Computer Sciences Earnings Call Nuggets: Cloud Computing Business and Partnering With Product Firms

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

Cloud Computing Business

Arvind Ram Nair: On your cloud business specifically kind of your progress on negotiating utility type arrangements with some of your partners or vendors? Just if you can talk a little bit about your cloud computing business and progress on negotiating utility type arrangements with some of your partners or vendors?

Mike Lawrie – President and CEO: We are attempting to negotiate more utility-based contract with our suppliers. An example this would be what we have done with EMC for example and a new offering that we’ve come out with around Storage as a Service being a good example of that and we are trying to do that with many other of our partners. Our cloud business, we are seeing a tremendous amount of not only of interest, but what is the most noteworthy is lot of our large infrastructure bid, just in a one year period of time we’ve seen the cloud content go from roughly 20%, 30% to 50%, 60%. So, it’s one of the reasons why we concluded that we wanted to do this partnership with AT&T so that we could gain access to a much broader infrastructure as we’ve begin to transition more and more work flows over to the cloud. As I mentioned earlier, our pipeline for cloud is in excess of $2 billion. Now, this obviously doesn’t show up in one chunk of revenue. This is business that is more of an annuity basis that gets build out over time. So, underneath the covers here, things like cloud and cyber which is our security operations and offering is also a cloud-based as a service offering, our business process services, BPO business the improved revenue from NHS, we are beginning to build a much stronger reoccurring revenue stream underneath some of these businesses.

Arvind Ram Nair: If I can – just a quick follow-up on this, if you can provide some color on the competitive environment in terms of not just partners but also kind of clients, who else are you seeing on these types of bid as far as the IT services companies go? And secondly, as you kind of painted a picture for the next three years, five years, there’s an argument that cloud in some ways kind of cannibalizes some of the maintenance business. I mean obviously you are going after cloud a lot more aggressively than some of your competitors. Little bit thought on that would be very helpful…

Mike Lawrie – President and CEO: That’s fairly broad topic, but we are seeing a major shift in the compute model out there. I think this is as big a shift as what we saw when we moved from mainframe to client server 25 years ago. This is a shift that takes place over many, many years. This industry is much more – particularly the customers are much more conservative in making rapid shifts. So I don’t expect this to occur overnight, but it is a profound shift and I think it is putting a lot of traditional business models that have grown up over the last 20 years in the IT industry. It’s putting some of those business models under a lot of pressure and I think you see that in lot of the results. So I do think it’s a major shift. We see all the competitors that you would expect us to see both onshore competitors as well as offshore competitors and everyone is struggling to make some of this shift to this new compute paradigm around virtualized infrastructures and workloads that work on cloud infrastructures.


Partnering With Product Firms

Rod Bourgeois – Sanford C. Bernstein & Co., LLC: Just a strategic question and then maybe a number a clarification item. On the strategy side the strategy of a services firm driving demand by partnering with product firms to provide deployment services that complement those products. That strategy has been pursued by firms in the past with generally limited success. But I guess you might argue that the market today is different perhaps more open to best-of-breed solutions and so on and so I’d love your take on the prospects for your strategy of partnering with product firms and why those prospects for success might be better today than what we’ve seen in the industry actually play out in the past?

Mike Lawrie – President and CEO: Even I’ve talked about this at length I do see a difference. I do. I think it’s a great time to partner with a lot of leading technology firms. I do think as we begin to go through the shift of routes to market are not as clear as they were 5 years ago or 10 years ago. Lot of traditional IT firms are finding it more difficult to get to market the same way they got to in the past and to have a leading global independent technology services firm that is able to integrate multiple product technologies into a comprehensive solution that is taken to market. I think is an enormous benefit over where we were just five years ago and one of the reasons, why I think CSC is well-positioned for they shift and I have talked about some of our offerings like our offering with Microsoft, where we partnered with Polycom and Citrix and Microsoft, and we package together with those technology firms a comprehensive end-to-end solution for the workplace environment including desktop and mobile devices and CSC is providing much of the glue that brings back end-to-end solution together and can take that to market. So these are some of the shifts that are taking place that I think point to a strong position for a global independent technology services firm and we are trying to exploit that. We are exploiting that with a lot of our traditional partners and we are trying to exploit that with a new set of partners like our partnership with SAP that we announced and our most recent partnership today that we announced with AT&T all very much are lined up to take advantage of that shifts in the marketplace. But again, this stuff does not happen in one or two weeks. The technology industry typically points to the fences on a lot of these technology shifts, but the truth is it takes years and years. Question is you’ve got to get the Company positioned so that you got the skills, you got the offerings, you’ve got the partnerships that will allow you to take advantage of these shifts in the marketplace and that’s what we are trying to do…

Rod Bourgeois – Sanford C. Bernstein & Co., LLC: Then maybe a question for Paul on the cash flow side. So I am looking at operating cash flow. It was down a little bit year-over-year despite I think a two-day drop in DSOs. But you are taking your full year cash flow guidance up by $50 million. So I’m wondering if you could quantify some on the $50 million increase in free cash flow, how much of that is from maybe the tax rate versus a lower CapEx outlook versus something else. I mean, if you could provide some numbers on that? Then I guess related to it I’m wondering how much your year-over-year cash flow might have been hurt by the divestiture particularly the credit reporting business? So, I know there’s a lot of numbers there, but any quantification on the cash flow side would be helpful.

Paul N. Saleh – EVP and CFO: I think one of the slide that we’ve provided to help actually address how much do the divested businesses would have contributed this past year. If you include the credit services plus even the two businesses that we sold in this quarter ATD and the (indiscernible) and all the other that we sold last year. In total its $75 million that benefitted last year but would not benefit us in 2014. So that’s the drag and so when you compare last year to this year if you adjust for that, that’s what led among other things to a more appropriate comparison of our free cash flow going up 20% on the year-over-year basis. As far as what is contributing to the $550 million increase and most of it is the cost takeout improvements that we are seeing which is really helping to offset a little bit the weakness that we are seeing in the NPS so that is just much more the operational improvement that we are seeing on the cost side.

Paul N. Saleh – EVP and CFO: Overall we did have a significant improvement fiscal ’11 to ’12 in terms of capital. That clearly benefited our improvement in cash flow in ’12 and what we’ve done is we’ve kept our cash I mean our capital expenditures, cash expenditures relatively flat to 2013 to 2014. So there was a big improvement. Now to the degree we can drive just more of these relationships that are less capital-intensive you know that gives us an opportunity as we go forward to hopefully improve that cash flow from operations.

Rod Bourgeois – Sanford C. Bernstein & Co., LLC: Has the tax rate guidance change?

Paul N. Saleh – EVP and CFO: No, not at this point. We are working very hard to find ways again of optimizing that tax rate but at this stage I think it’s 32%.