CSC – some progress, bad economy
CSC’s Global Outsourcing Services (GOS) group saw the biggest drop. posting $1.49 billion in revenues, a 13% percent drop (3% in constant currency) from a year ago. Business Solutions & Services (BS&S) was essentially flat with $1.01 billion versus $1.03 billion a year ago, while North American Public Sector (NPS) group revenues increased 3% year-on-year to $1.48 billion. But the healthcare sector – even the NHS National Programme for IT – was marked out as a bright spot, with a 17% revenue increase.
Two key milestones for NHS were achieved in the third quarter,” said CEO Mike Laphen. “They include the successful upgrade of our primary care solution which manages electronic patient records in doctor’s offices, community settings and prisons. Additionally, we achieved a release milestone with our emergency care solution that is installed on mobile devices and ambulances enabling emergency personnel online access to patient information.
“We went live with our Lorenzo Release 1 in the South Birmingham Primary Care Trust in late September. This was followed by our second successful early adopted go-live at the University Hospitals of Morcambe Bay. In early January this release was deployed to the wider clinical community at Morcambe. Feedback so far has been very encouraging.
“Our third early adopter, Bradford, remains on track to go live by the end of the fourth quarter. At that point the functionality of this first release of Lorenzo will have been fully trialed, completing its critical milestone and enabling us to proceed with the next phase of the roll out. To that end, some 20 trusts are currently in discussions with us regarding Release 1 implementation. In parallel we are already working with a further set of early adopters for Release 2 with full deployment scheduled to begin later this year. In addition to Lorenzo over 100,000 NHS professionals are today users of the systems that we have delivered and continue to deploy.”
Lapen clearly wasn’t impressed by recent criticism from Mps about the slow progress of the wider NHS programme. “It is obviously a complex picture,” he noted. “First I would say that the data coming out of a government report always lags, that is it is a bit older than current data, so you do have that lag time. I think what they highlighted was there has been from the programme’s start some delay in the implementation of the capability. That, in fact, is true. We have been very straight forward about that.
“Having said that we have a schedule we are working against with the NHS. We had key milestones that we had to make in the third quarter which we did make and another one in the fourth quarter which we still expect to make relative to Release 1. Based on the direction I gave , we are on target relative to that.
“Rolling out Release 1 is a major accomplishment. At the same time we have been working on Release 2 and that development is essentially complete and we are now working with the customers in terms of some early testing on that. We are one of the players in the NHS overall programme. It is not unusual if there is a problem somewhere in the programme that just for notoriety or political reasons gets painted with a very broad brush. I know it is somewhat complex looking from the outside.
“I have to say we are pretty pleased with the developments we have had. We have over 100,000 users out there using all different aspects of the NHS program. Sometimes we get very focused on the Lorenzo delivery and implementation but there is many successful deliveries across the program from a CSC standpoint and from an NHS standpoint. We are making good progress. We all wish it had come a little bit faster than it had. The feedback we are getting back is quite encouraging.”
But he conceded that the NHS deal is a complicated one that carries some risk. “ In all seriousness, in terms of contractual performance and delivery NHS is the most significant and by far the most complex. so that is the one I stay on top of most of all and watch most closely” he said. “On the other hand, the macro economy is a pretty difficult situation and from that standpoint I think what you are seeing us focus on and what we are trying to convey is we are going to manage those elements we can manage within this environment and that is expense control and cash management.”
Laphen said all sectors of CSC’s business had been impacted by the global recession however. “Our top line performance by industry for the quarter reflects the widespread impact of the global economic conditions and significant currency fluctuations,” he noted. “Our public sector, healthcare and chemical, energy and natural resource verticals achieved constant currency growth in the third quarter.
“Bookings were down for the quarter. However, year-to-date we have achieved 21% growth in bookings over last year with all three lines of business experiencing positive booking gains. During the third quarter we experienced a slowdown in outsourcing award decisions. At the same time our current outsourcing pipeline and sales activities are strengthening as companies seek cost reductions and economic benefit. As a result, our outsourcing pipeline has expanded to $13 billion from last quarter’s $8 billion. We anticipate it would take 6-9 months to convert these new opportunities to revenue.
“While the economy remains uncertain and customers are anxious this market also presents opportunity as illustrated on slide nine. For example, we are prepared for the shift in the spending priorities by the new US Administration and are well positioned for opportunities in transportation, infrastructure, renewable energy and cyber security. As healthcare reform becomes a priority not only in the US. but around the globe we believe our world class private and public sector healthcare IT capabilities in medical systems, healthcare informatics, our electronic patient records and the management of digital imagery will prove beneficial to us.
“We are also well positioned to help clients respond to increased regulatory intervention and the consolidation pressures within their markets and as I mentioned we have the outsourcing capability to help organizations cut costs and improve profitability. Lastly, as a result of recent events in the Indian Pure Play market we are seeing opportunities to work with companies to ensure the continuity of their operations. We anticipate there may be further flight to quality opportunities for off shore support from which CSC can benefit.”
But he added: “We are just in uncharted waters here in terms of bookings and converting bookings into revenue. Customers are causing us to come up a bit short on our revenue guidance and the customers are really stepping back and having a hard look at what they are going to go forward with and what they are not going to go forward with. IWe have seen some softness and some pull back on the outsourcing project spend yet at the same time, we have seen a significant impact in the pipeline and the sales activity of new opportunities in outsourcing.
“I think what we are going to have is a bit of a transition period here. How significant the transition is I think is still to be determined in terms of how the economy sorts out. I think it will take us 6-9 months to sort this new outsourcing potential wins into the revenue stream but we will see a more, as we are seeing a more immediate impact on the softness side relative to the projects.”
“The earnings demonstrate that [CSC’s] attempts to expand its vertical go-to-market model and its global workforce, while reigning in costs, have blunted some of the impact from the worldwide economic slowdown,” observed John Madden of research firm Ovum. “But realistically, CSC and its competitors are just beginning a somewhat gloomy marathon that will test their organisational, operational and service-delivery rigour as they chase customers during a global recession throughout the year.
“We think the real test for CSC and its competitive brethren will come as the global recession runs wider and deeper; recent quarterly earnings announcements show they’re preparing as best they can for an ongoing decline, but their greater successes and shortcomings will become apparent in subsequent announcements.
Clearly, there is opportunity for outsourcers in a down economy, and customers are willing to turn to established, financially-sound IT services firms to lead the way. However, the magnitude of any potential “flight to quality” is still to be determined. Earnings from global SIs and outsourcers for the moment look relatively stable, if somewhat shaky, particularly compared to others in and out of the IT industry.
“CSC, for example, can rely on its strong health-care and government businesses to deliver consistent revenues (on a related note, CSC and others must be pouring over details of the Obama administration’s economic stimulus package for potential IT project work). In addition, the many changes CSC made under its Project Accelerate initiative – improving its vertical go-to-market model, strengthening its offshore and delivery capabilities, and investing in wider branding and promotion activities – have come not a moment too soon.
“But the real question for CSC and others is whether customers will turn in greater numbers (or with greater streams of recurring and substantial revenues) to third parties for deploying and managing IT – or (and this is already quite evident) if IT funding and investments decisions will continue to be delayed for an indeterminate amount of time.”