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?


Anonymous said...

Hard to say if the 5% fall off on 10/31/13 was the Q2 figures though or the Wells Notices. I suspect the latter.

I am surprised though that there isn't more people noticing out in the market that apart from selling the family silver, the much vaunted turn around only exists in the words mouthed by top level people.

Then again, the markets are less about fact and more about sentiment for the most part.

Anonymous said...

The cost cutting cannot continue at the same level and thus the future is not bright. New for FY2014 was the elimination of bonuses for most US employees who were previously eligible to receive them. A sizable savings for CSC but a significant reduction in compensation for most of these employees leading to low morale and poor client service. Also not discussed was the loss of the Chrysler re-compete and the departure of Siki..

Anonymous said...

Does anyone know the facts why Joachim Lauterbach left?

Anonymous said...

US employees actually received promised bonuses in previous years? Lucky them...

Anonymous said...

So Mr Lawrie's Performance Bonus for cutting $1b out of costs gives him a $20m bonus and if the CSC Share Price should hit $60/share he gets a $200m performance bonus. Not bad. Pity there won't be any CSC Staff Christmas functions to discuss how great it is working at CSC. Perhaps Mr Lawrie would throw $1m to a staff Christmas party. Oh Wait, he earnt that bonus. Merry Christmas.