Signs of progress at CSC

There are some encouraging signs of early progress at CSC as the turnaround strategy implemented by ‘new’ President and CEO Mike Lawrie begins to take effect. The Q2 results reveal improved margins and cash flow across the business, albeit on slightly declining revenues. The results were enough to send CSC’s share price to a 52-week high; shares are currently trading up around 17% on the previous close at nearly $37.

The Q2 results show total revenue declined by 3% (1% at constant currency, ccy) to $3.85bn whilst operating margins climbed to 7.7% as reported, compared to -1.9% a year ago and 4.6% in the previous quarter. Free cash flow of $237m for the quarter was a $505m improvement on the same period a year ago thanks to improved contract management, cost takeout and the NHS Interim Agreement. Indeed, whatever else its woes, CSC is not particularly short of cash: cash and cash equivalents at the period end were $1.85bn. The progress is such that Lawrie feels able to raise the FY13 EPS target to $2.30-$2.50, that compares to the previous analyst consensus estimate of $2.24.

Unfortunately, we’re still not able to get a sense of what’s happening by geography from CSC’s results. But we’d be surprised if the UK was a bright spot for the company at the moment. Whilst there have been some reasons to be cheerful over recent months – most notably the (near final) agreement with the NHS (see CSC and NHS finally reach agreement) and the win at Service Personnel and Veterans Agency (see HP fails to ‘defend’ MoD SPVA Future contract) – in general we sense that CSC is finding it tough going in the UK. That’s particularly true in the public sector where it’s come under increased scrutiny from the Cabinet Office, and competition has never been tougher as rivals seize the opportunity to target contracts where it’s the incumbent. Theoretically things should get easier now that it’s (finally) drawn a line under the NHS debacle but no one’s pretending it’s going to be a smooth ride over the next year or so. As is the case with the turnaround strategy at a global level, it is early days and there is still a lot of work to be done.

Eligible TechMarketView subscribers can read more detailed analysis of CSC’s results in HotViewsExtra – CSC: Turning around under Lawrie.