OVUM. Phil Codling

The US federal business grew by 6% to $1.29bn. Europe saw a 9% fall (or 8% in constant currency) to $942m. US commercial business shrank by 3% to $977m. Australia was highlighted for its strong performance, with 15% growth in constant currency. For the full-year, CSC's total revenue growth guidance is 2-3%.

Comment:

 This is another mildly disappointing - but not disastrous - performance from CSC. Q1 saw the resolution of the company's investigation of "strategic alternatives" (i.e. the process of allowing potential buyers to take a good look at it) and Chairman/CEO Van Honeycutt and his team are clearly pleased to have put that distracting episode behind them. But they also admitted in a call with analysts last night that the lingering possibility of a break-up or acquisition of CSC "may have impacted" its commercial business in particular. Whether that's the case or not, we'll need to see a much better performance in Q2 and a major pick-up in signings.

CSC's total signings were disappointing at $2.2bn in Q1, with the majority coming from the federal business. Indeed, the company continues to report a strong picture in the US federal segment, with a pipeline of opportunities worth $36bn in potential contract value over the coming seven quarters. So it's in the commercial segment - on both sides of the Atlantic - that CSC needs to focus its sales energies. The company claims it has increased and reorganised its sales capability to do this, but we're still waiting to see the results. It's also dropping down from its traditional large corporate customers to mid-sized businesses and, it claims, beginning to see some success here.

Meanwhile Europe remains a problem child, particularly outside the UK. The company continues its attempts to reduce headcount (globally it's already completed 1,750 of the 4,300 reductions slated for FY 2007) and to blame weak consulting and SI markets for its woes in countries like Germany and Italy. Restructuring through redundancy in such places is inevitably more protracted (and more expensive) than in the UK and the US, so the improvements the company is seeking are taking a long time to come through. But as such processes rumble on, employee morale can be hit hard, and that's not helpful to sales.

Overall, there's some evidence that the restructuring programme is already helping CSC's cost base. Costs of services fell by 1% in Q1. Admittedly that's not a huge shift, and one that's in line with revenues, but we should see the benefits of reduced headcount in North America and Europe accelerating through the rest of the year. India continues to grow of course, having passed through the 6,000 mark, although without an acquisition it looks a long way from matching EDS's newfound offshore capacity. The company also said it will shortly be opening a nearshore Czech centre to support business in Europe.

FY 2006 was a year of big renewals (BAE Systems, General Dynamics, etc) for CSC and, as we've said before, FY 2007 needs to see more new business signed. So far, there's no indication that it's doing well enough on this count to maintain its market share or even to keep pace with rejuvenated rival EDS (see its Q2 results from yesterday). Many of the strategic priorities at CSC these days (from offshore increases/onshore reductions to automation/standardisation to winning in the commercial sector) also dominate the agenda at EDS. But on recent evidence, EDS is currently delivering the superior execution.