CSC has announced its fourth quarter results. Revenues were $4.48 billion, up 11% (or 7% on a constant currency basis). Its fourth quarter EBIT margin was 9.2%, compared to 9.5% in the same quarter last year. CSC signed major contracts worth $2.5 billion in the quarter, which took its total for FY08 to $13.3 billion.
Ovum analyst Phil Codling said: "This was a solid financial performance from CSC to round off a solid year. For FY08 as a whole, the revenue growth metrics were the same as for the quarter (i.e. 11% topline growth, 7% in constant currency). However, if we take out the c$500 million that CSC's acquisitions contributed to FY08 revenues, organic growth looks more like four percent. That is, nonetheless, an improvement on the flat performance we saw in FY07, a fact that reflects contract revenue timings and better execution from CSC, rather than any pick-up in the market more generally.
"CSC's deal signing performance raises some question marks, however. The sum of $13.3 billion in total contract value for the year is down on the $16.9 billion bagged in FY07. Bear in mind that $11.2 billion of the FY08 signings came from the public sector, which means just $2.1 billion came from CSC's global commercial interests. CSC says some signings have slipped into FY09 and reports a reasonable start to the year, but the low level of major commercial signings is undoubtedly a weakness the company needs to address.
"In attempting to do this, it faces a tough market environment with few new opportunities for the kinds of big wins that have traditionally underpinned CSC's outsourcing business. That said, a number of developments at CSC should give the company a chance of improving its position. Not least, its acquisition of Covansys last year means it now has a 15,000-strong workforce in India, a vital resource for competing effectively in the commercial sector in both North America and Europe. Secondly, under its 'Project Accelerate' strategy, the company has begun to align itself under targeted vertical markets which, in the private sector, should give it a better focus in financial services and manufacturing in particular. Finally, CSC is also focusing attention on what it terms 'mid-sized' deals (i.e. those typically $50-350 million in value) and appears to be gaining some traction here as the outsourcing market continues to fragment.
"There is also a positive sign in the fourth quarter numbers that CSC can do better in the commercial sector. Global commercial revenues actually counterbalanced a flatter quarterly performance in the federal sector with an impressive 16% top-line growth (or 11% in constant currency) to $3.0 billion. CSC's improved and expanded consulting and projects capability accounts for much of this growth, not least in Europe (where the company's performance has remained significantly better than in FY07).
"Overall, CSC is right to be aiming a little higher in the coming year (with a projection of 5-7% organic growth), particularly as CEO Mike Laphen appears to think he can capitalise on a likely wobble at major competitor EDS as it undergoes its integration with HP. (Whether such a wobble occurs is of course in the hands of EDS, HP, their partners and their customers, not CSC, but we acknowledge that it's a possibility.) The last two years have seen CSC put some key strategic pieces in place to improve its performance. Having restructured and refocused the business, it's now time to show that CSC really can accelerate. And in a competitive landscape that is about to be shaken up by the merger of HP and EDS, CSC needs to make it clear that it provides customers with a long-term alternative to its much larger competitors."
