Computer Sciences Management Discusses Q1 2013 Results - Earnings Call Transcript

Computer Sciences (CSC)

Q1 2013 Earnings Call

August 08, 2012 11:00 am ET

Executives

Steve Virostek - Director of Investor Relations

J. Michael Lawrie - Chief Executive Officer, President, Director and Chairman of Executive Committee

Paul N. Saleh - Chief Financial Officer and Vice President

Bryan Brady - Vice President of Investor Relations

Analysts

Matt Diamond - Deutsche Bank AG, Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Moshe Katri - Cowen and Company, LLC, Research Division

Keith F. Bachman - BMO Capital Markets U.S.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Presentation

Operator

Good day, everyone, and welcome to the CSC First Quarter Fiscal Year 2013 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Steve Virostek, acting Head of Investor Relations. Please go ahead, sir.

Steve Virostek

Thank you, operator, and good morning, everyone. Welcome to CSC's first quarter 2013 earnings call and webcast. This morning, CSC issued our earnings release, and I do hope you had a chance to review that document.

On the call with me today are Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer.

As usual, this call is being webcast at csc.com, and we've also posted slides to the website, which will accompany today's discussion.

Turning to Slide 2, some of the matters which we discuss on the call will be forward-looking. Just keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties which could cause actual results to differ materially from those expressed during the call. A discussion of risks and uncertainties is included in the Risk Factor section of our Form 10-K, 10-Q and other SEC filings.

Slide 3, we acknowledge that CSC's presentation includes certain non-GAAP financial measures, which we believe provide useful information to our investors. In accordance with SEC rules, we've provided a reconciliation of these metrics with the respective and most directly comparable GAAP metrics. These reconciliations can be found in the tables of today's earnings release and in an appendix through our web slides. Both documents are available for your review within the Investor Relations section of the website.

Finally, I'd like to remind our listeners that CSC assumes no obligation to update the information presented on this conference call, except, of course, as required by law.

Moving to the next slide, I'd like to introduce Mike Lawrie.

J. Michael Lawrie

Okay. Thanks, Steve, and welcome, everyone, and thank you for your interest in CSC, and joining us this morning. As Steve said, I am joined here by Paul Saleh. I really have 4 messages that I would like to leave you with this morning. And then I'll develop each of those messages in a little more detail. But first, we are beginning to see some early signs of an improving financial performance. The second key message is that we are putting some very strong turnaround actions in place and are beginning to execute against those actions. The third message is we still have, as I've said many time, a lot of work ahead of us to be done, and we do see some market uncertainties. And that the fourth key message I'd like to leave you with this morning is that we are trying to be very clear and very transparent about our performance and to try to clear up as much of the ambiguity around our performance as we possibly can.

So I'm going to delve into a little more detail on those messages, and then I will turn it over to Paul, who will go through a little more detail of the first quarter results. And then as always, we'll open it up for some questions and answers.

So let me just develop the first key message here that we are beginning to see some early signs of improving financial performance. One, our sales were very good in the first quarter. We had new business awards of $4 billion, which were significantly better than the same period a year ago, up 74%, with very strong signings. In our MSS business, $2.2 billion, and that included 20 new logos or 20 new customers.

One of the major contracts we signed was with Alstom, which is a world leader in power generation. And this is -- I'm singling this out because this was a very large cloud and global infrastructure services win for us. And I think it begins to validate our increasing strength in cloud computing.

Revenue was up around 1% in constant currency to about $3.96 billion. As we had anticipated, the commercial growth that we saw in the quarter was offset by a decline in our NPS segment. For the full year, I continue to expect NPS revenue will probably decline by mid-single digits, as we've talked about before. And on the commercial side, we expect sort of flattish revenues, primarily due to some of the market headwinds, but also resulting from our increased focus on profitability and our increased focus on our portfolio of contracts.

We also reported very strong improvements to our cash flow. Free cash flow was a negative $25 million, which is about a $378 million improvement year-on-year. This improvement came primarily through a higher cash flow from operations, improved working capital, but also reflected the fact that we made substantially less bonus payments in the first quarter.

Profitability was solid. We really are beginning to realize some improvements from our focus on contract management discipline, as well as some early initial returns from our cost takeout program. Operating margins of 4.6% showed a strong sequential increase and a slight year-over-year increase.

MSS margins showed a marked improvement, again primarily due to our contract discipline on many of our focused contracts. NPS margins were slightly down, and the BSS margins declined year-on-year.

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