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.