Monday, 18 November 2013

More disappearings at CSC?

In the past we have mentioned that CSC seems to be prone to what are known in South America as 'disappearings'. This is when someone who was around yesterday is not around today. In South American regimes it is because the government has a hand in it.
But what about when senior execs in CSC who were said to be good performers with lots of company publicity to back them suddenly disappear off the radar?

Any disappearings cause rumours to flourish which is why we wonder why Mr Lawrie allows the 'disappearing' of senior execs to go unremarked. After all if they are no good and were part of CSC's down fall he should say so, or if they left for genuine differences of opinion he should be adult about it and say so. If he took the action to remove them for poor performance he should proudly announce to world that he has done this and that it is part of his plans for CSC. That way he would gain credibility at a trying time for CSC. He would also gain the confidence of its employees. 

However, what does Mr Lawrie have to say about; Joachim Lauterbach who was good enough to be appointed as stand-in for leadership of CSC Germany but has now disappeared, and Siki Giunta who was in many press statements by CSC in the past, even as recently as 2012 as being announced as 'among women worth watching' who has also disappeared?

As things stand many senior employees must be wondering if they will get a 'mid-night knock on the door' soon.

We leave the final words to Wikipedia:
Disappearances work on two levels: not only do they silence opponents and critics who have disappeared, but they also create uncertainty and fear in the wider community, silencing others who would oppose and criticise. Disappearances entail the violation of many fundamental human rights. For the disappeared person, these include the right to liberty, the right to personal security and humane treatment (including freedom from torture), the right to a fair trial, to legal counsel and to equal protection under the law, and the right of presumption of innocence among others. Their families, who often spend the rest of their lives searching for information on the disappeared, are also victims.

Saturday, 2 November 2013

CSC – Is it really "Waterlogged and getting Wetter" ?


“Waterlogged and getting wetter” was how investment consultant Trading Ideas LLC  described CSC shares after the company announced its Q2 FY2014 earnings at its Analyst Conference Call.  Other analysts described the results as “mixed”, while CSC talked about “continued earnings and margin growth”.  The share price dropped around 8% after the announcement, but has since recovered about half of that loss.

Highlights of the Q2 FY2014 results were:


  Revenues totaled US$ 3.187 billion, some US$ 0.176 billion or 5% below Analysts’ expectations and down 9.7% from the US$ 3.528 billion recorded in Q2 FY2013.

  Operating margin of 10.6% compared to 7.4% in the same quarter of FY2013.

  Net Income of US$ 209 million, being US$ 71 million higher than Q2 FY2013.

  EPS from continuing operations reached US$ 0.93c  per share, up by US$ 0.24c  from Q2 FY2013, and US$ 0.07c  above the consensus of Analysts’ expectations.

  New Business Bookings totaled US$ 4.2 billion and included a renewal of US$ 1 billion in the North American Public Sector. The total was roughly flat with Q2 FY2013,

The announced results were pretty much as we at Cassandra had expected. EPS was strong and exceeded analyst expectations due to cost cutting (this of course cannot go one forever).  Revenue was once again below analyst expectations and continued its year-on-year decline.  New Business Bookings were higher than revenue for the first time in 4 quarters, due to the US$ 1 billion NPS renewal.
The Analyst Conference was also what we expected,  being very professionally managed by Lawrie with lots of positive statements about the quarter’s results and CSC’s future prospects. CEO Mike Lawrie and CFO PaulSaleh gave articulate and polished performances. They had prepared themselves thoroughly, answered the Analysts’ questions with assurance and appeared to know and understand their numbers.

So is all well with CSC now?  We have to say that we remain unconvinced.  
We do not like the trend of Messrs  Lawrie and Saleh talking increasingly  about “normalized” numbers, with phrases such as “after adjusting for  this impact and that unusual item”…..  Executives “normalize” numbers only when it embellishes the message they wish to give. We saw too much of this practice  in CSC around 2011.
Mr Lawrie gave few specific details about progress of turnaround program progress, whilst in previous earnings conferences he seemed more than happy to give specifics and numbers.  Nevertheless, he was upbeat and optimistic about CSC’s future.

He spoke about early success in commercial new business bookings, about higher value offerings, about industry-specific partner-led consulting, about moving from lumpy software licence deals to business process services offerings, about next generation offerings, about cyber and big data revenues, about what the Infochimps and ServiceMesh  acquisitions will bring to CSC and about “strengthening CSC’s cloud leadership” . But he kept his comments on these topics, as with the cost take-out program,  to the generic and high-level.

Here are some of the things we wonder about:
With all these positive messages, why does CSC not seem to announce new business wins anymore? And if the future is so bright, why spend US$ 100 million to repurchase shares at almost US$ 50 per share?Does the company not have any more attractive investment opportunities?
Cost of services has dropped from 77% to 73% of revenue in 12 months. How much of this is due to genuine operating efficiency improvements, for example better project management, and how much is due to the termination of highly skilled technical staff which is creating a hole in the delivery organization?
Selling, General & Administrative costs were 8.4% of revenue in Q2 FY2013.  They are now fully 10% of revenue. How much of this is investment in direct sales and sales support skills? Or are we seeing a return of the bloated Headquarters micromanagement and bureaucracy that CSC suffered from in the past?

The above are some of the questions we have.  Unfortunately, many of the analysts’ questions were less than challengingFor example; Nobody asked about the large Allianz deal in Europe which IBM is reported to have snatched from CSC’s grasp at the last minute. Nobody asked why there appear to be differences between the CSC and the UK Government stories about the NHS contract termination. Nobody challenged the reasons given for the delay in restructuring in Germany.  Nobody asked about the recent media comments about the alleged failure of a major Healthcare project in the US. Nobody asked why AMP in Australia, a long standing CSC client, is competitively bidding a new services opportunity.

In summary, is CSC “showing early signs of success in its ability to grow”, as Mike Lawrie claims?  Or is it to use Trading Ideas LLC’s phrase “waterlogged and getting wetter”?   

In giving such a polished performance this week, Mr Lawrie bought himself more time with the markets and most of the analyst community. But when will he start delivering the goods, including the growth, he has promised?

Friday, 1 November 2013

SEC investigation into CSC’s accounting irregularities - are things becoming more serious for some individuals?


CSC had gone quiet about the SEC investigation into its accounting irregularities in Nordics, Australia and the Managed Services Sector. In fact things were so quiet that many people assumed the investigation had quietly come to a close.

Not at all!  
Bloomberg has today reported that certain CSC US and nonUS based employees have received Wells Notices. Fuller details on:
http://www.bloomberg.com/news/2013-10-31/csc-shares-tumble-after-employees-receive-wells-notices-from-sec.html?cmpid=street

Wells Notices are often a precursor of the SEC taking enforcement action, which may include legal proceedings, against a company and/or certain employees.

CSC disclosed in 2010 that accounting irregularities had been discovered in its Nordic Region. The amount involved eventually totaled over US$ 90 millionIt then announced further irregularities had been found in its Managed Services Sector and Australia.
The SEC announced an investigation into these irregularities, subsequent to which CSC’s Audit Committee announced an independent investigation of its own. Quite why it took CSC’s Audit Committee so many months and the announcement of anSEC investigation to investigate the irregularities is something we found puzzling.
Whatever the Wells Notices turn out to be the precursors of, it is unlikely to be good news for CSC or for the employees involved..