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Computer Sciences Targets Cost Rationalization; Risks Remain

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On Jul 3, 2014, we issued an updated research report on Computer Sciences Corp. .

Computer Sciences is one of the largest IT services firms worldwide. A leading IT service contractor of the U.S. federal government, accounting for 30% of fiscal 2014 revenues, the company has ample exposure to the rapidly growing Department of Defense and Department of Homeland Security budgets. Thus, having government departments as a major customer lends stability to the business and moderates revenue fluctuations.

However, federal contracts are subject to extensive and stringent legal and regulatory hurdles, which are changed from time to time. Also, the time taken to secure a government contract is substantial due to the time-consuming decision-making process.

The company is focusing on the cyber business, cloud computing market and Big Data business. A significant portion of Computer Sciences’ cyber business is contributed by the federal government and, to an extent, the commercial sector. The company mainly focuses on providing backup IT support to federal government departments, and some other companies.

The company is focuses on strategic partnerships to expand its share in the cloud computing market. For instance, the strategic partnership with AT&T (T - Free Report) where Computer Sciences’ cloud business infrastructure will be merged with that of AT&T. The company has also entered into a partnership with Amazon (AMZN - Free Report) to develop cloud-based solutions for enterprise and public sector clients. This has led to year-over-year growth in revenues from commercial cloud segment (up 48% in fiscal 2014) and a strong book to bill ratio of 4.3.

It is worth noting that, Computer Sciences has undertaken a turnaround strategy and part of it involves rationalization of the cost structure. Not only is it taking measures to rightsize its workforce, but is also focusing on increasing efficiencies in the supply chain and procurement process. Leveraging these initiatives, the company saved approximately $570 million in fiscal 2014, exceeding its guided range of $500–$550 million. The company has set $450 to $500 million cost optimization target for fiscal 2015 backed by efficient supply chain management and shift to lower-cost delivery centers.

Nonetheless, the IT services market is becoming competitive with companies like CACI International Inc. and Accenture (ACN - Free Report) making their presence felt. Delay in the government’s order renewal process and constricted federal spending are the near-term headwinds for the company. Moreover, as a substantial portion of Computer Sciences’ sales (approximately 41%) is derived from outside the U.S., currency fluctuation risks cannot be ignored.

Currently, Computer Sciences has a Zacks Rank #3 (Hold).

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