Computer Sciences Corporation - Analyst/Investor Day

Computer Sciences Corporation (CSC)

September 10, 2012 12:30 pm ET


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


George A. Price - BB&T Capital Markets, Research Division

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

Jason Kupferberg - Jefferies & Company, Inc., Research Division

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


Steve Virostek

Good afternoon, ladies and gentlemen, and welcome to CSC's 2012 Investor Day. We're so glad that you joined us here in New York, and we'd like to also welcome all of those who are participating via webcast. I'm Steve Virostek, the Acting Head of Investor Relations for CSC and we've got an intriguing afternoon of events here for you. I'm pleased to know that we have books available for all of you in the room, and there are slides posted to the website for those of you listing on the webcast.

Slide 2 is a reminder that we'll be making forward-looking statements during this presentation, and please keep in mind that these statements contain known and unknown risk and uncertainties, which could cause actual results to differ materially from those expressed on the webcast. A discussion of risks and uncertainties is included on our Risk Factors section of our SEC filings.

Moving to the next slide, we have the non-GAAP reconciliations. We will be referring to those non-GAAP terms, and we believe these information provides useful information to investors. In accordance with SEC rules, we've provided a reconciliation of those metrics to their respective and most directly comparable GAAP metrics. The reconciliations will be made available for download on the website, and we'll also have a copy for you as you leave the auditorium.

Finally, I'd like to remind our listeners that CSC assumes no obligation to update the information presented on the conference call, except of course as required by law. And now, I'm pleased to introduce our President and CEO, Mike Lawrie.

J. Michael Lawrie

Okay. Very good, Steve. Thank you very much. Welcome to everyone here in the auditorium at Barclays and those of you on the webcast. Thanks for taking the time today and your interest in CSC.

What we'd like to do this afternoon is I'd like to cover with you the game plan that we have now put in place to turn CSC around over the next 3 to 5 years, and this is a 3- to 5-year turnaround plan. You'll see in the books we're outlining a game plan to take us from roughly 60-some cents per share in earnings to over a $5 per share in earnings over this time frame. So what I'm going to do is cover some of those strategies and game plans at a fairly high level, and then I will ask Paul to join me on stage, and he will go through the financial model, how we get to where we are trying to get to and also to cover our emerging capital allocation program that you can expect to see from us over this turnaround time frame.

I'd like to leave with you this afternoon several key messages, and I will develop each of these messages in just a little more detail in a moment. But the first message is that CSC has a very strong global franchise that we can build off of as we go forward. There's no question that the recent financial performance of this company has not lived up to the assets that we have, both our people assets, as well as our client assets, as well as other intellectual property. We certainly recognize that underperformance. And we think over the last 3 or 4 months, we've got a reasonably good handle now on what those root causes of that misperformance has been. And as I said, we have put together a comprehensive 3- to 5-year turnaround plan. And the most important thing is, and I've said this on many of the calls that we have done over the last several months, that there's no question in our mind that the business can, in fact, be fixed. We are working on a new financial model here that we think will significantly improve shareholder value, and as I said, we'll go into that in a little more detail. As you might expect, there are some risks. We don't operate in an environment right now that's perfect. There's a fair amount of volatility. We have identified those risks. I'll share them with you today, and we factored most of them into our ongoing financial model as we go forward, and we have not been waiting for today to begin execution. So execution of what we cover today is well underway.

So let me just develop each of those key messages very briefly. First, as I said, CSC has a very strong global franchise. Over 2,500 clients operating in 70-plus countries, almost 100,000 employees. Very strong relationships with the federal government, as well as commercial clients. But what is not completely understood is most people think of CSC as primarily a technology services company, and we are. But underneath that, we have some extraordinarily strong assets, intellectual property, software assets, people skills, domain knowledge that actually drives that technology services business. And we have leading positions in the financial services industry, most notably banking, insurance and in the healthcare industry. We have leading edge, what I'll call next-generation offerings, particularly around our Cybersecurity offerings that we've developed with the federal government over the past many years, as well as next-generation IT infrastructure, what we refer to as cloud computing or as service computing. Very strong leadership position there with great domain knowledge, great people skills. So one of the great surprises coming into CSC was the extraordinary capability of the people within the company, and we have a $36 billion backlog. And as you know today, we announced another very large deal that we signed with Zurich Financial in the application space, so we continue to build that backlog as we go forward.

You can see across the industries that we operate in, financial services, healthcare, manufacturing, what we refer to as diversified and then our federal public sector, really fantastic clients on a global basis. So really, a key asset of the company are these key relationships we have. We span a global basis. So you can see here we've got a lot of resources in India. Almost 23,000 employees are in India that work everyday, supporting our clients on a global basis. We've got service centers. We've got data centers. We have got call centers on a global basis. As a matter fact, this is probably an opportunity to rationalize a little bit as we go forward, but the point is a great foundation off of which we can expand and scale our business globally. You can see that about 62% of our revenues come out of North America, followed by Europe, but a very strong presence on a global basis.

And this company has got a long history of accomplishments and achievements. It was founded in 1959. Very few people realize this. It was founded as a software company -- software company. That was and is the roots of CSC, and many first with clients in the federal government and the commercial sector over that period of time. But not unlike a lot of companies that are around for 50 or 60 years, they do often get off course, and CSC got off course. And as I said, the financial performance over the last several years has not been up to the capabilities of our asset base and our people, and we think the root causes of this underperformance were fairly straightforward. One, the strategy of the company was very slow to reflect the change in the IT infrastructure business. The IT infrastructure business has been commoditizing for over 10 years now. A lot of this was brought on by less big deals, many smaller deals by clients, and it was brought on by the entrants of new lower-cost competitors, but for whatever reason, CSC doubled down in that business. Part of that was due to the way the incentives were set up, where the team was incented to drive revenue and drive total contract value. So you got almost a perfect storm where you've got a commoditizing market and you've got the entire throw away to the company, trying to drive bigger and bigger deals. We lost control, lost the discipline around our contracting, around our contracting life cycle management and around the delivery of many of our services. It wasn't that CSC didn't know how to do it. They did know how to do it. It's in binders and process manuals and it's best-of-breed. But for whatever reason, the company stopped practicing what in many cases it had invented, and that caused a significant number of problems.

The company was highly fragmented. It had grown up around a series of acquisitions over that 30- or 40- or 50-year period of time. Most of those acquisitions were not adequately integrated. It was in fact a holding company. It was managed as a holding company. And with that holding company mentality and the management system around that, over time, we lost control of the financial systems. We lost control of the discipline around much of our financial systems, and that has been well chronicled in the press over the last year and culminated, of course, in SEC investigation. And this fragmentation also led to a cost structure that just was no longer competitive with the key competitors that we face day in and day out in the marketplace. So this led to an over-indexation of very high risk, capital-intensive IT infrastructure and some of significant, high-risk application deals that we had done over that period of time.

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