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IT SERVICES

Analysis of Computer Sciences Corp.’s Third (Fiscal) Quarter Results

Back to the Future

Revenue, New Contract Sales Down, Profits Up; DynCorp Acquisition to Propel CSC into a Pentagon Top 10 Supplier

PHOENIX, Feb 5 - Computer Sciences Corp. (CSC) was the first major IT services company to reports its business results for the calendar fourth quarter 2002 (its third fiscal quarter) since IBM’s encouraging Jan 16 earnings release.  And the CSC picture wasn’t so pretty. 

CSC’s revenues were down 3.5% while its earnings jumped by 20%.  But its new contract sales - a good indicator of what revenues can be expected ahead - were down sharply.  The third (fiscal) quarter new business closings were only $1.8 billion, down from $3.2 billion a year ago, and only one-tenth of IBM’s in the same period ($18.1 billion - see “IBM: Start of a Real Turnaround?,” Jan 2003). 

Undaunted, Wall Street cheered CSC’s results the day after they were released.  After boosting the company’s shares by almost 10% at one point today, investors settled for a 5.3% gain on a down Dow Jones day.  The CSC stock closed Wednesday at $32.38.

Our report then goes on to describe the transformation CSC had undergone in the 1990s, and why its current trend toward more government business is a trip "back to the future."  

Here are some additional excerpts:

Back to the Future

The growth of CSC’s government business and the contraction of its commercial revenues implies that the company may be making a trip “back to the future.”  During a seven-year period in the 1990s (1991-1998), CSC underwent one of the most dramatic transformations in the computer industry.  Its business changed from a 66% government vs. 34% commercial, to 25% government 75% commercial.  

[snip]

Hardware.  After successfully completing the sale of its money-losing storage operations to Hitachi, the remaining IBM hardware segments managed to turn in a meager growth in the fourth quarter (+1.3%).  For the full year, however, hardware revenues were down 10%.

[snip]

Sector Analysis and Outlook

For the full fiscal year 2003 (which ends March 31), we expect the CSC worldwide revenues to be down by about 2% to $11,200 (without any DynCorp revenues).  The U.S. commercial sector will likely drop by about 8% to $3.2 billion, while the international business, except for Europe, will decline by about 9% to $1.15 billion.  European revenues are expected to shrink by about 1% to $2.9 billion.

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (8 pages in print edition), along with all charts which back up our story.

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Volume XIX, No. 2003-03
February 5, 2003

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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