Computer Sciences Beats on Q4 Earnings, Lags Revs - Analyst Blog

Computer Sciences Corporation CSC reported fourth-quarter 2014 earnings from continuing operations of $1.09 per share, well ahead of the Zacks Consensus Estimate of $1.03.

Quarter Details

Revenues decreased 4.9% from the year-ago quarter to $3.33 billion and also lagged the Zacks Consensus Estimate of $3.38 billion. Weak performances across all segments resulted led to the revenue decline. Moreover, decline in federal business and a certain change in the commercial consulting business were partly responsible for the dismal revenue performance.

Segment-wise, revenues from Global Business Services (GBS) declined 3.5% on a year-over-year basis to $1.18 billion, primarily due near-term impact of shift in business to a high-value technology services. This shift is expected to have long-term benefits.  

Revenues from Computer Sciences' North American Public Sector (NPS) were down 11.3% from the year-ago quarter to $1.0 billion in the quarter, primarily due to the continuing tepid demand in the U.S. federal market.

Nonetheless, Global Infrastructure Services GIS revenues increased marginally (up 0.2%) on a year-over-year basis primarily driven by cloud business (up 108% year over year) and commercial cyber business (up 78% year over year), which partially offset the decline in prices and certain contract modifications.

Computer Sciences reported $1.3 billion year-over-year increase in its commercial bookings during the quarter. The company's book-to-bill ratio was 1.4.

Computer Sciences' adjusted operating margins increased from 10.2% in the year-ago quarter to 11.4%, primarily due to lower operating costs. The company witnessed 9.2% decrease in cost of sales and reported 4.2% decline in selling, general and administrative expenses.

Net income from continuing operations was $165 million or $1.09 per share, compared with $203 million or $1.27 in the year-ago period.

The company exited the quarter with $2.44 billion in cash and cash equivalents, up from $2.28 billion reported in the previous quarter. Long-term debt balance (including current portion) stood at $2.87 billion. Moreover, the company generated $548 million of cash from operating activity, up from $529 million in the previous quarter. Free cash flow came in at $288 million.

During the quarter, Computer Sciences repurchased shares worth $151 million and paid $29 million as dividends. Moreover, the company increased the dividend by 15% and subsequently authorized $1.5 billion share repurchase program.

Fiscal 2015 Outlook

For fiscal 2015, Computer Sciences expects revenues to be flat to up marginally on a year-over-year basis. The company's earnings forecast is expected to range between $4.35 and $4.55 (mid-point $4.45). The Zacks Consensus Estimate is pegged at $4.45 per share. The company expects to generate free cash flow of approximately $700 million in fiscal 2015. The company expects to reinvest $350 to $400 million in growth initiatives and cut costs by $450 to $500 million during the same time frame.

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. Although the company's fiscal 2015 bottom-line guidance was modest, the top-line forecast was not encouraging.

We believe that despite the company's operating segments remained down on a year-over-year basis, the shift toward high-margin offerings will 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 government's order renewal process and constricted federal spending are the near-term headwinds.

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 has a Zacks Rank #3 (Hold).