Wednesday, 20 May 2015

“Smoke gets in your eyes” or CSC Q4 FY2015 earnings



CSC announced its Q4 FY2015 earnings and held its Analyst Conference Call on May 19, a week later than in previous years. 

We had wondered why the delay, and found out yesterday, as the earnings announcement itself was overshadowed by the other news Mike Lawrie had for us. 

This posting looks solely at Q4 FY2015 earningsAnd it was “back to the future” once again with earnings beating Wall Street profit expectations (after adjusting for this unusual item and that one-off impact), allied to accelerating revenue declines.   

Non-GAAP earnings per share, excluding exceptional items, one-offs and the like, came in at $1.26, compared with Wall Street consensus of $1.20 and actual earnings of  $1.16 for Q4 FY14.   Without the unusual and/or one-time itemsEPS for the quarter was only $0.06.  

Back in the latter days of Mike Laphen’s tenure as CEO, as the quality of CSC’s profits deteriorated, we saw earnings announcements with more and more reconciliations and explanations of  “adjusting for this unusual  item and that one-off impact”.  Are we heading in that direction again? 

There was nothing remarkable about the Q4 FY2015 earnings announcement, just a worrying set of numbers. Profits are maintained by continued cutting of costs and laying-off more and more skilled technical staff.  

Revenue for Q4 FY2015 was a different story. While the US Public Sector remained almost flat with Q4 FY2014, the commercial revenue decline is accelerating, being 17% down on Q4 FY2014 in constant currency.  Neither of the two segments of commercial revenue (Global Business Solutions and Global Infrastructure Services) achieved $1 billion revenue for the quarter.    

The operating margins of Business Solutions for Q4 FY2015 were satisfactory at 13.5%,  while Infrastructure Services showed an operating loss of just over 5% for the quarter.   Mike Lawrie’s  explanation of the reasons for this loss (“price-downs, restructurings and contract completions”) is plausible but not comforting for the future. These underlying issues have been heading in CSC’s direction for quite some time and will not just go away. It is hard to see how things will improve substantially unless Mike Lawrie’s optimism about the positive impact of next generation offerings turns out to be well-founded (for once?). 

Lastly, new business bookings for Q4 FY2015 were anaemic at $3.4billion, down a massive 20% on Q4 FY2014

Thus it looks like CSC can only maintain profitability by cutting loose old loss making accounts, which many would see as sensible. However, the problem is CSC does not appear to be able to turn badly performing accounts or services into profitable ones - it just gives up on them - or indeed sell new profitable services. Anyone can slash and burn and leave the wounded to the wolves. It takes imagination to create and grow something. We see nothing about the results or announcements of yet more lay offs that will change that view.

Cutting through the smoke and one-offs,  our major “take away” from the earnings announcement is heightened concern about the continuing, indeed accelerating, revenue declines.  


prepared by Littlejohn

37 comments:

Anonymous said...

The "Stock Markets Daily" today described CSC as "Very Overpriced on Growth Expectations".

http://www.stockmarketsdaily.com/very-overpriced-on-growth-expectations-computer-sciences-corporation-nysecsc/14478/

Anonymous said...

There was a glimpse of CSC's idea of reward for superior performance is Mikey's Q&A during the earnings conference.

He said that CSC UK financial performance had improved significantly, and this had allowed CSC to fund investments in right sizing the pyramid.

Put into plain English, Mikey said that that UK financial performance had increased significantly, and to show his appreciation to the UK employees responsible for this improvement, he had decided to use the extra profit they had earned to make a load of them redundant.

Thanks, Mikey. I shall bear that in mind if I escape the planned cull of 780 people.

Anonymous said...

Here's a scary excerpt from the analyst call transcript. If this doesn't scare European employees, I don't know what will.

I've highlighted the key statements with asterixs...

-------------------

Joseph Foresi (Analyst - Janney Montgomery Scott):

Okay. And then just maybe you could provide a little bit more depth on some of the new opportunities and the initiative to continue to build out the global delivery network. What is the size of those new opportunities, cloud, digital, social, mobile, and then on the global build-out, where do we stand today and where do you hope to take it over the next 6 to 12 months?

Mike Lawrie (CEO):

We are, Paul, correct me if I'm wrong, somewhere in the mid-30%s, now, offshore?

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Paul Saleh (CFO):

I think in total, between the two businesses, close to 40%, Mike --

Mike Lawrie (CEO):

Commercial?

Paul Saleh (CFO):

Of commercial, I'm talking about -- yes, commercial.

Mike Lawrie (CEO):

So somewhere in the high 30%s and with this restructuring charge that we took in the fourth quarter, that will improve that mix probably 5 or 6 points. The bigger issue is that we really don't have a labor pyramid. We have a diamond. So part of this optimization work that we're doing is to bring a lot more people into the bottom part of this pyramid.

We have launched a very aggressive, what we call workforce optimization and workforce management process, where we expect to hire thousands of people into those parts of the pyramid. So, as a lot of these contracts are restructured and we begin to build these new offerings, we are trying to rebuild that pyramid.

****This is most noticeable in Europe. And that's where we had the most work to do.*****

Now, as I said before, we are building out a network of global delivery centers. Two in the US, Bossier City and Pittsburgh, primarily. In Asia, we've got India, obviously, and Vietnam, and the Philippines. And then we have got some centers that we're building out in Lithuania and in Bulgaria.

So those are the primary centers that we are building out and that's where we are hiring the bulk of the people. So this is an ongoing active program around what I call talent transformation.

Joseph Foresi (Analyst - Janney Montgomery Scott):

Thanks.

Operator:

James Schneider with Goldman Sachs .

James Schneider (Analyst - Goldman Sachs):

Congratulations. Following up on the earlier question, can you maybe give us a little bit more color on how much of the headcount move is to the lower-cost geographies within the U.S. that you mentioned versus how much is going to be further out off-shoring, maybe I missed the specific figures.

Mike Lawrie (CEO):

We set an objective to move -- I'm going to give you some rough numbers, so don't hold me to this. But, I'd like to see probably our near-shore -- let's just call it right-shore, somewhere in the plus 50% to 60% range. We are at about, as Paul said, high 30%s, roughly 40%.

*****So think of this as another 10% to 20%.*****

So I hate to do math in public, but you take the number of people we have in delivery, and multiply that out times 20%, 25% and you get a handle on what we intend to do over the next several years. This is an ongoing program, it's not a one-shot deal.

Because we are transforming our offerings. As our offerings transform to these next-generation services. They have an entirely different profile than the classic ITO business, and that gives us a chance to remodel the talent and remodel the workforce in a much different way.

******We are not taking people on from other companies*****

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Seems some experts are rather concerned as to how Mikey is going to be able to lead two NYSE companies at the same time.... I'm sure we know the answer is either:

1) He's going to sell one immediately (NPS)

2) Leadership like this takes exactly how much effort?

http://www.bizjournals.com/washington/blog/fedbiz_daily/2015/05/why-cscs-plan-to-put-mike-lawrie-at-the-helm-of.html?ana=yahoo

Anonymous said...

This is indeed a scary comment as not only is CSC using whatever cash it has to give the shareholders and not for investment in better products and services, it also admits the restricting these last few years has left the company with no one to do the work. I refer to those who would be at the bottom of the pyramid that is now a diamond.
It all shows that middle management has been left in place inspire of the supposed change - restructuring - reinventing of the company. On that basis Lawrie and co have failed.
I might add that I worked at CSC years ago in GIS and when they did a restructuring at that time they used a pyramid diagram to track and show how people were being taken out down one side of the pyramid at all levels. Such a fundamental management tool seems to have passed Lawrie by.

Anonymous said...

OMG.. again employees get screwed. Sorry no pay raises, we have to pay a special dividend. Oh and yeah, we are still trying to get fit, so now we will have some more re-org to do, which will be again all cost cutting done on the back of the employees. Nice how they made sure employees had less then 10% of CSC stock in their 401K, can't have them pesky employees benefitting from the cash dividend.

Anonymous said...

According to this http://www.crn.com/news/channel-programs/300076886/csc-ceo-i-missed-the-acceleration-to-cloud.htm
Laura missed the boat on Cloud Computing and admits it.
Another failure.

Anonymous said...

Please excuse my maths if I have this wrong but doesn't a special dividend of $10 paid to 141.05mln shareholders equate to $1.4bln of cost? A nice wind fall for shareholders who get a 15% 'bung' for holding their shares. That must satisfy recent 'activist' investors big-time.
Sadly it shows that the company is unable to improve and grow and that it is now turning to asset stripping.
The mercenaries who recently joined up to collect big bonuses must be visiting the yacht salesmen to see where they can spend there thirty pieces of silver,

Anonymous said...

You are only slightly wrong, its $10.50 per share, so about 1.48 billion dollars.

Yes, 15% pay day for Jana and friends. Nice vampire action. It's repeated all over Wall Street though - these guys and their ilk just smashing and breaking stuff while spouting "unlocking value" is just plain commerce raiding. Another sign of the collapse of the western economy.

NPS will be sold before FY17, you mark my words... and the money handed to shareholders and not reinvested - unless you count more money for redundancy packages as "investment"

Anonymous said...

Sorry - I couldn't resist ....

http://finance.yahoo.com/q/it?s=CSC+Insider+Transactions

April and May have been pretty good for some people ...

Anonymous said...

Employee morale just broke a new record low as stock hit a record high. Everybody has to be laid off except the huge load of middle managers that make the company diamond shape. ML objective now is to make it a pyramid by keeping all middle managers in charge, layoff some more senior technical staff and bring a couple thousand new graduates. If you were a senior specialist or architect and still work for CSC you are now down a couple levels to show potential buyers that we have a leveraged pyramid organization. They only care about keeping the Titanic orchestra playing so that vampires get a bit richer while they wait to be extremely richer when they sell this zombie once it is properly maked-up.

Anonymous said...

At last some uk fat cats getting the chop. Some managers who you think on 60 70k actually on 130k basic plus bonus... is a real eye opener.. especially those tuped in with senior roles who then take a back seat in the floundering whsle that is csc uk. http://www.theregister.co.uk/2015/05/18/unite_csc_redundancies_unite_union/ lol. Good riddance


Service execs sdms ops managers new business tech dept leads twidfling thumbs the grim reaper now looking for you... just remember karma.. how many people have you removed to safe own skin...

Anonymous said...

I think the main problem in the UK was that CSC have missed their offshoring targets for years. When I was transitioned to CSC in 2004 we were told that 40% would be offshored which would possibly raise to 60% or more. .They also told us Techies that CSC was probably not the place to forward you career but suggested we all move into project management of offshore resources. I do remember thinking at the time my days were numbered but 9 years later I had to jump as bits of my job just couldn't seem to get offshored and the client tried to block some people getting redundancy. Even when I resigned CSC asked me no to tell the client until they did. I wanted the money but in the end didn't want to waste any more of my working life stuck with CSC.

Since then the near-shore move has taken off mostly to Spain for my old account but the stuff in India just doesn't get completely offshored and kept coming back due to indian staff walking out or getting sacked. I trained 7 different offshore guys for parts of my job and each time they left or couldn't do the job.

Maybe I might have gone in this latest cull but the important thing was to get on with my career as I'd moved nearer London ready to leave and got fed up with commuting to a dead end job. Ive got a few more years to work and could easily have ended up with a pay out but no job.

Lots more comments on the article below form CSC'ers

http://forums.channelregister.co.uk/forum/1/2015/05/12/csc_job_cuts_nearly_800_at_risk/

Anonymous said...

Record new low! I have heard this for the last 8 years.... very Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

Lots of companies bring in grads for revenue generating projects such as company audits etc... they are young, bright and keen... quite the opposite of most people in CSC UK...

I would say a good strategy..

Anonymous said...

Many CSC staff were bright and keen too and maintained that work ethic for many years. The endless rounds of redundancies put paid to that. We'll see how long those new graduates will be able to keep that enthusiastic spring in their step after a couple of cycles through the bell-curve appraisals, in which 40% of them are declared substandard no matter how 'bright and keen' they are..... and then put through the redundancy wringer.

Anonymous said...

Doe anyone have access to the following article? If so, could you please cut/paste here?

http://www.bizjournals.com/washington/print-edition/2015/05/22/csc-x-2-finally-csc-to-split-in-two-here-s-what-it.html
Thanks.

Anonymous said...

10 Unanswered Questions About The CSC Split

http://www.crn.com/slide-shows/channel-programs/300076906/10-unanswered-questions-about-the-csc-split.htm

Anonymous said...

Here's another snippet...May 11th, the official press release about the upcoming fourth quarter figures closed out with the usual waffle and as usual made a statement about the number of employees.... 72,000.

The announcement of the split said that by October 2015 the two companies would be 14,000 and 51,000 employees. So that's another 7,000 heads on the block - almost 10%.

Quite something when you consider that in a merger you can expect to reduce headcount because of duplication of core functions, whereas this should actually go the other way and need some extra functions creating.

There's quite a bit of infrastructure to disentangle to fully split off NPS from Commerical too - I think 6 months is probably very hopeful for a project timeline - especially given that at the same time you are trying to bin another 10% of staff.

I have of course made the assumption here that the projected company sizes don't include the 10-15k of "new hires" that Mikey thinks is the answer. If I have got that bit wrong, then we are looking at 45-50% wipeout of current staff.

Oh joy.

Anonymous said...

So people getting chop in the UK.

Let us say the aim is people on £100k basic + benefits. So would be looking at account execs, SDMs, those department managers who seem to talk a lot but not do a lot, PMs living on the back of others, operations managers (what do they do?), architects, legal, accountant execs, new business leads who never get any new business, general higher echelons (but £100k is still low hanging fruit).

So add 40% on 100k basic to include pension, csc benefits, bonus (ok not paid... but still a cost on the books), office expenses, no doubt they do fill boots on travel etc... we would be looking at £140k a year per person saving.

Once cut annual saving in region £110 million - worth having!

Also the minions reporting to these people can take up the core work actually required and on the false hope of promotion and pay rewards.. the minions will do anything to not get the chop themselves.

Not long now.... never know.. might be in time for the summer....

Anonymous said...

To: Anon 07.57

Your comments are spot on if you believe there will a split into two public companies.

But if you believe, as I do, that the sale of NPS is already in progress, then it all looks feasible.

The split has to be done in 6 months, as the acquirer of NPS will not wait any longer.

The infrastructure does not need to be disentangled, as minimal infrastructure will move over with the sale of NPS; the acquirer will use its own existing infrastructure of Finance, HR, Legal and so on. CSC will go through the motions of identifying the infrastructure relating to NPS, but just so they will know who to make redundant on D+1 of the NPS sale.

Anonymous said...

Sorry - but on the NPS side, the infrastructure has been a significant part of customer solutions for years. The "20-Net" has been allocated and incorporated into hardware, security and applications prior to corporate policy.

CSC "owns" 20.0.0.0 - 20.255.255.255 address range. To accomplish Lawries' objective, CSC will have to:
* Spend the time, money and energy to properly separate ( re-IP ) the address space from the customers (This isn't going to happen because there isn't enough time, CSC won't spend a dime on anything other than executive perks and the staff is getting pretty well worn out.)
* Build yet another "cost take" out solution with shortcuts, re-purposed equipment (read: end of life); underestimated assumptions / overestimated capabilities (this is how the B&P team won so many contracts)

I am no longer a CSC employee but I left behind a group of talented, hard working IT professionals that are in between the proverbial rock and a hard spot. I know what they are going through and it is a shame that they are wasting their time building not a world class solutions company but rather working their tails off to satisfy the unabated greed of a select few.

Anonymous said...

I was thinking more technical infrastructure than human based.... despite what you might think, there are big crossovers.

Anonymous said...

They will split and simply cross charge services. Is not a show stopper rg data centre floor space,
Shared HR toolsets etc .

Also i expect planning for split going full ahead.

Lawrie is laughing all the way to the bank.

He will run US split in the end. Profitable USA etc and less hassle than the other organisation.


Anonymous said...

Split special dividend ($10.5) returns on the 92% of major institutional holders. Good for investors no doubt, especially Jana, bad for the CSC and those people within that still think like entrepreneurs despite all the controls/endless/slow approval cycles put in place (usually ending with Mike and his close circle) for even minor tasks/decisions and would love to invest to develop IP, hire talent, improve competitiveness, buy companies, etc...actually generating revenue/OI.

Vanguard Group, Inc. (The) 12,766,690 $134,050,245.00
Jana Partners LLC 7,467,874 $78,412,677.00
State Street Corporation 6,086,315 $63,906,307.50
BlackRock 5,284,713 $55,489,486.50
FMR, LLC 5,190,624 $54,501,552.00
Bank of New York Mellon 4,891,770 $51,363,585.00
Acadian Asset Management 4,834,085 $50,757,892.50
Paulson & Company, Inc. 4,180,000 $43,890,000.00
Price (T.Rowe) Associates 2,677,738 $28,116,249.00
Oppenheimer Funds, Inc. 2,622,160 $27,532,680.00

Anonymous said...

The sale of NPS does make sense. It explains why Mikey was announced as the leader of both company's. No use going through the motions of 'finding' a new CEO when you are arranging for the company to be sold. More lies from Falls Church.

Anonymous said...

Quit complaining about people who optimize business and make money. Have any of you worked in the Rust Belt? We went through this in the 1970s. As for the rest of the market. CSC Federal is a true integrator, defining the standards in private cloud, which are being applied to the FedRamp and GovCloud initiatives across the globe. Commercial is having trouble, not only in our market, but across commercial globally across many of the top companies. How do work the commercial book of business in a world where they do not "Print Money" any more? On the other hand, Federal has been challenged by tremendous budget cuts to actually Perform and Deliver, readying ourselves for the massive sucking sound when youAll realize that public commercial cloud is insecure. Don't worry CSC Federal is the New Bell Labs, we will have great integrator offerings for all, and I am sure when commercial is sold to some Over Seas Company who still believes in Hiding the Money.. Federal will buy some small Rocket Science Technology Group and Rule the Space..!

Anonymous said...

http://www.bizjournals.com/washington/blog/fedbiz_daily/2015/05/csc-accuses-former-exec-competitor-of-poaching.html

So apparently you can lay off 20,000 employees, but it's illegal for someone to hire them.

Anonymous said...

@07:23 - That looks like a nasty move. Does it make CSC look like an "employer of choice" if that's the way ex-CSC'ers are treated. It would be interesting to see how the case is evidenced, do any of those cases ever wash?. The gentleman cited is recognised as a seasoned, well networked and established character, could he equally be a magnet for those who looked to pursue a career elsewhere?
One wonders, how many execs who were bought in to the farm "attracted" talent to follow them into CSC from their former employers?

Anonymous said...

Hmmmm.... performance reviews to get people out........... and reduced severance terms......... nice...

Anonymous said...

'Don't worry CSC Federal is the New Bell Labs'. You're post is a joke right?

Anonymous said...

@22:11 - You can't be serious? CSC may have had a couple of forward thinking individuals (emphasis on individual) who understand the need for securitization of virtual resources but that is where CSC's involvement ends.

If you've been with CSC for any length of time, you should know that unless you have an e-Tes charge code for work being performed, that work will not be done - period.

"optimize business and make money" - perhaps in other sectors but not in NPS where I worked. I was constantly put in the 'hot seat' to cut back on hours due to false estimates and projections from the F&A side of the house. I finally gave up and started lying on my time sheet - if it took me 2 hours to complete a task, for the sake of the company (or rather my need to avoid wasting even more time preparing detailed reports on my keystroke by keystroke activity oh and btw wasn't going to be read anyway) I reported 1 hour.

CSC as an 'integrator' or 'defining standards' ? Now I don't know whether you are serious or being funny here. Even the Wall Street analysts agree that CSC has been a 'laggard' in jumping into the virtual (cloud) space.

Oh - one more thing - I have lived in the Rust Belt for most of my life and worked for some very innovative technology companies but CSC was not one of them.

Anonymous said...

I find this practice - making it difficult to find work after creating an environment designed to making life painful and cause attrition - extremely troubling (I'm being charitable in my description). I have encountered a situation in my job search where I applied for a job and received an email from the General Counsel of the company that they would be very interested in processing my application - as soon as I get CSC to waive the non-compete agreement. Also have had to honestly check the box on several applications that I was in fact subject to anon-compete clause...I think the company at a high level would have no problems to replace my salary with someone cheaper but there's no way they are going to set that precedent. Now as my project and area are steadily downsized, the cuts cause more productivity and falling revenue.. I'm feeling increasingly trapped... argh!

Anonymous said...

Take the job and jump ship... in the UK I have seen people leave under redundancy and start Monday with the account they were for - oh who they left when TUPED out at start of contract (this only works if your good at your job,the majority of crud they TUPEd out - not interested in having back).

Also CSC will not risk upsetting a client if a person from CSC joined a current contract company they have, would not like to upset the people paying the account an income.

I would say get on with it and move onto a company that may appreciate people

Anonymous said...

So 53% or more precisely 130 senior professional PMs for the chop in the UK. I wonder what proportion will be PEs, read that as non-productive WBS baseline code abusers, and how many active, read that revenue earning project WBS billing code users, will be replaced by ‘apprentice’ new hires?
God help the affected clients!

Anonymous said...

Absolutely the most spot on two page run down on why CSC is in the mess its in and why Mikey is doing exactly the wrong thing to make it any different:

http://www.forbes.com/sites/adamhartung/2015/05/31/csc-when-all-else-fails-split/?utm_campaign=yahootix&partner=yahootix

Anonymous said...

Can they reduce severance terms just like that? - in the UK?