CSC Buys Two Firms, Hints Public Sector Business Could Be Acquired

CSC's public sector business could be an acquisition target after it splits from the solution provider's commercial business in October, according to CEO Mike Lawrie.

"[Computer Sciences Government Services] will take advantage of opportunities as an acquirer or as an acquiree," Lawrie said Tuesday during the company's earnings call. "The general landscape in the government business will be consolidation."

The Falls Church, Va.-based company, No. 5 on the CRN 2015 Solution Provider 500, is therefore ensuring its $4.1 billion public sector business is strong and well-balanced so that it take can advantage of consolidation in the government contracting space, which Lawrie said he expects to occur over the next year.

[Related: CSC Names Government Sector CEO In Official Split Filing With The SEC]

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These comments come on the heels of CSC's revealing Tuesday plans to purchase managed trading solutions provider Fixnetix of London as well as Fruition Partners, a 300-person, cloud-based service management firm based in Chicago that's ServiceNow's largest dedicated global integration partner. Financial details weren't disclosed for the deals, both of which are expected to close later this year.

These deals are intended to bolster CSC's $8.1 billion commercial business after the segment recorded a 10.2 percent drop in sales, to $1.8 billion, in the quarter ended July 3, after factoring out changes in foreign currency exchange rates.

"We're really beginning to position the commercial business for post-separation," Lawrie said. "It needs to continue to be transformed."

CSC plans to continue looking at an active pipeline of acquisition opportunities for its commercial business to infuse the solution provider with skills it doesn't currently have.

"We have an appetite for those tuck-ins, and we have the balance sheet for those as well," Lawrie said.

The acquisitions should help CSC further the transformation of its commercial business away from legacy projects such as ERP (enterprise resource planning) installations toward next-generation offerings focused on cloud and big data, both of which recorded year-over-year growth in excess of 30 percent.

Still, Lawrie acknowledged, neither Fixnetix nor Fruition would greatly affect CSC's performance in the short run.

"These aren't huge acquisitions by any stretch of the imagination," Lawrie said.

Though CSC has been rumored to be an acquisition target since at least 2005, Lawrie said the company is managing the commercial property as if it'll be standalone property and therefore making targeted, strategic investments in the segment before the split.

"The speculation is what the speculation is," Lawrie said. "If someone wants to approach us, someone can approach us. But we're not waiting for that."

Computer Sciences Government Services would likely be more attractive to prospective buyers, as it's smaller, has higher margins and serves a base of government clients that are less compelled to pursue a rapid digital transformation, Gard Little, an IT consulting and systems integration research director at Framingham, Mass.-based IDC, told CRN in May.

Still, CSC's North American public sector business saw a 6 percent drop in revenue this past quarter on a constant currency basis, to $957 million, due to reduced tasking and wind-downs on several programs, the company reported. Lawrie will lead CSC's commercial business after the split closes in October, while Larry Prior will lead Computer Science Government Services.

The solution provider fared better on the earnings front, with non-GAAP earnings improving 8 percent, to $160 million, or $1.11 per share, beating Seeking Alpha projections of $1.01 per share. This is predominantly due to higher margins on the commercial side of CSC's business, Lawrie said.

Total sales fell 9.8 percent on a constant currency basis, to $2.76 billion, missing Seeking Alpha estimates of $2.82 billion. CSC's stock was up 1.3 percent in after-hours trading Tuesday, to $65 per share; earnings were announced after the market closed.

CSC has made progress internally on creating separate facility, human resources and IT work streams for the commercial and public sector business, Lawrie said.

The solution provider has taken advantage of the separation to upgrade Computer Sciences Government Services to next-generation infrastructure, Lawrie said, securing network connectivity through AT&T and migrating 40 business applications and 170 workflow applications to the cloud.

For the company's 2016 fiscal year, which ends March 31, CSC expects its commercial sector revenue to come in slightly below 2015's, while public sector sales are expected to remain flat or increase slightly from last year, Lawrie said.

Annual earnings are expected to come in between $4.75 and $5.05 per share, Lawrie said, due largely to improved margins from workforce optimization initiatives that will be felt primarily in the second half of CSC's fiscal year.