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Computer Sciences Beats on Q3 Earnings

Zacks Equity Research

Computer Sciences Corporation (CSC) reported third-quarter 2014 earnings from continuing operations of 98 cents per share, well ahead of the Zacks Consensus Estimate of 83 cents.

Quarter Details

Revenues decreased 8.7% from the year-ago quarter to $3.23 billion and also lagged the Zacks Consensus Estimate of $3.24 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 14.4% from the year-ago quarter to $990.0 million in the quarter, primarily due to the continuing uncertainties related to the federal budget. Moreover, the government shutdown and contract delays led to the year-over-year decline in revenues.

Revenues from Global Business Services declined 9.1% on a year-over-year basis to $1.11 billion, primarily due to a shift in business from the licensing model to a high-value business process service.

Computer Sciences generated $1.15 billion in revenues from its Global Infrastructure Services which also declined 3.1% on a year-over-year basis. In this segment, Computer Sciences witnessed higher revenue growth in  commercial cloud and commercial cyber, but failed to offset certain contract modifications.  

Computer Sciences reported a $400 million year-over-year increase in its commercial bookings during the quarter. The company’s book-to-bill ratio also improved to 1.2 from 1.0 in the year-ago period.

The company’s operating margins increased from 7.4% in the year-ago quarter to 9.8%, primarily due to lower costs and expenses (down 10.6% year over year). Moreover, margin expansion in all the business segments positively impacted margins.

Operating margins for the Global Business Services, Global Infrastructure Services and North American Public Sector increased 380 basis points (bps), 220 bps and 40 bps, respectively. Net income from continuing operations of Computer Sciences Corporation was $146 million or 98 cents per share, compared to $114.0 million or 71 cents in the year-ago period.

The company exited the quarter with $2.28 billion in cash and cash equivalents, up from $2.1 billion reported in the previous quarter. Long-term debt balance (including current portion) stood at $2.82 billion. Moreover, the company generated $529 million of cash from operating activity, up from $270 million in the previous quarter. Free cash flow came in at $324 million.

During the third quarter, Computer Sciences repurchased shares worth $125 million and paid $29 million as dividends.

Computer Sciences raised the fiscal 2014 earnings forecast from the previous range of $3.5—$3.7 per share to $3.80—$3.90. The Zacks Consensus Estimate is pegged at $3.67 per share. Revenues are expected to be up marginally on a year-over-year basis. The company expects to generate free cash flow of $550 million to $600 million in fiscal 2014.

Our Take

Computer Sciences Corporation is one of the leading players in the information technology services industry. The company reported mixed third-quarter results wherein the bottom line surpassed the Zacks Consensus Estimate but the top line lagged the same. Moreover, the company raised its fiscal 2014 guidance based on higher commercial revenues.

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. The company’s traction in the cloud and partnerships with HCL, AT&T (T), VMware (VMW) and Microsoft (MSFT) are expected to drive growth, going forward.

Moreover, the company’s continuous share buybacks and dividend payments are expected to support earnings and instill investors’ confidence.

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

Despite sales team reorganization, the revenues remain subdued. Full effect of the sales team restructuring could take more time than expected which is a near-term headwind for the company.

Currently, Computer Sciences holds a Zacks Rank #4 (Sell).

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