Excerpts from analysis of CSC's FY06 business results (May 25, 2006)

Annex Bulletin 2006-24 May 25, 2006

Excerpts from CONFIDENTIAL client edition

IT SERVICES

Updated 5/31/06, 10:50PM PDT, adds Competitors Chart

Analysis of Computer Sciences' FY2006 Business Results

Up for Grabs

Those Who Can Do; Those Who Can't Sell Out; Or Buy Back Own Shares; Time for Change at Helm?

ST. PETERSBURG, Russia, May 25 - "Those who can do; those who can't teach," goes an old proverb. Applied to Computer Sciences Corp. (CSC) latest results, the modified saying would be "those who can do; those who can't sell out; or buy back own shares."

After the disappointing fourth quarter results (flat revenues; halved profits); that capped a flaccid year (FY06; ended Mar 31 - revenues up only 2%; profits down 15%), sharply contrasted by stellar results of its major competitors, CSC management's recipes for the turnaround seem to be "look for a buyer" and/or "buy back shares." They might as well have put up a sign "gone fishing," or "see you at 19th green."

[snip]

HP-CSC Merger?

Ironically, such increases mitigate against a CSC buyout by making the target company more expensive for a potential suitor. As you can see from the above chart, CSC stock has already appreciated over 20% since a year ago, about the same as Accenture's, for example, even though the two companies' fundamentals are vastly different (see "Accenture Wins 'Gold'," Apr 2006).

[snip]

Toward a Tripolar World?

Should such an HP-CSC merger ever take place, it would push the IT services industry in the direction of a tripolar world. IBM, Fujitsu and HP - the three leading conglomerates and technological foundries - would be at the center of gravity in each of the three techno-universes (see above chart).

[snip]

Business Results

Meanwhile, back to CSC's latest results, the company reported net earnings of $199.4 million, or $1.05 a share, for the quarter. A year ago, the IT services company had $411.8 million, or $2.13 a share. Last year's number included $245.2 million in income from discontinued operations.

[snip]

New Contracts Down Sharply

One reason for the downcast outlook and meager growth in FY07 is a sharp decline in the new contract signings that the company experiences in FY06, especially in the commercial sector. For the full year, new bookings totaled $12.1 billion, down 26% from the previous year's total (from continuing operations - see the chart).

[snip]

Another Passenger on Crowded Ship to India

And what is CSC doing about it? Nothing that we heard. CSC executives also told the analysts that they are planning to reduce headcount by 4,300 employees in 2007, and by 700 in 2008. Pretax restructuring charges will total $375 million. The company said it also plans to relocate 2,000 jobs to India.

Now that's an "original" thought! (Most of CSC competitors already have tens of thousands of people in India). Another passenger on a ship to India. And that's going to boost the growth and the new contract sales?

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.

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Volume XXII, Annex Newsflash 2006-24
May 25, 2006

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