CSC CEO: We're Not Waiting To Make Improvements, Restructuring Ongoing Ahead Of HPE Enterprise Services Merger

CSC plans to take additional restructuring actions this quarter as both CSC and HPE Enterprise Services take steps to manage costs before their merger, according to CEO Mike Lawrie. The companies have committed to $1 billion in cost synergies in their first year as a combined entity.

Management teams from the Tysons, Va.-based company, No. 8 on the CRN Solution Provider 500, have attended regular integration summits with their counterparts from HPE Enterprise Services, No. 3 on the CRN SP500, where clear and disciplined synergy targets are set, Lawrie explained.

"We are not waiting for the merger to take place to position the business," said Lawrie, CEO's chairman, president and CEO, during an earnings call Thursday. "Both HPE ES and CSC have identified areas where we can make improvements, and we're making those improvements as we go throughout the year."

[RELATED: CSC's Top Execs Eligible For $90.5M In Possible Payouts Thanks To HPE Enterprise Services Deal]

CFO Paul Saleh told investors that CSC has shipped some 1,500 positions out of high-costs locations and is using automation to get more efficiency in low-cost locations. Roughly half of CSC's workforce is based in low-cost locations today, Saleh said, up from 45 percent a year ago.

One risk factor associated with the merger pertains to the public sector business of HPE Enterprise Services, according to a filing Wednesday with the U.S. Securities and Exchange Commission (SEC).

CSC's separation agreement with its North American public sector business – which was spun off in November 2015 to become CSRA – restricts CSC and its controlled affiliates from engaged in certain activities related to U.S. federal and certain state and local government customers until Nov. 27, 2017. That's nearly eight months after the HPE Enterprise Services merger is set to close.

Saleh said Thursday that CSC is taking its time to evaluate all appropriate options for the public sector business HPE Enterprise Services, and he promised to update investors in due course.

CSC's separation agreement with CSRA doesn't restrict parties that control or are under common control with CSC from engaging in public sector activities, according to the SEC filing.

CSC CEO Lawrie said he came away very pleased with a just-concluded worldwide trip meeting clients, partners and employees of both CSC and HPE Enterprise Services in Asia, Europe, India and Australia.

"I've come away from this particular trip and experience really impressed with the strength of our talent, the similarities of our company cultures, and the clear opportunity to serve our clients more effectively as a combined organization," Lawrie said.

CSC is working closely with its counterparts at HPE Enterprise Services on integration planning across more than a dozen organizations, Lawrie said, including delivery, sales, finance, human resources and IT.

The two companies have also made headway with regulatory authorities across various geographies, Lawrie said. CSC doesn't anticipate any issues in securing the clearances necessary to close on April 1, Lawrie said.

CSC reported that sales in the fiscal 2017 second quarter ended Sept. 30 increased to $1.87 million, up 7.2 percent from $1.75 billion a year ago. That beat the Seeking Alpha projection of $1.86 billion.

Net income plummeted to $15 million, or 10 cents per share, down 92.3 percent from $171 million, or 66 cents per share, last year. On a non-GAAP basis, net income fell to $88 million, or 61 cents per share, down 43.6 percent from $156 million, or 55 cents per share, last year. That was well over Seeking Alpha's estimate of 47 cents per share.

The solution provider saw Global Business Services (GBS) sales skyrocket to $1.03 billion, up 16.2 percent from $891 million a year ago due in large part to the acquisitions of Australia-based UXC Limited and U.K.-based Xchanging, both of which closed in May.

Industry software and solutions revenue jumped by 27 percent after factoring out changes in foreign currency exchange rates, while CSC's newly-formed digital apps group (which combines its consulting and applications business) enjoyed 13 percent growth in constant currency.

Global Infrastructure Services (GIS) revenue, though, slipped to $836 million, down 2.1 percent from $854 million a year ago, as an enhanced focus on the company's next-generation platform failed to mitigate the headwinds facing GIS's traditional business.

Revenue from next-generation offerings nearly doubled on a constant currency basis, Lawrie said. Sales of CSC's MyWorkStyle virtualized desktop service and revenue from CSC's next-generation network service, delivered in partnership with AT&T, each grew by 70 percent over the past year. Storage-as-a-service revenue, meanwhile, jumped up 35 percent on a year-over-year basis, Lawrie said.

CSC's stock fell 0.1 percent to $53.40 per share in after-hours trading Thursday. Earnings were announced after the market closed.

For the 2017 fiscal year – which ends March 31, 2017 – CSC continues to project earnings from continuing operations of between $2.75 and $3 per share, with overall revenue increased in the low double digits on a constant currency basis. GBS revenue is expected to climb sharply, while GIS revenue is projected to decrease in the single digits inclusive of acquisitions.