Saturday, 10 May 2014

CSC – Q4 FY2014 earnings – yet more of the same, but with a glimpse of the future

CSC announced its Q4 FY2014 earnings and held its Analyst Conference Call on 10 May. 

It was “yet more of the same” with continued earnings and margin growth beating Wall Street profit expectations, allied to continued revenue declines.  Once more, the market loved it and CSC stock gained 8% the next day. 

Highlights of the Q4 FY2014 results were:

·   Revenues totaled US$ 3.3 billion, down 5% from Q4 FY2013, and about US$30 million below the Analysts’ expectations. Operating margin of 10.8% compared to 5.9% in the same quarter of FY2013. Mike Lawrie attributed this improvement to the Cost Take-out program.

·   New Business Bookings totaled US$ 4.3 billion being 1.3x the quarter’s revenue. But one has to remember that this “1.3x” is against a constantly decreasing revenue denominator. The profile of the bookings also suggests there may be a strong element of  renewal of multi-year GIS contracts. 
    Note: the GIS contracts have the lowest profit margin so far.

It was also noted that S&P has upgraded CSC’s credit rating to BBB+.  This is a reflection of CSC’s progress in strengthening its balance sheet over the past couple of years. An improved credit rating does not guarantee future commercial success. 
CSC reversed a US$21 million liability for contingent consideration relating to the acquisition of ServiceMesh. This suggests that ServiceMesh may not have fully met financial performance expectations since the acquisition.
Full details of the results, the press release, the webcast of the Analyst conference and the accompanying slides can be found on .

The Analyst conference allowed Mike Lawrie to give some glimpses of the direction he is taking:
Increase offshore resources from 20% of work force to “mid 40%s” for the whole company. We calculate that to mean at least 15,000 staff will have to go from on-shore locations and 15,000 recruited at new locations. The top 40 or 50 accounts are targeted to reach  70% and above. What should this tell career minded “on-shore” employees  about prospects within CSC?

During FY2014, CSC’s net cash outflows for business investing activities totaled US$ 566 million (that's about 4.5% of turnover - is it sufficient?).  
US$640 million was also spent on stock repurchases and dividend payments in the year. 
In FY2015 CSC intends increasing its dividends and spending US$ 1.5  billion on stock buybacks,  which Mr Lawrie described as a “fantastic investment”.  This gives an interesting perspective of the company’s investment priorities.  Mr Lawrie and CFO Paul Saleh seemed unusually unsure of themselves when asked if the stock buyback was factored into the FY2015 guidance. Do they intend re-issuing most of these shares as stock options and deferred compensation for themselves? For an independent considered opinion on the value of share buy backs we suggest reading this 

·   CSC’s FY2015 plans for Cost Takeout will target greater G&A efficiency, Low-cost delivery centers, productivity gains from automation and Contract management. The total financial savings of these actions is targeted at almost US$500 million. Some US$400 million will be reinvested in Finance and HR systems, customer committed savings,  work-force and real estate restructuring and next-generation offerings.   Mr Lawrie was asked why CSC investments in open-source Cloud seemed so small compared with the likes of IBM and HP. Unusually, he waffled, talking about leveraging alliances. So no surprise about where CSC will invest next year – cost reduction, profit maximization  and restructuring once again.  

The HCL alliance is to target the apps modernisation segment.  Mike Lawrie said CSC had  not addressed apps modernization in the past. This may come as news to some employees.

It looks good on the surface.  Onwards and upwards with continued profit growth and shareholder value.  However, the continued failure to grow revenue and invest in new services and products give an indication of clouds on the horizon.   

Mr Lawrie appears to be so focused on profitability numbers he continues to overlook the human element.  CSC’s demoralized workforce (just read the comments on other posts) will not delight customers nor will the workforce be motivated to “go the extra mile”.  His FY2015 plans and priorities seem to continue to ignore the risks of this situation.

We do not share the market’s enthusiasm for CSC, nor have we changed our opinion from what we said 3 months ago, namely that we could almost believe it all, except for the nagging reality of the very different story we hear from CSC employees and the lack of ground breaking new business.

Friday, 9 May 2014

Treatment of Comments

After a recent question Cassandra wants to make it clear to all readers that comments are welcome and are published provided they are not personally rude or libellous. Also comments alleging sexual misconduct will not be posted. The appropriate way to raise such matters is to notify CSC's  HR team.
The history of the comment trail indicates that only a handful of comments fall into the rude or libellous category, which is gratifying as the net has a poor track record of anonymous bad behaviour.
Cassandra's followers seem to be better mannered and better informed than most.

Thank you    

Thursday, 8 May 2014

Why the simplified bell curve for staff performance

Classic Bell Curve

The result

CSC Investors Call Tonight 8th May

CSC will be holding its investors call tonight. Connect to it here:-
CSC Investors Call

The agenda
The CSC executives line up in readiness

while the new HR team take up positions alongside
the Bell Curve implementation team who continue with the implementation program.

Outside the hall the sales and marketing team man their stand

and get ready to greet their latest super-consultant

Over at Blythewood the latest corporate art is greeted with rapturous applause.

The chairman takes the stand
as the analysts ply him with questions

The event concludes with a demonstration of latest technology from the labs.

Don't miss it
CSC Investors Call