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Executives

Bryan Brady - Vice President of Investor Relations

Michael Mancuso - Chief Financial Officer and Vice President

Michael Laphen - Executive Chairman, Chief Executive Officer and President

Analysts

Joseph Foresi - Janney Montgomery Scott LLC

Julio Quinteros - Goldman Sachs Group Inc.

Nathan Rozof - Morgan Stanley

Jason Kupferberg - Jefferies & Company, Inc.

Tien-Tsin Huang - JP Morgan Chase & Co

Edward Caso - Wells Fargo Securities, LLC

Darrin Peller - Barclays Capital

Unknown Analyst -

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

Computer Sciences (CSC) Q1 2012 Earnings Call August 10, 2011 11:00 AM ET

Operator

Ladies and gentlemen, good day, and welcome to the CSC Fiscal Year 2012 First Quarter Earnings Conference Call. Please note today's conference is being recorded. And for opening remarks and introduction, I would like to turn the call over to Mr. Bryan Brady, Vice President of Investor Relations. Please go ahead, Sir.

Bryan Brady

Thank you, operator. Well, good morning, ladies and gentlemen, and welcome to CSC's earnings call for the first quarter of our fiscal year 2012. We issued our financial results earlier this morning; so hopefully, you've had a good opportunity to review them.

With me today are Mike Laphen, our Chairman and Chief Executive Officer; and Mike Mancuso, our Chief Financial Officer.

As usual, this call is being webcast at csc.com, and we've also posted slides to our website to accompany our discussion.

So moving to Slide 2, you'll see our reminder that statements made during 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. 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, from our website and from our Investor Relations department.

On Slide 3, you'll see our acknowledgment that CSC's presentation includes certain non-GAAP financial measures. In accordance with SEC rules, a reconciliation of these metrics to GAAP metrics is included in the tables of the earnings release and in the appendix to our slides. And both documents are available for your review at the Investor Relations section of the CSC website. Finally, I'd like to remind our listeners that CSC assumes no obligation to update the information presented on this conference call except, of course, as required by law.

Now if you kindly move to Slide #4, I'm pleased to turn the call over to Mike Laphen.

Michael Laphen

Thank you, Bryan. Good morning, ladies and gentlemen, and thank you for joining us today. In addition to covering our financial performance for the first quarter of our fiscal year 2012, I will provide some further insight into our recently announced acquisition of iSOFT, an update on the status of our NHS program and our new business bookings.

At the end of July, we successfully completed our acquisition of iSOFT Group Limited. This strategic acquisition brings to CSC approximately 3,000 health care IT skilled employees including those from major research and development centers in India, Spain, the U.K., Australia, New Zealand and Central Europe. We also gained roughly 200 qualified health care administrators and some 100 clinical practitioners, as well as 100 premium health care software products to add to CSC's portfolio. These assets, in combination with CSC's existing health care capabilities, intellectual property and client base create a vertical business unit that operates at all levels of the health care value chain. This includes individual patient care to national government settings across both payers and providers with offerings spanning from consultancy engagements to solution, design, delivery and technology and business process outsourcing. Strategically, our health care vertical now has a strong foundation of IP to leverage, much as we do with our very successful financial services vertical.

Geographically, iSOFT's coverage of the global markets complements that of CSC. The combined entity provide solid market positions in North America, the U.K., Central Europe, Australia and New Zealand, as well as IP and solutions necessary to enhance expansion within Asia, South America and the Middle East. Acquisition-related costs, including the requisite accounting treatments for conversion from international standards to GAAP, as well as integration costs, result in a dilutive effect in the current fiscal year. In subsequent years, we expect this business to generate double-digit margins and be accretive on a pro forma basis. Mike Mancuso will provide you with additional insight during this presentation.

Turning to NHS. We continue to execute and deliver against our current commitments across both primary and secondary care. Lorenzo remains in production, routinely supporting daily operations at Acute Trust [ph], including the 3 early adopters sites Release 1.9. We are progressing the next set of delivery modules includes emergency care and outpatient prescribing, which are anticipated to be installed at the University Hospitals Morecambe Bay once an agreement is reached with the authority. As we reported, finalization of an MLU remains dependent upon the completion of the U.K. government review process. The NHS has indicated that they will be scheduling a September meeting with CSC to discuss the program.

Moving now to new business. Our year-to-date bookings as of Monday totaled $4.1 billion with $2.3 billion of that total occurring in our first quarter. Additionally, there is a further $1.4 billion of awards for which we have been down selected to one, where we're the only party in the negotiations. We currently anticipate closing the second quarter at approximately the midpoint of our full year guidance.

Key new awards include a significant new outsourcing contract with the steel producer, ArcelorMittal; expansion of our outsourcing relationship with a major consumer goods company to include application services; and in the federal sector, a new contract for the World Trade Center health program to support health monitoring treatment for emergency responders, recovery and cleanup workers and others who were adversely affected by the terrorist attack of 9/11.

Turning now to the public sector. NPS' revenues declined 2.4% quarter-over-quarter, driven primarily by the completion of our support of last year's U.S. census, which occurs once every 10 years. We are experiencing growth in areas aligned with key government priorities including more than $600 million in key wins in fiscal year 2011 at Health and Human Services; continued success of winning tests on the Department of State Global Support Strategy for overseas consular support services; and our expansion of activities in data center consider consolidation and cloud activities with our public sector clients. Currently, over 60% of our fiscal year '12 pipeline lies within our identified high-growth market segments. These market segments in health, cybersecurity, identity management, data center consolidation and cloud services are continuing to grow at above-market rates, partially offsetting the reductions and pressures in other areas of our U.S. public sector portfolio.

Across the customer base in our U.S. government market, budget uncertainties in conjunction with the prolonged debate around the debt limit, continue to create delays in awarding new initiatives. The trend towards smaller awards and the increased use of ID/IQ contract vehicles continue. Currently, MPS has a substantial backlog of approximately $4.6 billion of submitted proposals scheduled for award in our fiscal year 2012. At the end of the first quarter, pipelines for U.S. public sector awards scheduled for year '12 stands at $11 million, with $2.9 million of those scheduled for award within our second quarter. For the full year, we expect MPS will continue to generate solid profitable cash flows with essentially flat full year revenues.

Consistent with recent improvements in our commercial pipeline, top line revenue growth in our first quarter of our BSS segment was 17% as reported and 8% on a constant-currency basis. Demand for consulting services was strong in North America, Brazil, Australia and selected markets in EMEA. Our financial services vertical continues to perform well with first quarter year-over-year growth of 14% as reported. Overall commercial growth was 6.7% on an as-reported basis, as the strong revenue performance from BSS was offset by weaker MSS demand. Managed services sector first quarter revenue increase of 1.3% year-over-year was aided by currency tailwinds. Recent delays and softness in contract awards contributed to the decline in constant currency revenues. However, for the full year, we anticipate revenues comparable to last year.

As you have seen in our press release, OI and OI margin declined in our first quarter driven primarily by the performance of our MSS business unit. MSS issues included normal first quarter workforce rationalizations, additional expenses required to offset the Nordic strike-related actions, higher-than-expected program and start-up transition costs and an adverse EAC adjustment. In spite of these MSS difficulties and increased legal court fees, we delivered strong EPS growth year-over-year as a result of our continued focus on the efficient effective management of tax globally. For the full fiscal year, we have revised our margin guidance to reflect the anticipated effects of the iSOFT acquisition, increased legal fees and the MSS performance issues discussed earlier. We expect that our improved tax efficiency will offset the dilutive first year EPS impact of our iSOFT acquisition. Consequently, our full year guidance for bookings, revenue, cash and EPS remains intact.

I'll now turn it over to Mike Mancuso for further details of our first quarter results, the financial impact of the iSOFT acquisition and our outlook for the remainder of fiscal year '12.

Michael Mancuso

Thanks, Mike, and good morning.

I'll begin on Chart 7. As Mike Laphen indicated, overall revenue in the quarter increased 3% as reported and declined about 2% when adjusted for currency. The good news is the strong commercial revenue growth in our BSS segment. I'll have more to say on revenue a little later.

Operating income declined significantly in our MSS segment. The margins in our other 2 segments were about where we expected, with the variation on mix and timing affecting the absolute rate. Our tax rate for the quarter offset the impacts of the MSS margin performance and the higher corporate G&A, resulting in a sizable increase in EPS versus last year and our earlier guidance. I'll add more color to these areas as we get further into my charts.

Now if you'll turn to Chart 8 labeled, "New Business Bookings." Historically in our business, as the FY '11 data suggests, the booking profile is lumpy with no real predictable pattern. We booked $2.3 billion in this Q1, and for Q2-to-date, we have booked $1.8 billion, have been down selected for another $1.4 billion, and we believe we will capture another $2.8 billion by the end of September. So our best estimate for Q2 is $6 billion, which would give us $8.3 billion at the halfway mark. And we are still of the view that $17 billion is achievable for the full year. However, if the world economic conditions weaken further and U.S. government spending is further disrupted, then the $17 billion becomes more challenging. But for now, it's our best estimate.

Chart 9 talks to our EPS for the quarter relative to our guidance. When we offered the Q1 guidance on May 25, we considered the labor situation in the Nordics, corporate G&A potential increases, et cetera, and we guided accordingly. As it turned out, tax planning initiatives progressed favorably, driving our tax rate into negative territory, resulting in a sizable tax benefit that more than offset the unanticipated MSS program issues and corporate G&A increase.

Chart 10 addresses revenue by line of business with a comparison to Q1 FY '11. On a GAAP basis, revenue grew by 3% and declined by 1.6% in constant currency, with the BSS segment growing at 17% and 8%, respectively, for the reasons Michael Laphen noted in his remarks.

Chart 11 displays operating income by segment. As we discussed, the decline in MSS accounts for the year-over-year decrease. I also need to remind you that we report the NHS contract in the BSS segment, and the margin rate on that contract was higher in Q1 of FY '11. You will recall we adjusted that margin downward in Q4 FY '11, and the NHS contract is recorded at the lower rate in this quarter.

Turning to Chart 12, the P&L statement for the quarter with comparison to last year. You can see the lower operating income and higher corporate G&A is more than offset by the lower tax rate, resulting in a $0.29 increase in continuing ops EPS over last year.

Chart 13 reflects selected balance sheet accounts with comparisons to last year. Our cash balance at the end of the quarter of $1.7 billion when compared to last year is lower primarily because we paid off our $1.5 billion fully drawn bank line subsequent to Q1 FY '11. Debt is lower as a result, and our debt-to-capital ratios continue to improve.

Chart 14 shows our DSO position for the last several quarters. On average, we have improved by one day relative to Q1 of last year.

Now to the hard part, full year guidance. Chart 15 is a walk from our May 25 full year EPS guidance to our updated guidance, which as you can see, is unchanged. Moving left to right. For now, we are forecasting a tax rate of 20% versus the earlier guidance of 32%, which generates a $0.82 EPS benefit. Our increased corporate G&A, driven primarily by legal fees coupled with the MSS performance issues, results in a $0.27 decrease such that excluding iSOFT, our EPS would climb to a range of $5.25 to $5.35. We have been very clear that our guidance always excluded the iSOFT acquisition. And assuming the transaction received regulatory approval, it would be dilutive to our EPS in the first year. The dilution results from the conversion of iSOFT from IFRS, International Financial Reporting Standards, to GAAP and the amortization impact of intangible assets and our own integration spend. The iSOFT transaction closed on July 29. Australian regulatory requirements restricted our pre-closing access to iSOFT, though we are now deep into the purchase accounting details by contract, region, et cetera. We estimate, and I underscore estimate, that iSOFT will dilute our EPS by $0.55 this year. On a pro forma basis, excluding the aforementioned purchase accounting adjustments, iSOFT will yield double-digit operating margins in FY '13 and beyond. So somewhat coincidentally, if we adjust FY '12 guidance for the inclusion of iSOFT, we come back to the range of $4.70 to $4.80 EPS.

Now the next challenge is to estimate how the iSOFT dilution will fall by quarter. Chart 16 reflects our best estimate at this time of Q2 EPS with and without iSOFT. Its $1 rate, excluding; and $0.58 to $0.78, including. Let me say one final word of caution about FY '12 guidance. As you know, there are a number of large balls still in the air, principally the NHS contract, MSS performance, the iSOFT integration, federal government spending, our ongoing SEC investigation and our ADR process with the federal government to name a few.

Now if you'll turn to Chart 17, I'll summarize our position on guidance. We are expressing our current guidance including and excluding iSOFT. We think $17 billion of bookings is achievable. On revenue, iSOFT will contribute on a GAAP basis, approximately $150 million this year. The midpoint of our range is 16 750. So iSOFT's inclusion is within our current range.

My get-off-the-stage message is that our business is sound. We have one of the strongest balance sheets in our industry. In fact, this morning, S&P issued a press release removing us from CreditWatch and affirming our A- rating. We will perform our way through the challenges on our plates, we'll continue to focus on cash generation and provide meaningful returns to our shareholders.

Now I'll turn it back to Bryan to initiate the Q&A.

Bryan Brady

Okay. Thank you, Mike. Well, ladies and gentlemen, we are now ready for our Q&A session. Operator, could I ask you to please advise our callers of the procedures for asking their questions?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today will come from Janney Montgomery Scott, Joseph Foresi.

Joseph Foresi - Janney Montgomery Scott LLC

I guess my first question here is just maybe you could give us an update on the outlook for government spending. Obviously, the sector segment was down year-over-year. And maybe you could just give us some reason why you are confident that, that might end up flat for the full year.

Michael Laphen

Well, Joseph, as I said earlier, we're tracking the market closely. We are making good progress in the areas that we identified as high-growth. We are winning our fair share of the business there. So where we are right now, as we see the government spending evolving, we think we're pretty close to a breakeven in terms of last year. This quarter was impacted by the census' revenues that we had last year that, as I mentioned in the commentary, happens only once in every 10 years. So that affects Q2 again a little bit, but then normalizes out of that after Q2.

Joseph Foresi - Janney Montgomery Scott LLC

Okay. And is there -- has there been any change in sort of the size of either the ID/IQs or the potential deals that are coming your way? Has there been any change in the government's procurement process? I know that changed around the CIO side. Maybe you could just give us some idea on that front.

Michael Laphen

Yes. I think the trend is greater use of the ID/IQs, for sure, and also smaller awards. I think the agencies are parsing their awards more than they did historically, so that they can stay flexible until they understand how the debt ceiling negotiations are going to impact them. So as we said, as Mike said earlier, our estimate for the federal marketplace does not assume a radical impact from the debt ceiling. If we do get a radical impact, obviously, we will be impacted as would others.

Joseph Foresi - Janney Montgomery Scott LLC

And just finally on that. On the ID/IQ side, by definition, I would think the visibility would go down as ID/IQ's increase as a percentage of the Government business, maybe could you just talk about maybe what percentage of bookings they are and just review your confidence given the fact that they're becoming a larger piece?

Michael Laphen

Yes, I don't have at hand the percentage. We'll get that. But I would say that what gives us confidence is that we have an extensive array of ID/IQ contracts in our portfolio that go across just about every agency and department in the government, and we have traditionally been very high performers on those ID/IQ contracts. So corporately, we feel we're very well placed as that shift occurs. I would agree with your comments regarding visibility because as you go forward with smaller awards, obviously, what you're able to project with greater visibility in the future gets impaired a bit versus big RFPs coming out and carrying revenue for multiple years.

Operator

Our next caller comes from Morgan Stanley, Nathan Rozof.

Nathan Rozof - Morgan Stanley

I'll switch gears a little bit and ask some questions about the commercial side of the business. Industry-wide, we seem to be seeing a divergence in demand between consulting and outsourcing, and I think that's evidenced by your strong performance in BSS this quarter as well as your focus on that as a growth platform. But given your position in both these markets, can you help us understand what's motivating the differences at the client side in terms of willingness to invest in consulting versus outsourcing? Do you think this is a temporary or more of a secular shift? And how are you guys positioning CSC to capture the benefits of the changing dynamics?

Michael Laphen

Yes. Well, as we briefed in our Investors Day, we think there's a significant shift going on in the marketplace and in the technology basis as well. So as we see, as we experience a shift more to the cloud environment, I think that will continue to impact what's going on in the outsourcing market. We have invested in and have positioned ourselves very well in the cloud environment, but I think the clients, industry-in-large out there, is I think sorting out exactly what they're going to do or not going to do on a cloud basis versus an outsourcing basis. On the other hand, in the business solutions side, we continue to see the demand for offerings that improve the top line as well as the bottom line and particularly from an industry perspective. And barring a significant downturn in the macroeconomic picture, I think we will continue to see that. We have purposely positioned ourselves for that market. As I said, our financial services vertical is doing very well in that market. And the acquisition of iSOFT and the IP that's associated with that positions us in the same manner in the health care market as it did for the -- as we are in the financial services. So we see CSC and industry in general, the IT services industry in general, I believe are in a significant transition, and we're all working our way through this.

Nathan Rozof - Morgan Stanley

So the discussion in the cloud is helpful now as it was at the Analyst Day. I was wondering if you can provide us -- I think at the Analyst Day, you said you're incorporating in the cloud an all-new outsourcing pursuits, is there a way you can quantify, what proportion of clients or what proportion of negotiations are now including some sort of a cloud component?

Michael Laphen

You know, I would say just about every initiative or every undertaking includes discussions and studies around cloud now at various levels. And I think we're particularly well positioned to help our clients identify what should go on the public cloud, which could be on a hybrid and what needs to be on the private cloud. So I think that analysis is part of almost every engagement discussion at this point in time, and I think it will continue to be as we get more clarity around exactly how cloud can best be utilized in the corporate environment or public-sector environment as well.

Nathan Rozof - Morgan Stanley

And then last one for me and then I'll get out of every one else's way. Here, the insight you gave into the outlooks of bookings in fiscal second quarter is very helpful, so thank you for that. I just was curious how the 50% win rate assumption on the qualified pipeline compares to history.

Michael Laphen

Our typical win rate is 50% or better on qualified opportunities. So that's why we used the 50%.

Operator

I'd like to move on to David Grossman at Stifel, Nicolaus.

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

I know you identified and talked about the margin issue in the Managed Service business. Can you help us understand just how far along you are in determining what those issues are and kind of the visibility on when you see those stabilizing or in fact going back up?

Michael Laphen

Sure, David. There's always a lot of puts and takes, but let me break this down into 3 major tranches to help give a little bit more visibility and clarity on it. The first element was a significant amount of costs in the Nordics Region to support our efforts to be able to realign and rationalize the workforce in the Nordics to put us back in a more competitive situation. That involved a strike by that workforce. It went to court, with the court ruled favorably for CSC, which we are extremely pleased about. So therefore, we now have the ability, going forward, to rationalize the workforce at a significantly lower cost as well. Unfortunately, we had to infuse an incremental higher level of external resources to keep the business running while the CSC contingent that was on strike was out of the facility. So that one from a standpoint of the incremental cost is behind us. But I would say that the benefits will take place in the upcoming quarters and into next year in terms of being able to rationalize workforce. We have some constraints on some of the timing there, but it's exceptionally better than what it was. So again, we're pleased with that and I would say that one is behind us. A second major tranche that contributed to it was a EAC adjustment on a classified program, and that simply is we, as we went through the quarter, it surfaced that the delivery timetable that they were signed up for with the customer they were not going to meet and required incremental time to do that, and there were some penalties associated with that. We have taken the EAC hit that we believe covers the issue there. The classified program and you might ask why didn't we catch it, it's a little bit more, it is a lot more difficult actually to get the visibility of our quality assurance people on a classified program, and this was a classified program overseas as well, so it was sort of unique. But we believe we have that one behind us as well. The final one is a start-up transition outsourcing program. We are performing very well. It's amicable with the customer, but it's costing us more than we expected it to cost us. I expect that will continue to bleed in somewhat into Q2. So they're the 3 major things. So David, what I would say is that if you look at MSS profitability on a whole, what I would suggest you would take away is that we expect our profitability for the full year to be in excess of what was reported last year for MSS just to give you some parameter. It will be somewhat less than if you normalize it for the Nordics reduction. So unfortunately, we will not recover the full Nordics impact, if you will, because of these other things, but still very profitable, very sound business and unfortunate stumbles here.

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

So just to make sure that I'm clear then, Mike, then the margins have in fact bottomed on the first 2. So we won't see any recurring costs related to the first 2 items that you mentioned but the transition on the new outsourcing contract will, in fact, continue into the second quarter. Is that right?

Michael Laphen

That's correct.

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

Okay. And then if I could just ask one other thing related to NHS. As you think about the dilution that you're talking about on iSOFT for this year, does that get impacted by the final resolution and rescoping of the NHS contract or could that potentially be impacted?

Michael Laphen

That's such a hypothetical -- David, it really would depend on which way the NHS turned. So I would just really be making a hypothetical statement here. And given the political sensitivities of the negotiations and the discussions and what's going on with the NHS, I just think it's best that I steer clear of that at this point in time. I appreciate everybody would like to have more visibility into it. Frankly, we'd like to have a little more visibility into it as well, but we are where we are and we're performing very well on it. We think that we have an outstanding product here. We know that demand has improved significantly as production has continued the earlier adopter sites. But having said all that, there are still the political debate as to what to do with the program. So I wish I could give you more insight on that, but I think that's about where we are at this point.

Operator

Darrin Peller at Barclays Capital.

Darrin Peller - Barclays Capital

The step-up in the corporate G&A line, I know that you said there were some of ongoing expenses with challenges across the business and rightsizing, can you give us a little more granularity on what -- first of all, what should we expect going forward on that line? I think it was $44 million this quarter more or less, or maybe could help me what exactly it was and how much -- how we should think about that.

Michael Mancuso

Best insight I can give you, Darrin, it is predominantly legal fees associated with the SEC investigation and the shareholders suits that have been filed during the last quarter.

Darrin Peller - Barclays Capital

Okay. So is that something that is generally thought of as recurring or can we expect that to kind of be and come down a bit through the remaining part of the year?

Michael Mancuso

I could be very cavalier and answer that question. It's an estimate. In terms of the spend, it'll have an impact for the remaining quarters of the year relative to last year, it's incremental. The size and scope of it is very difficult to predict. We cannot predict the tenure of either piece of either one of the drivers kind of thing and a good bit of it is out of our control. So we're making a swag right now, not knowing basically what we're facing into. So I can't give you much more insight than that, Darrin.

Darrin Peller - Barclays Capital

And so one follow-up for Mike Laphen, if you don't mind. Taking a step back, I mean and looking from a kind of high level, the stock's, obviously, at a point where I'm sure, you guys, didn't want it to be in and I'm sure that you're trying to figure out whether there's different opportunities in terms of best use of capital. The uncertainty in the market might give you some pause, but are you considering anything from a capital structure opportunity or any other, anything else that might sort of utilize taking advantage of where the stock price is now given -- which seems like your confidence that the business is still in the right direction and everything is really going to end up being fine?

Michael Laphen

Well, let me make a couple of comments there. But first of all, I think there's a severe overreaction in the market right now, but the whole macro market is so volatile that if you pop up with a surprise, you're going to get penalized significantly for it, but I think you need to step back and really look at what's the underlying core business is and what the prospects are, and that's what we're trying to paint for you today. In terms of the capital structure, you might have seen that we again announced our dividend, so that dividend program continues and we anticipate that we will continue well into the future and probably gets stronger as it goes forward. Unfortunately, we have been advised by outside counsel that we need to suspend our open market buyback program until the conclusion of the audit committee's external/internal review associated with the Nordics. So that's got us -- bought that for bit of time, hopefully not too long. Other than that, I would say that we have a strategic direction that has been endorsed by the Board. I think that strategic direction is on target. I think that our performance in the BSS, along with our acquisition of iSOFT to further build our vertical businesses, is right on target. I think we got out in front of the cloud very well, and I think we get a lot of kudos for that. So as the outsourcing market morphs, which it is in the process of doing, we will morph with it and hopefully, stay one step ahead of it.

Operator

[Operator Instructions] At this time, we'll now go to Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang - JP Morgan Chase & Co

Book-to-bill, Mike, was running --looks like it's running below one hit over the last 3 quarters. Could this challenge your targeted growth next year on organic basis? I know you talked about what 2Q looks like but still looks like it might be tracking below one for the year, on a trailing 12-month basis.

Michael Laphen

Well, this is Mike Laphen, let me make a few comments and I'll let Mike Mancuso follow-up with what ever he thinks complement it. I think first of all, I think you have to recognize 2 macro market forces that are impacting our bookings and I think others as well. First of all, in the federal marketplace, we continue to be impacted by the budgetary uncertainties that are involved there. Obviously, the full second half of our last fiscal year, which ended at the end of March, there was no federal budgets in place, there just continuing resolutions which dramatically impacted the bookings process. Even as we go through our first half of the fiscal year here, the civil agencies still operate under continuing resolutions. So there's still somewhat of an impact there. And as we said the -- I think there has been softness in the outsourcing market as people sort their way through exactly what they want to do. I think, quite frankly, if we are successful on booking what we currently see as likely for the second quarter, I think that's going to be an extremely good picture and positions us for the remainder of the fiscal year. I think -- Mike pointed out that we're still facing uncertainties here. If we go into another government fiscal year where they can't get their act together and get a budget, we could again get impacted. And then the broader macro picture that we're all dealing with in terms of the U.S. credit rating and the fallout from all that, that could, at some point, hit our commercial and discretionary spend business. So Mike, you want to add anything on there?

Michael Mancuso

This is Mike Mancuso. We didn't, in this particular, presentation introduce or talk about backlog. But at the end of the first quarter, we have something north of $35 billion in our backlog, and that's firm backlog, and it only includes the large deals in our BSS segment. It doesn't include the fundamental short-term consulting engagements that we get. So as we sit right now, we've got $35 billion, almost $36 billion in backlog at this point in time. So that, coupled with our anticipated new bookings this year, still gives us the confidence that while the pattern of book-to-bill in the last few quarters may have been then one, still tells us that we can achieve the revenue forecast that is sitting out there.

Tien-Tsin Huang - JP Morgan Chase & Co

Okay. Just 2 more follow-ups, if you don't mind. Just first on the -- in terms of the what you're talking about in the pipeline, are there any large chunky deals that are driving some of that, that $6 billion number that you're talking about? Because I know you've mentioned that some of the deals are still quite small. So could you kind of give a sense if anything could really get pushed out and move the needle.

Michael Mancuso

I'm not thinking that there -- there are probably a handful of deals in the $300 million to $500 million range that are decision-sensitive as a function of timing. I'm not aware of any multibillion dollar transactions that have would have a, if delayed or missed, it would have a sizable impact. But let me ask Mike Laphen.

Michael Laphen

No, I would concur with Mike said.

Tien-Tsin Huang - JP Morgan Chase & Co

That's good to know. Then the last one, just on the tax side. I know on the K, there was some discussion about the change in tax status and one of them, I think that one of your subsidiaries that would drive like $120 million benefit. Is that what we saw here in the quarter? I'm asking because I'm trying to get a sense of if you're recognizing that now, I guess we won't see that repeated again next year.

Michael Mancuso

I'd like to have one every year. The answer is yes, it was the maturity of that tax initiative that we had been intensely studying through both internal and outside accounting talent, legal talent, et cetera. In tax speak, it was a somewhat check the block. For tax purposes, it was the deemed liquidation of a foreign subsidiary, from let's say, tax deduction for the fundamental liquidation at a loss of the entity. So that is the transaction that we're talking about.

Tien-Tsin Huang - JP Morgan Chase & Co

Okay, that's good know. And this is distinct from the IRS?

Michael Mancuso

Yes.

Operator

And a question now from Edward Caso, Wells Fargo.

Edward Caso - Wells Fargo Securities, LLC

I'm not sure if I missed it or not, but historically, you've talked about in guidance, you assume growth rate of the Commercial business versus the Government business, can you offer that?

Michael Laphen

I know the -- the Federal business, I think we said earlier, is we're forecasting flat revenues in that area. Previously, I had stated that the Commercial business, we were forecasting in the 3% to 6% range overall. And I think at this point, I'd just prefer to stay with that number right now until we see how the rest of the year goes. But that's kind of the range we're in.

Edward Caso - Wells Fargo Securities, LLC

Okay. And making sure I've got the tax rate right, we should, for modeling purposes, run with a sort of a 35-ish percent rate for the next 3 quarters? Is that how it works to get us to 20% for the year?

Michael Mancuso

Yes, the answer is yes. If you consider 20% for the year and negative 84% for the first quarter, the tax rate won't necessarily be linear in the next 3 quarters because there will be discrete items. But you're in the right direction. I don't want to guide for a tax rate by quarter. But if you assume a year-end 20% rate, I'll let you do the math.

Operator

Bank of Montréal, Garaf Gupta [ph].

Unknown Analyst -

This is Garaf Gupta [ph] for Keith Bachman. I have a quick question on the booking side. So in the Q2, you are mentioning $6 billion of bookings and out of which, I heard $2.9 billion from the federal side. Can you please breakdown between the 3 buckets for the federal out of $1.8 million, $1.4 million and $2.8 million, how much is federal?

Michael Laphen

I think I don't have the specific numbers, but I think from my recollection, I think that the commercial and the federal awards were about evenly split.

Unknown Analyst -

Okay. I just have a quick follow-up, Bryan, on the second half for the bookings. You mentioned about 50% of the bookings will be in the second half and last year, MSS was the key driver of contributing about 50% of bookings, and I heard Mike Laphen mentioned that there is some softness in the MSS. So if you can just talk about what gives you confidence about the bookings for the next half, second half of this year?

Michael Laphen

We're working directly from our qualified pipeline. So our global sales and marketing organization goes opportunity by opportunity as to what we see out there and the probability of award this year and the probability of win for us. So that's a very detailed analysis that we go through. Obviously, some things can slip, but that's grounded on a qualified pipeline of known opportunities.

Operator

A question now from Jefferies, Jason Kupferberg.

Jason Kupferberg - Jefferies & Company, Inc.

Just wanted to ask a follow-up on NHS. I mean I think a couple of the assumptions that underpinned your fiscal '12 guidance were that the renegotiated terms of the MOU would remain intact upon final signature and that there would not be any additional charges taken on the contract. And I know you had mentioned in the prepared remarks that there is some meeting scheduled for September to discuss the program. I just want to get a sense at a high level, does this change your confidence level that there will be no material change in the renegotiated terms and that there will be no additional charges or is that from an investor's point of view, is that a elevated risk factor that people should be considering since obviously, the final signatures have dragged out here?

Michael Laphen

Well, first of all, I'd probably assume it's already elevated in terms of a risk factor. No. There is a whole bunch of different scenarios that could happen here. But I guess the one thing that I would offer up as a little bit more visibility is that we have included within our forecast about $250 million of NHS revenue that's just associated with implementations throughout the remainder of the year. So if we're not at a baseline in September or at least by the end of September, then the net number will start to get impacted because some things will start to slip out of the fiscal year. But right now, we're assuming that we're still on target with the MOU. We're absolutely staffed up, ready to execute. We've got the products in the delivery pipeline, and we believe we have the demand. So hopefully, we'll get the turn on and things will move forward.

Jason Kupferberg - Jefferies & Company, Inc.

And then just a quick follow-up. I know you mentioned, Mike, you felt that the stock price was overreacting. I mean what are you guys focused on as a management team in terms of getting the stock to go back the other way and close the gap in the valuation multiple versus the peers and what do guys think are the most critical success factors to achieve that?

Michael Laphen

Well, I think this call and given the visibility and then us continuing to perform. I think the message that Mike and I both want to get out there is that this is a very solid business with excellent prospects. We used to get criticized on our cash flow. I think we have excellent cash flow. So I think if you look at this from a number of different vectors or dimensions, I think you would come to the conclusion with us that it's undervalued.

Operator

And we have time for one final question; let's go to Goldman Sachs, Julio Quinteros.

Julio Quinteros - Goldman Sachs Group Inc.

Real quickly on just headcount metrics. Can you just talk a little bit to wage inflation or wage increases, utilization and your headcount plans for the year?

Michael Laphen

I don't have specific headcount numbers. I will tell you we are hiring significantly in the Consulting business, in the BSS business in general. We are hiring selectively in the MPS market to fulfill our success in the identified growth markets. And the MSS again, it's selective hiring in areas like the cloud computing, virtualization and so forth.

Julio Quinteros - Goldman Sachs Group Inc.

Any comments on utilization in terms of where you are and where you could get that number to?

Michael Laphen

Again, I don't have the exact number, but utilization is up, and utilization is a big number in our BSS. It's less of a factor in the MBS market because we have such high utilization because the majority of the people are directly on contracts and the same on MSS. So when you talk about utilization with us, it's really is around the BSS space and I can tell you that I don't have the exact numbers, but it is improving. We just hope the macro conditions will continue to support that improvement.

Bryan Brady

And operator, I think we're out of time now. And I wonder we could ask Mike Laphen to just close off the call.

Michael Laphen

Well, again, thank you, everyone for joining us. I hope our comments and insights have been helpful for you to understand where we are. It is unfortunately, again, a lot of moving parts. But most of the moving parts are positive ones, including the acquisition of iSOFT, that again, strengthens our strategic direction. And we look forward to talking to you next quarter. Thank you so much.

Operator

Again, ladies and gentlemen, that does conclude our CSC teleconference for today. Thank you for your participation.

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