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Computer Sciences (NYSE:CSC)

Q1 2014 Earnings Call

August 06, 2013 5:00 pm ET

Executives

Steve Virostek - Director of Investor Relations

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

Paul N. Saleh - Chief Financial Officer and Executive Vice President

Analysts

Arvind A. Ramnani - BNP Paribas, Research Division

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

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

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

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Darrin D. Peller - Barclays Capital, Research Division

Operator

Good day and welcome to the CSC First Quarter 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Steve Virostek. Please go ahead, sir.

Steve Virostek

Thank you, operator. Good afternoon, everyone. I'm pleased you've joined us for CSC's first quarter 2014 earnings call and webcast. Today's speakers are Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer.

As usual, the call is being webcast at csc.com, and we have posted slides to our website, which will company our discussion.

Slide 2 informs you that certain comments we make today 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 this call. A discussion of risks and uncertainties is included in 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 provide useful information to our investors. In accordance with SEC rules, we've provided a reconciliation of these metrics to their respective and most directly comparable GAAP metrics. The reconciliations can be found in the tables of today's earnings release and in our supplemental slides, and both documents are available on the Investor Relations website.

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.

Our first quarter results for fiscal '14 reflect our new operating model, which we previewed at our Investor Day last September. The new model supports CSC's strategy of leading the next-generation of IT services and solutions by facilitating the effective development, sales and support of our next-gen offerings and commercial -- for commercial and government clients. The company's reportable segments now include: Global Business Services, or GBS, which encompasses our consulting apps and industry software & solutions business; Global Infrastructure Services, or GIS, which includes our desktops, data center, storage and next-generation Cloud offerings; and the North American Public Sector, or NPS, which has not changed from prior periods.

Our results for the prior periods have been recast to reflect the new segments and the impact of our divestitures. Additionally, bookings from prior periods also reflect the use of a new global order input system, which offers a more comprehensive tool for tracking new business awards. Now I'll hand the call to Mike Lawrie.

John Michael Lawrie

Okay. Thank you, Steve, and thanks, everyone, for joining us this afternoon. I appreciate your continued interest in CSC. As is my usual practice, I'd like to leave you with several key messages, which I will develop in a little more detail and then turn it over to Paul for a little more of the financial detail. And then, as usual, we'll open it up to Q&A.

I've got 4 key messages. The first message is continued good work on our cost takeout drove higher margins and higher EPS in the first quarter. The second key message is we are continuing to make investments to drive our future ability to grow, and we are forming some additional strategic partnerships to help us expand market coverage and drive demand for our higher value offerings. We are beginning to see some encouraging signs in our commercial business, which I will highlight, but at the same time, we continue to see weakness in our NPS business. And the third key message here is we are continuing with our plans to return more cash to our shareholders. And then finally, based on our strong first quarter cost takeout, we are raising our EPS projections from continuing operations, by $0.20, to $3.50 to $3.70.

So let me just delve into a little more detail here and give you some color. Our teams at CSC have really continued to make a great progress in rightsizing CSC and improving our efficiencies. We're reducing overhead, continuing to optimize our workforce, consolidating real estate and benefiting from supply chain efficiencies, and we delivered approximately $175 million of cost takeout in this first quarter.

Operating margin increased from 4% to 9.3% year-on-year, which was an improvement of 530 basis points, and our EBIT margin increased from 2% to 7.4% year-on-year, which was an improvement of 540 basis points. Operating margins increased significantly across all 3 business segments year-to-year, again primarily due to our cost takeout. GBS increased by 410 basis points, GIS increased by 580 basis points and NPS increased by 360 basis points. And as you saw EPS from continuing operations was $0.91, which was up from $0.10 in the prior year.

The second message around investment is we are continuing to make investments to begin to drive our ability to grow in the future, so we are pivoting now more towards investments to enable this growth. And we're forming strategic partnerships to expand market coverage, drive demand for our higher value offerings. And as I said, we're beginning to see some encouraging signs in the commercial business, while, at the same time, some continued weakness in NPS.

So for example, we've added approximately 500 new account coverage professionals and 300 sales offering professionals. We've designed clear targets for bookings, revenue and profitability to all of these salespeople that we have invested in. We've altered our sales compensation plans to incent cross-selling within our current accounts, as well as drive new accounts. And we expect that this increased coverage will drive bookings growth in the second half of this fiscal year.

We're also building new strategic partnerships to differentiate our offerings while expanding the aperture that we have on the marketplace. For example, as you may have seen late this afternoon, we announced CSC and AT&T have announced a strategic partnership that resulted in 3 very important things: one, AT&T will run CSC's communication network, which gives us a world-class network, and at the same time, reduces our capital intensity associated with the network; number two, we are merging our industry-leading Cloud hardware infrastructure with AT&T's, again reducing our capital intensity as more and more work load transitions to the Cloud and giving us global scale to build out our Cloud offerings that we just didn't have before; and three, we will assist AT&T and AT&T's customers in modernizing their application portfolio and moving those applications to the Cloud.

So this is really the first time in our history that an IT integrator, like CSC, and a major telecommunications company have come together to deliver this broad of a range of next-generation solutions, comprising applications, modernizing workloads, a Cloud platform infrastructure and network services. So we're quite excited about what this will drive for CSC as we go forward, as well as a major benefit to AT&T.

We're also making investments in other high-value offerings. During the quarter, we opened a new security operations center in support of our fast-growing Cyber business, which increased revenue by 16% in the first quarter. We're beginning to, as I said, see some encouraging signs in our commercial business, including pipeline growth in our higher-value activities. Our global infrastructure pipeline increased 39% sequentially. Applications increased by 64%. BPO increased by 100% and Cloud increased by more than 200%, in fact, our qualified pipeline now for Cloud is in excess of $2 billion.

The next task, obviously, is we need to win more of these opportunities and then convert them to revenue. I'm also delighted to be able to announce today that we closed, just last week, in the early part here of the second quarter, a major business process services contract that was valued at over $140 million. And in this contract, we'll be consolidating the insurance policy administration systems for one of the world's largest insurance and financial services companies. So this is again an example of investments and the beginning of a payoff here in terms of pipeline and then closing the business.

Now just turning to our commercial bookings for the quarter, the $2.1 billion reflects a decline of 33% year-on-year, as we reported. However, after adjusting for a large European contract win that we had in the first quarter a year ago, commercial bookings increased by 2%. So this was a book-to-bill of 94% in the quarter. And this bookings increase was led by our success in Asia, which more than tripled, and the Americas, which was up over 30%. And I think this growth that we're seeing in the commercial pipeline is a result of some of our early investments and it's also a reflection of the new leadership and market coverage that we're beginning to gain.

One of the shifts that we talked about -- or industry trends we've talked about in previous calls, was a shift towards greater number of smaller contract awards, and we are certainly seeing that shift in our bookings result. Our contracts of $100 million or less increased by 40% year-on-year. And we saw a 350% increase in the $50 million to $100 million deal range and a 40% increase in the deals ranging, in size, from $5 million to $50 million, as well as a 15% increase in contracts under $5 million.

So to continue to build out and support these smaller more profitable deals, we are redesigning our sales processes while, at the same time, retooling our solutioning, our governance and pricing, so that we can respond much more efficiently and effectively to these emerging opportunities in the marketplace.

We booked fewer large deals in the first quarter of this year. Matter of fact, we only had one deal over $100 million. And as I've said before, on these larger deals, we are applying a very disciplined methodology to make sure that we have the right risk profile of all of these large contracts going forward and we're comfortable that we can actually make money on it.

The commercial revenue declined 4%, which was roughly in line with what we had expected, after we adjust for the divested businesses and a one-time milestone payment that we received in the first quarter of last year from NHS in the U.K.

We saw year-on-year revenue growth on our commercial Cloud, that was up 27%, and our commercial Cyber solutions, which was up 117%. So we're seeing a shift here from NPS to commercial in Cyber. So the overall business is up 16%, but commercial Cyber was up 117% and our industry software & solutions increased revenue by 9% on a comparable basis.

Consulting revenue declined year-on-year, and this was largely due to our repositioning our offerings towards higher-value opportunities. And as I mentioned with the BPO win, our BPO revenue increased by 30% year-on-year.

So that's the commercial segments. If we look at NPS, revenue and bookings continue to reflect the uncertainty of sequestration and delays in new contract awards. NPS revenue of $1.1 billion was down 11% year-on-year, which is more than what we had expected and what we have talked about on previous calls. The decline was primarily due to a reduction in professional services, largely due to sequestration, normal contract endings and delays that we continue to see in new business awards. And for the remainder of the year, we would expect that NPS will be down a little more than what we anticipated, I think this is going to be more like high-single digits, low-double digit of revenue decline as we look out.

Continuing with NPS, the bookings of $700 million were down 13%. The book-to-bill was 70%, which was a slight improvement over the fourth quarter. And NPS is still -- has submitted approximately $2.4 billion in proposals, which are awaiting award. And on the positive side, the qualified pipeline in our NPS business remains flat to slightly up. These lower orders, I think, reflect fewer contract opportunities that we see in the federal marketplace, but our recompete and our new business win rates continue to improve year-on-year. Matter of fact, our recompete win rate was 90% in the first quarter versus 66% last year. And the overall win rate was 66% in the quarter versus a lower number in fiscal '12. And the new business win rate increased to 54% from 48% a year ago.

And excluding the large NGEN contract, which we lost to HP, our win rate in next-generation offerings, Cloud, Cyber, Big Data was around 70%. So again, overall, the bookings were weaker than what we had expected and we continue to see some real pressure from the uncertainty around sequestration and the budget process.

Turning to the third key message here, we are continuing with our plans to return more cash to our shareholders. During the quarter, we purchased -- repurchased 9.5 million shares at approximately $432 million -- I'm sorry, we repurchased 2.8 million shares for approximately $127 million, excuse me. What I was giving you was the -- since we started, we repurchased 9.5 million shares using approximately $432 million.

As you saw with our extensive liquidity resources, including the $1.9 billion of cash on hand at the end of the quarter and our improving cash flow from operations, we are in a position to continue to execute our cash flow priorities, which include continuing to reinvest in the business, as we've discussed before, ensuring that we have ample liquidity and a strong financial position, pursuing some bolt-on acquisitions and returning more capital to our shareholders. And subsequent to the close of the quarter, we did make a small acquisition in support of our Big Data business, a company called Infochimps, which we acquired, and we will continue to look at other acquisitions that support our strategy of leading the next generation of IT solutions and services.

And finally, before I turn it over to Paul here, based on our strong first quarter EPS performance and cost takeout, we are raising our full-year fiscal '14 EPS to $3.50 to $3.70. And we would continue to expect that company revenues would be flat to slightly down. This is largely unchanged from what we have talked about. Our federal business is, as I said before, is now expected to decline by high-single digits to low-double digits as opposed to a mid-single digits that we have disclosed before, again, primarily around the government budgeting process. But we do anticipate that commercial revenue will be slightly up on an equivalent basis, driven by future growth in Cloud, Cyber, Big Data and applications. And this slight improvement is offsetting the further decline we see in our federal business. So again, on a constant currency basis, we will see revenue flat to slightly down for the full year. We're targeting operating margins in the high 8% range and EBIT margins in the low 7% range, and this is approximately a 75 to 100 basis point improvement over our prior target, again, largely driven by divestitures and cost takeout. And our targets for fiscal '14 continue to include the approximately $300 million of reinvestment and restructuring, as we've previously communicated, which is essential to getting the baselines right, especially in our European operations. And we're targeting free cash flow of $550 million, which is a little higher than what we had talked about in previous calls. So with that, I will turn it over to Paul, to go through a little more of the details, and then we will open it up to any questions that you might have. Paul?

Paul N. Saleh

Thank you, Mike, and good afternoon, everyone. I'll be covering our first quarter results for the company and also by our operating segments. And I'll update you on our cost takeout progress and our revised targets for fiscal '14.

We reported strong improvement in profitability in the first quarter. Revenue was $3,260,000,000 in the quarter, compared with $3.63 billion in the prior year. Our last year's revenues included $79 million for an IT staffing business, which was subsequently sold, and also included $55 million from a one-time NHS milestone payment. So on a more comparable basis, revenue declined by 6% in constant currency.

Operating income was $304 million in the quarter, a twofold improvement over the prior year. Our operating margin was 9.3%, up from 4% in the prior year.

Our earnings before interest and taxes were $241 million, up significantly year-over-year, and our EBIT margin improved from 2% to 7.4%. Now our strong improvement in profitability is being fueled by our cost takeout effort. Even as a result, our income from continuing operations was $141 million, and EPS from continuing operations was $0.91 per share for the quarter, which compares with $17 million last year and $0.10 per share in the prior year.

So bookings of $2.8 billion compares with $4 billion in the prior year. And as Mike mentioned, last year's booking included one large commercial contract win of more than $1 billion.

So let's turn to our segment results. Our Global Business Services, which consist of our consulting business, industry software & solutions and our applications business, accounted for 33% of total company revenue in the first quarter. Revenue for Global Business Services was $1.08 billion in the quarter. Revenue declined by 4% in constant currency, after adjusting primarily for the $79 million of revenue from the divested IT staffing business, which, for accounting purposes, was still included in continuing operations for 2013, and we also had the one-time $55 million NHS milestone payment in the prior year.

Consulting revenue was down year-over-year, as we repositioned the business toward high-value offering and leading edge solutions. Our revenue for the industry software and solution business was up, after adjusting for the nonrecurring NHS milestone in the prior year.

In health care, we booked 3 new wins with NHS Trust. However, as previously disclosed, we're deferring revenue on these and similar contracts under software accounting rules. At the end of the quarter, we had approximately $330 million in deferred revenue from NHS and select iSOFT contracts. That represents an increase of $140 million over the prior year. Now this deferred revenue represents an annuity, which will be recognized over time, whilst we begin to host these software solutions on behalf of our customers. Our application revenue was slightly lower in the quarter, but we're seeing strong sequential growth in our pipeline.

Operating income for the GBS segment was $110 million, excluding restructuring of $9 million, this compares with $80 million in the prior period. Operating margin was 10.2% as compared with 6.3% in the prior period, and all of it reflecting the benefits of our cost takeout activities. Our GBS bookings of $1.2 billion were flat, after adjusting for a large contract win in the year-ago period, and our book-to-bill ratio was 1.1x.

Turning to Global Infrastructure Services. The segment represent 35% of total company revenue. GIS revenue was $1.15 billion in the quarter, a decline of approximately 4% in constant currency. Operating income was $82 million, a significant improvement over the prior year. Operating margin was 7.1% in the quarter, up from 2.4% in the prior period.

Now GIS profitability is driven by continued improvement on our focus accounts and the benefit of our workforce optimization efforts. Bookings were $900 million, and the book-to-bill ratio was 0.8x.

As Mike mentioned, we're seeing a shift across the industry towards smaller-sized deals, and we're gearing up to respond to large volumes of these opportunities. We're seeing strong sequential and year-over-year growth in the pipeline for GIS, particularly for next-generation Cloud offerings, which bodes very well for the second half of this year.

The final segment, our North American Public Sector, which represent 32% of total company revenue, has not changed, except that our NPS offerings now mirror our commercial offerings.

Revenue was $1.05 billion in the quarter, a decline of 11% from the prior year. In the quarter, we saw reductions in professional services due to sequestration and we continue to experience delays in new contract awards. At the end of the quarter, we still had $2.4 billion in submitted proposals awaiting award.

Given these trends, we now expect NPS revenues to be down in the high-single to low-double-digit rates for the year, as compared with our previous target of mid-single-digit decline.

Now operating income of $121 million in the quarter improved from the $93 million in the prior year. Our operating margin was 11.5% in the quarter, up from 7.9% in the prior year, as we benefited from better contract performance and tight cost control. Now we expect NPS margins to moderate from this high level, however, for the remainder of the year.

NPS bookings were $700 million for the quarter, and our NPS book-to-bill ratio was 0.7x, which is flat year-over-year and slightly better on a sequential basis. Now you should note that our qualified pipeline is still flat on a year-over-year basis.

Let me now comment on other financial highlights for the quarter. We continue to rebalance our asset portfolio and focus on next-generation IT solution and services. Now during the quarter, we divested 2 businesses: the Applied Technology Division and our Flood BPO business, which, together, contributed approximately $774 million in revenue during fiscal year 2013.

Now the gross proceeds from these 2 divestitures were approximately $225 million, but at the quarter end, cash balances that we have on our balance sheet did not include the ATD proceeds since this transaction closed in July. Now for the quarter, we returned $157 million of capital to shareholders, we repurchased 2.8 million shares in the quarter for approximately $127 million at an average price of $44.78, and we also paid $30 million in dividends to our shareholders.

Our free cash flow for the quarter was negative $9 million or $16 million better than the prior year. Our DSOs were 77 days, and -- but 45 days if you were to exclude our unbilled receivables.

CapEx and capital lease payments were $228 million in the quarter or 7% of revenue, which is down compared with the prior year.

Cash and cash equivalents were $1.93 billion in -- at the end of the quarter, an increase of $930 million over the prior year, and our net-debt-to-total-capital was 13%, again a significant improvement from the prior year.

Now our strong performance and profitability this quarter was driven by continued progress on cost takeout. We're maintaining a very tight discipline on contract management. We're generating greater savings from supply chain and procurement. We're continuing to optimize our workforce, and we're focusing on reducing overhead costs.

In the quarter, we delivered about $175 million of cost saving, which is slightly ahead of our plan for the year. And so at this time, we're comfortable raising our cost takeout targets for the full year to $500 million from $400 million previously.

We're making investments in the business as the company begins to pivot towards growth. We're broadening our sales coverage and are progressing rapidly on our plans to deploy a new integrated HR and finance system, which will drive greater productivity.

Now in the quarter, we made approximately $35 million of reinvestments in the form of customer-committed savings, enterprise systems, sales coverage and restructuring costs. And in the quarter, restructuring costs, as we indicated earlier, were $7 million, and we expect to return to a range of $30 million to $40 million in subsequent quarters.

Our full-year reinvestment target, including restructuring, remains at $300 million. Now cost takeout is a key contributor to our free cash flow performance this year, but I should note that we are working on a number of initiatives to drive better cash flow results. We're working on optimizing the geographic mix of income and the use of R&D credit for tax purposes. We're also focusing on working capital management and we're proactively working with vendors and partners on utility-based agreements, which should reduce our capital intensity over the long run.

And we're also entering strategic partnership agreements such as the one we announced today with AT&T, which allows us to leverage the global network and scale of our partners and realize greater capital efficiencies from next-generation solutions.

So for this fiscal year, we are revising our free cash flow target to $550 million from $500 million previously.

Now at this point, I thought it would be useful to put this year's free cash flow target in its proper perspective. Now last year, we reported free cash flow of $764 million before our discretionary pension contributions. Now since this figure includes $75 million contribution from divested businesses and a one-time $110 million settlement payment from NHS. Now if you adjust for these items, our free cash flow would have been $579 million last year.

Our free cash flow target for this year are $550 million, includes incremental bonus payments of approximately $90 million and an incremental restructuring payment of at least $50 million when compared with the prior year. So if you adjust for these items, our free cash flow target for fiscal 2014 represents a 20% increase on a year-over-year basis.

So in closing, I would like to say we're executing on our cost takeout plans and we're beginning to pivot towards growth. We're raising our target EPS from continuing operations by $0.20 from a range of $3.30 to $3.50 to a range of $3.50 to $3.70.

We're targeting flat to slightly down revenue for the year. Commercial revenue is expected to be slightly up, while NPS revenue is now expected to decline high-single to low-double digits.

Now the baseline revenue for fiscal 2013 is $14 billion, that's the starting point. Now this excludes revenue from divested businesses of $774 million, and in addition, it excludes approximately $240 million from the IT staffing business, which we sold last year but, for accounting purposes, is still included in last year's results from continuing operations. Now finally, our free cash flow target for fiscal '14 is now $550 million.

Now I'll turn the call back to our operator for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Arvind Ramnani.

Arvind A. Ramnani - BNP Paribas, Research Division

[indiscernible] on a great quarter, if you...

John Michael Lawrie

I can't hear you, Arvind. If you could speak up.

Arvind A. Ramnani - BNP Paribas, Research Division

On your Cloud business, specifically, you're going to -- progress on negotiating utility-type arrangements with some of your partners or vendors?

John Michael Lawrie

I'm sorry, I can't hear you. You're going to have to speak up.

Arvind A. Ramnani - BNP Paribas, Research Division

Just if you can talk a little bit about your cloud computing business and progress on negotiating utility type arrangements with some of your partners or vendors?

John Michael Lawrie

Yes, we are attempting to negotiate more utility-based contracts with our suppliers. An example of this would be what we have done with EMC, for example, and a new offering that we've come out with around Storage as a Service being a good example of that, and we are trying to do that with many other of our partners. Our Cloud business, we're seeing a tremendous amount of -- not only of interest, but what is most noteworthy is in a lot of our large infrastructure bids, just in a 1-year period of time, we've seen the Cloud content go from roughly 20%, 30% to 50%, 60%. So it was one of the reasons why we concluded that we wanted to do this partnership with AT&T, so that we could gain access to a much broader infrastructure, as we begin to transition more and more work loads over to the Cloud. As I mentioned earlier, our pipeline for Cloud is in excess of $2 billion. Now this obviously doesn't show up in one chunk of revenue. This is business that is more of an annuity basis that gets billed out over time. So underneath the covers here, things like Cloud and Cyber, which is our security operation center offering is also a Cloud-based as-a-service offering; our business process services BPO business; the accrued revenue from NHS. We're beginning to build a much stronger reoccurring revenue stream underneath some of these businesses.

Arvind A. Ramnani - BNP Paribas, Research Division

Great, and if I can -- just a quick follow-up on this. If you can provide some color on the competitive environment in terms of not just partners, but also kind of clients. Who else are you seeing on these type of bids as far other IT services companies go? And secondly, as you kind of paint a picture over the next 3 or 5 years, there's an argument that Cloud, in some ways, kind of cannibalizes some of the maintenance business. But -- I mean, obviously you're going after Cloud a lot more aggressively than some of your competitors, a little bit thought on that would be very helpful.

John Michael Lawrie

That's a fairly broad topic. But I mean we are seeing a major shift in the compute model out there. I think this is as big a shift as what we saw when we moved from mainframe to client server 25 years ago. This is a shift that takes place over many, many years. This industry is much more -- particularly the customers are much more conservative in making rapid shifts. So I don't expect this to occur overnight, but it is a profound shift, and I think it is putting a lot of traditional business models that have grown up over the last 20 years in the IT industry. It's putting some of those business models under a lot of pressure, and I think you see that in a lot of the results. So I do think it's a major shift. We see all the competitors that you would expect us to see, both onshore competitors, as well as offshore competitors, and everyone is struggling to make some of this shift to this new compute paradigm around virtualized infrastructures and workloads that work on Cloud infrastructures.

Operator

We'll go next question to Rod Bourgeois.

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

A strategic question and maybe a numbers clarification item. On the strategy side, the strategy of a services firm driving demand by partnering with product firms to provide the deployment services that complement those products, that strategy has been pursued by firms in the past with generally limited success. But I guess you might argue that the market today is different, perhaps more open to best-of-breed solutions and so on. And so I'd love your take on the prospects for your strategy of partnering with product firms and why those prospects for success might be better today than what we've seen in the industry actually play out in the past.

John Michael Lawrie

Yes, that's a great question. And you and I have talked about this at length. I do see a difference. I do -- I think it's a great time to partner with a lot of leading technology firms. I do think, as we begin to go through this shift, routes to market are not as clear as they were 5 years ago or 10 years ago. And a lot of traditional IT firms are finding it more difficult to get to market in the same way they got to in the past. And to have a leading global independent technology services firm that is able to integrate multiple product technologies into a comprehensive solution that is taken to market, I think is an enormous benefit over where we were just 5 years ago, and one of the reasons why I think CSC is well-positioned for this shift. And I've talked about some of our offerings like our offering with Microsoft where we've partnered with Polycom and Citrix and Microsoft. And we've packaged, together with those technology firms, a comprehensive end-to-end solution for the workplace environment, including desktop and mobile devices. And CSC is providing much of the glue that brings that end-to-end solution together and then can take that to market. So these are some of the shifts that are taking place that I think point to a strong position for a global independent technology services firm. And we're trying to exploit that. We're exploiting that with a lot of our traditional partners, and we're trying to exploit that with a new set of partners, like our partnership with SAP that we announced, and our most recent partnership today that we announced with AT&T are all very much, Rod, lined up to take advantage of that shift in the marketplace. But again, this stuff does not happen in 1 or 2 weeks. The technology industry typically points to the fences on a lot of these technology shifts, but the truth is it takes years and years. The question is you've got to get the company positioned, so that you've got the skills, you've got the offerings, you've got the partnerships that allow you to take advantage of these shifts in the marketplace, and that's what we're trying to do.

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

Okay, great. And then maybe a question for Paul on the cash flow side. So I'm looking at operating cash flow, it was down a little bit year-over-year despite, I think, a 2-day drop in DSOs. So -- but you're taking your full-year cash flow guidance up by $50 million. So I'm wondering if you could quantify some on the $50 million increase in free cash flow, how much of that is from maybe the tax rate versus a lower CapEx outlook versus something else? I mean, if you could provide some numbers on that. And then I guess related to it, I'm wondering how much your year-over-year cash flow might have been hurt by the divestiture, particularly of the credit reporting business. So I know there's a lot of numbers there, but any quantification on the cash flow side would be helpful.

Paul N. Saleh

Yes, I think on one of the slides that we provided could help actually address how much the divested businesses would have contributed this past year. If you include the credit services, plus even the 2 businesses that we sold even this quarter, ATD and the Flood and all the others that we sold last year, in total, it's $75 million that benefited last year but would not benefit us, in a sense, in 2014. So that's the drag. And so when you compare last year to this year, if you adjust for that, that's what led among other things to a more appropriate comparison of our free cash flow going up 20% on a year-over-year basis. As far as what is contributing to the $550 million increase, and most of it is the cost takeout improvement that we are seeing, which is really helping to offset a little bit the weakness that we are seeing in the NPS. So net-net, it's just much more the operational improvement that we're seeing on the cost side.

John Michael Lawrie

And overall, we did have a significant improvement fiscal '11 to '12 in terms of capital, that clearly benefited our improvement in cash flow in '12. And what we've done is we've kept our cash, I mean, our capital expenditures, cash expenditures relatively flat 2013 to 2014. So there wasn't a big improvement. Now to the degree we can drive some more of these relationships that are less capital intensive, that gives us an opportunity, as we go forward, to hopefully improve that cash flow from operations.

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

Got it. And just -- has the tax rate guidance changed?

Paul N. Saleh

No, not at this point. We're working very hard to find ways again of optimizing that tax rate. But at this stage, I think it's 32%.

Operator

And now we'll go next to Avishai Kantor [ph].

Unknown Analyst

Can you please talk a little bit about your comfort level with accelerating booking trends in the second half of fiscal '14? And I have a follow-up after that.

John Michael Lawrie

Well, the confidence is largely rooted in the -- where we see the pipelines right now, that's one. The second is -- and we didn't talk about this today, but we are building more and more standardized offerings out there. Those standardized offerings have a higher propensity of being able to convert to in-year revenue and in-year bookings. So the combination of some of the increase we see in the pipeline, as well as more standardized offerings, as well as the investments that we see in people, so we've made a big investment, a big investment in coverage, and we've moved much more from a -- we'll respond to the RFP too. We will respond to a greater number of smaller transactions. Those smaller transactions tend to happen faster. They tend to convert to revenue faster, and they also tend to be more profitable. We're also seeing a a lot of interest and it's starting to show up in the pipelines around applications and moving existing applications to more of a virtualized/Cloud environment. Most of these businesses, however, like Cloud and Cyber and so on, are more of a, by definition, more of a services business, so you recognize that revenue over a period of time.

Unknown Analyst

And can you talk a little bit more about the salesforce reorganization?

John Michael Lawrie

Well, I didn't -- we didn't reorganize anything. We are expanding it. So what we've done is we have put what we call account general managers on our top 500 or 600 clients around the world, and those account general managers have the responsibility for driving performance of the contracts that we have, as well as cross-selling and revenue increase. And we have changed compensation systems around to make sure that people are rewarded for that cross-sell and for increasing the overall share of wallet that we get from those clients. And then we've made a big investment in what I'll call hunters. So people that can go out and close opportunities that are identified by our account general managers, and we've put a significant investment around infrastructure salespeople, application salespeople, and as Paul mentioned, even our consulting business, we're making an investment around our industry orientation to consulting. We've put more Cloud sales specialists in place, Big Data, Cyber, so we have expanded quite significantly the sales force. So we haven't reorganized it, what we've done is we have expanded it. And it's probably one of the more profound shifts that we're making at CSC, is rather than wait for the market to come to us, we are taking our game to the marketplace. And we're seeing this in several of our regions. Asia, which was up over 30% in the first quarter, fantastic. The first time since I've been here, we've seen that kind of growth. The Americas is beginning to show some growth. And as we continue to restructure our operations in Europe, we think we'll begin to see some improvement there as we get towards the end of this fiscal year. So these are pretty big investments. And again, it reflects the change in the marketplace. In the old world, there was x number of big deals every year. You would go pick the ones you want to go bid on. You'd put a team on, you go after those big ones, you drag a couple of them in, and everybody's happy. That world doesn't exist anymore. There's not as many big deals, a lot of customers have unbundled. They go smaller deals, and we needed to respond in like, in terms of coverage and sales specialists to get that together. And then, we've -- by definition, you begin to move away from just a transaction orientation to much more a value-based selling, much more of a relationship -- long-term relationship orientation with your clients, which tends to be more profitable over time. That's probably more than you were looking for, but that's my old sales background coming out.

Operator

We'll go next to Edward Caso.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's actually Rick Eskelsen on for Ed. Questions around the NPS business. I was wondering if you had -- could give us an expectation for the bookings next quarter and the government's fiscal fourth quarter, and whether you'd expect to see at least some seasonal uptick there?

John Michael Lawrie

Yes, there is a possibility that we will see a seasonal uptick there, because we have over $2 billion of contracts that we have submitted that we are waiting for award. I just flat out don't know. I hate to say it, but I just don't know. I just don't know what's going to happen at the end of this budget year, I don't know whether if they're even going to have a budget. I don't know -- some of these contracts have to be renewed, because they're fairly substantial and they're important in terms of ongoing services. But, as I've said, we have seen a delay in a lot of these awards, so it could easily slip out to another quarter. I just don't know yet. What is clear is that based on the run rate of our bookings, we do expect that we will not see as much revenue as we had anticipated. And I think Paul said and I said, we expected revenues to be down mid-single digits. We now expect that to be high-single digits, low-double digit kind of revenue growth. So this business is clearly being impacted by what we are seeing in the government sector. Now we are trying to take many of our commercial offerings and begin to take them into the federal sector. So there is a lot of interest around Cloud, around Cyber, around Big Data. This company that we just bought Big Data Infochimps is very involved with many government contracts, which is a software platform, open system software platform that allows processing of multiple data feeds into a real-time analytics offering. So I don't know. Our win rates are holding up, our recompete win rates are holding up. We did lose the big NGEN deal. And certainly, that impacted some future revenue growth in the second half of the year. But overall, we're seeing the same sort of shift in the government sector that we're seeing in the commercial sector. So hopefully, that gives you a little more color.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

That definitely does. And just the second question, on the cross-sell, I think you'd previously talked about being, I want to say, around 5% was kind of the cross-sell figures that you had and you're targeting about 40%. I'm just wondering if you could just maybe give us some updates on the progress, maybe numbers if you have them on the -- how the cross-sell has progressed?

John Michael Lawrie

Truthfully, we are seeing some improved cross-sell around pipelines. I have not seen any significant improvement in terms of revenue generation. But obviously, you first got to get the pipeline. So we've put a lot of focus on that. I don't think that's going to move in one quarter. It's more of a multi-quarter kind of a shift that's going to take place. We're training a lot of these account general managers who think about how they drive other offerings into the marketplace and into those accounts. We see our Cloud business often, as it drags along other things like our Cyber and, in some cases, even our analytics or Big Data business. So I have not seen a significant uptick in the revenues associated with cross-sell but we are seeing some pipeline increase associated with cross-sell.

Operator

We'll go next to Julio Quinteros.

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

Maybe just to back up a little bit to the 2012 Investor Presentation. And Paul, I think when we talked about this last, I'd figured I'd give you another chance to walk us back through the view to fiscal 2017. I think looking at the EPS guidance for fiscal '14, obviously, you're tracking well ahead of what we were talking about in September of '12, the revenue coming in a little bit lower. And I guess, relative to the kind of revenue run rate that you have, do you guys still feel comfortable with the $5-plus in EPS as you start thinking about fiscal 2017? And how does that ramp look from here?

Paul N. Saleh

Again, it's early to just really point to 2017 and just provide additional insight, except to say that, obviously, we are ahead of where we thought we would be for 2014. Our cost takeout is -- played out faster than we had anticipated. We're making great progress there. We're beginning to see, as Mike mentioned, improvement in our commercial business. And we are again -- believe that we will have a cost structure that will enable us basically to convert more of the revenue in the long run to the bottom line, and so have the leverage of a very effective cost structure.

John Michael Lawrie

Yes, I think if I go back to the Investor Presentation in September, my view is we've clearly made good progress here in the cost takeout. We've pivoted this organization very hard to efficiency and contract management and discipline around that, so that we could drive improved profitability and improved free cash flow. Those were our 2 most clear and present dangers a year ago, which weren't generating enough cash and we weren't profitable. And we've pivoted this organization very, very hard. We've delayered them in [ph] others -- hundreds of things that we've done to get that under control. Now we are beginning to pivot towards trying to put the investments in place to drive growth. I am doing it delicately because we aren't completely finished with the efficiencies and the cost takeout I want to get done. Organizations, sometimes, have a difficult time keeping 2 opposing thoughts in their mind at the same time, so we do need to continue to make progress on the cost take out that's fundamental to the $5 per share, but we also need to begin to show some growth as we exit the get-fit phase and move into the win-more phase. And that's part of the agility that we're trying to build into the company, is to learn how to do multiple things at the same time. And we're seeing some encouraging signs, as we said, particularly in the commercial business, I think our regions are seeing making some good progress, our industries are making some good progress. Frankly, what's changed from September is this whole NPS thing is probably a more -- slightly more difficult conundrum than what we had seen at that point in time. Thank God, we took the cost actions on NPS early, so we're not chasing this thing. We're actually in front of it. You saw the margins this quarter. That's just a result of really getting out in front of what we saw was going to happen. But the truth is it's a little worse, from a revenue standpoint, than what we had anticipated.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Got it. And just on -- sorry, one quick housekeeping item on the restructuring commentary that you made. It sounded like you said $7 million in restructuring cost in the current quarter, and then that's a return to a run rate of about $30 million to $40 million per quarter going forward. Is that correct?

John Michael Lawrie

Yes, we had taken, as you know, in the fourth quarter, a restructuring charge. As I indicated at that time, we'd moved a lot of our first quarter restructuring we planned to do into the fourth quarter. There was just some de minimis stuff in the first quarter that was really just carryover from things we had before. But we continued to expect to spend in the $30 million to $40 million range per quarter on restructuring, particularly in our European operations. But this is part of, in my mind, it's part of business. When we take these contracts on, we have to drive more efficiencies in these contracts, and it was one of the things CSC didn't do. They didn't take the restructuring on these contracts. And instead, they took it in the form of lower profitability. So what we're doing is we're factoring that into our business model, that's why we run this stuff through the P&L, as part of how you manage a business like this. Now obviously, over time, as you become less infrastructure-intensive and more consulting and application and Cyber and so on and so forth, some of that restructuring overtime should certainly diminish.

Operator, could we have the final question, please?

Operator

Certainly. Our final question comes from Darrin Peller.

Darrin D. Peller - Barclays Capital, Research Division

Just want to start off. Just want to hear Mike, maybe where do you think you stand versus where you think you should be on personnel changes you've been making? I know there's been a number of new front office hires over the past quarters, including, I think, a new head of sales and marketing. I would hope to see some traction, obviously, on overall book-to-bill ratio maybe in a couple of quarters to really represent what you hope for in the year after of growth.

John Michael Lawrie

I agree.

Darrin D. Peller - Barclays Capital, Research Division

So could you just give us a sense, number one, where you stand on the traction? How the new people are really trending out? And then what may be implications of some people that are not there anymore?

John Michael Lawrie

Okay. So I think -- listen, just a couple numbers here. I think when I got here 1.5 years ago, we had 370-some vice presidents, we now have 75. And of those 75, roughly -- don't hold me to this I don't have the number right in front of me -- but 50 of them are new. So that's fairly significant restructuring, if you will. And I think, by and large, most of the new people that we have brought in have added a lot of value. You've mentioned the head of sales, we brought John Maguire in to run our worldwide sales operation and our regional operation, and he's off to a good start. We've made significant changes in our region lineup. We've got new regional managers in Central region, which is fundamentally Germany; new regional manager in our Asia Pacific and Middle East operations; and a new regional manager in the Americas; a significant change in some of our software, some of our other key offering groups. So this is a really significant -- we also made a change in regional manager in France, our Southwest region. I'm really pretty pleased with the progress. We are attracting some really high-caliber people, they are clearly making a difference. I fully expect some of them will not make it. Whenever you bring that kind of group in, you're going to have some that don't make it, and we've already had some of that, so I view that as quite normal. But overall, the batting record right now is pretty strong, and we're pivoting this new team towards focusing on winning in the marketplace, focusing on growth, focusing on a much more proactive -- proactive -- leadership role in the marketplace. The new operating model, which we've talked about today, has simplified our operations dramatically, has improved accountability. Most of the people we bring in are high energy, want to win and know what excellence looks like. Part of the transformation in a company is you need to bring a leadership team in that knows what excellent looks like, not what mediocrity looks like, what excellence looks like. And one of the things that we really try to screen is for people that have done it or want to win, roll up their sleeves and know what excellence looks like, and you do that over a protracted period of time, that's how you change companies. Fundamentally, it's all about people.

Darrin D. Peller - Barclays Capital, Research Division

That's great. I mean just these people, some of your best people you brought on, are they actually out and selling it? Or they're still on the training process? Where do you stand?

John Michael Lawrie

No, no. They're out, man. They are out. I mean they have roughly 24 hours to begin to make a difference. So I mean, our -- take our regional manager that we've put in Asia, I mean, this is the first year, a guy by the name of Maruf Majed who runs our Middle East operations in Asia. I mean this guy took about 15 minutes to get his arms around things and shake things up, and lo and behold, we saw a 30% increase in sales in the first quarter. That doesn't just happen, it's because people are really driving things and going out and calling on customers. And we're seeing some of the same activity levels in the Americas and some of the same activities in South and West and in Germany. So these are all really important early signs, but it's difficult to measure it in 1 or 2 quarters. It takes a little longer to show some of those results.

Okay, operator. Well thank you very much. Again, I appreciate everyone's interest here. I think we're encouraged by what we're seeing here on our turnaround. And as Paul said, we expect to see continued progress as we go through our fiscal year. And I look forward to updating you again after our next quarter results. Thank you very much.

Operator

This does conclude today's program. We appreciate your participation. You may disconnect at any time, and have a great day.

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