Friday, 4 November 2016

CSC Q2 FY2017 results – It doesn’t matter anymore

In early 1959, just around the time CSC was founded, Buddy Holly made the US charts just after his death with a song called “It doesn’t matter anymore”. The title of this song seems to describe well CSC’s announcement of its Q2 FY2017 results this week. 

Who cares about CSC’s results any more? Nobody its seems. The share price hardly moved after the announcement, and some of the Analysts who have covered CSC for a long time either did not join the Earnings Call or were represented by a stand-in. Those who were there each asked a question to denote their attendance and Messrs Lawrie and Saleh went through the motions of answering without too much excitement or enthusiasm. 

EPS was slightly above expectations, on a non-GAAP basis as always. Revenue showed year-on-year growth, but this seems to be due to the impact of the inclusion of UXC and XChanging. 

Mike Lawrie re-iterated the growth in next-generation offerings, talked about a new go-to-market alliance with PwC, and said that low cost centers now accounted for 50% -55% of the workforce, expected to grow to 65%-75% in the next couple of years. He also mentioned that after moving resources from higher cost to low cost centers the next step would be to remove them completely via automation. 

The Analysts asked a few innocuous questions and the event was over. Not surprising. The only thing of any importance for Messrs Lawrie and Saleh today is ensuring that there are no bad surprises which could jeopardize the merger with HP Enterprise Services, or cause the pricing or its balance to be brought into question. (The current plan is that the “NewCo” , (Everett SpinOff) will be owned 50.1% by former shareholders of HP Enterprise Services and 49.9% by CSC shareholders). So far they are doing a good job in that regard and they do not expect any SEC regulatory issues with the merger. 

And the futures of the CSC employees in all this? Who knows! But as they reflect on their options for the future, they may find the last verse of that Buddy Holly song to be pertinent: 

"Well, you go your way and I'll go mine, 
Now and forever till the end of time, 
I'll find somebody new, 
And baby, we'll say we're through, 
And you won't matter anymore".

Wednesday, 10 August 2016

CSC Q1 FY17 earnings....or into the last quarter of the game

CSC announced their Q1 FY17 earnings. In the analyst call at which the results were announced; to use a sporting analogy, they gave the impression of a soccer team going into the last few minutes of their last match with a one goal lead which they want to preserve at all costs.

The prize at the end of the game, if they can preserve the lead, is promotion to the top tier with the merger with HPE Services. This will give CSC a new start amongst the big players, having been relegated to market mediocrity by earlier mismanagement.   So one
can understand that Messrs Lawrie and Saleh are doing their utmost to avoid any errors which could jeopardize this future.

So it was no surprise that the results showed a profit in non-GAAP accounting terms, which is what Mike Lawrie addressed, along with further earnings growth. The operating loss in GAAP accounting terms barely got a mention. It was as though GAAP accounting standards, on which all proper business reporting is done, are not worth the bother. 

The  quarter's earnings exceeded analyst expectations, as they usually do. The novelty this time being the Year-on-Year revenue growth of around 8%. This was due to the revenue of the recent
acquisitions being consolidated into the results. There was no
organic growth. New business bookings were lacklustre, but
Mike Lawrie pointed out that if one takes account of a business
booking which slipped into Q2, things look much better.

Mr Lawrie gave his usual upbeat and often repeated commentary about 'tremendous growth' in next-generation services without quantifying the level of revenue. He disclosed that CSC has won a large Business Process Services contract in the insurance industry with MetLife. But gave no financial figures on the deal. It looks to be good news as it gives the company a chance to start making up for lost ground in a segment in which CSC could have been a market leader and some would argue should have been a market leader.

The analysts' questions did not pose any real challenge to Messrs
Lawrie and Saleh,  who must have finished the earnings conference
with the feeling of a job well done, safe in the knowledge that
their one goal lead was still intact, while the clock was running down and they had moved closer to winning the match.

Sunday, 10 July 2016

The King Is Dead

Over the past few days, there have been some interesting 
comments in the Cassandra blog about the direction CSC is taking.

One school of thought is that Mike Lawrie has taken the right 
steps to respond to fast changing market conditions, and the changing expectations of analysts and investors. In doing so, he has not only saved a company which came close to bankruptcy just 4 years ago, but has revived it and given it a future via the planned merger with HP Enterprise Services.  This view says that Cassandra’s skeptical view of CSC’s future is all wrong.

Another school of thought is that CSC was being kept alive, 
and its share price maintained, by intelligent financial engineering and by hollowing out the company’s intrinsic value in the quest for quarterly Earnings Per Share. In this view of the world, at some point the financial markets and the company’s clients would figure out that CSC is more style and window-dressing than substance and when that day comes, CSC share price will come down to earth with a jolt. Cassandra’s skeptical view of CSC was broadly in line with this scenario.

In a certain way, it does not matter any more whose view is 
more accurate. The merger with HP Enterprise Services will impact CSC’s future massively, the big question is “how”. We all know that such deals are usually announced as “mergers of equals”, but that is just marketing spin.  After the merger has happened, we will find out which company has really taken over and subsumed the other. The fact that Mike Lawrie has been announced as CEO of the new company is not necessarily good news for CSC employees. Lawrie is after all the best placed person to “vaporize” CSC into HPE if that is the plan.

We at Cassandra are not hopeless nostalgics yearning for the 
time when CSC was a successful, highly regarded and a great company to work with or for.  The only thing we are really nostalgic about are the days when CSC employees were treated with respect by the management. But the market has changed, the customer needs have changed and the industry has changed forever. Elvis is dead and no amount of reported Elvis sightings will bring him back. So it is with CSC.  The merge with HPE will probably be the biggest change CSC has experienced in its history and nothing will bring CSC back to what it was.

Saturday, 4 June 2016

The Greater Fool Theory of investment

Mike Lawrie out to prove the Greater Fool Theory – once again! 

The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In other words, one may pay a price that seems "foolishly" high because one may rationally have the expectation that the item can be resold to a "greater fool". 
(credit to Wikipedia) 

Mike Lawrie has been proving the Greater Fool Theory for the past 3 years or so, in fact ever since CSC stock (pre-CSRA spin-off) went above US$40 which has always been our opinion of its intrinsic value. We thought the CSC stock bubble was about to run out of steam in 2016, because spin-offs had happened, share buybacks had been maximized, one-off mega dividend payments had been made, and high profile but essentially small acquisition had created a lot of buzz, but little revenue. Mr Lawrie has proved us wrong by pulling another rabbit out of the hat, namely the planned merger with HP Enterprise Services, to boost the share price again. 

Since the May 23rd announcement of a planned merger between HP Enterprise (HPE) Services and CSC, HPE has added some US$3 billion or 10% to its market capitalization. CSC’s share price has gone up from US$35 to just over US$50, also adding more than US$3billion to its market capitalization. 

What is behind this sudden US$6 billion increase in market capitalization ? Better business prospects, or finally some signs of real revenue growth? Not at all. No new sales are on the horizon. No new products are to be announced.Only further staff reduction are planned. The jump is based solely on the merger announcement and the expectation that Mike Lawrie will “create” shareholder value by transforming (ie hollowing out) HPE as he has done at CSC. 

History has shown that mergers of established companies which are struggling to keep up with the market rarely live up to expectations. In fact such mergers more often demonstrate that 1+1 = <1 .="" 1="" font="" nbsp="">
We think this is what will happen with CSC and HPE. 

Mike Lawrie and Paul Saleh have shown they are capable of generating share price growth well beyond any growth in rational business prospects and performance. So there may be opportunities to make short-term gains in CSC shares if one gets the timing absolutely right. But we believe there is a much bigger risk of an investor today being the “greater fool” as reality kicks in, which it will sooner or later.

Or in investment analyst speak:-

Tuesday, 31 May 2016

CSC to merge with Hewlett Packard Enterprise

We apologise for the delay in preparing this post but we were analysing the new high powered HPE/CSC Engine, see image below, and had some trouble understanding its workings. Apparently the guy with the butterfly net represents the sales force catching opportunities.

The announcement of CSC’s Q4 FY16 results were overshadowed by the announcement of the company’s merger with the Enterprise Services segment of Hewlett Packard Enterprise. 
Here are the headlines from the CSC news release:
• CSC and the Enterprise Services segment of Hewlett Packard Enterprise (HPE) to create leading pure-play global IT services company, uniquely positioned to lead clients on their digital transformations;
• New company expected to have annual revenues of $26 billion and more than 5,000 clients in 70 countries, covering every major global region;
• Combined company expected to produce first-year synergies of approximately $1 billion post-close, with a run rate of $1.5 billion by the end of year one;
• CSC and HPE shareholders each will own approximately 50 percent of shares in the new company;
• Agreements between HPE and the new company to ensure ongoing beneficial relationship; and
• Mike Lawrie to become chairman, president and CEO of combined company; Meg Whitman to join the new company’s board; board appointments will be split equally between nominees of HPE and CSC.

How much of a surprise is this? Not as much as it would have been three or four years ago! Neither HPE nor CSC are the powerhouses they used to be, and it was difficult to see how either of them was going to turn things around as more agile and focused competitors overtook them.

The news releases about the merger refer to growth, benefits for customers, world-class capabilities, technology leadership , innovation and so on. However, neither company has a stellar record in getting real value out of its acquisitions; does anybody remember what happened to EDS, which is what HP Enterprise Services is based upon? We think this is HP ditching services so that it can focus on widgets - the stuff on which the company was built. This merger is going to be tricky for the new company to keep the best talent from both sides of the house.

We shall wait and see how the merger planning plays out, but with Mike Lawrie at its helm, we fear that there will be far more focus on restructuring and cost cutting than on building. How long will it take for Mr Lawrie to drive the revenue level from US$26billion to US$20 billion? Especially as CSC and HPE’s competitors have just been given 10 months to attack them while the CSC/HPE management are too pre-occupied with their positions, remunerations and stock options in the new company to worry about today’s customers and staff!

By the way, CSC’s Q4 FY16 results were pretty much as expected! Revenue showed a Year-on-Year decline of almost 6% while Earnings per Share of US$0.73 beat Analyst estimates by US$0.05. These results show the company still shrinking and unable to make meaningful sales, while the good old EPS target continues to be hit. The thing is an EPS of $1,000 a share sounds even better yet is worthless when the company has one share outstanding. That is where CSC's strategy is taking it.

Monday, 23 May 2016

Why there is not much to say about CSC

News about CSC is thin on the ground and what there is is just replays of what went before. That is why we are not writing much about events there. We do note that with yet more news of staff reductions the addiction to slimming down continues. It seems that CSC is anorexic and needs some psychological support.

If anyone watches the Sopranos they will know that previous episodes are always worth watching without having to start the series again at Episode One. With that in mind here is Cassandra Greatest Hits Volume 1. 


A new model - again

"History repeats itself, First as Tragedy, Second as Farce."

Thursday, 31 March 2016

Timing is everything - Jana Partners’ stake in CSC

Everyone has seen examples of the basic truth that in business timing is everything.

Jana Partners gave an illustration of their view that it is time to sell CSC shares.  It has further reduced its stake in the company by 2.5 million shares (almost 35% of its holding) during the quarter to 31 March 2016 . 

Jana Partners now holds almost 4.8 million shares or 2.31% of the equity of Computer Sciences Corporation, a stake is valued at $150 million.

As a point of comparison, in May 2015 Jana Partners held 5.9% of CSC’s shares, and had options to buy a further 2.6%.

Does anybody think Jana Partners would be selling off their stake in CSC if they believed the future was as rosy as Mike Lawrie tries to tell us?  No, we don’t either! Jana reckon they have made their money, now it is time to go.  We agree!

Wednesday, 10 February 2016

CSC Q3 FY2016 results – “excluding the impact of certain items”

Excluding the impact of certain items like mortgage payments, tax bills, education costs for my children, transport costs etc, I would be financially quite well off.  And so it is with CSC’s Q3 FY2016 results.

Non-GAAP EPS was headlined as $0.71, slightly above analyst expectations,  “excluding the impact of certain (cost) items”  totaling $0.61.  These “certain items” were principally separation and transaction costs, together with an increase in the expected tax charge. They seem pretty normal and real to us, so why not just say clearly that EPS was just $0.10?

It’s as if we are going back to when CSC’s previous CEO Mike Laphen started talking about the company’s profits  “without this unusual item and that exceptional cost”.  It turned out to be his first line of defence in explaining away declining performance.  Mike Lawrie, on the other hand, when he first joined CSC, got rid of all that smoke and told us the way things were. Why are we now going back to the habits, which preceded CSC’s worst days?

Non-GAAP net income after taxes for Q3 FY2016 “after excluding certain items” totaled $124million, up from $109million in the corresponding quarter of the previous year. In the real world of GAAP (Generally Accepted Accounting Principles), with the inclusion of these “certain items”, the net income after taxes was not $124million, but just $78million. As a point of comparison, Goodwill on the balance sheet increased by $188million in the quarter.

Revenue for the quarter was $1,750 million, $100 million below expectations and down 10%  (5% in constant currency) compared to Q3 FY2015.  Nothing new here, just continuing revenue decline no matter how much spin you put on it.

No details were provided of free cash flow nor working capital movements, CFO Paul Saleh being unusually vague on the details.

Mike Lawrie’s comments to the analysts were pretty much a re-run of what we have heard before. Headwinds in the legacy business,  strength and good prospects for next-generation offerings etc etc.  He expects a great outlook for the offerings of the planned acquisitions UXC and Xchanging and can see revenue growth just over the horizon!! Just like he did for iCloud etc. Ooh I wonder what happened to them?

In general, Messrs Lawrie and Saleh seemed to give fewer specifics in their answers to the analysts than in past conferences, but curiously dwelled quite some time on the relatively small legacy short-term “non backlog” consulting business. We hope this vagueness is not the beginning of a trend back to the bad habits of a few years ago.

Mr Lawrie stated that Q3 new business bookings,  at $2.7 billion for the quarter, were the highest for over two years. At last here is our growth. But then one analyst went “off message” and reminded Mr Lawrie that in November he had explained away the poor bookings performance of Q2 FY2016  as business which had really been won in Q2, but which just slipped into Q3 FY2016.

CSC employees listening to the analyst conference were probably surprised to hear Mike Lawrie say, in answer to an analyst question, that the biggest operational obstacle to to growth at CSC is (lack of) skills and people. Well, Mike, we can help you there. Stop firing your highly skilled people, ruining moral, and reinstate training budgets.  

So there it is. CSC’s outlook is great, the future is bright and the numbers are very good, at least “excluding certain items”.  The company just needs to find skilled people!

I wonder why this story does not match what we hear from employees of all levels within CSC, or indeed see in the actions of customers who continue to walk away.