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Csc - Q2 2016 Computer Sciences Corp Earnings Call EVENT DATE/TIME: NOVEMBER 04, 2015 / 10:00PM GMT OVERVIEW:

The following excerpt is from the company's SEC filing.

Co. reported 2Q16 revenue of $2.7b, operating income, adjusting for special items, of $331m and non-GAAP diluted EPS from continuing operations of $1.26. Expects FY16 revenue to be flat to slightly down in constant currency and non-GAAP EPS from continuing operations to be $4.75-5.05.

CORPORATE PARTICIPANTS

George Price

Computer Sciences Corporation - Director of IR

Mike Lawrie

Computer Sciences Corporation - CEO

Paul Saleh

Computer Sciences Corporation - CFO

CONFERENCE CALL PARTICIPANTS

Dan Perlin

RBC Capital Markets - Analyst

Jim Schneider

Goldman Sachs - Analyst

Jason Kupferberg

Jefferies & Company - Analyst

Keith Bachman

BMO Capital Markets - Analyst

Rod Bourgeois

DeepDive Equity Research - Analyst

David Grossman

Stifel Nicolaus - Analyst

Frank Atkins

SunTrust Robinson Humphrey - Analyst

PRESENTATION

Operator

Good day, everyone, and welcome to the CSC second-quarter 2016 earnings call. Just a reminder that this call is being recorded. And for opening remarks and introductions, it's my pleasure to turn the conference over to Mr. George Price. Please go ahead, sir.

George Price

- Computer Sciences Corporation - Director of IR

Thank you, Lori, and good afternoon, everyone. I'm pleased you've joined us for CSC's second-quarter 2016 earnings call and webcast. Our speakers on today's call will be Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. As usual, the call is being webcast on CSC.com/InvestorRelations, and we have posted some slides to our website which will accompany our discussion today.

On slide 2, you'll see that certain comments we make on the call will be forward-looking. These statements are subject to known and unknown risks and uncertainties which could cause actual results to differ materially from those expressed on the call. A discussion of risks and uncertainties is included in our Form 10-K, Form 10-Q and other SEC filings.

Slide 3 informs our participants that CSC's presentation includes certain non-GAAP financial measures and certain further adjustments to these measures which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables with today's earnings release, as well as in our supplemental slides. Both documents are available on the investor relations section of our website. Briefly, I'd like to note that Mike's prepared remarks addressing operating results will exclude special items that are discussed in more detail in the non-GAAP reconciliation in our second-quarter 2016 earnings press release. In addition, I'd like to also introduce Neil DeSilva, who is on the call with us today. Neil has joined CSC to lead both our Commercial M&A and our Investor Relations functions, and I'll be working closely with Neil. Finally, I'd like to remind our listeners that CSC assumes no obligation to update the information presented on the call, except, of course, as required by law. And now I'd like to introduce CSC's CEO, Mike Lawrie.

Mike Lawrie

- Computer Sciences Corporation - CEO

Okay, George, thank you. And good afternoon, everyone. Thanks for taking the time with us this afternoon. And hopefully, we'll see many of you tomorrow at our Investor Day. As is my practice, I've got several key messages which we'll develop a little bit this afternoon, and some more that we'll develop tomorrow in the Investor Day. But message one is, our second-quarter non-GAAP EPS from continuing operations was $1.26, up 7% year over year. And this was driven by strong commercial margin improvement and strong performance in NPS, as well as a slightly lower tax rate. Our free cash flow was $53 million, which was up $22 million from a year ago. Our commercial revenue continues to reflect the stronger US dollar and the impact of restructured contracts, though we expect many of these headwinds to moderate in the second half of the year. Notably, we saw some improvement in our consulting business, with Americas' consulting essentially flat, and UK consulting again showing strong growth. Our commercial book-to-bill was 0.8, but normalizing for a few large deals, it slipped into the third quarter, and already-have-been-signed, the commercial book-to-bill would have been roughly 1.0.

We continue to see real positive momentum in our next generation offerings, which in aggregate, grew 31% year over year in constant currency. And we're also up sequentially. Next gen bookings were strong, with an aggregate book-to-bill of 2.2. In addition, late in the quarter, as we've talked before, we did close our acquisitions of Fixnetix and Fruition Partners, and also announced our potential acquisition of UXC in Australia. These acquisitions are consistent with our strategy of shifting our mix towards applications, consulting and next gen, and continuing to moderate our exposure to the traditional infrastructure outsourcing business.

Our NPS business continues to produce strong margins at 16.6%, and again delivered strong bookings, with a book-to-bill of 1.5. I think this bodes well for revenue going forward, although revenue in the quarter was down 7% year over year. We had expected revenue to be flat year over year, with the resolution of a contract dispute, but this

resolution was delayed. NPS revenue did grow sequentially. And we remain on track to separate CSC into two pure play industry leaders, complete the merger with SRA, and begin trading on the New York Stock Exchange as separate companies on November 30. We also announced our Investor Day, as I said, will be held tomorrow, where we will provide you with many more details about each of these two businesses. And finally, for FY16, we continue to target commercial revenue to be flat to slightly down in constant currency, and NPS revenue to be slightly up, assuming the contract resolution. And our FY16 non-GAAP EPS from continuing operations, that target remains $4.75 to $5.05. And our free cash flow target is also unchanged at $750 million to $800 million. So let me just develop each of these in just a little more detail, and then I'll turn it over to Paul, and we'll then handle any questions that you might have.

As I said, our second-quarter GAAP EPS from continuing operations was $1.26, up from $1.18 a year ago. This was driven by strong commercial margin improvement and strong performance in NPS, as well as a slightly lower tax rate. EPS growth also comes despite the continued headwind we see from currency. Overall, our operating margin in the second quarter was 12.2%. This was up 90 basis points year over year. Our commercial operating margin was 10.7%, which was up 100 basis points year over year, driven by benefits of our cost takeout actions, including our fourth-quarter 2015 workforce optimization program. GBS operating margin was 12.8% up 220 basis points sequentially, and relatively flat year over year. And the GIS operating margin was 8.5%. This was up 190 basis points year over year, driven by the benefit of our recent workforce optimization and continued contract restructurings. The NPS operating margin was 16.6%. This was up 120 basis points year over year, and continues to be at the upper end of the industry, driven by continued strong execution. And free cash flow was $53 million for the second quarter, and this was up $22 million year over year.

Now turning to commercial revenue, our commercial revenue was $1.75 billion in the second quarter. This was down 7.3% year over year in constant currency, again driven by the impact of restructured contracts and other headwinds that we've talked about many times in this forum. And this was mainly in our GIS business. Sequentially, commercial revenue was down 3%, and this was consistent with seasonal trends and in line with our expectations. Global Business Services revenue was down 4% year over year in constant currency, again largely in line with our expectations. IS&S revenue was essentially flat year over year on a constant currency basis. And our BPS business again showed good growth, up 8% year over year in constant currency. And our healthcare business was essentially flat. In consulting, we saw the year-over-year revenue decline moderate to 5% constant currency, driven by relatively stable revenue performance in the Americas' consulting business, and continued growth in our UK consulting business, which was up 18% year over year in constant currency. And we expect to see our consulting business continue to show signs of stabilization as we make progress repositioning the business to focus on technology and industry consulting, as a tip of the spear for our new next generation offerings.

Application revenue was down 8% year over year in constant currency, with continued runoff as planned in our staff augmentation work. And this offset a growth from new work, including apps modernization. Our Global Infrastructure Services revenue was down 11% year over year in constant currency, again largely in line with what we had anticipated. We continue to experience the effects of price-downs, restructurings and contract completions, which are still ahead of incremental revenue that we're generating from new and traditional offerings. But we are closing the gap, as we did in the first quarter. We continue to close that gap between traditional runoff and incremental new revenue from our offerings. And we'll spend more time tomorrow in the Investor Day talking about this trend, and when we can expect to see it cross over.

Shifting to contract awards, overall commercial bookings of $1.4 billion represented a book-to-bill of 0.8. And as I mentioned, a few sizable deals were not signed by the end of the second quarter, but have been signed during the first two -- or first few weeks of the quarter. Normalizing for this, our book-to-bill would have been roughly flat at 1.0. GBS book-to-bill was 0.8 on a reported basis, and normalizing for a couple of these contracts, would have been a 1.1. And GIS book-to-bill was 0.8 on a reported basis, and this compares to 0.6 a year ago.

CSC added 78 new logos in the quarter on a global basis, more than half of which were outside the US. And just to highlight, one of our key competitive wins this quarter came from a major global insurance company, which shows CSC to support its digital first go-to-market strategy. And as part of this win, CSC will employ our next generation infrastructure offerings, including our private cloud offering CSC BizCloud, as well as Amazon's public cloud offering orchestrated by CSC's Agility platform. And we've also recently signed work with this client to consolidate their existing Oracle state and deliver it at a lower cost as a service. And I think this example and other examples continues to demonstrate aspects of CSC strategy in the marketplace, our position as an orchestrator of next generation technology solutions, our deep industry and domain knowledge and our strong partnerships with technology leaders, including Amazon and Oracle. In fact, if you look out through of the balance of this year, over one-third of our qualified pipeline now involves one or more of these strategic partners.

Turning to our next generation offerings, we continue to see positive momentum in the second quarter. Here's just a couple of data points. Our big data revenue is up 37% year over year in constant currency, with a book-to-bill of 1.3. Revenue from our next generation network offering with our partner AT&T was approximately up 20% sequentially, and our pipeline for this offering is up over 50% from the year-ago period. Storages and service revenue was up approximately 37% sequentially, and our storage-as-a-service pipeline is up 70% year over year. Standalone cyber revenue was up approximately 36% year on year in constant currency, and our applications modernization revenue was up approximately 31% sequentially. And our pipeline for that offering is also up over 20% year over year. In aggregate, revenue from our next generation offerings was up approximately 31% year over year in constant currency, and had a cumulative book-to-bill of approximately 2.2X.

And also during the quarter, we introduced a groundbreaking next generation network offering with our partner AT&T. We integrated our Agility platform, which manages the orchestration of applications in a hybrid cloud environment with AT&T's NetBond, which establishes a fast secure network link from the enterprise to public clouds like Amazon and Azure. This offering enables our clients to quickly configure both the cloud environment and the secure network in an integrated manner, removing a key obstacle to broader public and hybrid cloud adoption with our clients globally.

And late in the quarter, as we previously disclosed, we did close on Fixnetix and Fruition Partners. As you know, Fixnetix is a leading provider of managed services in the financial services industry. And Fruition Partners is the leading global integrating partner for ServiceNow, a leading provider of enterprise service management solutions. And in addition, we announced that we've entered into due diligence to potentially acquire Australia-based UXC. UXC is the largest Independently owned IT services provider in Australia. Assuming our acquisition moves forward, UXC would bring an attractive mix of offerings -- with approximately 2/3 of its revenues in applications, consulting and next gen areas -- as well as help CSC expand in...


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