Computer Sciences (CSC) Q4 Earnings Top, Stock Surges

Computer Sciences Corporation CSC reported fourth-quarter of fiscal 2016 non-GAAP earnings from continuing operations of 73 cents per share, which surpassed the Zacks Consensus Estimate of 68 cents per share.

Computer Sciences Corporation (CSC) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

For fiscal 2016, the company’s non-GAAP earnings per share were $2.52, increasing 13% over fiscal 2015.

In addition, the company also announced its decision to merge its business with the Enterprise Services segment of Hewlett Packard Enterprise HPE.

Following the news, shares soared nearly 28% in after-hours trading yesterday.

Quarter Details

Revenues were down 5.4% from the year-ago quarter to $1.807 billion and beat the Zacks Consensus Estimate of $1.800 billion.

Segment-wise, revenues from Global Business Services (GBS) decreased 4% on a year-over-year basis to $941 million, primarily due to a decline in Consulting revenues, which offset the growth in BPS and Big Data businesses. Revenues from new business for GBS came in at $1.1 billion during the quarter.

Global Infrastructure Services (GIS) revenues were down 6.9% from the year-ago quarter to $866 million, primarily due to a decline in revenues from the legacy business. Revenues from new business for GIS awards came in at $1.2 billion during the quarter.

The company reported bookings of $2.3 billion in the quarter.

The company’s adjusted operating income declined 29.6% year over year and came in at $138 million. Operating margin decreased 270 basis points on a year-over-year basis to 7.6%. 

Adjusted net income from continuing operations came in at $78 million or 73 cents a share during the quarter.

The company exited the quarter with $1.18 billion in cash and cash equivalents compared with $2.08 billion as on fiscal 2015-end. Long-term debt balance (including current portion) stood at $2.64 billion. Preliminary free cash outflow during the quarter came in at $66 million.

During the quarter, Computer Sciences repurchased 1.5 million shares worth $45 million and paid $20 million as dividends.

In the quarter, the company also completed the acquisition of UXC.

CSC-HP Merger Details

Computer Sciences announced its decision to merge its business with HPE’s Enterprise Services business, which will be spun off from the parent company. This deal will bring together CSC’s strengths in insurance, healthcare and financial services along with HPE’s Enterprise Services expertise in industries like transportation, pharma, technology, media and telecom. Post-merger, the combined entity will generate about $26 billion in revenues. The company plans to generate cost synergies worth $1 billion in year one and a run rate of $1.5 billion exiting year one.

Per the deal, both CSC and HPE shareholders will own about 50% of the shares each in the combined company. Following the merger, the combined company will be undertaking about $2.4 billion of HPE’s liabilities (debt, pension deficits and others).  At the same time, HPE will be receiving a $1.5 billion cash dividend with regard to the spinoff of its business.

The transaction is anticipated to close in Mar 2017.

Outlook

For fiscal 2017, the company expects revenues to grow in low double digits on a constant currency basis. This expectation includes contributions from the UXC and Xchanging acquisitions.

The company expects non-GAAP earnings to be in the range of $2.75 to $3 per share (excluding the amortization of all purchase accounting intangibles).

Our Take

Computer Sciences Corporation is one of the leading players in the information technology services industry. The merger with HPE’s business will further strengthen the company, allowing it to become a leading player in the IT services domain.

Apart from this, the company has been making strategic acquisitions to strengthen its portfolio, which should drive growth over the long run.

Following the acquisition of UXC, the company recently acquired another company Xchanging. These are expected to contribute to the company’s revenues from this fiscal itself.  Apart from these, the company has also announced plans to acquire Europe-based Aspediens, which is expected to close by Jun 2016.

Additionally, the company’s traction in the cloud and partnerships with HCL, AT&T T, VMware VMW and Microsoft are expected to drive growth, going forward.

However, the company will likely face some challenges with regard to the integration of the new businesses and the costs associated with them. Apart from this, increased competition and delay in government’s order renewal process and constricted federal spending are the other concerns.

Currently, Computer Sciences has a Zacks Rank #3 (Hold).

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