Good day, ladies and gentlemen, and welcome to the CSC fourth quarter 2016 earnings conference call. Today's conference is being recorded. And at this time I would like to turn the floor over to Mr. Neil DeSilva. Please go ahead, sir.

Thank you very much, and good afternoon everyone. I'm pleased you've joined us for CSC's fourth quarter 2016 earnings call and webcast. Our speakers on today's call will be Mike Lawrie, our Chairman and Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. As usual, the call is being webcast at csc.com/investor_relations and we've posted some slides to our website which will accompany our discussion today. Please note that we will be filing our 10-K for fiscal 2016 early next week. On the slides, on slide two, you'll see that certain comments we make on the call will be forward-looking. 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 and certain further adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we've provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release, as well as in our supplemental slides. Both documents are available on the Investor Relations section of our website. CSC will file with the SEC a proxy statement on Schedule 14A, and a registration statement on Form S-4 containing a prospectus. Investors and security holders are advised to read the registration statement and prospectuses and the proxy statement when they become available because they will contain important information about the parties and the proposed transaction. Many factors could cause actual results to differ materially from such forward looking statements with respect to the announced transaction, including risks relating to the completion of the transaction on anticipated timing, including obtaining shareholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, inability to achieve expected synergies, loss of revenues, delay or business disruption caused by difficulties in integrating the businesses of CSC and Enterprise Services. Finally, I would 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 would like to introduce CSC's Chairman and CEO, Mike Lawrie. Mike?

Okay. Neil, thank you. We've got quite a few things going on today. What I'd like to do is start out with a quick overview of the transaction, and then I'll transition into a discussion of our fourth quarter and full year earnings and then turn it over to Paul for a little more detail on the earnings announcement, and then as usual we’ll take some questions that you might have. So, I think you saw earlier this afternoon we did share the news about our intent to merge CSC with the Enterprise Services segment of Hewlett Packard Enterprise. And what we're specifically announcing is that both boards have unanimously approved the plan to merge CSC with HPE’s Enterprise Services segment, which is being spun off. The merger of these two complementary businesses will create the world's largest pure-play IT services company with $26 billion of revenue world-class capabilities and global reach. The second point is why are we doing this now? The combination of CSC with HPE’s Enterprise Services is a significant and logical next step forward for both companies in their transformation journey, so it will create, as I said, a world-class agile and versatile global technology services firm, one that is really best equipped to lead the digital transformations for our clients and enable them to respond to an environment of rapidly changing business needs and customer expectations. Just a few details, and again, I'll go through a little more detail on each of these points just to flesh this out, but CSC and HPE shareholders will each own approximately 50% of the shares in the newly combined company. The merger is intended to qualify as a tax-free transaction to CSC and HPE shareholders. The newly combined company will assume approximately $2.4 billion of expected indebtedness, pension…

Thank you, Mike and good evening everyone. Before I review the fourth quarter and the full year, let me cover some items that are included in our GAAP results. First, in this quarter we had $78 million in pre-tax expenses or $0.51 per diluted share. Those are related to separation, restructuring and other transaction activities. Second, we had a non-cash pre-tax charge of $118 million or $0.84 per diluted share, and that was related to our annual re-measurement of pension plan assets and liabilities. Third, we had a pre-tax charge of $100 million or $0.46 per diluted share associated with the retirement of our 6.5% coupon 2018 bonds. Lastly, we had a $14 million or $0.10 per diluted share benefit from the adoption of a newly accounting standard for stock based compensation which was offset by an adjustment to our tax valuation allowances. Now these items have been excluded from our non-GAAP results for the quarter and the full year. Now let me turn to our fourth quarter and full year results. Fourth quarter revenue was $1.8 billion, down 2.4% year over year in constant currency, and on a sequential basis fourth quarter revenue grew 3.3%. Sequential growth was driven by higher revenue in BPS and consulting within our GBS segment and our GIS business was also up slightly sequentially. Commercial operating income adjusted for separation, restructuring and other transaction costs was $156 million in the quarter. Commercial operating margin on that basis was 8.6%, down 260 basis points from the prior year, reflecting our continued investment in next generation offerings. In addition, the UXC acquisition was a headwind of 30 to 35 basis points to our margin due to the accounting effect of moving UXC from IFRS to US GAAP. Earnings before interest and taxes adjusted for special items…

[Operator Instructions] At this time we will take a question. This will be from Jason Kupferberg with Jefferies.

Thanks guys. Congratulations on the deal. Pretty interesting. Wanted to just get your initial view on what your year-one accretion can look like from HPE, inclusive of at least the initial $1 billion of cost synergies.

I think we'll give you those kind of numbers a little bit later. We’re just really right now just pointing you to the synergies of $1 billion in the year and $1.5 billion on exiting that first year, and the HPE services group will be providing their guidance for the full year.

I think what we'll do as we get closer to the actual close, we’ll obviously do another investor day and analyst day, so we can share what this all looks like as we put it together and get committed to the execution.

And then if we look at those cost synergy numbers, I mean our preliminary math is you're looking at a combined overall cost base here of somewhere in the neighborhood of $24 billion or so when you bring the companies together. So even at the $1.5 billion number, I think you'd be looking at about 6% or so. It sounds like you're very confident in the $1.5 billion, so could there be some upside here and once you get further along with the integration efforts?

Yes, I think listen, we're very comfortable with the $1.5 billion. We've identified that, it's spread across a number of areas harmonizing policies. We've talked about 95 data centers and delivery centers, obviously that can continue to be consolidated. There is a significant, we think, improvement capability because of the increased scale that we’ll have now on a global basis. We're about 50% right shoring, so there is some opportunity there. So yeah, there's a significant opportunity. You are right, the $24 billion cost basis, there's probably room to grow that as well over time.

And then just lastly on the fiscal ’17 guidance, can you clarify how much accretion, if any, is in the non-GAAP EPS from UXC and Xchanging, in other words, excluding intangibles and then are you assuming a crossover point to positive constant currency organic growth before the end of the fiscal year?

From the GAAP that we talked about at the Investor Day, we saw a continued improvement in the fourth quarter on that GAAP. With these acquisitions now. I mean, that crossover point will be achieved in the first quarter of this year. So with the full quarter of UXC and then Xchanging, that crossover point will now occur in the first quarter. If you go back on just a pure organic basis, yeah, I think that that GAAP is going to cross over roughly when we talked about, but probably we're not going to talk about it that way if I talk about it more now in total of our next generation offerings versus the decline in the traditional business, but even this quarter, you saw – you continue to see the flattening out of that decline. We've seen that now for two or three quarters, that continued in the fourth quarter and the continued ramp up of the next generation revenue streams and the highlight there of some of the key wins was very important for us in the fourth quarter.

We’ll move along to Edward Caso with Wells Fargo.

Hi, good evening. I was curious, the legacy EDS had a lot of federal government business and you just spun off your CSRA. Is there a piece of revenue here that you're going to have to spend, because I believe you're committed not to compete in the U.S. federal space?

Yeah, the way the transaction is structured, we have several options of what to do with that business. It’s a good business. We liked the business before, that's why we spun off CSRA and merged the CSC NPS business with SRA last year. HP’s got a very strong -- HP Enterprise Services has a very strong business in the federal government, and what I'd say is post-close all options and I underscore the word ‘all options’ would be on the table. But that decision will be approached and looked at after we close the transaction.

Obviously great book-to-bill again, how much of that is incremental business and how much of that is recompete?

I don't know whether I have the exact numbers, Paul, if I remember correctly, I think somewhere around 50% of that was new business and 50% of that was recompete business. This quarter was a little stronger on new. That’s why I want to be a little careful on the number because I just don't have it in front of me, but the Metropolitan Police, for example, was a completely new incremental win for us. Most of the new logo business that I talked about was also a new business. Paul, do you have any detail on that?

No, Mike, I think –

About 50% was incremental new business, and the rest was recompete or extensions of existing contracts.

David Grossman with Stifel Financial has the next question.

Thank you. So Mike, I think I understand the scale on the cost synergies and the benefits of the merger. But I guess I'm still trying to get my arms around some of the strategic benefits and perhaps my knowledge of HP’s service business is somewhat dated. But if I recall, they didn't have a particularly strong professional services organization, and I'm just trying to get a better feeling in terms of how the market is shifting and how their native capabilities that they bring to your portfolio, how that really enhances kind of your strategic position in the marketplace?

That’s great question. First and foremost as I said it brings scale. That's very important. They have made a fair amount of progress over the last two years in terms of dealing with their headwinds. They had many of the same headwinds that we had, traditional clients either moving away from them or contracts that were in a wind down phase and mode that caused them a significant revenue headwind. They too are seeing those revenue headwinds abate. They have a strong cloud business, they've got a strong cyber business, they have got a strong big data and analytics business. They've got a good applications business. So they too have made investments in some of these new offerings and that too is offsetting the headwinds in their traditional business. The thing that was amazing to me when we went through all of this is the very little overlap of the top 200 clients there's less than a 15% overlap. So that gives us an opportunity to expand our footprint in their customer base and for them to expand their footprint in our customer base. We have agreed to a partnership agreement with HPE. So we will have access to their solutions across their networking and their storage and their server and their software businesses which will also give us the opportunity to expand the profile. So global scale is one, reach, lack of overlap of very solid skill base. This gives us a critical mass now of skills in new areas like cloud, cyber, the other business areas that I just mentioned to you. And I think most importantly for us, as we see more and more clients making a more dramatic shift to this next generation cloud infrastructure and the modernization and deployment of new applications, that takes scale and it takes financial commitment. And this combination gives us a balance sheet and a financial structure that will allow us to really help major clients around the world make that transformation to the digital world.

And maybe in that context about the balance sheet since you brought it up. Can you help us understand what the balance sheet looks like post -- first of all, post the close of the Xchanging deal, since that probably wasn’t in the 3/31 numbers? And then what the incremental -- I think you said it was about $2.5 billion of debt, plus you had another $1.5 billion of a payment that you're making to them. So what should we think about both kind of today what the balance sheet looks like in terms of leverage and then how much is the increment we need to add post close of this transaction?

So I think what you think about this, if you add the two companies together on a pro forma basis you would have about $7.5 billion in maybe gross debt and net debt of about, maybe $5.5 billion or so in net debt. And the ratios will be very consistent, as Mike has indicated, with an investment grade profile.

And that net debt includes the pension, Paul?

No, the net debt is just the cash position that we would have on the balance sheet. Right now it's about $1 billion, I think probably by the time of the close, it would be somewhat closer to $2 billion of cash on the balance sheet. And most of the capital structure will be very flexible.

Right, but does the debt number include the pension liability for both companies?

No it does not. I think it will be minimal on both sides, and it would be probably less than $1 billion for both.

Right. And then how much was the incremental leverage to close Xchanging then, or what does that do the balance, since that was after – just so we know where you are right now?

Some of it came -- I think it would be about $500 million or $600 million more debt indebtedness. As a result of that transaction. We had already bought 10% of the stock prior to closing the transaction.

I got it. And just one last one, what is your FX assumption for this year in your guidance?

Right now we are assuming flat. We don't know exactly what the dollar is going to be doing.

Okay. So the report on a constant currency would be about the same.

That’s actually what we have said.

We’ll now take the next question from Keith Bachman, Bank of Montreal.

Hi gentlemen, thanks very much. Mike, I wanted to go back to the cost savings. Originally when EDS was bought, Mark Hurd spent a lot of time taking costs out mix, spent the last five plus years taking incremental costs out, you've obviously been very aggressive with CSC. So when you talk about $1.5 billion, on what would be pro forma revenues of $25 billion or $26 billion, that's almost 6%. So are you talking about taking incremental costs out, or is this really duplication of overlapping resources?

It's a little of both. There is clearly a duplication, I mentioned a couple of areas like the data centers and delivery centers. There's absolutely no question about that. I think there'll be obviously some synergies that we can get across the sales forces, delivery organizations. So the other area is real estate. Real estate, we think, is going to be a significant area of consolidation. And then as I mentioned, procurement, this will allow us to do much more from a global procurement standpoint, the support functions, all of those things are built into that synergy roadmap. And these synergies by the way don't come all from HPE Enterprise Services. This really is across both organizations.

If I could just ask one, a bit more on Xchanging and UXC, how much was the revenue in the quarter, you got a little bit of help – but you mentioned the cost synergies that you think you get from this I think $25 million to $50 million or $40 million, what do you –

$25 million to $45 million, now that will come largely in the second half of the year, fiscal 2017 and the reason for that is we are taking some actions in Europe and that has a longer period of time, and likewise with UXC the time to get those synergies fully captured will be the second half of the year. And just going back on the synergies we've taken a lot of costs out of CSC over the last couple years. And in some cases -- in some cases we will actually be making an investment in some of ours. So some of our support functions will have access to news kills, new capabilities and allow us to actually invest more. Some of our IT systems, for example, we've made some investments in our financial systems. We will continue with that, some of our HR systems and our customer facing sales force system, so it's not all about just taking cost out. There will also be an opportunity to reinvest in people and reinvest in some of these critical functions, because we now have more scale.

Right. Well, that's a great point, because a lot of times when HP was taking costs out they would reinvest. So if you have a $1.5 billion that you earmarked as potential cost savings, is there a amount that you think about that investors at least notionally would see on the bottom line? In other words, would you drop half of that at the bottom line, or 75%, or is there any kind of guidepost that you can identify how investors should be thinking about that?

I really don't have a specific guidepost for that. As I said we've identified the net synergies, we've identified where we think we need to make investments back in our business. And when you add that all up, we're quite comfortable with $1 billion in year one, and a run rate of $1.5 billion out of exiting the first full year of operations. But yes, we will invest in people, we're going to invest in skills, we're going to continue to invest in our offerings. We've made -- and I talked about it this quarter -- but we made a substantial investment in these offerings and they are starting to pay off. I mean we're actually starting to win significant business now as a result of these offerings. And this has been a long process over the last two or three years but it's really beginning to pay dividends with these book to bills and these significant new wins. So the beauty of this is that it takes us to the next level of scale which gives you more maneuverability in terms of these investments while at the same time giving you a significant cost synergy much of which can be returned to the shareholders in the form of better operating performance.

I want to build on what Mike said, because the synergies here are so critical. We believe we spent quite a bit of time the two teams together, we had over 20 different categories of synergy opportunities. And we went one by one to make sure that we understood the opportunities. We then tried to stretch the opportunities except to make sure that we felt very comfortable in committing that we could get the billion dollars of in-year synergies and that run rate of $1.5 billion. And so we've looked at our cost structure, we looked at the benefit that will come from scale. But I also wanted just to stress that some of these synergies also are going to come, and they're not necessarily eliminating or consolidating just the real estate or taking advantage of the procurement scale and the like. But some of them, as Mike mentioned, are the alignment of some of our standards and our policies across the two companies. They do things very well in certain areas, we do things very well in other areas and bringing the best of both worlds together, so many of those synergies also come from the realignment of similar practices and policies and accelerating also the cost synergies that -- the cost reductions that we were doing independently. So together we will get to where we need to be faster.

And let's plan on two last questions, operator.

Thank you. We will move along at this time to Bryan Keane, Deutsche Bank.

Yeah, hi, just a couple clarification questions. I guess, first in the quarter how much acquisition revenue was in the quarter and was it equally split between GBS and GIS?

About $30 million to $40 million.

$30 million to $40 million?

Yes.

Was it just in GBS or was it also in GIS?

No, I think it was actually primarily in the GBS business, a little bit in GIS, maybe about 20% of it.

And then just on the quarter itself, the Street was looking for 9.2% operating margins and you guys did 7.6%, so it was quite a bit lower and you guys had a much lower tax rate than anticipated. Were the investments known or did you guys just take the opportunity with the lower tax rate that you’re going to have to invest going forward?

Yeah, we did. There is a little bit of both. If you look at this, I said probably 30 to 50 basis points, these are rough numbers, I would associate with the fact that we integrate the UXC at basically a zero margin. We did make some investments, the most notable one we’ve been making for the last quarter or so but we increased that was in our BPS platform. Because we are expecting to grow that business pretty significantly, and that does require an investment in the platform and in the people and in some of the skills that we have supporting that business. And then we continue to make an investment in some of the offerings, I mentioned a couple, MyWorkStyle, what we're continuing to do in our cloud business. And then as we have begun to transition some of our clients from a more traditional infrastructure to a hybrid cloud structure, there are some upfront costs that we incur in that transition that will recoup as we go through the year. So we expect some of these trends to definitely persist through the first half of our new fiscal year. So those were the primary drivers of the 180, 200 basis point of lower margin, and they were spread pretty equally across, as I said, UXC, the investment in our BPS platform and our reinvestment in the offerings. The other thing I would say is that we moved a little slower than what in all candor I had anticipated in some of our cost takeout activities, primarily in Europe.

Yeah and you mentioned some lower profitability in some contracts too within the quarter?

No, it wasn't lower profitability. It was the transition of some of our clients from our more traditional offerings to our next generation offerings.

The lower profitability I was referring to was in the consulting business. If you look at it on a year-over-year basis we saw, just because of the repositioning that we've been making in that business, the profitability was lower on a year-over-year basis even though the revenue was –

The revenue was beginning to come back in that business.

Right.

And then just on the guidance, just so we have it, just thoughts on constant currency without the acquisitions for the two segments and then tax rate and operating margin.

I think we said actually for the combined entity we were going to be going up low double digit on constant currency. The contribution from those acquisitions, again as Mike mentioned, they're going to be more integrated within our business but the assumptions that we're making is that they'll add about $1 billion of top line revenue. And in terms of the tax rate, I mentioned it in my comment it will be about 20% for the full year.

Okay. Last one for me then just on the acquisition. If I look at Enterprise Services, it looks like they did about $19.8 billion in revenue but you guys are talking about $18 billion in revenue. So just trying to reconcile what they did last year versus what you guys will pull forward, will there be some divestitures or is that just natural drop off of some of the –

No, I think they're keeping two businesses, they are keeping their network services business, the CMS and also contributing to the lower comparability to what you're describing.

We’ll take the final question from Darrin Peller with Barclays.

Thanks guys. I'm just trying to understand, when I look at the growth inflection you said organically, I think you mentioned before the first quarter you’d see go positive obviously with the deals. But again that's just a bit of a follow on to Bryan’s question, that's not pro forma organic growth for, as if you owned the deals last year though, is that correct?

That's absolutely correct.

So that inflection you said is kind of back to where we thought it would be from the Investor Day, so perhaps sometime during fiscal ‘17?

Yes. I mean the gap -- I mean to be quite straightforward about this, we were looking at several hundred million dollars in gap between the decline in our traditional business and the growth of our next generation offerings. That's now below $100 million a quarter and that has been narrowing now for almost two years as these new offerings that we keep talking about come on stream and we get them installed that we build them with our customers. With the acquisition of UXC and Xchanging that just accelerates that crossover point to almost exactly what we talked about at the Investor Day. So on a purely organic basis, yes, we expect that gap to continue to close and probably cross over sometime in the second half of fiscal ’17 but with these acquisitions that crossover has been accelerated into the first -- think of it as the first quarter of 2017.

And that’s helpful. Now when we look at the mix of revenue going forward pro forma for the integration, you have -- you said $26 billion of potential revenue, and I know in CSC standalone pre even these deals you've had around $700 million of what we call growth revenues, right, in the next gen solution revenues. I mean can you give us a sense of the type of profile of this revenue mix going forward? I mean I ask only because I know that HPE’s services side was obviously declining last year. And so I am just trying to understand how much there is – are we back to a story where those pieces of that business that has to be purged kind of like there was in the legacy CSC, but there's a growth inflection coming from part of that combined with what you will have pro forma, how should we think of the mix of that business that's going to be growing versus what potentially is going to have to run off?

Yeah, I think we think of the profile, we've got $3 billion plus business in next generation. And that is growing on both our side and on the HPE Enterprise Services side. They've got probably roughly – again these are rough numbers here, about $8 billion, think of it as GBS type business, so application business, mobility, those kinds of offerings in the marketplace. And then the balance is more of the traditional IPO although they too have been transitioning some of their clients to much more of a cloud environment. So the profile of the business, our profile around next generation offerings gets strengthened pretty dramatically with this merger.

The percentage of your total revenue goes up I guess in terms of the profile?

That’s exactly right. And the growth rates go up and as a result -- and as I said many of the – well, I don’t call them troubled but run off contracts that HPE Enterprise Services had, whether that be GM or Bank of America or some others just like we've had run off on some of our large contracts, much of that is behind them. They've also had some very significant new wins over the last year or so which is contributing to their revenue stream, things like Deutsche Bank and Nokia, just to mention a couple, which have added some incremental revenue to their mix. The other thing is that we will be picking up as part of this is HPE and HPI. Those are outsourced contracts that will now become part of the new company’s profile. So when you add that all up it is a much healthier mix towards the new and growing segments than what we've had, and because of the critical mass, it allows us to recruit people to those platforms more easily, retain people more easily. In short, we've gotten to critical mass -- critical mass in these very important emerging segments.

So last question, is it when we look at the pro forma entity even a year out after the deal closes, I mean it may be too early to ask this, but is it an organic growth -- growing story even if it's just anything greater than zero percent I guess is what I'm trying to figure out.

Yeah, I think first of all, we don't see significant revenue dis-synergies because of the very little overlap as I mentioned before. So I want to do a little more work on this before I commit to, is this a 2% growth, 3% growth, what is it, that's all work that we need to do over the ensuing months as we put the integration teams together. So we'll have a better handle on that when we get a little closer to closing the transaction. But the big thing here -- the big thing here from a short term value creation is the synergies. There just are not that many opportunities that come along that present this type of synergy opportunity. It reminds me a little bit of where CSC was three or four years ago. It is that type of value generative opportunity. But at the end of the day this takes CSC or NewCo or whatever you want to call it, we haven't decided on the name yet. But this really takes us to a different level. It gives us the critical mass, it gives us the skills, it gives us the financial wherewithal to now be able to really control our destiny. We made these acquisitions, we made around Xchanging and UXC, and ServiceNow -- these are fantastic from our point of view acquisitions and we're bring great people and skills. But they were smaller and as a result it was a slower process to really get the critical mass in these new areas and offset the decline in the traditional business. This allows us to get to that point and get the scale necessary to compete with anybody -- compete with anybody in the market and that's what's so exciting about this. Years ago I talked about, you’ve got to get fit, you've got to win more and then you've got to take a leadership position. This catapults the commercial business into a leadership position globally just as our spinoff and merger between NPS and SRA, created a leader in the federal government IT space. So this is all about creating a leadership position, a new foundation and a new starting point.

Okay. Makes sense. Congrats guys, thanks. End of Q&A

Thank you everyone for being on the call. We will talk to everyone next quarter. Thank you.

And again this does conclude today's conference call. Thank you all for participation.