This was another quarter of margin expansion for CSC, across all three reporting segments, driven primarily by cost takeout efforts, which have been huge. And cash flow is improving: FCF guidance for the full year has been revised upwards to ~$600m.

FY 2014 has also been a year of rebuilding the portfolio, with partnerships a key element. FY 2015 will be a year when we should begin to see growth in its commercial units, though NPS continues to look challenged.

Cost Takeout Ahead of Plan: Investments include Expansion of Sales Engine

CSC achieved ~ $120m of cost savings in the quarter. Year-to-date, savings are ~$415m and the company is likely to be at the high end of its cost takeout target of $500m to $550m for full FY 2014.

CSC is reinvesting, taking some of these savings and some of the proceeds from recent divestments into initiatives such as adding sales resources to expand market coverage and updating its financial and HR systems.  Reinvestments were ~$80m for the quarter and $195m YTD. For full FY 2014, it is targeting reinvestments in the range of $300m to $325m

Commercial Sector Business:

The strongest unit in CSC currently is GBS.

• Revenue was down 4% in constant currency; management highlights that it was flat y/y after taking into account actions such as the repositioning of the consulting business to higher-value offerings, the shifting from a licensing model to more BPO services and the deferral of revenue on NHS and other iSOFT transactions under service accounting
• Segment margin is up 38 pts y/y to 12.1% 
• There have been some senior sales hires recently in GBS, and this may have helped the book-to-bill of 1.8 this quarter. GBS bookings included a growth in consulting bookings of 92%, and a tenfold increase in BPO bookings.

Overall commercial sector bookings (including GIS) were $2.7bn, a book-to-bill of 1.2, an improvement both y/y and sequentially.

What about GIS? Although its revenue decline is more muted (still being impacted by the restructuring of some contracts), GIS is not doing as well as GBS in terms of new bookings: book-to-bill this quarter was just 0.65. CSC is repositioning its GIS sales engine and re-architecting its sales model to be able to operate more effectively in targeting smaller deals: contracts of under $50m, and even under $1m. This is a huge shift in focus from its traditional heartland of big deals (no $100m+ contract wins this quarter); one that involves a change in things such as culture and processes, new domain skills, and also more solution architects. 

Current initiatives in the GIS sales organization include

• Building out regional sales hubs, including within EMEA in the U.K., the Nordics, and Central and Eastern Europe
• Update its pricing to be more price-competitive on smaller transactions.

CSC has indicated that it expects to see an improvement in GIS book-to-bill from this quarter.

Overall with its commercial sector business, CSC is focusing on what it calls “next generation” offerings, such as Cloud, StorageaaS and Cyber. It highlights that its Cyber revenue was up 140% and Cloud revenue was up around 32% (both from a small base).

The aim is to become much smarter at landing smaller wins, e.g. a consulting engagement around application modernization, and then expand.

Management highlights that the company has been busy assembling assets and forming strategic partnerships to position more strongly in an IT services market in which SMAC features prominently. The big investment by CSC this year has been its acquisition of ServiceMesh which, inter alia, will help link its infrastructure and application modernization businesses. And there have been some key partnership announcements including:

• A global alliance with AT&T to merge CSC's cloud consulting and application expertise with AT&T's network and cloud infrastructure platform. This alliance is significant financially for CSC as it reduces its capital intensity while providing it with global scale for running modernized application workloads
• A strategic partnership with HCL to create an application modernization delivery network work and jointly create a Banking CoE for application modernization. HCL also is going to white label and resell CSC's BizCloud
• Announced today, a partnership with Amazon Web Services to create a Cloud CoE using services from Amazon. The ServiceMesh platform will be used to catalog enterprise applications and orchestrate them to run across Amazon's AWS platform and CSC's BizCloud.

NPS:

NPS performed "in line with expectations" in the quarter, given the federal government shut-down  (which accounted for about 3 points of the 14.4% decline) and the ongoing budget uncertainties. Interestingly, Unisys’ federal sector business (which includes its technology business) does not appear to have been hit as badly as CSC’s last quarter.

Looking ahead, NPS book-to-bill was just 0.6 and guidance for FY 2014 is a low double digit revenue decline. Once CSC's strongest business, NPS is now something of a problem child  in a challenging market.

When will we see a return to Topline Growth at CSC?

If we go back to FY 2009, CSC reported global revenues of $16.74bn and was declaring its ambition to become the second largest IT services provider globally. There has been a lot of water under the bridge since then.

Today, as well as it being a much leaner organization, there is a clear drive to be competitive in a changing IT services market: the series of partnerships - and we should expect to see more announcements - reflect its awareness that it cannot go it alone.

FY 2015 will be a year when the success of CSC’s efforts to transform its go to market into the commercial sector will be more evident

Revenue guidance for FY 2014 has been trimmed downwards slightly to mid-single-digit decline overall with a slight decline in commercial revenues (slight y/y growth in Q4) and low double digit decline in NPS.

In FY 2015, CSC expects to show growth in its commercial sector business, led by GBS, with GIS still impacted by restructuring some contracts. StorageaaS signings (small but numerous) should begin to convert into revenue in FY 2015.

For details of CSC's Q3 FY 2014 results, see http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=13007&id=201898&fv=2

NelsonHall will be publishing an updated Key Vendor Assessment on CSC shortly: for details, contact [email protected]