Good day everyone and welcome to the CSC Fourth Quarter and Fiscal Year 2015 Earnings 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 very much Amber and good afternoon to everyone. I am pleased you have joined us for CSC's fourth quarter and fiscal year 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've posted some slides on our website which will accompany our discussion today. On slide two, you will 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 three informs our participants that CSC's presentation includes certain non-GAAP financial measures and further -- 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. Both documents are available on the Investor Relations section of our website. Briefly, I would like to mention that our fourth quarter 2015 GAAP results include the impact of certain items; including non-cash pension related charges, charges related to our proposed SEC settlement, as well as other expenses, a special restructuring charge, and a tax valuation allowance benefit. In addition, our fourth quarter 2014 GAAP results include the impact of non-cash pension related charges and a benefit from the reversal of contingent consideration associated with our ServiceMesh acquisition. Mike's prepared remarks will exclude the impact of these items on our results. Paul will cover these items in more detail in his remarks. 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. Now, I would like to introduce CSC's CEO, Mike Lawrie.

Okay. Thank you and good afternoon here to everyone. As you know, within the last hour we shared the news about our intent to separate CSC into two publicly traded companies. But we are also going to be covering our Q4 and full year results and then after we do that we will have our normal Q&A session. But I would like to begin by walking you through the separation that we announced. As is my habit, I have got three or four key messages around the separation; I will share those with you and then go into a little more detail around each of those points. But first, what we are announcing is CSC's Board of Directors has unanimously approved a plan to separate CSC into two publicly traded pure play companies. One to serve commercial and government clients globally, and one to serve public sector clients in the United States. The second key message here is concurrent with the separation. CSC intends to pay a special cash dividend to shareholders of $10.50 per share at closing. The separation is intended to qualify as a tax free transaction to CSC shareholders and immediately following the separation, shareholders will own shares of both CSC Global Commercial and CSC U.S. Public Sector. Now, the third point is why are we doing this now? The Get Fit journey that we have been talking about for several years and began almost three years ago has largely been successful. We have taken a lot of costs out and really moved the company in the right direction. But at the same time market needs have changed for the public sector and commercial segments. And the Board felt that separating the two businesses will allow these two businesses to tailor their growth and leadership paths to…

Thank you, Mike. Before I review the fourth quarter and full year, let me cover some items that are included in our GAAP results. First, due to improving profitability in our U.K. business over the past two years, we're able to reverse a tax valuation allowance and record a tax benefit of $264 million, or $1.85 per share in the quarter. While we use this opportunity to accelerate efforts to optimize our workforce in high-cost markets, particularly in Europe, address our labor pyramid and right-shore our labor mix. This resulted in a special restructuring charge totaling $246 million pretax in the quarter. Second, we had additional SEC-related and other costs totaling $5 million in pretax in the fourth quarter. And finally, as part of our annual re-measurement of pension plan assets and liabilities, we recorded a non-cash pretax charge of $319 million, reflecting the lower interest rate environment globally. We've excluded these items from our non-GAAP results for the quarter and the full year. We've also adjusted the prior-year period to exclude a $21 million benefit from the reversal of the ServiceMesh contingent consideration. Now, let me turn to our fourth quarter and full-year results. Fourth quarter revenue was $2.9 billion, down 8% in constant currency. On a sequential basis, fourth quarter revenue grew 1% in constant currency, driven by 2% growth in commercial revenue, which was consistent with our expectations. Sequential growth was driven by improvement in all three businesses of our GBS segment, which helped offset a slight decline in our GIS business. Operating income adjusted for the special restructuring was $349 million. Operating margin on that basis was 12%, up 110 basis points over the prior year. Earnings before interest and taxes adjusted for the special restructuring was $283 million. EBIT margin on that basis was 9.7%,…

Thank you. [Operator Instructions] And we will go first to David Grossman with Stifel Financial.

Thank you very much. I know -- just a few quick questions on the separation. Can you give us any sense for the cash costs that you expect to incur, not only to execute the separation, but also to create separate operating infrastructure for each of the business units?

Yeah -- we're estimating somewhere in the neighborhood of $50 million to $75 million. So, we don't see this as a big cost to separate the businesses. We've been running these businesses in such a way where we positioned this to happen for some time.

Okay. And then just on the cash flow, the cash flow guidance of the $750 million to $800 million, does that include the $190 million still due the SEC? And what impact, if any, is included from the new accounts receivable facility?

Okay. So, I will let Paul handle the accounts receivable facility, but it does not include the $190 million penalty we will be -- we're most likely going to pay here to the SEC.

And then the free cash flow -- when we define free cash flow, we do not include any of the benefit of the sale of receivables through our special facilities. So, it's exclude that -- there's no benefit.

And that was not in the fourth quarter, full year, or next year.

Correct. It's not.

Okay. And then if I could just get one fundamental question in, just on the commercial business. Obviously, the book-to-bill has been improving in GBS and actually it's been good in GBS for the last several quarters, and GIS has shown signs of improvement. Can you help us better understand the timing of when the outflows in the install base or whatever headwinds exist, you start getting past that so that the positive book-to-bill starts generating growth?

Yeah. I think it's a little different for GBS versus GIS. GIS, you continue to have these headwinds that we've talked about before. The good news here is that at least one of our major offerings, which is our workplace offering that we call MyWorkStyle, those bookings now have surpassed the bookings of the more, what I call legacy offerings. So, as we go through next year, we will begin to see some of that in the GIS business. But the fundamental issue in GIS hasn't changed one Iota in the last 18 months, which is the decline in the runoff in some of the existing IPO business is still greater than the incremental new revenue we're getting from cloud, from the network, and so on and so forth. And we continue to restructure some contracts to improve profitability, and in doing that we usually give up some revenue to get that profitability. GBS is a different story. We had -- and I reported at the end of the third quarter where we did not execute very well in our consulting business in particular. We had utilization rates that were down, we didn't execute very well. That execution improved in the fourth quarter and that is one of the primary engines of driving incremental revenue. The time from when you book an order to when you begin to bill it is much shorter in the consulting business. The other thing, I didn't highlight this, but the U.K. Consulting business, I don't have the exact number, goes up like 50% now, sequentially, and we're beginning to see some improvements in the U.S. Consulting business. That's where we will get the most of our short-term revenue improvement.

Great. Thank you very much.

And we will go next to Moshe Katri with Cowen and Company. Your line is open. Please go ahead. Check your mute function.

Hey, sorry about that. GIS and GBS--

That's a good question.

GIS and GBS are very different than--

You're going to have to speak up. You're not coming through at all clearly.

Sorry about that. Is that better? Great.

That's better. Thank you.

So, GIS and GBS are very different businesses. Was there ever a thought or consideration to split those businesses, as well?

No. The reason for that is that the clients are the same. So, we go in with a client that has an infrastructure business and that often leads to consulting business and then application. And as we talk about digital transformations, as we talk about transformations to next-generation infrastructure, it includes applications, it includes infrastructure. Those businesses are really not separable and customers don't buy that way. It's much different than the separation we announced today, where we've got U.S. Public Sector, largely the U.S. federal government, versus commercial clients. Those are two distinctly different businesses.

And I get it. Unfortunately, though, you're still -- you still have a business that has a decent growth trajectory that's probably from the consulting and inside part of the business, and then you have another business that's going to keep on pressuring the rest of the operation because you have some structural issues there.

Yeah, that's absolutely fair. There's no question that there is much greater headwinds in that infrastructure business. You're absolutely right and we see it play out in most of our competitors' reports as well. But we are very comfortable and confident that we are beginning to see -- and I'm not ready to call the crossover point yet, but we are beginning to see the uptake in these new offerings. And they are beginning to slow down, or let's say substitute for that decline in some of the classic IT infrastructure business and that's things like Storage as a Service, which is growing, our network offerings, which I just talked about, cloud, and of course MyWorkStyle.

Okay. And last question--

And that's where we're been making the bulk of our investments, is to build those offerings out and then begin to take those offerings into the marketplace. And we're beginning to see some very good traction around that, but it's not yet enough to offset decline in the traditional IPO business.

Okay. And then you're getting closer to the end of your contract, Mike. Is there any plan to extend it?

What contract?

Well, when you came to CSC, I believe the Board -- I think you signed a -- the Board basically asked you to sign a five-year contract to pretty much do what you are doing. And I think you're getting closer to the end of the expiration of your contract. Is there any plan to extend it?

I haven't had any discussions about that. We -- my contract still runs for some period of time and it's really, I think, it's an evergreen contract. So, I haven't even focused on that at all. What I have announced is that I'm going to stay with both of these businesses, both as the CEO of CSC Commercial and then as the Executive Chair of the U.S. Public Sector business. But to be honest with you, I haven't even thought about that. I'm focused on getting this up and running and now dedicated to getting these two new businesses launched in the fall.

All right. Thank you.

And we will go next to Darrin Peller with Barclays.

Thanks guys. Well congrats on this announcement. I just want to start off, first of all, is there -- I mean, obviously, this is a tax division transaction and the way of doing things. I mean does it preclude you from any type of merger that would also be somewhat tax efficient, even within the next six months or so or maybe in the next 12 months, potentially with -- on the government side or with even a smaller entity?

There's vehicles like Reverse Morris Trust that could be employed. But again, the focus here is we think both of these businesses are well-positioned now to go compete, as I said, the U.S. Public Sector business will be the third-largest IT provider to the federal government. The commercial business is a very strong platform. But no, there's nothing that would preclude other things.

Okay, that's helpful. And then just a follow-up question on the commercial side of the business. I mean the government, obviously, we see the NPS obviously inflecting right now, which is great. But I think just a follow-up to the earlier question. I mean we've talked about this before, Mike, but can you at least tell us what point in time, where is that crossover? Is it 2017 when GIS inflects to the positive because you've got the right-sizing down to the right point and the growth areas are going to overtake it? Or maybe asked another way, how big of that business -- how big will GIS be when that occurs?

Yeah. Let's put it like this. I don't see that crossover point in fiscal 2016, just to be quite candid about it. And that's why we are projecting the GIS revenue to be down mid-single-digits in constant currency next year. And when I'm looking -- there's two things we're doing. One, we're being -- we're really not bidding on a lot of big infrastructure deals. We're not at all interested in that capital intensive business. So, you can see our percent of revenue that we spend on capital now continues to decline; I think it was 6% last year. That's down 300 or 400 basis points over the last couple of years. So, we're continuing to be very careful about where we've been. And let me be real clear where we do bid, it is with the intention that even if we lose, because we will not go down to ground zero on these deals, we will not go to ground zero. So, if we aren't going to win, so be it, but then, we expect to win other business as a result of our engagement with that client. Last year we had a very large infrastructure deal that we lost. And since then, we've signed $500 million or $600 million of business in that same client. So, we did not have to take on the capital intensity and the business that we signed has almost no capital intensity. So, these large outsourcing deals that were very prevalent for the last 20 years, there's fewer of them and we're thinking about it more as a route-to-market, as opposed to a business in and of itself. So, we're continuing to make sure that the contracts we do have are profitable and we're willing to give up some revenue to get to that profitability. And then the next biggest thing is building these offerings out with our partners and trying to get the crossover point with the new offerings versus the traditional business. And as I said, we at least got that crossover point with MyWorkStyle in the fourth quarter. Probably more of an answer than you wanted, but its worth.

No, that's helpful. All right. Thanks very much.

Yeah.

And we will go next to Joseph Foresi with Janney Montgomery Scott.

Hi. One of the legacies of CSC was that the government business or the NPS business fed into the private sector work and created a level of competitive advantage, because you could cross-reference what you are doing for the government. How do you expect to maintain that competitive advantage now that you're splitting up the companies?

Well, I think there's a couple dimensions. One, the intellectual property, some of the intellectual property that's in the NPS business, we will cross-license back to the commercial business. And then some of the intellectual property that's in the commercial business we'll cross-license back to the public sector business. So, I see absolutely no impact there at all. Where we had seen some strong synergies initially and I think I even commented on this publicly was within the cyberspace. We've really grown our cyber business now outside of the U.S. Public Sector where we've got a network of security operations centers and a whole new set of offerings around cyber. So, those synergies are less pronounced today than they were a couple of years ago. The same thing holds for Big Data. Originally, we had a lot of Big Data synergy that came out of some of our work with the intelligence agencies. And now we've built a commercial Big Data business, commercially, that's continuing to grow. So, at this point in time, a lot of those cross synergies that we saw two or three years ago are less pronounced today, and where we have relationships outside of the U.S. government, we'll either cross-license the intellectual property or come up with some sort of shared service agreement. So, I don't think it's an impact that it would have been two or three years ago.

Okay. And then just maybe you could provide a little bit more depth on some of the new opportunities and the initiative to continue to build out the global delivery network. What is the size of those new opportunities, cloud, digital, social, mobile, and then on the global build-out, where do we stand today and where do you hope to take it over the next six to 12 months?

We are -- Paul, correct me if I'm wrong, somewhere in the mid-30s, now, offshore?

I think in total, between the two businesses, close to 40%, Mike.

Commercial?

Of commercial, I'm talking about -- yes, commercial.

So, somewhere in the high 30s and with this restructuring charge that we took in the fourth quarter that will improve that mix probably five or six points. The bigger issue is that we really don't have a labor pyramid. We have a diamond. So, part of this optimization work that we're doing is to bring a lot more people into the bottom part of this pyramid. We've launched a very aggressive what we call workforce optimization and workforce management process, where we expect to hire thousands of people into those parts of the pyramid. So, as a lot of these contracts are restructured and we begin to build these new offerings, we're trying to rebuild that pyramid. This is most noticeable in Europe. And that's where we had the most work to do. Now, as I said before, we're building out a network of global delivery centers, two in the U.S., Bossier City and Pittsburgh, primarily. In Asia, we've got India, obviously, and Vietnam, and the Philippines. And then we have got some centers that we're building out in Lithuania and in Bulgaria. So, those are the primary centers that we are building out and that's where we are hiring the bulk of the people. So, this is an ongoing active program around what I call talent transformation.

Thanks.

And we will go next to James Schneider with Goldman Sachs.

Thanks for taking my question and congratulations. Following up on the earlier question, can you maybe give us a little bit more color on how much of the headcount move is to the lower cost geographies within the U.S. that you mentioned versus how much is going to be further out offshoring, maybe I missed the specific figures.

Well, I mean we set an objective to move -- I'm going to give you some rough numbers, so don't hold me to this. But, I'd like to see probably our near-shore -- let's just call it right-shore, somewhere in the plus 50% to 60% range. And we're at about, as Paul said, high 30%s, roughly 40%. So, think of this as another 10% to 20%. So I hate to do math in public, but you take the number of people we have in delivery, and multiply that out times 20%, 25%, you get a handle on what we intend to do over the next several years. This is an ongoing program; it's not a one-shot deal because we're transforming our offerings. As our offerings transform to these next-generation services, they have an entirely different profile than the classic ITO business. And that gives us a chance to remodel the talent and remodel the workforce in a much different way. We're not taking people on from other companies. One of the big issues, historically with the ITO business, you took over a contract, you took the people, and that then left you with a five, 10, 15-year issue that you had to deal with. Most of these new offerings we are building, they are longer term contracts, but have an entirely different profile in terms of people and in terms of margins. So, it's really a major transformation of a capital intensive, fairly low margin business to a less capital intensive, higher margin, different skill profile business.

Thanks.

And to add to what Mike is saying, there's a several hundred basis point, 200, 300 basis point of margin opportunities as we continue to move from where we are today to where we need to be.

And again, the separation will allow us to move with alacrity in both some of this optimization work in commercial as well as the U.S. Public Sector. And it's a great opportunity for our people because this is opening up a whole new set of opportunities that they will be able to avail themselves with the appropriate training.

That's helpful. Thank you. And then as a quick follow-up, can you maybe just clarify the structure of the debt going forward? Do you plan to reissue new debt and then in the two separate companies, would one of the companies retain some of the existing debt or how do expect to structure that, broadly speaking?

We will probably put some more debt on the NPS side and then we will be retiring some debt on the commercial side. We'll provide a lot more visibility in all of these things as we progress, and the leverage, as I mentioned to you, I gave you some indication of where we will end up being at both companies. What is important to note is that the NPS business is really structured to have an investment grade credit profile, which is really unique in the space itself. It will give it a lot of flexibility and will be well-positioned and also reflective of the fact that this is a business with very high margins.

I would just add one thing here, as I do with the capital structure. The bottom-line here is what we announced today would have been inconceivable three years ago. It just couldn't have been done. We didn't have the wherewithal to do it or the capital structure to do it. So, the turnaround that we've done over the last couple of years has largely been successful, but we felt that by separating the business, the ongoing transformation -- and there's a big difference between turning a company around and transforming a company. Turnarounds get measured in relatively short periods of time, a couple of years, two, three, four years. Transformations are much longer term and we just talked about what I mean by transformation. When you have to reskill a company, when you have to redo labor pyramids, when you need to introduce new offerings, when you need to change the capital intensity of the business, these are not things that you do in two quarters. They are long-term, that's why it's a transformation. And the key is the success, the success of the turnaround, the get-fit program over the last couple of years, has really allowed us now to take this next step and we think this next step will allow us to transform these businesses faster than if they were together. That's really the bottom-line. That's why we think it is a real milestone in the ongoing transformation of CSC.

And then maybe if I can sneak one last one in--

I know that wasn't your question, but I just thought that was a good time to make the comment.

No, that's helpful. And just one last one, if I could. In terms of the tax-free nature of the spin, can you comment on whether there is a specific timeframe, six months, 12 months, before which time any acquisition of one of the entities would not -- would harm the tax-free nature of the spin?

Again, we have to be just really careful in addressing this issue. I would say to you that right now, we structured it as a tax-free separation. As Mike mentioned, there are certain structures that can be contemplated in the interim as long as our shareholders end up owning the majority of the shares of the combined entity. And then after close, there are a number of other opportunities that we considered, provided that there was really no pre-plan or anything like that, which was not the case anyway.

Thank you.

And we will go next to Jason Kupferberg with Jefferies.

Hey, thanks guys. Maybe just to build on that last answer, I mean were there active efforts made to sell either or both of these businesses before the Board decided to split them into two separate public companies? And if there were such efforts, what were the reasons why those didn't come to fruition?

It's not appropriate for us to talk about any of these topics except to say that this separation served the best interest of our shareholders and also our employees and our partners and our customers. And we believe and the Board believes also that's in the best interest of all four parties.

As I said, we looked at this across four constituencies, one, our employees, our clients, our partners, and our shareholders. And believe me, we've done a thorough analysis over a period of time and looked at different options and we felt when you look across those four domains, but right now, at this point in time, this was the best option or transaction that could unlock the value that we talked about previously.

Okay. And then just circling back on the commercial business, I appreciate things seem to be getting better on the GBS side. Obviously, GIS still has some challenges. Can you just talk about the visibility on that fiscal 2016 guidance there, the flat to down constant currency? Because I know that it's been a bit of a struggle the past couple of years. So, some pieces seem to be turning the corner, other pieces still challenged. So just curious, your visibility on that guidance compared to maybe what your visibility was on the fiscal 2015 guidance for that business a year ago.

Listen, I think the visibility is a little better going into 2016 than it was 2015. Just in the spirit of candor, I missed -- this is me; I missed some of the dynamics associated with the acceleration to cloud. And not that cloud is displacing everything, I'm not making that point, but that is accelerating and that had a bigger impact than what I had thought it was going to have in 2015. And that impact is not only the restructuring of contracts, but it's also the willingness to go in and displace existing infrastructure with new infrastructure. And that visibility, I didn't have as clear insight into last year as we do this year. And then the other thing that we missed, collectively, was that the buying patterns of the clients have also begun to shift. There's less big buys, there's much smaller experimentation in pilots than the existence of large contracts. And I view this as positive and we've retooled our go-to-market to be able to handle smaller transactions because those smaller transactions, as I've said many times, are often more profitable and then lead to greater business. But that dynamic of having these smaller transactions versus large transactions and then the delay in being able to grow those smaller contracts, you know, I just didn't completely understand some of those dynamics and we have better insight into that now.

And I'll add just one possible point of clarification as we look to 2016. The first, obviously Q1, the comparison will be a little bit tougher to the prior year because we had an extra week in the prior quarter -- the prior year if you will remember. And then as we get into the second quarter and third quarter, this is when we started to take some of the restructuring action on the contracts to better position us for long-term profitability. And so as we move into the second half of the year, you'll see the comparison become much better and easier.

Amber, let's go ahead and take our last question.

And we will go to Steven Schneiderman with BMO Capital Markets.

Thank you for taking my question. I'm pinch-hitting for Keith Bachman tonight. Just a clarification question on the separation, then I have a follow-up. The $50 million to $75 million that you referenced, is that a one-time separation cost or is that an ongoing incremental OpEx cost as well? And if it isn't the latter, what would you estimate that to be at this point in time?

No, I said one-time item. I think it's hard just really to stand up the businesses. There are certain actions that we have to take, just additional accounting work that needs to be done to just get the audited financial work. As Mike mentioned, that's already underway, way underway and this is just one-time between now and close. Beyond that, I think the two businesses will be able to have the right cost structures anyway to support their ongoing business.

So, they all have the right cost structures with what they have in place?

Correct, they will not be -- I mean if you look at it they will not need an incremental amount.

And let's put it like this: they're not going to have to add cost. Because the way it's set up now, our NPS business, they have financial staff, they have communication staff, they have HR staff. That's already in place. So, -- and that's already in the cost structures and is already in the margins that we just reported, which by the way, are pretty good at 14%. So, they are not going to have to add cost to cooperate the business, that's why this makes so much sense. But we will have, as Paul said, some one-time charges, getting the accounting and the lawyers, all that stuff that has to get done in order to stand up to publicly-traded corporations.

That's fair.

If you look at our timetable, those efforts are not complicated. We said that we will -- in our targeted an October close, and so we're well underway for that.

Fair enough. And just on the leverage, I understand the buckets you're trying to get to on gross debt to EBITDA on the NPS and the commercial business. But how are you thinking about capital allocations at this point in time for both of those businesses? Are they being positioned as a return of capital or either of them being positioned more for M& A than the other? How are you thinking about it at this point in time?

I think we'll have ample opportunity again to expand on that, but we gave you already, if you look at how we have been operating as a company, those are the policies of investing in the business first, continuing to strengthen the new offering with bolt-on type of acquisition and returning our capital to shareholders in the form of dividend and buyback.

Yeah. So, we're planning to maintain the dividend policies, it's a Board decision, obviously, as these two companies get formed. But yes, we are planning to maintain a dividend in the aggregate that you've seen over the last year or two. And we plan to continue from a capital allocation standpoint to buy stock back as it makes sense. So, I think the capital allocation model that we have been working with the last couple of years we'll continue with the two new companies. And because I'm staying with both these companies, I plan to maintain that capital allocation strategy as we go forward. And what we will do is once these two businesses get stood up -- let's just say right now, it's October, what we'll plan to do is an Analyst Meeting after they get stood up, so that we can go through what the strategy is, what the dynamics of the business are, what the capital allocation strategy would be, and some insight as to what you can expect. It will be a little up and down between now and then, as you'd expect. We've got a lot of client work that we have got to do and partner work that we've got to do. But once they get stood up, then we'll sit down and be able to provide much better outlook as to what these businesses look like over the next couple of years.

And then just to clarify, again, our objective, even with a capital allocation, is to make sure that the businesses have a financial profile that is consistent with an investment grade financial position. So, that is very important to us.

Okay. Guys listen, thank you very much for your comments and positive comments about what we've announced today and I look forward to continuing the dialogue as we go forward. Thank you very much.

That does conclude our conference. Thank you for your participation.