Note: More details to come, changes are highlighted. Except where highlighted no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 1Q14 Earnings
Prev.Ed: June 4, 2013: 4Q13 Earnings Update
FLASH UPDATE [Earnings Update in progress; to follow]
On Aug 6, 2013, Computer Sciences Corporation reported 1Q14 earnings per share of $0.91, well ahead of the Zacks Consensus Estimate of $0.64. The company successfully controlled its cost, which resulted in margin expansion.
Revenues
The company reported 1Q14 revenues of $3.26 billion, down 10.3% from $3.63 billion y/y. Weak performances across all business segments resulted in the decline in revenues.
Segment wise, NPS sector’s revenues were $1.05 billion in the quarter or approximately 32.3% of the total company revenue. The segment’s revenues declined 11.0% on y/y basis. The company has witnessed a shift in customer demand, which led to a weakness in the NPS segment.
Global Business services Sector revenues stood at $1.08 billion, which is around 33.2% of the total revenue generated by the company and is down 15.3% compared to the year-ago quarter. The revenues from this segment took a beating, after adjusting for the $79.0 million of revenues from the divested IT staffing business. Moreover, the shift toward high-value offering and leading edge solutions affected the consulting business included in this segment.
North America Public Sector revenues were $1.05 billion in the quarter, representing 32.3% of the total company revenue. Segment revenues declined 11.0% on y/y basis. The company witnessed reductions in professional services due to sequestration and continues to witness delays in contract wins.
Operating Results
The company posted income from continuing operation of $304.0 million, up 108.2% from $146.0 million reported in the year-ago quarter. This increase was primarily attributed to a more than 100.0% jump in operating income. The operating margin for the quarter was 9.3% compared with 4.0% in the year-ago quarter. The improvement was mainly due to the benefits received from better contract performance and tight cost control.
Net income from continuing operation available to Computer Sciences Corporation shareholders was $141.0 million or $0.91, compared to $17.0 million or $0.10 per share in the year-ago period.
Balance Sheet & Cash Back to Shareholders
The company exited the quarter with $1.93 billion in cash and cash equivalents, down from $2.05 billion reported in the previous quarter. Long-term debt balance was $2.46 billion, slightly down from $2.50 billion. Moreover, the company generated $213 million of cash from operating activity, up from $41.0 million in the previous quarter. During 1Q14, Computer Sciences Corporation returned $157.0 million to shareholders consisting of $30.0 million in common stock dividends and $127.0 million worth of share repurchases.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON CSC
Portfolio Manager Executive Summary [Note: Only highlighted materials has been changed]
Computer Sciences Corporation (CSC) is a leading provider of information technology outsourcing, consulting and systems integration services and other professional services.
The analysts’ sentiments are mixed with roughly 70.0% in the Digest group covering CSC being neutral, 20.0% being positive and the remaining 10.0% being negative. Target prices range from a low of $32.00 to a high of $52.00, with the average being $46.36. On an average, the analysts expect a return of 6.2% from the stock based on the current price.
Cautious Stance (Neutral or equivalent outlook) – 7 analysts or 70.0% – Despite growth and margin expansion potentials, these analysts believe that the turnaround would be slow. This is due to higher-than-expected investments, which will likely push much of the operating margin expansion toward later years. They prefer to be on the sidelines due to lack of revenue visibility given expected declines in federal volumes and slow growth in commercial volumes. They also remain concerned about bookings growth, which appears to remain under pressure.
Bullish Stance (Buy or equivalent outlook) – 2 analysts or 20.0% – The analysts are positive on the company’s ongoing cost reduction initiatives and focus on reinvesting the savings for further expansion. Further they believe that focus toward cloud computing and cyber security will boost revenue streams, going forward. The analysts are also positive on the company’s decision to return shareholder value continuously and fund its pension plan. The company’s increased FY14 earnings guidance also keeps the analysts bullish.
Bearish Stance (Sell or equivalent outlook) – 1 analyst or 10.0% – The analyst believes that the company’s shares will continue to trade in the lower range till there is substantial revenue growth. The analyst also believes that revenue growth will be hindered due to lower government spending and the European debt crisis. The analyst also thinks that the heavy investments for realigning portfolio toward high-margin deals (which are less in number) could lead to share loss in the near term and might take longer to materialize.
Long-Term Outlook: The analysts believe that CSC has ample exposure to the rapidly growing Department of Defense and Department of Homeland Security budgets. However, this is also the primary reason for concern as US federal spending remains sluggish.
Jun 4, 2013
Overview [Note: Only highlighted materials has been changed]
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative Arguments· The company is the leader in IT outsourcing for the U.S. federal government, with ample exposure to the rapidly-growing Department of Defense and Department of Homeland Security budgets.
· The company has undertaken a restructuring initiative to improve FCF, margins and return on invested capital (ROIC) while at the same time help clients to lower total outsourcing costs.
· As the majority of CSC's recent wins are more service oriented and less infrastructure intensive, the company could also be able to better utilize the assets that it has accumulated in the past few years.
· Shareholder-friendly policies such as share repurchase and dividend increase is expected to drive the stock over the long term. / · As a premier IT outsourcing provider, CSC experiences seasonality in cash flow and subsequently, volatile results. The size and number of contracts signed by the company can also significantly impact its cash flow.
· Since CSC operates in international markets, negative changes in foreign government policy as well as exposure to fluctuating foreign currency may pose investment risks.
· The company has historically developed a portion of its business through acquisitions. As a result, it faces the task of integrating the acquired businesses into its current operations, which can entail certain integration risks.
· Lack of visibility on a number of contracts, weak federal demand and sluggish US macro environment are major headwinds.
California-based Computer Sciences Corporation (CSC) provides information technology (IT) outsourcing, consulting and systems integration services, and other professional services worldwide. The company also provides business process outsourcing services, such as procurement and supply chain, call centers, and customer relationship management (CRM); credit services; claims processing services; and logistics services. IT and professional services include systems integration, consulting, and other professional services. Systems integration (SI) includes designing, developing, implementing, and integrating complete information systems. Consulting and professional services include advising clients on the strategic acquisition and utilization of IT, and on business strategy, security, modeling, simulation, engineering, operations, change management, and business process re-engineering. The company also licenses software systems for the financial services markets and provides various end-to-end e-business solutions to commercial and government clients. The company’s total employee strength is approximately 98,000. More information about the company is available at its website: www.csc.com.
Note: The company’s fiscal year ends on Mar 31; fiscal year references differ from the calendar year.
Jun 4, 2013
Long-Term Growth [Note: Only highlighted materials has been changed]
According to the analysts, CSC is one of the largest IT service analysts worldwide. Being a leader in IT outsourcing for the U.S. federal government, CSC has ample exposure to the rapidly growing Department of Defense and Department of Homeland Security budgets.
The company is a major player in the enterprise resource planning (ERP) market. It uses best-in-class tools and methodologies, such as balanced scorecards and solution maps coupled with decades of experience to help clients realize the full potential of their ERP investment. The company’s success in this market is evident from a recent report published by KLAS, an independent research firm monitoring vendor performance in healthcare technology. Gartner estimates that companies spent $12.3 billion on ERP and that spending could grow to $22.1 billion by 2015. This will benefit CSC.
Computer Sciences has been supplementing growth through acquisitions over years. During 4Q13, it completed the acquisition of a privately-held company 42Six, which is a big data processing and advanced applications firm, which serves the US intelligence community and the Department of Defense. Considering its rich experience in handling government projects, it is expected that the acquisition will help in solidifying growth in its NPS segment.
Jun 4, 2013
Target Price/Valuation [Note: Only highlighted materials has been changed]
Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 20.0%↓
Neutral / 70.0%↑
Negative / 10.0%
Max. Target Price / $52.00↓
Min. Target Price / $32.00
Avg. Target Price / $46.36↑
Analysts with Target Price/Total / 7/10
Risks to the target price include greater-than-expected capital intensity resulting from the pursuit of large IT outsourcing contracts, pricing pressure, and earnings and free cash flow shortfalls in underperforming contracts.
Recent Events [Note: Only highlighted materials has been changed]
On May 29, 2013, Computer Sciences Corporation announced that it will dispose of its Applied Technology Division (ATD), which deals with base operation, range service and aviation services, to PAE for a sum of $175.0 million in cash.
This is the sixth continuous divesture that the company made over a period of seven months. This reiterates the fact that CSC is committed to rebalancing the company’s portfolio in a way, which will help them strengthen the company’s business model by focusing on core strength of the company.
As per the contract, Computer Sciences Corporation will sell the aviation maintenance, base operations and maintenance, test and training range and space range businesses, while retaining the training and simulation business. ATD’s business currently spans across the United States covering more than 20 client locations.
Again, this acquisition would be of help to PAE as it would help the company gain access to the military and space testing and training services, which will be a new capability. It will also increase PAE’s clients in the federal services market.
Moreover, this acquisition will give PAE access to 5400 trained employees, who have the experience of providing quality services to government and semi-government departments, NASA and the Department of Defence.
On May 15, 2013, Computer Sciences Corp. announced its 4Q13 results. Highlights are as follows:
§ Total revenue was $3.70 billion in 4Q13, down 7.3% y/y.
§ Reported net income was $1.57 per share in 4Q13 compared with a net loss of $1.20 per share in 4Q12. Adjusted net income was $1.27 per share in 4Q12.
§ Computer Sciences ended the quarter with strong cash and cash equivalents of $2.05 billion compared with $2.20 billion in the prior quarter. Cash from operating activities was $41.0 million versus $413.0 million in the prior quarter. The company paid a quarterly cash dividend of $0.20 per share valuing $30.0 million and bought shares worth $228.0 million.
On Feb 20, 2013, Computer Sciences Corporation announced the sale of its Enterprise Systems Integration (ESI) unit, a reseller of enterprise hardware and software and a provider of maintenance services with operations in Malaysia and Singapore. The unit will be sold to ITOCHU Techno-Solutions Corporation and ITOCHU Corporation at a consideration of $90.0 million. This divestiture marks the company’s fourth in a row. With these divestitures, the company aims to focus more on delivering next generation technology solutions and services including Cybersecurity, big data and cloud computing. The company also plans to focus on providing high-value solutions for clients in Singapore, Malaysia and other parts of Southeast Asia.
On Dec 12, 2012, Computer Sciences Corp. announced the divestiture of its Australian IT staffing unit.
Per the terms of a definitive agreement, Computer Sciences will be offloading its staffing business in Australia to South African employee services company, Adcorp Holdings Ltd for a cash value of $73.5 million. The deal will benefit Adcorp in various ways, which includes greater geographic reach, rich client base, complementing product portfolio and reduced cost of operations.
Computer Sciences intends to meet its general corporate expenses with the cash consideration after deducting tax elements.
On Dec 3, 2012, Computer Sciences signed a definitive agreement to sell its credit service business to Equifax Inc. (EFX) for $1.0 billion. After deducting tax, CSC expects total cash inflow of $750 million to $800 million. From this, the company plans to use $300 million to $400 million for share buyback, around $300 million to $400 million for its pension plans and the rest for general corporate purposes.
In October, the company divested its Italian consulting and systems integration services business to Dedagroup, an IT services company. Financial details of the deal could not be known.
It is notable that all the three business units were so far operating under its Business Solutions and Services (BSS) segment. The segment provides consulting, systems integration, business process outsourcing, and services such as staffing, repair and maintenance and credit reporting.
Now it has become clear that the company largely wants to focus on the outsourcing business. According to research firm Gartner Inc. (IT), worldwide spending on IT outsourcing services would increase 2.1% y/y to $257.1 billion. The firm also expects a boost in IT sourcing spending in 2013 buoyed by Asia/Pacific regions and North America. Europe, however, with its continuing debt issues can put a lid.
Another advisory and research firm Offshore Insights expects a surge in spending for IT outsourcing services in 2013. The firm predicts a rise of 15.0%–18.0% in spending by 2013.