CSC Beats, Guides in Line

The IT outsourcer beats estimates by 4 cents on lower sales.
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Updated from 4:56 p.m. EST

Computer Sciences

(CSC)

, the IT outsourcer reportedly on the selling block, posted fiscal second-quarter earnings Thursday that exceeded analysts' estimates by 4 cents on sales that were slightly short of expectations.

The company issued third-quarter guidance in line with expectations and fine-tuned its fiscal 2006 outlook by taking revenue lower and raising the lower end of its earnings targets. CSC also maintained its guidance for free cash flow for the year, despite it being significantly negative for the year to date.

The after-the-bell earnings report followed earlier Thursday news that CFO Leon Level is stepping down and will be succeeded by Michael Keane, who joined the company in September as vice president, finance.

Under generally accepted accounting principles, El Segundo, Calif.-based Computer Sciences reported net income of $99.5 million, or 53 cents a share, for the second quarter, which ended Sept. 30.

That includes a $33.1 million after-tax, noncash asset-impairment special charge related to the company's

Nortel Networks

(NT)

contract.

A year ago the company posted net income of $130.5 million, or 68 cents a share.

Earnings excluding the special charge totaled 71 cents, compared with earnings of 56 cents a share a year earlier, which exclude earnings of 12 cents a share from discontinued operations.

Analysts were most recently forecasting that the company would earn 67 cents a share, according to Thomson First Call. The company had predicted earnings in the mid-to-upper 60-cent range.

Second-quarter revenue increased 5.3% from a year ago to $3.57 billion. That fell slightly short of the consensus estimate of $3.62 billion and the company's estimate of $3.6 billion.

CSC expects fiscal third-quarter revenue to be around $3.8 billion and earnings to be roughly 85 cents a share. That's in line with analysts' estimates calling for CSC to earn 85 cents a share on $3.77 billion in sales in the third quarter.

For the full year, CSC said it expects revenue to be about $15 billion, at the lower end of previous targets ranging from $15 billion to $15.2 billion, because of an estimated $200 million to $300 million adverse impact of currency fluctuation.

Earnings per share for the year are anticipated to be in the $3.25 to $3.30 range, within the upper half of the previous range of $3.20 to $3.30.

Analysts were pegging fiscal 2006 earnings at $3.25 a share on $15.1 billion in sales.

On a postclose earnings call, management said it is on course to meeting its guidance for $350 million to $450 million in free cash flow for the year.

But analysts on the call expressed some confusion about the company's ability to reach that goal, given that the company has recorded negative cash flow of $387 million for the year to date. In response, Level noted the company is already expecting payment of $100 million on one government contract alone in this fiscal year.

CSC reported $2.5 billion in major business signings in the quarter, bringing a six-month total to about $6.2 billion. That was about in line with what analysts were expecting.

The company's federal business -- 35 % of total sales - showed a 7.5% increase in sales to $1.24 billion from $1.16 billion a year earlier. Revenue from Department of Defense-related business climbed 19.9% from a year ago to $835.4 million.

But CSC's civil agencies activities suffered an 8.7% decline in sales to $383.4 million and other federal revenue, which includes state and local government, fell to $25.3 million from $41.2 million a year ago.

CSC said it sees $30 billion in potential U.S. federal opportunities in the next 17 months, with about one-third of those scheduled for award during the remainder of the fiscal year.

CSC said second-quarter global commercial revenue increased 4.1% to $2.33 billion from $2.24 billion in the year-ago quarter. U.S. commercial revenue increased 11.3% to $1.01 billion, while European revenue fell 4.9%, or 4% in constant currency, to $983.7 million. International revenue excluding Europe jumped 13.9%, or 8% in constant currency, to $339.1 million.

CSC also said it is making big steps in hiring employees offshore, with its offshore headcount up 60% year-over-year and India headcount up 85%. That brings its total offshore workforce to 6,500 employees, including 4,600 in India. Excluding the company's federal employee base, CSC's offshore employees make up 15% of its workforce.

Separately, CSC named Michael Keane as its new CFO. Leon Level, who has served as the company's CFO for more than six years, will continue to work for the company as a corporate vice president working on strategic projects with Chairman and CEO Van Honeycutt.

"The timing of the this announcement in light of published takeover rumors certainly raises many questions and will spark even more debate about the future of CSC," Banc of America Securities analyst Abhishek Gami wrote in a note Thursday.

He speculated that the move could enable both Keane and Level to hold a CFO role in part of the company if it is broken into pieces under a takeover.

Gami has a neutral rating on CSC, and his firm has done investment banking with CSC.

Shares of CSC have soared as much as 32% to $59.90, a new 52-week high, since

The Wall Street Journal

first reported more than a week ago that three private equity firms and

Lockheed Martin

(LMT) - Get Report

were considering breaking up and buying pieces of the IT services company. The firms have either declined to comment or have not responded to phone calls seeking comment.

On the earnings call Thursday, CSC officials again declined to comment, citing a longstanding policy not to comment on speculation and rumor.

Two analysts have downgraded their ratings on CSC as its stock has hit their price targets, even though the firms are reportedly considering prices as high as $64 and $65 a share.

Shares of CSC fell $1.50, or 2.8%, to $52 in recent after-hours trading. Shares closed the regular trading session down $2.75, or 4.9%, at $53.50.