Saturday, 9 August 2014

Why CSC’s Q1 FY2015 results heighten our concerns

This is full of valuable metals but it won't be going anywhere.


 Analysis of CSC ‘s Q1 FY2014 earnings release increased our level of concern about the company’s outlook and direction. It confirmed our misgivings, and those of many of our correspondents, about the underlying level of sustainable profit in today’s CSC.


As ever, CEO Mike Lawrie gave a professional performance during the Analyst Conference focusing on the positive aspects of the Q1 results and talking up CSC’s prospects. In fact, just listening to Mr. Lawrie without looking at any numbers gave the impression everything was going to plan, the only problem being the failure of the recently-departed Head of GBS to manage his business adequately.   As usual, Mr. Lawrie was helped by a series of soft questions from the analysts who showed their usual level of docility.

Nor was there anything remarkable or exciting about the company’s Q1FY2015 results release.  CSC once more exceeded the Analysts’ consensus on its profitability and, unusually, did manage to exceed the consensus on Q1 revenue; also the rate of revenue decline slowed.

However, looking beyond Mr Lawrie’s positivity and the company’s exceeding the analysts’ expectations, there were items which gave us real concern:

  • ·     Revenue continued to decline, being 2% lower, in constant currency, than the equivalent figure of the previous year.

  • ·     Total Operating margin dropped to 9.4% from 10.2%. NPS, which is largely a cost-plus business, saw its margin grow by 2.7% to 14.7%, but GBS and GIS, whose delivery can carry greater financial risks suffered margin reductions.

  • ·     EBIT for Q1 FY2015 dropped to 7.7% from 8.3% a year ago. This was despite the cost take-out and involuntary vacation in the quarter; also despite a change in pension accounting policy which yielded a profit boost of US$21 million in the quarter, and despite Q1 FY2015 having an extra week, which yielded a one-off benefit of at least US$ 39million and maybe anything up to US$119 million.

  • ·     Investments (as defined by CSC) of US$105m continue to focus on HR and Finance systems, customer committed savings, restructuring and next generation offerings. Share buybacks totaled US$148million and dividends distributed US$29million.  This investment approach speaks volumes about CSC’s intentions.

  • ·     New Business awards for the quarter were a disappointing US$2.7 billion, being 15% below the level required to simply replenish the pipeline.  Yet another indicator of a shrinking business. 
This begs the question "What would EBIT (Earnings Before Interest and Tax) have been without these one-off benefits?
    It is a pity no analyst asked about this; unsurprisingly CSC did not volunteer the information.

    We estimate that these one-offs could have accounted for US$96 million of EBIT. If so this would bring underlying EBIT down to US$152 million, or 4.7% rather than the reported US$248 million or 7.7%. A significant difference that is 46% lower than last year and needs explaining.
    
    This difference is made up of three items; 

  •    US$21 million Pension accounting change (Note 1)
  •    US$60 million impact of Extra Week (Note 2)
  •    US$15 million impact of Involuntary Vacation (Note 3)
                               

Note 1 - Figure given by P Saleh in Q&A session.

Note 2 -  P Saleh in Q&A session said GIS impact was US$39m: that GBS and NPS impact impossible to calculate, but could be anywhere in a range between zero and US$ 80million. We have assumed US$21 million within this range.

Note 3 – We cannot calculate the total impact of forced or involuntary vacation because we do not know the revenue impact. However, we can estimate the impact on the SG&A line alone, as these resources do not directly generate revenue. We calculate the impact as approx US$5 million per day of forced or involuntary vacation. For the sake of this exercise we have assumed that each SG&A resource took three days of “involuntary” vacation in Q1 FY2015, meaning vacation they would not have chosen to take without a directive from the company.

So where does this leave matters?

It reinforced and heightened our concerns about the business fundamentals underlying the published results.
For shareholders, one would be hoping Mr. Lawrie is close to concluding the rumoured sale; because we see nothing to be optimistic about in the company's prospects, and the share price range may not be sustained. In fact it has started to fall.
For employees, the concern is more bad news to come  as Mr. Lawrie uses the only business tool he seems familiar with; cost and people take out to maintain profits.

The bottom line is:
The breaking down of a once great enterprise continues.

20 comments:

Anonymous said...

"the failure of the recently-departed Head of GBS" - Is Jim Smith gone?

Anonymous said...

Mikey was referring to Jim Cook.

Anonymous said...

CSC is like a headless chicken.

Anonymous said...

I see Mikey's pleasure on the investors call with the rapid growth of Cyber has already played out... Sam Visner (head of Cyber) chooses this exact moment to go and spend more time doing his own stuff.

Bye bye Sam, its been.... real.

Anonymous said...

>> Mr. Lawrie uses the only business tool he seems familiar with; cost and people take out to maintain profits.

CSC. Cant Stop Cuttting

Anonymous said...

A BusyBee typo, or cant Mikey even remember the litany of L2's he's hired then fired?
Jim Cook was EVP of "Global Industries" sales/coverage, not GBS.

Anonymous said...

Wall Street is finally paying attention to revenue. The game is up now. Mr. Lawrie will no longer be able to fluff the stock price by lopping off heads (probably won't stop him however...). An axe seems to be the only tool in his tool box. The clock is now ticking. His primary focus will now be to sell CSC or sell of parts as he is obviously not in it for the long haul. If he can't sell in the next 3 to 4 quarters, the board will send him packing. tic tic tic

Anonymous said...

There isn't 3 or 4 quarters left :-). NPS is on life support and can't function under the new organization. They are turning it back to the old format and getting ready to cut it loose. The IC does not view CSC as a valid prime any longer.

Anonymous said...

CSC has hardly been able to deliver a quality product or service for the last few years. It's only a matter of time before the few remaining customers realize this and bail. I'm sure it will happen sooner as the quality staff are leaving in droves. Given all the cuts, I'm not really sure how they can manipulate the numbers to look as good as they do? How much longer can they keep up the shell game that CSC has become?

Anonymous said...

Oops!
From The Street
Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Computer ( CSC) as a "water-logged and getting wetter" (weak stocks crossing below support with today's range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Computer as such a stock due to the following factors:

CSC has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $50.5 million.
CSC has traded 80,680 shares today.
CSC traded in a range 213.9% of the normal price range with a price range of $2.07.
CSC traded below its daily resistance level (quality: 183 days, meaning that the stock is crossing a resistance level set by the last 183 calendar days. The resistance price is defined by the Price - $0.01 at the time of the signal).

Stocks matching the 'Water-Logged and Getting Wetter' criteria are worthwhile stocks to watch for a variety of factors including historical back testing and volatility. Trade-Ideas targets these opportunities because the stock is exhibiting an unusual behavior while displaying negative price action. In this case, the stock crossed an important inflection point; namely, "support" while at the same time the range of the stock's movement in price is twice its normal size. This large range foreshadows a possible continuation as the stock moves lower.


Anonymous said...

An interesting extract from the Q1 results transcript giving a good idea of Mr Lawrie's aim in regards moving to low cost centers.

"Well, I'll respond first. We -- in the first quarter, we concluded what we call Delivery Excellence 2 in 6 accounts. And when I say Delivery Excellence, we are going account-by-account where we work with the client on moving more work and workload to our lower-cost centers around the world. And in those 6 accounts, we saw several very important metrics. One, we saw a reduction in overall tickets. We saw an improvement in time to respond. And we saw a significant improvement in our ability to move workload to low-cost centers. So for example, we've reduced in those accounts about 500 jobs that we could move to the low-cost centers. And I just reviewed those results about 2 or 3 weeks ago, and we've made the decision now to implement that program in another 40 to 50 accounts. The other thing, and this was the most important thing to me, is we did a quick survey, what we call pulse survey, with the customers. And we saw customer satisfaction improve, and we saw, believe it or not, our own internal, meaning our own employee satisfaction, increase dramatically as a result of doing this. It's going to take a little longer to do this. So 6 accounts, we pilot it, we love the results. Now we're going to go implement it in 40. As a matter of fact, this morning, I just cut a videotape to launch this around the world with the different teams that we're working with. And although 40 may sound like a lot, there's still -- I wish we could do all 200, to tell you the truth. But we're doing this account by account so that we don't take people or jobs out that would impact, one, either our service delivery capability or customer satisfaction."

The "I wish we could do all 200", is the portion that stands out.

Anonymous said...

Yes @10:34, I thought that too. Also ML mentions a new video. Is this the one?

http://captiongenerator.com/19655/Mike-dictates-the-company-direction

Anonymous said...

Absolutely bloody brilliant, well done that man !!!

Anonymous said...

This video is ruthless and mercilessly hilarious (and I suspect more accurate in some ways than it appears). A brief moment of humor during an otherwise dreary environment. Thank you.

Anonymous said...

Poor man, being pilloried as some sort of madman who sacrificed his own people to meet his own selfish ends. And then there' s Mike........

Anonymous said...

Priceless... TY!

Anonymous said...

The company is failing as its focus on stock price instead of people continues. The actions are not aligned to the values of the company. Employee engagement is at all time low. Customers dont see the increased value from consultants as compamy is not invesing in people anymore. If employees are not learning new stuff, they cant bring new perspectives or tech to the customer. The senior mgmt sends emails citing HR action including termination every now and then. Increasing sales force can only help if you have the relevant products/ offerings. SGA is at the highest as sales people get paid even without sales. Account teams generate revenue and the people at the top get paid sales commissions. Only God or new renovated strategy can save this company...I feel for the people and customers.

Anonymous said...

Can't Sell Cloud

Anonymous said...

Why on earth would any company based outside the US let CSC anywhere near its data, either in Cloud or as part of any Services Management contract in view of the bullying and arguably unethical behaviour of the US Govt towards Yahoo?

Here is what Reuters has reported on the topic. Make up your own minds about it.

"The U.S. government in 2008 threatened to fine Yahoo Inc $250,000 a day if it failed to turn over customer data to intelligence agencies, according to documents unsealed on Thursday (11 Sept 2014).

The documents shed new light on how the government dealt with U.S. Internet companies that were reluctant to comply with orders from the secretive U.S. Foreign Intelligence Surveillance Court, which rules on government requests to conduct surveillance for national security issues"

Anonymous said...

Why does this result heighten your concerns ? if you are an existing employee and don't like what you see, move on... if you are a disgruntled ex employee look forward and not behind. You only get one chance at life, so why spend your time moaning and groaning about a corporation that is probably like many many other corporations that has and will continue to act in the way it acts. Perhaps you should concentrate on writing about real issues such as the middle east or famine in Africa or the immigration within the UK - get a life and move on...