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Analysis of Computer Sciences Corp.’s Calendar 2000 Results

CSC Hits a Big Bump!

Stock Drops 40%, Sheds $3.7 Billion, after Warnings of Lower Earnings

PHOENIX, Mar. 26 - World’s third-largest IT services competitor will hit a big bump in the fourth quarter of its fiscal year 2001, which ends March 31, Computer Science Corp.’s (CSC) management warned investors just over a week ago.  The company expects to lose money in the quarter after a $100 million to $150 million charge related to firing of 700 to 900 employees, and some other acquisition and accounts receivable issues.

What followed the Mar. 16 announcement was a $3.7 billion-blood bath, in which 40% of the company’s market value evaporated in a single day (Mar. 19).  And the CSC stock has stayed down, hovering around $32, less than one-third of its 12-month high of nearly $100 (reached on May 31, 2000).

And no wonder.  CSC cited a litany of reasons for its pessimistic outlook for the fourth fiscal quarter and the first half of the 2002 fiscal year (quoting):

·        Rapidly changing mix of services and deteriorating overall demand for consulting and systems integration services, including ERP and Net Markets in Europe, which are causing unanticipated reduction in global staff utilization and billing rate realization;

·        An accelerating decline both in healthcare software license sales, which have historically made a significant contribution to margins, and in related services;

·        Profitability pressure experienced on two of its recent outsourcing engagements;

·        Reduced demand for out-of-scope consulting and systems integration projects for certain commercial outsourcing clients, and recently revised cost estimates on a few fixed price projects;

·        Lengthening sales cycles across many of its commercial businesses and;

·        Increasingly adverse factors in the Internet and healthcare markets, which are causing the write off of some of the company's receivables and an increase in the allowance for doubtful accounts.

Text Box:  What the company didn’t say, however, is probably as significant as the above six factors.  CSC just isn’t winning enough profitable big deals.  After three quarters of the current fiscal year (i.e., as of the end of December), the company had closed $9.4 billion in new contracts. 

“We’re ahead of last year’s major new business award pace,” CSC’s chairman Van Honeycutt boasted in a Feb. 5 release.  Nevertheless, that left CSC, the No. 3 IT services competitor, well behind No. 1 and 2 companies - IBM and EDS - which signed $56.4 billion and $32.6 billion respectively in new business last year. 

The tone at the CSC Mar.19 teleconference was decidedly less boastful and more subdued.  An upturn in consulting and systems integration operations may not occur until the second half of next year, Honeycutt said. 

As a result, the company expects a FY02 revenue growth rate of only 13% to 15%.  That’s a considerably drop-off from the 21% compound annual growth rates CSC chalked up in the last 10 years, which made it the fastest growing among the top five IT services companies (see “IT Services Heptathlon,” Annex Bulletin 2000-11, 4/17/2001).

We figure that CSC will grow the revenues by 12% to $11.8 billion in its FY02, accompanied by a 41% growth in its net earnings to $432 million, or $2.56 per share.

Happy bargain hunting!

Bob Djurdjevic















































Volume XVII, No. 2001-07
March 26, 2001

Editor: Bob Djurdjevic
Published by Annex Research

P.O. Box 97100,      Phoenix, Arizona 85060-7100
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