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Confidential Annex Research Client Edition
Analysis of Computer Services Corp.’s
FY03 Business Results
Less Than Meets the Eye
Stock Rose Nearly 10% after Earnings Release, But Look Under the Hood
May 16 - The fact that Computer Sciences Corp.’s (CSC) stock rose
nearly 10% following its fourth quarter and full fiscal year 2003 earnings
release on May 13, goes to show you how easy it is to pull the wool over
Wall Street analysts’ eyes.
Goldman Sachs, for example, one of the most respected Wall Street
firms, even upgraded the stock the following day, giving the CSC shares’
rise additional impetus (see a May
14 Reuters wire report).
An even greater PR yarn-spinning feat for CSC was that its market cap soared by over $600 million on the day the Dow Jones, IBM, EDS and other major competitors’ shares declined (see “CSC Zigs as IBM, EDS Zag…”-chart).
what’s wrong with that? Well,
take a look under the CSC hood…
In short, check under the CSC hood for additional flaws, and you will find an engine that’s a lot less than meets the eye.
Declining New Contract Sales
Take CSC’s new contract sales, for example, perhaps the best indicator of what’s ahead for companies with annuity-type income streams, such as IT services firms. The company reported $7.7 billion in new business awards during its latest fiscal year (ended Mar 31), versus $11.4 billion during the previous 12 months. That’s a 32% drop!
Worse, that’s a poorer sales record than even that of a competitor half CSC’s size (CGE&Y - $7.5 billion revenues; $9.4 billion new contract sales in 2002), who is having problems of its own. CSC’s latest Book-to-Bill ratio was 0.7 versus 1.3 for CGE&Y. But unlike CSC, which is being rewarded by Wall Street for its apparent “successes,” CGE&Y is being punished for its shortcomings by the Paris bourse (see “The Ten-year Glitch,” Mar 3).
broader comparison of CSC’s latest sales record with IT services
industry’s top competitors shows that this California-based company has
by far the worst Book-to-Bill ratio of the Top 5 competitors.
In fact, CSC’s FY03 ratio was only about half that of the other
top four vendors (see the above charts).
means that CSC’s past is looking better than its future when it comes to
And that its expected FY04 revenue growth (to between $14.3 billion
to $14.7 billion, according to the company’s release, or to $14 billion,
per our forecast), will come basically from its DynCorp acquisition.
Strip that away, and you have a shrinking company.
DynCorp, CSC’s FY04 revenues would be $11 billion, down from $11.3
Its commercial business will decline by about 5% from FY03 (it had
already dropped by 6% in FY03).
And its erosion will be even steeper in the U.S. (down 9%).
leaves the U.S. government as CSC’s only real growth business.
“With the increasing demand for IT services within the U.S.
federal government, and our recent acquisition of DynCorp, we are very
well positioned to benefit from the opportunities this market presents,”
CSC’s CEO Van Honeycutt agreed in a prepared statement.
added that the 35-month federal pipeline (of new contracts) now exceeds
$39 billion, of which about $23 billion is scheduled to be awarded by
March 2004, the end of CSC’s fiscal year.
The implication being, of course, that CSC will get its share of
is often the case with CEOs who cannot boast about current or past sales
achievements, Honeycutt and other CSC executives who spoke during the May
13 teleconference with Wall Street analysts talked a lot about
He used the word no less than three times in three successive
paragraphs of the CSC release.
CSC didn’t say is how it planned to convert these “opportunities”
into profitable future business, given its dismal past sales record and
the market share losses in the global and U.S. commercial IT services
that is what sets successful CEOs apart.
Or conversely, that is what sets up opportunities for
more successful companies to try to gobble up their less fortunate rivals
Save, Spend and Split,” May 5 and “IGS
Investing in Growth,” Apr 20).
takeover opportunities are usually accentuated if the target
company loses money or has meager profit margins.
Enter CSC, again.
Its FY03 net margin of 3.9%, although up from 3% in FY02 and 2% in
FY01, is still less than even that of beleaguered EDS in a “bad” year
(5.2% in 2002), a company whose stock has been also severely punished by
And the more CSC becomes dependent on its federal government business with its strict competitive tender rules, the less likely it is to improve its profit margins. If in doubt, just check out again EDS and its once ballyhooed U.S. Navy “megadeal,” that has just cost the company $334 million in first quarter 2003 pretax charges. Profit margins? That’s a dirty word in this instance.
as CSC is trekking “back
to its future,” it’s facing a “death merchant’s” worst
nightmare - that peace may break out.
In which case CSC would once again look like fish out of water
among the top global IT services competitors, as it did when the Cold War
this may be a far-fetched fear given Dubya’s imperialistic agenda.
But governments change, as do their policies.
Prudent business leaders take that into account when devising
short, CSC is a lot less than meets the eye.
But as usual, it will probably take Wall Street some time to
For additional Annex Research reports, check out...
A selection from prior years: Analysis of CSC calendar 2000 results (Mar 26, 2000), CSC's FY2000 Business Results (May 10, 2000), Business Is Humming Nicely (Nov 3, 2000), CSC 3Q2K, CIO Survey (Feb. 29, 2000), CSC: A Mouse That Roars? (Nov 1998)
Volume XIX, No. 2003-11
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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