CSC Stock Plunges After Warning of Slight Slowdown in Quarterly Growth
Shares of Computer Sciences Corp. plunged 14.8% Tuesday after the El Segundo-based information technology services giant warned its revenue growth had slowed below Wall Street’s expectations.
Computer Sciences said its current quarterly revenues would grow 11% to 13%, down from its previous projections of 14% to 15%. Although analysts said the slower growth reflects pressures facing most big information technology outsourcing firms, CSC executives emphasized that the company is still on track to meet its goal of 18% annual revenue growth.
CSC also said Tuesday that it would buy Policy Management Services, a computer consulting businesses that caters to the insurance and financial services industries, for $568 million in cash. The deal will make financial services the biggest business inside CSC, with more than $2.7 billion in annual revenue from 1,200 clients in 60 countries, analysts said.
Although CSC said the acquisition of Policy Management, commonly known as Mynd, would boost its earnings this year, investors bailed out of the stock. CSC shares dropped $12.38 Tuesday to close at $71 in extremely heavy volume on the New York Stock Exchange.
CSC said there were several reasons for its slowing growth, including foreign currency fluctuations, a reduction in contracts to deploy enterprise resource planning software systems, and a severe falloff in Y2K-related business.
“Most of the large cap outsourcing companies are in the same situation, whether it’s EDS, Unisys, IBM Global Services, Keane or Perot Systems,” said Moshe Katri, an analyst who follows the computer-services industry for SG Cowen Securities in New York.
On June 9, Electronic Data Systems cut its projections for second-quarter revenue growth by more than half. EDS’ shares tumbled 24% that day, losing $13.94 to close at $43.88. It has since eased to $41.94, closing down $1.69 Tuesday on the NYSE.
Computer Sciences has a diverse roster of clients ranging from the Internal Revenue Service to Deutsche Bank and helps them implement big computer systems. CSC has helped the royal family of Saudi Arabia set up a computer system to track the millions of Muslims who make pilgrimages to Mecca every year, and it is helping San Diego County digitize many government services.
But computer consulting firms have found it difficult to outpace last year’s revenues, which were flush with lucrative contracts to identify and fix problems related to the so-called Y2K bug. Computer systems that read dates in two digits instead of four could have become confused on Jan. 1 if they interpreted the year “00” as 1900 instead of 2000.
Additionally, demand from Fortune 100 companies for enterprise resource planning, or ERP, systems has slipped. ERP systems manage all of a company’s business processes from sales to inventory and payroll, and they are expensive. Some firms that spent generously to tackle the Y2K bug last year have been forced to delay spending on ERP projects.
CSC has been especially hard hit by drops in the euro and the British pound. About 27% of its $9.4 billion in revenue last year came from European consulting contracts. CSC made a profit of $403 million in its 2000 fiscal year, which ended March 31.
CSC executives emphasized that they remain bullish on the company’s prospects for the year.
“We are still comfortable with an annual revenue growth rate of 18%, to about $11 billion,” CSC spokesman Frank Pollare said. “This is a [first-quarter] hiccup.”
Still, CSC is less vulnerable than others because of its $2.3-billion business with the federal government. Defense and civilian contracts made up 24% of last year’s revenue.
CSC’s deal to buy Blythewood, S.C.-based Mynd values the company at $16 a share, a 46% premium over Monday’s closing price of $10.94. CSC expects to fold the company into its global Financial Service Group. Last year Mynd lost $72 million on revenue of $644 million.
CSC Chairman, Chief Executive and President Van B. Honeycutt said the deal would produce significant cost savings by allowing CSC to consolidate computing and operating facilities and eliminate redundant employees.
CSC sued Mynd in January, alleging that Mynd’s property and casualty insurance software product improperly copied CSC’s own software product. Mynd later counter-sued CSC. Those suits would be dismissed if the acquisition is completed.
Mynd accepted a $14-a-share buyout offer from the private investment firm Welsh, Carson, Anderson & Stowe in March. One month later, EDS offered to buy Mynd for $18 to $20 a share, but that offer was withdrawn in May after EDS completed a due diligence investigation.
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CSC’s Dive
A warning of slower growth prompted a 14.8% decline in Computer Sciences Corp.’s stock Tuesday. Weekly closes and latest:
Tuesday: $71.00, down $12.38
