Computer Sciences Corporation F3Q09 (Qtr End 01/02/09) Earnings Call Transcript

Feb.10.09 | About: Computer Sciences (CSC)

Computer Sciences Corporation (NYSE:CSC)

F3Q09 Earnings Call

February 10, 2009 5:00 pm ET

Executives

Bill Lackey - Director of Investor Relations

Mike Laphen – Chairman, Chief Executive Officer

Michael Mancuso – Vice President, Chief Financial Officer

Analysts

Jason Kupferberg – UBS

Analyst for Julio Quinteros – Goldman Sachs

George Price - Stifel Nicolaus

Rod Bourgeois - Bernstein

Eric Boyer – Wachovia Capital Markets

Analyst for David Grossman - Thomas Weisel

Operator

Good day everyone and welcome to the CSC fiscal year 2009 third quarterly earnings conference call. For opening remarks and introductions, I would like to turn the call over to Mr. Bill Lackey, Director of Investor Relations. Please go ahead, sir.

Bill Lackey

Good afternoon everyone. Welcome to CSC's third quarter fiscal 2009 earnings conference call. We hope you've had a chance to review our financial results issued earlier this afternoon.

With me this afternoon are Mike Laphen, Chairman and Chief Executive Officer, who will begin with some opening remarks and Mike Mancuso, Chief Financial Officer who will then review quarters’ financials.

As usual, this call is being web cast live at csc.com, and we also welcome those joining us via that process.

We again have slides posted on csc.com, which accompany our presentation today. As always, I must caution everybody that any statements on this call that are not historical facts may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed or implied by these statements. Additional information concerning these risks and uncertainties is contained in the company's filings with the SEC. Copies of these filings are available from the SEC's website, from CSC's website at www.csc.com or from us at Investor Relations.

Our presentation today also includes certain non-GAAP financial measures. In an effort to provide additional information to investors all non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find a reconciliation of these measures included in the tables attached to the earnings press release and they also will also be posted on the Investor Relations section of CSC's website.

Finally, we assume no obligation to update the information present on this conference call except as required by law. Now, if you’ll please turn to slide number four, I am very pleased to turn the call over to Mike Laphen.

Mike Laphen

Thank you Bill and good afternoon everyone. I am pleased to have the opportunity to speak with you today about CSC’s business position and specifically CSC’s third quarter results. Slide five reflects our focus on operational performance during the third quarter. In particular, it highlights our emphasis on cash management, profit improvement and delivery excellence.

The expense reduction program we initiated during the first half of the fiscal year provided our expected savings in the third quarter and is on track for the fourth quarter as well. We are also pleased to report that two key milestones for NHS were achieved in the third quarter. They include the successful upgrade of our primary care solution which manages electronic patient records in doctor’s offices, community settings and prisons. Additionally, we achieved a release milestone with our emergency care solution that is installed on mobile devices and ambulances enabling emergency personnel online access to patient information.

As was reported last quarter we went live with our Lorenzo Release 1 in the South Birmingham Primary Care Trust in late September. This was followed by our second successful early adopted go-live at the University Hospitals of Morcambe Bay. In early January this release was deployed to the wider clinical community at Morcambe. Feedback so far has been very encouraging.

Our third early adopted, Bradford, remains on track to go live by the end of the fourth quarter. At that point the functionality of this first release of Lorenzo will have been fully trialed, completing its critical milestone and enabling us to proceed with the next phase of the roll out. To that end, some 20 trusts are currently in discussions with us regarding Release 1 implementation.

In parallel we are already working with a further set of early adopters for Release 2 with full deployment scheduled to begin later this year. In addition to Lorenzo over 100,000 NHS professionals are today users of the systems that we have delivered and continue to deploy.

Another positive development I am pleased to report is the resolution of the Hensley Basham action litigation. We have reached a favorable settlement which we are now in the process of submitting for the court’s approval. This settlement will not result in any material financial impact.

Now to further discuss our financial performance I draw your attention to slide six.

Notwithstanding top line pressures we had solid Q3 financial performance. Our strong free cash flow performance of $333 million for the quarter contributes to a $544 million year-to-date improvement over last year. This improvement reflects our ongoing efforts to manage all cash levers. We have also made progress in improving our operating margin over last year with an 18 basis point gain year-to-date which puts us on pace to achieve our full year guidance of margin improvement of 25 basis points or better.

We delivered earnings per share of $1.06 in line with our guidance of $1.00 to $1.10. Revenue and bookings for the quarter were impacted by some decreases in discretionary spend as well as delays in new business awards in outsourcing and government. Third quarter revenue was $3.95 billion, a year-over-year decrease of 5% as reported but up 2% in constant currency.

Turning to slide seven, our top line performance by industry for the quarter reflects the widespread impact of the global economic conditions and significant currency fluctuations. Our public sector, healthcare and chemical, energy and natural resource verticals achieved constant currency growth in the third quarter. The healthcare results include the effects of the First Consulting Group acquisition. We have shown the results on both a GAAP and constant currency basis to provide transparency into the considerably impact exchange rates have had on this quarter’s results.

Slide eight details our new business bookings performance. Bookings were down for the quarter. However, year-to-date we have achieved 21% growth in bookings over last year with all three lines of business experiencing positive booking gains. During the third quarter we experienced a slowdown in outsourcing award decisions. At the same time our current outsourcing pipeline and sales activities are strengthening as companies seek cost reductions and economic benefit. As a result, our outsourcing pipeline has expanded to $13 billion from last quarter’s $8 billion. We would anticipate it would take 6-9 months to convert these new opportunities to revenue.

Our MPS pipeline remains steady at about $30 billion with $2.5 billion of these opportunities scheduled for reward over the remainder of our fiscal year. In aggregate we anticipate achieving total year bookings at the lower end of our previous guidance of $17-19 billion.

While the economy remains uncertain and customers are anxious this market also presents opportunity as illustrated on slide nine. For example, we are prepared for the shift in the spending priorities by the new U.S. Administration and are well positioned for opportunities in transportation, infrastructure, renewable energy and cyber security. As healthcare reform becomes a priority not only in the U.S. but around the globe we believe our world class private and public sector healthcare IT capabilities in medical systems, healthcare informatics, our electronic patient records and the management of digital imagery will prove beneficial to us.

We are also well positioned to help clients respond to increased regulatory intervention and the consolidation pressures within their markets and as I mentioned we have the outsourcing capability to help organizations cut costs and improve profitability.

Lastly, as a result of recent events in the Indian Pure Play market we are seeing opportunities to work with companies to ensure the continuity of their operations. We anticipate there may be further flight to quality opportunities for off shore support from which CSC can benefit.

In summary we continue to manage our financial performance through strict expense control and cash management. These efforts strengthen our business enabling us to take advantage of current market opportunities and position CSC for the market’s eventual rebound. For the full year we anticipate achieving the lower end of our previous guidance for both revenue and EPS.

At this point, I am pleased to introduce Mike Mancuso who joined CSC in December as CFO. This is Mike’s first call with CSC and it is my pleasure to turn the call over to him for further details on the quarter’s financials.

Michael Mancuso

Thanks Mike. Good afternoon or evening depending on where you are ladies and gentlemen. First off I would like to tell you how pleased I am to be part of Mike’s CSC team. On a personal note, as Mike said, I have been on board since early December but in that short time and although I am no stranger to CSC having been a client for many years in another life I am very impressed with the talent of the men and women I have met and with the breadth of products, services and technologies resident in this world class company.

As far as my style on these calls is concerned, although I am not quite sure what you are used to, I am going to strive to keep my remarks comparatively short void of too much accounting detail focused on the highlights of the quarter as we see it and I will allow a little bit more time for your questions. Not a lot of time, but a little bit of time. Recognizing I am new to the job I am sure you will be kind and understanding with your questions.

Having said that, we do not intend to back off from our commitment to provide you with transparency and to the extent you have detailed questions our IR folks will make themselves available after the call.

Now if you will bear with me I will do my best to walk you through some of the financial highlights and details of the company’s third quarter and where we stand through 9 months of fiscal 2009. If you will flip to slide 11, I think this basically characterizes what we have been saying about the quarter. Revenue as reported is down about 5% but up in constant currency about 2%. Operating income was very strong to benefit of the cost reduction efforts as Mike indicated, up significantly from last year.

EPS increased $0.01 due to the margin gain offset by the tax rate change. Of course free cash flow is very good. If you go to slide 12, let’s move down the chart starting with revenue, which as I said is down 5% from last year. The currency effect was $272 million. Holding currency constant would have yielded revenue of $4.226 million or an increase of 1.6%.

In a subsequent chart we will display the revenue fluctuations by lines of business. Beginning on slide 12, if you’ll look at operating income you will see it has grown by 7.5% or $26 million despite the reduction in revenue. The $371 million yielded a margin if 9.4% versus last year’s 8.3%. Between other income expense and special items there is a year-over-year delta or change of $8 million additional expense. The $17 million last year due to a restructuring charge was offset by the $16 million un-hedged currency gain.

This year the $9 million expense results from the cross of hedges and some minor losses from some un-hedged positions. As you can see the tax rate is 5.5% higher than last year. The third quarter 2008 tax rate reflects the benefit of settling tax year’s 1995 through 1999 with the IRS. So the swing in other income expense and the increased tax rate offset to a large part the operating income improvement. Still EPS of $1.06 is better than a year ago.

Now if you will move to slide 13 this just graphically displays the year-over-year revenue comparisons both for the third quarter and year-to-date and we have talked obviously about the revenue changes.

If you move to slide 14 this displays revenues by lines of business. As you can see the year-over-year growth is in the North American public sector. In constant currency, however, both NPS and BS&S experienced growth. The growth in NPS is primarily from the defense sector.

GOS revenue is down 13%, 3% in constant currency. Contract completions and delays, as Mike said, in IT project spending is impacting revenue growth. A more meaningful comparison for BS&S is the 7% growth in constant currency. The NHS contract is reported in BS&S which experienced modest growth as well as consulting services in what we call EMEA which is Europe, the Middle East and Asia and some encouraging growth in Asia.

Now slide 15 displays operating income from lines of business and the earnings fluctuations year-over-year by and large mirror the revenue results on the previous charts. If you move to slide 16 which displays year-to-date results versus last year, the results through operating income are all favorable to last year. Other income expense and special items are a net $28 million better than 2008 and coupled with the tax rate swing again a result of our second quarter settlement with the IRS GAAP EPS is $2.72 favorable to 2008. Excluding the IRS settlement non-GAAP EPS of $2.37 is $0.29 above 2008.

Turning to slide 17, selected balance sheet items, you can see that year-over-year cash is almost $1 billion greater. The draw down of our bank lines or our revolver of $1.5 billion coupled with improvements in working capital have helped our cash balance. We did pay off our commercial paper balance and $300 million of term debt during the year.

All in all the balance sheet is stronger than where it was but not quite where we would like it. Also just to note, currency fluctuations also create periodic distortions in year-over-year performance driven balance sheet comparisons.

Slide 18, which is year-to-date cash flow, again is a good news story. $544 million above 2008 with a big improvement in operating cash flow of $430 million.

In summary, and to repeat what Mike Laphen has said, we are pleased with our progress. By all measures notwithstanding the currency driven revenue decline it was a good quarter. It demonstrates good progress, however we are not satisfied. We think we can do even better. The macro economic environment will present challenges and opportunities and under Mike’s leadership I am confident we can prosper and create more value for our shareholders.

That concludes my remarks. Now I will turn it back to Bill to kick off the Q&A.

Bill Lackey

Thank you Mike. Operator we are ready for the Q&A session now.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jason Kupferberg – UBS.

Jason Kupferberg – UBS

I had a question on cash flow to start. Specifically the line item on the cash flow statement on the foreign currency exchange losses. It looks like there was a real positive swing this quarter which clearly helped the free cash flow in the quarter. I was hoping you could just talk a little bit more about what that is. Do you consider it to be part of free cash flow from core operations and if you can just also talk about your outlook for the full year in terms of the 80-90% of net income in terms of an annual target of free cash flow? Does that still hold?

Michael Mancuso

Let me take the latter part of your question first. We think the earlier guidance we gave that cash flow will be about 80-90% of net income is still holding. We think we can achieve that in the fourth quarter. Needless to say currencies are bouncing around and we have some modest to significant NHS payments programmed for our fourth quarter. Having said that though, we think the cash flow number in the earlier guidance is still solid.

I’m probably not deep enough right now to answer your question on the details about currency fluctuations on the cash flow so I am going to punt on that one for now and we will get back to you after the call to answer your question in more detail.

Jason Kupferberg – UBS

I understand it is a little too early for you to provide fiscal 2010 guidance but obviously that is what investors are focused on right now. Can you give us any directional sense of how you are thinking about constant currency organic growth potential for the business in fiscal 2010 versus fiscal 2009 and maybe some similar qualitative commentary around margins?

Mike Laphen

We are in our budget process as many of you will know so we don’t have that solidified yet. Just at a high level I would say that I expect the first half of fiscal 2009 [sic] to have significant currency headwinds as you look at how the currency rolled out during our last fiscal year. I think you can quickly see we will have some pretty strong headwinds there from a currency standpoint going into the first half. I am going to reserve comment on the commercial side of the business until we work our way through the business because we want to get as much visibility and clarity as we can in this type of market situation.

From the NPS standpoint or government standpoint as we look through how the budgets are rolling out and we have a little better visibility into that we are expecting that to be back in the upper single digit range as we look at it today. In terms of the margin we are continuing to work to improve our margins so that will be a goal again next year as it is at this point in time but I couldn’t put any metrics on that until we work through our numbers. It is obviously a continuing goal as part of our overall financial objectives.

Jason Kupferberg – UBS

I think for the first time in a while this quarter you didn’t put out any press releases disclosing the value of unannounced awards in the quarter. Is that a one-time event? Is that the new policy going forward?

Michael Mancuso

I think going forward we are going to try and time the releases more around our press release and earnings release. We were deep into the quarter, maybe two weeks prior to our earnings release and this call, when we would have put out our previously unannounced orders. So we are trying not to fracture it and deal with bookings during this call and consistent with our press release. That will be our practice going forward.

Operator

The next question comes from Julio Quinteros – Goldman Sachs.

Analyst for Julio Quinteros – Goldman Sachs

Regarding the disconnection between revenues and bookings, year-to-date as we are seeing right now it looks like year-to-date bookings growth is north of 20% but even adjusting for currency we are still looking at low single digit growth. I’m just wondering when should we start to see those bookings growth start to translate to organic revenue?

Mike Laphen

We are just in uncharted waters here in terms of bookings and converting bookings into revenue. Customers are, as we saw in the fourth quarter, causing us to come up a bit short on our revenue guidance and the customers are really stepping back and having a hard look at what they are going to go forward with and what they are not going to go forward with. And I think what you can expect is that we have seen some softness and some pull back on the outsourcing project spend yet at the same time, as I said, we have seen a significant impact in the pipeline and the sales activity of new opportunities in outsourcing. I think what we are going to have is a bit of a transition period here. How significant the transition is I think is still to be determined frankly in terms of how the economy sorts out. I think it will take us 6-9 months to sort this new outsourcing potential wins into the revenue stream but we will see a more, as we are seeing a more immediate impact on the softness side relative to the projects.

Analyst for Julio Quinteros – Goldman Sachs

On the margin side, obviously the margin performance was pretty soft this quarter. I’m just wondering because of your operations in India did the margin benefit from the Rupee depreciation during the quarter and if you can quantify that?

Michael Mancuso

I’m not sure we can detail that question for you. Why don’t you let us get back to you on that one?

Mike Laphen

We had currency impacts going all across the board, not just in India so we certainly had currency impacts on the Pound and from the Euro. There were some offsetting effects there but our guys will get back to you and give you more detail on that.

Analyst for Julio Quinteros – Goldman Sachs

What was the acquisition contribution in terms of revenue this quarter?

Michael Mancuso

About $40 million.

Operator

The next question comes from George Price - Stifel Nicolaus.

George Price - Stifel Nicolaus

On pension implications, there was I guess at risk of trying to push a little too hard right off the bat, there was an analysis that CSC provided last quarter on expectations for 2009 through 09/30 for expected pension contributions. I think in total it was about $200 million for the year and I think through last quarter you were about half way there. Obviously we had some market turmoil towards the end of the quarter. I was wondering if we could get an update on the cash contribution expectations for the rest of fiscal 2009 and if there is anything you have available for fiscal 2010?

Michael Mancuso

I think the guidance you got last quarter kind of bearing true. For the third quarter we funded about $50 million which would put us about, round numbers, around $150 million through three quarters. We expect that something in the neighborhood of $50 million will be the contribution for the fourth quarter so it will make that $200 million number just about right on target. Obviously with equity portfolio performance and so on and so forth next year is a crap shoot. I think it is probably prudent to suggest contributions will be in order next year and probably increased above 2009. The magnitude of the increase I could ballpark for you and suggest maybe next year if it was $200 million this year it could be in the ballpark of $300-350 million next year but we will set that as a result of our balances at the end of our fourth quarter. For planning purposes I think in those ranges.

George Price - Stifel Nicolaus

On NHS, how much of the pretty strong cash flow in the quarter how much of that was driven by milestone payments from NHS and can you give us any more color on the comment about I think you said modest to significant NHS milestone payments you expect in the March quarter?

Michael Mancuso

In round numbers, adjusting if you will for what currency might do, the third quarter number was ball parked around $200 million of NHS payments. Fourth quarter we are looking like somewhere around $125 million to $150 million of NHS milestone payments in the quarter.

George Price - Stifel Nicolaus

Is there any reason to believe that typical seasonality, CSC’s strongest cash flow quarter is the fiscal fourth quarter sometimes in a pretty big way, is there any reason to believe that seasonality we won’t see that same sort of seasonal trend? I guess another way to ask it is have we been pulling anything forward so should we expect a pretty strong quarter in light of NHS plus typical seasonality?

Michael Mancuso

Again to answer the latter part of the question first, anything we can pull forward we do. Cash sooner is always better. We are at 170 through the three quarters and we said we would be at 90-ish% of net income during the year so that would suggest to you we are going to have a robust fourth quarter and at this point in time we have no reason to believe that won’t happen.

Operator

The next question comes from Rod Bourgeois – Bernstein.

Rod Bourgeois - Bernstein

I just wanted to acquire, and I appreciate the update on the NHS contract, and I’m trying to just understand your commentary. It sounds like you are hitting all the milestones that are important for your financial performance and the guidance that you have set. At the same time, most of us are seeing news in the press and even in contact on the ground that has different commentary but they are looking at the NHS contract from a different angle. The Committee on Public Accounts has a pretty negative view of what is happening there but some of that data is also looking at some of the other vendors and their performance in different regions. I was wondering Mike if you could put all that in proper context and help us kind of reconcile your view of what is happening on the contract from CSC’s perspective versus what we are seeing in the press and what we have heard from The Committee on Public Accounts in terms of their evaluation?

Mike Laphen

I’ll try. It is obviously a complex picture. First I would say that the data coming out of a government report always lags, that is it is a bit older than current data, so you do have that lag time. I think what they highlighted was there has been from the program’s start some delay in the implementation of the capability. That, in fact, is true. We have been very straight forward about that. Having said that we have a schedule we are working against with the NHS and as I reported last quarter we had key milestones that we had to make in the third quarter which we did make and another one in the fourth quarter which we still expect to make relative to Release 1. Based on the direction I gave in the last briefing we are on target relative to that.

Rolling out Release 1 is a major accomplishment. At the same time we have been working on Release 2 and that development is essentially complete and we are now working with the customers in terms of some early testing on that. As you pointed out we are one of the players in the NHS overall program or umbrella program if you will. It is not unusual if there is a problem somewhere in the program that the program sometimes just for notoriety or political reasons gets painted with a very broad brush. As it does here as well on certain programs. I know it is somewhat complex looking from the outside. We are giving you our very best perspective of where we are on the program.

I have to say we are pretty pleased with the developments we have had. As I mentioned in my commentary we have over 100,000 users out there using all different aspects of the NHS program. Sometimes we get very focused on the Lorenzo delivery and implementation but there is many successful deliveries across the program from a CSC standpoint and from an NHS standpoint. We are making good progress. We all wish it had come a little bit faster than it had. The feedback we are getting back is quite encouraging and as I said our key milestones for the fourth quarter we are very optimistic we are going to make that.

Rod Bourgeois - Bernstein

From your perspective is NHS kind of the biggest wildcard or the risk factor you are managing against in the business? Or is it the economy? How do you weigh those two things when you look at the financial performance of CSC heading into next year? Is it NHS or the economy that is the biggest challenge?

Mike Laphen

Yes. In all seriousness, in terms of contractual performance and delivery NHS is the most significant and by far the most complex as we all know. So that is the one I stay on top of most of all and watch most closely. On the other hand, yes this macro economy is a pretty difficult situation and from that standpoint I think what you are seeing us focus on and what we are trying to convey is we are going to manage those elements we can manage within this environment and that is expense control and cash management. We are just all over that right now and will continue to be and we will take advantage of as much as we can get on the top line but we are not counting on significant top line growth right now because it is just too unclear where all this is going to go. As late as today it didn’t look any clearer.

Rod Bourgeois - Bernstein

Mike, your downward guidance, you’re nudging guidance to the lower end of the range with one quarter left in the year. Is that mostly attributable to economic uncertainty or is it also attributable to NHS?

Mike Laphen

It is not attributable to NHS at all. It is being very much driven by…

Rod Bourgeois - Bernstein

Is it the economic wildcard you are dealing with there?

Mike Laphen

Yes. I would say it is two things. One is we are continuing to be impacted significantly by currency. The second is the discretionary spend on the broader economic picture.

Rod Bourgeois - Bernstein

Can you tell us your under funded pension obligation status today and also if you have a DSO target for the end of the year since that is key to understanding your free cash flow guidance you currently have in place?

Michael Mancuso

Under funded pension is about $600 million roughly right now. That could fluctuate a little bit but that is where it is right now. As far as DSO we are looking for an improvement obviously in the fourth quarter. It has been an improvement throughout the year. I think in terms of four or five days improvement from what it was this quarter.

Operator

The next question comes from Eric Boyer – Wachovia Capital Markets.

Eric Boyer – Wachovia Capital Markets

I was wondering if you could remind us of the large civil agency contracts that you are a part of today?

Mike Laphen

I’m sorry I missed that.

Eric Boyer – Wachovia Capital Markets

The large civil agency contracts that you are a part of today.

Mike Laphen

There is a number of NASA contracts, a number of FAA contracts, a number of Justice Department including FBI, the IRS monitorization continues on, then there are a number of Homeland Security, Cyber Security type depending on where you put cyber security so in reality if you look at the task order contracts we have we are in every agency. We are in Health and Human Services, National Institutes of Health. Just across the whole spectrum.

Eric Boyer – Wachovia Capital Markets

You talked about the balance sheet not being where you liked it yet. Can you give us a sense of the areas that you are focusing in on first here? You have been here a couple of months. Your overall impression on the things you can improve?

Michael Mancuso

I think we can get better in DSO’s. I think there is improvement opportunity there. If you read the Q you will know however there are some claims on the balance sheet that we would like to get reconciled and settled kind of things. So we have the model in this business often requires up front investment in client equipment and/or start up costs. Obviously in this environment we are going to be very conservative in terms of whom and what we commit to. We are going to take a broader look at terms and conditions and so on so we can kind of minimize our investment if you will and maximize our cash flow. Now that is not going to be easy at some of our customer base but broadly we are going to manage for cash and you have heard the old cliché cash is king. I think there is still a lot of room that we can work on to improve and that will be in this very difficult economic environment we will deal with the things we can control and several of those reflect on the balance sheet with an emphasis on cash improvement.

Eric Boyer – Wachovia Capital Markets

Is there a tax rate assumption for Q4?

Michael Mancuso

Think in terms of about 38%.

Eric Boyer – Wachovia Capital Markets

Just to make sure the GAAP EPS guidance you gave [in 06/30] does that still correspond to the pro forma guidance you gave of 405 last quarter?

Michael Mancuso

Yes, ballpark. I think we are $4.80 through the three quarters. $1.50 gets you to $6.30. I think last quarter guidance was between $1.50 and $1.60 or somewhere in that range kind of thing. We are guiding to the low end of the range.

Operator

The next question comes from David Grossman - Thomas Weisel.

Analyst for David Grossman - Thomas Weisel

I had a question on the cost savings. You have talked in the past about expecting about $75 million in cost savings in the second half. Could you give us a sense for how much of that was realized in the third quarter and what we can expect in the fourth quarter? Then possibly just give us a sense for how we should think about that going into fiscal 2010?

Mike Laphen

I think we are on target with respect to those cost savings, actually slightly ahead of target, and as we said we are expecting to have an operating margin improvement year-over-year of at least 25 basis points. As I said that is still on track. Going forward as we have spoken before our goal and our objective is to continue to improve the margin year-over-year so we will be talking about that as we go through the budget process. Again we haven’t completed that process so I will reserve final comment on that.

Analyst for David Grossman - Thomas Weisel

On the segments, I know you talked about the segment growth rates. Can you give us a little more color on why the BSS segment grew and the Global Outsourcing segment contracted in constant currency? Was there something in there acquisition wise? Can you give us just a little more color on that?

Michael Mancuso

I think I said BSS the growth came in a little bit in NHS which is in that, a little bit in what we call Europe and the Middle East and a decent slice in Asia, offset somewhat by a little bit of a downturn in the U.S. market but that is where the BSS growth is coming from.

I’m sorry, what was the other part of your question?

Analyst for David Grossman - Thomas Weisel

The GOS, you had talked about some pull back on outsourcing. Was there something specific driving that?

Mike Laphen

That is basically the discretionary spend we had been speaking to earlier that we have been impacted by. I don’t want to say it is across the board because it is not on every contract but it is not on one contract either. It is not limited to geographic area because the macro conditions aren’t limited to one geographic area.

I’d like to thank everybody for joining us again today. We will look forward to speaking with you with our year-end results and then updating you as well with our forecast for next fiscal year. Thanks for joining us.

Operator

That does conclude today’s conference. Thank you for your participation. Have a great day.

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