CSC's Consulting, Staff Augmentation Businesses Struggle As Workforce Issues Persist

Weak consulting and staff augmentation results dragged CSC's sales down for yet another quarter, though the company hopes to resume growing revenue by late 2017.

The Falls Church, Va.-based company, which was No. 5 on the CRN 2015 Solution Provider 500 before spinning off its public sector business, saw sales in the quarter ended Jan. 1 fall 4.9 percent, to $1.75 billion, after factoring for changes in foreign currency exchange rates. This fell well short of Seeking Alpha projections of $1.85 billion, the company reported Tuesday.

Non-GAAP earnings per share climbed 16 percent, to 71 cents, or $130 million overall, edging out Seeking Alpha estimates of 69 cents per share.

[Related: New Day Dawns: CSC Split, SRA Merger Done, Spawning $8.1B Commercial, $5.5B Public Sector Powerhouses]

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"We saw a moderation in the trends of our legacy business, and continued strong growth in our next-generation offerings," CSC Chairman and CEO Mike Lawrie said Tuesday during the first earnings call after November's split with CSRA.

The solution provider recorded declining sales in both areas of its business, with global business services (GBS) revenue falling 2.5 percent on a constant-currency basis, to $886 million, and global infrastructure services (GIS) revenue sinking 7.2 percent on a constant-currency basis, to $864 million.

CSC's Americas region is further behind other areas in moving to higher value digital work, Lawrie said, which contributed to project-based consulting and staff augmentation projects' not materializing at the anticipated level.

Year-over-year consulting revenue fell globally by 10 percent on a constant-currency basis, though regions with more enhanced capabilities such as the United Kingdom delivered double-digit growth. Applications revenue was also down slightly on a constant-currency basis as declines in legacy staff augmentation engagements were not wholly offset by growth in higher-value app utilization work, according to the company.

Part of the challenge stems from a lack of employees, particularly in the Americas, who can carry out app utilizations and high-level IT consulting engagement, the company said. Much of the existing staff has more familiarity with legacy consulting and staff augmentation, Lawrie said.

"To transform the business model of a company, you have to transform the skill set," Lawrie said. "The drag we are experiencing is in the acquisition of skills."

Additionally, concerns about the state of the global economy prompted some clients to push out the start date on their short-term consulting work by two or three months, which Lawrie expects to continue at least through the first three months of 2016.

"I have certainly seen some caution in the marketplace over the past six or seven weeks," Lawrie said.

CSC's infrastructure sales continue to tumble even in the absence of lost business since renewals often come in at a lower rate than the initial contract. Lawrie gave the example of an outsourcing deal that was initially signed 17 years ago for $2.5 billion but renewed at a rate of only $600 million, despite the same services' being provided.

CSC hopes to replace these large legacy deals with a higher volume of small contracts and renewals, but Lawrie cautioned that the process will take time. Additional infrastructure contracts around next-generation technology such as cloud or virtualized desktop tend to come in at a lower revenue rate, Lawrie said.

Yet roughly 18 months from now, CSC expects to be at a point where the growth in next-generation offerings exceeds the decline in legacy revenue.

As recently as late 2014, Lawrie said, CSC was experiencing $200 million to $300 million declines in legacy sales and recouping less than $100 million from new offerings. Yet over the past year, Lawrie said, that gap has been cut in half.

CSC's revenue from next-generation technologies is now approaching a couple of hundred million dollars each quarter, Lawrie said. That has, in part, been fueled by 40 percent year-over-year growth in cloud sales, 300 percent annual growth in next-generation networking and virtualized desktop sales, and 1,000 percent year-over-year growth in Storage-as-a-Service (STaaS) sales, Lawrie said.

CSC's stock remained unchanged at $30.80 per share in after-hours trading Tuesday. Earnings were announced after the market closed.

For the next quarter, CSC expects low to mid-single-digit decline in revenue. Non-GAAP earnings per share for CSC's 2016 fiscal year, which ends March 31, are expected to come in at between $2.40 and $2.60 per share, Lawrie said.