Wednesday, 6 February 2013

CSC Results Q3 FY2013 - Our Analysis

CSC shares jump 10% to US$46 after its Q3 FY2013 earnings release, but where is CSC going?

The Q3FY2013 profit performance exceeded analyst expectations, and the company once more upped its FY2013 EPS earnings guidance. 
Just like they did in the previous quarter, CEO Mike Lawrie and CFO Paul Saleh gave polished performances at the Analyst conference presentation, and the Q&A session.  Analyst questions were handled confidently.
  Here are the highlights of what impressed the market:
  • Reported revenue for the quarter in constant currency was up 2.8% compared to Q3 FY2012.
  • Earnings per Share (EPS) for the quarter were US$ 0.77c, compared with analyst expectations of between US$0.58c and US$0.62.
  • The company bought back 1.97 million of its shares at an average price of just over US$39 per share. This drives up EPS but does not mean the company is performing any better.
  • EPS guidance for FY2013 has been increased by US$0.20 to a range of US$2.50 to US$2.70.  The previous analyst consensus was US$2.37.
  • CEO Mike Lawrie said the company was ahead of plan on key actions such as its Cost Take-Out program.
The headlines look good, the shares jumped and the Analyst conference went well. So why do we remain skeptical about the sustainability of CSC’s progress? 
Looking a little bit beyond the headlines and behind the numbers and correlating to other information in the public domain one can see that:
  • The new business bookings for the quarter at US$3billion were the lowest level for 7 quarters, indicating continual decline. The new business bookings for the 9 months to date of FY2013 were only US$11.2billion.  This correlates with comments we have received about poor sales focus and performance in CSC, due to employees’ uncertainty about their futures and concerns with internal  matters such as widely misunderstood new operating models and future organization charts.  As a point of comparison, new business bookings for the first 9 months of FY2012,  in the Laphen era,  were 16% higher than the first 9 months of FY2013. 

  • The reported year-on-year revenue growth of 2.8% is potentially misleading. The Q3 FY2012 (ie last year) revenue number was net of a one-time write-off of US$204million.  Adjusting for that write-off, Q3 FY2013 revenue was in fact lower than the same period of FY2012. 

  • There were exceptional cash inflows of US$1 billion relating to the disposal of CSC business segments, including Credit Services.  CSC has said that some US$600–800 million of this will be used 50/50 for share buybacks and pension fund contributions. This may seem an unusual choice of investment for business growth. But it makes a lot of sense as an investment in support of a sale of CSC and/or large-scale employee lay-offs. 

  • Capital expenditure continues to drop, totaling only US$156million for the quarter.  Thus continuing with the trends set by the previous management. Have customer technology refresh investment programs been put on hold once more? Could this be because the investment payback period is longer than the recovery timescale CEO Mike Lawrie is working to?

  • The latest US$0.20 increase in FY2013 EPS guidance needs clarification.  CSC has let the US$0.17 Q3 “over-performance” flow through to the full year. It has also released only US$0.03 of the US$0.16 EPS “contingency” it took in Q2.  (CSC effectively reduced its EPS guidance for Q3 and Q4 by US$0.16 at that time. For details, see our blog entry of 12 November 2012 re CSC Q2 FY2012 earnings release). This suggests CSC still has a contingency of US$0.13 available for Q4 FY2013.

The Q&A session details brought out a few interesting points:
  • Europe is seen as creating “uneasiness”, notably in Germany, but also in France and UK.  CSC will continue to restructure some Europe businesses.  This correlates with reader comments about CSC plans to force UK and German employees to take 5 days vacation in Q1 FY2014, apparently to reduce costs when in fact costs are being deferred to the rest of FY2014 with this method. It also suggests CSC’s problems there may be more than just “uneasiness” in the work force.

  • CSC sees its growth opportunities as being in Latin America, Asia and United States.   (One must deduce from this statement that only Europe will be non-growth, with the consequences anyone can guess).   

  • UK NHS will represent lower revenue and profit than CSC had anticipated. (Why is this not a surprise to us? Why is the NHS failure still not fully accounted for?)

  • Mike Lawrie sees CSC moving away from what he calls a “holding company mentality” with its resulting overlap, duplication and too much staff function focus.  (In our opinion, this has been a major cause of CSC Europe’s woes for the past decade).  

Shareholders must be pretty happy with Mike Lawrie’s performance on their behalf.  Exactly 12 months ago, CSC shares were below S$27 and the outlook was getting worse.  Today the shares are 70% higher and most of the non-performing top management have gone. What shareholder would not have signed up for that outcome 12 months ago?

From an employee perspective things have not developed anywhere near as happily during Mike Lawrie’s tenure, with job losses, salary reductions, off-shoring to India etc.  Nor does the future look  brighter. There is declining morale, too much uncertainty and great confusion compounding a growing lack of trust of Mike Lawrie’s real objectives. There is anger that while former CEO Mike Laphen and his senior management left with large payoffs, the hardworking and performing employees who are losing their jobs due to senior management incompetence are getting legal minimum termination payoffs. 

So where does this leave us? 
It leaves us with the impression that Mike Lawrie’s actions will achieve a peak of profitability performance in about 12 months from now, which may be sustainable for a couple of quarters. Thereafter we may see a second decline in CSC’s performance. Not as dramatic as the collapse of calendar year 2011, which saw 50% wiped off the share price, but enough to reduce the attraction of CSC. 
It leaves us thinking that Mike Lawrie’s plan could well  be to sell off CSC in the next 18 months, aiming for an acquisition share price towards US$60.  This would be more good news for shareholders, but to achieve it CSC will need to develop an effective retention strategy for its top employees. Without them Mike Lawrie’s plans will not succeed.  And right now they are not happy and many are leaving - see recent posts.


Anonymous said...

Just one slight correction, in the UK the 5 days mandated leave is Q4 FY13, that is before the end of March 2013 but we will receive an addition days leave. The main difference is that for the past two years this has been voluntary in the UK with the "carrot" of an additional days leave.

Anonymous said...

Quite interesting to follow CSC employees' and applicants' judgement on their company in various countries.


Seems esp. German (EMEA) employees are steadily loosing confident in CSC (incl. new Mgmt.), while the US and Overseas employees seem to be little more optimistic.
Nonetheless, compared to competitors, especially in the german market (links below on kununu, a XING related site), CSC is way, way, way behind ... and customers and all do know and see the trouble.

Anonymous said...

csc has no moral fibre, yes, decades of loyalty and dedication mean squat bring in the reapers slashn n burn who gives a root not me its normal get over it take ur punishment n get th hell outta there all US companies live an die for th stock exchange wot r u expectn .... a kiss, some love? Wake up reinvent urselves! the future is in ur head not a shareholders wallet THINK!! THATS WOT WE KNOW BEST! come together without th corporates, move th clever communes into th corporate world without corporate values