DXC Technology Company (DXC) — Q2 2015 Earnings Call Transcript

Great. Thank you, Jason, and good afternoon, everyone. I'm pleased you've joined us for CSC's Second Quarter 2015 Earnings Call and Webcast. Our speakers on the call today will be Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. As usual, the call is being webcast at csc.com/investorrelations, and we've posted some slides on our website, which will accompany our discussion today. On Slide 2, you'll see that certain comments we make on the call will be forward-looking. These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our Form 10-K, Form 10-Q and other SEC filings. Slide 3 informs our participants that CSC's presentation includes certain non-GAAP financial measures, which we believe will provide useful information to our investors. In accordance with SEC rules, we've provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release as well as in our supplemental slides. Both documents are available on the Investor Relations section of our website. Finally, I'd like to remind our listeners that CSC assumes no obligation to update the information presented on the call except, of course, as required by law. And now I'd like to introduce CSC's CEO, Mike Lawrie.

Thank you for joining us today. I appreciate your interest in CSC. I'll share several key messages, and then I'll provide more detail before handing it over to Paul, who will delve deeper into the numbers and then we'll take your questions. First, our second quarter EPS from continuing operations was $1.18, attributed to our ongoing cost reduction efforts and a lower tax rate. We experienced slight margin improvements in our Global Infrastructure Services sequentially and notable advancements in our Global Business Services and North American public sector, compared to both year-over-year and sequential results. Secondly, we're encouraged by the strong performance from our next-generation offerings and partnerships, as well as some positive developments in our consulting business. However, like others in our field, the infrastructure outsourcing sector is facing pressures from contract renegotiations, price reductions, and contract completions. Our third takeaway is that our NPS business is outperforming our expectations, and we anticipate this trend will persist. Revenue increased sequentially, margins were robust thanks to our cost initiatives, and our book-to-bill ratio showed significant improvement despite ongoing budget uncertainties. Looking ahead to fiscal 2015, we now predict NPS revenue to be flat to slightly down, and commercial revenue to also remain flat to slightly down. We're raising our EPS guidance for the year to a range of $4.45 to $4.65 and continue to target free cash flow around $700 million. Lastly, we remain focused on returning capital to our shareholders, having returned $385 million through share repurchases and dividends this quarter. Now, let me dive deeper into each key message. Our second quarter EPS from continuing operations of $1.18 reflects a 17% year-over-year increase, driven by ongoing cost reduction efforts and a lower tax rate. Our operating margin stood at 11.3%, up 190 basis points sequentially and unchanged year-over-year. The commercial operating margin increased to 9.7%, a 160 basis points improvement sequentially. The Global Business Services operating margin was 13%, which improved by 310 basis points sequentially and 130 basis points annually. This increase is due to several factors, such as our cost reduction efforts, the shift of labor to lower-cost locations, and enhanced profitability in consulting, which helped mitigate some of the ongoing investments in the GBS business. In the Global Infrastructure sector, the operating margin was 6.6% for the quarter, up 30 basis points sequentially, driven by our cost reduction initiatives, which offset the impact of investments in next-generation offerings like cloud services and Storage-as-a-Service, as well as the decline in revenue from contract restructurings and completions. It's important to note that these investments reduced GIS operating margin by over 200 basis points this quarter. Over the long term, we aim to improve GIS margins by increasing our use of lower-cost labor, consolidating data centers, investing in automation, and pursuing other efficiencies that we believe will enhance client satisfaction. The NPS operating margin was 15.4%, an increase of 60 basis points sequentially, reflecting our cost reduction efforts and robust contract performance. We generated $31 million in free cash flow in the second quarter, which was lower year-over-year due to an additional payroll cycle in the U.S. Now onto the second key message: we remain optimistic about the strong performance of our next-generation offerings and partnerships. Our overall commercial revenue was $2 billion, a 4% decrease year-over-year on a GAAP basis, while GBS revenue stood at $1 billion, down 2% compared to last year. Revenue declines in consulting moderated to 3% compared to last year, indicating progress in our repositioning efforts, which is particularly encouraging given recent quarters, though we still have substantial work ahead. Our software and solutions business maintained growth, with revenue increasing by 2% year-over-year, similar to previous quarters, boosted by strength in the banking and healthcare sectors. We achieved another significant win with the Sheffield Teaching Hospitals Trust, the U.K.'s largest teaching hospital, adding to our successes in North Bristol last quarter, bringing our total number of trust wins to 14. Applications revenue decreased by 3% year-over-year, primarily due to contract completions, but was partially balanced by new business and growth in applications modernization. Our GIS business revenue was $1 billion, a 7% decrease year-over-year, reflecting price impacts from price reductions and contract restructuring. Additionally, we're seeing a decline in large deals, and we are maintaining a disciplined approach to pricing for the ones we do pursue. Nevertheless, we're experiencing strong momentum and growth in our next-generation GIS offerings, with cloud revenue increasing by 96% year-over-year and cyber by 8%. We expect continued growth in these offerings throughout the second half of the year. Although they are not yet sufficient to offset challenges in our core GIS business this year, we view significant growth opportunities ahead. We are positioning CSC to capitalize on changes in the industry landscape by investing in next-generation offerings like cloud services, big data, and virtual desktops, along with optimizing our partnerships with HCL, AT&T, and others. Positive momentum from these investments is reflected in our GBS business, where our application modernization offering is gaining traction. We signed an application modernization deal with a major Australian bank, leveraging our banking center of excellence. Additionally, we're in the final stages of contract negotiations for a multiyear deal related to application modernization valued at over $60 million. In the big data sector, we've secured a deal with a prominent insurance company to support a new auto insurance program through our big data as a service offering. In GIS, new opportunities for cross-selling are emerging as evidenced by our MyWorkStyle win with a large insurance company, where we've transitioned nearly 30,000 users and gained additional business from the same client for end-user services. Our expertise in virtualized desktop solutions is generating substantial interest from clients and prospects. Furthermore, industry experts are recognizing our portfolio's transition, with Gartner naming us an industry leader in its Magic Quadrants for end-user outsourcing services and data center sourcing outsourcing both in North America and Europe. Regarding contract awards, our commercial bookings totaled $1.8 billion, resulting in a book-to-bill ratio of 0.9, slightly down from 1.0 last year. We observed several sizable deals delayed into the third quarter, but since our quarter closed, we've signed many of these, amounting to a total TCV of around $300 million. GBS bookings reached $1.2 billion with a book-to-bill ratio of 1.2, consistent with last year. GIS bookings of $0.6 billion were lower year-over-year, with a book-to-bill ratio of 0.6 due to the previously mentioned delayed deals. Our next-generation offerings in commercial cloud and big data showcased healthy bookings, with cloud achieving a book-to-bill ratio of 1.2 and big data reaching 1.5. We also onboarded over 100 new logos this quarter. While many of these are smaller deals, they present an opportunity for CSC to expand and sell our full suite of offerings. For instance, a major global energy company recently expanded their partnership with us after a small consulting deal, indicating progress in our strategy. Lastly, we're optimistic about the growth in our commercial qualified pipeline, which is up 17% year-over-year, and with our partnership with AT&T, our qualified pipeline stands at over $3 billion, up from $2 billion last quarter. We have also been shortlisted for several critical new opportunities with AT&T, while other partners like HCL, IBM, and Microsoft are increasingly contributing to our commercial pipeline. Turning to our NPS business, it is performing better than anticipated. NPS revenue for the second quarter was $1 billion, down 1% year-over-year but up 2.3% sequentially. The NPS operating margin of 15.4% reflects ongoing cost reduction efforts and strong contract performance, and we now expect it to moderate into the low double-digit range in the second half of this fiscal year. NPS bookings were $1.1 billion, resulting in a book-to-bill ratio of 1.1, a notable improvement from 0.3 last quarter and consistent with last year's performance after adjusting for a large renewal. At the end of the government fiscal year, we experienced an uptick in activity, though not the typical budget influx we've seen in previous years. These results highlight our success in securing smaller awards in NPS, but delays in decision-making persist. The number of submitted proposals awaiting awards has increased by $1.9 billion year-over-year and $700 million sequentially, totaling $4.2 billion, which gives us cautious optimism for moderate demand improvement in the latter half of the year. The NPS pipeline is up 91% year-over-year and 26% sequentially, which includes a $2.1 billion pipeline for next-generation services, an increase from $1.2 billion last quarter. Even when excluding the substantial Department of Defense Health Care Management System Modernization opportunity, the NPS pipeline remains up 75% year-over-year. We continue our preparations in case the spending climate does not enhance in the second half of the year. As we look to the remainder of fiscal 2015, we expect NPS revenue to be flat to slightly down, with commercial revenue also expected to remain flat to slightly down. We're raising our EPS range to $4.45 to $4.65, up from $4.35 to $4.55, and we continue to target free cash flow around $700 million. We also expect ongoing cost reductions in the second half of the year through increased utilization of our low-cost delivery centers, workforce optimization, and greater efficiencies in our G&A functions. Finally, I want to note that we opportunistically repurchased more shares this quarter than in the first quarter, buying back 4.6 million shares for $278 million in the open market. Additionally, we initiated an accelerated stock repurchase agreement that retired another 1.3 million shares for $75 million. We also declared a $32 million quarterly dividend for our shareholders. Now, I'll hand it over to Paul.

Well, thank you, Mike, and good afternoon, everyone. I'll discuss our results for the quarter and I will review some key financial highlights. Revenue was $3.08 billion in the quarter, down 3% at GAAP and down 4% in constant currency. Operating income was $349 million. Operating margin was 11.3%, unchanged when compared with the year-ago period, and it was up 190 basis points sequentially. Earnings before interest and taxes was $276 million. EBIT margin was 9% compared with 8.5% a year ago. Income from continuing operations was $177 million in the quarter, an increase of 9%, and EPS from continuing operations was $1.18, up 17%, including the benefit of the lower tax rate of 28%. Bookings in the quarter were $3 billion for a book-to-bill of 1. Year-to-date, revenue declined by 3% in constant currency. Operating margin was 10.3% and our EPS was $2.22. Bookings were $5.7 billion. Now turning to our segment results. Global Business Services accounted for 32% of total company revenue in the quarter. GBS revenue was $1 billion in the quarter, down $19 million year-over-year or 3% in constant currency. Revenue from our industry software and solutions was slightly up year-over-year with continued strength in health care and banking. Consulting revenue was down year-over-year, reflecting the repositioning of the business for higher-value next-generation technology consulting. In our application business, growth in new accounts and applications modernization were offset by contract completions. Now, the operating income for GBS was $130 million in the quarter, and our operating margin in GBS was 13%, a year-over-year improvement of 130 basis points and a sequential improvement of 310 basis points. Now we're extracting greater operating efficiencies from lower headcount and a continued shift of work to low-cost locations and also better utilization rates. Offsetting these benefits are higher investments in sales coverage and investments to operationalize our strategic partnerships. GBS bookings were $1.2 billion in the quarter for a book to bill ratio of 1.2x. Year-to-date, revenue was relatively flat. Operating margin was up year-over-year to 11.4% and bookings were $2.4 billion. Now let's turn to the Global Infrastructure Services business. This segment represented 34% of total revenue in the quarter. GIS revenue was $1.04 billion in the quarter, down 8% year-over-year in constant currency. Now we're seeing growth of our next-generation offerings of Cyber, Cloud, MyWorkStyle as well as from other new businesses. Now offsetting that growth are price-down, restructuring of contract and contract conclusions, which we discussed with you earlier. GIS operating income was $68 million in the quarter and operating margin was 6.6%, reflecting the significant investments we're making in next-generation offerings as well as investments, which will enable us to shift more work to lower-cost locations. Today 35% of the GIS workforce is in low-cost locations, up from 32% 1 year ago, and our objective is to increase the mix to about 60% over the long run. Bookings for GIS were $0.6 billion in the quarter for a book-to-bill ratio of 0.6x as a result of a few delayed deals. On a year-to-date basis, revenue declined by 5.8% in constant currency. Operating margin was 6.4% and bookings were $1.8 billion. Turning to our North American public sector business. NPS accounted for 34% of total revenue in the quarter. Revenue was $1.04 billion in the quarter, relatively flat when compared with the prior year. On a sequential basis, revenue was up slightly. In the quarter, operating income was $160 million. Operating margin was 15.4% in the quarter, in line with our margins for the prior year. NPS margins reflect our continued cost takeout achievements as well as better contract performance. We expect margins to moderate back to the low double-digit range during the second half of this year as we pass along savings on cost plus contracts. Longer term, we expect NPS to benefit from increased utilization of lower-cost onshore centers such as our new facility in Bossier City, Louisiana. We've already transitioned 180 positions to Louisiana, and we expect to ramp up our activities there over the next few quarters. NPS bookings were $1.1 billion for the quarter for a book to bill of 1.1x. Year-to-date, revenue declined by 2%, operating margin was 15.1% and bookings were $1.4 billion. Turning to other financial highlights for the quarter. Our tax rate was at 27.8% reflecting our global mix of income. For the third and fourth quarter of this year, we are targeting a 32% tax rate, though we remain cautiously optimistic that our tax planning strategies may help us to do better than that. Free cash flow was $31 million in the quarter compared with $86 million in the prior year, and now it's primarily due to the impact of an extra payroll cycle in this quarter. Year-to-date, free cash flow was $101 million, which compares with $77 million in the prior year. CapEx was $199 million in the quarter and compares with $205 million in the year-ago period. Now during the second quarter, the company returned $385 million of capital to shareholders, consisting of $32 million in dividends and $278 million to repurchase 4.6 million shares at an average price of $59.77. We also entered into an accelerated share repurchase agreement, which enabled us to retire an additional 1.3 million shares for $75 million. Now during the quarter, we acquired a privately-held cyber company for $35 million in cash, which is consistent with our strategy to pursue bolt-on acquisitions that are aligned with our goal to be a leader in next-generation IT services and offerings. Cash on hand at the end of the quarter was $1.9 billion compared with $2.1 billion in the prior year. Our net debt to capital was 13% compared with 10% in the year-ago period. Now let me turn to our cost takeout and reinvestment activities. We delivered approximately $85 million of cost savings in the quarter. Our cost savings are primarily from continued G&A efficiencies, workforce optimization and moving more work to lower-cost locations. We're also benefiting from the rationalization of our real estate footprint and from procurement savings. Our reinvestments were approximately $65 million for the quarter and approximately $170 million year-to-date. As we highlighted previously, we're investing in next-generation offerings, in sales coverage and sales support, and we are also investing to upgrade our financial and HR systems. For fiscal 2015, we continue to target cost takeout benefits of $450 million to $500 million, an investment of $350 million to $400 million or net savings of approximately $100 million. So in closing, let me recap our revised targets for this year. We're targeting revenue to be flat to slightly down for the company. EPS from continuing operation is targeted to be $4.45 to $4.65, up from our prior range, and our free cash flow target remains at approximately $700 million.

I want to start with revenue. You continue to perform well on the margin side, but regarding revenues, you mentioned the improvement in the NPS. We're receiving a lot of questions from clients about what's driving that improvement right now. You seem to believe it's sustainable. However, in terms of the commercial side, you indicated that the inflection is noticeable in the consulting improvements, which are now down 3%. While that's an improvement, your overall GBS business performed slightly worse than we expected. The change in guidance indicates a downturn in commercial overall. What is different this quarter compared to last quarter that led to this change in growth?

Yes, I think it's fairly straightforward. We are continuing to see some of the headwinds that we've talked about before, particularly around contract restructurings, which we're continuing to do and closed a couple of additional ones out this quarter, the continuing price-downs and then the contract of completions. So that is creating some headwinds that in the commercial business, we have not yet been able to offset with the growth from our new offerings. And those new offerings are growing very well. We're really pleased with that, but it just hasn't been enough in the first half of the year to offset those headwinds. So we are being a little cautious as we look out into the second half of the year because we continue to see those headwinds. Now we think we're getting closer to the end of that, but I thought it was important to continue to signal that those headwinds have not yet been offset. In GBS, yes, the consulting improved this quarter, but I'm not ready to call that a turn. I think that's great, and it looks to me as we go out in the second half of the year that business on a sequential basis ought to continue to show some improvement. I'm really pleased with software. That's continuing to grow. I mean it's not a barnburner, but it's growing. I think the application maintenance business, as we begin to unwind some of our, what I'll call staff augmentation business, that just has no margin associated with it, that's providing some headwinds in the application space that have not fully been offset by the application modernization streams. Now the good news, from my perspective, is we are seeing some traction on that application modernization. I think I reported in the first quarter that we really haven't seen much, but we're beginning to operationalize it. Well, now we're seeing the pipeline and we're actually getting some business closed but not yet enough to offset some of the staff augmentation business. The application maintenance business itself is very healthy and it's got a very good margin, but the staff augmentation business has no margin with it. So the decision that I continue to make and we continue to make is we will give up some of that revenue, lower margin revenue in order to improve the profitability. So that's sort of the net of it, but I felt that given the headwinds that we're seeing, it was important to signal that it was going to be more difficult to grow the commercial business in the second half of the year.

All right, that's helpful. I mean, I guess where do you think the inflection lies? It sounds like it's the right mix finally get to that inflection where your growth of your businesses is a high enough percentage to offset some of the headwinds.

I monitor the curve every quarter, and while I can't predict the exact timing of the inflection, we're definitely getting closer. Additionally, our net promoter score is performing better than expected, which has been a pleasant surprise for us. We attribute this improvement to several factors, including successful contract renewals that continue to benefit us, as well as significant wins from last year that are starting to generate revenue and profits, such as the FDIC deal, which faced numerous challenges before we finally secured it and began generating revenue. We're also pursuing smaller deals as part of our next-generation offerings in the net promoter score area. We're still waiting on some contract awards, but when considering all of this, along with the excellent cost management efforts by our team, we are now confident in seeing higher margins. Initially, I thought this business would have an 8 to 10 percent margin, but I now believe it can achieve double-digit margins, primarily due to the execution and leadership in driving down costs.

I was wondering if you could maybe dive down a little bit more into the federal business. You mentioned FDIC, but can you talk about what subsegments or what different agencies you're seeing the uptick? And where do you think that, that growth could get to? I mean do you think we can kind of inflect positively as we get in the back half of the fiscal year? And are there any signposts, whether it'd be congressional action or otherwise, that would give you greater confidence on that?

Yes, we achieved some successes with the Department of Defense. This sector was significantly impacted by sequestration, and while we've discussed this previously, it's unclear if this business will recover. Honestly, I'm uncertain, but we're preparing for it as if there are many opportunities on the mission side of our operations, which we have been successful in securing. Our inventory was strong in the last quarter, leading to additional business in civil agencies. These contracts typically have fixed costs and offer good profit margins. We also saw a slight increase in revenue from the cyber acquisition that Paul mentioned. Overall, the business is performing better than we expected, and when comparing our revenue and margins to some competitors, it seems we're likely gaining a bit of market share in a limited or stagnant pool of opportunities.

That's helpful. And then maybe a follow-up on the cost takeout targets. We're a little bit more than halfway through the fiscal year at this point. Can you maybe provide us any color on whether you expect to kind of run in towards the high end of that 450 to 500 range at this point?

Paul, I'll let you respond to that. We still have opportunities to reduce costs. For instance, this quarter, we transitioned to a shared service infrastructure for our entire commercial business, which has simplified operations and generated significant savings that will be realized in the second half of the year. We are gradually making progress with these low-cost centers each quarter, working on this client by client. We are not just transferring staff from one location to another as that could lead to customer satisfaction issues and subsequent revenue problems. We've discussed working with 40 to 50 accounts globally in our delivery excellence program. We customize our approach for each client, and every quarter, we are shifting more resources to these centers. As Paul mentioned, this strategy has given us confidence in maintaining a higher margin because we are seeing positive results from our lower-cost centers in Bossier and, to a lesser extent, Pittsburgh.

Yes, Jim, I think I will add also, we're doing a lot of work on the G&A efficiencies across both commercial and NPS. So that is also giving us a reason to be optimistic about additional cost takeouts, also additional procurement savings that we're able to extract from the organization, better real estate rationalization that is coming, and then we'll have again, as Mike said, the big driver and longer term, too, is that shift of workforce to lower-cost location that's particularly important for the GIS business. As I mentioned in my earlier remark, 35% is not really something to brag about when a lot of our competitors are in the 65% in low-cost centers.

I wanted to ask a question about the free cash flow. I think you had about $100 million year-to-date. I know you're maintaining a $700 million target. Can you just help us kind of bridge that gap? I know you typically have some favorable seasonality on the back end of the year, and you did mention an extra payroll cycle. So maybe you can quantify that and just any other pieces just to get a sense of confidence on the $700 million number.

Sure. Paul.

Well, last year, if you recall, we did $684 million of free cash flow and we're ahead of where we are last year, with 1 extra payroll cycle already this quarter. This quarter, at least over $90 million as a result of that extra payroll cycle. So in the second half of the year, we expect contribution particularly from working capital. We saw receivables. We have opportunity to drive greater, better working capital management in the second half of the year as we have done this past year.

Okay, understood, that's helpful. And then just to circle back on that long-term target on the GIS headcount, 60% offshore, so I guess that's, obviously, up quite a bit from where we are today. I mean, do you think you need some acquisitions to get there? And if not, is this kind of a very long-term target versus something in the next several years?

No, I don't believe we need any acquisitions. I don't think this will happen in the next year or so; it will be a longer-term endeavor measured over a couple of years, especially since we're approaching this client by client, which does slow us down. The reality is that we've taken two significant actions. First, we are shedding unprofitable business through contract restructurings, as we had some operations without margins. This creates challenges, but we've accepted that because we believe it's the right direction for the company in the long run. Second, we are making significant investments in our next-generation offerings. I mentioned that we are investing 200 to 300 basis points in GIS alone. We need to demonstrate returns on those investments, but we are not only cutting costs; we are also reinvesting for the future, and we are witnessing promising signs. We believe our cloud strategy is strong, and we are leveraging our partners' platforms instead of our own. We have also invested in sales, particularly focusing on our key clients. All these decisions align with the financial targets we've established, but they do present some challenges. I wish we were closing that gap quicker, but we are on the right path. The efficiencies we continue to drive will allow us to expand margins and make those investments.

Just on GIS, thanks for disclosing the targeted mix to 60% low-cost location headcount. I'm curious how quickly can you do this? Do you have the infrastructure in place to hire at scale in these locations? And most importantly, I'm curious, what's the impact on revenue as you do this transition assuming lower cost also means lower revenue per head.

No, I wouldn’t assume that regarding lower revenue. It is primarily due to returning work to the client that we could not handle profitably, so when we renegotiate contracts, we typically give back some scope that we cannot manage effectively. I believe we can hire in India without issue; we have HCL as our partner for applications modernization there. For GIS, we think we can manage within our existing locations, and I don't foresee any problems with that. The time frame spans multiple years as we tailor our approach account by account. Additionally, we haven’t discussed much about automation, which we believe will play a significant role in GIS over the coming years. It will require investment, which is included in our plans. We see several avenues for improving profitability in this business, including off-shoring, which we were late to adopt, investments in automation, and new offerings with better margin profiles. We want to approach this without alienating our customer base. Other large firms have faced substantial declines in customer satisfaction after making similar transitions. However, in North America, recent surveys showed an improvement in client satisfaction based on our Delivery Excellence methodology. Therefore, I’m willing to sacrifice some speed to maintain our clients' goodwill during this process.

Okay, that's good to know. As my follow-up, Mike, maybe just a big picture question. I know there's been a lot of spins and splits and whatnot out there amongst the peer group here. Just the concept of separating NPS with the federal business from the commercial business. So can you talk about the pros and cons of keeping them together versus separating them?

Yes. I mean as I've said many times in these calls, all options are on the table. We're a public company. We're always going to look for the best ways of driving shareholder value and continue to serve our customers and employees. We continue to see really strong synergies with our NPS business. I would reiterate a couple of comments I've made before. Our cyber business, which is really growing in our commercial space, largely came from NPS, and we now are applying that discipline to our commercial accounts. Our, what I would call project management and program management discipline out of NPS, we are now using across our commercial business and getting great synergies. There's other examples such as our work with big data with 426 and how we've leveraged that across the commercial business. And then there's good cross synergies between our commercial business. So we've taken many of these cloud partnership like with Amazon Web Services, and they're now taking that into NPS. We continue to see significant cross synergies between the businesses, but having said that, all options are always on the table.

A question and a clarification, please. Mike, you mentioned commercial could be flat to down. I guess I'm wondering if flat is realistic actually? And should we be thinking more about down? In the first 2 quarters GIS is down quite a bit. GBS is down modestly, but your compares get meaningfully harder as you look at the next 2 quarters plus I would imagine currency is going to go against you a little bit. Shall we be thinking more down rather than even the notion of flat, particularly given the status of GIS?

Well, we're down, I think Paul, correct me if I'm wrong here, about 2% on commercial through the first half, correct.

Right, so to be flat, are you suggesting up 2% in the second half?

No. I'm not suggesting that. I am suggesting that we think there's an opportunity for sequential improvement as we go into the third quarter and the fourth quarter. So I don't think mathematically it's out of the question. I think the bias would probably be slightly down on commercial revenue given the headwinds and some of the other things that I talked about on the call today. So I don't think that would be an unrealistic assumption.

Yes, I'll let Paul give a little bit more detail, but there was a slight gain, I think $5 million or $7 million in the quarter. What we are doing is we have remixed some of the money that we were spending on restructuring. We remixed that into investments, and if we see some sequential revenue improvement in the second half of the year, we probably continue to restructure into that revenue. We've had, as I said, 2% revenue decline, and we have been slower to restructure some of the workforce out, particularly in Europe. So in all candor, we just haven't been able to move quite as quickly there. Therefore, there was no need to spend incremental money, particularly outside the U.S. Yes and the other thing that happened also when we set up those plans, and again, it's not a big amount, $7 million in the quarter but we've had people leave the company that were targeted to be taken out as part of the restructuring, so we didn't have to pay them the restructuring that we have set aside. We did better than we had originally anticipated with the attrition that occurred in some of our markets.

I was curious about you brought in a dramatic new group of people, dramatic in number, and obviously, they appear to be doing well. But I've heard almost maybe most of the top 100 executives are now new to the company. I'm curious, are they all with you or have some of those turned over? And maybe some commentary on sort of morale at this point?

Yes. I think morale is beginning to improve, particularly outside the United States. If you just think about this, we're really beginning to see some really nice improvements in our businesses outside of the United States. We have got more work to do in the United States. I just put a new leadership team in the United States. We announced that I guess 3 or 4 weeks ago because I think we can do better in the United States and to be candid, I haven't been totally pleased with some of our execution in the United States. You are right. We have replaced, I think, I could be wrong about this, but 95% of the top 3 layers of management in the company, and they are beginning to come together as a team. It is hard when you make that kind of change. It's like inviting 100 people over for dinner and not knowing anyone until they show up at the front door. So it takes a while to come together and knit together as a team. I think that is beginning to happen. We run a pretty tight performance management culture in the company, and you can expect that there will be continued turnover in the executive ranks as we move forward. We're having great success recruiting people from outside the company and from the industry, so we're always looking for ways to upgrade the team. So I think, we just run some surveys. I think, I mentioned before, we did our big electronic jam out of 6 or 7 months ago. And by and large, most of the employees are with us. That's not to say everyone is with us, and when you go through this kind of cultural change, it means you are certainly going to have some casualty. But by and large, most of the people would like us to even move faster than we are currently moving.

My other question is on the share count. Part A is, was the ASR, did that happen in the September quarter? And then help us with what the Q3 and the Q4 share count would be given, Paul, the repurchasing that's been done?

Yes, the ASR was implemented in the second quarter, allowing us to retire 1.3 million shares for $75 million. The program was slightly larger, but that summarizes the impact of that part of the ASR. As we've mentioned before, we've been out of the market for various reasons.

; We're always doing partnerships and there's something going on, so we are always in a perpetual blackout period. So that's one of the reasons we did this.

Right. And I think if you look at more what we've been doing before and somewhere between the 120, 150 on a regular basis, we look at the share buyback really as an opportunistic way to return capital to our shareholders, and we're going to continue with that. At the end of the second quarter, our number of shares outstanding was 140 million, and so we could go from there.

But was that down pretty marginally from a year ago. That was like 142 million a year ago?

I think it was actually much more than that. I think what we report our average number for diluted this year we use the treasury method for some of the stock and so it gets to about $143 million.

I think it's a few million dollars.

So the share count should be lower in Q3 and Q4 than it was in Q2.

I think if you look at the average, it may be down a little bit for the next 2 quarters.

I guess my first question is on NPS, double-digit margins. Is that what 10%, 11%, is that going to be lower end of the range? And more importantly, why should CSC be able to sustain better margins than its competitors? I mean, your competitors in NPS are some well-regarded companies that do quite well for themselves. So why should this one company have higher margins?

That's a good question, Ashwin. I think one, we started much earlier in some of these cost reduction moves. I think you've got to remember that lowering your cost is not intuitively obvious in the government sector because when you lower cost, a certain amount of that is returned to the clients, which means your revenue declined because you were billing less. So it is not an intuitively obvious cycle. Now I know our government is a paradigm of efficiency, but that's not a typical thing that you would do is take cost out so you can lower your revenue. We chose to do that because we thought that the market was going to shift to many of these next-generation service offerings and we wanted to be more competitive in pricing, and we thought that the game in NPS was going to be more of a share gain game then it was going to be a market expansion game. So if you are in a fairly stagnant market, you better have a cost structure that allows you to gain some share. The other thing that we have done and are doing well is these low-cost labor centers in our government business. Very few other people, at least to my knowledge, have moved in this direction yet. I've said many times, Bossier City has a cost profile that's 70% of the Washington area. So as you move more jobs there, you are able to maintain a higher margin, and I think we were out in front of that, and we do think that we can sustain that. So that's the reason why we are predicting now that the margin profile of that business can be in the low double-digit range as opposed to the high single-digit range.

And with regards to the elections that just happened, typically midterms and to have less of an impact, but given all the changes, what's your view, as a, I would say, relative to a Washington insider?

I tell you the truth, I have no idea, I have no idea. I mean there's different new theories and different hypotheses out there, but I would only be speculating. The truth is I am not that well informed and don't actually know.

No, I meant specifically with regards to the pipeline that you mentioned.

Well, as I mentioned, the pipeline is up. The pipeline is up. So it's not the only indicator. But as an indicator, yes, the pipeline is up. But at the same time, the number of awards that have not been awarded, in other words, bids that we have put in that haven't been awarded, has also increased. So that would suggest that decisions aren't being made. There's a big issue as to the budget and continuing resolutions, and that has to get resolved before spending is freed up. That's why we are cautiously optimistic because we see a growing pipeline, but that has got to be tempered by the ongoing uncertainty in the budget process. So all we can do is remain focused and make sure we are running an efficient operation, make sure we are bidding where we think it's appropriate for us to bid, and I don't want the guys thinking about the political environment. We got other people who can worry about that. We're going to just stick to our knitting and run what's becoming a pretty nice business.

I think you've talked about in prior conference calls and meetings about going after some smaller accounts. I was wondering if you had any update on the progress you're making there and if you could wrap any numbers around it.

Yes, I can share some information, though these numbers may not be exact. In the second quarter, we brought on over 100 new clients, with 92 of those being outside of the Americas. Approximately 80% of these were for contracts under $10 million. We've mentioned in past calls that there's a notable increase in lower-value transactions. We're realigning our sales force, which is why we've invested in it, to pursue these opportunities more effectively. We prefer the profit margins from these smaller transactions compared to large infrastructure deals that tend to undercut our pricing. We're intentionally shifting our focus in that direction, which also explains why we're investing in more standardized offerings in our GIS business. To successfully address smaller transactions, a high level of customization isn't feasible; we need to offer more standardized solutions. This approach seems to be boosting the morale of our workforce and sales teams, especially since adding 100 new clients in a single quarter is quite significant. This success provides us an avenue to perform well, even on smaller deals, which can build our credibility and enable us to expand into different areas. I've mentioned a large energy company where we accomplished this, and we're starting to grow from that foundation. This model is more sustainable and contributes to better long-term stability for both our revenue and profits.

Got it. And then just along the same lines, obviously, you're working on building out your global delivery network. I was just wondering, as you move along that process, what competitive advantage do you think you might be able to develop versus the players who already have that in place? And how do you tweak your go-to-market so that you can gain market share as you, I guess, basically play some catch-up there?

Yes. We aim to set ourselves apart by consolidating our global delivery capabilities to manage our accounts from one location. Instead of having GIS in India and GBS in Manila, we're focusing on relocating our larger clients to a single site. This brings significant efficiencies as it allows our support and services staff to be close to each other, fostering better collaboration, enhancing client knowledge, minimizing duplication, and improving overall morale. We believe this approach offers us a unique advantage. Additionally, we have established a strong partnership strategy. We have worked diligently to forge partnerships with many providers, allowing us to operate independently. If a client prefers AWS or believes Azure is a better fit, we can accommodate that. Our acquisition of ServiceMesh, which we are currently amortizing as part of our investment this year, provides us with an excellent solution for our clients. We recently held an industry Analyst Day and our first global client conference, both of which received positive feedback. Moving forward, we need to prioritize disciplined execution. This is no longer a strategic issue; it's about executing swiftly while including our employees and customers in the process. Thank you all for joining the call, and we look forward to speaking with you next quarter.