Friday, 26 August 2011

CSC settlement of dispute with US Government.... why yet another shock ??

Our previous blog mentioned that CSC would take a charge of $250m in Q2 FY2012 relating to its August 24 2011 settlement of a contract dispute with the US Government dating back to FY2007.

On August 10 2011, CSC said  in its Q1 FY2012 Form 10-Q SEC filing that it was "committed to vigorous pursuit of its claimed entitements (in this dispute) and believed that recovery of at least its net balance sheet value is probable".  CSC also stated that its position had been supported by outside counsel and reiterated as recently as May 20, 2011. 

CSC did give a caveat that they could not be sure of the outcome and that its position "is subject to the ongoing evaluation of new facts and information which may come to the Company's attention". This seems a normal and prudent proviso, but nothing alarming.

(Full details of this 10-Q filing can be found on the CSC website or on http://quote.morningstar.com/stock-filing/Quarterly-Report/2011/7/1/t.aspx?t=XNYS:CSC&ft=10-Q&d=04897c6169f6d037f5f041735459ba6d )


 So on August 10 2011 CSC gave the impression of being reasonably confident that there would be no significant write off arising from this dispute. Then just two weeks later, CSC announces a settlement which entails a $250million write-off, probably turning a Q2 FY2012 profit into a significant loss. And they announce it as if it is some kind of achievement for the company!! 

James Schaeffer, CSC President, North American Public Sector said in announcing the settlement. "We are pleased to be able to reach an equitable agreement with the Government while preserving our important role in a critical government program".

We have to ask what happened in the final two weeks of a 5 year old dispute to turn "vigorous pursuit of entitlements" into something which looks like capitulation or being out-negotiated?  What new facts and information came to light? What new evaluation was made? On August 10, we are led to believe that the balance sheet position was probably safe. Just two weeks later, we have  an "equitable agreement". which creates a write-off of $250million. 

Am I the only person perplexed by these events? Or is it just another in the long series of unpleasant surprises CSC shareholders have been getting recently?

Thursday, 25 August 2011

Just How Much Bad News Can CSC Continue to Get Away With?

CSC will take a Q2 FY2012 charge of approx $250Million  for dispute settlement
CSC announced on August 24th 2011 a settlement of a contract dispute with the US Government.
Details are given in CSC's Form 8K filing with the SEC:
http://marketbrief.com/csc/8k/events-or-changes-between-quar/2011/8/24/8992697/filing


The company currently estimates the financial impact of the settlement as a $250million or $1.15 EPS. Before this announcement, the Analyst consensus estimate of CSC for Q2 was a profit of $0.69 per share(source: Google Finance). So is it now a loss of $0.46 per share?. 
CSC are "pleased" by the settlement. As a shareholder, I am not. It is yet another piece of bad news falling out of the sky. Can CSC tell us when the good news they keep promising will actually start?? 

It would also be useful to know what charges CSC will have to make in the contract dispute/renegotiation, with the UK Government over the NHS contract, and what likely charges are due for the failing services in Nordic countries following the strikes and lock outs, which hit the services from mthe Copenhagen data centres.


Monday, 15 August 2011

CSC First Quarter Results - Comments and Analysis

CSC - "a very solid business with excellent prospects"
 This was Mike Laphen's description of CSC at its Q1 FY2012 earnings call of August 10th 2011. It shows that nothing much has changed. The company still tells shareholders that it is on the verge of success, there are just a few issues to sort out, and the future will be bright. Just the same as always.
How many times have we heard this message in the past?  Unfortunately, each time an outstanding issue is sorted out, a new and sometimes bigger issue seems to appear. We knew about the NHS situation, the Nordic accounting irregularities, the SEC investigation, the Audit Committee investigation, the lack of revenue growth, the Class Action lawsuit and the Long-term Investor Investigations. We can now add MSS (outsourcing) segment business performance to the list of issues.
The business highlight of the Q1 results release was the collapse of the MSS segment profitability from 10% ($175million) in Q4 FY2011, to just $9million in Q1 FY2012. In constant currency, Q1 FY2012 MSS revenue was 6% down on the same quarter of the previous year, which is a possible cause for concern given the annuity nature of MSS. The explanations given for this profitability collapse seem plausible, workforce rationalization, impact of the strike in Denmark, higher than planned project costs (again), and so on. But maybe we are beginning to see the impact of the lack of service delivery investment over the years? Read the comments from this blog to see how CSC has over years; curtailed travelling so that senior managers cannot visit the widely scattered workplaces to review work and acutally 'manage', and  cut out training which must have inevitably reduced the skills of its work force.
It seems that what the business performance failed to deliver was compensated by the accounting performance. Tax planning initiatives created an exceptional one-time credit of $85million in Q1 FY2012, which turned a poor pre-tax profit of $101million into a healthy profit after tax of $186million. One would normally expect a tax charge of about 25% or about $26million  for the quarter, so the delta impact of this credit was some $110million or almost 60% of the net profit.

Readers may recall that in FY2009, CSC similarly benefitted from a one-time tax credit of $166million. Just how many of these tax credits are there and where are they coming from? Is CSC now a finance house instead of IT Services provider?
The CSC balance sheet shows the book value of the company as $7,500million, while its market capitalization is only $4,600million. So why is the market value of CSC so much lower than its historical book value?  One indicator  is CSC's poor P/E ratio, (its share price expressed as a multiple of the annual earnings per share), which reflects the market's view of the company's future prospects. CSC's P/E ratio is only 6.20, while competitor Accenture, for example,  is 17.20, almost 3 times more. This means the market has much more confidence in Accenture's future performance than it does in CSC`s. This is corroborated by historical performance. Today, a CSC share is worth about 40% less than it was 5 years ago, while an Accenture share is worth over 95% more.
According to Michael  Laphen, CSC is "a very solid business with excellent prospects", Its share price has suffered because of a "severe overreaction in the market....which is so volatile that if you pop up with a surprise you'll get severely penalized for it"   This reassurance will no doubt come as a relief to worried shareholders.
Back in 2006, the then CSC Board of Directors reportedly turned down a takeover bid in the "low $60's" as they felt it undervalued the company. Since then, the CEO has changed, but most of the non-executive directors are still in place. Do they ever reflect on the wisdom of that decision? With CSC stock now below $30, what would the shareholders rather have? Mike Laphen's reassurances of a rosy future or the chance to accept a $60 takeover bid?

Thursday, 11 August 2011

At CSC - "Come in N° 491, your time is up"

With many of its competitors reporting strong revenue growth, we wondered how CSC's Q1 FY2012 results would come in.
Well, they were reported yesterday and were just woeful, leading to an immediate 15% drop in its share price to $27.
Compared to the same quarter of last year, revenue was flat, new business wins were down, pre-tax margin was substantially reduced. Earnings per Share (EPS) were up, but only because of a large tax credit. Without this credit EPS would have been 27 cents below the Wall Street analysts' expectations. Highlights are given on http://blogs.forbes.com/ericsavitz/?p=9595 
It seems that CSC can only continue to meet or get close to financial targets through the support of one-off items like tax credits and 'charges' or whatever. This indicates that the underlying business is indeed has not been performing for a long time now. The shareholders seem to be very patient with CSC leadership and are tolerating third rate performance. Why? 

Watch for further analysis of these results as we dig into the suporting detail.






Note: The eagle eyed amongst you will have noticed the reference to CSC's 491st position on the Dow Jones, worst performing companies table. see previous post on this subject. Given the latest announcements this position has almost certainly slipped even further.

Compare CSC to its opposition:


Valuation
Company name Price Change Chg % d | m | y Mkt Cap
CSC Computer Sciences Corp. 28.24 -3.73 -11.67% 4.38B
IBM Intl. Business Machine... 162.54 -8.07 -4.73% 194.12B
CTSH Cognizant Tech. Soluti... 60.83 -4.03 -6.21% 18.47B
HPQ Hewlett-Packard Company 29.86 -1.67 -5.30% 61.93B
SYNT Syntel, Inc. 47.71 -1.84 -3.71% 1.99B
WYY WidePoint Corporation 0.670 -0.020 -2.90% 42.16M
DRCO Dynamics Research Corp. 9.58 -0.61 -5.99% 96.79M
UIS Unisys Corporation 16.88 -0.88 -4.95% 725.43M
NCIT NCI, INC. 14.24 -0.98 -6.44% 194.81M
ZANE Zanett, Inc. 0.520 +0.020 4.00% 4.82M
DST DST Systems, Inc. 43.84 -1.95 -4.26% 2.04B

Thursday, 4 August 2011

Another CSC competitor turns in good results and healthy revenue growth.

Another CSC competitor turns in good results and healthy revenue growth.


Another competitor of CSC, outsourcer Cognizant Technologies, showed strong revenue growth, further demonstrating the fallacy that CSC's problems are all due to the market.

For the quarter to 30 June 2011, Cognizant beat Wall St estimates, announcing revenue growth of 34%, and an EPS increase of 21% compared to the same quarter of the previous year. This is the fifth consecutive quarter it has shown revenue growth in excess of 30%.
Cognizant's CEO said they continue to see stronger than anticipated demand for its increasing range of services across the industries it serves. So why does CSC keep seeing market weaknesses everywhere? Maybe it is because Cognizant has invested in new market and service offerings over the past few years, while CSC stopped investments and failed to act on changing markets and new opportunities.


Full details of Cognizant's results are on http://finance.yahoo.com/news/Cognizant-Technology-wscheats-516074810.html


Just to underline CSC's approach to investing in the future, "Graham" has just posted on WikiCSCleaks a comment that all training has been cancelled in CSC UK again just two months after the staff were given assurances that under no circumstances would this happen. It looks like CSC is still obsessed with this quarter's expense reduction opportunities, which does not bode well.


Let's see what Messrs Laphen and Mancuso have to say at CSC's Q1 FY2012 results conference on August 10.
It's maybe a good thing for CSC's directors that its 2011 Annual General meeting is being held two days before the Q1 results announcement rather than two days after!