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A poor performance from CSC’s managed services business forced group margins lower in Q1. Operating margins are also set to be lower than previously expected for the year as a whole because of the dilutive effect of the iSOFT acquisition, which closed at the end of July. Volatile stock markets didn’t like the news, sending CSC’s share price down over 15% to a low of around $26 at one point in early US trading.
Overall, revenue in Q1 was actually up almost 10% on the same quarter a year ago to $4.03bn (Q1 FY11: $3.91bn) but margins deteriorated. Operating margins fell by 262bps to 4.46% and pre-tax margins were just 2.5%, down 290bps. Mike Laphen, CEO, put the blame firmly on the Managed Services Sector, which makes up 40% of CSC’s turnover. Revenue from that part of the business declined by almost 6% (constant currency) compared to Q1 FY11, to $1.62bn. Margins were adversely impacted by the additional costs associated with the Nordic strikes, penalties for a missed deadline on a ‘classified project overseas’ and unexpected startup costs on an outsourcing programme.
The other two parts of the business more or less met expectations. In fact, Business Solutions and Services, the home of CSC’s NPfIT contracts, showed strong revenue growth – up 17% (8% in constant currency) to $961m, almost a quarter of total turnover. A good performance from the commercial business took credit for the growth, bear in mind, however, that revenue from BSS declined by 15% in the same period a year ago.
CSC also took the opportunity to update its guidance for the year in light of the iSOFT acquisition. iSOFT isn’t big enough to make a significant impact on predicted turnover – that remains at $16.5-$17.0bn with a contribution of c$150m expected from iSOFT – but CSC has downgraded expectations for FY12 operating margins. These are now expected to be 7-7.5% compared to the 8.75-9.25% predicted before the acquisition. From FY13, however, the iSOFT business is forecast to contribute double-digit operating margins.
As usual, there were no real clues to the UK performance in CSC’s quarterly results. But it’s clear that the outcome of the still-unresolved negotiations over its NHS IT contracts is high on the corporate agenda. According to Laphen, CSC is due to meet the government in September to discuss the result of the Major Projects Authority’s review of the contract and, he hopes, conclude negotiations. Laphen stressed the company was assuming it was “on target for the MoU” and was “staffed up and ready to execute” if it gets the go ahead. But, reading between the lines, the management team isn’t quite as confident of a positive outcome as it was a few months ago - and rightly so.
