Good day, everyone, and welcome to the CSC Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Steve Virostek. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. I'm pleased you've joined us for CSC's second quarter earnings call and webcast for 2014. Our speakers on today's call include Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. As usual this call is being webcast at csc.com/investorrelations, and we've posted some slides to our website, which will accompany our discussion today. Slide 2 informs you that certain comments will be forward-looking on the call. 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, which we believe will provide useful information to investors. In accordance with SEC rules, we have provided a reconciliation of these metrics to their respective and most directly comparable GAAP metrics. The reconciliations can be found in the tables of today's earnings release and in our supplemental slides. Both documents are available on the Investor Relations section of the website. 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 hand the call back to Mike Lawrie.

Okay. Thank you. Good afternoon, everyone. As usual, thank you very much for your interest in CSC. As is our practice here, I've got a couple of key messages I'd like to share with you, and then I'll develop those messages in a little more detail and then turn it over to Paul who's with me. The first message is our Q2 results continue to show progress in profitability and margin expansion, largely driven by our continuing efforts on cost takeout and other actions. The second message is we're continuing to invest to drive our ability to grow, and we are seeing some early signs of success, particularly in our commercial business. And although revenue declined in the quarter, we are seeing some good signs in our book-to-bills and in some of our key strategic areas, and we still expect to deliver commercial revenue growth as we exit our fiscal 2014. The third message is our NPS business really performed pretty well. Given the ongoing budget uncertainties in the federal government, our bookings were strong. Revenue was down pretty much as expected, and our margins were very strong. And then the fourth message is we are tracking to the high end of our fiscal 2014 target for EPS from continuing operations of $3.50 to $3.70. So let me just develop each of those in a little more detail. In terms of our profitability and margin expansion, our operating margins of 10.6% increased by 320 basis points year-over-year and 110 points sequentially. Margins really increased significantly across all 3 segments. Our Global Business Services margin of 10.9% increased 410 basis points year-over-year and 110 points sequentially. Our Global Infrastructure business margin of 8.7% expanded by 510 basis points year-over-year and 160 basis points sequentially. And our NPS margin, 14.9% improved by…

Thank you, Mike, and good afternoon, everyone. I'll be discussing our second quarter results in more detail, and I will cover a few important highlights. We reported strong improvement in profitability in the second quarter. Revenue was $3.1 billion in the quarter compared with $3.53 billion in the prior year. Excluding $69 million from a divested IT staffing business in the year-ago period, revenue decreased by 7% in constant currency. Operating income was $338 million, an increase of $76 million over the prior year. Our operating margin was 10.6%, up from 7.4% in the year-ago period. Earnings before interest and taxes were $248 million, an increase of $45 million year-over-year. EBIT margins of 7.8% improved from 5.8% in the prior year. Our income from continuing operations was $146 million compared with $116 million in the prior year. And EPS from continuing operations was $0.93 per share for the quarter, which compares with $0.69 per share a year ago. Bookings of $4.2 billion were in line with the prior year. Now let's turn to our segment results. Global Business Services accounted for 32% of total company revenue in the quarter. Our GBS revenue was $1.05 billion in the quarter, a decline of 7% in constant currency, excluding the IT staffing business we sold in the year-ago period. As Mike indicated, there are a few items, which are masking our revenue performance. We are repositioning our consulting business for higher-value offerings. We are proactively shifting from a licensing model to a business process services. And in our health care business, revenue from our NHS and certain software contracts is being deferred under service accounting rules. Now normalizing for these items, GBS revenue would have been relatively flat. Operating income from this segment was $123 million, excluding restructuring. Operating margin, excluding restructuring, was…

[Operator Instructions] And we'll go first to Bryan Keane with Deutsche Bank.

This is Ashish, calling on behalf of Bryan Keane. Quick question on the commercial revenue growth guidance. So the commercial revenue growth was down 5% for the first half, and you still reiterated flat growth for the full year, which would indicate that the commercial revenue growth had to be more like mid-single digits for the second half. Is our understanding correct? And do you -- like what kind of visibility do you have into the contracts or the revenues that gives you comfort that the revenue growth will move from negative side to more like mid-single digit in the second half?

As I said, I think it's probably a bias to the lower end of that range for commercial revenue. The key factor here is the bookings, as you can see, are beginning to improve on a sequential basis, on a year-to-year basis. The real question is how quickly those contracts can be converted into current year revenue. Normally, we factor somewhere in the neighborhood of 20% of a contracted sign we can drop to in-year revenue and profitability. Now obviously, the later you go in the year, the lower that percentage is. So that's the great unknown, is how quickly we can convert the order backlog that we've just talked about that we've been able to sign through the first half and then how quickly we can convert the pipeline that we see in the third and the fourth quarter and then the amount of revenue you can generate in the year. The important point here, I think, is that we are seeing growth in our order intakes, particularly in these new higher-value, higher-margin offerings. And the question is, how quickly do they cross over with the continued focus on reducing some of our lower-value, lower-margin offerings. I mean, it's obviously easier to restructure a contract, take some revenue out to improve profitability. It's easier to do that than it is to grow in-year revenue in some of these new areas. So we have pretty good visibility to that, but the unknown, Ashish, is how quickly you convert that to in-year revenue.

Okay, it sounds good. Just on the NPS side, is it possible to quantify how much of the impact from the shutdown? And do you expect to see any kind of softness in the bookings because of the shutdown?

Well, the bookings in the second quarter were very strong. And again, we had one very large renewal. So if you normalize for that, the bookings were still roughly one, which is, given all that's taking place in the federal government, pretty strong. Our impact in the quarter was probably -- on the shutdown was probably somewhere in the neighborhood of $25 million to $30 million in revenue in quarter. We have a lot of people that were assigned to contracts, and literally, these were basically time-and-material contracts, and they went home. So when they go home, you don't bill. And unfortunately, that's not revenue that you can catch up in the subsequent quarters. That's just lost revenue, but that was roughly the impact, $25 million to $30 million. So you're sticking to the format of one question, I see.

We'll go next to the side of James Friedman with SIG.

Okay, I get my multipart question, but -- okay, so one is just more of a housekeeping. Paul, you mentioned, or you have a disclosure here that there was -- there was this $20 million of other expenses, and I was just probing about that. If that's too much of a curveball, I'll give you a second to find it. But I was trying to figure what that was. And I'll ask my second part, which is, could you just describe how would you qualify, Mike, the demand environment now relative to the vantage point of the beginning of the year? Is it the same, better or worse? And I'm talking about the overall demand in the industry as opposed to something specific to CSC, so what about the expenses [indiscernible]?

Yes. I -- well, Paul is searching for the $20 million.

I'll give it to you very quickly so that you could put your mind at ease. The $20 million had to do with some FX, a combination of unfavorable movement in the currency and then some intercompany hedging. Some of it will come back in the second half of the year, but that's what it is.

In terms of the demand environment, I'd say it's about the same. It does differ a little bit by region of the world. The U.S. still is relatively strong. But the big -- and Asia is very strong. We see pretty good growth in the Middle East. I'd say Europe is probably a little slower. But the big thing that we're seeing, and I've just been out with a lot of clients over the last couple of weeks and the last month or so, is that there is enormous interest on really putting definitive plans together to move to this next-generation IT infrastructure. And this, I have seen, pick up a lot in the last 6 to 8 months. I can't go to a CIO today that is not talking about how they want to move to a cloud environment, how they need to begin to remediate their current application portfolio, rationalize that application portfolio and deploy new applications. And this is being driven because they all want to move to a lower-cost infrastructure that gives them much more flexibility and responsiveness to their own businesses. And that was one of the underlying theses behind our acquisition we announced today of ServiceMesh. Because ServiceMesh provides that integration between a multiple cloud environment and also allows enterprise applications to be cataloged and put on the software platform, and then those workloads orchestrated and managed across a multiple, multi-cloud environment. Some applications will execute on lower-cost clouds, public clouds. Other applications will require much more security and robust infrastructure like our BizCloud offering. But the key is to be able to dynamically manage those applications across that environment, and that we're seeing a significant amount of interest. These are typically smaller projects in the beginning. These are not huge buys at this point in time, but they're very important starting points and pilots that we think, longer term, will lead to significant revenue. And there, we're seeing a significant pickup in our business as evidenced by the continued growth in our cloud and cyber business. And we think the acquisition of ServiceMesh today will really strengthen those offerings in the marketplace.

And we'll go next to the side of David Grossman with Stifel. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: One question I had was just on the guidance. It looks like you're reiterating the number, and it would seem to suggest you're going to be flattish sequentially for the balance of the year. Can you kind of help us understand what the puts and takes are that would lead to that outcome and any other insight into why would a typically a seasonally stronger period for CSC would be flattish relative to the first half of the year?

Well, I think there's a couple of things. One, I've no idea what's going to happen in our NPS business. I wish I could give you clarity, but I really don't know. There's a lot of unknowns. I don't know what's going to happen come the end of January or early February when the current agreement expires. I just -- I don't know. But I can tell you that there is still a great deal of uncertainty in the federal government. Most don't know exactly what the budget is going to look like. They don't -- the whole second tranche of sequestration begins to take effect here at the end of January. We've only seen the first phase of sequestration. So the net of all this is there's still a lot of unknowns. And so that leads us to some caution, particularly in the NPS business. In the commercial business, I mean, listen, the trend here is very clear. We are continuing to restructure a lot of our unprofitable, lower-margin contracts. We're well, well into that process, and we're beginning now to see some growth in these newer infrastructure offerings, newer application offerings. Cyber, et cetera, they are beginning to gain momentum; but I think there's still going to be a lag candidly before that revenue growth crosses over or exceeds the downward pressure in revenue due to the restructuring that we're doing in much of those lower-value contracts. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: I see. And maybe just related to that, I think as I recall the margin, you are anticipating to see some margin headwind sequentially. It was, I think, a combination of several factors, including resetting the cost plus rate in the NPS business, perhaps returning to more normalized rates of restructuring and reinvestment. Did in fact that happen in the quarter? Or are we still kind of perhaps behind plan? Because your guidance on the net cost saves versus reinvestment looks like that's only a change of $25 million. So I'm wondering is that now more skewed to the back end of the year? Or are we...

That's a good question. So first of all, we had some really onetime improvements on fixed contracts in our NPS business in the quarter, and that drove an expansion of the margins. And as I said, when we take cost out, typically, we return about $0.50 on the $1.00 back to the government. It's still the right thing to do, although it's counterintuitive because when you reduce cost and you bill less revenue. But long term, to get the business much more efficient and more productive is the right thing to do. But in this quarter, we did have a couple of adjustments to fixed price contracts that performed better than planned, and that impacted the quarter. And that's why we think those margins will normalize as we go into the second half of the year. Does that answer the question on that? David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Yes, it does, Mike. Can you give any sense for just how big that was of an impact?

The adjustments we made on the fixed price is about...

It will be in our Q in Note 1. It's $41 million...

About $40 million.

It's about $0.18 in a sense, but there are other things also that went the other way, so it's not just the...

Yes, I think we provide the bridge on that, so you see how that worked out and what the puts and takes were on that. And again, the -- on the commercial margins, we're seeing some improvement there. But again, it goes back to the shift in revenue. So as we begin to take some of the bookings on these newer higher-value offerings to revenue and then to the bottom line, we do expect to see some expansion in those margins. But the question is, as I said earlier, is the timing of that. The trend line here is really pretty clear. The timing around it is still not 100% sure it's certain. So that's why we're guiding the way we are guiding at this point in time. But I will say, overall, I mean the kind of margin expansion that we've seen over the last year, I mean the 500- or 600-basis-point improvement is pretty remarkable in that period of time for a business like this that is laden with a lot of longer-term contracts. So I am really pleased with the efforts that the teams have made to really get after this. There is some short-term hit to the downward pressure on revenue. But long term, I really wanted to get this business on a much firmer profitable foundation, so that as we begin to grow, we're growing with profitable business, not just booking revenue that winds up being a problem for us 2, 3 years down the road.

And we'll go next to Ashwin Shirvaikar, and he is with Citibank -- I'm sorry, with Citi.

So I guess my first question is a clarification on NPS margins. When you say 9% to 10%, is that on a full year basis? Or is that where your margins are going to be for GBS?

No, that's why we think they'll normalize in the second half of the year. That's -- a little bit higher than that. It's, again, not precise. But I think that's a reasonable range to think of as we get into the second half of the year.

Okay. And then on NHS, I'm kind of seeing reports in the last few weeks that the contracts might be abandoned. Can you quantify the impact on their financials? And it's not that big anymore, but can you quantify what that impact is on their financials [indiscernible]?

Yes. Well, first, let me correct your information. So we have recently -- about a year ago, we signed a definitive interim agreement, and we just have recently signed the final agreement, which is essentially the same thing as the interim agreement. We're actually quite pleased. We now have gone live with 4 or 5 trusts in the U.K., so we have delivered the Lorenzo software. It is up. It is working, and trusts are live on it now with hundreds, in some cases, thousands of users. We think we can get some really good commentary from those. We've signed up 11 trusts now, and we've got a pipeline of another 15 to 20 trusts that we are beginning to qualify and try to move towards contact -- contract closure. So I'm delighted with the progress we're making with Lorenzo, absolutely delighted. Now we've had a lot of negative press in the U.K., but that's to be expected. But I think we're making very good progress there. All of that is going to deferred revenue right now, so we're not taking any of those sales to revenue in the bottom line. What do we have in deferred revenue now?

$340 million.

$340 million, and that will begin to come off the balance sheet as we bill this in the future. So again, that's one of the downward pressures on the revenue growth, is we're not recognizing that revenue upfront. So I think NHS is in pretty good shape, and we're competing full bore right now in all of the regions of the U.K..

And we'll go next to the side of Jason Kupferberg with Jefferies.

This is Amit Singh for Jason. Just quickly coming back to the reinvestment part, based on your new guidance, you still have around $200 million or so to go for the year. Could you provide a little bit more information on how much of that you're expecting in Q3 versus Q4? And the restructuring part of it, I mean, originally, you had the guidance of $30 million to $40 million per quarter, but the last 2 quarters have been significantly below that. So is there any change in guidance over there?

No. The guidance on the restructuring is about the same. We delayed some of the restructuring in Europe, particularly in Germany, in the second quarter. We were working on some deals there, and candidly, we did not want to do some restructuring while we were working through some of those deals. So that was the principal delay in the restructuring in the second quarter. But we do expect that to continue here in the second half of the year, and we're continuing to invest second half of the year -- we'll continue to invest in the sales force expansion of the sales hub and continued internal investment around our systems and processes. So there's really no change to our plans other than that delay in the restructuring in the first and second quarter.

But you're expecting the reinvestment in quarter 3 of quarter 4 to be pretty much the same? Or is it more biased towards one of the quarters?

No, it's about the same.

Okay. And just one final quick thing, what is -- in your EPS guidance now, I mean, has there been any change in your operating margin, tax rate or share buyback assumptions?

No, we are making the same assumptions on the stock buyback as we go through the second half of the year. So absolutely no change there at all.

And we'll go next to the side of Joseph Foresi with Janney Capital.

I wonder if we could start, and I'll just make it 2 quick ones. First, on the commercial side of the business, could you give us some examples? Do you think you're taking market share there? Or is it all new business? And if you are taking market share, maybe you could give us some examples of where you're seeing some progress.

I don't think we're taking market share. I think most of what we have been focused on is migrating some of our own customers on our own installed base. So we are beginning now to reach out and engage new clients. We are beginning to see new logos, if you will, or new clients come into our pipeline, so we are beginning to qualify those. But to date, most of our activity has been centered around really trying to work on our own installed base, improve our delivery to those clients and restructure the contracts where appropriate, so that they could be more profitable. And again, once we got on that base, then I felt comfortable beginning to hire -- increase the sales force size so that we could go after new logos. Now I will tell you that with this acquisition of ServiceMesh and the end-to-end value proposition that is beginning to emerge around us being able to integrate a multi-cloud environment, we are planning to take that more aggressively to the market. And ServiceMesh brings some new logos to CSC. So some clients that heretofore we have not done business with are existing clients of ServiceMesh, and we certainly plan to expand off of that base.

Okay. And then just real quickly on NPS, any thoughts on the outlooks past this year? I know it's relatively early, but the book-to-bill has been improving. So I'm just trying to give you an opportunity to give some people some color on what you think NPS could do as we head into next year.

Yes, I -- it's really, really hard to call. If I had -- if you held me to the wall, I'd probably say that I see the NPS business going along pretty much the way it is today, sort of flattish. What we are seeing, though, is we are seeing a definite shift to this next-generation IT infrastructure and the modernization of application. So I think cloud is going to become a bigger and bigger wildcard in the federal government. And again, that was one of the key tenets of the acquisition of ServiceMesh. ServiceMesh has a very compelling value proposition in the federal government. Amazon Web Services is a very strong player in the federal government, but there is a need to integrate in the federal government this multi-cloud environment. So we think there is a play that we can run here in the federal government, but I think it's too early to predict what impact that will have on the overall business.

Our last question for today comes from Arvind Ramnani with BNP Paribas.

So most of my questions have been answered, but I do have a final one. There are many activities for the sector, certainly have been a step-up and some of the acquisitions have been fairly large, and you announced ServiceMesh earlier today. So has the appetite for acquisitions increased for CSC when compared to a year ago? And do you think sort of this increased demand for acquisitions, have you seen some sort of irrational pricing?

No, I haven't seen any irrational pricing. I mean, some of these assets are certainly valued pretty highly. The fundamental issue here, as we target this new environment, one of the key ingredients of this environment is people. I cannot overemphasize the importance of people and skills. And these skills are in fairly short supply. So what is critical here is the people and the skills that you are bringing into the company, because that enables a refresh of the skill base. So we spent most of last year divesting of businesses, so we sold a lot of businesses last year, mostly very low-margin businesses that did not have much of a growth profile in its future. So we are now -- now that, that portfolio switch has been completed, we're now focusing on those acquisitions that we think can really strengthen the value of our offerings in the marketplace and position us to be one of the leaders in helping our customers drive to this next-generation infrastructure and modernizing their applications. This is a huge shift that's playing out over time in the marketplace, and all we're doing now is positioning ourselves to strengthen our offering so we can drive much higher-value, higher-margin offerings and position CSC as a much higher-margin company as we go forward in this technology services business. So I guess, operator, that's it. Again, I want to thank everyone for your time this afternoon and continued interest. And as always, we will make ourselves available here for any other questions or details that you might have. But thank you, again.

And thank you for joining us today, ladies and gentlemen. We do appreciate your participation today. The call has concluded. You may disconnect at any time.