Computer Sciences Earnings Call Insights: Restructuring Outlook and Upcoming Booking Trends

Computer Sciences Corporation (NYSE:CSC) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Restructuring Outlook

Ashwin Shirvaikar – Citigroup: So, my first question is with regards to the additional restructuring, what kind of activities do you envision there? As you go through, are you finding more low hanging fruit? What specifically do you intent to do?

Mike Lawrie – President and Chief Executive Officer: Lot of that restructuring, Ashwin, is directed at Europe, It’s directed at people delayering activities as we begin to remix our skill base and as we begin to retool here around many of our new offerings that’s one activity. We’ve got significant real estate consolidations that we want to do, so those are the two primary things we want to do. When I talk about real estate, I’m also talking about the consolidation of our data center. So, those are the two principal activities primarily in the European theater that we are now funding as we go into 2014.
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Ashwin Shirvaikar – Citigroup: And could you provide an update on sort of generically on the problem contract resolutions, where you stand with that?

Mike Lawrie – President and Chief Executive Officer: Yeah. We don’t really call them problem anymore. They’re focus as I mentioned, we had over $200 million in improvement year-to-year, so we’re really very, very pleased with that. And what this really did for us was to begin to build a new set of disciplined processes around the way we manage transitions and the way we manage the full lifecycle of these contracts. So we’ve put economic game plans in place for all of these focus accounts and that drove significant results in the focus accounts, but it’s also beginning to drive results across all our portfolio of clients as we apply these disciplines across the entire client base.

Upcoming Booking Trends

Keith Bachman – Bank of Montreal: Hi, I have two if I could, Mike could you talk a little bit about how you see the booking trends for this upcoming fiscal year. In other words, do you think the bookings will be at a rate that’s greater than one, I was a little bit not so much surprised on the federal but the commercial is pretty weak when everybody else has been reporting very good numbers on the booking side, so may be give us a little bit of flavor on how just directionally you see the book-to-bill this year? And then I have a follow-up.
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Mike Lawrie – President and Chief Executive Officer: Yes, I think as we look out over this upcoming fiscal year we are making a pretty dramatic shift here to hire value, higher margin offerings and much focused on these very large capital intensive deals. So that is a fairly significant remix of our portfolio and of our pipeline. What we are beginning to see is we are beginning to see substantial pipeline growth. I would say that what we are planning to see is I think the bookings will continue to be a little bit on the weak side probably in the neighborhood of 1.0 or little less through the first quarter to second quarter, but what we are anticipating is, we are anticipating that to begin to pick up in the second half of this next fiscal year. And that’s why we have laid in the revenue plan that we have talked about last year and we reiterated this morning sort of flat growth to slightly up growth in the commercial sector, but we are clearly now beginning to move to the next phase of this turnaround, which I termed win more, that’s why we have added substantial sales capacity worldwide, why we are expanding dramatically our partner offerings, this is all geared towards beginning to pivot to driving some growth around these new offerings, and I expect to begin to see that show up not only in the pipelines, but in book-to-bill and the revenue as we get into the second half of 2014.

Keith Bachman – Bank of Montreal: Then, my follow-up is related to the guidance, and if I look at the EBIT dollar that you’ve reported in FY’13, if you normalize for the dispositions as well as restructuring, it looks to be around $900 million, and implicit in your guidance seems to be very little increase in the EBIT dollars in FY’14 when you would think some of the restructuring would continue to flow through in and NHS would assumed to go from a negative to a positive or at least to a neutral I should say. Are we missing something?

Mike Lawrie – President and Chief Executive Officer: I’ll let Paul comment in a little greater detail, but NHS as you know, we are not taking any of that revenue upfront, we are taking that on a ratable basis across the length of the contract, which was a five-year contract. By the way, we are seeing some significant sales gains in NHS. We don’t talk about that too much anymore, because it’s really no longer a problem, so we are actually selling, we are installing and going live with many trusts, but that revenue doesn’t show up in the period that we do this. It gets rated over the five-year contract period.

Keith Bachman – Bank of Montreal: And sorry I said NHS, I meant to actually say iSOFT is reporting a loss and will presumably go more to kind of a neutral position.Regular Posts

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Mike Lawrie – President and Chief Executive Officer: Yes, but we still got the big piece of iSOFT is NHS. That has changed the revenue profile of that business. Now in terms of the restructuring, yes we took significant restructuring in the fourth quarter and that will take time to play out. Most of this is geared to Europe and we’ve got works councils and other things to go through. So we don’t expect a lot of that to filter through to the bottom line until the second half of 2014.

Keith Bachman – Bank of Montreal: But Paul, am I wrong that the EBIT dollar levels are fairly minimal growth from FY ’13 from FY ’14 if you normalize for the things I just mentioned?

Paul N. Saleh – EVP and Chief Financial Officer: Yes, I think the way to look at it is that, as we indicated, if you look at our starting point from 2013 and you look at what we are guiding – we have targeted for next – for this coming year, we have $400 million of cost, additional incremental cost takeout year-over-year, but we’ve also pointed to additional investments in the form of about $300 million of reinvestments. So, the net of these two things is about $100 million. And then if you look at it also, we have – we expect maybe about some $40 million return on the investment that we made in the fourth quarter in the form of restructuring, because as Mike mentioned some of this thing is not going to pan out immediately. It’s in jurisdictions that take a while just to impact in transition. We also have in our model the benefit of the pension expense reduction as a result of the investment that we made this year of $500 million in discretionary pension spending which should give us a $30 million lift on a year-over-year basis in expenses. But offsetting that I’d say due to the NPS, NPS has been operating at a very high margin non-sustainable, if you remember, we told you it was in the high 9% and with the government where 50% of our businesses is cost plus. You’ll reset your overhead rates for 2014 so when — if you look at the NPS revenue targets plus the margin coming back down to something a little bit more sustainable which is a 9%, you’ll see that the numbers really do foot to the guidance — the target that we have given you.

A Closer Look: Computer Sciences Earnings Cheat Sheet>>