DJ Another Bleak Quarter Seen For Computer Services Cos
05 Jul 15:07
By Kathy Chu
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--It was another bleak quarter for computer services
companies.
Amid a continued reduction in information-technology spending that has weeded
out the weak and the cash deficient, surviving e-services companies struggled
to keep their heads above water while traditional firms fought to keep profits
steady.
More restructuring and profit warnings are inevitable in the near term, say
analysts, as companies hunker down for a few more difficult quarters.
"This (June) quarter will be just as bad as last quarter, and possibly even
worse," said Merrill Lynch Global Securities analyst Stephen McClellan. "The
optimism that things will be looking better by the second half is way
premature."
Preannouncements - while fewer and farther between - included Sapient Corp.
(SAPE) and DiamondCluster International Inc. (DTPI). Veterans such as Computer
Sciences Corp. (CSC) - the third largest computer services provider behind
International Business Machines Corp. (IBM) and Electronic Data Systems Corp.
(EDS) - guided lower at the end of the last earnings period.
Investors have some tolerance for a "sloppy June quarter," said Lehman
Brothers analyst Karl Keirstead. "The Street is looking for data points, trying
to take cues from the rest of tech stocks, particularly the enterprise service
sector, about when spending will rebound."
These signs can't come soon enough for KMPG Consulting Inc. (KCIN), which
provides no outsourcing - a service that tends to thrive despite economic
downturns as it generally saves companies money - and is 100% exposed to
technology downturns.
The company, which had its initial public offering in February, is expected
to post results in line with, or slightly below, the fourth quarter consensus,
currently at 17 cents a share.
One of KPMG's savings graces, according to SG Cowen Securities Corp. analyst
Moshe Katri, is the company's use of subcontractors, which saves money and
gives the company more flexibility in adjusting its employment needs. Katri
expects the company to post fiscal fourth-quarter results of 20 cents a share.
More Layoffs Expected From Computer Sciences
Expect mixed performance from Computer Sciences and Electronic Data Systems.
Computer Sciences, which gets only 35% to 40% of its revenue from
outsourcing, will take down full-year guidance a few notches and announce
layoffs of approximately 5%, said Salomon Smith Barney analyst Patrick M.
Burton. The company has already cut jobs this year by 1,700 employees, or about
2.5%.
It's more bitter medicine for a company trying to turn itself around. In
recent months, Computer Sciences has been criticized for underperforming
contracts, the loss of market share to competitors such as Electronic Data
Systems and its perceived inability to react quickly enough to a deteriorating
business environment.
Merrill's McClellan expects CSC's first-quarter revenue to rise 10% to $2.7
billion, with earnings of 28 cents a share - a penny above the current
consensus estimate. This compares with last year's earnings of 56 cents a share
on revenue of $2.46 billion.
Contract signings will be unremarkable this quarter, coming in at about $2
billion to $3 billion, say analysts, and the company should just squeak by
lowered earnings estimates - barring additional underperforming contracts.
"The typical outsider would say that this company needs a shakeup," said S.G.
Cowen's Katri.
In mid May, the company reported fourth-quarter earnings that were in line
with revised estimates and guided down first quarter numbers. At the same time,
however, Computer Sciences surprised some analysts by saying that fiscal-year
2002 earnings would be between $2.25 to $2.35 a share - in line with the
consensus at the time. The Street now expects year earnings of $2.02 a share.
In the fiscal year ended March 30, 2001, Computer Sciences had operating
earnings of $389.2 million, or $2.28 a diluted share, on revenue of $10.52
billion.
Analysts say that Computer Sciences may need to take a lesson from competitor
Electronic Data Systems, which instituted an aggressive turnaround in 1999
after two years of dismal earnings. When Chief Executive Richard Brown took
over that January, he gave some senior executives the ax, cut costs by almost
$2 billion and restructured the company's operations.
"These kinds of dramatic changes need to happen at CSC," said McClellan.
EDS faces its own challenges. The computer-services stalwart - one of the few
maintaining guidance for the past few quarters - is expected to meet consensus
estimates and give full-year guidance in line with the Street. A large part of
the company's strength, say analysts, comes from long-term outsourcing
contracts, which historically makes up about 65% to 70% of revenue.
But the company's consulting business will show signs of weakness this
quarter, and revenue from General Motors Corp. (GM) - EDS' former parent - will
continue to fall, said UBS Warburg analyst Adam Frisch.
GM revenue - which makes up about 17% of EDS' total revenue - will be down
about 4%, while commercial revenue will grow about 12% and total revenue will
come in almost 9% higher, at $5.1 billion, according to McClellan.
Investors will also be closely watching EDS' operating profit margin - which
Frisch expects to come in at about 9.5%, up slightly from the year ago's 9.4% -
and cash flow. EDS has said it expects to generate about $2.2 billion in cash
flow by year's end. The company started the year with $182 million, and will
need to "ramp up" if it expects to meet this guidance, said Frisch.
EDS' acquisitions comprise one of the few risks to the story, according to
analysts. The company recently acquired three businesses within two months, and
is now in the midst of integrating these operations.
Investors may be concerned that EDS is building an "unwieldy, difficult
hodgepodge of a company," said McClellan, who expects management to dispel
these concerns by announcing on the conference call that no more acquisitions
will be made this year.
McClellan expects quarterly new bookings of $4 to $5 billion - compared with
$3.7 billion last year - and total bookings, including renewals, of $7 billion,
compared with $6.1 billion last year.
Consolidation To Continue
The slowdown in information-technology spending has hit e-services providers
the hardest.
Some have already put down their cards. In late January, debt-saddled U.S.
Interactive Inc. (USITQ) became the first publicly held e-services company to
file for bankruptcy protection. MarchFirst Inc. (MRCHQ) came next and then
Xpedior Inc. (XPDR). A handful of others, including Razorfish Inc. (RAZF),
Scient Corp. (SCNT), Organic Inc. (OGNC) and Rare Medium Group Inc. (RRRR) have
seen their shares slide to around $1 a share.
Consolidation within the industry will continue, according to Burton, as
companies look for a way to stem the "hemorrhaging" of their stocks, and as
synergies gained by integration of hardware and software services are
increasingly seen as potent weapons against the economic slowdown.
Sapient and DiamondCluster are two companies likely to survive the economic
downturn due to strong cash positions and established customer bases, according
to Burton.
Analysts point to Cognizant Technology Solutions (CTSH) as another company
that will come out on top. Despite continued cutbacks in IT budgets, Cognizant
- which gets about half of its business from consulting and systems
integration, and the other half from outsourcing - has experienced sequential
revenue growth for the past 18 quarters, according to SG Cowen's Katri.
The secret? Almost 80% of the company's business is executed out of India,
which can cut Cognizant's costs by more than half.
More computer servicesfirms, in an effort to hedge themselves against the
domestic slowdown, will cater to growing European demand for outsourcing and
expand their foreign operations - especially in India, said Katri.
-By Kathy Chu, Dow Jones Newswires; 201-938-5388; kathy.chu@dowjones.com
(END) DOW JONES NEWS 07-05-01
03:07 PM |
