On Jul 3, 2014, we issued an updated research report on
Computer Sciences Corp.
Computer Sciences is one of the largest IT services firms
worldwide. A leading IT service contractor of the U.S. federal
government, accounting for 30% of fiscal 2014 revenues, the company
has ample exposure to the rapidly growing Department of Defense and
Department of Homeland Security budgets. Thus, having government
departments as a major customer lends stability to the business and
moderates revenue fluctuations.
However, federal contracts are subject to extensive and
stringent legal and regulatory hurdles, which are changed from time
to time. Also, the time taken to secure a government contract is
substantial due to the time-consuming decision-making process.
The company is focusing on the cyber business, cloud computing
market and Big Data business. A significant portion of Computer
Sciences' cyber business is contributed by the federal government
and, to an extent, the commercial sector. The company mainly
focuses on providing backup IT support to federal government
departments, and some other companies.
The company is focuses on strategic partnerships to expand its
share in the cloud computing market. For instance, the strategic
) where Computer Sciences' cloud business infrastructure will be
merged with that of AT&T. The company has also entered into a
) to develop cloud-based solutions for enterprise and public sector
clients. This has led to year-over-year growth in revenues from
commercial cloud segment (up 48% in fiscal 2014) and a strong book
to bill ratio of 4.3.
It is worth noting that, Computer Sciences has undertaken a
turnaround strategy and part of it involves rationalization of the
cost structure. Not only is it taking measures to rightsize its
workforce, but is also focusing on increasing efficiencies in the
supply chain and procurement process. Leveraging these initiatives,
the company saved approximately $570 million in fiscal 2014,
exceeding its guided range of $500-$550 million. The company has
set $450 to $500 million cost optimization target for fiscal 2015
backed by efficient supply chain management and shift to lower-cost
Nonetheless, the IT services market is becoming competitive with
companies like CACI International Inc. and
) making their presence felt. Delay in the government's order
renewal process and constricted federal spending are the near-term
headwinds for the company. Moreover, as a substantial portion of
Computer Sciences' sales (approximately 41%) is derived from
outside the U.S., currency fluctuation risks cannot be ignored.
Currently, Computer Sciences has a Zacks Rank #3 (Hold).
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