Computer Sciences Executive Insights: Margin Drivers and Problem Contracts

On Thursday, Computer Sciences Corporation (NYSE:CSC) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Margin Drivers

Keith Bachman – Bank of Montreal: Really two related questions. As you think about the comments you made of saying operating margins being say 200 basis points to 300 basis points higher, so it kind of put you over the adjusted numbers in that 4% to 5% range. I was hoping that a, you could talk a little bit more about the charge of $1 billion of savings rather, anymore color on how that contribute – how much do you keep versus how much you said you reinvest? Then secondly, how much is from, I don’t know how to say, but not chasing the bad contracts or improving the portfolio of contracts in terms of profitability, just any kind of color you can give us on the contributors to that improvement margin that’d be great?

Mike Lawrie – President and CEO: Yeah. As I said the billion dollar cost take out is over 12 to 18 months period. And I’m trying to get the little. And we’ve only been added now literally three or four weeks. So I’m trying to get a little better handle on what I can expect. There are some major changes. For example, we’re reducing dramatically the number of people that have PO authority to get control of our spending, but I don’t have any concrete numbers yet as to how that’s going to begin play out month-by-month. So I would like to see that. We’ve put probably in our budget for this year around $500 million to $600 million of those cost savings we have factored into the budget that we’ve deployed internally. Part of that is the cost savings, part of that is probably $100 million to $200 million of improvement we’d like to see in our MSS trouble contracts that we just talked about. So all that is factored into what we have deployed for the new fiscal year in terms of a budget. What I don’t yet have again just in total candor is I don’t have any results yet. So I don’t know the traction underneath some of these initiatives. That’s why I’m saying when we get together in August and again in September I’m going to have a little more facts and from that I can begin to extrapolate what I think will play out this fiscal year, then I can provide a little more clarity, a little more precision around that, but I want to give you a rough idea of what this looks like in terms of financial model for fiscal ’13. In terms of reinvestment, I don’t know. Part of that will be some systems. We obviously have a lot of work to do with our financial systems, and we’ve got work that’s undergoing right now putting that plan together. So I just don’t yet have a precise number of how much will be reinvested. My thinking is that the majority of this will be dropped to the bottom line.

Problem Contracts

Darrin Peller – Barclays Capital: Thanks, and thanks for all the added disclosure guys. For Mike Lawrie, can you give us a bit more sense into the scale or size of the 40 problem contracts in terms of maybe just percentage of the business? And then maybe just give a little more color on what is the measurement you are using to determine when one of those contracts should fit into that 40. Maybe profitability measurement or how do you think about when something is a problem contract? Last part of that question would just be, is that number, the 40 something we can really hang our hat on to, or is that something we should expect to change?

Mike Lawrie – President and CEO: Well, let’s start with the last part first. Yeah, so I certainly expect the 40 to change. I mean, we’ve been at this now for a couple weeks. We’ve already seen some improvement and we’ve got some game plans in place for some number of those 40 contracts. So yes, I do expect to see some performance improvement. Are we going to see it across all 40? Probably not, but we will see a significant improvement. In terms of dollar amounts, this is probably somewhere in the neighborhood of $100 million to $200 million that would hopefully be remediated. In terms of the contracts that would be – think of that as net loss that we’d like to convert to a positive. In terms of the percent of the revenue, think of this as probably somewhere in the neighborhood of 20% maybe to 25% something like that. So, it’s an important part of the business and I’ll just add one other comment here is by putting a very strong pre-signing or as we go through negotiation process on these contracts, putting some real discipline around contracting will help. I mean, it’s little things. For example, today we’ve put some very skilled contracting people on these deals as they work towards closure, but then often those people that have very good insight around these contracts, we reassign them to other new opportunities, so we actually lose that institutional knowledge around how the contract was structured, where some of the soft spots are in the contract, what the intent was. So, one of the little changes that we’ve made is we’re going to keep those contract people that are part of the closed process. They will stay with that contract through the life of the contract. So, those are ways that you don’t have this interruption of knowledge and an interruption and a handle of that can often contribute to transition services problems and then as scope changes occur; some of these contracts you don’t have the institutional knowledge to manage that more effectively. So, it’s little things like that that allow us to deal prospectively with new business, whereas the troubled contract process deals with things that have already occurred in an effort to remediate them.

Darrin Peller – Barclays Capital: That’s refreshing. Thanks Mike. Then just one quick follow-up. I mean how are clients responding? You know, clients are used to CSC a certain way and probably giving somewhat more scope away for (free at times) even I mean the scale expansions haven’t always come at the right economics in the past, which I think has been part of (the). How are your clients responding to these kind of addressing and changing really the terms in the way you’ve operated now versus what you’ve done in the past?

Mike Lawrie – President and CEO: Listen, our clients want us to be successful. There is an enormous reservoir of goodwill. I mean the last thing they want is a partner that has got a major responsibility for their IT infrastructure or for their application portfolio to be presenting results like we’ve presented today. I mean that’s not their idea of a good situation. So, in many cases they are welcoming the opportunity to sit down and say, well, gee, what can we do together, how could we increase this, could you maybe do something more, how do we do? So, it’s all about a dialog, an honest engagement where we sit down, the client say, here is what we’d like to do, what would you like to do and trying to put that together, so it becomes a win-win; not a win-lose, but a win-win, and in almost every situation that I know of, the client has responded exceptionally well to this and encourages that dialog.