Friday, 7 November 2014

CSC Q2 FY15 earnings call - the same old song………….

CSC announced their results for Q2 FY15 (quarter to 3 October 2014) on November 6.   And to the surprise of very few CSC watchers it was the same old song:

  • EPS up by 17% compared with Q2 FY14 due to cost take-out. Beating Analysts' consensus by $0.17
  • Guidance range for FY15 EPS increased by $0.10c
  • Revenue down 4% year-on-year in constant currency
  • Operating margins stagnant at 11.3%
  • New business wins for the quarter were $3.0 billion, down almost 30% from Q2 FY14 and once again below the revenue replenishment level.
  • Operating cash flow for the quarter of $217million and free cash flow of $31million, down 20% and 64% respectively from the previous year.
  • Share repurchases were $278million or 128% of total Operating cash flow; in comparison cash flow used for investments was $184million.

Despite the positive spin put on the results by CEO Mike Lawrie  “ CSC delivers continued earnings growth”  the real story lies elsewhere in the numbers . Declining new business wins, dropping revenue levels, an exodus of experienced managers, and stagnant operating margins despite all the cost take-out suggest a business in trouble. That the company “invests” more in share buybacks; a questionable 'value-add' activity, than in developing business suggests the management team has run out of ideas and is reduced to using financial management strategies to maintain the share price. 

How long can it last?

Unusually, the share price dropped 5% after this earnings announcement, suggesting that analysts and investors are beginning to feel less comfortable with CSC’s outlook and are (finally?) developing some healthy skepticism with Mike Lawrie’s promises of a bright future.
The next few months will be interesting at CSC . 
Will Mike Lawrie manage to cut even more costs to maintain EPS before revenue levels collapse?  
Will potential buyers of CSC be deterred by the Federal prosecution related to the alleged Medicaid  fraud in NYC?  

We continue to believe CSC is becoming a shell whose value
is being lost by being continually hollowed out in the quest for short term profits. 

Investors following the advice of   “financial spreadsheet analysts”; who we believe do not look deeply into the company but just run superficial financial spreadsheets on reported headline results, forecast the CSC share price as heading towards a range of $72 to $75. They could take a real beating.