CSC's 2Q EPS Outpaces Estimates

Computer Sciences Corporation ( CSC - Analyst Report ) reported second quarter 2013 earnings per share of 83 cents, way ahead of the Zacks Consensus Estimate of 47 cents.

Revenue

The company reported second quarter revenues of $3.85 billion in the quarter, down 2.8% year over year. This happened as a result of revenue declines across segments.

Segment wise, North American Public (NPS) sector revenues were $1.04 in the quarter or approximately 35.7% of total company revenues. The segment’s revenue declined 4.2% on a year-over-year basis, but remained flat on a sequential basis. Department of Defense contracts contributed 68% of NPS revenue, which moved down by 3% on a year-over-year basis.

Managed Services Sector's (MSS) revenue stood at $1.58 billion, which is around 41.0% of the total revenue generated by the company. MSS revenue declined by 2.0% on a year-over-year basis. Business in this segment benefited due to new client engagements and the acquisition of AppLabs, as this acquisition contributed around $25.0 million of revenue in the quarter, but the company is yet to realize its full potential of the acquisition.

The Business Solutions & Services revenue was $921.0 million in the quarter, representing 23.3% of the total company revenues. The segment revenue declined by 3.0% on a year-over-year basis. This particular segment witnessed iSOFT contribution of $49.0 million during the quarter and grew by $17 million on a year–over–year basis.

Operating Results

The company posted operating profit of $298.0 million rebounding from an operating loss of $75.35 million reported in the year-ago quarter. The operating profit margin for the quarter was 7.7%, up from loss margin of 1.9% in the year-ago quarter. Operating margin improved by 289 basis points, excluding the impact of a $269 million U.S. Claims settlement during the quarter.

Computer Sciences reported net income, attributable to the company’s shareholders, of $130.0 million or 83 cents per share, compared with a loss of $2.87 billion or $18.56 in the year-ago quarter.

Balance Sheet

The company exited the quarter with $1.85 billion in cash and cash equivalents, up from $1.0 billion reported in the previous quarter. Long term debt balance was $2.40 billion, up from $1.46 billion in the previous quarter. Operating cash flow improved to $444.0 million from $438.0 million in the previous year.

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.

Our Take

Computer Sciences is one of the leading players in the information technology (IT) services industry. CSC reported decent second quarter 2013 results, with the bottom line way ahead of the Zacks Consensus Estimate, but revenue declining marginally on a year-over-year basis.

The operating performance of the company improved substantially on a year-over-year basis, whereas the new business awards improved to a considerable extent. 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 ) , and challenging macroeconomic condition in European coupled with strained federal budgets may weigh on the stock.

The company has a Zacks #2 Rank, implying a short-term Buy rating.