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Computer Sciences Corporation (NYSE:CSC)

April 04, 2012 5:00 pm ET

Executives

Bryan Brady - Vice President of Investor Relations

Guy M. Hains - President of International

Analysts

Nathan A. Rozof - Morgan Stanley, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

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

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

Ashish Sabadra - Deutsche Bank AG, Research Division

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

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

Operator

Good day, everyone, and welcome to CSC's update call on the NHS. Just a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Mr. Bryan Brady, Vice President of Investor Relations. Please go ahead, sir.

Bryan Brady

Thank you, operator. Good evening, ladies and gentlemen, and welcome to CSC's update on the progress regarding our contractual relationship with the U.K. NHS.

We issued a press release and an 8-K yesterday containing the company's most recent update. And so I hope you've had an opportunity to read those.

This call is being webcast on csc.com, and we have posted a slide to our website containing our usual reminder cautioning participants about forward-looking statements. I'd also like to remind our listeners that CSC assumes no obligation to update the information provided on this conference call except, of course, as may be required by law.

Now as we reported in yesterday's 8-K, Guy Hains will be leading this call. Guy is CSC's President of Healthcare, and he's joining us from CSC's offices in the U.K. Guy has been leading CSC's negotiations with the NHS and is our expert in this matter.

So the purpose of today's call is to provide you with a brief update on the progress being made in our NHS discussions and in our health care business in general. We won't be commenting at this stage on any of our financial results or financial forecasts because these will be a topic at some later date. So with those comments, I'd now like to turn the call over to Guy.

Guy M. Hains

Thank you, Bryan, and good evening, ladies and gentlemen. We're looking to give you this brief business update on the NHS in the interest of transparency and to give you some background on what is happening. You'll appreciate there is only so much we can say in terms of specifics as negotiations are ongoing. But I do hope to give you some insights into where we are with the NHS and Lorenzo and answer your questions where you have them.

Back on December 27, 2011, we told you that the original and much discussed MOU was not going to go ahead, and CSC was taking a write-off of $1.5 billion. On March 5, 2012, we announced that CSC and the Department of Health in the U.K. had signed a letter of intent on the revised scope and volumes for the program. Both parties plan to make this a legal agreement by the end of March.

At this time, CSC took action to reduce our costs by redeploying or removing some 30% of the workforce on our NHS program here in the U.K., and that was aligned to the anticipated scope and volume of the new agreement. This call is to give you some color to our statement of yesterday, which said we have effectively climbed out on our LOI agreement but also said at the same time that both parties have renewed our standstill until 1st of June 2012.

I can report that the dialogue with the NHS is fundamentally going well. Both parties continue to see considerable merit in the revised structure we agreed in the LOI. I would say that the delay reflects the complexity of the change being undertaken and the need for very detailed agreements. The backdrop to this, and much of it is driven by the extent to which the NHS itself is changing and the government's, with the NHS, moving to much more devolved [ph] power in the trusts and therefore the need to consult very widely on this agreement. I can confirm that both parties really want this agreement to work, and no specific roadblocks have been accounted. It's rather just the detail and the length of time it's taking to put the four agreements together. I can also confirm that our discussions only relate to the re-scoping of Lorenzo and that the ongoing service provision that we provide to other -- 2,000-odd other systems that we've installed continue as before, as does the revenue stream we enjoy.

CSC has written off its investment in the Lorenzo product. Over 80% of that product is complete. And we've also got the 2 years experience in the early adopter process that we've been undertaking.

Our revenue objective for Lorenzo in the near term is a modest component of our health care business mix. As we said in the past, we expect our U.K. health care revenues to be approximately 2% to 3% of CSC's overall revenues. And within that, Lorenzo will not be taking a significant part of that revenue for next year. So in this context, our go-forward risk really should be seen as modest. Nonetheless, looking to the longer term, we remain confident in Lorenzo, its technical platform, the extent to which it really answers the NHS efficiency needs, plus the very positive feedback that we get from the field in the U.K. And additionally, we do see significant potential in applying this experience to other country health markets. There isn't a market, I think, globally that still doesn't have considerable interest in the learning from the U.K. NHS, both good and bad.

Our integration of the iSOFT business, acquired 1st of August 2011, is going well. And this, as we've identified before, gives us very considerable product and health care intellectual property and positions us extremely well in the health care market, as well as making health care a significant component of CSC's overall business.

So that concludes my prepared remarks, and I'd like to turn back to Bryan for Q&A.

Bryan Brady

Okay. Well, thank you, Guy. Well, we're now ready to move into our Q&A session. We said this would be a brief call, but we probably do have time for a few questions. Can I remind you of what I said earlier at the beginning that we won't be commenting at this stage on any of the financial results or financial forecasts because, as I said, that will be a topic at a later date. But if we have Q&As that are relevant for Guy that can put some more color on this, he'll be delighted to answer those. So operator, could you please pass on your instructions to our guests and anybody who may want to ask a question? Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Nathan Rozof with Morgan Stanley.

Nathan A. Rozof - Morgan Stanley, Research Division

I had just a clarification question on the 30% of the workforce that's been redeployed. Does -- would that indicate that the remaining 70% of the workforce is working on other aspects of NHS x Lorenzo, including the maintenance work? Or does that mean that we've still got 70% of the folks that had previously been working on Lorenzo still deployed but, at this point in time, in a standstill mode?

Guy M. Hains

Well, now, let me reassure on that, that we don't have people in a standstill mode. Let me try and explain that. You're right to say that a portion of that workforce provides the ongoing maintenance. We continue in the other domains of the health care. We're deploying in ambulance, GP systems, community and prisons. We continue to deploy product into the NHS. That momentum hasn't stopped. And we're also continuing to add to the Lorenzo product. And we're working with trusts who are developing, codeveloping those mainly clinical now elements of the program. So areas of prescribing, which is now out, released and accepted in the market, work on care plans and emergency care. So we're by no means idle on this program. We've restructured the workforce really, to a view on 2 fronts, I would say. One is, we are past the peak of development, and the development resource is not always applicable to the task now in hand, which is very much the deployment task. So to a degree, we had anticipated making this order of change in the program at about this juncture. But clearly, the program takes on a different shape. Deployment will require us to work on more concurrent trusts as we go forward. We'll need to be more active in the market as the decision making is devolved. So it's a different profile for the labor, but it's not a result of having in any way slackness in the workforce or the demand.

Nathan A. Rozof - Morgan Stanley, Research Division

Okay. And just one quick follow-up here and I'll turn it over. You mentioned that Lorenzo was roughly 80% complete. At the point in time when you resume work on Lorenzo at kind of full capacity, roughly how long do you expect it'll take to complete Lorenzo in that -- or that remaining 20%?

Guy M. Hains

Well, we have a product ready to go, which answers specifically the core administration of particularly the hospital environment, the significant hospital environment, which is representative of the hospitals we've implemented at Morecambe Bay. So that's a complete package that handles patient administration, back-office activities. And we're now adding additional components in areas of prescribing and emergency care, care plans and also a mental health module. That represents the core of the product. And we will then subsequently, in normal product development, create other subsequent departmental deployments. And those will be as a normal product company would approach the market. So bounded in the contract that we have with the NHS, we'll be ready, once this agreement is signed, to have a very substantial and deployable health care Lorenzo module, which we will add to ourselves over time. So the complete footprint that we would aim to have in due course is that extra 20%. But CSC and the authority are ready to go with the core and complete module that we have right now.

Operator

Our next question comes from Joseph Foresi with Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

My first question here -- and I know that you're sort of in the throes of this, but I wonder if you could give us any color on the margin profile of the business as it compares to the overall business. And any color on do you see that changing at all with all the changes in the labor cost?

Bryan Brady

Yes, Joe, as I said, we really want to stay away from the financial stuff at the moment. I know you'd love to hear more on that, but Guy's objective is just to try and let you know what's happening with the product overall in the health care business. So we're not going to do finance questions, Joe. We'll do that later, as I said.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. No problem. Can't blame me for trying. And I guess I'll ask it a different way then. And maybe you could just talk about the value of re-upping the contract. Do you have a lot of cross-selling opportunities, you think, based on this? Anything in the pipeline that this would help you in the selling process? And if you could give us any color around any objectives for the overall health care practice as well.

Guy M. Hains

Yes, I think not [ph] just specific in the U.K. CSC, and particularly since the acquisition of iSOFT, is a fairly significant player in the health care market here. With one system or another, we are in 85% of the trusts in the U.K. So Lorenzo -- and the point I was really making at the beginning, Lorenzo is a strategic product, and we're very excited about that for the future. But that's far from the only thing that we're providing to the NHS. So I think in terms of providing transformational capability, helping to meet the changing of its -- it certainly is changing, the U.K. health agenda with the government changes, we are best placed. And frankly, the trusts around the U.K. rely on CSC to upgrade and change, support a wide range of systems. So I think that's a very important point. As I said, the learning that we have here is literally referenced around the world. I can't think of a country at the moment that doesn't have some level of health reform and some high dependence on information technology to support those changes. Health care, frankly, against some other industries, financial services, other industries, is likely a generation behind and there's just so much IT-enabled change to be made. So it's very fertile territory. We are very pleased with the repertoire of product that we now have with iSOFT that we're further developing, Lorenzo and other products, and we've seen some significant wins and some significant expansions in Australia, developing markets in Asia and in South America most recently. So I think the product portfolio we have, and particularly Lorenzo, bodes very well for the future. So lots of cross-selling opportunities but also lots of new market growth opportunities.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay, so just a...

Bryan Brady

Joe, you still -- you have a quick one?

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Yes. Just to be clear, are you -- is -- the product that you're developing for Lorenzo, is that something that you'll be able to implement in other areas? Is that the thought process here? Or is it just the intellectual property that goes into developing that product?

Guy M. Hains

There's certainly the learning in the intellectual property, the core architecture, but not a specific code stream that were deployed in the U.K. But the core architecture is the same architecture that we're using, for example, to help with hospital changes and reform in Holland. So -- and we're also taking the product to Spain in the near term. So Lorenzo will represent a family of products and capability that certainly will widen our deployment opportunities in the U.K., yes.

Operator

Our next is David Grossman with Stifel, Nicolaus.

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

Guy, could you help us understand what will be the major changes to the spirit of the contract in this new negotiation vis-à-vis maybe where we were back in the old MOU?

Guy M. Hains

Yes. I think I'm going to avoid talking specifically about volumes or scope, but clearly, there's changes there. But when we're in a position to talk about those, we will. I think more generally, the -- and I think the timing is perfect. But fundamentally, the key customer contact will now move, as indeed the government has stated as policy, move much more towards the trusts. And I think you may recall from the very outset of the national program there was a lot of criticism over the lack of clinical engagement. Now that's changed dramatically over the years. But the modules that we're delivering now really are clinically driven, and they carry considerable clinical content and support. So I think the major change is that we're not building a monolithic system to address the back office through a significant main contract through a large, structured, fixed-price development program with a central agency. The central agency will play a key part in the tripartite relationship. But the key focus of our activity will be working closely with the trusts. And I think in the way we mature the product and the way it addresses and engages clinicians, that is a fundamental change and a beneficial change which the Department of Health and the officials working on this program pushed very hard for. And we -- both sides see that as a huge plus point.

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

And there's no kind of constraints of having to develop multiple customized solutions as a result of that change?

Guy M. Hains

Well, I think one of the benefits -- there's always challenges in product development on this front. And not to oversell in any way Lorenzo, but there is a very powerful level of configuration that Lorenzo supports. But we will be channeling requirements with groups of trusts. So when we work with a trust, other trusts look in on that process and add to those requirements. But pretty much, we're looking to deploy a core product with the ability to provide on the outer layer a local customization. And so far, so good. That seems to work very well.

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

Okay. Just one other thing. In terms of the commentary about the headcount reduction, is that headcount reduction consistent with the LOI that you have right now? Or is that pre the LOI, I guess?

Guy M. Hains

Well, I think I kind of explained that it was a change that we would have made in the profile about now. I think what you'll see is we'll be actually, probably acquiring some different type of resource in the future when we're in the full flight of deployment. But it's simply to the point that we really work throughout the bulk of the development and particularly a very large workforce that we have on very intensive testing. And that resource is not the resource you want to take forward into the future to do field deployment. So we had anticipated making a change at this time. I think it would have been about that order. There's some pause as we go through these agreements before we go into full-flight deployment. And you'll see other people move into the program, a different profile of people moving into the profile to do that work in the future.

Operator

Our next is Rod Bourgeois with Bernstein.

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

A quick question here just in terms of clarifying what I think you said in your opening remarks. You're taking out about 30% of the costs on your NHS-related work. But it seems like you said that there -- the revenue risk is only small, and I guess that, that was unclear. I mean, if you're taking 30% of the costs out, does the revenue run rate on your NHS work remain relatively unchanged? Or is there actually a meaningful change planned on the revenue side as well? If you can clarify that.

Guy M. Hains

Well, I'm not going to get too far onto that profile. But just to confirm that the revenue stream of our ongoing work in support of the 2,000-odd systems we've deployed, that's clearly a constant. We continue to strive to be more efficient in that area. But that's pretty well a constant from both a cost and a revenue point of view. We're -- the re-profiling of the labor is really a life cycle issue as we come off the development and then we move into deployment. So we've written off the costs effectively and the write-off of the development of Lorenzo. That work is done, and it will be clearly an opportunity now to much closely match cost of revenue going forward in the deployment phase. So it's a very different life cycle.

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

Okay. And as you move into this new life cycle, is there sufficient U.K. budget available for sort of the normal NHS scope that would have originally been planned for this stage of the life cycle, especially given the move of late in the U.K. to cap IT service project sizes?

Guy M. Hains

Yes, I think to a degree, we're experiencing the demand out there. Frankly, the changes in requirements in the NHS to make economies. IT, if there's confidence around the deployment and confidence in the business case, IT is one of the best levers that they can pull, frankly. So that requires us to present and sell, clearly. But we're seeing no shortage of trusts wanting to come forward and reengineer and overhaul their, frankly pretty, in many cases, quite aged IT base. So we see this as one of the best areas that we can help the NHS meet their budgetary targets.

Operator

The next question comes from Bryan Keane with Deutsche Bank.

Ashish Sabadra - Deutsche Bank AG, Research Division

This is Ashish Sabadra on behalf of Bryan Keane. A quick question regarding the LOI. Is there any provisions for expanding their current maintenance contract? And also, in terms of signing up new trusts, are there any headways [ph] in signing up new trusts as part of the LOI? Or will that be a separate process after the LOI is signed?

Guy M. Hains

Look, I'm not in a position to be able to discuss the mechanisms in the LOI. We have previously said that there is a provision in there to move beyond the early adopters to a next wave of initial trusts that will take this up into full production supported by government, by the authority. And we've stated that. But beyond that, I think we need to get through to the legally binding agreement before we can discuss that further. But needless to say, there are mechanisms that we will have between us to support and take the product forward. But I can't discuss that further.

Bryan Brady

Yes. That's fair. Okay?

Ashish Sabadra - Deutsche Bank AG, Research Division

Just a follow-up question maybe, if we can, about how do you plan to leverage the Lorenzo or any health care product in the U.S.? You referenced that earlier in the call, but I was just wondering if you could give some more color about leveraging that product or the iSOFT acquisitions for expanding your presence in the U.S. health care market.

Guy M. Hains

Yes, just to say we're looking at some opportunities there, there's a number of products that we think have -- a couple of them have pretty immediate relevance to U.S. market and particularly around accountable care requirements. We are undertaking work to look at how we would apply them to the U.S. and we'll update you on that. And certainly, in terms of its technology base and the ability to scale what we've seen and we're capable in Lorenzo, that will be in our forward plans to review. So we'll update you on that, but it's an active part of our plan to take iSOFT software and capabilities to the U.S. market. iSOFT themselves have looked at that but frankly didn't have either the financial strength or the market access to do it. That is something clearly we can, and that's under active planning.

Operator

The next one comes from Tien-Tsin Huang with JPMorgan.

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

Just 2 quick questions. First, just I'm curious. Once you start resuming services again, how long do you think you'll -- it'll take to get into full deployment mode? And then secondly, I wanted to ask just from a competitive landscape. How does Lorenzo compare to some of the other products that are out there? Obviously, a lot of people are asking about cross-selling, et cetera, but I'm curious how it stands versus some of the other competition in the eyes of the trusts and beyond, if you follow my question.

Guy M. Hains

Yes, absolutely. Look, we -- I think the point I'll make is that to put in care management, which is the core enterprise system to run a major hospital from the pressing the button to say "We're going to go and make the decision." It's a 9- to 12-month program to take the system and put it into the hospital and turn off the existing legacy infrastructure. It's complex. Lorenzo is the SAP of health care, if you like, so there's change processes. Certainly, there's usually very complex interface and all of that requires a huge amount of planning. And you're doing that clearly in a clinical -- clinically sensitive and requirements of high clinical safety. So there's a huge amount of planning that goes into that. So from ramp-up or day go 1, you're looking at taking on and switching on the first systems some 9 to 12 months later. We're ready to do that. So we don't have ramp-up time from the point at which we sign the agreement. We have plans in place to take on the first trusts. And indeed, we, with the authority, talk to those trusts and have built up their plans so that they're ready to go. I think in terms of Lorenzo, a few things. Firstly, we built it with the NHS for the NHS. So clearly, it's a very good fit. It has patients at the center, which is very much the theme of modern health care generally, but particularly the NHS strategy. So it's what's termed to be a very patient-centric system. It's on new architecture, new technology, which puts it a generation ahead of many of the systems that are out there. And most importantly, it links patient administration in a very integrated way with the way that doctors work. So historically, systems there had a big gap between the systems doctors want to use on wards and in surgeries with the back office administration system. This is truly integrated and is going to engage doctors in a way that frankly the technology typically hasn't in the past. So I think it's right on the money to help with the NHS cost reduction, and it's extremely competitive in terms of the way -- both the ease of deployment and its flexibility. So I'll stop the sales pitch there, but we do feel very confident of its competitive positioning.

Operator

We do have time remaining for that one more question, and that comes from Jason Kupferberg with Jefferies & Company.

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

Is there an opportunity or I guess I should say a probability that at some point, we could see some of the contract that was written off in the December quarter actually get written back into the P&L? Because obviously, you guys took a real conservative approach in the December quarter and essentially wrote off the whole balance there. So what do you think is the likelihood that perhaps, based on how these negotiations ultimately conclude, that you can actually take a positive impact back into the P&L at some point? Now I obviously wouldn't ask you to quantify that, but just directionally, do you think that, that's a plausible scenario?

Bryan Brady

Jason I'll -- I have to give you a yellow card for that one. And we've -- we said we wouldn't stray into that, and I just don't think it's appropriate for Guy, he's in the middle of discussions over there with the client. But clearly, the potential exists over the long term for us to do something there, but we really can't say anymore than that at this stage. I hope you understand that.

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

I do, I do. Okay, we'll wait for the earnings call.

Bryan Brady

Well, ladies and gentlemen, I think I -- that concludes the call for today. Guy, thank you very much for joining us from 3,000 miles away over there. It's very late in the U.K. now, so we appreciate your time and joining us and putting some color on this for the -- for our guests today. That's the update today, and we'll obviously be coming back to you to talk to more detail about the financial position later. So for the moment, that's all we wanted to do, is give you some color. So thank you for joining us. We appreciate it. And we'll talk to you again. Bye-bye now.

Operator

And that does conclude today's conference. Thank you for your participation today.

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