CSC Beats Comfortably, Revs Lag

Computer Sciences Corporation (CSC - Analyst Report) reported third quarter 2012 earnings per share (EPS) of $1.35, way ahead of the Zacks Consensus Estimate of 57 cents.

Revenue

The company reported revenues of $3.76 billion in the quarter, down 5.8% year over year.  The year-over-year decline in revenue was primarily attributed to the reduction in the U.K. National Health Service (NHS) contract. Excluding the NHS contract, total revenue stood at $3.97 billion, reflecting an annualized decrease of 0.7%.

During the quarter, revenue from Business Solutions & Services (BSS) was $740.0 million, down 7.7% from the year ago period. After an adjustment of $204.0 million pertaining to the NHS reduction, BSS revenue was $0.94 billion. North American Public Sector (NPS) revenue was $1.38 billion, down 6.1% year over year. Managed Service Sector (MSS) revenue inched up 1.0% year over year (1.1% in constant currency) to $1.67 billion.

New Business

The company secured total new business awards of $4.1 billion across its three lines of businesses. North American Public Sector (NPS) contributed $0.8 billion, Managed Services Sector (MSS) delivered $2.4 billion, and Business Solutions & Services (BSS) closed $0.9 billion worth new business.

On a year-to-date basis, new business awards were approximately $13.0 billion; up 26% from the previous year.

Operating Results

The company posted operating loss margin of 37.0%, deteriorating considerably from the operating profit margin of 6.10% in the year-ago quarter. The margin was negatively impacted by higher cost of services and a significant goodwill impairment charge during the quarter.

Computer Sciences reported net loss, attributable to the company’s shareholders, of $1.39 billion compared with a profit of $243.0 million in the year-ago quarter. Reported loss per share of $8.97 was much wider than the EPS of $1.55 in the year-ago quarter. Excluding specific contract charge and BSS Health Impairment, adjusted net loss was $3.97 billion or $1.35 per share.

Balance Sheet

The company exited the quarter with $898.0 million in cash and cash equivalents, down from $978.0 million reported in the previous quarter. CSC had a total debt balance of $2.73 billion, down from $3.26 billion in the previous quarter.

Guidance

Earlier, in December last year, the company issued a Form 8-K regarding the NHS contract and withdrew its guidance for fiscal year 2012 citing further clarity regarding the contract.

Conclusion

Computer Sciences is one of the leading players in the information technology (IT) services industry. CSC reported modest third quarter 2012 results, with revenue declining year over year but EPS exceeding our expectation. However, we are apprehensive about the intense competition in the IT and cloud computing space from both small and big players such as Accenture plc (ACN - Snapshot Report) and Hewlett-Packard Company (HPQ - Analyst Report).

Again, with the reduction in U.K. National Health Service contract, decline in the IT spending scenario and lower European business flow, the company is expected to generate lower-than-expected revenues in the upcoming quarters.

The company has a Zacks #5 Rank, implying a short-term Strong-Sell rating.

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