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Analysis of CSC’s Third Fiscal 2005 Quarter Business Results

Gearing Down on Purpose

Revenue, Profit Growth Slows, New Contracts Drop, Following Divestitures

PHOENIX, Feb 9 – After a year of ferocious upward spurt, Computer Sciences Corp.’s (CSC) growth engine is starting the sputter.  Revenue grew by only 5.6% in its third fiscal 2005 quarter that ended Dec 31, while earnings from continuing operations increased even more modestly (70 cents per share vs. 68 cents per share a year ago).  But at least they were $398 million of bottom line profits, not losses that needed executive tap dancing to be turned into earnings.


Sacrificing Profits for Morals

As for the divested DynCorp businesses, the company disclosed that its revenue growth rate has been higher than that of the rest of CSC, and that its profit margins during the last 15 months have been “high and rising,” according to CSC’s CFO, Leon Level.

Naturally, this raised some analysts’ eyebrows.

“They’ve been higher than the average and rising?” one perplexed analyst repeated the statement during the teleconference that followed the earnings release.

“Yes,” Level confirmed.

“So why would you divest it?”

Good question. 


Business Segment Analysis

On the bright side, CSC’s global commercial revenues increased 11% in the quarter (up 6% in constant currency) to $2.37 billion, led by the same rate of growth in the U.S. market ($994 million).  European revenues rose 15% (5% in constant currency) to $1.07 billion, while the rest of CSC’s international business was essentially flat at $039 million (down 4% in constant currency).



For the full fiscal year 2005, we expect CSC’s federal government business to decline in double digits, while its commercial revenues are likely to rise moderately (in single digits).  Coupled with the four-to-one commercial new contract awards ratio in favor of commercial customers, it seems that we are once again on the doorstep of another reversal in CSC’s business.

The pendulum seems to be swinging in the direction of commercial customers once again.  Given that bigger competitors, such as IBM, are also experiencing a revival in corporate spending, the timing of CSC’s strategy change seems to be right, whether or not Wall Street sees it just yet.


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Happy bargain hunting

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  CSC: Gearing Down on Purpose (Feb 2005); EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005);

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

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Volume XXI, Annex Bulletin 2005-04
February 9, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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