Computer Sciences Corporation (CSC) reported fourth quarter 2011 EPS of $1.01, exceeding the Zacks Consensus Estimate of 96 cents.
Revenue
The company’s fourth quarter 2011 revenue of $4.20 billion was flat with the year-ago quarter. Fiscal 2011 was a tough year as the NHS contract was pushed out further. Additionally, CSC has had a difficult time with its Nordics business and delays in federal budgets. Irrespective of this, CSC recorded positive revenue growth in the Commercial business both sequentially and year-over-year.
North American Public Sector (NPS) revenue was $1.50 billion, down 4.7% compared to the year-ago quarter. Managed Services Sector (MSS) revenue was $1.75 billion, up 3.6% from the year-ago quarter. Business Solutions and Services (BSS) revenue was $981.0 million, down 1.0% compared to the year-ago quarter.
New Business
The total new business awards for the fourth quarter were $4.0 billion. North American Public Sector (NPS) contributed approximately $0.9 billion; Business Solutions & Services (BSS) reported $1.1 billion and the Managed Services Sector (MSS) secured $2.0 billion of new business.
New business awards for the full year of $14.0 billion were comprised of $5.5 billion from NPS, $3.5 billion from BSS, and $5.0 billion from MSS.
Operating Results
CSC recorded an operating margin of 6.70%, down 39 basis points from 7.09% reported in the year-ago quarter. The margin was negatively impacted by increase in the cost of services. Moreover, the company’s government clients remained unsure of their fiscal situation and did not initiate new programs. The awards of new contracts were delayed. As a result, basic market operating conditions slowed tremendously, impacting both revenue and margins.
Computer Sciences reported net income attributable to the company’s shareholders of $171.0 million, compared to $259.0 million reported in the year-ago quarter. The fourth quarter EPS was $1.01, down from $1.66 reported in the year-ago quarter.
Balance Sheet
The company exited the quarter with $1.83 billion in cash and cash equivalents, down from $1.63 billion reported in the previous quarter. CSC has a total debt balance of $2.58 billion, or a debt-to-capitalization ratio of 25.4%. During the fourth quarter, the company used $65.0 million of cash on hand to purchase approximately 1.4 million shares under its previously-announced open market share repurchase program.
Guidance
The company provided its guidance for fiscal year 2012. Accordingly, Computer Sciences expects new business awards in excess of $17 billion, revenue of approximately $16.2 – $17.0 billion, operating margin of between 8.75% and 9.25% and EPS of approximately $4.70 – $4.80. Free cash flow is expected to be equal to or greater than 90% of net income for the year.
Our Take
CSC reported mediocre fourth quarter 2011 results. We are apprehensive about the intense competition in the IT and cloud computing space from both small and big players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, with government orders expected to dry up to a certain extent and the NHS realization getting pushed to future quarters, things look difficult for Computer Sciences.
Moreover, the demand for the company’s products in Europe is not encouraging for the upcoming quarters.
The company has a Zacks #5 Rank, implying a short-term Strong Sell rating.
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