The second quarter of FY12 is one that CSC would prefer not to dwell on. Today it revealed a pre-tax loss for the quarter of $2.85b and a loss per share of $18.6. Most of the damage was done by a goodwill impairment charge of $2.69b. The charge arose from the company’s annual goodwill test, which showed a 'discontinuity' between the market price and book value of goodwill as a result of CSC’s lower stock price. The results also bore the scars of a non-cash pre-tax charge of $269m, related to the settlement of its contract dispute with the US Government, and the integration of recently acquired iSOFT (see iSOFT faces the final curtain for starters).
To make matters worse, CSC’s cash position was severely affected by the $265m refund of advanced payments to the NHS (see CSC and NPfIT: the saga continues). Free cash-flow for the quarter was minus $268m compared to +$178m in the same period last year. By the end of the period, cash and cash equivalents were down to $978m, compared to $2.6b a year ago, and debt as a percentage of total capitalisation jumped to almost 41% from 25% six months earlier.
On the plus side, new business awards in the first half were up 13% on last year at $8.9b and revenue was stable (up 1% on the same quarter a year ago to $3.97b). The underlying business has also seen margins squeezed though. Excluding the impact of US Government settlement and iSOFT acquisition, operating margins are down to 5.6% from 7.8% in Q2 last year.
By line of business, the Business Solutions and Services division performed best growing revenue by 2.4% at constant currency. The North American Public Sector business declined by 4.8%, hit particularly by reductions in spending by the Department of Defense, while the Managed Service Sector saw revenues fall by 2.8% (all at ccy).
Of course, like many others, we have a particular interest in the iSOFT business and CSC’s megadeals with the UK NHS, the future of which is still the subject of negotiations with the Department of Health. The small print in the results reveals that iSOFT contributed $32m of revenue in Q2 but made an operating loss of $27m. Globally, the Health business (excluding iSOFT) grew by 8% but outgoing CEO Mike Laphen confirmed that NHS revenue in the period declined as a result of a ‘lower schedule of contract milestones’ – no surprise there then!
On the analyst call Laphen also revealed that the DoH and CSC have a target to reach agreement on their NHS IT contracts by ‘the end of 2011' - but he didn’t sound overly confident that would be achieved. The good news on the NHS front is that CSC and DoH have agreed that contract milestones have been met at three early adopters of iSOFT's Lorenzo 1.9 electronic patient record software. The ‘new’ fourth early adopter (Humber’s mental health trust) is now preparing for go-live (see here for the background). If that goes to plan then CSC should be due a significant milestone payment from the NHS.
CSC has downgraded its guidance for the full year, but it’s still assuming that the NHS contracts continue ‘within the framework of the MOU’. Revenue for FY12 is now expected to be $16.5-$16.7b (compared to the $16.5b-$17b predicted in August) with an operating margin of c4.5% (including the claims settlement and goodwill charge), down from previous expectations of 7-7.5%. But with ‘significant NHS revenue’ with a ‘meaningful margin rate’ expected by the company in Q4, there is clearly a risk the outlook could change yet again.