CSC: still looking on the bright side of life

Monty Python urges us to always look on the bright side of life. CSC CEO Mike Laphen and CFO Mike Manusco seem to have taken that to heart. 

While recent months have seen the formal cancellation of the NHS National Programme for IT (for which CSC was one of two lead contractors), savage criticism of CSC by MPs on the Public Accounts Committee to the extent of openly questioning its fitness for future public sector work and still no sign of the Memorandum of Understanding with the Cabinet Office that has been promised to be imminent again and again, the two CSC execs remain remarkably sanguine about prospects. 

Last week the firm revealed it had made a $2.85 billion loss for its second quarter, had to refund $265 million in advance payments to the NHS and that its Australian operation was now being investigated for accounting irregularities (as its Nordic arm was previously). Add to that the need to pay a non-cash pre-tax charge of $269 million related to settlement of a contract dispute with the US government and it's difficult to see many reasons to be cheerful. 

But Laphen was on upbeat form. "New business bookings this quarter were a strong $6.6 billion, resulting in a total of $8.9 billion for the first half of our fiscal year, up 13% increase over last year's first half," he declared. "Win rates on competitive outcomes for all business segments are over 50%. And our pipeline of new business opportunities continued to expand, and we have a total value of over $9 billion in submitted proposals awaiting decisions. These results affirm the competitiveness of our current offerings in the marketplace and should provide confidence in the ongoing strength of CSC's market position. They are also evidence that we are in an excellent position to meet or exceed our full year bookings guidance of $17 billion."

Chin up!

So everything's looking fine and dandy then?  Well, in Laphen's view, it's certainly not as downbeat as many analysts and market commentators would have you believe. Even the NHS crisis was painted in a good light. While the National Programme has been officially declared undeliverable, Laphen continues to see good progress being made. 

"I'm pleased to report that we and the authority agreed that the criteria for granting delivery key milestones for Lorenzo 1.9 have now been achieved at the 3 early adopter sites, the University Hospitals of Morecambe, Birmingham Women's and Bury," he explained. "Additionally, Humber NHS Foundation Trust, which is replacing Pennine as the early adopter for Lorenzo's mental health functionality, is progressing through their go-live preparations, having completed the trainer activities a few weeks ago."

He added: "I would note that without much fanfare, the University Hospitals of Morecambe recently posted on their website their account of their Lorenzo journey and how they are now using it to deliver better healthcare. It's an informative real-world article that's well worth a read."

He also praised the Lorenzo electronic patient records system's latest release. "CSC's latest Lorenzo release, in addition to delivering some richer outpatient clinic management functionality, moves beyond the care management mental health capabilities of Release 1.9 and delivers 2 new deployment units to take out prescribing TTO and emergency care," he argued. 

"Accordingly, in late October, Morecambe became the first to go live with TTO prescribing. TTO enables the trust to electronically record medications on admission, prescribe medication on discharge and within outpatient clinics, and notify GPs about any medication changes. The trust sees TTO as a key to safer prescribing and to preventing medication-related admissions and is now rolling it out to additional wards across the trust."

What MoU?

None of this addresses the current stalemate between the NHS and CSC of course, whereby it has been acknowledged that it might well end up costing more to cancel CSC's National Programme contract than to keep it. Hence, the UK government and its services supplier appear to be in a state of seemingly never-ending contract renegotiation. "CSC and NHS have resumed discussions with the target of reaching an agreed way forward by the end of 2011," confirmed Laphen, but added that there is no assurance that this will actually happen. 

But for all that, Laphen seems to be betting on still having the NHS as a revenue stream for some time as he was able to predict: "There is revenue associated with the NHS in the second half [of the fiscal year]."

It was a theme picked up by CFO Manusco who stated: "There is significant NHS revenue in the second half of the year with a meaningful margin rate...We can estimate in any given set of scenarios volatility around NHS margin. As I said, the presumption is, in our numbers, that the NHS programme continues within the framework of the MoU."

Manusco did not elaborate further on this point, but presumably the MoU referred to is the one over which CSC has yet to come to terms with the Cabinet Office with the supplier remaining the only top tier provider to government that has yet to sign on the dotted line. Whitehall sources insists that an MoU cannot be signed with the Cabinet Office now until agreement is reached over the fate of the NHS contracts. 

But it seems that from CSC's perspective the assumption is that while everyone else has deemed the NHS National Programme to be dead, it is presuming that there's still life in it and that it can somehow, in some form, be resuscitated in some revenue-generating way. 

Accounting woes

Elsewhere the firm's accounting practices continue to come under scrutiny. In June, CSC attributed "the majority" of some $91 million in charges taken during its fiscal 2011 to "accounting irregularities arising from suspected intentional misconduct by certain former employees in our Danish subsidiaries."

CSC has now identified and recorded some $19 million in "intentional accounting irregularities" and "unintentional accounting errors" related to its Australian operations. 

Meanwhile a CSC internal audit committee is said to be in the "early stages" of expanding investigations to include "certain aspects of [CSC's] accounting practices within its Americas Outsourcing operation" as well as a number of "contracts and related disclosures that involve percentage of completion accounting methodology."

All told, despite the upbeat spin pitched by Laphen and Manusco, it's hard not to sympathise with the opinion of Tola Serjeant of research house TechMarketView. who reckons that: "The second quarter of FY12 is one that CSC would prefer not to dwell on."