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.

Acquisitions and Alliances

Mike Lawrie's reshaping of CSC continues apace with the recent announcements of the acquisition of Infochamp as part of its 'Big Data' and Cloud Computing strategy, and the global alliance with AT&T. These announcements seem to be positive as they take CSC forward into newer services and capabilities. That is at least based on what little information is given about them, (as we all know the devil-is-in-the-detail). So based on what can be gleaned from the announcements, questions we would like answers to and comments are:

  • Is AT&T really a global player? We think it does little for CSC in global terms. AT&T may have networks with global reach but it is not really a global player in that its in-country reach is limited. It has to be said though that that few network companies are truly global - in spite of the industry's marketing hype.
  • The AT&T alliance announcement talks about the integration of cloud services. How does the cloud integration play with the Infochamp acquisition?
  • Further reading on this subject can be found here:
  • A positive point is that the alliance will probably be well received in USA Federal and Defence circles which will enhance business opportunities in the USA. 
  • Outside the USA CSC seems to have done little to build business from a corporate level. Although we note a modest $2.5mln investment in cyber security and cloud services in the BHP based facility at Wollongong south of Sydney Australia. Apart from that the story outside the USA seems to be one of reducing staff and disposal of businesses rather than investment, leading us to conclude that CSC is retrenching back to home.
  • We note the comment about not having to invest capital in networks. In some ways this is a good thing. But it could mean that CSC, and its clients, may pay more for network usage since AT&T will need its full service margin. If CSC were to use its own capital, of which it said to "have a pile", it could create its own without compromise. We are confused about the benefits and suggest these need to be clearly spelt out.
  • Does AT&T takeover CSC's current networks? If so does it pay for what has been invested to date? 
  • In order to reap the benefits of a new network alliance there will be a need for a joint CSC/AT&T global networks consolidation project. This will take time, money, and may cause some disruption. How much time? How much money? How much disruption?
  • What are implications for CSC's own network technology people? Do they join AT&T?
  • One final point. Does the AT&T alliance pave the way for a full scale take over of CSC by AT&T?

In conclusion, there are lots of open questions to be answered about the acquisitions and alliances CSC is seeking. We assume they will be answered in the coming weeks.

Changing the subject; CSC sells cyber crime and security services across the globe and is proud of its expertise in this area. So how come its major data centre in Copenhagen Denmark where it processes work for the Danish government can be hacked by outsiders?

Sunday, 4 August 2013

IT giant wants to suck brains amid 750 layoffs

That's the headline from Channel Register in a post that discusses how CSC in the UK is treating its staff. 

In an interesting and somewhat strange development in the handling of lay-offs CSC is selecting some people (to be known as "trusties" by their colleagues) to stay with the company to train on their successors for which they will be rewarded in some way before they are terminated. We are not sufficiently educated on UK employment law to judge whether or not what CSC is proposing to do is illegal. If it were illegal one would expect the trade unions to go to court with it. But it certainly seems 'near-the-edge', or bluntly speaking cruel in terms of people management. Perhaps CSC is so desperate it does not care what employees think, nor what prospective outsourcing customers think if that is how employees are to be treated.

Will CSC employees in France, Germany, Denmark, and Holland be treated in a similar manner? Who knows.

See more at the Channel Register here

Some 750 staff in the UK have been threatened with redundancy under the IT giant's global workforce shakeup, and roughly 200 roles will be moved offshore.
CSC - perhaps best known for its part in the NHS's patient records database fiasco - claimed it will "compensate" staff who share their knowhow with employees beyond Blighty's shores. But trade union Unite wants a better payoff package on the table.
"Workers who are paying the ultimate price of their jobs, will be expected to help make themselves redundant by training others," said Ian Tonks, a Unite national officer.
Describing the request to drill off-shore workers as an "indignity", he added: "This is totally unacceptable and the union is demanding that CSC negotiates a proper package for workers that recognises their contribution and loyalty. The company must also do everything to keep compulsory redundancies to an absolute minimum."

Friday, 2 August 2013

CSC Business Disposals Summary

CSC’s divestments of businesses that do not meet the new operating model or do not perform well have been listed from CSC’s press releases. You can see details below.

These show that five business units have been sold or divested since new management took over. One unit, CSC Italy has no financial information in the press release.
The other four were sold for a total of  $1,338.5mln cash.
The reported revenue associated with these businesses is $1,510mln.
Questions for the next earnings call on 6th August:-
Are there any other divestments planed?
How will the impact of the reduced revenues be reported?
Were these sort of figures reported at previous earnings calls?
What is the additional impact on cost, revenue and profit before tax of the large-scale head count reductions in other business areas?

News Release -- May 29, 2013
FALLS CHURCH, Va., May 29 – CSC has reached a definitive agreement with PAE for the sale of its base operations, aviation and range services business unit, Applied Technology Division (ATD), for $175 million in cash. CSC acquired ATD with the 2003 purchase of DynCorp.
This agreement, CSC’s sixth divestiture in seven months, furthers CSC’s transformation strategy to rebalance its portfolio of services by focusing on its core strength in next-generation technology solutions and services.
News Release -- February 20, 2013
FALLS CHURCH, Va., Feb. 20 – CSC has reached a definitive agreement with a consortium comprising ITOCHU Techno-Solutions Corporation (“CTC”) and ITOCHU Corporation for the sale of CSC’s Enterprise Systems Integration (ESI) unit, a reseller of enterprise hardware and software and a provider of maintenance services with operations in Malaysia and Singapore, for $90 million in cash.
…….In fiscal 2012, ESI’s revenue was approximately $180 million with mid-single digit operating margins. ESI’s results will be recast as discontinued operations. ESI’s results had been previously reported within CSC’s Business Solutions & Services sector.
The transaction is expected to close in March 2013.
News Release -- December 12, 2012
FALLS CHURCH, Va., Dec. 12 – CSC (NYSE: CSC) has reached a definitive agreement with Adcorp, South Africa’s largest employment services company, for the sale of Paxus, its Australian IT staffing unit. This agreement, CSC’s third divestiture in seven weeks, advances CSC’s transformation strategy to rebalance its portfolio of services. The total value of this all-cash transaction is expected to be $73.5 million.
In fiscal 2012, revenue from Paxus was approximately $340 million with low single-digit operating margins. Paxus’s results will be recast as discontinued operations in future periods. Paxus’s results had been previously reported within CSC’s Business Solutions and Services segment.
The companies expect to close the transaction by the end of January 2013.
News Release -- December 03, 2012
Transaction Expected to Close by End of December 2012

Management to Host Conference Call to Discuss Transaction
FALLS CHURCH, Va., Dec. 3 – As part of its transformation initiative to rebalance its portfolio of services and focus on next-generation technology solutions and services, CSC (NYSE: CSC) has reached a definitive agreement with Equifax for the sale of its credit services unit for $1 billion in cash. The after-tax proceeds from the sale of the business will be approximately $750 - $800 million based on preliminary plans. CSC intends to use $300 - $400 million to repurchase shares, contribute $300 - $400 million to its pension plans and apply the remainder to general corporate purposes.
…. “This transaction advances CSC’s turnaround by reshaping our portfolio and enabling the company to focus on next-generation technology solutions and services,” said Mike Lawrie, president and CEO, CSC. “Upon closing, we will receive $1 billion in cash and we intend to redeploy these funds for share repurchases and to fund our pension plan, which will be value accretive.”
For this current fiscal year CSC’s Credit Services business is tracking to approximately $230 million in revenue, $100 million in operating income and $0.40 of earnings per share. The credit services business results have been previously reported in CSC’s Business Solutions and Services segment.
News Release -- October 25, 2012
FALLS CHURCH, Va., Oct. 25 – As part of its ongoing service portfolio optimization, CSC (NYSE: CSC) has entered into an agreement with Dedagroup, an Italian IT services company, for the sale of the consulting and systems integration services part of its business in Italy. Financial terms were not disclosed.
After the transaction reaches final agreement, CSC will retain a presence in Italy and continue to provide a select portfolio of services, including cloud, financial services, infrastructure, business process outsourcing and healthcare offerings, to multinational companies. CSC will also retain corporate financial services products, solutions and services for CSC's international accounts.