Good day and welcome to the CSC second quarter 2017 earnings conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Neil DeSilva. Please go ahead.

Thanks very much. Thank you, everyone, and good afternoon. I'm pleased you've joined us for CSC's second quarter 2017 earnings call and webcast. I'm Neil DeSilva, the Head of M&A and IR at CSC. 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. 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-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 have 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. (1:47 – 5:13) Thanks very much. Apologies. We became disconnected. So, as I was saying around our slide deck, if you look at Slide 3, which informs our participants, CSC's participation will include certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide important information to our investors. In accordance with SEC rules, we have 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. 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. Lastly, I would like to remind those listening that this call is focused on our second quarter results rather than our merger filings. As many on the call are aware, Paul spoke this morning on a conference call regarding Everett SpinCo's SEC filings related to our merger with the HPE Enterprise Services business. Over the course of the day, we have received significant investor interest in clarifying questions on these filings. We are therefore going to host a follow-up Q&A call with Paul immediately after this one to go further into the filings. That call will start at 6:30 PM this evening, and you can find the dial-in information on the Investor Relations section of our website. As such, I will thank those who submit questions on this call to please keep them focused on our second quarter. And now I would like to introduce CSC's Chairman and CEO, Mike Lawrie. Mike?

Neil, thank you. Thanks, everyone, for joining us this afternoon. As is always was my practice, I've got four or five key points here. I will go into a little more detail on those and then turn it over to Paul, and then I'd be happy to respond to any questions. So the first point here is our second quarter non-GAAP EPS from continuing operations was $0.61, or normalizing for a 20% tax rate would have been $0.53. Our commercial profit margin in the second quarter was up 80 basis points sequentially, and year over year our margin was down 80 basis points, reflecting the continued investment we're making in key growth areas such as our next-gen BPS platform. In the second quarter, we generated adjusted free cash flow of $75 million. Second point, revenue in the second quarter was up more than 10% year over year in constant currency, inclusive of our acquisitions of Xchanging and UXC. Sequentially revenue was down in line with the typical seasonality we experienced in the second quarter, and we had a book-to-bill of 1.3x for the quarter. Third point, we're continuing to develop our strengths in next-generation technologies. In the second quarter, our next-gen revenues nearly doubled year over year in constant currency, and our next-gen book-to-bill was 0.9x. And today, we're building on our momentum with the announcement of a global alliance with PwC, which brings together their global leadership in business consulting with our global technology services to deliver end-to-end digital transformation services to new and existing clients. Fourth, we continue to make progress on our plan to merge CSC with Enterprise Services business of Hewlett Packard Enterprise. We're engaged in pre-integration planning with HPEES. We filed our SEC filings related to the merger to coincide with HPEES's filings and have…

Thank you, Mike, and greetings, everyone. Let me start by covering some items that are included in our GAAP results. In the current quarter, we had restructuring costs of $25 million pre-tax or $0.13 per diluted share. Now that relates to cost actions to take advantage of operational efficiencies following our recent acquisitions. Also in the current quarter, we had transaction and integration-related costs of $78 million pre-tax or $0.38 per diluted share. These costs related to our merger with the Enterprise Services segments of HPE as well as our acquisitions of UXC and Xchanging. Excluding the impact of these special items, non-GAAP income from continuing operations before taxes was $102 million or $0.61 per share. Now this compares with $95 million or $0.55 per share in the prior year. Before turning to CSC's second quarter results, let me touch on new financial presentation terminology. In our second quarter filing and earnings release as well as going forward, when discussing GBS or GIS profitability, we will refer to GBS segment operating income and GIS segment operating income. Now consolidated segment commercial operating income will refer to the combined profitability of GBS and GIS. And the consolidated segment operating income will refer to that consolidated segment commercial operating income less corporate OI. Now let me turn to our second quarter results. Revenue in the quarter was $1.9 billion, up 10% year over year in constant currency. Sequentially, revenue was down less than 1.8% in constant currency, which reflects the typical seasonality of our business. Now in the second quarter, consolidated segment profitability for GBS and GIS segments was $171 million after adjusting for special items. Our profit margin on that basis was 9.1% compared with 9.9% in the prior year. And sequentially, our margin was up 80 basis points. Consolidated segment…

Yes, thank you. We will take our first question from Darrin Peller with Barclays.

Thanks, guys. Just given some of the noise around UXC and Xchanging, is there any chance you can give us a sense into the pro forma profile of growth in the sense of – had you owned any of the two businesses last year? And then maybe just an update, Mike, on what you – you've given us some sense in the last couple of quarters of the spread between the business you see that you've been trying to run off or purge versus where the growth initiatives are today. How big are they, how fast are they growing on an aggregate basis? Maybe I missed it on the call before. Thank you.

That's fine, Darrin. Paul can give you a little more detail on the growth. But fundamentally, UXC is performing pretty much the way we had anticipated it to perform. I'd say from a revenue standpoint, maybe just slightly ahead of what we thought. Xchanging is also pretty much on the target that we had talked about. We are anticipating some cost synergies from Xchanging as we get back. The issue we've had is the translation of IFRS to GAAP, and that has candidly caused some issues from a profitability standpoint, although it's largely being offset with some additional synergies. And then, of course, as I've mentioned before, with the pound depreciating vis-à-vis the dollar, that has caused some issues as we translate that back. So that's what we're recognizing. Now in terms of the gap, it is getting harder and harder to distinguish this because we have almost now fully integrated these businesses, but that gap continues to narrow. I think I've talked about this before. This gap used to be hundreds of millions of dollars a quarter, and it's below $100 million. I'd say in the second quarter it was about similar to what it was in the first quarter, so well below $100 million. Now, you see that some of these next-generation offerings like MyWorkStyle and Storage-as-a-Service and all that are continuing to increase at pretty good clips, but they are smaller basis that they are working off of. So I'd say we continue to make progress on that.

Just really, relative to the $700 million range, I think you had talked about it being in your Investor Day. How big has that gotten down, and how big could that be?

I talked about keeping us I think somewhere in the neighborhood of $300 million $400 million a quarter several years ago when we started out.

That's right.

And it's less than $100 million a quarter now. So take that out on a full-year basis, that would be similar between a gap of $300 million to $400 million, but that continues to narrow. And if you look at it from a standpoint now of the acquisitions that we made, that crossover point has already been achieved. In other words, we are getting now more growth from our next-generation offerings. And two acquisitions that we've made, we talk about Xchanging and UXC, but you'd also need to throw the ServiceNow acquisitions that we've made like Fruition and Aspediens and so on. When you throw that in, that crossover point was achieved towards the end of last quarter and definitely this quarter.

All right. And just quickly before I return to the queue, on the margin side, again, your investments being made are obviously noted. The margins did improve versus our estimate for the quarter on the GIS side. How long do you think it will take before we see even further margin benefits from some of the investments you made in terms of growth and that passing through to the margin side? Thanks, guys.

The big benefit that we will continue to see as we go forward is the move of labor to offshore and near-shore centers. Paul shared with you on a year-over-year basis how that has moved. It didn't move that much frankly from the first quarter to the second quarter. We're continuing to make very good progress in our labor pyramid, and this just means we are bringing more and more people in at lower levels of the organization. That continues to drive benefits. We're seeing a lot of improvement from our engineering efforts in GIS, so we're really beginning to get – just think of this as analytics and other operational engineering processes and procedures that we're putting in place. We're beginning to see some benefit of that. And then robotics, which we're really making a fairly reasonable investment in, we're applying that to our BPS platform and to our insurance business first. As a matter of fact, when I was over in India a couple weeks ago, I had a chance to sit down with that team and review the progress we're making there. And that really looks like over a longer period of time – that's not going to show up in the third quarter, but that is going to help drive margins. And of course, once we complete the merger, there are significant opportunities for further improvement post-merger.

Right, that makes sense, great. Thanks, guys.

Thank you.

And we'll go next to James Friedman with Susquehanna.

Hi. I just wanted to make sure I heard you right both. So our math is that you grew 9.7% constant currency in the first half of the year. That would imply some top line acceleration. Could you dimensionalize? Is that Q3 or Q4? Where should we be landing the accelerated growth?

I think it would be more in the fourth quarter, a little bit in the third, but mostly in the fourth quarter.

Got it. And then since we do have to model on an as-reported basis, how much did the pound impact you in the quarter, or maybe what should we be thinking in terms of FX impact on the revenue from here?

I don't have the revenue impact per se. I can give it to you by the time we finish our call maybe. But from an EPS standpoint...

In the second quarter was almost an $0.08 impact when you combine the currency as well as the translation of IFRS to GAAP, so that's $0.08. And we are anticipating that that will continue in the second half of the year. That's why we said our bias right now for full-year EPS is on the lower end of the range because we don't see that back mitigating, notwithstanding what occurred in the UK today.

Got it. And my last question, Mike, was it sounds like, if I heard you right, you're standing up, meaning you're launching the MetLife contract in the third quarter. I was just surprised that a $600 million – $700 million total contract value could launch that quickly. Is that where the company is going in terms of being able to launch contracts concurrent with their close?

Yes. There is a closer – there's a shorter period of time from contract closure to beginning to execute. Not all 7 million policies are going to go live in the third quarter. But as I said, this is one of the reasons why we made the investment that we made in this BPS platform, and we're going to continue that investment. As I said in my commentary, MetLife was a great win, 7 million policies. And we've got a very significant pipeline. Scale really matters here because it allows you to lower the unit cost, which then makes you more competitive. But we see this as a very attractive segment coupled with our IP. Both our software IP and a lot of our highly skilled professionals that we have in this business makes us an attractive business. So yes, this investment is helping us move from contract signing to beginning to administer some of these policies more quickly.

Okay, thanks for the color.

You bet.

And we'll go next to Keith Bachman with Bank of Montreal.

Hi, this is Steve Schneiderman pinch-hitting for Keith. Thanks for taking my questions. Mike, just to start off, can you talk about the pipeline a little bit? You talked on the last call about the strength that we are seeing, particularly when you have the MetLife contract in your pocket ready to go. Now that that one is signed, can you give a little bit of an update on how you're looking at that and what book-to-bill probably would have looked like this quarter without the MetLife deal?

I think it's a little hard to say what it would have looked like without MetLife, but obviously it would have been a little lower. We are seeing some very interesting trends as we look at our pipeline. We're seeing very significant increase in what I'll call the under $100 million pipeline. This has been part of our strategy. As we saw deal sizes getting smaller, and that trend has continued, we're seeing that now show up in our pipeline. So for example, our pipeline under $100 million size transactions is up 16%, 17%, 18%, very healthy. And then below $50 million, that pipeline is up almost 20%. And below $5 million, so this is this land-and-expand and why I made the commentary this afternoon about these quick-start service offers. You can't afford to have the same sales cycle and the same delivery cycle for a $5 million deal that you have for a $300 million deal. So these quick starts are pre-configured, pre-priced, a bundle of different services that we now have in the marketplace. And the increase we see in these less than $5 million deals, that pipeline is up over 40% year over year, so very, very substantial increase in those pipelines. And the whole idea here is, you get one of these more bundled, simpler to deliver offerings installed, and then that often gives you brand permission to be able to go in with other offerings. So that is an absolute part of our strategy. We changed our coverage strategy. We put more of our sales resources in new logos. You heard me report we had I think 161 new logos this quarter. Now a lot of these are small transactions, but they can grow over time and gives much more stability to the overall revenue going forward, so that gives you a color on the pipeline. Now our large deal pipeline is in pretty good shape too. We have a lot of large deals we're working on. But they just take much longer and are a little harder to predict in terms of when they're going to close and also when they are going to get into revenue recognition mode.

Okay, great. Shifting gears to margin, to me there are two different trends going on. One in GBS, you had the pressure from MetLife getting some investments to stand the business up. How should we think about acceleration on that moving forward throughout the year? And on GIS, you've been at about 50% low-cost labor mix for a few quarters now. I'm wondering. How much more juice is there left for the rest of the year in order to use that lever in order to take your margins up?

Listen, there is more juice. But what's going on under the covers here, as we introduce more automation, what we are seeing is the need for less people in our low-cost centers. So you've got to be careful, and I can't quantify this because I'm just really starting to take a hard look at this. So one measure is you're moving things from point A to point B; that's good. But then at point B, we're actually stabilizing or in some cases reducing the head count because of the productivity or operational efficiency gains within that lower-cost center. So in other words, we're beginning to do more with less. This is a really important trend. It's not again going to show up in the third quarter or the fourth quarter. But as I look out over the next couple years and I look out at the merger, this is a very promising area for us to begin to drive productivity improvements in our delivery capacity worldwide. So that's what you're seeing under the covers in GIS. GBS is a slightly different story. There we are making a pretty substantial investment; I'd say probably 100-plus basis points in the quarter alone in BPS. That investment is going to continue throughout the year. We've made that decision to make that investment. And that's people, it's process, and it's technology in order to capture this emerging opportunity we see in the BPS market in the United States.

Okay, great. Thank you, and last one from me. The add-backs both to free cash flow and to EPS moderated a little bit this quarter. Is there any other guidance you can give to how to look at the for the rest of the year, looking at the difference between the GAAP and non-GAAP EPS?

I think you're going to continue to see, particularly when it comes to the cost related to the HPEES merger cost to be in the same line as what you've seen in the second quarter, in the $75 million range.

And the restructuring would probably be around the same, $25 million?

I think it's going to be very...

We may actually do a little more restructuring as we exit the third and the fourth quarter in preparation for the merger. As I said in my commentary, we are not waiting for the merger to take place to position the business. So both companies, both HPEES as well as CSC, have identified areas where we can make improvements, and we're making those improvements as we go throughout the year. So you may very well see CSC on a standalone basis take some additional actions as we get into the fourth quarter.

Okay. Thank you, gentleman. I'll cede the floor.

I want to take this opportunity just to answer the question that James had about how much was the impact of the UK cloud in the quarter. When I look at it, there was about $65 million to $70 million on the top line.

And we'll take our next question from...

James isn't on the phone, but we appreciate that answer.

...Brian Essex with Morgan Stanley. Brian L. Essex - Morgan Stanley & Co. LLC: Hi, good afternoon. Thanks for taking the question. I was wondering if you might be able to talk a little bit about how you view the composition of the business as you fold in Xchanging and UXC and maybe other acquisitions like Fruition primarily from a vertical perspective as you build domain expertise in insurance and healthcare and other verticals. What are the primary verticals, and can you offer maybe a ballpark split of what the revenue composition for a vertical would be?

I can't give you the vertical split. The UXC acquisition is largely – think of it is around GBS. And now within this new Digital Applications business unit we talked about today, most of it is centered there. Most of it is centered around our Oracle practice, our Microsoft practice, our SAP practice, and what's known as UXC Keystone, which is a ServiceNow practice. Brian L. Essex - Morgan Stanley & Co. LLC: Right.

Now those practices, so Oracle, SAP, ServiceNow, and Microsoft, they really are across almost all the verticals. We're seeing really good take-up. I think I mentioned in my commentary just a couple minutes ago a major win we had in a pharmaceutical company in France. Think of that as life science and our healthcare vertical. But we're seeing that really across the board. UXC and those offerings are applied across all the verticals. Xchanging, on the other hand, is obviously much more focused on the insurance space, both the property and casualty... Brian L. Essex - Morgan Stanley & Co. LLC: Right.

...in the BPS segment in the UK, and then Xuber. Now we are starting to see Xuber apply to some other verticals outside of insurance, for example, the healthcare industry. We're seeing some growth in our pipeline and opportunities there. And then Fixnetix is largely in our banking segment. And as you know that's our low-latency managed service platform for our capital markets clients. We're seeing a good pipeline there, and we got one closed this quarter. These are fairly lengthy sales cycles. And what happens is if you penetrate one of these large capital market players successfully, it really does give you an opportunity to then expand the Fixnetix platform into other trading areas of some of these large capital market players. And although we report that through GIS, it's largely a banking/capital markets vertical. So that gives you a little flavor of how those acquisitions play out by vertical. Brian L. Essex - Morgan Stanley & Co. LLC: Got it. And then maybe as a follow-up, spending ahead of MetLife, as we look at margin expansion through the rest of the year, what kind of impact is implementation of that deal going to have on the financials?

I don't think it's going to have much margin expansion, again, because of the continuation of the investment. Now I think these contracts are long-term contracts. So these contracts, some of them are 10 years plus. That expansion will come later once that platform is fully in operation and installed. And I want to highlight this robotics because we're seeing some really encouraging signs with what we are doing with robotics. And robotics, as you guys know, is software. You're taking a workflow, you're taking a business process and you are developing software that automates that workflow process. But where the real benefit is – when I was in India, I walked into the room and there was a screen, and I was looking at 8 or 10 processes being monitored on one screen by one person as opposed to having multiple people in multiple rooms looking at multiple processes. You expand that out across all the workflows and business processes associated with these large BPS deals or other Xchanging deals, you can begin to see the impact that robotics can have from a productivity standpoint. By the way, these robotics applications run 24 hours a day. They execute the process exactly the same way every time. I really as I look out five years from now, I think this is one of the game-changers in how services will be delivered, so we're encouraged by that.

And operator, why don't we do one last call. Thank you.

One last question.

One last question, pardon me.

We'll go to James Schneider with Goldman Sachs.

Good afternoon, thanks for taking my question. I was wondering if you can maybe talk a little bit about the PwC deal. What are the restrictions on that in terms of where PwC's business offerings or technical offerings specifically and where yours begin; any kind of division of labor between those two? And maybe talk about what you expect that could mean in terms of size of revenue, in terms of incremental for you over time.

It's hard to gauge over time what it will be, but we consider this to be a really important launch. It's a non-exclusive alliance, that's point one. And what we are doing is a very simple concept. PwC has technology practices and other advisory practices around the world and by industry vertical. In all candor, they have better access to the C-suite in many instances than CSC has. So what we are doing is we are partnering with them to be able to participate in those discussions and in those dialogues in the C-suite primarily around digital transformations. So this isn't about an outsourcing deal or an IPO. This is about corporations that are making their own digital transformation journeys. This is fairly complex stuff. It looks like it's going to have major impact in business models. So we will participate with PwC in think of it as consulting engagements. And then where CSC comes in is our offering, so our offerings then will be part of that go-to-market motion with PwC. So if we're doing a consulting engagement on conversion of applications to cloud – I'm just making this up as an example. We would participate with that consulting engagement, but then also have the apps modernization offering that would be part of that equation. So what we're doing is creating an end-to-end value proposition where you can go in from a consulting standpoint and help clients plan and understand. And then CSC comes in with its offerings that can drive additional expertise along with our alliance partners around the offerings that we have in the marketplace, and then the actual transformation work and delivery of those services. So it really helps us fill out the end-to-end value proposition that we bring to our client. And we're leveraging their expertise and they're leveraging our expertise in an effort to meet what is increasingly significant demand around digital transformations.

That's helpful, thanks. And then just as a quick follow-up, regarding the head count transformation, can you maybe give us an update, as you look maybe two years out in time, where you think we're going to be in terms of the ratios of head count moved to low-cost geographies? And then today give us a sense of about where the split lies of those in low-cost geographies, how much in low-cost places in the U.S. versus India?

I would say probably in our planning, and again this is a planning number, I'd say somewhere in the neighborhood of 65% to maybe in some areas 75%. Where we planned to be towards the end of this year is in the 50% to 55% range. So that gives you the sort of the bid/ask spread here on that. Again, those numbers may shift a little bit because of the productivity impact we're seeing in those low-cost locations. Not all of this will be in India. Some of it will be in India, but we have a lot of capability in other delivery centers like Malaysia, Kuala Lumpur, Vietnam, centers in Eastern Europe. As you know, we announced a major new center in Puerto Rico to do a lot of our ITAR-compliant work there. And we also have some lower cost locations in the U.S. Before we split NPS off, we used Louisiana, but we have some other places that we're beginning to pilot and look as well. And then the other thing that we're doing more of is we're landing more resources from these low-cost centers into the United States, where we have a requirement for a higher-touch approach. So for example, a lot of these digital transformations, that requires more high-touch, and we're using more landed resources to drive that. So hopefully that gives you a flavor of where we are and where we're anticipating going over the next couple of years.

Thank you.

Thank you, everyone, for joining us for our second quarter call. For those of you who will be wanting to follow up on the Q&A call with Paul Saleh and myself, that begins at 6:30 PM. If you go to csc.com/investor_relations, you will see the dial-in information there. Thank you again.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation.