Computer Sciences Beats on Q2 Earnings, Misses Revenues

Computer Sciences CorporationCSC reported second-quarter of fiscal 2016 non-GAAP earnings from continuing operations of $1.26 per share, comfortably surpassing the Zacks Consensus Estimate of $1.15. Also, reported earnings increased on a year-over-year basis attributable to lower tax rate and improvement in commercial margin.

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Quarter Details

Revenues were down 11.9% from the year-ago quarter to $2.712 billion and missed the Zacks Consensus Estimate of $2.805 billion.

Segment-wise, revenues from Global Business Services (GBS) decreased 11.2% on a year-over-year basis to $891 million, primarily due to a shift in consulting business and contract completions.

Global Infrastructure Services (GIS) revenues were down 17.6% from the year-ago quarter to $854 million, primarily due to a decline in prices and certain contract modifications.

Revenues from Computer Sciences' North American Public Sector (NPS) were down 7.1% on a year-over-year basis and came in at $967 million. The year-over-year decline was primarily due to program completions and changes in task orders.

Computer Sciences reported bookings of $2.9 billion, down 3.3% on a year-over-year basis.

Computer Sciences' adjusted operating income (excluding all one-time items) was down 5.2% year over year and came in at $331 million, primarily due to a lower revenue base. The company reported a 17.3% decrease in selling, general and administrative expenses. This in turn impacted operating margin, which increased 88 basis points on a year-over-year basis.

Adjusted net income from continuing operations came in at $177 million compared with $172 million reported in the year-ago period.

The company exited the quarter with $1.82 billion in cash and cash equivalents compared with $2.19 billion reported in the previous quarter. Long-term debt balance (including current portion) was $2.61 billion. Moreover, the company generated $441 million of cash from operating activity during six months ended Oct 31, 2015. Free cash flow during the quarter came in at $53 million.

During the second quarter, Computer Sciences repurchased 0.2 million shares million and paid $32 million as dividends.

Fiscal 2016 Outlook

Computer Sciences reiterated its fiscal 2016 guidance. The company expects revenues to be flat to slightly down on a constant currency basis. Revenues from the NPS segment are expected to be slightly up while the commercial segment is expected to be flat to slightly down. Non-GAAP earnings per share are forecast to be in the range of $4.75-$5.05 (mid-point $4.9). The Zacks Consensus Estimate is pegged at $4.94 per share. Free cash flow for fiscal 2016 is expected to be in the range of $750 million-$800 million.

Our Take

Computer Sciences Corporation is one of the leading players in the information technology services industry. The company reported mixed second-quarter results wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same. The company retained its fiscal 2016 earnings outlook.

Going forward, we believe that despite the company's revenues being down on a year-over-year basis, the shift toward higher margin offerings will be beneficial over the long run. The company's traction in the cloud and partnerships with HCL, AT&T T , VMware VMW and Microsoft MSFT are expected to drive growth, going forward.

Moreover, the company's continuous share buybacks and dividend payments are expected to support earnings and boost investors' confidence.

However, the market is becoming competitive with companies like CACI International Inc. and Accenture making their presence felt. Delay in government's order renewal process and constricted federal spending are the near-term headwinds. Moreover, tepid overall bookings remain a cause of concern.

Currently, Computer Sciences has a Zacks Rank #4 (Sell).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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