Bryan Brady - VP, IR Mike Laphen - Chairman, President & CEO Mike Mancuso - VP & CFO

Darrin Peller - Barclays Capital Adam Frisch - Morgan Stanley Bryan Keane - Credit Suisse George Price - Stifel Nicolaus Ashwin Shirvaikar - Citi Sri Anantha - Oppenheimer Tien-Tsin Huang - JPMorgan Jason Kupferberg - UBS Rod Bourgeois - Bernstein

Good day everyone and welcome to the CSC fiscal year 2010 third quarter earnings conference call. Today's call is being recorded. For opening remarks and introductions I'd like to turn the call over to Mr. Bryan Brady, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning everyone and welcome to CSC earnings call for the third quarter of the fiscal year 2010. We hope you've had a chance to review our financial results which were issued earlier this morning. With me today are Mike Laphen, our Chairman and Chief Executive Officer and Mike Mancuso, our Chief Financial Officer. As usual, this call is being webcast at csc.com and we have also posted slides to our website to accompany this discussion. If you can turn to slide two, there is the usual reminder of that statements made during this call that are not historical facts may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks and uncertainties which could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the company's filings with the SEC. Copies of these filings are available from the SEC, from our website and from our investor relations department. Slide three acknowledges that CSC's presentation includes certain non-GAAP financial measures. In accordance with SEC rules a reconciliation of these metrics to GAAP metrics is included in the tables of the earnings release and in the appendix to our slides. Both documents are available for your review at the investor relations section of the CSC website. Finally, I'd like to remind our listeners that CSC assumes no obligation to update the information presented on this conference call, except of course as required by law. Sir, if you kindly move to slide number four, I am pleased to turn the call over to Mike Laphen.

Thank you, Bryan and good morning everyone. Our third quarter results build upon the successful performance we delivered in the first half of the fiscal year. Despite a market that is still on recovery we achieved both solid business and financial performance in the third quarter. We are particularly pleased with the continuing ramp up in new business bookings, which we believe affirms the marketability, and innovativeness of our expanding offerings and solution sets. These offerings could with our [progress] selected high gross sectors, have increased our opportunity of pipeline and positioned us for the accomplishment of our long term financial objective of growth with group profitability. Slide five, summarizes the major highlights of the third quarters performance. We achieved significant new business bookings, delivered solid EPS growth, continue to expand our operating modules, held year-over-year revenue stable, delivered cash performance ahead of our plan, and most importantly we continue to deliver real results of value to our growing list of clients. Continuing improving profitability has been a consistent objective of this management team. All three lines of business expanded operating margins sequentially, yielding an improvement of 110 basis points. On a year-over-year basis, operating margin improved 15 basis points; this continued expansion derived some improved operational performance, recurring benefits from our cost structure improvement programs and ongoing proactive management of expenses. We anticipate that the net affect of these efforts will be margin improvement at the upper end of our target range of 25 to 50 basis points for the full fiscal year. Revenue of $4 billion net of a non-core disposition was inline with our expectation and on track with our full year guidance of $16 billion to $16.5 billion. We anticipate a ramping up of revenues in our fourth quarter, with about half of the growth coming…

Thanks Mike and good morning ladies and gentleman. Before I get into the numbers, as most of you are aware, the timing of this year's press release in analyst call marks a significant departure from CSC's past practice. Historically we have released our financial results at the end of the day after the market closed and then almost immediately thereafter initiated the call. That of course, did not allow much time for me to parch the numbers and formulate your questions. Hopefully, this current routine will help facilitate more targeted discussion. In any event, we certainly invite your feedback on the timing of this call. Now I'll get to the numbers. First of all, as Mike Laphen does, I feel very good about the quarter. We are on track to meet or beat all of the financial targets we set for ourselves this year and as you will see, we are further strengthening the balance sheet and are very well positioned for next year. If you will turn to chart nine, chart nine delineates what we see as the more significant accomplishments in the quarter. Mike has already addressed the new business award, so I won't dwell further on that except to suggest that this bodes well for our future revenue growth. As you can see, EPS is $1.36, that's about $0.11 higher than the top end of our guidance. I'll have more to say about this. Our tax rate for the quarter has dropped by roughly eight percentage points from our previous estimate and our annual rate will drop from our previously discussed 28% to 24%. Sequential revenue stability, sequentially for the first three quarters of this year our revenue has been a constant and roughly $4 billion per quarter, and our third quarter revenue was comparable to last…

We're now ready to move into the Q&A session. Operator, could you please advise the participants all the instructions for asking questions?

(Operator Instructions). And we will take our first question today from Darrin Peller with Barclays Capital.

I would like to touch first on the margin improvement. I think it was pretty impressive and consistent throughout the year, and just maybe Mike you can give a little more color as to detail around the change sequentially in year-over-year and really give us a sense of what is left for next year?

Certainly, we do not intend to rest on our laurels. I think we outlined for the folks that had attended our investor conference last November that we fully expected to continue the March toward margin improvement in the coming years and that we would target something to the tune of about another 25 or 50 basis points improvement going forward. It's obviously I don't think it's any one element, but it's every element of our performance from the large scale things that we can't control to improve the execution, better manage travel expense, space reductions across the world as we continue our analysis of our space need etcetera, etcetera. It's really a number of things across to all the spectrum, better activities around capitalization and we'll keep an eye on the interest rates next year so our efforts are concentrated on that which is in the operating income side of things and those items between operating income and net income and that we can affect by prudent action. So I hope that it's kind of a general answer but that's kind of where we are.

I would just answer that Mike I think you also keep looking in the contacts though of the business mix and particularly with the new business levels that we're waiting, will be infusing that revenue stream and that will come at a better margin and also will reflect and enhance our ability to increase our offshore mix of employees which today is around 32% to 33% and we've set ourselves a target of 50% over the three year period. So good opportunity to improve the margins through the mix of business as well.

And then another question on the next quarter your discretionary items you alluded to around the 401(k) plans on the debt extinguishment that, you know your guidance suggests that you will have over a $800 million, at least $800 million of free cash next quarter alone and that I guess taking into account those two items as well.

Well the discretionary yes, the debt repayment would be outside free cash flow and in investing activities. So the 800 plus million would be mildly [predicated] by the $25 million 401(k) contribution. The other debt repayment in investing activities and that's certainly part of the free cash flow calculation.

Okay and those two items are really just sort of one time and [make sure] other than the may be the benefits of the debt repayment going forward.

Next we will hear from Adam Frisch with Morgan Stanley.

I wanted to address the bookings pipeline a little bit. Obviously, the third quarter was solid, but what are the next few quarters looking like? Do you think you can get into the $4 billion to $5 billion range near term and will the mix change at all between the different business segments?

Well as I've said we've targeted $17 billion to $18 billion for the full-year, so that, that requires another good quarter in the fourth quarter which we anticipate, and we believe we have opportunity to exceed that $17 billion to $18 billion levels. So looking to next quarter we think it should be a pretty good quarter and a very good year. Going beyond that, the pipelines are robust in the outsourcing arena projected. There are also robust in our public sector business. So the outsourcing as you know it can be bumpy by quarter, so I'm reluctant to say quarter-by-quarter, it's going to be the $4 billion to $5 billion because you do get lump sum with some of the outsourcing, but from what we see, near term, it looks good for us, I'd say very good, and on a more extended range, we like what we see in the pipeline.

Just to add to that on the discretionary side, especially in BSS, we're seeing a pickup there in small projects, it's not pre-crisis levels, but we're definitely seeing a pickup on the discretionary side. Can you talk about BSS as well and then maybe Mike you can wrap this part of the conversation up with. Can you still increase margins by 25 to 50 bids if more of your bookings may be coming from NPS and OS which I think are lower margin than some other areas?

Well, just to talk to the [real] data the activity is picking up. We are projecting higher utilization in the fourth quarter. I think I eluded that in my commentary. We do see increased interest in the transformational opportunities. I think we are going to continue to have to see how this plays out, so we are cautiously optimistic I would say on the BSS space. As I said earlier, it's been stable for three quarters, it's like the up tick in the fourth quarter and hopefully that trend or slope will continue.

And Adam this is Mike Mancuso. Certainly BSS, we're gladly optimistic obviously the pick up will come right now. There's significant amount of competitive pressure within BSS etcetera, but we think that that would increase business and what we have to offer that we can win new business in BSS with very favorable margin rates and continue our march towards low single digit margin rates certainly in BSS in the coming quarters.

Sounds good, if I could just sneak in one more before turning it over. The off-shore players are making some pretty solid headway into the infrastructure business with their rim offerings (inaudible) spoke about yesterday; other players have spoken about it on the earnings season's calls. How does CSC counter the push from the new base firms into rim and what impact are you seeing in pricing so far? Thank you.

Well RIM is nothing new for us. We've been doing remote infrastructure management for a long time. We've been doing it from a global perspective, so my perspective position is that we are significantly ahead of the [Indian fuel placement]. Frankly, we think they have a long way to go to be able to be a real global provider of RIM, so there I'm sure there'll be aggressive competitors, but clearly with the bookings that we are showing right now, we are not being negatively impacted by whatever actions they are doing out there.

We'll move on to Bryan Keane with Credit Suisse.

Just looking at the $4.4 billion revenue guidance for the March quarter that was a little higher than I anticipated, turns out to be about 7% year-over-year growth, I guess how much of that is constant currency and how much of that be FX growth?

I don't have that answer of the top of my head. Bryan, it's we'll have to get back to you with that one. You got me cold on breaking down at forecast by currency.

Yeah I guess another way too look at it. I think NPS is expected to be to pro-mid to high single digits in the fourth quarter. In order to get the $4.4 billion, it looks like both managed services and business solution services need to grow high single digits or does one grow faster than the other when we look at the fourth quarter?

Let me first of all remind you that there are some NHS milestones in the fourth quarter that will bring with it revenue recognition, so that has some influence not total by any stretch influence on the BSS number as Mike had indicated those milestones and those performances are on track so we fully expect to achieve that. So, the stretch on the other parts of the business I mean the start up activities in MSS including the new awards that we had talked about the effort beginning on those new awards etcetera. So to give you some comfort we have detailed insight into the projections for the quarter. We already have January under our belt so to speak, so we are confident that that four is achievable for the quarter.

Okay and should we expect MSS or BSS to grow faster than the other or equal or just trying to figure out the modeling aspect here.

Well I think probably with NHS influence BSS should grow a little bit more in the quarter and MPS will have a significant growth in the quarter. Probably the one that'll grow in the recent quarter percentage wise would be MSS. So kind of look at MPS and BSS is the bigger contributors to revenue growth in the fourth quarter.

Okay that's helpful and then Mike you talked about the UK government having discussions with them about potential reduction in NHS spend what are the potential outcomes, we've heard a lot in the press there, but you said you discussed it over the quarter, but where is this going to lead or any hints that would be helpful.

Well let me just say that the government has publicly said that they would like to reduce the program, the total program not just our piece but all the vendors' piece and as well as the internal spend by about 600 million pounds to over the likes of the program. And so we are working with them on a portion of that with us. I think we are you would say it's a very constructive engagement and at the end of the day I think we are going to work something out that satisfies their needs as well as ours. So, and that's the way we born into this. So we recognize that they need some fiscal savings and they realized that we've made investments and commitments buying at the start of this contract, so again as I said during the comments, I think it's going to be a constructive outcome. And I don't think you should we will be taking the context of the whole scale of this contract and the length of this contract. I guess the only thing that I could suggest to you is I would not overreact, as to any expectations here, and then you got to put in the context that there is an election coming up over there. There is a lot of political rhetoric if you recall back to our elections and although [credit] that went on and all promises that were made and what level they are coming to be true at this point in time. I think you just got to keep all of that in perspective when you talk about in it. So we're feeling confident about where we are. We are encouraged that we are on track with another critical milestone and I think we have an extremely good working relationship with the client.

And Bryan this is Mike Mancuso again. Let me come back to your question on the growth in the quarter in constant currency with the good help of the folks in the room, we pulled out the number, there is about 1% of the fourth quarter growth, just something above 1% in constant currency growth in the quarter, and just to add to that it kind of takes the whole year in perspective our best guess for the full year is that our revenue will have declined for the full year in constant currency, something less than 3%. And in this environment we feel very, very good about that.

Okay that's helpful. Last question for me Mike is on the tax rate, its been below 30% all year and it seems like you continue to surprise on the tax rate what would be the reason why you know tax rate would go up to the low 30s since its been in the kind of the mid to low 20s all year, thanks.

In this year we've had the benefit of the number of non-recurring items one of which is from net operating losses out of our international areas strictly only in Germany that don't repeat next year. So that's probably if there is one single thing across many individual initiatives. The impact was of German NOL, so won't repeat next year but when you think about the aggressiveness of the states in tax rates going forward and so on and so forth, 32% is not too shabby.

George Price with Stifel Nicolaus has our next question.

Wanted to just follow up if I could a couple of things, first on the cash flow I guess cash flow on the quarter worse than expected and I apologize if you went over this at some point, but Mike what happened was it timing issues, was it NHS can you get a little bit more specific on what usually is a more stronger quarter seasonally for cash flow?

Well worse than expected, beauty is in the eye of the beholder. It wasn't worse than we expected. It's actually better by a couple of $100 million to our internal plans. Year-over-year comparisons with the cash flow are difficult obviously particularly when you have significant swings in milestones that may or may not occur in a given quarter. So if we surprise in the negative, we're sorry about that but we're very comfortable around the cash in the quarter and encouraged if I might add the word in terms of our ability to meet our full year guidance, so there was nothing aberrational there that we hadn't anticipated.

In terms of the improvement that you expect and that's implied in the guidance next quarter, obviously there is, if you look back seasonality is a big factor in the fiscal fourth quarter, I guess other drivers would be expected milestone payments related to NHS with Marcum Bay, any other milestones, any other timing issues that you can elaborate on?

No. it's probably the single event if you can say that in the quarter, it would be a contributor. Of course is will be the NHS milestones and the advances that will come with that execution, but that's a portion of it but certainly not the entire portion as a matter of fact as well as the 50% of cash in the fourth quarter. Its just deliveries and some seasonality, but other than NHS milestone nothing aberrational in the quarter.

In terms of demand I wanted to follow up on one thing that you said around DSS especially around larger transformational opportunities you know you said that its been kind of stable and you know you are seeing some more activity in some I guess some improving interest but it sounds to me that in terms of the actual getting new deals spending started in new deals done it sounds like may be the pick up has been progressing may be a little bit slower than you thought coming into this year, is that fair?

No I wouldn't characterize that, that was to be honest in that particular area we weren't all that optimistic when the activity would pick up so I guess from our perspective we are starting to get some of the bookings and I have referred to some of them global prints and it's the ones I've talked about in France and Brazil and elsewhere in different markets so I think it really varies by geographical markets I would say that first and foremost but I would say that it's a bit up more than we expected but I wouldn't I don't want to give the impression that I think its robust by any means. I think we still have a good way with that right? You know it's a positive slope but it's not indicating that you know things are a little back to normal if you will.

Okay. Last question is on the two discretionary items were they originally factored in guidance or have they been in guidance recently or are you basically just using the opportunity of the lower tax rate to kind of knock these out. Thanks.

The discretionary 401-K contribution as I said was embodied in our guidance throughout the year. The tax rate improvement gave us some latitude in terms of being able to address the debt repayment opportunity, but also the credit markets have also stimulated our interest in paying down at 7% debt and should we need to borrow next year for whatever needs we can borrow at a much cheaper rate than what we're currently paying on that debt. And there is a minor improvement arbitrage wise with the early payment not astounding by any stretch but also presents an opportunity.

Thanks George. Operator, we're just a little bit concerned about the time available, so I wonder if we could just ask the question as you could please restrict yourself to one question, so they can all get an opportunity.

Yes. As a reminder everyone, please limit your self to one question initially. We will now go to Karl Keirstead with Kaufman Bros.

Thanks for taking my question. Mike, this one is about the March quarter operating margin improvement. CSC's had up year-over-year adjusted operating margins. It seems almost to every quarter for the last couple of years, but your guidance for 10.1% operating margins and then even we add back the 25 million of 401-K contribution, it feels like its going to be down from the 10.9 from last year, so I just I want to get a sense for whether there is anything in the March quarter beyond that 401-K contribution that might sort of break the streak up year-over-year margins.

The quick answer Karl is no. I can't think of anything other than 401-K contribution in the quarter. Last year just to be specific, I think the margin rate was 10.86 and this year excluding the discretionary $25 million the number would be 10.68. So its slightly down if you will but again it's a mixed issue if anything, there's nothing unique in there. So nothing that we can think of at this point that is unusual.

Ashwin Shirvaikar with Citi has our next question.

Hi I wanted to go back to the growth question and if you could break out your bookings to date by renewals versus new logos and then talk about the as new logos potentially become a bigger part of future bookings do you expect that to have what kind of an impact do you expect that to have on both CapEx working capital margins, thanks.

Okay well let me the way we look at it is new logos and new specific expanded work for an existing logo and of the bookings today it was 14.9 billion about 75% of that would go into our new category and about 25% would be on, included on our re-compete or follow up business if you will.

Ashwin its pretty difficult at this point to give you any detail around how those bookings break down and how they might affect CapEx or working capital and margins certainly the outsourcing contracts would carry more of a working capital requirement than the consulting awards or the government awards kind of things sp you can think of it in that sense. Margins, again we're talking about margin rate improvement next year to the term 25 or 50 basis points that will come from across the board execution improvement. New business carries with it more attractive margins and challenges for us to be able to deliver those margins.

I would just add that as we asses the desirability to pursue a new business opportunity, the capital intensity is taken into consideration and now that fits into our overall corporate picture so there is deals that we're walking away from time to time because they are too capital intensive. So that's right in our forefront and will pay attention to that.

We will move on to Sri Anantha with Oppenheimer.

Mike, in the Analyst Day, you've talked about a certain portion of future would be coming from acquisitions, could you just say, where does that list in the priorities as you look at fiscal year 11 especially with operations now being stabilized and just want to question on the bookings, is there any reason given your comments about pipeline that your bookings for the next fiscal quarter would be less than $3 billion?

Let me tell about the acquisition first. As I said at the Investor's Day, we were back into acquisition mode. We feel very strong, very good about our balance sheet, feel a strong, feel the cash flows or consisting with solid, so we've put a target there of about 2% to 3% growth as a result of acquisition and that's 2% to 3% a year now you know it may not necessarily all happen in one year in two to three or it may overlap a little bit but just in general terms that's our target 2% to 3% of acquisitive growth per year and we are active on that.

Our next question comes from Tien-Tsin Huang with JPMorgan

Just a real quick one, can you give us an idea what percentage of revenue is coming from NHS now and is there a reason where you assume that it could contract a bit in fiscal 11.

Unfortunately I cannot give you that visibility as a result of our contract terms. So I apologize but unfortunately we can't take you into that.

I understand how about another just a quick one then on free cash flow is there a chance that we might see a little smoother performance quarter to quarter next year with free cash flow.

Yeah we are certainly working on it you know it takes some time to obviously restructure contracts and reorganize milestones etcetera, etcetera. but we are working on it very diligently and I am not going to stand up here and preach success at this moment but in future quarters over time I think you will see a dramatic change in our quarterly cash flow profile. How quickly that comes I am not quite ready to commit specifically.

Jason Kupferberg with UBS has our next question.

Hey guys this is actually Steve Potterman in for Jason. During the last call you guys mentioned that we should expect a smaller CapEx run rate which areas are you guys targeting on those fronts would it be traditional property or software outsourcing contracts?

: Steve, your question was breaking up, and we didn't get it. Would you try it again, please? You may be too close to your phone or your microphone because it's breaking up a little bit so go ahead.

During the last call, you guys mentioned that we should expect a lower CapEx run rate going forward. I was just wondering what part of CapEx are you guys targeting to lower is it traditional property equipment or is it software outsourcing contracts?

Thank you for repeating the question. It would be more oriented as Mike said towards some of the outsourcing opportunities that are extremely capital intensive with very deferred and late longer term recoveries of the initial investment. Those were the kinds of things we're looking at extremely carefully, and probably the primary targeting area in terms of reduced CapEx spending and we're also looking at variations of with the clients on how we can minimize CapEx investments and that includes obvious things like leasing opportunities and more innovative ways of refreshing assets etcetera. So it's across the spectrum, but outsourcing contracts would probably get the primary focus.

Yes. We have a question from Rod Bourgeois with Bernstein.

Just real quick on the NHS contract, I mean I know we are multiple years into this deal and I think it's generally been a cash draining contract so far. Could you give us an update on what type of cash flow you are expecting from NHS in fiscal 10 and if you can specify the exact number if you just give us a direction on whether its positive or negative and then assuming the NHS program gets truncated and there's clearly some political momentum behind that idea will that affect at all your longer term financial targets for margin expansion and free cash flow improvement in any way?

Let me take the first part of this and I will let Michael Laphen address the longer term aspects of NHS. Relative to the cash flow, cash flow performance of the program FY10 we will be cash neutral by the end of the year on NHS. Now obviously if you follow as you have our detailed 10-Q filings you know that our investment in NHS through the first two quarters has increased. You will also note when you will read this particular queue for the third quarter there is another modest increase in our investment in the NHS program. By year end we expect to be back to about where we were at the beginning of this year or the end of last year. The program is coming through the development cycle. It will turn into more obviously the delivery and non development phase of the program but let me throw it back to Mike to cover the NHS program.

Rod I guess I would just say we have no reason to change our projections and guidance that we gave with the Investor's Day in terms of growth and margin improvement if anything we've put another quarter in the record books that points in that direction, and as we say we're forecasting for the fourth quarter and the full-year to continue and point in that direction. There is, I think we continue to make excellent progress on the NHS. It's getting more and more embedded into the NHS system, and I think that this is going to continue on in some reduced way, but at this point we have no reason to believe that we need to change the guidance we've given the street relative to it.

If I can just a quick follow-on, on that. With your free cash flow, being sighted as above your plan year-to-date and since NHS is on track and you're getting at least a five day reduction in DSOs, shouldn't that put your free cash flow in fiscal 10 above your net income rather than just set kind of the 90% mark?

It might we will see how fourth quarter comes out.

I think we're ready to close down, and I wonder if I can pass the call over to Mike Laphen for his closing remarks.

Thank you Bryan and thank you for everyone for participating. As again, as Mike said in his opening remarks, we obviously adjusted the starting date, starting time for this meeting and we would appreciate your feedback and whether that works for you or against you. We did some initial soundings and it sounded like it would work better for the community. So, I think you can hear from our tone we're pleased with the third quarter. We look forward to concluding our fourth quarter, and closing the books on a successful fiscal 10 and looking forward to fiscal year 11 on a positive note. With that I will conclude and talk to you in the next. Thank you very much.

This does conclude today's conference. Thank you for your participation.