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Computer Sciences Corporation (CSC - Analyst Report) reported first-quarter 2015 earnings from continuing operations of $1.03 per share comfortably surpassing the Zacks Consensus Estimate of 94 cents.

 

Quarter Details

Although revenues were down marginally (0.5%) from the year-ago quarter to $3.24 billion it beat the Zacks Consensus Estimate of $3.19 billion.

Segment-wise, revenues from Global Business Services (GBS) increased 3.2% on a year-over-year basis to $1.09 billion, primarily due to shift in business to high-value technology software and services.

Revenues from Computer Sciences’ North American Public Sector (NPS) were down 3.3% from the year-ago quarter to $1.02 billion in the quarter, primarily due to the continuing tepid demand in the U.S. federal agencies.

Global Infrastructure Services (GIS) revenues were down 1.4% from the year-ago quarter to $1.13 billion primarily due to decline in prices and certain contract modifications.

Computer Sciences reported bookings of $2.7 billion which compared unfavorably with $2.8 billion booking in the year-ago period and $4.3 billion bookings reported in the previous quarter.

Computer Sciences’ adjusted operating margins were down from 10.4% in the year-ago quarter to 9.7%, primarily due to higher investments in developing new products and services and restructuring of certain contracts. The company witnessed 3% decrease in cost of sales and reported 19.4% increase in selling, general and administrative expenses.

Net income from continuing operations came in at $159 million compared with $161 million reported in the year-ago period.

The company exited the quarter with $2.44 billion in cash and cash equivalents compared with $2.44 billion reported in the previous quarter. Long-term debt balance (including current portion) stood at $2.89 billion. Moreover, the company generated $273 million of cash from operating activity, up from $548 million in the previous quarter. Free cash flow came in at $70 million.

During the first quarter, Computer Sciences repurchased shares worth $148 million and paid $29 million as dividends.

Fiscal 2015 Outlook

For fiscal 2015, Computer Sciences expects revenues to be flat to up marginally on a year-over-year basis. The company’s earnings forecast is expected to range between $4.35 and $4.55 per share (mid-point $4.45). The Zacks Consensus Estimate is pegged at $4.50. The company expects to generate free cash flow of approximately $700 million in fiscal 2015. The company expects to reinvest $350 to $400 million in growth initiatives and cut costs by $450 to $500 million during the same time frame.

Our Take

Computer Sciences Corporation is one of the leading players in the information technology services industry. The company reported better-than-expected first-quarter results and reiterated its fiscal 2015 outlook.

We believe that despite the company’s operating segments remained down on a year-over-year basis, the shift toward high-margin offerings will be beneficial in the long run. The company’s traction in the cloud and partnerships with HCL, AT&T (T - Analyst Report), VMware (VMW - Snapshot Report) and Microsoft (MSFT - Analyst Report) are expected to drive growth, going forward.

Moreover, the company’s continuous share buybacks and dividend payments are expected to support earnings and instill investors’ confidence.

However, the market is becoming competitive with companies like CACI International Inc. and Accenture making their presence felt. Delay in government’s order renewal process and constricted federal spending are the near-term headwinds.

Despite sales team reorganization, the revenues remain subdued. Full effect of the sales team restructuring could take more time than expected which is a near-term headwind for the company. Moreover, tepid overall booking remains a cause of concern.

Currently, Computer Sciences has a Zacks Rank #4 (Sell).

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