CSC's 1Q EPS Tops, Revenue Dips Y/Y

Computer Sciences Corporation ( CSC - Analyst Report ) reported first quarter 2013 earnings per share of 43 cents, beating the Zacks Consensus EPS Estimate of 20 cents.

Revenue

The company reported revenues of $3.96 billion in the quarter, down 2.0% year over year. Poor performance of the North American Public Sector (NPS) primarily dragged the revenues down.

During the quarter, NPS’ revenue declined 8.0% year on year to $1.37 billion, owing to the cessation of three Defense contracts. Meanwhile, the Managed Services Sector (MSS) revenue inched up 1.0% from the year-ago quarter to $1.64 billion and Business Solutions & Services (BSS) revenue improved 2.0% year on year to $0.99 billion. New Business awards were $4.0 billion in the quarter.

Operating Results

The company posted operating profit of $123.0 million compared with a profit of $126.0 million reported in the year-ago quarter. The operating profit margin for the quarter was 3.10%, deteriorating considerably from 3.12% in the year-ago quarter. The margin was negatively impacted by higher cost of services, higher selling general & administrative expense and higher interest expense.

Computer Sciences reported net income, attributable to the company’s shareholders, of $67.0 million or 43 cents per share, compared with a profit of $183.0 million or $1.17 in the year-ago quarter.

Balance Sheet

The company exited the quarter with $1.0 billion in cash and cash equivalents, down from $1.09 billion reported in the previous quarter. Long term debt balance was $1.46 billion, down from $1.49 billion in the previous quarter.

Guidance

The company is still evaluating the impact of the turnaround initiatives and is expected to issue fiscal 2013 guidance later, most probably during the next earnings call.

Recommendation

Computer Sciences is one of the leading players in the information technology (IT) services industry. CSC reported modest first quarter 2013 result, with the bottom line exceeding the Zacks Consensus Estimate, but revenue declining on a year-over-year basis. The company displayed a lackluster operating performance, whereas the new business awards improved meaningfully.

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 ) , its European exposure and strained federal budgets coupled with the troubled NHS contract prompt our bearish outlook on the stock.

Currently, CSC holds a Zacks #5 Rank (implying a short-term Strong Sell rating).