Computer Sciences Corporation (CSC) reported second quarter 2012 earnings per share (EPS) of 94 cents, way ahead of the Zacks Consensus Estimate of 68 cents.
Revenue
The company’s second quarter 2012 revenues inched up 0.79% year over year to $3.97 billion.
The company also witnessed year-over-year revenue growth in the company’s Business Solutions & Services (BSS) segment and the Managed Service Sector (MSS). Within the commercial segment, strong revenue growth in the BSS segment somewhat compensated the weak MSS performance.
North American Public Sector (NPS) revenue came in at $1.43 billion, down 5.3% year over year. Managed Services Sector (MSS) revenue was $1.62 billion, almost flat from the year-ago quarter. Business Solutions and Services (BSS) revenue was $945.0 million, up 8.75% compared with the prior-year quarter.
New Business
Across the three lines of business, new business awards in the reported quarter were $6.6 billion. North American Public Sector (NPS) contributed $3.1 billion, MSS reported $2.6 billion, and Business Solutions & Services closed $0.9 billion of new business.
On a year-to-date basis, new business awards stood at approximately $8.9 billion as opposed to $7.9 billion in the year-ago period.
During the first half of the year the company recognized total bookings worth $8.9 billion, based on the company’s investments in its sales force.
Operating Results
CSC posted operating loss margin of 1.89%, deteriorating considerably from the operating profit margin of 7.75% in the year-ago quarter. The margin was negatively impacted by higher cost of services, and a significant goodwill impairment charge during the quarter.
This apart, the company incurred settlement charges of $1.0 billion relating to the US government, a cash payment of $277.0 million and a non-cash pre-tax charge of $269.0 million.
CSC reported net income attributable to the company’s shareholders of $2.87 billion, compared with a profit of $184.0 million reported in the year-ago quarter. The second quarter loss per share of $18.56 was much wider than an EPS of $1.18 reported in the year-ago quarter. Excluding special items claim settlement, iSOFT acquisition and goodwill impairment charges, adjusted net income was $3.97 billion or 94 cents per share.
Balance Sheet
The company exited the quarter with $978.0 million in cash and cash equivalents, down from $1.67 billion reported in the previous quarter. CSC had a total debt balance of $3.26 billion, or a debt-to-capitalization ratio of 40.8%.
Guidance
The company provided its guidance for fiscal 2012 including the iSoft acquisition. CSC expects new business awards in excess of $17 billion, revenues of approximately $16.5 – $16.7 billion, operating margin of 6.00% and EPS of approximately $4.05 – $4.10. Free cash flow is expected to be equal to or greater than 90% of net income for the year.
Conclusion
CSC Inc. is one of the leading players in the information technology (IT) services industry. CSC reported modest second quarter 2012 results, with revenue remaining almost flat year over year. However, we are apprehensive about the intense competition in the IT and cloud computing space from both small and big players such as Accenture plc (ACN) and Hewlett-Packard Company (HPQ).
Moreover, with government orders expected to dry up to a certain extent and the NHS (National Health Services) business is expected to slow down, 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 #3 Rank, implying a short-term Hold rating.
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