

It will only have a long term negative effect on CSC when experienced staff are no longer there and clients get sub standard service.