Warning sinks Computer Sciences' shares

Shares go tumbling after the services provider warns that fourth-quarter profits will fall severely below analysts' estimates and that it will cut as many as 900 jobs.

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Shares of Computer Sciences on Friday were sent sprawling after the company warned that fourth-quarter profits will fall severely below analysts' estimates and that it intends to cut as many as 900 jobs in a restructuring plan meant to reduce costs.

The giant professional services provider said it now expects fourth-quarter earnings to be in the range of 35 cents to 37 cents a share, with revenue growth coming in approximately 11 percent to 13 percent over the same period last year.

Analysts surveyed by First Call anticipated that CSC would earn 92 cents a share in the quarter ending March 30.

The company, based in El Segundo, Calif., blamed lower-than-expected earnings on factors including the overall decline in customer demand for traditional consulting and systems integration services and weakness in some of its commercial businesses. Computer Sciences also said reduced demand in the health care sector for software licensing and services contributed to its profit shortfall.

Wall Street responded to the news with a shudder. Shares of Computer Sciences tumbled 31 percent at midmorning Friday, down $17.10 to $37.

Goldman Sachs analyst Gregory Gould cut earnings estimates for fiscal 2001 to $2.27 per share from $2.84 per share, and cut 2002 estimates from $3.27 per share to $2.50. He also dropped the stock from Goldman's recommended list, cutting his rating to "market outperformer."

Greg Gieber, an analyst with A.G. Edwards, likewise cut his rating on Computer Sciences' stock to "maintain" from "accumulate." The slowdown in technology spending was not the only thing that hurt the company during the quarter, he said, citing problems with specific contracts.

"The systems integration business, whether it be for specialized Web-based consulting like Razorfish all the way down to larger, more traditional systems integration...are all showing weakness," Gieber said. "Systems integrators are the architects and engineers responsible for putting all this (technology) in its place. If (companies) aren?t buying computers or buying software, systems integrators aren?t installing it."

The company is developing a restructuring plan to help trim costs, which will include staff reductions of approximately 700 to 900 employees. Computer Sciences, which employs about 68,000 workers worldwide, expects to take a charge in the fourth quarter as a result of the plan currently estimated to be in the range of $100 million to $150 million.

Revenue growth is expected to be in the area of 13 percent to 15 percent, with earnings per share in the range of $2.50 to $2.60, according to the company's preliminary estimates. That's sharply below First Call consensus estimate of $3.64 a share for fiscal 2002, which ends March 29 of next year.

How rivals are faring
The company, which competes against Electronic Data Systems, IBM Global Services and others in the computer-services sector, also missed analysts' estimates last quarter and, at the time, suggested that the fourth quarter would be somewhat shaky.

Many of Computer Sciences' smaller counterparts in the Internet consulting niche have had it extremely rough in recent months. The company's own earnings woes indicate that larger players in the overall consulting sector are also feeling the heat.

On the flip side, close rival EDS has been trumpeting a winning streak and recently offered Wall Street an upbeat earnings outlook. On Thursday, it agreed to acquire Sabre's technology outsourcing division in a broad deal worth $670 million, a move that drew positive attention from the financial community.

CSFB analyst Barry Chubrik said the industry is seeing a "tale of two cities" between the two goliaths, primarily because EDS is leaning more heavily on its technology outsourcing business, which has not yet seen a slowdown, whereas Computer Sciences' pains are mainly coming from its consulting and systems integration business.

He added that Computer Sciences gets 50 percent of overall revenue from consulting and systems integration services and that EDS sees less than that, nabbing 85 percent of revenue from traditional outsourcing contracts.

"EDS is on the rebound," Gieber said. "They?re coming off a weak basis with a lot of momentum." He added that EDS has been aggressively moving into enough other areas such as outsourcing, which has helped it compensate for weakness in the systems integration area.

"CSC is much more dependent on the consulting and systems integration market, more so than EDS," he said.

Chubrik, who has a "hold" rating on the company's stock, added that Computer Sciences "is being a little bit aggressive in terms of its (revenue) guidance. There's still room to move south...We remain cautious on the name and the stock will continue to trade sideways in the (current) environment."

The company acknowledged that demand for its core consulting and systems integration services has deteriorated given the current tumult in the market. Many of its clients, the company said, have held off on technology spending because of the more challenging economy.

Earlier this week, troubled Cambridge Technology Partners, another systems integrator, was scooped up by network software provider Novell in a $266 million stock deal. Several analysts have said that the consulting market is ripe for consolidation and they expect more buyouts to come.

Computer Sciences is slated to hold a call Monday to discuss changes in its fourth-quarter outlook.

Staff writer Margaret Kane contributed to this report.