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.