Computer Sciences Corporation (CSC) reported first quarter 2012 earnings per share (EPS) of $1.18, exceeding the Zacks Consensus Estimate of 70 cents.
Revenue
The company’s first quarter 2012 revenues moved up 3.06% from year-ago quarter’s $3.91 billion to $4.03 billion.
Business Solutions & Services (BSS), which have been identified as the growth platform, primarily boosted the revenues. Moreover, the company’s acquisition of iSoft has been accretive to the revenue growth.
North American Public Sector (NPS) revenue was $1.5 billion, down 2.4% compared with the year-ago quarter. Managed Services Sector (MSS) revenue was $1.62 billion, up 1.3% from the year-ago quarter. Business Solutions and Services (BSS) revenue was $961.0 million, up 17.0% compared with the prior-year quarter.
New Business
Across the three lines of business, new business awards for the first quarter were $2.3 billion. NPS and BSS both contributed $0.9 billion each and MSS accounted for $0.5 billion of new business.
On a year-to-date basis, new business awards are approximately $4.1 billion with a further $1.4 billion of awards for which CSC has been down-selected to one and/or the only party in negotiations.
Operating Results
CSC recorded an operating margin of 4.46%, a decrease of 262 bps from the previous-year quarter. The margin was negatively impacted by an 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.
CSC reported net income attributable to the company’s shareholders of $183.0 million, compared with $143.0 million reported in the year-ago quarter. The first quarter EPS was $1.18, up from $0.89 reported in the year-ago quarter.
Balance Sheet
The company exited the quarter with $1.67 billion in cash and cash equivalents, down from $1.84 billion reported in the previous quarter. CSC has a total debt balance of $2.42 billion, or a debt-to-capitalization ratio of 26.8%.
Guidance
The company provided its guidance for fiscal year 2012 including the iSoft acquisition. Accordingly, CSC expects new business awards in excess of $17 billion, revenues of approximately $16.2 – $17.0 billion, operating margin of between 7.00% and 7.50% 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 decent first quarter 2012 results. However, 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 (National Health Services) realization getting pushed to future quarters, things look difficult for the company.
Moreover, the demand for the company’s products in Europe is not encouraging for the upcoming quarters.
The company has a Zacks #4 Rank, implying a short-term Sell rating.
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