Finally someone else is becoming
publicly skeptical about CSC’s outlook
It sometimes seemed
that we were almost alone is having serious doubts about the sustainability of
CSC’s so-called recovery. The only people who seemed to share our view were
many of CSC’s employees.
No longer! An article from iStockAnalyst datelined
December 20 highlights the weaknesses we have talked about. Further, Deutsche
Bank analyst Bryan Keane, who has followed CSC for some time and is a regular
attendee at CSC’s quarterly earnings analyst
calls has publicly expressed his skepticism about CSC’s ability to make its
financial targets.
Full details of iStockAnalyst’s article can be found
on:
Here are some extracts of the key points it raises:
· CSC may miss its fiscal 2014 and 2017 revenue goals, as
the next phase of turnaround gets more difficult. The company's margin
expansion and cost takeout has tracked ahead of the plan, but revenue has
fallen short of expectations.
· Although there is some potential remaining for margin improvement
due to cost savings over the next few quarters, these will become more
challenging to achieve over time. CSC will soon need to improve revenue growth
to drive profitability improvement. Bryan Keane is skeptical that CSC can
accomplish a revenue turnaround near-term especially given the recent
significant business model and organizational changes.
· CSC targets revenue of about $16 billion in fiscal
2014 and $18 billion in fiscal 2017. The company is expected to generate sales
of $13.07 billion for the year ending March 2014, which is implying a drop of
12.9 percent from last year. Keane also believes CSC will clearly miss its
fiscal 2017 revenue goal of $18 billion.
· While CSC's pipeline in Cloud and applications has
grown significantly, the company is not responding fast enough to other opportunities
including moving to a consulting partnership model, improving cross-selling and
focussing away from software licenses towards a services based BPO model.
· The company plans to refresh the sales force
(currently 1,200 employees) with new hires and aim for deeper client
relationships. Additionally, it is re-evaluating its pricing
strategy as it is losing deals because of price. It also expects to expand
margins beyond fiscal 2014 by operating leverage, standardization of offerings,
mix changes towards higher value services, offshoring, leveraging shared
services, resetting the pyramid structure, as well as automation. (Blog editor’s note: all this makes us think
that what CSC needs is a true transformation program!!).
· CSC would need to report some revenue growth in its
commercial business to achieve its fiscal 2014 forecasts. The IT services
demand environment remains relatively healthy, but CSC has to go out and actually
win the deals! This is especially important as US Federal government budgets
still remain weak and may prove to be a headwind for CSC, which derives almost 40
percent of its annual revenue from federal contracts.
When you put all of this together, it reinforces our
view that it is difficult to be optimistic about the outlook for CSC unless or
until it starts generating revenue growth. And for the moment we do not see
many signs of that happening in the near-term.