Computer Sciences Corp F1Q09 (Qtr End 7/4/08) Earnings Call Transcript

Aug. 5.08 | About: Computer Sciences (CSC)

Computer Sciences Corp (NYSE:CSC)

F1Q09 (Qtr End 7/4/08) Earnings Call

August 05 2008 5:00 ET

Executives

Bill Lackey - Director of IR

Mike Laphen - Chairman, President and CEO

Don DeBuck - VP, CFO and Controller

Analysts

Bryan Keane - Credit Suisse

George Price - Stifel Nicolaus

Adam Frisch - UBS

Rod Bourgeois - Bernstein

Eric Boyer - Wachovia

David Cohen - JPMorgan

Vincent Lansing - Goldman Sachs

Operator

Welcome to the CSC 2009 first quarter earnings conference call. Today's call is being recorded, and for opening remarks and introduction, I would like to turn the call over to Mr. Bill Lackey, Director of Investor Relations. Please go ahead, sir.

Bill Lackey

Thank you very much, operator, and good afternoon everyone. Welcome to CSC's first quarter of fiscal year 2009 earnings conference call. I know you have had a chance to review our financial results issued earlier this afternoon. Mike Laphen, Chairman and Chief Executive Officer will begin with some opening remarks, and Don DeBuck, interim CFO will review the quarter's financials.

As usual, this call is being webcast live at csc.com and we also welcome those joining us via that process. Additionally, we have provided a slide presentation on our website, which we will refer to during this discussion. Before we begin, please understand as shown on slide number 2, some of the matters discussed on this constitute forward-looking statements within the meaning of the Private Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties and the actual results of the company of the company may differ materially from results expressed or implied by the forward-looking statements. A more complete expression of these risks and uncertainties is contained in the section titled “Risk Factors” of CSC’s Form 10-K for the period ending March 28, 2008.

Also on today’s call, we will reference certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures are provided in the tables attached to the earnings press release and will be posted on the investor relations section of CSCs website.

The non-GAAP financial measures referred to during 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, if you would please turn to slide number 4, I am happy to turn the call over to Mike Laphen.

Mike Laphen

Thank you Bill, and good afternoon everyone. I am pleased to again have the opportunity to speak with you about CSCs current business position, as well as our strong first quarter financial results. Highlights for the quarter include revenue of $4.4 billion, up nearly 16%, with gains in all three of our lines of business and across all geographies.

Our overall results include solid financial performance, as well as record new business profits. Much easier to be done, but we are pleased with the performance, particularly given how well it is balanced between each of our alliance of business, verticals and geographies.

Our earnings per share of $0.79 is at the high end of our guidance, which no special items during the quarter. Free cash flow performance was on target with an approximate $300 million improvement in Q1 year-over-year.

We have record signings for the quarter, a total of $5.4 billion comprised of $1.2 billion in our Business Solutions & Services business, our fastest growing business, $2.9 billion within Global Outsourcing and $1.2 billion in our North American Public Sector.

Going forward the pipeline for our lines of business are robust. The opportunity set for NPS over the next 20 months is $43 billion with about $20 billion scheduled for award during the balance of this fiscal year.

Of these opportunities is some meaningful number coming from the six high growth segments we have identified within the public sector market. The new business pipeline for Global Outsourcing is approximately $9 billion of qualified opportunities including about $6 billion within the midsize market.

Overall we are not experiencing significant impacts on our short-term projects in the current economic environment. We are however, somewhat cautious and are keeping a watchful eye on discretionary spending.

With the benefits of our diversified portfolio and the solid beginning for the fiscal year, we are on target to achieve, and we are reaffirming our fiscal 2009 guidance.

Turning to slide number 5. Business Solutions and Services, our fastest growing line of business is a key component of our multi-year growth strategy. BS&S includes our commercial consulting and systems integration activities, intellectual property-based solutions, business process outsourcing, as well as other information technology related services.

As you can see, and as we have previously indicated, we continue to diversify our revenue mix with BS&S contributing the strongest growth and becoming a larger percentage of CSC's total revenue.

Within Global Outsourcing, we are experiencing a growing opportunity pipeline, traction resulting from our premiere partner alliance, new scope and broadened services with existing clients, and a growing proportion of midsize deals relative to total awards.

Within NPS, where we support the US government's most critical programs, we have continued to experience a good degree of success in addressing new opportunities. A meaningful number of potential awards will be derived from the six high growth market segments we have previously identified, expanding our already diversified revenue stream.

One of the benefits of having a large presence in the US Federal Government IT Services market is the relative insulation in this business, as from the general economic cycle.

Turning to our vertical industries; Slide number 6. Within our Financial Services vertical, we have seen a lengthening of the decision making cycles for some types of discretionary spending. However, the impact has been modest to date and those propositions, which provide cost benefit, remain attractive to our clients.

Revenue growth by our industry verticals, further demonstrates our diversification and an ability to draw on our deep industry expertise to provide meaningful business solutions declines.

Five of our six markets delivered double-digit revenue growth, and Healthcare an important vertical for our future was up 40%. We expect to see growing revenue from new Healthcare Solutions in claims management and revenue cycle BPO, building on a successful model we have developed for our financial services BPO's offerings.

Let me now give you an update on NHS. Significant progress is being made with the final testing of the LORENZO Release and our three early adopter sites. They had the software for seven months and are all now in the later stages of the testing cycles. We are working closely with the trust to prepare for deployment and to ensure that we need all of the necessary quality criterias prior to giving live in a clinical working environment. Going live will happen as soon as all parties are satisfied on quality and that there is no risk to patient safety.

In addition NHS has appointed CSC as the supplier of clinical information systems and services under the NHS connecting per house, four-year framework contracts, for additional supply capability and capacity, ASCC. Under this appointment, CSC will help supplement the delivery of existing clinical information IT systems and enable the faster and easier procurement of new systems and services as business requirements emerge.

We believe this award is continued testament of the confidence on NHS's and our capabilities to deliver on this large complex program

Also in the program we are continuing to successfully deploy systems at scale in GP surgeries and mental help ambulance and community service.

Slide number 7 illustrates the global diversity and balanced composition of CSC's employee population across all geographies. About 30% of our population conducts our US federal business and approximately 70% of our population supports our global commercial businesses. And it is evenly distributed across the Americas, EMEA and Asia-Pac.

All our commercial geographies delivered double-digit growth this quarter both as recorded and in constant currency. About 25% of our employee population Asia-Pacific is an increasing important component of our business both because of its world sourcing centers and its growing revenue contributions, representing some 10% of CSCs first quarter result.

Importantly in Asia, we acquired the minority interest of Computer Systems Advisors, Berhad in Malaysia providing added leverage of business opportunities for us in that market. That is consistent with our previous communications to you regarding increasing our presence in emerging markets.

Slide number 8 takes a look at our strong new business bookings and orders for the first quarter. This is the first time we have reported awards for all three lines of business and look forward to continuing to do so in the future.

The totals for last years quarter have been adjusted to provide a more meaningful comparison and to account for our new practice of reporting ID/IQ task order awards, rather than the estimated value of the ID/IQ contract itself. Additionally, last year includes a BSS total, which had not been previously announced.

Of the $2.9 billion in global outsourcing booking $1.8 billion arises from new logo or new scope businesses with the remaining $1.1 billion representing renewals. Tom will elaborate further on this during his comments.

So to recap for the quarter we delivered strong topline growth, solid profitability with operating income on plan and improved free cash flow with Q1, also on target. Bookings were strong and position us for continued improved revenue performance going forward.

Importantly, we have executed to our strategic plan of diversifying our portfolio mix with solid progress and performance from our vertical markets, three lines of business and contributions from all of our geographic regions.

I will now turn the call over to Don for further details on the quarter's financials.

Don DeBuck

Thank you, Mike and thanks everyone for joining us today for our fiscal 2009, first quarter conference cal and I have to ask you all to turn to slide 11.

Financial highlights for the quarter include, revenue growth of 15.6% as reported, above our previous guidance, and 12% in constant currency. Operating income of $282 million. Earnings per share of $0.79, up 30% compared to the same period last year on an as-reported basis. And a free cash outflow of $329 million, an improvement of $332 million compared to last year.

We did not record any special charges during the first quarter of fiscal 2009. So my comments today will be focused on as-reported figures.

For reference, we reported $49 million in special charges during the first quarter last year or $0.19 per share. These charges included approximately $27 million related to restructuring, and $22 million related to the retirement of the Company's former Chairman and CEO.

With that, let us move on to the next slide and focus first on revenues. Our revenue split about 60/40, US versus international. Given our expanded international presence, we got the benefit of some favorable tailwinds on our revenue performance of about 3.6 percentage points.

We experienced growth across each geographic region and line of business. Revenue in the Americas was up about 14%, with EMEA up nearly 17%, and Asia and Australia, both up over 20%.

Let us move to the next slide and discuss revenue as it relates to our three lines of business. Our North American Public Sector, or NPS, generated revenues of $1.5 billion, resulting in growth of 5% compared to the same period last year. The increment was primarily driven by growth on existing program for our defense related customers.

Revenues from civil agencies declined as increased tasking, and the timing of certain milestones were offset by the conclusion of certain programs.

The global outsourcing services or GOS, revenues grew 12% as reported, to $1.8 billion. In constant currency revenues increased 8%. This was also driven by new outsourcing deals and growth on existing engagements, partially offset by the completion of some of the contracts.

In Business Solutions and Services or BS&S revenues increased 39% as reported to $1.2 billion. In constant currency revenues advanced to 31% compared to last year. We experienced growth across all areas of the BS&S, as a result of the acquisition of Covansys, which is now anniversaried and First Consulting Group, new business in EMEA, higher billing rates in our American's operations and an increase on a number of contracts across various geographies. The profile reflects progress in achieving a better balance across our three lines of business.

As you a see on this slide NPS, GOS and BS&S accounted for 33%, 40%, 27% of our consolidated revenues in the first quarter of fiscal 2009 and you can see the mixed changes quarter-on-quarter. We expect to see continued improvements as we move forward.

I would also like to point out at fiscal 2009 will consist of 53 weeks as opposed to 52 weeks, but the extra week falling into our fiscal first quarter.

Now, I will turn to operating income on the next slide. As I noted at year end that you can see from our 10-K as well as our investor day briefing, we have moved a measured of profit to operating income from earnings before interest and taxes.

The primary difference between the two measures is that OI excludes corporate G&A, which historically has amounted to less than 1% of total revenue. It also excludes the other income expense category, which is primarily foreign exchange related and gains/losses on non-operating assets.

Operating income for the quarter was $282 million, resulting in an operating income margin of 6.4% or a decline of 24 basis points compared to the same period last year. The margin decrease was primarily due to higher than anticipated startup cost on one of the new programs in GOS and our receivable dispute with the GOS client for which we provided an allowance. The start up cost issue is expected to be back on track by Q3. So it will have an impact to Q2.

Our GOS line of business normally experiences increased margin, as we go through the fiscal year. Certain fixed cost items large enterprise software costs are somewhat fixed, independent of volume. So as revenue grows during the year we pick up additional margin as that fixed cost is a smaller percentage on the growing revenue.

In addition work force atomization actions usually take place in the first half of the fiscal year to yield a benefit by the end of the year.

I should also note as we completed our formal restructuring program, cost of severance for reduction-in-force will now affect operating income compared to the restructuring special item of the previous two years.

We did have some of that in GOS in Q1, although not a very material impact. The BS&S margins are up, particularly in Europe, aided by the restructuring program, higher margins in our Financial Services vertical and the acquisition of Covansys, now called CSC India.

Now, through to the next slide a look at our bookings. Before talking about the specifics, I would like to remind you that we have a new methodology in how we track our bookings. For starters we will now report bookings across each of our three lines of business.

Additionally, NPS bookings now exclude any estimates of ID/IQ vehicles and consist of firm contracts and task orders received. And we have adjusted fiscal 2008 figures here to conform to this new methodology.

With that as background, total bookings for the first quarter were $5.4 billion, nearly double compared to last year. NPS bookings of approximately $1.2 billion were essentially twice as high as last year, as a result of new business wins, expansion of services on existing contracts and the removal of ID/IQ vehicle awards from the previous 2008 figures.

Our NPS pipeline remains strong with approximately $43 billion in opportunities expected to be awarded over the next 20 months.

GOS bookings of $2.9 billion also more than doubled, primarily due to new logo wins in the Americas region, as well as contract extensions and increased scope of existing customer in EMEA and Australia.

BS&S bookings were $1.2 billion resulting in year-over-year growth of about 20%. The growth was primarily driven by the acquisitions of Covansys and First Consulting Group.

The next two slides reconcile the amount of awards previously announced for our Federal and commercial sectors.

And looking at slide 16, as you can see in this slide, we have removed the estimated value of ID/IQ vehicles from our prior announcements for fiscal 2008. To give you the basis for an apples-to-apples comparison for fiscal 2009, we have also added back any task orders from those awards that we have received.

So in total, fiscal 2008 federal awards were $9.3 billion, compared to the previous methodology figure of $11.2 billion.

We move to the next slide. This slide gives the new methodology data for fiscal 2008's commercial awards, showing a break up for GOS and BS&S, so that you can track our progress across fiscal 2009 relative to last year. As you can see BS&S awards were not announced in the prior year. We believe that our new method of reporting bookings gives you more complete picture of our business and our revenue.

Now let us move on and discuss some specific income statement item.

As already noted total revenue increased approximately 15.6%, operating cost increased at slightly higher rate and were 93.6% of revenues compared to 93.4% in the same period last year. The components that make up the 93.6% of operating cost during the quarter were, cost of services accounted for 81.2% of the 93.6% and was up above point 4% from the GOS selected contract performance matters I noted earlier.

Business unit SG&A, which excludes corporate G&A was 5.3% of the 93.6% and was flat year-on-year. And depreciation and amortization made up the remaining 7.1% and approved about 0.2%.

We recorded an expense of $13 million related to foreign exchange cost, including hedging cost during the quarter versus the gain of $18 million in the same period last year.

I will provide some additional comments on this line-item in a few minutes. As I mentioned at beginning of my comments we did not record any special charges this quarter compared with a charge of $49 million last year.

Our effective tax rate for the first quarter was just over 30%. The tax rate was lower than the overall guidance for the year, due to our filing of some accounting method changes in the first quarter and the beneficial impact on tax interests of the settlement of certain federal audit period, as well as the conclusion of a state audit. These items will not benefit all quarters and our guidance for the full year tax rate is still in the upper 30% range.

And finally, EPS was $0.79 this quarter compared to $0.61 as reported a year ago with this quarter including the adverse effect of the $13 million other expense or about $0.06 per share.

Now let us move to the balance sheet. We ended the first quarter with approximately $600 million in cash and cash equivalents compared to $700 million at year end. The decrease in the cash balance is primarily due to the seasonal patterns of our business with the first quarter typically being a use of cash.

Our receivables balance remained relatively flat of prepaid and other current assets, which includes work-in-process, increased to approximately $189 million. The single largest increase is the work-in-process on NHS, as we continue to develop a solution. We expect this balance to grow due to the ramp up in the development and various releases of the solution.

Total interest bearing debt increased a little more than $300 million compared to the end of last year resulting in a 1.5% increase in our debt to total cap ratio, as a result of higher commercial paper balance to fund operations. The first quarter being a use of cash as noted earlier, we expect this ratio to decline by the end of the year as we plan to use our cash flow to pay down this balance.

Now let us discuss some of the major components of our cash flow. As I mentioned in the beginning of my comments, free cash flow improved to $332 million compared to the same period last year, which you can see at the bottom of the right column and the table with the right column showing the favorable or unfavorable variance compared to last years first quarter.

The majority of the change was due to a decrease in the receivables, compared to a significant increase to the prior year. Improvement in receivables was aided by positive changes on the NHS account, including the mix of revenue on this account, which now involves more services, which are paid directly rather than by offsets to advance contract payments, leading to a quicker clearance of receivables. Q1 performance is on track for our fiscal 2009 free cash flow guidance.

Moving to the next slide, you will see the profile of our DSO and free cash flow on a quarterly basis. First on DSO; Looking at the chart on the left I am happy to report that our DSO is down seven days versus the first quarter of fiscal 2008.

Improvement is due to strong growth in revenue and the actual decline in receivable balance compared to the previous year's first quarter. We had anticipated much of this in our fiscal year plan, and we continue to focus on our DSO and work for continued improvements throughout the year.

The chart on the right, shows our cash flow on a quarterly basis, reflecting our usual seasonal pattern of Q1 being a consumer of cash, building to a strong Q4 performance.

Seasonally, the first quarter has cash outflows for items like bonuses, payments for subcontractor accruals on their fourth quarter efforts, as the fourth quarter has the largest number of billable days. Also the first quarter traditionally includes items, such as prepaid maintenance and software, which applies to the fiscal year.

Now, let us turn to slide 22, on return on investment. Our ROI on a trailing 12-month basis was 9.1% compared to 9.7% in the same period last year. Primary reason for the decline of approximately 60 basis points was the added capital from the Covansys acquisition, which is now reflected in the investment base for a full 12 months, as well as a slight decline in our PBIAT margin, that is Profit Before Interest and After Tax.

As you know, our multi-year strategy is to get to 10%, and we promise you the transparency to evaluate our progress on achieving our goal.

Before concluding my remarks on the quarter, let me give you some additional comments on the other income line. As discussed in our restatement, we determined that certain inner-company transactions have been incorrectly recorded as long-term investments, and the foreign currency effects should have been recorded in the P&L. As a result, a new line item was created to capture such gains and losses from all foreign exchange activity, as well as non-operating asset disposals.

In the first quarter of fiscal 2008, this resulted in a gain of $18 million. Given the unpredictable nature of exchange rate movements, we began implementing selected hedges, since the latter part of last year, to help minimize the volatility of these currency movements on our P&L and we continue to expand that program.

Un-hedged foreign currency movements were about $5 million of this quarter's loss. The balance of the expense is hedging cost, including points on forward contracts and a new option program for the Indian rupee.

We implemented a purchase currency option hedging program to protect our economic exposure to the Indian rupee. The current hedges cover rupee exposure through the end of this fiscal year and almost all of the hedge expense is hitting the first quarter. In effect this is an insurance premium to protect us during the rest of this year in the event the rupee strengthens.

Our hedges do not qualify for hedge accounting treatment and therefore mark-to-market every quarter, with adjustments flowing to the other income line. Given the expanded hedged in the company positions and the bulk of the rupee option cost hitting this quarter, we would expect future amounts to be less in subsequent quarters.

As you can see from the chart, last year Q1 had a benefit of $18 million pretax versus this year's first quarter unfavorable impact of %13 million pr-tax, a $31 million adverse swing or about $0.13 of EPS for the year-over-year comparison.

Turning to slide 24, our guidance for the full year remained unchanged with revenue in a range of $17 billion to $18 billion, and earnings per share of $4.20 to $4.40. For the second quarter of fiscal 2009 we are projecting revenue to be in the $4.25 billion to $4.35 billion range with a growth 6% to 8% with earnings per share of $0.70 to $0.80.

That guidance will make the first six months $1.49 to $1.59 for a mid 30% of our total year guidance, which is inline with historic comparisons. Future guidance is adversely affected by an effective tax projection just not the 40%.

The interest component of our tax rate for outstanding tax matters is relatively fixed through the year. There is a higher percentage of pretax income in the earlier quarters. You do not see that easily in Q1, as Q1 benefited from account method changes filed with US tax authorities and resolutions of certain state matters and to a lesser extent some federal matters, which we did anticipate as part of our total year guidance.

Furthermore in taxes we are in active, constructive negotiations with federal tax authorities on resolving some of our larger Fin 48 reserve tax positions. But I am unable to predict that outcome. So, Q2 has a significant headwind from the projected Q2 effective tax rate, as well as the GOS contract startup item I noted earlier, which is projected to be resolved by Q3.

Our first quarter performance combined with our Q2 guidance puts us on plan for a fiscal year budget for the first half of the year and we are affirming our full year guidance.

In closing, we achieved a more balanced revenue mix in our three lines of business, which is one of the priorities we talked about at the Investor Conference in June. In addition total revenues grew at a double-digit rate on both the as-reported and constant currency basis.

We are off to a good start in fiscal 2009 from a free cash flow perspective with an improvement of $332 million, compared to the first quarter of last year. And we are on target to our plan. And finally we reaffirm our fiscal year guidance for revenue, EPS and free cash flow.

And now I will turn the call back over to Bill.

Bill Lackey

Thank you and operator we are ready for calls now, questions. I would like to again request that the questions be limited to no more than one part, with one short follow up. So that we can ensure that we get to all those people who are waiting to ask questions.

So operator we are ready for the first question now.

Question-and-Answer Session

Operator

(Operator Instructions)

Bill Lackey

Hi, operator, ready for the first question?

Operator

And we will go first to Bryan Keane with Credit Suisse.

Bryan Keane - Credit Suisse

Hi, good afternoon. Don, operating margins were down a little bit year-over-year, do you still expect operating margins to be up, I think 25 to 50 basis points for the full year?

Don DeBuck

We do. Absolutely.

Bryan Keane - Credit Suisse

And how will you make that up, because it sounds like the startup costs in 2Q are going to drag that down and if I look at 2Q margin, it almost could be again below 2Q of the past year?

Don DeBuck

Bryan, I tried to give some profile on that. As I said in our Global Outsourcing business, we have – that has traditionally had improving margins as you come through the fiscal year and a key element of that is, major items like these major enterprise software agreements we have, that are in essence are fixed costs for the year and so as a percentage of revenue with an increasing revenue throughout the year, they are a smaller component of that cost. And therefore that is one of the elements that helped come through with improved margins.

And then we are just continually on working cost actions constantly, as you know that business tends to have a year-on-year price improvements, been into it. So it is always a matter of continuing to look for productivity improvement measures, whether they be labor or other related.

Bryan Keane - Credit Suisse

Okay. And then just finally, what is the risk of revenue EPS and free cash flow if delays continue with the implementation of Lorenzo. We are hearing that the Care Records Service product is having some issues?

Don DeBuck

The revenue recognition on NHS is its quite complex and it is more of a function of hospitals and trusts that accept the product. Though to the certain extent if there is slipped in that that may have an effect. Mike?

Mike Laphen

I would just add Don that, there is a lot of different working parts here on NHS Bryan. We have go continued work on the legacy products that we were working on and there is also a lot of other service activities going on. So, our expectation at this point is that the go-live or occur by the end of this month. Obviously we cannot guarantee that but that is what everybody's anticipation is at this point of time. So, if that does in fact happen as we expect to hope it will then, we think we are still on good shape with our revenue projections.

Don DeBuck

And based on all of the factors we know, we are very comfortable with our cash flow projections on that program as well.

Bryan Keane - Credit Suisse

Okay so the Care Records Service issue with Lorenzo does not sound like you overly worried about that going forward?

Mike Laphen

Well a bit based on the scale, but I am always worried about that. I do not want to that, but it has my utmost attention. But, we have been in testing for two months with the earlier adopters and we are ringing up the system and now through the final stages of testing, but we were pretty hopeful and expect that we get through that this month.

Bryan Keane - Credit Suisse

Okay thanks a lot.

Bill Lackey

Next question please operator.

Operator

Our next question come from George Price with Stifel Nicolaus.

George Price- Stifel Nicolaus

Hi thanks very much. First on the -- I wanted to just circle back on the something you mentioned about demand, the tone on the discretionary services, consulting services. It seemed a little qualified when you mentioned that you are starting to see some impact on the discretionary spending in financial services, can you give us a little more detail there may be when you started to see that impact what type of client, generally we are talking about, what type of specific work, is it project based, consulting, does it add on to outsourcing deals. Any color there would be great.

Mike Laphen

Yeah well its project based and it is consulting. I would say both in our some of our offshore work with CSC India, as well as some of our consulting business. And I would say, it really has just started the service in the last month or so or six week, something like that. And its not a stopping of projects, just its more of a delay and as I said at this point its been modest and you might hear some mixed signals here, but we are just, I think like everybody else in the industry, we are just being cautious about what we are projecting on a go-forward basis here, but so far so good.

George Price- Stifel Nicolaus

Any other signals or any other verticals there is been some turmoil on the healthcare side particularly on the payer side or may be in terms of retail, any signs there that might be a little worrisome.

Mike Laphen

No our healthcare business has been doing quiet well and continues to project a good pipeline and a good forward revenue forecast. Retail we do not have great exposure to. So, we probably see last end of that and may be some other providers.

George Price- Stifel Nicolaus

Okay. Last question just on the tax rate. Don, tax rate was considerably lower I think than expected going into the quarter, did you with tax rate, I think you said that that tax rate was known when you gave the guidance. I just wanted to confirm that. And if there has been any change to the -- you were saying the upper 30% range. But if there is effectively any change, versus what you expected last quarter for the full year tax rate, is it moving down as a result of the magnitude of lower tax rate in the quarter?

Don DeBuck

No. Certain of these matters like these accounting method changes are in essence can be effective at a point that you file for them. And so there are so many things that we certainly knew heading into the fiscal year when we were giving the guidance.

There is other matters that we expect to resolve with some of the local, like for example some of the state authority issues cannot necessarily predict which quarter this may happen until, but we sort of took that into account into the full year rate.

So that rate is going to move around as we settle out from these positions. As you know, one of the issues we have with our restatement was the number of open tax years that we have had and we are working hard to resolve many of those matters.

So we are on track with our total year rate for that, and again Q1 gets the benefit of some of these resolutions and Q2 is going to be a high, obviously in comparison to the Q1, but we are still tracking to the total year guidance number.

George Price- Stifel Nicolaus

But, just to be clear, coming into the quarter, how did the tax rate perform versus your expected, what you gave in the guidance for EPS.

Don DeBuck

We probably got a little bit of benefit out of that just in terms of the timing.

George Price- Stifel Nicolaus

Can you quantify that?

Don DeBuck

No. I would say we just got some benefit out of it. But I cannot give you the time. I cannot give you the magnitude.

George Price- Stifel Nicolaus

Okay, all right. Thank you.

Bill Lackey

Next question please, operator.

Operator

And we will go next to Adam Frisch with UBS

Adam Frisch – UBS

Thanks. Good afternoon. First of all nice job on the presentation. The incremental data is very helpful. If we can just look at bookings, trends in a different light for a second in terms of what you are expecting in the next quarter or two. Obviously this was a big quarter, did get some push from last quarter or pull from the next few quarters are you expecting continued momentum in the next or in the near term?

Mike Laphen

Well we had some slip from the fourth quarter into the first quarter this year. So obviously that was little bit uptick. I do not want to get into predicting the bookings quarter-by-quarter, because we just get in these situation where some of these things are slipping right. And I would say Q2 is difficult to predict because we have a number of things happenings in September, which could fall into Q2 or Q3.

I would say for the full fiscal what we are targeting is $17 billion to $19 billion in overall bookings. So that I think that could help you give a little bit of flavor of what we are anticipating.

Adam Frisch - UBS

17 to 19, okay. And the first time you are guiding for 2Q EPS but it is a little bit below the Street. Your full year is obviously unchanged aside from the precedent of prior year seasonality and patterns. Why do we feel comfortable with the back half ramp, especially given some of the uncertainty in discretionary spending and continued resolution of the government side and things like that?

Don DeBuck

Well I think the continued resolution on the government side, traditionally when we have been through this tends to -- you get some issues with there is some pent-up issues that ends up, for our experience tends to always get caught up. There are some issues at times with ODCs that get towards year end that you wouldn't necessarily have when you get some of those things, that those are often don’t bring them an awful lot of margin with them.

And I think with respect to the comments on the discretionary spend, Mike commented that in the last four to six weeks we have seen some of those things and some things may have shifted to the right. But the amount of some that discretionary spend as a percentages of our total revenue versus what we see today, we do not see that impacting our guidance. We remain committed and reaffirm the guidance with the year.

Mike Laphen

The only other thing I would add[Adam, is that the revenue growth quarter over quarter, is a pretty consistent number. S its not like we have a big hockey stick in the revenue side on the ongoing quarters and we are about where would expect to be at this point in time for the first quarter and first half. As you well know, we always have a more productive, from a profitability standpoint second half over first half and all the signals at this point is that we are on target for that.

Adam Frisch – UBS

Okay great. If I could just sneak in, two house keeping questions, one what was your organic growth in the quarter and two are you planning on updating the revenue and operating income? Do you have a new format, for each quarter that comes out, or you are going to plan for all every quarter in '08, so we can update our models little bit more easily?

Mike Laphen

We will do that as we come through the quarters.

Adam Frisch – UBS

Okay. And then your organic growth rate?

Don DeBuck

The organic growth rate, if we take out the effect of the currency of our 15.6%, we would say that the currency impact was the 3.6%. The acquired growth is about 5.5%. So the net organic would then be about 6.5%.

Adam Frisch – UBS

Great, thanks so much

Bill Lackey

Okay, next question please operator?

Operator

We will go next to Rod Bourgeois with Bernstein.

Rod Bourgeois - Sanford Bernstein

Hi guys, I am just trying to understand the big picture on how things are progressing for the year. With the margins down year-over-year and you cited a contract startup issue. I am trying to reconcile that with the argument that you are on track for the year. I guess I just have not heard the offsetting positive that is offsetting the contract startup issue to allow you to be on track for the year. Or maybe you were already expecting the contract startup issue. So if you can clarify how we are on track for the year, but yet you had some issues with margins and contract startup things year-over-year, as the year has started. Can you clarify what is happening on that front?

Mike Laphen

Yeah. Well the contract startup, number one is not a particularly large number. We are reporting it out and we have already put the corrective actions and replacing the number one to correct the problem associated with the startup, but that has been not as we expected. We would be through that shortly. But we have also taken into consideration cost reductions and expense reductions that will be taken to offset that. So, that we still have the numbers that we are planning to hit.

Don DeBuck

Rod, I would also point out that given the greater granularity we are now giving you in our presentation, the magnitude of certain numbers that before were not be material as to comment on, we are now having to point out to you some of those items.

Rod Bourgeois - Sanford Bernstein

Yeah. It is a good point. Can you – so how big was the contract startup issue and can you define what a contract startup issue is or did you just.

Don DeBuck

Well, we are not getting into the specifics of the magnitude of it. But Rod as I think you well know we have a profile and this was disclosed in our basis for accounting, that we have certain items that we will defer to the balance sheet to the extent that they are protected by contractual coverage items.

But if we overrun and there is no contractual coverage then we are going to expense that and you have got that kind of situation kind of going on here.

Mike Laphen

So in this particular case Rod it was a startup and it is a transition from us taking over the activities from the client and that transition is taking a bit longer than we had anticipated with this.. From our perspective it is not a big deal to have from time to time on a startup, but it impacted the numbers this period.

Rod Bourgeois - Sanford Bernstein

Got it. And you are offsetting that with what you said taking down cost and expenses on that particular contract?

Mike Laphen

Well on that contract there well as other…

Rod Bourgeois - Sanford Bernstein

Okay.

Mike Laphen

Other production cost.

Rod Bourgeois - Sanford Bernstein

Okay and then a couple of things on the cash flow on the cash flow trajectory front. Do you have back-end loaded milestones on the NHS contract? I am assuming you do but probably not to the same extent as you had in past years. And I wanted to test the accuracy of that as something…?

Mike Laphen

I think that is not the fair statement the way you have said it. I mean there is lots of those issues on NHS as the milestones comes through that and the pattern of that is such that the fourth quarter has some of those. That is just the way the program is [calendared] for that. But I agree with your comments that is not the magnitude of initiative we had whatever was a year or two years ago.

Rod Bourgeois - Sanford Bernstein

In other words you could argue that the next couple of months with the testing process underway right now, maybe more critical in terms of milestones what you are going to be facing in the month of March, in this fiscal year?

Don DeBuck

Its very important for us to get this offer up then loaded as Mike has said we are not going do it unless there is, we are through the clinical safety issues. We are very highly energized to have success on this program and get that going.

Rod Bourgeois - Sanford Bernstein

I got it and then what you are targeting in terms of DSO reductions through the you are targeting a reduction, but I was wondering if you could just mention how big that reduction target is?

Don DeBuck

Rod I think we talked in terms of the Investor Day about sort of four to five days.

Rod Bourgeois - Sanford Bernstein

Okay.

Don DeBuck

For that.

Rod Bourgeois - Sanford Bernstein

Okay and that is already in your guidance for the cash flow for the year.

Don DeBuck

Okay great. Thanks guys.

Bill Lackey

Next question please operator.

Operator

And our next question comes from Eric Boyer with Wachovia.

Eric Boyer - Wachovia Securities

Thanks. Could you just comment on whether or not you are seeing any signs of softness within Europe?

Mike Laphen

Europe has actually been pretty good for us, we have had good utilization in our Business Solutions and Services sector line of business and the Outsourcing has been quiet active in Europe as well. So Europe has been pretty good for us.

Eric Boyer - Wachovia Securities

How about as far as application development outsourcing?

Mike Laphen

That is active, there is a considerable amount of offshore activity going on that. So from that perspective we utilize both CSC India when that is appropriate, as well as GOS when it is applicable.

Eric Boyer - Wachovia Securities

How about then, do you have any update on how the NHS is going to handle the South region with Logisys [discussion]?

Mike Laphen

No, we would have to parse them, as I said my expectation has been that they will parse that out, not necessarily parse force out but make both ourselves and BT available to as alternatives to the southern region. But again I think you are better off raising that question with the NHS at this point of time until we have more visibility.

Eric Boyer - Wachovia Securities

Okay and just following the federal business bit again. Are you planning for slowdown I guess in that business line just due to the upcoming elections and the change in the administration that is going to happen here in your fiscal year.

Mike Laphen

I think we are still from the rolling forecast, we are getting we are still expecting 6% to 8% growth in that area. So that is what in there right now and those guys have their ears pretty close to the ground. So, and I think so far we are going to stick with that.

Eric Boyer - Wachovia Securities

All right. Thanks a lot.

Bill Lackey

Next question please, operator.

Operator

Our next question comes from Tien-Tsin Huang at JPMorgan.

David Cohen - JPMorgan

Hi, this is David Cohen for Tien-Tsin. Would you talk a little bit about the M&A pipeline? Any thoughts you have around future acquisitions?

Mike Laphen

We have said that acquisitions will be part of our growth strategy. We are not going to talk about any specific ones. What we have said publicly is that we would be -- our priorities would be industry specific plays, particularly those with intellectual property that we could exploit and turn into a business solutions or BPO plays in specific industries.

So, we are always out there looking and seeing what is available and then the other would be some possible geographic expansion.

David Cohen - JPMorgan

And on the geographic expansion, can you talk about the geographies that are important? Is it just India, or it is more than India?

Mike Laphen

Well, no, it is more than India. We just said that we bought the minority interest of a Malaysian subsidiary. So we just completed that piece. Eastern Europe continues to be a target for opportunity for us there and Latin America will probably also be a target.

David Cohen - JPMorgan

And are you where you want to be in terms of your India based workforce?

Mike Laphen

Well, but always wanted to be bigger, but we do not see the need to make an acquisition there.

David Cohen - JPMorgan

Great. And then just quickly in the competitive landscape as you have gone after the mid-size deals, has there been any shift in the competitive landscape for Outsourcing, given the slightly different market that you are pursuing?

Mike Laphen

From our standpoint it has been a significant shift, as I spoke previously we have shifted our sales and marketing approach to accommodate the needs of that specific market and we have adjusted our solutions segment into a more standardized set, that is economical and feasible for that market. So from that standpoint we have made a lot of changes.

From the competitive standpoint we have seen more players there then we would in the mega deals, but we seem to be wining our fair share at this point in time, so.

David Cohen - JPMorgan

Okay thank you.

Bill Lackey

The next question please operator.

Operator

Our next question comes from Julio Quinteros with Goldman Sachs.

Vincent Lansing - Goldman Sachs

Hi this is actually [Vincent Lansing] for Julio. I am just going back to the 6% to 8% revenue growth expected for this year I know that. I think you mentioned that you are still expecting 6% to 8% that’s were 40 federal business how about the, in terms of growth expectations for the other two segments. How should we think about the composition between the Business Solution segment and the Global Outsourcing segment?

Don DeBuck

Well we expect the Outsourcing business to grow in the 5% to 6% range and we expect the Business solutions to grow in the mid teens.

Vincent Lansing - Goldman Sachs

Not yet and then just secondly could you provide a little bit more color and may be discuss a little bit more about the progress that you are making in the small-medium size market?

Don DeBuck

The midsize market?

Vincent Lansing - Goldman Sachs

Yeah.

Don DeBuck

With respect to the Outsourcing business?

Vincent Lansing - Goldman Sachs

Right.

Don DeBuck

Yeah I think that is a -- I will let Mike take that. I think that is going quite well for us with respective to the pipeline that we are seeing on that, as well as our ability to on that.

Vincent Lansing - Goldman Sachs

May be just in terms of percentage of your overall pipeline and then maybe on revenue.

Don DeBuck

I think I mentioned that overall Outsourcing pipeline was $9 billion and that the midsize was $6 billion of that $9 billion.

Vincent Lansing - Goldman Sachs

That is $6 million of $9 million. Okay that is helpful. Thanks a lot.

Bill Lackey

Operator we have time for one more question please.

Operator

And we will take our final question from George Price of Stifel Nicolaus.

George Price - Stifel Nicolaus

Thanks for letting me ask one more and first of all just wanted to clarify one thing Don on the 25 to 50 bips of improvement in the operating margin, just to clarify is that operating margin, a operating profit by your definition as a percent of revenue or bottom line EBIT.

Don DeBuck

No it is consistent with the operating income discussion as we outlined at the Investor Day. So it is the operating income.

George Price - Stifel Nicolaus

Excluding corporate overheads?

Don DeBuck

Which excludes corporate G&A.

George Price - Stifel Nicolaus

Okay, by virtue of the corporate G&A increase this quarter in terms of year-over-year and I guess what should we expect for that. In terms of how should we expect that to move as a percent of revenue?

Don DeBuck

This quarter its increased a little bit before our stock option expenses, the so called FAS-123R expense, for the corporate piece for that there are certain requirements of certain options that are granted and if you are at retirement eligible, you have to expense a lot of that right away. You can sometimes get some of those phenomena effects in there. As well as we have indicated we are making investments in global sales and marketing in our branding campaign and those are higher in the first quarter as well.

And also we have the relocation of the corporate headquarters. And so if we are to the extent we have severance related packages we have to accrue those during the performance period, as well we have the relocation efforts and we have the knowledge transfer where we may in fact have people doubled up as they execute the knowledge transfer. So the corporate relocation is adding some corporate G&A type cost as well.

George Price - Stifel Nicolaus

Lastly, can you give us an update on maybe on the Chrysler deal, given the turmoil that we are seeing in the automotive world, particularly with Chrysler?

Mike Laphen

No, it is not appropriate for me to speak to any specific transaction and I am booked to the contract specifically for this, but I am sure I am barred from talking about it without their consent, so.

George Price - Stifel Nicolaus

Is that the contract that we are talking about in terms of startup costs and transition being extended and that sort of thing?

Mike Laphen

No, it is not.

George Price - Stifel Nicolaus

Okay. Thank you.

Mike Laphen

Okay. Well, let me thank everyone for participating. I hope our presentation was more enlightening and illuminating to you, and hopefully you have again a better understanding of CSC and our business, with our opportunity ahead of us. So, thank you for participating and we look forward to talking to you next quarter.

Operator

And again, that does conclude today's conference. We appreciate your participation and you may now disconnect.

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