CSC Delivers Decent Numbers - Analyst Blog

Computer Sciences Corporation (CSC) reported second quarter 2011 earnings per share (EPS) of $1.18, exceeding the Zacks Consensus Estimate of $1.17. Revenue of $3.97 billion, remained below the Zacks Consensus Estimate of $3.99 billion.

Revenue

The company's second quarter 2011 revenue of $3.97 billion slipped 1.63% from the year-ago quarter, mainly due to the decline in revenue in the North American Public Sector (NPS) segment.

Revenue from NPS was $1.55 billion, down 4.5% from the year-ago quarter, mainly due to the higher base effect as the prior-year quarter's revenue increased from higher claims settlement. The Managed Services Sector (MSS) generated $1.58 billion in revenue, up 0.1% from the year-ago quarter. Business Solutions and Services (BSS) revenue was $0.87 billion, up 0.6% year over year.

New Business

The company won $4.5 billion worth of new business in the second quarter. Of the three lines of business, NPS accounted for $2.9 billion of new business wins, BSS for $0.9 billion and MSS for $0.8 billion.

Operating Results

Computer Sciences recorded an operating margin of 7.75%, down 69 basis points from 8.44% in the year-ago quarter. The margin was adversely affected by the decline in total revenue, which exceeded the decline in operating cost. 

Computer Sciences reported net income attributable to the company's shareholders of $184.0 million, which was down 14.8% from $216.0 million reported in the year-ago quarter. The second quarter EPS was $1.18, down from $1.40 reported in the year-ago quarter.

Balance Sheet

Computer Sciences generated $402.0 million of operating cash flows, which declined from $572.0 million from the prior-year quarter, and free cash flow of $175.0 million was well below the $429.0 million generated in the second quarter of 2010.

The company exited the quarter with $2.65 billion of cash and cash equivalents, up from $2.43 billion reported in the previous quarter. The debt balance was $3.83 billion at the end of the quarter and debt to capitalization ratio declined by 90 basis points from the last quarter to 35.9%.

Guidance

Computer Sciences provided its guidance for fiscal year 2011. Accordingly, Computer Sciences expects new business awards in excess of $18.5 billion, revenue in the range of $16.5 to $17.0 billion, operating margin of between 8.5% and 9.0% and EPS in the range of $5.35– $5.45. Free cash flow is expected to be equal to or greater than 90% of net income. 

Recommendation

We are optimistic about the company's outlook for fiscal 2011, its enhanced product portfolio, growing customer base and the revival in the macro economy. On the other hand, we are a bit concerned about the intense competition in the IT and cloud computing space from players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, demand from Computer Sciences' European customers may be muted in the upcoming quarters.

Currently, Computer Sciences has a Zacks #4 Rank (short-term Sell rating).