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Computer Sciences hedges bet on fourth quarter

After missing its mark in the third quarter, the technology services provider predicts fiscal fourth-quarter net income below Wall Street's expectations.

Computer Sciences missed third-quarter earnings estimates and suggested that it could fall short of fourth-quarter expectations.

During a Monday conference call with analysts, the technology services provider predicted fiscal fourth-quarter net income of 92 cents to 95 cents per share, which suggests the company could earn less than Wall Street has anticipated.

Analysts' consensus has been for a profit of 95 cents per share for the quarter ending in March.

Shares of Computer Sciences traded at $57.96 in after-hours activity on the Island ECN, after the analyst call. Computer Sciences fell $2.86 to $59.40 in Monday's regular trading ahead of the report.

The El Segundo, Calif.-based company reported fiscal third-quarter net income of $122.9 million, or 72 cents per share, excluding special charges. Thirteen analysts surveyed by earnings-tracking company First Call produced a consensus profit forecast of 74 cents per share for that quarter, ended Dec. 29.

Third-quarter revenue increased 12.9 percent year over year to $2.66 billion. First Call's consensus prediction was for revenue of $2.67 billion.

The company's earnings were hurt by currency effects, severance costs related to job cuts in its global consulting practices unit and lower-than-expected sales of software for the health care market, said CEO Van Honeycutt.

"We are not immune to the conditions that have made this a difficult environment," Honeycutt told analysts. "But we are pleased with our results."

Not everyone was impressed. ING Barings analyst Brian Maimone saw no reason to change his "hold" rating on the stock. "We thought the performance was lackluster," Maimone said.

Mynd-ing their own business
If not for revenue from the recently acquired Mynd unit, Computer Sciences would have missed analyst estimates by 4 cents to 5 cents per share, Maimone said. Although the company provided fourth-quarter targets, including revenue growth of 12 percent to 14 percent year over year, Computer Sciences did not give a forecast for fiscal 2002.

"It's a cloudy picture, really," he said. "To not give a 2002 outlook doesn't make you all that confident."

Business from the federal government led Computer Sciences' third-quarter growth. That segment generated third-quarter revenue of $647.5 million, up 19.1 percent year over year. Revenue from civil agencies increased 22.2 percent to $248.1 million, on the back of contracts with the Internal Revenue Service, General Services Administration and other departments. Revenue from the Department of Defense rose 17.2 percent to $399.4 million.

Commercial revenue gained 11.1 percent year over year to $2 billion, including $999.6 million from North America and $314.2 million from international areas except for Europe. Third-quarter revenue from Europe rose 7.5 percent to $654.3 million; European revenue rose 24.2 percent if currency effects are discounted.

Growth in commercial business needs to improve, Maimone said, adding that profit margins on government contracts are 0.2 to 0.3 percent lower than those for commercial business. "You need big commercial contracts to drive the business and, more important, the stock higher," he said. "I think the inflection point in the company's growth rate upward is probably a quarter or two away."

Computer Sciences won $1.8 billion in contracts during the third quarter.

Including restructuring charges of $84.2 million, Computer Sciences in the third quarter earned $65.6 million, or 38 cents per share. Cost-cutting moves undertaken after the Mynd acquisition was announced in June will save $150 million a year, the company said.