CSC revenue up thanks to acquired assets

Kevin Collupy, analyst at TBR, said CSC integrates acquired assets and shifts services focus towards next-generation technologies to recapture revenue growth.

CSC has utilized recent inorganic contributions to grow its top-line, reversing 7 consecutive quarters of  revenue declines.

CSC revenue break-up

Global Business Services revenue of $1,049 million (+14.1%)
Global Infrastructure Services revenue of $881 million (–0.5%)

CSC continues to develop its cloud migration and digital modernization capabilities underlined with its core cloud platform, Agility. Efforts to broaden its alliance network and expand on existing relationship with AWS and with cloud providers including Azure and Softlayer position CSC as a vendor-agnostic, end-to-end solutions provider and systems integrator.

CSC posted total revenue growth of 7 percent in Q2 2016, driven by inorganic additions to revenue. We expect that CSC will continue with positive revenue growth through the rest of 2016. However we do expect pressures on CSC’s profitability as integration of recent acquisitions, restructuring initiatives and preparation for merging with HPE’s Enterprise Services (ES) will take time and money to achieve success.

CSC’s aggressive inorganic activity results from massive shifts across the IT landscape

CSC’s aggressive M&A activity over the past year, closing 5 deals since 4Q15 help reposition its portfolio towards emerging technologies and help it rebuild scale after its 3Q15 split from its National Public Sector (NPS) unit that helped form CSRA. We believe the inorganic additions are driven by the desire to offset diminishing legacy revenue streams. During the quarter CSC’s top-line was heightened by multiple new client engagements secured by UXC Limited including contracts from SAP Hybris to develop a public sector accelerator, and from Federation University Australia (FedUni) to implement a ServiceNow enterprise service management solution.

We expect CSC’s acquisition pace to halt in the near-term, as it focuses its efforts toward completing its merger and integration with HPE Enterprise Services unit. To combat declines in legacy services that both CSC and ES have been experiencing, innovation to create differentiated services around emerging technologies will be critical. Hybrid cloud migration and digital transformations will be a top priority for CSC. Similar to Dell and EMC, headcount reductions will ensue, reducing overlap and TBR expects go-to-market roles such as marketing, sales and channel to be most impacted.

Acquiring niche capabilities presents CSC with opportunities to cross-sell additional services and new client engagements

TBR believes one area where market perception is weak for the combined entity is in consulting. While it is unlikely the new combined company will rise to the same level as consulting specialists such as Bain, EY or McKinsey, we believe being able to offer front-end advisory with industry knowledge would greatly enhance its position against peers IBM and Accenture. Finding specialization through organic development, preferred partnerships or acquisitions will help CSC transition in a turbulent IT environment that has negatively impacted its core legacy services.

Capitalizing on demand for cybersecurity solutions among enterprise clients will help CSC capture revenue as clients invest in mobile, IoT and IT infrastructure modernization. Small-scale acquisitions such as CSC’s subsidiary, UXC Saltbush’s acquisition of cybersecurity consulting firm, The Dalmatian Group will not add significant revenues, but we believe the close relationship and complementary capabilities provide opportunity to cross-sell and broaden the reach of CSC’s cybersecurity solutions. Even as CSC slows its acquisition pace ahead of the planned mega-merger, we could see additional acquisitions such as Racemi, a small cloud software migration provider and joint partner with CSC.