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Computer Sciences Corporation (CSC - Analyst Report) reported third quarter 2013 earnings per share of 77 cents, way ahead of the Zacks Consensus Estimate of 63 cents. Excellent cost management supported the earnings beat.

Revenues

The company reported third quarter revenues of $3.78 billion, up 2.5% year over year. Weak performances of the North American Public (NPS) segment and Managed Services Sector (MSS) were offset by solid growth in Business Solutions & Services (BSS).

Segment wise, NPS sector revenues were $1.34 in the quarter or approximately 35.4% of total company revenues. Segment revenues declined 2.8% on a year-over-year basis and 2.5% on a sequential basis. Modest contribution from Department of Defense contracts was more than offset by lower contribution from Civil agencies’ contracts. NPS signed $0.7 billion of new business during the quarter.

Managed Services Sector's revenue stood at $1.62 billion, which is around 42.8% of total revenues generated by the company. Managed Services Sector revenues fell 3.0% on a year-over-year basis but grew 2.3% from the prior quarter. New bookings were $1.4 billion.

Business Solutions & Services revenues were $853.0 million in the quarter, representing 22.6% of the total company revenues. Segment revenues jumped 28.7% on a year-over-year basis. The improvement was attributable to favorable comparison arising due to lower National Health Service revenues in the year-ago quarter. New bookings for BSS were $0.9 billion.

Operating Results

The company posted operating profit of $212.0 million, rebounding from an operating loss of $1.41 billion reported in the year-ago quarter. The operating profit margin for the quarter was 5.6% compared with loss margin of 38.3% in the year-ago quarter. The improvement was mainly due to margin expansion across all the business segments reflecting ongoing cost reduction initiatives.

Management’s cost optimization plans included efficient contract management, workforce optimization, supply chain, and demand management, and overhead reductions throughout the enterprise.

Reported net income from continuing operations was $120.0 million or 77 cents per share, compared with a loss of $1.42 billion or $9.16 in the year-ago quarter.

Balance Sheet

The company exited the quarter with $2.20 billion in cash and cash equivalents, up from $1.85 billion reported in the previous quarter. Long-term debt balance remained unchanged at $2.40 billion. Operating cash flow decreased to $413.0 million from $444.0 million in the previous year. Computer Sciences generated free cash flow of $245.0 million in the quarter.

The company bought back 1.97 million common stock worth $77.0 million and paid $31.0 million by way of dividend.

Guidance

Management asserts that the company has achieved cost optimization well ahead of its target. These measures are expected to drive $500–$600 million cost reduction in 2013. Also, the company is optimistic about cost savings of $1.0–$1.2 billion by 2014.

Banking on the cost reduction plan, which is running on track, Computer Sciences now expects 2013 earnings from continuing operations in the range of $2.50–$2.70 (up from previously expected range of $2.30–$2.50).

The company also stated that the divestiture of its Credit Solutions business to Equifax Inc. (EFX - Analyst Report) and certain other non-core businesses has generated a fund, which will be used to return shareholder value through a share repurchase program and contribution to pension fund.

Our Take

Computer Sciences reported decent third quarter 2013 results, with the bottom line beating the Zacks Consensus Estimate comprehensively and revenues growing marginally on a year-over-year basis.

The operating performance of the company improved substantially on a year-over-year basis. But new bookings growth was not encouraging enough. However, raised 2013 EPS guidance, cost containment program and a continuous share buyback program are positives.

Intense competition in the IT and cloud computing space from both small and big players such as Accenture plc. (ACN - Analyst Report) and Hewlett-Packard Company (HPQ - Analyst Report) and a challenging macroeconomic condition in Europe coupled with strained federal budgets may weigh on the stock.

Currently, Computer Sciences has a Zacks Rank #2 (Buy).

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