Saturday, 21 December 2013

CSC - an analyst's view

Finally someone else is becoming publicly skeptical about CSC’s outlook

It  sometimes seemed that we were almost alone is having serious doubts about the sustainability of CSC’s so-called recovery. The only people who seemed to share our view were many of CSC’s  employees.
No longer! An article from iStockAnalyst datelined December 20 highlights the weaknesses we have talked about. Further, Deutsche Bank analyst Bryan Keane, who has followed CSC for some time and is a regular attendee at CSC’s quarterly  earnings analyst calls has publicly expressed his skepticism about CSC’s ability to make its financial targets.

Full details of iStockAnalyst’s article can be found on:

Here are some extracts of the key points it raises:

·      CSC may miss its fiscal 2014 and 2017 revenue goals, as the next phase of turnaround gets more difficult. The company's margin expansion and cost takeout has tracked ahead of the plan, but revenue has fallen short of expectations.

·      Although there is some potential remaining for margin improvement due to cost savings over the next few quarters, these will become more challenging to achieve over time. CSC will soon need to improve revenue growth to drive profitability improvement. Bryan Keane is skeptical that CSC can accomplish a revenue turnaround near-term especially given the recent significant business model and organizational changes.

·      CSC targets revenue of about $16 billion in fiscal 2014 and $18 billion in fiscal 2017. The company is expected to generate sales of $13.07 billion for the year ending March 2014, which is implying a drop of 12.9 percent from last year. Keane also believes CSC will clearly miss its fiscal 2017 revenue goal of $18 billion.

·      While CSC's pipeline in Cloud and applications has grown significantly, the company is not responding fast enough to other opportunities including moving to a consulting partnership model, improving cross-selling and focussing away from software licenses towards a services based BPO model.

·      The company plans to refresh the sales force (currently 1,200 employees) with new hires and aim for deeper client relationships. Additionally, it is re-evaluating its pricing strategy as it is losing deals because of price. It also expects to expand margins beyond fiscal 2014 by operating leverage, standardization of offerings, mix changes towards higher value services, offshoring, leveraging shared services, resetting the pyramid structure, as well as automation. (Blog editor’s note: all this makes us think that what CSC needs is a true transformation program!!).

·      CSC would need to report some revenue growth in its commercial business to achieve its fiscal 2014 forecasts. The IT services demand environment remains relatively healthy, but CSC has to go out and actually win the deals! This is especially important as US Federal government budgets still remain weak and may prove to be a headwind for CSC, which derives almost 40 percent of its annual revenue from federal contracts.

When you put all of this together, it reinforces our view that it is difficult to be optimistic about the outlook for CSC unless or until it starts generating revenue growth. And for the moment we do not see many signs of that happening in the near-term.

Wednesday, 18 December 2013

Is CSC really transforming itself or just running round in circles?

Only time will tell if CSC’s management is transforming the company fast enough and in the right way to avoid its profitability collapsing as significant changes occur and as Nemesis in the form of the Securities and Exchange Commission and aggrieved investors doggedly continue investigations into the company.
 We see three themes emerging which ought to concern employees, investors and customers.
Firstly: with the cost reduction program well under way it is now obvious that CSC is targeting old-style outsourcing and consulting as it slashes headcount across the board and closes facilities. We do not argue that much of this needs doing but continue to question the intelligence that has gone into what look like pretty crude changes. Many would say ‘the baby is being thrown out with the bath water’.
Secondly: new business is just not being signed up.  See our post on this from July 2013 and the later one in October. According to CSC’s own press announcements not a single significant contract has been signed outside the USA this year. Those signed within the USA are all US government focused and part of multi-supplier deals where CSC is one of 15 and more in a single contract. No revenue has been attributed by CSC in any of these contracts, which means we do not know just how big, or little, they really are. Therefore as far as we can see the new business has to come from the acquisitions of which there have been many. The question is do they fill the gap in terms of revenues and profitability lost elsewhere? Another question is, why is CSC’s commercial business in apparent decline? Even current customers are walking away.  We have commented on that and wondered why CSC seems to be letting this happen. The latest being Tryg a longstanding customer in Denmark who has served notice to close a contract and transfer the business to Tata. This story has appeared in on-line news in both the The Business Standard and in The Times of  India
 Thirdly: the SEC has served yet another Wells notice, story (link here) this time to the company itself, not an individual. CSC has not chosen to comment on this matter as it has the right to do. But for the sake of its reputation and good relationships with customers and employees they ought to say something, even if it is only to acknowledge such an event has occurred and that it is dealing with it. Whatever happened to the investigation into irregularities that was mandated by CSC's own Audit Committee? Were the findings too embarrassing to be published? To cap it all,  CSC’s alleged involvement in flights of rendition, story link here from the German press, has almost certainly caused potential and current customers to question whether they wish to be viewed as a business partner of a company like CSC.
 As calendar year 2013 closes there are just three months left for CSC to show good solid financial results (not smoke and mirrors) to investors. CSC may still be able to put together a good story as the loss-making business are closed, overheads are reduced, and the integration of newly acquired businesses provide the opportunity to restate financial comparators.  
At the beginning of this post we asked, is CSC really transforming itself or just running round in circles confusing motion for progress? Only time will tell.

Monday, 18 November 2013

More disappearings at CSC?

In the past we have mentioned that CSC seems to be prone to what are known in South America as 'disappearings'. This is when someone who was around yesterday is not around today. In South American regimes it is because the government has a hand in it.
But what about when senior execs in CSC who were said to be good performers with lots of company publicity to back them suddenly disappear off the radar?

Any disappearings cause rumours to flourish which is why we wonder why Mr Lawrie allows the 'disappearing' of senior execs to go unremarked. After all if they are no good and were part of CSC's down fall he should say so, or if they left for genuine differences of opinion he should be adult about it and say so. If he took the action to remove them for poor performance he should proudly announce to world that he has done this and that it is part of his plans for CSC. That way he would gain credibility at a trying time for CSC. He would also gain the confidence of its employees. 

However, what does Mr Lawrie have to say about; Joachim Lauterbach who was good enough to be appointed as stand-in for leadership of CSC Germany but has now disappeared, and Siki Giunta who was in many press statements by CSC in the past, even as recently as 2012 as being announced as 'among women worth watching' who has also disappeared?

As things stand many senior employees must be wondering if they will get a 'mid-night knock on the door' soon.

We leave the final words to Wikipedia:
Disappearances work on two levels: not only do they silence opponents and critics who have disappeared, but they also create uncertainty and fear in the wider community, silencing others who would oppose and criticise. Disappearances entail the violation of many fundamental human rights. For the disappeared person, these include the right to liberty, the right to personal security and humane treatment (including freedom from torture), the right to a fair trial, to legal counsel and to equal protection under the law, and the right of presumption of innocence among others. Their families, who often spend the rest of their lives searching for information on the disappeared, are also victims.

Saturday, 2 November 2013

CSC – Is it really "Waterlogged and getting Wetter" ?

“Waterlogged and getting wetter” was how investment consultant Trading Ideas LLC  described CSC shares after the company announced its Q2 FY2014 earnings at its Analyst Conference Call.  Other analysts described the results as “mixed”, while CSC talked about “continued earnings and margin growth”.  The share price dropped around 8% after the announcement, but has since recovered about half of that loss.

Highlights of the Q2 FY2014 results were:

  Revenues totaled US$ 3.187 billion, some US$ 0.176 billion or 5% below Analysts’ expectations and down 9.7% from the US$ 3.528 billion recorded in Q2 FY2013.

  Operating margin of 10.6% compared to 7.4% in the same quarter of FY2013.

  Net Income of US$ 209 million, being US$ 71 million higher than Q2 FY2013.

  EPS from continuing operations reached US$ 0.93c  per share, up by US$ 0.24c  from Q2 FY2013, and US$ 0.07c  above the consensus of Analysts’ expectations.

  New Business Bookings totaled US$ 4.2 billion and included a renewal of US$ 1 billion in the North American Public Sector. The total was roughly flat with Q2 FY2013,

The announced results were pretty much as we at Cassandra had expected. EPS was strong and exceeded analyst expectations due to cost cutting (this of course cannot go one forever).  Revenue was once again below analyst expectations and continued its year-on-year decline.  New Business Bookings were higher than revenue for the first time in 4 quarters, due to the US$ 1 billion NPS renewal.
The Analyst Conference was also what we expected,  being very professionally managed by Lawrie with lots of positive statements about the quarter’s results and CSC’s future prospects. CEO Mike Lawrie and CFO PaulSaleh gave articulate and polished performances. They had prepared themselves thoroughly, answered the Analysts’ questions with assurance and appeared to know and understand their numbers.

So is all well with CSC now?  We have to say that we remain unconvinced.  
We do not like the trend of Messrs  Lawrie and Saleh talking increasingly  about “normalized” numbers, with phrases such as “after adjusting for  this impact and that unusual item”…..  Executives “normalize” numbers only when it embellishes the message they wish to give. We saw too much of this practice  in CSC around 2011.
Mr Lawrie gave few specific details about progress of turnaround program progress, whilst in previous earnings conferences he seemed more than happy to give specifics and numbers.  Nevertheless, he was upbeat and optimistic about CSC’s future.

He spoke about early success in commercial new business bookings, about higher value offerings, about industry-specific partner-led consulting, about moving from lumpy software licence deals to business process services offerings, about next generation offerings, about cyber and big data revenues, about what the Infochimps and ServiceMesh  acquisitions will bring to CSC and about “strengthening CSC’s cloud leadership” . But he kept his comments on these topics, as with the cost take-out program,  to the generic and high-level.

Here are some of the things we wonder about:
With all these positive messages, why does CSC not seem to announce new business wins anymore? And if the future is so bright, why spend US$ 100 million to repurchase shares at almost US$ 50 per share?Does the company not have any more attractive investment opportunities?
Cost of services has dropped from 77% to 73% of revenue in 12 months. How much of this is due to genuine operating efficiency improvements, for example better project management, and how much is due to the termination of highly skilled technical staff which is creating a hole in the delivery organization?
Selling, General & Administrative costs were 8.4% of revenue in Q2 FY2013.  They are now fully 10% of revenue. How much of this is investment in direct sales and sales support skills? Or are we seeing a return of the bloated Headquarters micromanagement and bureaucracy that CSC suffered from in the past?

The above are some of the questions we have.  Unfortunately, many of the analysts’ questions were less than challengingFor example; Nobody asked about the large Allianz deal in Europe which IBM is reported to have snatched from CSC’s grasp at the last minute. Nobody asked why there appear to be differences between the CSC and the UK Government stories about the NHS contract termination. Nobody challenged the reasons given for the delay in restructuring in Germany.  Nobody asked about the recent media comments about the alleged failure of a major Healthcare project in the US. Nobody asked why AMP in Australia, a long standing CSC client, is competitively bidding a new services opportunity.

In summary, is CSC “showing early signs of success in its ability to grow”, as Mike Lawrie claims?  Or is it to use Trading Ideas LLC’s phrase “waterlogged and getting wetter”?   

In giving such a polished performance this week, Mr Lawrie bought himself more time with the markets and most of the analyst community. But when will he start delivering the goods, including the growth, he has promised?

Friday, 1 November 2013

SEC investigation into CSC’s accounting irregularities - are things becoming more serious for some individuals?

CSC had gone quiet about the SEC investigation into its accounting irregularities in Nordics, Australia and the Managed Services Sector. In fact things were so quiet that many people assumed the investigation had quietly come to a close.

Not at all!  
Bloomberg has today reported that certain CSC US and nonUS based employees have received Wells Notices. Fuller details on:

Wells Notices are often a precursor of the SEC taking enforcement action, which may include legal proceedings, against a company and/or certain employees.

CSC disclosed in 2010 that accounting irregularities had been discovered in its Nordic Region. The amount involved eventually totaled over US$ 90 millionIt then announced further irregularities had been found in its Managed Services Sector and Australia.
The SEC announced an investigation into these irregularities, subsequent to which CSC’s Audit Committee announced an independent investigation of its own. Quite why it took CSC’s Audit Committee so many months and the announcement of anSEC investigation to investigate the irregularities is something we found puzzling.
Whatever the Wells Notices turn out to be the precursors of, it is unlikely to be good news for CSC or for the employees involved..

Thursday, 31 October 2013

CSC class action lawsuit settlement. Was justice done?

The US courts have approved CSC paying just over US$ 97 million to settle the Class Action lawsuit brought by the Ontario Teachers’ Pension Fund and others. The lawsuit alleged that CSC and its CEO of that time, Michael W Laphenwillfully and fraudulently misled shareholders about the real state of the failed NHS project in the UK. The judge agreed with this.

The UK daily “The Guardian” recently reported on the background to the case and the settlement, per the below link:

Let’s look at how the various key figures and groups involved in this episode have fared:

The class action plaintiffs agreed to the settlement, so presumably must feel they got reasonable compensation for the prejudice they suffered.  

Former CEO Michael W Laphen has since left the company, helped along by a payoff in excess of US$ 20 million. Additionally CSC is paying him a monthly pension of US$ 81,000 for life.  (That makes his pension each year worth $972,000 or $29,160,000 if he takes it for 30 years) Thus Laphen will have collected from CSC $50million dollars after the leaving the company. We are not aware of Laphen having to make any contribution towards the settlement amount.  He can stay out on the golf course for the rest of his life and not have to worry about calls from his bank manager.

Guy Hains, the then President CSC Europe, was the senior executive with personal accountability for the NHS project. He left CSC almost 12 months ago.  We do not have all the details of his severance package. CSC disclosed that his remuneration for FY2012 was in excess of US$ 2 million. Add to that his remuneration during his tenure as President Europeand we doubt that he is suffering any kind of financial hardship.

The CSC non-executive directors were supposed to look after the interests of the shareholders, specifically by providing adequate oversight over the senior executives.  We look at the amount ofsettlement of the Class Action lawsuit and ask ourselves how the non-executives could have allowed this mess to occur if they were exercising adequate oversight. This seems particularly pertinent in the light of reports alleging difficulties appearing in reputable media sources as far back as 2006.  

Two or three of these non-executive directors have since reached mandatory retirement age and have stepped down.  The others have been rewarded with a 50% increase in their retainer remuneration. We are not sure what they have done to deserve this.

So the key players in CSC who played a role in the events leading up the lawsuit do not seem to have suffered too much financial damage from the NHS fiasco and lawsuit, while employees who did their bidding are losing out.

So who has suffered?

Firstly, the UK taxpayers have seen literally billions of dollars (or more accurately, pounds sterling) of their money wasted.

We suppose that many of the CSC employees who worked on the NHS project from 2003 onwards (many of whom worked 60 and 70 hour weeks without overtime payments to make this mess work) have now lost their jobs as the company has re-structured and downsized.  We wonder how many of these people were amongst the employees who unsuccessfully tried and tried to get CSC senior management to listen to their concerns about the real state of the project.

CSC employees who had never been involved with NHS in any way have also become victims of its failure, being made redundant  as a result of the massive financial damage the NHS project did to the company.

And finally, there are the normal CSC shareholders. They saw the value of their investments crash as the company’s NHS propaganda unraveled and CSC’s financial condition with it.

It seems that the CSC top management responsible for the NHS fiasco, and the non-executive directors who were supposed to provide oversight to prevent such disasters, have not sufferedmuch financial damage at allThe losses are borne by the employees and “shareholders on the street” who naively entrusted their investments and careers to the CSC senior executives and Board of Directors.

That’s justice isn’t it?

Tuesday, 22 October 2013

Is CSC's past catching up with it? or Where is CSC's growth?

In a week or two CSC will be announcing its Q2 results. This will be an important report for Mr Lawrie and his management team as not only have they via previous quarterly reports set high expectations in the market they have given a very strong message about CSC's future growth. We expect the upcoming report to be professional with many positive statements about the reported quarter but judging from employee posts in various blogs and from reports in the media we think there is an underlying and as yet undiscussed decline occurring in CSC's performance. 
Why do we say this? Here's why:
The UK Government has closed down CSC's cash cow, the NHS National Program for IT. The reasons for this are thoroughly documented in the media, on the internet, in various UK government committee meetings, and in this blog.
There are few if any sizeable new contracts announced. In fact Allianz Insurance, a company with which CSC has a long standing relationship, has recently signed a multi-million dollar long term outsourcing agreement with IBM even though it was in close discussions with Mike Lawrie and his Executive Team at CSC. 
A former CSC employee now with a large IT user witnessed CSC bidding on a major contract has posted a comment; I am ex CSC and the company I moved to (massive UK company) was considering CSC as part of a large outsourcing deal. The issue was that the CSC sales team came in and delivered by far the best pitch, everyone was very impressed. We then went to see the operation in the flesh and it didn't add up. All that was promised was not visible on the ground and we walked out of the session and left. This is due to the issue that I saw every day within CSC; a chronic lack of investment in the operational ability of the company.’
Employees report confusion about structural changes, the people who actually deliver services are being decimated in what are obviously badly managed staff reductions, thus reducing service quality. They also report that the senior technicians who fixed technical failures before they became customer problems are being made to leave before suitable replacements are found. 
As a result of all the above morale is reported to be at an all time low which again must impact service along with the manner in which employees engage with customers. This may be one reason why Allianz walked away from negotiations. Or maybe it was because Allianz was not comfortable with CSC's recent track record of laying off staff who had cut over to them as part of an outsourcing contract.
We would comment that there seems to be a vicious spiral of decline occurring at CSC. Cost cutting is needed as is new investment and renewed skills and leadership, all of which creates a tricky balancing act for management. CSC's seems to be dropping a lot of plates.
Thus, although the financial spinmeisters in CSC may be able to conjure up a positive Q2 financial report for the market analysts, it still needs to show there is new revenue and growth from innovative services (not the much hyped and under invested in cloud computing), while ensuring that contributions to the bottom line are not just the results of the CSC trademark slash and burn cost cutting, tax management, and rescheduling of revenues.
The call on 30th October should be fascinating.

Sunday, 13 October 2013

The UK Government abandons NHS IT system

CSC's cash cow now dry? ref: previous post.

So the UK government has finally bitten the bullet and given the decision to close the disgracefully late and failed system it bought from CSC. 
The big questions now are:
What will be the impact on CSC earnings?
What will be the impact on employees?
What will CSC tell analysts on its next earnings call?
Will they fess up to the true state of monetary write-offs needed to clear this from the books?
What will CSC tell clients as this obvious failure damages the company's reputation.

Read more here

And here

And here

Friday, 23 August 2013

CSC Cash Cow Running Out Of Milk

The CSC solution sold to the UK's National Health Service comes under fire once again for not delivering on its promises and costing the tax payer billions in fees. These fees to CSC will dry up soon. Hence the comparison with cow's milk. That being the case what is the future of CSC looking like without this cash cow? 

The Register reports: The shambolic nationwide NHS patient record computer system, abandoned by Whitehall in 2011, will ultimately cost UK taxpayers a staggering £10.1bn.
It also goes on to report that Last year, CSC and the UK government finally reached a truce over the company's central patient database cock-up with both sides agreeing to a more flexible contract until 2016 and to shelve any potential litigation.

The question for the CSC board, and for the Wall Street analysts, who seem soft on CSC by avoiding asking the hard questions; is where is the replacement business and profits to come from? It is certainly not coming from the UK or Europe, which leaves just Federal US business.

To drive home the point in June of this year it was reported by eHealth Insider that after nearly ten years of work; 
Ninety-eight per cent of the estimated benefits of several high-profile National Programme for IT in the NHS programmes are yet to be realised, according to the National Audit Office.
That is to say the tax payer has over the years paid out billions for a non-functioning solution while CSC has booked large profits from them.
No wonder ANYTHING BUT CSC seems to be the UK public sector mantra as local health groups commission new and replacement services from other companies. See these three as examples: (copyright eHealth Insider)

 Coventry and Warwickshire invest in VNA
University Hospitals Coventry and Warwickshire NHS Trust has signed a five-year contract with Visbion for a vendor neutral archive, which will store images and scanned patient notes.
Six Surrey clinical commissioning groups are deploying a managed telehealth service, commissioned by Surrey County Council.

Cambridge University Hospitals NHS Foundation Trust is taking a ‘big bang’ approach to its Epic electronic patient record implementation, on a scale rarely seen in the NHS.

All the above supports our previously published views that CSC is being hollowed out to drive out short term costs yet is not able to sign up meaningful new business because of its poor sales performance and inability to deliver. Does it have a future? 

Wednesday, 7 August 2013

CSC Q1 FY2014 results confirm our concerns about revenue and new business

CSC shares jumped 5% immediately after its Q1 FY2014 earnings release and analyst conference due to another excellent profit performance.

Earnings per Share (EPS) for the quarter came in at US$ 0.91c, being 40% ahead of the analysts’ expectation consensus of US$ 0.64c.  CSC also revised upwards its EPS guidance for full year FY14 by US $ 0.20, meaning that they expect the greater part of the Q1 over-performance to flow through to the full year. 

CSC CEO Mike Lawrie talked about the progress on the cost take-out program, Operating Margin improvements, cash flow performance, and other highlights.  He also noted he expects to continue to spend around US$30 million to US$40 million per quarter on restructuring, particularly in European operations.

But the quarter’s revenue, at US$3.26billion, was 10% below its Q1 FY13 equivalent (restated to take account of discontinued operations). It was also well below the analysts’ expectation consensus of US$3.58billion.  As a point of comparison, CSC’s revenues dropped by about 4% year-on-year throughout FY13. The annual revenue decline has now accelerated to 10%.

New Business Bookings numbers were US$2.8billion, down 30% from the US$4billion posted in Q1 FY13. Mike Lawrie said commercial new business bookings for Q1 FY14 were down 33% year-on-year, and that the book/bill ratio for the quarter was 94%, suggesting further revenue declines are likely.  He also mentioned that CSC had only won one deal in Q1 FY14 with a total contract value over US$100million.  He attributed this to a market shift towards smaller contracts.  At the same time, he was optimistic about CSC’s prospects in Cloud, Cyber and Big Data.

Mr Lawrie is aware that CSC needs to address revenue, saying “we need to begin to show growth as we exit the get-fit phase and move into the win-more phase”, talking confidently of CSC’s capabilities and offerings, and about their investments in new account executives and sales professionals.  All very good, but we note it is much removed from the comments we hear about the reality of life for CSC’s front-line troops today.

Mr Lawrie gave another assured and persuasive performance at the Analyst conference. Add to that an excellent profit performance and he has probably bought himself another quarter’s breathing space to address revenue and new business awards. The analyst community and the financial markets were obviously impressed by CSC’s results. We are less impressed and are not yet convinced things are as rosy as Mr Lawrie suggests.  We have heard CSC’s “success is just around the corner” speeches before.    To date, Mr Lawrie has driven down CSC’s cost base effectively.  We want to see some progress on revenue and new business awards.
Details of CSC’s Q1 FY2014 financial statements, accompanying slides and webcast of the Analyst call can be found on the company’s website.  A transcript of the Analyst call can be found on the website of Seeking Alpha.