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Computer Sciences Beats on Q2 Earnings

Zacks Equity Research

Computer Sciences Corporation (CSC) reported second-quarter fiscal 2014 earnings from continuing operations of 93 cents per share, well ahead of the Zacks Consensus Estimate of 82 cents.

Quarter Details

Revenues decreased 9.7% from the year-ago quarter to $3.19 billion and missed the Zacks Consensus Estimate of $3.35 billion. Weak performances across all business segments resulted in the decline in revenues.

Segment-wise, revenues from Computer Sciences’ North American Public Sector (:NPS) were down 11.6% from the year-ago quarter to $1.05 billion in the quarter, primarily due to sequestration and continuing uncertainties related to the federal budget. The company is witnessing a shift in customer demand which has led to a weakness in the NPS segment.

The company reported new business booking of $4.2 billion which remained flat on a year-over-year basis but improved significantly from $2.87 billion reported in the previous quarter.

Revenues from Global Business Services declined 12.8% on a year-over-year basis to $1.04 billion, primarily due to deferment of NHS and certain software contracts. Moreover, the shift in business from a licensing model to business process services also impacted segment revenues.

Computer Sciences generated $1.21 billion in revenues from its Global Infrastructure Services which also declined 3.6% on a year-over-year basis.

The company reported a 29.0% year over year increase in operating income to $338 million. The operating margin for the quarter was 10.6% compared with 7.4% in the year-ago quarter. The improvement was mainly due to margin expansions from all the three business segments.

Operating margins for the Global Business Services, Global Infrastructure Services and North American Public Sector increased 410 basis points, 510 basis points and 290 basis points respectively. Moreover, benefits received from better contract performance and tight cost control also positively impacted margins.

Net income from continuing operations of Computer Sciences Corporation was $140.0 million or 93 cents per share, compared to $108.0 million or 69 cents in the year-ago period.

The company exited the quarter with $2.1 billion in cash and cash equivalents, up from $1.93 billion reported in the previous quarter. Long-term debt balance (including current portion) stood at $2.70 billion. Moreover, the company generated $270 million of cash from operating activity, up from $213 million in the previous quarter. Free cash flow generated amounted to $86 million.

During the second quarter, Computer Sciences repurchased 2 million shares for an estimated $102 million at an average price of $49.85 per share and paid dividends worth $30 million.

Computer Sciences expects its fiscal 2014 earnings to range between $3.5 and $3.7 per share. Revenues are expected to be down marginally on a year-over-year basis. The company expects to generate free cash flow of $550 million in fiscal 2014.

Our Take

Computer Sciences Corporation is one of the leading players in the information technology (IT) services industry. The company reported mixed second-quarter results, with the bottom line increasing year over year and beating the Zacks Consensus Estimate but revenues declining on a year-over-year basis and missing the consensus mark. Although the company’s operating segments were down on a year-over-year basis, the company’s shift toward high-margin offerings are expected to be beneficial in the long run. Moreover, the company’s continuous share buy backs and dividend payments are expected to support earnings and instill investors’ confidence.

However, the market is becoming increasingly competitive with companies like CACI International Inc. (CACI), Accenture plc (ACN) and Syntel Inc. (SYNT) making their presence felt. Delay in the government’s order renewal process and constricted federal spending are the near-term headwinds for the company.

Computer Sciences holds a Zacks Rank #3 (Hold).

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