Good day, everyone, and welcome to the CSC First Quarter 2015 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. George Price. Please go ahead, sir.

Great. Thank you, operator, and good afternoon to everyone. I'm pleased you've joined us for CSC's First Quarter 2015 Earnings Call and Webcast. Our speakers on today's call will be Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. As usual, the call is being webcast at csc.com/investorrelations, and we have posted some slides to our website, which will accompany our discussion today. On Slide 2, 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 these risks and uncertainties is included on 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 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. Those documents are available on the Investor Relations section of our website. Slide 4 makes our participants aware of 2 important changes in our results presentation this quarter. First, CSC adopted a new mark-to-market pension accounting policy, which recognizes actuarial gains and losses on the fair value of pension assets each year. Paul will discuss this change in more detail. Second, CSC changed its intercompany accounting. Intercompany transactions are now treated as cost transfers and not as intercompany revenue. Finally, 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 introduce CSC's CEO, Mike Lawrie.

Okay, thank you. Good afternoon, and good evening, everyone. As usual, thank you for your interest in CSC. And as is my practice, I've got 4 or 5 key messages here that I will cover with you and then develop in a little more detail, and then Paul will go through the numbers. And then as usual, we will open it up to any questions that you might have. So let me start here with the key messages. One, the first quarter results were generally consistent with our expectations for the start to our fiscal 2015 year. EPS from continuing operations were $1.03, and this did benefit from a lower tax rate. Our commercial business performed in line with our expectations. Revenue was up 1% year-over-year on a GAAP basis and down 1% in constant currency and did include the benefit of a few extra days in the quarter. Our commercial bookings were solid with a 1.1 book-to-bill. The third message here is our NPS business continues to perform well in the current environment. Revenue was up sequentially. The year-over-year revenue decline moderated, and the operating margin was significantly higher, both sequentially and year-over-year. Bookings, however, continue to reflect the uncertain budget environment, and in many cases, delayed decision-making. The fourth key message that I will get into a little more detail in a minute is that we continue to position CSC for future growth by investing in new offerings and partnerships with leading technology companies, most recently our announcement this afternoon with IBM. And we are seeing some early positive signs from these investments, which we expect will help drive revenue growth and profit improvement as we progress through fiscal 2015. And finally, we are maintaining our targets for the fiscal year with EPS trending towards the high end…

Yes. Thank you, Mike, and good evening, everyone. Before discussing our first quarter, I'd like to point out 3 items that are reflected in the results. First, during the quarter, CSC adopted a new mark-to-market pension accounting policy, which recognizes actuarial gains and losses on the fair value of pension assets each year. Now previously, these gains and losses were amortized over the life expectancy of plan participants. Other elements of our pension expense do not change and continue to flow through our income statement. Now the benefits of the new pension accounting policy are greater transparency in the operating results, increased comparability with our peers and greater flexibility in managing our pension liabilities such as facilitating lump sum settlements. The impact of this accounting change was a $21 million pretax benefit in the quarter, which we reinvested in the business, as previously planned. And the impact was a $23 million pretax benefit in the prior year. Our pension funding requirements, our cash flow and pension benefits are not affected by the new policy change. Second, as part of our new financial system transformation, CSC changed its intercompany accounting. Intercompany transactions are now treated as cost transfers and not intercompany revenue. Now we've recast our financial statements for the year-ago period to reflect the new pension and the intercompany policies. Now lastly, our first quarter included an extra week when compared with the prior year. Now this occurs every 5 years, given the company's fiscal year convention. Now the revenue impact of the extra week consists of 2 components. There's a $39 million amount, which represents the amortization of fixed fee contracts, and it's coming primarily from our GIS business. Now this amount will normalize in subsequent quarters and will have no impact on our fiscal year. Now there is…

[Operator Instructions] And we'll take our first question from David Grossman with Stifel Financial. David M. Grossman - Stifel, Nicolaus & Company, Incorporated, Research Division: I'm wondering if we could just look at the federal business just for a minute and talk a little bit about your optimism at the back half of the year. I know, Mike, you said the same thing 3 months ago, and I'm just wondering based on what you've seen over the last 3 months whether you're equally as optimistic that we could see a return to better contract activity and awards in the back half of the year or based on what you've seen in the last 3 months you're perhaps a little more pessimistic than you were 3 months ago.

Yes, David, I would say that it's about the same. As I said, what we are seeing is an increase of business that we have bid on that's awaiting for awards. Now what we are hearing, and again, this is more just noise in the channel right now, is that this -- we're getting to the end of the government's fiscal year. And there is some talk that some of these awards may be made late in the fiscal year, meaning end of September, potentially early October. So we are hearing some of that. And the proof point there is an increase in the number of awards that are awaiting final decision. I don't see any substantial change in the overall environment as we go forward. We are bidding on some very large deals like this Department of Defense Healthcare Modernization, and that's not going to play out probably this fiscal year. But we're seeing some additions to some of the contracts -- contract negotiations. So that's what gives us some modest hope that there may be a little bit improvement in the spending environment. But if I had to call it right now, I think it would be pretty much the same. Now we are making a big effort to just put a lot of unsolicited bids on the table, and we do think that, that is helping us get a little more share of what is out there. And again, I think that showed up this quarter with a moderating of the year-on-year decline around 3% and a modest sequential improvement. We'll have to see now what happens this quarter and then into the subsequent quarters. David M. Grossman - Stifel, Nicolaus & Company, Incorporated, Research Division: Got it. And then just going back to the consulting business, can you help us better understand how much of a drag that is in terms of the overall growth rate of the GBS unit?

It is a big drag, to be honest with you. It is -- and I got to be honest with you. And as I've said before, we've been repositioning this business, but some of this was just flat out poor execution on our part. I have made a management change there, a leadership change there. I think the business is showing some signs, but consulting down 10% is a drag on overall revenue growth for the company but certainly is a big impact on GBS.

[Operator Instructions] Up next, we'll take Ashwin Shirvaikar from Citi.

I guess a couple of housekeeping things to get out of the way first. One is give me the organic growth rate. And also on the pension change, I missed whether there was a cash flow impact.

Yes, I'll let Paul respond to that.

Yes. On the organic growth rate, the rate that we give you are basically reflective of the actual growth. We mentioned the benefit of the extra few days in the quarter, but the only thing we can point to is in the GIS business, which was about $39 million in fixed revenue fees. The rest of it is very speculative in terms of understanding exactly what is the contribution for those extra days. As far as the impact of cash flow for the pension, there was none.

No, on organic, I meant any impact from past acquisitions.

Minimal. There is none in the quarter. In fact, there was more -- stated on a more comparable basis.

Okay, got it. And one question I just have is you guys have signed some really interesting alliances here, the one with IBM today, you have one with HCL and so on and so forth. And I continue to be curious as to how the go-to-market works with these kind of demand.

It's a very good question. So I'm going to give you an example of a deal we're involved in right now. I can't obviously put the name of the client out there. But we are bidding a very large deal that involves infrastructure transition to cloud and application modernization, both key enterprise line of business applications, as well as other applications. And we are bidding with SAP. We're bidding with Amazon, and we are bidding with HCL. And the way we've done this, the go-to-market is we've actually come together as one team. So we're actually sitting in a room. In the country where we're doing this work, we've sat together as a bidding proposal team for the last 2 months, and we are working as one team. So we are -- when I approved the pricing, it's myself and in some cases the other CEOs who were approving the pricing. We are going to -- we've architected the solution together. So our solution architects and engineers, their solution architects and engineers, all working as one team. As matter of fact, when we do the orals, which is part of a big deal like this, where you have to present it, we're presenting it as one team. And the customer is actually beginning to see us work as one team. Now I don't want to make this sound like it's a simple thing to do because you have to learn to work with sometimes competitors in other situations. But we're learning how to do that. The client is seeing the benefits of that, and the overwhelming benefit, I just talked to one of the top executives last week, is that they are getting the best, the best solution the industry has to offer as opposed to having to sub-optimize around one vendor. So this is -- we're seeing this play out now in multiple engagements. We're beginning to get some really good traction. I mentioned today we had a big win with AT&T in one of our network deals. Again, that was something we priced together and we teamed together. So operationally, that's how it works. It's interesting when the CEOs get together and agree to do this stuff, but what's really important is how does it play out at the point of contact with the client. And that's -- when I talk about operationalizing these partnerships, that's what I mean. And as you get some successes, you then share those successes on a global basis, and that's what begins to get the momentum behind the partnerships.

Got it. And so if in that particular situation you were to win, and say, it would be a -- I mean, Amazon is providing its AWS services, you're coming in with ServiceMesh, you each get paid for your component.

Correct, that's exactly right. And I'll tell you, Ashwin, we're really encouraged by this. It is a completely different strategy than a lot of other players. We think that this is one of the key differentiators that we have to offer our clients, and by and large, they see it as a differentiation. But you must operationalize it, and you must come together as one team in front of the customer. And that's the process that we're in the middle of as we speak.

Up next, we'll take Bryan Keane with Deutsche Bank.

This is Ashish Sabadra calling on behalf of Bryan Keane. A quick question on NPS. NPS saw some pretty good sequential improvement from last quarter. But despite that, you've kept your guidance of mid-single-digit decline. And I was wondering, is that because of the soft bookings or was there any some onetime benefit that -- revenue benefit that you received in the quarter? And so how should we think about the growth going forward for the rest of the year?

Yes, that's a good question. Every quarter -- and Paul, you can add to this. But every quarter, as you know, we have contract completions, and then we true up some of those contracts. And when we do better than what we've planned, we recognize at the time. We did have some of that in the first quarter. The bookings were very low. I mean, $300 million is low. And that declined from year-over-year. Now again, I don't get too excited about that in one quarter because of the notoriously lumpy sort of attainment of bookings. But until I see a little more sustainable strength and buying in that market, I'm reluctant to change that outlook. And I just don't see it right now. So we're giving it our best -- our best call. Now we are doing a little better on some of our cost takeout, as Paul talked about, and so on and so forth, and that's what gives us a little more confidence in the trending to the high end of our EPS. But I just don't see it yet in terms of revenue growth, and that's why we've landed where we've landed.

Okay, that makes sense. And then quickly on the GBS margins. I believe on the last call, you mentioned you could deliver more like 14% to 15% EBIT margins for the full year. Now you also highlighted some of the misexecution on the consulting side, and I don't know if that weighed on the margins for GBS. But I was just wondering, does that change the expectations for margins for GBS for the full year? And just in terms of the consulting, when do you expect the turnaround?

Yes, again, it's a very good question. No, I'm not changing the outlook on the margins there. I will say that there certainly would be some downward pressure given the performance in the first quarter. But I don't, at this point in time, see a reason to adjust those margins down as we go through the year. The consulting business should begin to show some improvement this quarter. We thought we were going to see it, frankly, in the first quarter, and that's -- when I talked about some misexecution, that's what I'm referring to. And we expect to clean up some of those execution issues. Our second quarter, which is summer in North America, is usually a tough quarter for consulting because of all the vacations and loss of billable time. But not withstanding that, to be candid, I was surprised that, that business declined 10%. We weren't expecting a decline of 10%. It was a drag on the overall company's performance. It was certainly a drag on GBS, and we're expecting to see some improvement in the second quarter and then a strengthening as we get into the second half.

Up next, we'll take James Friedman with Susquehanna.

I had 2 questions I'll just ask you upfront. Mike, you had mentioned with regard to the utilization of your offshore facilities, and I was wondering if you could give us a progress report in that regard, and even if you have a metric, that might be helpful. And then with regard to the free cash flow, Paul, you mentioned that you had a reduction in CapEx as a percentage. I think it was at the low 6s CapEx percentage of revenue. We're should we anticipate that, that can travel over the course of the year?

Well, I'll respond first. We -- in the first quarter, we concluded what we call Delivery Excellence 2 in 6 accounts. And when I say Delivery Excellence, we are going account-by-account where we work with the client on moving more work and workload to our lower-cost centers around the world. And in those 6 accounts, we saw several very important metrics. One, we saw a reduction in overall tickets. We saw an improvement in time to respond. And we saw a significant improvement in our ability to move workload to low-cost centers. So for example, we've reduced in those accounts about 500 jobs that we could move to the low-cost centers. And I just reviewed those results about 2 or 3 weeks ago, and we've made the decision now to implement that program in another 40 to 50 accounts. The other thing, and this was the most important thing to me, is we did a quick survey, what we call pulse survey, with the customers. And we saw customer satisfaction improve, and we saw, believe it or not, our own internal, meaning our own employee satisfaction, increase dramatically as a result of doing this. It's going to take a little longer to do this. So 6 accounts, we pilot it, we love the results. Now we're going to go implement it in 40. As a matter of fact, this morning, I just cut a videotape to launch this around the world with the different teams that we're working with. And although 40 may sound like a lot, there's still -- I wish we could do all 200, to tell you the truth. But we're doing this account by account so that we don't take people or jobs out that would impact, one, either our service delivery capability or customer satisfaction. But we are pretty clear after this trial of 6 accounts that we are getting better service delivery at a lower cost. So that gives you a little color on what we are doing there, and we're encouraged by that progress.

I think in the free cash flow, it reflects right now a CapEx in the $850 to lower.

$850 for the year.

$850 for the year, yes.

Up next, will take Moshe Katri with Cowen.

Paul, can you give us some color on what sort of dilution you had during the quarter from ServiceMesh?

I think in total, I would say the investment that we are doing in cloud in general was about a $20 million drag on our profitability.

Okay. So that included the impact of, I mean, of the D&A from ServiceMesh, right?

Yes, correct.

Okay. And then you spoke a bit about the NHS. Is that a profitable contract right now? Is it -- if I remember, it was operating at breakeven levels.

Yes, NHS is -- we don't talk about this too much, but I mean, it is remarkable and I give the team, the industry team that runs this, just enormous credit. And this thing cost us billions, and we're now making money in NHS. And we've taken, I think, correct me, I don't have it on the tip of my tongue, but another 4, 5 trusts live. And we are making money on those trusts. We are making money. And the significance of what we talked about today is that when we renegotiated the contract, we sort of gave up our exclusivity with the region that we had been awarded by NHS. In exchange for that, we asked the right to compete throughout the U.K. And this Bristol NHS trust, which is a large trust, was taken away from a competitor. This is our first major win outside of that region, where we had been given some preferential treatment. What I mean by preferential treatment, NHS subsidized the cost of the system. So this one, we won straight up, no subsidy from NHS, just won on the merits. So the project hasn't started yet. It was just awarded. But our anticipation is, yes, we can make money at it because we have now delivered the Lorenzo product suites. They're up, they're running, they're working, and there's very little additional development work that needs to be done for these new trusts that we are bidding on and winning. So it's quite a turnaround in NHS. Even the press in the U.K. has actually turned positive around some of these things, which, in and of itself, is remarkable.

Okay. So when you say make money, are we talking about optimal profitability? Can we get some color in terms of what sort of profitability we can get from here?

Yes, we went from a loss to a high-single digit to low double-digit margin.

Low double digit.

Okay, which is very respectable. Okay, great. And then can you give us a...

By the way, one other thing. This health care business, now on a global basis, is growing. This was -- I think this was also a big drag on our performance a couple of years ago, and this business is beginning to grow again. And we're beginning to bid now on other opportunities around the world. And as we announced, we're partnering with Allscripts on [indiscernible].

Yes, I want to ask about the DHMSM contract. Can you give us some time line in terms of potential awards and when can we expect that?

No, I really can't. I just don't know. I mean, it's an open procurement here. It's going to go through its normal cycle. I've got no idea, but I don't think it'll be this year.

And is that an IDIQ contract?

No, I don't think so. It may be. There is an incumbent now, and I'm not sure under what contract vehicle it's currently contracted under. We could get that information, but I just don't know off of the top of my head.

And then last question, you spoke a bit about shifting some work, very preliminary kind of phase of shifting some work to low-cost locations, and you mentioned 6 accounts. Is that a substantial part of the strategy down the road? Can you give us some more details on where this is going to go next year or next few years?

Yes, it's a very substantial part of our strategy. It's what we expect to be able to be the primary driver for improved margins in our GIS business. And we're also doing the same thing with NPS. I think you know we announced 2 new centers in the United States, 1 in Louisiana and 1 in Pittsburgh. And those 2 centers are not only for commercial work, but they're also for NPS work. So we're combining that and then consolidating some of our centers, for example, in the Washington area and moving workload from here to those lower-cost centers. So they serve not only commercial but NPS business as well. And then we've got our other centers in India and other places around the world. But it is a major, major part of our strategy of improving our margins across the board in our infrastructure and application business.

And you said it brought down your delivery cost, especially in these 6 contracts. Can you quantify that?

I can't off the top of my head. But it was -- I'm just going to hazard a guess here, probably a couple of hundred basis points.

Our next question will come from Brian Essex with Morgan Stanley.

If I could just follow up to that last line of question on migration of workload to lower-cost geographies. What is the typical pricing power in those scenarios in terms of when you have a customer where you're moving their workload to lower-cost geographies, is there a pass-through to the customer in terms of lower revenue where you at least get some margin uplift but it might hit the revenue line? What's -- what are the typical dynamics in the conversations with the customers?

Yes, good question. Typically, what we've done here is we've restructured a lot of contracts. And in restructuring, we often gave workload back to the customer, so that resulted in less revenue but higher profitability. And that's how we improved dramatically our margins in the GIS business the last couple of years. As we go forward, all these contracts have price takedowns assumed in them. Every year, x amount. What we have done in the past is we never really eliminated those jobs or moved those jobs or moved those workloads to lower-cost centers. As a result of that, it was CSC that took it on the chin in terms of margin. That was one of the primary reasons CSC's margins over a period of time declined in GIS, because we did not take those costs out by moving them to lower-cost centers. That depressed our margins. So a major part of our strategy is to be able to absorb those price-downs without suffering margin degradation because we are moving that workload to lower-cost centers. Now to put this in context, the industry had made this move years ago, I mean, 10 years ago. I mean, Accenture, IBM, they've made these moves 10 years ago. CSC did not make that move. And as a result, we have a lower percentage of our workload is done in these offshore centers. I think when we started out, we were in the mid-20s, and I think now, George, correct me, I think we're in the mid- to high 30s. But a long way to go. This should be 60% to 70% over the long haul. So it's a major part of our strategy to continue to drive margin expansion, particularly in the GIS business. So that's -- and again, this isn't all about costs. It's also about better delivery and better service, better SLA performance and just better support to our clients, which then has a net effect of allowing us to cross-sell into those accounts, which is another area that we are focused on and is a major part of our improvement plans going forward. Does that, Brian, answer the question?

Yes, very helpful. And on the point of SLAs, does that -- I mean, does that kind of selling point allow you to go into a customer mid-contract or renegotiate or is it typically contract renewal that's a catalyst for renegotiating a contract?

It's a usually contract -- usually, a contract renewal is the catalyst for that. We, CSC, were the catalyst in a lot of these accounts because we were underwater in a lot of these accounts. So we went to the clients and said, "Hey, we need to renegotiate this, and we're going to make this a win-win." And in some cases, we return revenue back to be able to get higher margins. But going forward, we want to be able to manage that in a much more proactive basis, much more business as usual as we go forward. But the big thing is -- the big thing is when you are delivering better SLA performance, you are providing a better delivery service, you have an opportunity to cross-sell. And that is we're beginning to see -- we're seeing that in cyber. So some of our GIS accounts is we approve the SLAs and service delivery. We're then being invited to come in and talk about how to transition to cloud or talk about application modernization or talk about cyber. So it opens the door to other things when you are performing better. It's just very logical and very intuitive.

Great. How far would you say along you are on that contract renegotiation process the ones that you identified that you've kind of -- feel as though aren't up to the level that you want them to be? What kind of progress have you gotten?

We're really down to a handful now, a handful. I mean, when we started out, there was 40-plus. I think I mentioned this on our last earnings call. We're down to a handful, and I say a handful, 4, 5, 6, something like that. We sold a couple more this quarter. That does -- I mean, listen, that is one of the things that provides the downward pressure on revenue, is we are renegotiating these things. We're -- typically, we're renegotiating at a lower revenue rate but more profitability. But it's not like we have hundreds of these things in front of us. Most of that is done. So as I said, we have a handful left to do. The big thing now is to take those accounts where you're making minimal profit and begin to proactively move some of this workload to low-cost centers and then expanding the margin and maintaining the existing revenue. That's what this Delivery Excellence or DEO 2, is all about.

And our next question will come from Rick Eskelsen from Wells Fargo.

[indiscernible] clarifier on the EPS guidance. I think in the prior guidance, you mentioned that the share repurchase -- or the share count assumption was for it to be flat. Is that still the case?

It all depends where the stock price goes because what you have is we continue to buy back shares, right? The 2 other offsetting aspects is the exercise of options. That would be one. The second one is the -- under the treasury method is the dilution that gets created by more options getting into the money. So it's a treasury option. So we're continuing to buy back shares, and as you could see, continue to accelerate that process.

And then the other one is, Mike, you talked a lot about moving things offshore or into low-cost delivery centers, and you talked about some success on the NPS side moving into Pittsburgh and Louisiana. Can you just talk a little bit more about how your clients are responding to that? I know in the past it's been tougher with some of the particularly D.C.-based clients that want to move things out of a region that they could drive to. So just a little more detail on that.

Yes, we're having a fair amount of success with that, particularly with Louisiana, because what we're doing in Louisiana is we're hiring a lot of people there. We're hiring quite a bit of ex-military people that are coming back from deployments around the world. A lot of those people have some fantastic technical and IT skills. So we're adding quite a bit of resource there. Some people are deciding to move to Louisiana, so actually, moving from Louisiana -- moving from the Washington area to Louisiana. But obviously, if a client says, "Gee, we don't want to do that," we don't force the issue. But there's plenty of clients that are more than willing to see the potential improvement in service delivery and other productivity gains and are happy to help assist in that transfer to other locations. And in many cases, they benefit because they get a lower-cost as well as improved service delivery.

At this time, we will take our last question from Tien-tsin Huang. Tien-tsin Huang - JP Morgan Chase & Co, Research Division: Just 2 quick ones. On NPS, the margins, obviously, very high. You said it's going to moderate. Can you give us some sense on how quickly that might moderate, into what level and what's driving exactly? I heard pricing, but I thought maybe with the low bookings, you have low selling costs as well. Can you elaborate?

Yes. I think what happened is as we mentioned, we passed along some of those cost savings to customers who are on cost plus contracts. So it's just the timing. It'll start to show up next quarter. Our expectation will be, obviously, lower than these levels in terms of margins, and then it will continue to moderate from these levels. Our expectation is to have something in the 10-some percent range in the margins for the full year.

Okay, that's helpful to know. And then just quickly on the follow-up. I know consulting was asked a bunch. Can you give us a little bit more on what the sales execution issues were? Was it simply hiring the wrong talent? I know it's very tough to have stand up a new -- or change consulting. So I was just trying to understand how quickly this thing can be turned around.

I'll give you an example of what I call an execution issue. So we had an account, and again, I'm not going to name accounts, that accounted for, I don't know, $10 plus million in revenue in consulting. And we had a service issue or some other disagreement with the client. They asked us to resolve it, and they said, "Listen, if you don't resolve it, then we're not going to do some additional consulting work with you in the quarter." We didn't resolve it. It's clearly -- was clearly resolvable, but we didn't resolve it. And as a result, we didn't get some of that additional billings in the quarter. So that's an example of what I mean by execution issues. It's nothing to do with the skills or the people or the hiring. It has to do with how the business is managed. And that's why one of the reasons I wanted to call out some of those execution issues is because it's not just a matter of repositioning the business. Some of this is on us, and we're trying to address that by some changes in leadership.

And I'd like to clarify one thing I said on the NPS margins. I said it's 10%. I think it'll be by the end -- by the fourth quarter, so not the average for the whole year.

Yes, it's going to play out very similar to the way it played out last year. We had higher margins at the beginning of the year.

Right. So exit at 10.

Okay. Guys, well, thank you again for your interest, and we'll talk again soon. Thank you.