CSC CEO: Conviction Around Rationale For HPE Enterprise Services Merger Has Grown Stronger

CSC CEO Mike Lawrie is even more confident that his company's proposed merger with HPE Enterprise Services will benefit both companies, following three months of stakeholder feedback.

"My personal conviction around the strategic rationale and the synergy potential of the merger has, frankly, only increased since our announcement," Lawrie said Monday during an earnings call. "The cultures are more similar than dissimilar, so there are a lot of positives."

The Tysons, Va.-based company, No. 8 on the CRN Solution Provider 500, reported that sales in the fiscal 2017 first quarter ended July 1 climbed 7 percent from $1.80 billion last year to $1.93 billion this year. This edged out Seeking Alpha projections of $1.91 billion.

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The company recorded a net loss of $21 million, or 15 cents per share, down from net income of $163 million, or 1.15 cents per share, the year prior. On a non-GAAP basis, CSC's net income fell from $164 million last year to $75 million, or 53 cents per share, this year, beating Seeking Alpha estimates of 45 cents per share.

CSC is well-along in planning how the integration with HPE's $20 billion Enterprise Services unit will progress, Lawrie said, and is working very closely with HPE in dozens of workgroups, examining facets of both companies' operations ranging from sales, finance and contracts to facilities, human resources and IT. The combined company is expected to achieve immediate cost savings of $1 billion.

Lawrie said he spent two to three weeks after the deal was announced in May making calls to CSC's American and European clients, who he said were supportive and saw the benefits of bringing together the service offerings and respective capabilities of both organizations.

CSC's vendor partners are eager to expand their market reach, Lawrie said, while the company's employees are excited to be part of a new, dynamic company with such scale and potential. The deal is still expected to close in late March 2017, Lawrie said.

"We've seen very positive responses across the board," Lawrie said. "We're getting more conviction as we get to better know the Enterprise Services segment of HPE."

CSC has also gotten closer to the point where the growth in its next-generation markets is outpacing the decline of its legacy business, Lawrie said.

Just a few years ago, the gap between the legacy runoff and next-generation sales was a whopping $250 million to $300 million each quarter. The gap has narrowed each quarter and is now less than $70 million, with Lawrie expecting next-generation sales to exceed legacy runoff in the near future.

"I feel much stronger about the hand we're holding now than the hand we were holding three to four years ago," Lawrie said.

Acquisitions have accelerated CSC's position in next-generation technologies, Lawrie said, as well as the company's Quick Start offerings, which the company launched in May and are geared toward mid-size enterprise customers.

Lawrie said that slightly smaller customers require a more standardized offering that can be quickly priced and configured to provide a higher level of certainty around delivery. CSC has found this sales coverage model to be much more cost-effective, Lawrie said, and is crediting it for driving increased automation.

The solution provider saw Global Business Services (GBS) sales climb 14.1 percent from $919 million in last year's first fiscal quarter to $1.05 billion in this year's first fiscal quarter, thanks to the acquisitions of Australia-based UXC Limited and U.K.-based Xchanging, both of which closed in May.

Sequential-quarter consulting revenue climbed by 24 percent thanks to the recent acquisitions, Lawrie said, while industry software and solutions revenue grew by 13 percent sequentially due to the addition of Xchanging's leading software business. Big data revenue improved by 5 percent sequentially, Lawrie said, while applications revenue inched ahead by 1 percent sequentially.

Global Infrastructure Services (GIS) revenue, though, fell 0.5 percent from $885 million last year to $881 million this year as contract completions and price declines outpaced growth in next-generation software and services and contributions from recent acquisitions.

Revenue from next-generation offerings soared by 110 percent on a year-over-year basis, Lawrie said, with sales of CSC's MyWorkStyle virtualized desktop service climbing by 70 percent and revenue from CSC's next-generation network service, delivered in partnership with AT&T, growing by 100 percent. Storage-as-a-Service revenue is 2.5 times where it was a year earlier, Lawrie said.

CSC's stock climbed 0.1 percent to $48.07 per share in after-hours trading Monday. Earnings were announced after the market closed.

For the 2017 fiscal year - which ends March 31, 2017 - CSC expects to deliver earnings from continuing operations of $2.75 to $3 per share, with overall revenue increasing by double digits after factoring for changes in foreign currency exchange rates. GBS revenue is expected to climb sharply, while GIS revenue is projected to decline in the low single digits.