When CSC announced its Q3 FY13 profit 3 months ago, the markets were impressed and the stock price jumped 10%. We were less impressed, and questioned where CSC was going. We thought the situation may not be as good as Mike Lawrie’s articulate and polished performance suggested. The reasons for our questions and concerns are outlined in our blog postings of February 6th and 11th 2013.
Part of the answer was provided this week when CSC announced its Q4 FY13 earnings and saw its shares slump 15% in the following couple of days. .
Earnings per share, at US$1.27c, outstripped Analyst expectations, primarily due to the impact of the company’s Cost Take-Out program. Operating Profit was US$212 million or 5.7%. Cash flow was good, helped by certain business dispositions. So much for the positive news.
Revenue at US$3.70bn was a big disappointment, being 7.2% lower than the corresponding quarter of FY12. The revenue decline impacted all business segments; North American Public Sector declined by 7%, Managed Services by 4% and Business Solutions by 12%. Additionally, the revenue was below the Analyst consensus estimate of US$3.86bn, and even below the estimate of the least optimistic analyst.
New Business bookings presented an even gloomier picture. The new business won in FY13 was only US$13.8bn, down 25% from US$18.8bn in FY12. The Q4 FY13 performance, totaling only US$2.9bn, was fully 50% below the level of Q4 FY12. Mike Lawrie did not seem optimistic about any significant near-term improvement. There can be no sustainable revenue growth with a book/bill ratio below 1.0 and under developed (through lack of investment) services and products.
In some respects, it was as if CSC were heading back to the old days of earnings announcements which ought to have been left behind. This was because:
- The New Business bookings are disappointing
- The unpleasant surprise of revenue below expectations in areas of the business considered to be 'solid'.
- CSC fell back to its habit of explaining during the Analyst call that “without this impact and excluding that item, the profit would have been……………”
- CSC shares suffered a significant drop following the results announcement.
There was waffling from Mike Lawrie and Paul Saleh initially regarding revenue and new business, but especially in the Q&A session of the Analyst call. Paul Saleh did not seem assured or convincing when some Analysts pressed him to explain and reconcile profitability and cash flow in its FY14 Guidance.
So where does this leave CSC?
On the one hand there is a determined and articulate CEO who has driven cost reduction and improved profitability for now, who has replaced some of the non-performing senior management of the previous régime, and who seems to take the tough decisions his predecessor avoided.
On the other hand, we hear about demoralized employees, organizational confusion and a major change program which has run out of steam. As a consequence, CSC is not selling. The Q4 FY13 results support that view.
All of which leads to the same conclusion as 3 months ago, namely that we question CSC’s ability to achieve sustainable longer-term performance. We hope Mike Lawrie will start to prove us wrong by turning in vastly improved revenue and new business numbers, and soon.