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Executives

Bill Lackey- Director of Investor Relations

Michael Laphen- Chmn. And CEO

Donald DeBuck- CFO

Analysts

Adam Frisch- UBS

Bryan Keane- Credit Suisse

Julio Quinteros- Goldman Sachs

George Price- Stifel Nicolaus

Eric Boyer- Wachovia

Tien-Tsin Huang- JP Morgan

Computer Sciences Corp. (CSC) F4Q08 Earnings Call May 21, 2008 5:00 PM ET

Operator

Good afternoon everyone and welcome to the CSC fiscal year 2008 fourth quarter conference. Today’s call is being recorded, and for opening remarks and introductions I would like to turn the program over to Mr. Bill Lackey, director of Investor Relations. Please go ahead sir.

Bill Lachey

Thank you operator, and good afternoon everyone. Welcome to CSCs fourth quarter fiscal year 2008 earnings conference call. I trust you have had an opportunity to review our financial results issued earlier this afternoon. Mike Laphen, Chairman and CEO will begin with some opening remarks, and Don DeBuck, CFO will review the quarters’ financials.

As usual, this call is being webcast live at CSC.com and we also welcome those joining us via that process. Any information we cover that does not directly and exclusively relate to historical facts constitute forward-looking statements under Federal Securities’ laws. For a written description of the factors that could cause actual results to vary from these statements, please refer to the section titled Risk Factors. CSC’s Form 10-K for the year ended March 30, 2007.

On today’s call, we will reference certain non-GAAP financial measures. Reconciliation of these non-GAAP measures are provided in the tables attached to the earnings press release and will be posted on the investor relations portion of CSCs website. The non-GAAP financial measures referred to in this conference call are not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Finally, we assume no obligation to update the information presented on this conference call. And now please to turn the call over to Mike Laphen.

Michael Laphen

Thank you Bill, and good afternoon everyone. I am pleased to again have the opportunity to again discuss CSCs current business position, as well as our fiscal 08’ results. As many of you know, last year was challenging with respect to our reporting, and of course that impacted your analysis during the year. I am delighted these issues are behind us, affording better clarity with improved transparency going forward.

Throughout fiscal year 08’, we have focused on both the implementation of our strategic plan and the delivery of improved operational and financial results. Several of the years’ accomplishments are of particular note.

First, we have now completed the integration of Covansys and CSE. The result is CSC India. The go-to market that enables CSC to compete directly for India pure-play business. And a totally integrated operation in India of some 15,000 professionals who support all of CSCs business as part of our world sourcing strategy. With CSC India, CSC offers its clients a compelling value proposition of local presence, global delivery, and the best of India.

Several vary recent new logo wins demonstrate that CSC is now able to compete successfully within the India pure-play market. Provided CSC with a new high-growth market as well as increased operating leverage.

Second, we acquired and are not integrating First Consulting Group Health Services sector. CSCs health services sectors fiscal year 08’ revenues were $1 billion which nicely complements our $400 million + health services business within our North American public sector.

CSC offers a broad portfolio of IP based solutions and service offerings to an impressive array of clients across the public and private health services spectrum. On our UK NHS contract, we made strong progress last quarter with deployments in both primary and secondary care. I am particularly pleased to note that Lorenzo Release 1 was made available for the client integration environment on schedule, and we are now actively working toward going live with three major hospital who are the early adopters for the software.

Third, we successfully completed our $1.7 billion private placement debt refinancing in a challenging credit environment.

Fourth, we completed our stock buyback program, bringing the two year total to $2 billion or 40.7 million shares.

Lastly, we completed our restructuring program in Fiscal year 2008. Accordingly, I am very pleased to announce that we anticipate reporting no further restructuring related special items in fiscal year 2009. We of course will continue to focus on cost reductions and operational efficiencies.

The costs associated with the previously announced relocation of our corporate headquarters will be included within the fiscal year 2009 guidance that I will provide in a few minutes, and not as a special charge.

For Fiscal 08’, we achieved solid revenue growth and delivered earnings and free cash flow at the upper end of our guidance ranges. More specifically, Fiscal 2008 revenues grew $1.6 billion, 11%. Global commercial revenues were $10.7 billion, up 14% with positive growth in all geographies.

North American public sector revenue was $5.78 billion, up 6%. Our earnings-per-share for the year, before special items, were at $3.84 a growth of 4.6% year-over-year despite the negative impacts previously recorded.

Importantly we honored our free cash flow guidance commitment. We delivered free cash flow performance of 88% of net income over the two year period Fiscal 07’ and Fiscal 08’ exclusive of restructuring costs, which compares favorably with our guidance range of 80-90%.

Major announcement reports for the fourth quarter were $2.5 billion, bringing the full year total to $13.3 billion. Of that total, $11.2 billion was derived from CSCs MPS, a record annual reward total for that line of business, setting up solid opportunity for future revenue growth.

The 22 month pipeline for MPS currently stands at over$50 billion, spread across a broad list of agencies and departments of the United States federal government. The award date for a number of important commercial pursuits slipped from the fourth quarter of fiscal 08’ to the first quarter of fiscal 09’. As a result, I am pleased to note that commercial bookings for the first quarter of fiscal year 09’ are off to a solid beginning, with a to-date total of $1.6 billion. The company is pursuing numerous other commercial opportunities and anticipates further awards in the first quarter and an improved commercial award profile over the year just ended. To help drive achievement of improved longer term operational and financial performance, we continue to strengthen our position in six selected industry markets, including the health services vertical we mentioned earlier, and our three lines of business.

CSCs three lines of business include: business solutions and services; North American public sector; and global outsourcing. With fiscal 08’ revenues of $4.0 billion, $5.8 billion, and $6.7 billion respectively. With revenues of $4.0 billion our business solutions and services line of business now comprises 24% of CSCs total revenue, and includes our vertical industry software and VPO solutions and services, and our CSC India business as well as our class’s systems integrations and consulting business. Its markets provide the high revenue growth rates and higher operating margin opportunities required to realize our longer term objectives.

The dynamics of the markets for these three lines of business are quite different, and are often counter-cyclical. Consequently, we believe a balanced portfolio of business solutions services, North American public sector, and global outsourcing business provides CSC considerable mitigation of geographic and economic risk while providing the market opportunities for CSC to achieve our longer term objectives of 10% or greater revenue growth rate, operating margin, and ROIC.

As we begin fiscal year 2009 with the issues of restructuring and restatements behind us, we look forward to improving operating metrics. Our expectations for fiscal 2009 excluding any new acquisitions, is revenue growth in the 6-8% range, and earnings-per-share in the $4.20 to $4.40 range, an increase of 9-15% year-over-year.

We expect to deliver fiscal year free cash flow consistent with our standing guidance of 80-90% net income over a two year period. To improve transparency, we will provide greater insight into revenue and margin performances of our businesses. During our investor conference on June 5th, we will provide greater detail on our guidance and more transparency into our business unit performances.

Additionally, we look to significantly enhance reporting of both North American public sector and commercial bookings to capture more of the business solutions and services type business, and move to an approached focus more on announcing past quarter value for U.S. federal awards rather than estimated value of IDIQ contracts.

With continued execution of our strategic plan, we expect to reach our multi-year financial and operational goals. I look forward to keeping you apprised of our progress, and to the opportunity to provide further insight into our plans and ambitions at our Investors Conference on June 5th.

Now I will turn the call over to Don for further details on our financial results.

Donald DeBuck

Thank you Mike, and thanks everyone for joining us today for our year end fiscal 2008 conference call. Financial highlights include double digit revenue growth reported for both the fourth quarter and full year; earnings-per-share before special items of $1.44 for the quarter, above our prior guidance, and $3.84 for the full year, at the high end of our previously announced range; and an adjusted free cash flow of $306 million for the full year, in line with our prior guidance.

Before moving on, I would like to remind everyone that unless indicated otherwise, all data and comparisons will be on a re-stated basis and will exclude the impact of special items. Special items totaling $155.8 million for the full year consisted of: a restructuring charge of $133.4 million, with the remaining $22.4 million charge in our first quarter related to the retirement of the companies former chairman and CEO.

So, let’s start with our focus first on revenues. Fourth quarter revenues were $4.5 billion, representing 11% growth as reported, and 7% growth in constant currency. Full year revenues were $16.5 billion, also representing 11% growth as reported, and 7.5% growth in constant currency.

Our North American public sector, or NPS, generating $1.5 billion of fourth quarter revenue, resulting in growth of 1%. This slower growth was due to the conclusion of several contracts of defense related customers, and some programs that were and others that slipped to the right.

For the full year, NPS revenues of $5.8 billion grew 6% over last year. Results for the full year were driven by new business awarded during fiscal 2008 and 2007; increases on existing Department of Defense contracts; and new contracts as a major provider of relief aid.

The Data Track acquisition, which closed late in the third quarter fiscal year 2007, contributed approximately $100 million of acquired revenue for fiscal 2008.

Global commercial revenues grew 16% during the quarter, to $3 billion. In constant currency, revenues increased 10% for global commercial. For the full year, global commercial revenues increased 14% to $10.7 billion as reported and 8% in constant currency. [inaudible] and FTG added over $400 million.

Let’s now walk through each of the individual pieces of our Global Commercial Operations.

U.S. commercial revenues grew 19% in the fourth quarter, and 9% for the full year. The main drivers of growth included the acquisitions of as well as higher bill rates in our U.S. consulting and systems integrations business, partially offset by the conclusion of certain contracts and normal scheduled rate reductions on certain engagements.

Reported revenues in Europe increased 12% during the quarter, and 16% for the full year. In constant currency, revenues grew 4% and 8% during the quarter and full year respectively. Results were driven by new contract wins for the U.K. public sector, and major commercial customers both in our European consulting business and increased project work with existing outsourcing customers.

Asia revenues grew 20% and 17% for the quarter and full year respectively, and constant currency fourth quarter revenues increased 11%, while full year revenues advanced 10% due to additional work from major outsourcing customers.

Australian revenues increased 22% during both the quarter and the full year. In constant currency, revenues increased 6% for the quarter and 8% for the year. The growth includes a notable string of successes last year, and a number of repeat contracts, as well as continued expansion in our IT recruitment business.

Turning to awards, we announced $13.3 billion in award for fiscal 2008, and in doing so we maintained momentum in our federal sector with another record year. 2008 public sector signings were $11.2 billion, and our pipeline continues to be strong with more than $50 billion in opportunities scheduled for award in the next 22 months.

Our announced commercial rewards were down compared to previous years, but our first quarter is off to a good start as Mike just mentioned, with $1.6 billion already signed. Now to narrow down the income statement.

Cost of services as a percentage of revenue for the year was 79.9%, an increase of 20 basis points compared to last year, primarily due to the adjustments to the IRS contracts we noted earlier this year.

[inaudible] general administrative expenses were 5.9% of revenues in 2008, an improvement of 30 basis points over the prior year. The improvement was driven by the effective restructuring activities in Europe, as well as a mixed effect with and reduction in current year proposal expenses yielding a more favorable expense ratio.

Depreciation and amortization expense was 7.3% of revenues for the year and was essentially unchanged from the prior year. Our effective tax rate for the quarter was 39%, compared to 29% for the fourth quarter of last year. The rate difference is primarily attributable to fiscal 2007s higher income tax credits and other changes in tax contingencies. For the full year the tax rate was 39% compared to 29% last year, with the difference being primarily attributable to the companies change in accounting policies that classify interest and penalties, and uncertain tax positions to the income tax provision in connection with the 1048 adoption, as we noted earlier, and secondly, the higher fiscal 2007 income tax credit.

Summarizing the income statement, diluted earnings per share before special items were for the fourth quarter and full year were $1.44 and $3.84 respectively. And as I mentioned on our third quarter call, the sum of the individual quarters are greater than $3.84 due to the timing effect of quarterly profits and significant changes in share base across quarters.

Now we are ready to update on three issues: restructuring, share repurchases, and a change in our segments that note income presentation. First, restructuring. Restructuring charges for the year of $133.4 million were mostly workforce reduction costs. We concluded our two year restructuring program and will not have restructuring related special charges in fiscal 2009. Total restructuring of the two year period resulted in a reduction of approximately 3500 employees, net of new hires and lower cost location. We completed this program on time and within the parameters previously outlined.

Second, our share repurchase program. Our board authorized a share repurchase program in June of 2006. We completed the first phase, a $1 billion share repurchase in July 2007. In August of 2007 we began the second phase under a defined 10B51 program with daily open market purchases against a pricing grid. In March of 2008 we completed the 10B51 program. The second phase resulted in the repurchase of 21.7 million shares for $1 billion. So across the two year program we repurchased 40.17 shares with no further repurchases planned.

Third, you will see in the segments of the 10k that we have moved the measure of profit or loss to operating income from earnings before interest and taxes. The primary difference between the two measures is that LOI excludes corporate general administrative expense, which has historically amounted to less than 1% of total revenue. One of the benefits of the change is that it aligns us on a comparable basis with the multi-year accelerated strategy metric, namely our goal of 10% operating income margin. Now let’s move to the balance sheet.

We ended the fourth quarter with approximately $700 million of cash and cash equivalents, up $110 million from the prior quarter, but down $351 million from the prior year. The higher cash balance over the quarter was primarily attributable to higher advanced contract payments as a result of the planned milestone payments in the quarter from the NHS contract. The decrease over the year was primarily attributable to the combination of the share buy back and 2007 NHS cash advances and milestone payments.

On a quarterly basis, DSO was 90 days, an improvement of 10 days compared to last quarter, and an improvement of 4 days compared to the same period last year, due to cash collection efforts in our North America commercial operation and our public sector.

Our debt to total capital ratio at the end of the quarter stood at approximately 39% an increase of 3% compared to the prior quarter, primarily attributable to the issuance of $260 million of commercial paper to complete the share repurchase. Over the year, the debt to capital ratio is up 17 percentage points, primarily attributable to the $1.7 billion of commercial paper that was issued during fiscal year 2008 to fund the acquisition of Covansys’s corporation and First Consulting Group. This commercial paper was replaced by five year and ten year term debt. We plan to use our cash flow to reduce this debt over time.

Moving on to the status of the companies sixteen requests for equitable adjustments, and subsequent conversion into interest-bearing claims, the status of that remains essentially unchanged, as expected from our last call. As previously reported, the government denied both sets of claims. The companies disagreed, and initiated litigation at the Armed Services board of contract appeals on the first set of claims during November of 2007 and on the second set of claims during February of 2008. The discovery phase of litigation for both sets of claims is expected to begin in the first half of fiscal 2007, and could last one to two years. We continue to vigorously pursue both sets of claims.

Now, moving to cash flow. Given the nature of our services and large contract business, our cash flow historically reflects significant inter-quarter volatility within each fiscal year. For example, we have mentioned in prior calls that a significant amount of cash from the NHS contract was received at the end of fiscal 2007, lowering fiscal 2008s expected cash inflow. With that said, fourth quarter cash flow was a $549 million cash in-flow as described in the press release. Including $42 million in after-tax restructuring cash payments yielding $592 million free cash in-flow by the measurement we talked about previously. For the year $175 million free cash in-flow was disclosed in the press release, with approximately $130 million after-tax restructuring cash payments yields $306 million excluding restructuring charges.

The net cash provided by operations of $844 million in the fourth quarter is $197 million lower than the same period last year. As expected, the main driver was the prior year fourth quarter advance payments on the NHS contract. For the year, the net cash provided by operations of $1.34 billion is $236 million lower than the same period last year for similar reasons. The net cash out-flow for investing activities in the fourth quarter was higher this year due to the acquisition of First Consulting Group. For the year, it was higher due to both Covansys’s and First Consulting Group acquisitions. Our results were inline with our previous guidance ratio of free cash flow to net income over a two year period would be in the range of 80-90%. Our ratio for the combination of fiscal 2007 and 2008 was 88%, as Mike noted.

Before concluding my remarks, let me provide you with some additional guidance from first quarter and full-year of fiscal year 2009. We expect first quarter revenues in the range of $4.25-$4.4 billion, for a growth of just under 11% to almost 15%. We expect full-year revenues in the range of $17-$18 billion, for growth of 6-8% over the current year. For the full year, EPS is projected to be at the $4.20-$4.40 range. Although we are projecting strong EPS guidance for the year, for the first quarter we expect earnings-per-share to be in the $.70-$/80 range. That is a potential decrease, despite the expected growth in operating income due to some comparative headwinds in non-operating items.

Last years first quarter had $18 million of foreign exchange gains and other income from inter-company notes which are now hedged. Interest expense will be up in the first quarter due to the share buyback program and having replaced commercial paper with term debt at rates higher than commercial paper rates. Finally, the projected tax rate is several points higher, primarily due to a reduction in discreet items. These factors are projected to outweigh the lower share base impact. By the way, from an operating perspective, our Q1 expectations also incorporate approximately $8 million of higher amortization expense for purchasing tangible assets, reflecting the impact of fiscal 2008s acquisitions. The full year increase is approximately $11 million.

On a go-forward basis, we have completed our restructuring plan and do not foresee any more restructuring expenses. On the third quarter call I mentioned that the relocation of the corporate headquarters may be treated as a special item in fiscal 2009. Upon review we have decided to not treat it as such. Rather, the relocation costs will be absorbed into the corporate G&A line for a cleaner presentation. With respect to other guidance items, our projections for expense ratios for the full year are as follows: cost of services we would project to be 75-80% of revenues; SG&A in the 6-7% range; depreciation amortization 7-8%; and a tax rate in the upper 30% range.

Going forward, we expect free cash flow for fiscal 2009 to be within our range of 80-90% net income; however, I would remind you that cash flow can be lumpy given timing of milestone payments on significant contracts such as NHS and that is why we talk about the two year window.

So in closing, key take- aways from this years results include: first, we delivered double digit revenue growth with solid contributions from each geographic region balanced across our portfolio of business solutions and services, the North American public sector, and Global outsourcing services; second, we delivered earnings-per-share at the high end of our previously issued guidance and finally, free cash flow was in line with our guidance. Summary: we are well positioned to deliver strong financial results, increasing revenue and operating income and earnings-per-share in fiscal 2009. With that, I will turn the call back over to Bill.

Michael Laphen

Operator, before beginning questions, let me again, as Mike referenced in his remarks, say we are holding an institutional investor conference in New York on June 5th, and those people needing assistance with registration just please call my office and we will help you. Ok, Operator, now we are ready for the first question.

Question-and-Answer Session

Operator

Operator Instructions

Our first question is from Adam Frisch of UBS. Please go ahead.

Adam Frisch UBS

I wanted to ask you about NHS a little bit. If you can give an update on the program; and the reason we heard that the government initiated a new rule, not making it mandatory for all providers to participate in the program. I wanted you to comment on that, and if that has hurt your revenues at all?

Michael Laphen

The update on the program as I reflected earlier, we made very good progress on our deliveries during the past quarter. We brought the release one of Lorenzo software off to our integration environment for preparation of the live fielding. We are anticipating that live fielding to go forward in the month of June. So we are both pleased and excited about that. We had a few integration issues that we worked through, but we are pretty comfortable that we are through those now.

I think you are talking about the new framework contract relative to NHS, and we are included in that award and all line items of the additional services. As far as we see right now we don’t anticipate any impact.

Adam Frisch- UBS

Did the government change the original construct of the program?

Michael Laphen

No.

Adam Frisch- UBS

Are they still mandating all the providers to be in the program?

Michael Laphen

To the best of my knowledge, Adam.

Adam Frisch- UBS

OK. Two quick housekeeping items. One, how much of the $11.2 billion in government bookings was IDIQ; and what is the outlook for commercial in 09’? I know you said you already had $1.6 billion in the first quarter, but what should we expect in commercial in 09’ because that was pretty weak in 08’?

Michael Laphen

I don’t have the break-out of the IDIQ. If you call Bill Lackey or Don afterward we will get that for you. We’ve got a robust pipeline right now, my best guess for the first quarter is somewhere of a total booking around $4 billion. I think at least half of that would be commercial. And we have good prospects for the second quarter as well.

As I said, the pipeline is robust, but to go out more than two quarters is a bit risky, Adam. We are feeling pretty good about it right now.

Adam Frisch- UBS

If I could just sneak in one more for Don. The 09’ growth rate on the top line, XM & A, what would that be? How much of the acquisitions you made in 08’, what are those acquisitions adding to in 09’?

Donald DeBuck

Probably maybe two percentage points or so.

Adam Frisch- UBS

So the organic rate would be somewhere in the 5-10% range?

Donald DeBuck

Yes, if you do the twelve month anniversary effect.

Operator

The next question will come from Brian Keane with Credit Suisse.

Brian Keane- Credit Suisse

Just following up on that; the federal awards had a pretty good year at $11.2, it is up about 22%. Yet in the fourth quarter here revenue slowed down quite a bit. I am just trying to reconcile the two. Should we see that pick back up, or is it that a lot of these awards haven’t actually taken place yet?

Michael Laphen

We are anticipating it to pick back up in the first quarter to the mid-to-upper single digits. The anomaly in the fourth quarter was actually twofold: One was two significant awards that we were expecting to contribute to the revenue base in the quarter. One was . There was a protest on that. We have a significant revenue contribution on that. That has started now as we go into fiscal year 09’. That was a delay in the start-up. There is another major program that was included there and that has not been awarded yet, and that will be awarded in June. And then we had a couple of programs that came to conclusion that had a negative impact on revenue. From our perspective it was a one quarter anomaly.

Brian Keane- Credit Suisse

On our organic basis, taking that 5-7%, will federal be pretty similar to commercial, or do you expect federal to be a little stronger next year?

Michael Laphen

I think federal will be as it typically is: upper single digits.

Brian Keane- Credit Suisse

Don, just on the operating margin perspective, what should we expect going into fiscal 09’? It is hard to back into the guidance. Just trying to figure out if you are expecting operating margin expansion in 09’?

Donald DeBuck

We are. This will be a little easier I think once you see the 10K which we hope to file by Friday. We will be breaking out that and you will be able to see our operating income profile for that. And then, what we expect to do is at the Investor Conference on June 5th to break that down a little more for you in regard to fiscal 2009.

Michael Laphen

We will be giving you more visibility in the Investors Conference than we have historically given you.

Brian Keane- Credit Suisse

I didn’t catch the difference in your definition, Don, for the 10% operating income goal. Can you give that to me again?

Donald DeBuck

We have historically given an EBIT margin in our segment footnote, but we have talked in terms of the operating income margin, and what I described was the distinction there was in essence the corporate G&A. Which has historically been just under 1% point of revenue. I am not sure if that answers your question, but if not please follow up.

Brian Keane- Credit Suisse

That helps. Finally, a last question on terms of how much acquisition revenue was in the fourth quarter?

Donald DeBuck

Under $200 million. Maybe about $180 million or so.

Operator

Your next question will come from Julio Quinteros with Goldman Sachs. Please go ahead.

Julio Quinteros- Goldman Sachs

First question: could you update where we are in term of the CFO search process?

Michael Laphen

We are interviewing, and I am hopeful that we would bring that to a conclusion by the end of June.

Julio Quinteros- Goldman Sachs

Any big contract renewals that you are expecting in FY09’ that we should be aware of?

Michael Laphen

Not off the top of my head, none that I can think of.

Julio Quinteros- Goldman Sachs

Could you comment at all relative to the $4 billion of bookings that you recorded in this quarter, how much of this was renew- overs .

Michael Laphen

I think most if not all of the $1.6 billion in commercial is new. There is one re-signing; although it is an expansion of scope as well that we are expecting to sign within the first quarter. That would be part of the $4 billion. But as I said, I expect the commercial bookings to exceed 50% of that $4 billion. The commercial bookings will be north of $2 billion.

Julio Quinteros- Goldman Sachs

Finally, for the full year, should we expect the 50% commercial mix to stay true for the rest of the year? I am trying to get a sense of the weighting of the federal versus the commercial bookings.

Michael Laphen

That is really lumpy. One of the things that we haven’t done and that we are going to try and lay out at the Investors Conference is we only report what I call “large bookings” and significant bookings. There are a lot of our commercial bookings that we do not announce and we do not give visibility to. As we change that reporting scheme I think that will be helpful for you to get a better view of our commercial pipeline and our commercial backlog. If you could bear with us until the Investors Conference I think we will be able to help you a bit more then.

Operator

The next question is from Rod Bourgeois with Sanford Bernstein.

Rod Bourgeois- Sanford Bernstein

I am not completely clear on the free cash flow guidance, so let me inquire here. If you are guiding into 80-90% over two years in terms of free cash flow to net income, does this imply that fiscal 09’ free cash flow will actually need to be greater than 90% of net income in order to make up for the weak free cash flow of fiscal 09’? I am trying to understand how you are using this two year period that is involved in your free cash flow guidance.

Donald DeBuck

The two year profile we talked about in looking at 2007and 2008 together because as we commented, at the end of 2007 there was a significant payment that we got from NHS that came in right at the very end that we hadn’t anticipated. That gave us a much stronger 2007 and we knew that it was going to give us a weaker 2008. I am not at all trying to imply that is a constant rolling two year profile. We are not trying to say that 2009 add it to 2008 and look at that as a two year profile. What I am trying to say for 2009 is that 2009 alone in isolation right now looks like it could be in the 80-90% range in isolation, looking at it as a single year. However, again, there is lumpiness associated with that, the program, like NHS has significant milestone payments throughout the year, some included in the fourth quarter that is a function of our ability to deliver things on schedule, on time, etc. And if that were to happen and flip the other way on us and at the end of 2009 something were to spill into fiscal 2010, that is where I would look for the 2009 and 2010 profile to be two year; but I am not trying to give a “it will always be” a rolling two year profile.

Michael Laphen

Our fiscal year 2009 free cash flow budget is in the 80-90% of this years net income.

Rod Bourgeois- Sanford Bernstein

When you say that cash flow could be lumpy for 09’, what you are signaling is that if NHS or some other contract has some lumpiness you may decide to change your fiscal 09’ guidance to look at fiscal 09’ and fiscal 10’?

Donald DeBuck

It will be a function of progress we make on work efforts that have associated milestone payments with those work efforts. If those were to slip 30 days or 45 days, a payment could slip accordingly.

Rod Bourgeois-Sanford Bernstein

But is it NHS that is the biggest wildcard as you see that guidance on fiscal 09’ on the cash flow front?

Donald DeBuck

That is a significant piece of the wildcard.

Rod Bourgeois- Sanford Bernstein

Can you talk about what the milestone is specifically that would create that? Is it related to the software deployment, or can you talk about the specific milestone that we should be watching in that regard?

Donald DeBuck

There are the rollouts and the take-ups of all the trusts, etc. so I think it is a combination.

William Dacklman

It is a combination of the deployments that go on as well as the milestones of the software development as well as the advance payments that we negotiate with the customer. It is a combination of those things, and historically we have managed them to the level that we have spoken to, and would expect to continue to do that. But I think is trying to put out here that there is some potential for some variability. We don’t expect it, but it could happen.

Rod Bourgeois- Sanford Bernstein

On the DSO front, you made some progress in low-ranked DSOs and that was necessary to hit your fiscal 08’ cash flow target. Are you assuming further DSO decline in your fiscal 09’ free cash flow guidance?

Can you give us an idea of what magnitude?

Donald DeBuck

Yes. Single digits.

Rod Bourgeois- Sanford Bernstein

Finally, on your revenue growth guidance, does it assume any foreign exchange benefit?

Donald DeBuck

We look at the currency rate at the time of the fiscal year end lock-in for that and then just proceed on from there.

Rod Bourgeois- Sanford Bernstein

So it assumes the current rates stay intact for the next year?

Donald DeBuck

Right.

Rod Bourgeois- Sanford Bernstein

One final question. How are you responding to the HP- EDS proposed merger? Are you expecting that this might help your sales pipeline given disruption that might occur, or are you looking at this as a neutral event at this point in time?

Michael Laphen

I guess I would say we have been contacted by several EDSs industry partners who have voiced various levels of concern, I might say up to alarm, regarding the expected combination, and of course we are dialoguing with those companies to see what the opportunities might be. You can also suspect that some of EDSs clients will investigate their options in the exchange of control provisions and we certainly consider CSC to one of those available options.

Rod Bourgeois- Sanford Bernstein

It is both partners of EDS hardware and software companies and also customers that you are going to be looking out for?

Michael Laphen

We are doing more than looking out for.

Operator

The next question comes from George Price of Stifel Nicolaus.

George Price- Stifel Nicolaus

I wanted to clarify one thing from the last question. The particular guidance that you are giving for free cash flow, and I don’t want to beat a dead horse, but I want to make sure that I understood this clearly because we are going between one year and two years, you are suggesting best visibility now 80-90% of net income for 09’, is that correct?

Michael Laphen

Correct.

George Price- Stifel Nicolaus

When you talk about lumpiness and potential timing issues and so forth, my perception that the tone was more suggestive of downside to fiscal 09’ if things flip, is that accurate in the sense more likelihood of downside slippage into fiscal 10’, than upside potential for some reason?

Donald DeBuck

I don’t think I am trying to signal one way or the other, just trying to say that there are things that can happen where something could flip from one year to the next the same way it happened in fiscal 2008-08.

Michael Laphen

If you recall, in fiscal 07’ we had a very positive surprise on the last day, and that could happen as well.

George Price- Stifel Nicolaus

I know you are saying no more special items in the P & L. Do we have any lingering restructuring cash outflows that you expect?

Can you give the timing and amounts?

Donald DeBuck

We expect that it is about $30 million more cash in the next fiscal year, but that is baked into the projections we have already given.

George Price- Stifel Nicolaus

So that 80-90% …

Donald DeBuck

It includes the restructuring related cash out-flows.

George Price- Stifel Nicolaus

It includes the negative impact of them?

Donald DeBuck

It includes the negative impact.

George Price- Stifel Nicolaus

Do we know the timing of these out-flows?

Donald DeBuck

There is a lot of it that is related to lease payments, etc. etc. so some of it will just be over the course of the period.

George Price- Stifel Nicolaus

Last question, in terms of everything that is going on in the global demand macroenvironment, can you talk a little more about your pipeline, particularly on the commercial side? Maybe looking at U.S. versus International; conversion rates; how fast are things moving, or sales cycles being impacted? Is it one vertical versus another, a little color along those lines would be great. Thank you.

Michael Laphen

I would say that non-U.S. is hotter than U.S. We are seeing good activity in Europe, we are seeing good activity in Asia. U.S. is growing but not as aggressively as the other areas. As I pointed out in my opening remarks, we have a very diversified portfolio between government business, which is insulated from the general macro-economic issues, and then we have the outsourcing business that is more or less long-term annuities, and then we have the project business. And the project business, or what we call business solutions and services, would be where we would expect to see an impact in a softening of the economy. So far we are doing ok, knock onwood. We haven’t seen the extent of a negative outcome that to some extent I had anticipated. I don’t think this is over yet, either.

George Price- Stifel Nicolaus

Have you had any signs of deterioration, even if demand is still reasonably good, just given what happened at the end of last quarter in the financial side particularly?

Michael Laphen

There has been cautious advancement on the project side, but we are continuing, people are making awards, so I wouldn’t send a signal that anything there is looking abnormally slow.

Operator

The next question is from Eric Boyer with Wachovia.

Eric Boyer- Wachovia

The last couple of quarters you cited higher bill rates in your U.S. SI consulting business. Could you go into more detail about what areas of that business you are seeing

Michael Laphen

Certainly in the SAP area. Globally there is a shortage of SAP resources and we are certainly seeing a pickup there. We have put a real emphasis on industry-specific consulting, and what we are seeing is that we can get a better value, and better return with our industry-specific consulting staff as opposed to what I will call a generic staff. I think our focus at an industry level as well as some of the general market conditions in our areas like SAP I probably highlighted the ones with the most activity and the biggest boost to the ratings.

Eric Boyer- Wachovia

You also mentioned some slip to the right. Can you give us some more details into which areas the Warfighter Focus, is it mostly budget-related, or another issues there?

Michael Laphen

No, as I said, the one program was Warfighter Focus a big training program. The award was protested, it took a number of months to work through that protest process. We were one of the awardees on that, and we continue to be one of the awardees. It is just that the work didn’t start on the time that we or the government customer anticipated. It has now started.

Eric Boyer- Wachovia

And just a clarification question on the equitable adjustment timing: did you say that it could take two years for the discover and the litigation process to be ove?

Donald DeBuck

It could. It is a function of how the judge moves things along and how the parties are pushed or whether it goes to full litigation and full discovery etc.

Michael Laphen

It is still in the early days, and we don’t control this process, so we will keep you apprised of any significant changes along that path, but again it is not incorporated in any of our numbers or any of our forecast. From a cash-flow standpoint it is an upside number.

Eric Boyer- Wachovia

Finally, just how many points of revenue growth does NHS provide to the Europe segment in the quarter?

Michael Laphen

I don’t think we have that data. I am not sure we are allowed to disclose that either; I have to check on the contractual constraints. We are very constrained in regard to NHS in what we can and can’t say.

Operator

Our final question will come from Tien-Tsin Huang with JP Morgan.

Tien-Tsin Huang- JP Morgan

I was curious on the Covansys side, how that has fared in terms of retention both with employees and clients, and maybe if you could describe how the business is performing overall relative to the plan?

Michael Laphen

The retention has been excellent. I am not aware of any senior level executive that has left us. The retention in India has improved, both at the Legacy CSC and at the Covansys so we are very pleased with that. And the integration with overall CSC is proceeding very well. We are very pleased with it, we are leveraging it in a significant way with our existing legacy CSC clients, so we are effectively to their base and our base. In a very effective manner.

Tien-Tsin Huang- JP Morgan

It sounds like the consulting in the NSI side of the house is faring pretty well. I am just curious, any change in terms of the pricing utilization that you can share with us?

Michael Laphen

As you said, the rates have up-ticked, and that is a bit of mix and a bit of supply, I don’t know if I have the utilization numbers.

Tien-Tsin Huang- JP Morgan

If not I can follow up off line.

Michael Laphen

We moved some of the organizational structure around, so to get apples to apples on utilization we have to do a little bit of work, but we will get that for you.

Tien-Tsin Huang JP Morgan

If I could sneak in one more. I know that you struck a nice software deal with Mastercard on the payment side with NBPO. Any other deals like that that are out there? I know there is a lot going on in the payment side related to step-up in Europe. How does the pipeline look there?

Michael Laphen

We are really optimistic about the whole industry specific BPO play. Financial services for sure, but also on the healthcare side. That is one of our specific focuses of project or strategic plan. We think there is real opportunity there, as I have said for a number of years We are not really interested in what I call the horizontal BPO play. I think that is commoditized and we think that there is good growth and good profitability in the industry-specific BPO.

Tien-Tsin Huang- JP Morgan

We will look for more detail on the analysts day.

Operator

That will conclude our question-and-answer session. I would like to turn the call back over to our speakers for any additional or closing comments.

Michael Laphen

Thank you so much for joining us today, and for bearing with us the past year. I know it has been difficult to sort through our reporting when we got our reporting out. We are working diligently to insure that you have better insight and better visibility, and as you heard on the call today we have made the decision in a number of cases to where we could have gone the other way to keep the P&L quite clean relative to special charges and that is our goal forward. We look forward to seeing you in a couple of weeks in the Investors Conference. Thanks for joining us.

Operator

Thank you everyone for your participation. You may disconnect at this time.

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Source: Computer Sciences Corporation F4Q08 (Qtr. End 3/28/08) Earnings Call Transcript
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