DXC Technology Company (DXC) — Q3 2015 Earnings Call Transcript

Okay. Thank you very much. Thank you, everyone, for joining today and your continued interest in CSC. As is my first point here, I've got five key messages I want to leave you with. I'll share those upfront, then develop it in a little more detail, and then turn this over to Paul and then we'll have an opportunity to respond to your questions. The first key message here is our third quarter non-GAAP EPS from continuing operations was $1.18, driven by our continued cost takeout actions and a shift to lower cost locations, as well as a slightly lower tax rate. We also generated strong free cash flow of around $500 million. And finally, we reached an understanding with the SEC to settle our long-standing civil investigation, allowing us to focus even more attention on executing our strategy. The second key message is our NPS business continues to show signs of improvement despite the challenging market. Revenue was up modestly on a year-over-year basis and margins were again strong as a result of our cost takeout actions and good execution. We continue to see strength from our next-generation offerings with revenue growth in key areas like commercial cloud and big data. We also continue to operationalize our key partnerships and are seeing positive results. The fourth key message is our commercial business delivered sequential margin improvement due to our ongoing cost takeout actions. Commercial revenue, however, was lower than we expected, primarily due to some unforeseen delays and execution issues, particularly in the United States and to a lesser extent, in the U.K. and Australia. And finally, for fiscal 2015, we continue to target non-GAAP EPS from continuing operations in the range of $4.45 to $4.65. And for free cash flow, we are tracking at $700 million or more. And based on our year-to-date performance, we are targeting NPS revenues to now be relatively flat this year and commercial revenue to be down in the mid-single digits in constant currency. And finally, year-to-date, we returned $610 million of capital to our shareholders, including $512 million for share buybacks and $98 million for dividends. So now let me just develop each of those in a little more detail. As I said, our third quarter non-GAAP EPS from continuing operations was $1.18, which is up 9% year-over-year. EPS benefited from our ongoing cost takeout actions and shifting work to lower-cost locations, as well as a slightly lower tax rate. Operating margin was 11.3%, up 80 basis points year-over-year. We saw a sequential improvement in our commercial operating margin, which was up 60 basis points, and strong year-over-year improvement in our NPS operating margin, which was up 220 basis points. We generated, as I said, $498 million in free cash flow in the third quarter, driven primarily by focused and improved collections. And finally, we reached an understanding with the SEC to settle our long-standing civil investigation. As you know, this investigation primarily involved matters related to the accounting for our contractual relationship with the U.K. National Health Service, in the period from fiscal 2009 through fiscal 2012. And just as a reminder, the proposed settlement will have no impact on the company's financial statements for fiscal years 2013, 2014 and fiscal 2015 year-to-date. Moving to our NPS business. NPS revenue was $1 billion in the third quarter, up 1% year-over-year. This is the first time since fiscal 2011 that NPS has delivered top line growth. Admittedly, it was against an easier comparison because the government was partially shut down in the year-ago period due to sequestration, but nevertheless, an encouraging sign. NPS operating margin of 14.5% was up 220 basis points year-over-year and reflects continued cost takeout and strong contract performance. NPS bookings were about $500 million, representing a book-to-bill of 0.5. And these bookings were relatively flat year-to-year and consistent with the seasonal performance in that business. Our NPS pipeline continues to be strong, up 66% year-over-year. This includes a pipeline of $2.4 billion of next-generation services, up from $2.1 billion last quarter. And even if you exclude the large DoD health care management system modernization opportunity, the NPS pipeline is still up 51% year-over-year. Our submitted proposals awaiting award totaled $5.7 billion at the end of the quarter, up 115% year-over-year. And we've recently decided to increase our bid and proposal spend in NPS to pursue more work now that we have a much more competitive cost structure. Moving to our next-generation offerings. We continue to see positive momentum and growth from these offerings. Commercial cloud revenue was up 34% year-over-year in constant currency. Big data was up 47% year-over-year in constant currency. Commercial cyber was down 4% year-on-year constant currency, driven primarily by GIS contract completions that had a cyber component to them. However, the standalone commercial cyber work was up modestly year-over-year. And we continue to deliver sequential revenue growth from our newer offerings. Our MyWorkStyle virtualized desktop offering was up 60%. Our next-generation network offering with our partner AT&T was up over 80%. And we're seeing traction with applications modernization, which was also up over 50%, albeit on a low base. And as I said before, we're really encouraged with this growth, though the contributions from these next-generation offerings are not yet large enough to offset the headwinds that we have experienced in other parts of our commercial business. We continue to deliver healthy next-generation bookings. In the quarter, the book-to-bill was 2.2 for commercial cloud, 1.5 for commercial cyber and 2.9 for big data. And the qualified pipelines for our next-generation offerings also continue to grow nicely. The commercial cloud pipeline now stands at $1.6 billion, that's up 19% year-over-year; commercial cyber more than doubled year-over-year to over $400 million; and big data also increased 14% year-over-year. And within our newer next-generation offerings, pipelines from MyWorkStyle and our next-generation network offerings each stand in excess of $700 million. In aggregate, our qualified pipeline for next-generation services stands at approximately $4.5 billion, more than double a year ago. But those are just numbers. Let me give you an example of how this plays out in the marketplace, as we continue to execute our strategy around next-generation IT services. In the third quarter, CSC secured a five-year deal with BlueScope Steel for applications modernization, workplace, network, cybersecurity and platform support services, leveraging CSC's BizCloud. This win with Australia's largest steel manufacturer for the building and construction market is important as it demonstrates CSC's comprehensive next-gen strategy, as well as the value of our strategic partnerships. AT&T joined us on the network scope and HCL bid with us on the apps modernization work. We also teamed with VMware and EMC to secure a new contract with QBE, a large global insurer, to deliver next-generation cloud infrastructure, cyber and application services. Though it's clear that our clients continue to see greater operational agility from next-generation IT services, they're looking to benefit from the insights provided by mobility, social media and big data analytics. At the same time, they continue to seek advantage by migrating from traditional IT infrastructure to the cloud, and this shift continues to create a substantial opportunity for CSC. And we're continuing to invest and expand our share of this opportunity and operationalize our key partnerships. Again, as an illustration or example, our network business, through our partnership with AT&T, has captured over $300 million in new incremental TCV year-to-date. This is nearly triple the amount of incremental TCV this business signed in our previous fiscal year 2014. We still have opportunities for additional deal closures in this area in the fourth quarter. Now let me turn to our commercial business. Our commercial operating margin was 10.3%, and that was up 60 basis points sequentially and flat year-over-year. Global Business Services operating margin was 13.3%, and this was up 50 basis points year-over-year and 30 basis points sequentially. This performance reflects our ongoing cost takeout actions and shifting work to lower-cost locations. Global Infrastructure Services operating margin was 7.3% in the quarter, and this was up 70 basis points sequentially, reflecting both the benefits of our continued cost-reduction initiatives and moving work. Year-over-year, GIS's operating margin was down 60 basis points, reflecting our continued investments in new offerings, which was partially offset by the benefit of moving work to lower-cost locations. Longer term, we continue to see opportunities to drive improved margins in both GBS and GIS by increasing our mix of low-cost labor, optimizing our employee pyramid and investing aggressively in automation. Commercial revenue was $1.95 billion in the quarter on a GAAP basis, and on a constant-currency basis, was a little over $2 billion, which was down a little over 9% year-over-year, and was about $150 million below the target that we had for the quarter. Now some of the revenue decline reflects the impact of contract restructurings, price reductions and contract completions that we have previously discussed. But about half of the shortfall was caused by not closing and billing all the work that we expected to win in the third quarter. And the rest of the shortfall was split between our difficulty or inability to recruit and onboard all the necessary skills to meet projects and demand that we had in the quarter. In some instances, contracts that we expected to begin to bill and operationalize were delayed into the fourth quarter. These issues were most apparent in the Americas and, to a lesser extent, in the U.K. and Australia. It goes without saying that we put corrective actions in place to address these issues. But to be completely transparent, we did not execute as well as we needed to in the quarter in selling new work and generating the revenue that we had anticipated. This is not a market issue; the market is certainly challenging, but there is ample opportunity in the marketplace. Shifting to new contract awards. Overall commercial bookings of $2.2 billion represented a book-to-bill of 1.1, which was down slightly from a year ago, which was at 1.2. GBS bookings were $1.2 billion, representing a book-to-bill of 1.3, which was down from 1.8 a year ago. Again, there were some one-time deals in the third quarter of last year. GIS bookings of $1 billion were up 32% year-over-year, with a book-to-bill of 1.0, which improved from 0.7 a year ago. We added 100 new logos in the quarter. As we have discussed, we've moved to smaller deals and have focused on smaller transactions. Although they don't represent a tremendous amount of in-quarter revenue, it is an opportunity for CSC to land and expand and sell our full portfolio of offerings over time. Our growth in our total commercial qualified pipeline was also up 17% year-over-year. As I wrap up here before I turn it over to Paul, I want to give a quick update on our targets for the remainder of fiscal 2015. We're continuing to target non-GAAP EPS in the range of $4.45 to $4.65. We're also on track to achieve our free cash flow target of $700 million, though with our strong third quarter performance, there may be some upside to our cash flow outlook. With our NPS business performing better than we expected, we now expect NPS revenue to be relatively flat on a full-year basis. Based on our year-to-date performance, we now expect commercial revenue to be down in the mid-single digits in constant currency, though we expect commercial revenue to be up sequentially in the fourth quarter in constant currency. Overall, this equates to total revenue for CSC to being down in the mid-single digits for the year in constant currency. We continue to focus on returning capital to the shareholders; in the quarter, our share repurchases were modest, only 150,000 shares, because of our ongoing negotiations with the SEC. However, as I said, year-to-date, we have returned $610 million of capital to our shareholders, including $512 million for share buybacks and $98 million for dividends. So with that, I'll turn it over to Paul and then come back for any questions that you might have.

Well, thank you, Mike, and good afternoon, everyone. I'll discuss our third quarter results and update you on our targets for '15. Before I begin, let me cover two items that are included in our GAAP results. Earlier this year, CSC adopted a new mark-to-market pension accounting policy, which recognizes actuarial gains and losses on the fair value of pension assets. So during the quarter, we extended a lump sum offer to eligible U.S. pension plan participants, which triggered interim remeasurements of the plan's assets and liabilities using updated mortality tables. We also added interim remeasurements of our pension plan in Switzerland. The impact of these remeasurements was a noncash actuarial charge of $462 million for the quarter. Also during the quarter, we reached a proposed settlement with the SEC relating to the NHS accounting and disclosures from fiscal 2009 to 2012. As a result, we recorded a $195 million charge related to this matter. So excluding these two items, diluted EPS from continuing operations was $1.18 for the quarter. Turning to our third quarter results. Revenue was $2.95 billion, down 6.5% in constant currency. Operating income was $332 million and operating margin was 11.3%, an improvement of 80 basis points over the prior year. Earnings before interest and taxes was $272 million, and EBIT margin was 9.2%, up 60 basis points from a year ago and up 20 basis points sequentially. Income from continuing operations was $172 million in the quarter, and our diluted EPS from continuing operations was $1.18, up 9% year-over-year. Our effective tax rate was 28% in the quarter, slightly better than anticipated. Our bookings in the quarter were $2.7 billion for a book-to-bill of 0.9. Year-to-date, revenue declined by 4% in constant currency, but our operating margin was 10.6%. EBIT margin improved 10 basis points to 8.6%. EPS on a year-to-date basis was $3.39, up 9% year-over-year. Bookings were $8.4 billion. Now let's turn to our segment results. Our Global Business Services revenue was $965 million in the quarter, down 8.5% year-over-year in constant currency. Revenue from our industry software and solutions was down 8.9% year-over-year in constant currency, primarily due to lower revenue from our insurance offerings and a contract completion in our business process services. Consulting revenue was down 12% year-over-year in constant currency, primarily due to the wind-down and a few large ERP implementations in the Americas. Now sequentially, our consulting revenue was flat as we continue to reposition the business to focus on technology consulting. Our U.K. region is the furthest along on this front and is already showing improved bookings and revenue growth. In our application business, revenue was down 8% year-over-year in constant currency. Growth in new accounts and applications modernization was more than offset by contract completions and select clients' insourcing. Applications revenue was relatively flat on a sequential basis. Operating income for GBS was $128 million in the quarter, and operating margin was 13.3%, a year-over-year improvement of 50 basis points and a sequential improvement of 30 basis points. Adjusting for restructuring, GBS margin improved by 90 basis points year-over-year to 14.3%. Our improved profitability reflects actions we're taking to optimize our workforce and shift work to low-cost centers. Partially offsetting these benefits are investments in sales coverage and investments to operationalize our strategic partnerships, which collectively represent a full point of margin in the quarter. GBS bookings were $1.2 billion in the quarter for a book-to-bill ratio of 1.3x. Year-to-date, revenue declined by 3.7% in constant currency, while operating margin was 12%, up 20 basis points over the prior year. Bookings of $3.6 billion compare to $4.5 billion in the prior year. Turning to our Global Infrastructure Services, revenue was $984 million in the quarter, down 10.9% year-over-year in constant currency, reflecting the impact of restructured contracts and contract completions. This was partially offset by growth from our next-generation offerings of cloud, network and MyWorkStyle. GIS operating income was $72 million in the quarter. Operating margin was 7.3%, down 60 basis points year-over-year, reflecting the investments we continue to make in new offerings, particularly integrating our strategic partner's cloud offerings with our Agility platform. Operating margin was up 70 basis points on a sequential basis, reflecting G&A efficiencies as well as the progress we're making on our Delivery Excellence initiatives and our efforts to optimize our workforce. Longer term, our operating margin should benefit from continued actions to shift more labor to lower-cost markets. Our objective is to increase our low-cost labor mix from 35% to 60% over time. This will allow us to mitigate the impact of revenue headwinds in our traditional GIS business while we ramp up our next-generation offerings. Bookings for GIS were $1 billion in the quarter for a book-to-bill of 1x. On a year-to-date basis, revenue declined by 7.5% in constant currency. Operating margin was 6.7%, reflecting our investments in new offerings and partnerships, which represent about 300 basis points of operating income margin. Bookings were $2.8 billion, up from $2.4 billion in the prior year. Now turning to our North American public sector business. Revenue was $998 million in the quarter, up 1% year-over-year. Growth from infrastructure services, business process outsourcing and health care systems offset declines in DoD contracts, which were winding down or completed. Operating income was $145 million. Operating margin was 14.5% in the quarter, up 220 basis points compared with the prior year as we benefited from ongoing cost takeouts and strong contract performance. Longer term, we expect NPS margins to benefit from increased utilization of lower-cost, onshore centers such as our new facility in Bossier City, Louisiana, where we've already transitioned nearly 200 positions. We expect to ramp up our hiring activities at this facility in the coming quarters, and these actions should enable us to maintain strong margins in the low-double digits, even as we pursue more opportunities. NPS bookings were $0.5 billion in the quarter for a book-to-bill of 0.5x, consistent with normal seasonal trends in our third quarter. Year-to-date revenue was relatively flat. Operating margin improved to 14.9% compared with 13.3% in the prior year. Bookings were $1.9 billion compared with $2.4 billion in the prior year, adjusted for one large contract award. Now turning to other financial highlights for the quarter. Free cash flow was approximately $500 million in the quarter, a strong performance when compared to prior quarters, but we're focusing on better working capital management and improved collection. Year-to-date free cash flow was approximately $600 million, and we're on track to meet and likely exceed our full-year target of $700 million. In the fourth quarter, we'll have to absorb one extra payroll cycle and an annual contribution to the company's 401(k) plan, which together will represent approximately $150 million of cash outflow. CapEx was $163 million in the quarter or 5.5% of revenue, down compared with 6.1% of revenue year-to-date. Cash on hand at the end of the quarter was $2.4 billion compared with $2.3 billion in the prior year. Our net debt to total capital was 5% compared with 8% in the prior year. During the third quarter, CSC returned $41 million to shareholders, which included $32 million in dividends and $9 million in share repurchases. We were largely out of the market during the quarter due to our ongoing settlement discussions with the SEC. Year-to-date, we returned $610 million of capital to our shareholders and remain committed to returning excess cash to our shareholders. In the quarter, our effective tax rate was 28%, slightly better than expected due to a favorable global mix of income. We're making progress on our tax planning strategies. For planning purposes, we're targeting an effective tax rate of 30% to 32% for the fourth quarter. Turning now to our cost takeout and reinvestment activities. We delivered approximately $115 million of cost savings in the quarter, and $310 million year-to-date. Our cost savings are from continued G&A efficiencies, optimizing our workforce, shifting work to low-cost centers, streamlining our real estate facilities and delivering on procurement savings. Our reinvestments totaled approximately $7 million in the quarter and approximately $240 million year-to-date. We're continuing to invest in next-generation offerings, strategic partnerships, sales coverage and sales support, as well as funding upgrades to our internal financial and HR systems. Year-to-date, we're on target to deliver cost takeout benefits of $450 million to $500 million and reinvestments of $350 million to $400 million for a net savings of approximately $100 million. In closing, let me recap our targets for 2015. We're targeting total revenue to be down in the mid-single digits, commercial revenue to be down in the mid-single digits in constant currency and NPS revenue to be relatively flat. We continue to target our non-GAAP EPS in the range of $4.45 to $4.65, which excludes the impact of mark-to-market pension accounting and the proposed SEC settlement and related charges. Lastly, we're targeting free cash flow of $700 million or more, which also excludes the SEC settlement charges. Now I'll hand the call back to the operator for the Q&A session.

I had two questions, if I could. Mike, I think the first one is for you. On the commercial side, you indicated there were some execution and deal push-outs. Yet it seems like aspirations for the year have been fairly well muted mid-single digits constant currency and I think you were hoping for more flattish previously. Are some of these deals not getting closed in the current quarter and/or are there share loss issues or are deals not going forward? It just seems the objectives have contracted more than a few deal push-outs. If you could just elaborate. And I have a follow-up, please.

The shortfall was mainly due to not securing as much business during the quarter and being able to bill for it, particularly in our consulting sector. Once billable hours are lost in a quarter, they can't be recovered in the following quarter; they are simply lost. This isn't a matter of market share; it's about having limited capacity. When billing capacity is lost in a quarter, it doesn't come back. Additionally, some deals have been postponed, and it's uncertain if they'll close and bill in the fourth quarter or if they will be delayed further. One challenge we've faced this quarter is the difficulty in recruiting and onboarding the specific skills we need for projects that are already contracted. These projects require specialized skills that have become more difficult to find, likely due to a tighter labor market. We've made adjustments, including changes to our salary offerings, but this has undoubtedly affected us, and we anticipate that impact to persist. We are also in the process of restructuring some of our GIS contracts, which will proceed. Lastly, our applications modernization efforts have progressed more slowly than expected, mainly because we started with smaller projects that have since scaled up. This isn't a loss of market share; it's more a matter of timing.

Okay, got it. Then maybe my follow-up, if I could address to you, Paul. In NPS, the operating margin was once again very, very strong, and I'm just wondering about sustainability. Was there any unusual items associated with that operating margin? I know you suggested that the margin should be in double digits. If there weren't any unusual items, why wouldn't it stay at these types of levels? It's been strong for two or three quarters now.

Yes, no, there are no unusual items in our NPS margins. As you'll recall, about 40% or 50% of our business is cost-reimbursable; thus, some of the savings that we generate, we pass along to our customers in the form of lower COGS. Longer term, we expect the margins in that business to be in the low double digits due to our labor strategy.

The other thing I'd just mention here, Paul, is that we've made significant progress on our cost structure in NPS. This improvement has led us to allocate more resources into bid and proposal funding. We manage our bid and proposal funds carefully, and we're putting more money into NPS because, with this improved cost structure, we feel we can price more competitively and pursue additional market share. Honestly, I expected the commercial business to perform better revenue-wise than it is, and for NPS to do slightly worse. However, NPS is exceeding expectations, and we're now reallocating more bid and proposal funds into that business to capitalize on that opportunity.

I guess just a follow-up, Mike, on that comment around recruiting. Is that in reference to on-site, offshore or both? And I guess, what's the remedy there? Is it simply just paying more for staff? Just trying to understand the remediation effort.

Yes. Let me give you an example because I think an example is the best way of describing it. We were in a major rollout with an insurance company that required specific skills, such as RPG programming. RPG is not a programming language that many are learning today, so there's a finite supply. We had difficulty recruiting and getting those people onboarded in time to be able to bill all the work that was under contract in the quarter. One way we're addressing this is through execution, by focusing week in and week out on tracking open positions, interview processes, onboarding, and training. The second is reaching out to partners who have access to skills we might lack; in this case, we used ACL to help backfill some of those skills. Finally, we've adjusted starting salaries to ensure we remain competitive, as candidates often have multiple job offers to choose from. While this was a classic example, there are many such instances that occurred in the third quarter that we did not anticipate. Hence, Tien-tsin, I mentioned our responsibility for execution as part of the issue; it is not a market issues, contract issue, or demand issue—just an execution issue.

That makes sense; it's helpful. My follow-up quickly is that the book-to-bill in commercial was good, above 1 here. Is that what's driving the confidence in sequential improvement in the fourth quarter for commercial, or is there something else? I just wanted to clarify.

Yes, that combined with the expectation that we won’t encounter the same execution missteps. Again, I want to be candid; I attribute part of this to our execution capabilities. We've implemented some new processes that give us confidence we won't see the same gaps moving forward. For example, in hiring, we now conduct weekly assessments on openness of positions globally and review interview pipelines. These are fixes that we can implement, and they provide assurance that we will not face the same execution challenges in the fourth quarter.

It's Jamie at Susquehanna. Paul, you had mentioned in your comments that over time, your low-cost labor delivery on the GIS side could move to 60% from 35%. I was wondering what we should infer about the operating margin trajectory from that transition.

I think there's a lot of upside for us across the world. Not only does it involve the offshoring to low-cost markets, but it can also include insourcing to other low-cost markets for GIS. We also still have opportunities to modify our workforce pyramid. There's excellent potential for improvement, particularly in the 0-3 years of experience range. Both of these initiatives could yield several hundred million dollars of opportunity across the board, not only in GIS but also in GBS.

Okay. I wanted to ask you about one of the slides, I think it's Slide 15, where you iterate the cost takeout and the reinvestment. How should we consider the balance between these two over time? Is there a point where the reinvestment stabilizes and the spread expands?

Yes, I think that's a good assumption. While we continue to see significant progress in cost takeout, it is essential as commercial revenue declines. These cost-saving measures are crucial for margin expansion and profit improvement, and we have taken aggressive cost-cutting steps. However, we are not solely focused on cutting costs. We are also investing in new offerings. The work we are doing on our ServiceMesh, Agility Platform, and integration with Amazon Web Services and Microsoft are crucial. We are also continuing to invest in sales coverage to further penetrate the market with these offerings. While we are achieving over $300 million in incremental TCV through our partnership with AT&T, we expect more rewards. In summary, we are focused on cost savings and reinvestments simultaneously, and yes, the spread will become more even over time.

I want to jump in on the restructuring of the contracts you've mentioned with GIS. Can you talk a bit more about any other headwinds that are still in the model and the potential timing of resources on those? Are there any more contracts you’ve identified in GIS that might need restructuring? Moreover, where do we stand on the consulting side? Can you provide the timing on this turning positive?

Let's take consulting first. Consulting suffered execution issues in the third quarter, which I mentioned earlier; some of those projects rolled through consulting. Those execution issues won’t last forever. Regarding GIS, we have pointed out that there is likely a 2-3% headwind each year from price reductions embedded in contracts. In this business, many labor costs remain manual, which is a factor influencing margins. To improve margins going forward, we need to both transition some work to lower-cost locations and automate many of those tasks. This requires collaboration with each client to ascertain which tasks can be automated while maintaining goodwill. In fact, our customer satisfaction scores for commercial and GIS contracts increased significantly this third quarter. There will be consistent headwinds, but the challenge remains how to address them and implement the new offerings to counterbalance headwinds. We must cross-sell and penetrate new logos; we added 100 new logos in the quarter, which should allow for growth. We need to balance these dynamics as we work through the business going forward.

That's helpful. One quick follow-up; can you provide insight on the capital return strategy? You mentioned that it was lower this quarter, with approximately 0.2 million shares? Can you discuss the strategy and plans moving forward? Also, talk about your current capital level and debt status?

We've been in the market regularly. Looking at year-to-date, we've returned over $600 million to shareholders. This quarter, by the time we reported our earnings, we could not make any market moves due to ongoing discussions regarding a settlement with the SEC. Now that is behind us, and we plan to resume our capital returns to shareholders.

I have a couple of questions. First, Paul, I remember you mentioned the top-line miss of about $230 million. So if I'm slicing it down, $65 million came from FX headwinds; is that correct?

About $70 million came in from currency.

Okay. So we have about $160 million to $170 million resulting from a combination of execution issues and delays. Can you provide insight on how some of these recruiting problems impacted us during the quarter? It's ironic, as you have been working on building up your pipeline, but more recently, you couldn't execute due to a lack of qualified personnel. What can we assume from this? Did you succeed?

I wouldn't draw that conclusion just yet. So, let's stick with the $150 million. About $60 million to $70 million of that stemmed from projects that didn’t close in the quarter and that we couldn't bill. That’s not all execution-related; some customers decided to wait, which is not necessarily an execution issue. However, think of that as about half of the shortfall. The skills issue accounts for about $25 million to $40 million, where we failed to act quickly on some of the skills available in the market that affected us. Then about $10 million to $20 million ran into delays; contracts with anticipated billing were postponed due to client preferences. Sometimes we encountered revenue recognition issues related to incomplete paperwork, which were also execution problems. This is how the $150 million challenge can be broken down in broad terms.

Has the recruiting issue been mitigated? Is this also a function of having an effective recruiting strategy in place?

It's a combination. Yes, having the right people in the field matters, but primarily, it’s about comprehending every week, what skills are necessary, and enforcing discipline in ensuring that adequate recruiting is executed while identifying candidates and moving them through the hiring process. If we don’t address these, we end up losing the billing potential for projects we have already taken on. That’s a management challenge, and we intend to manage it effectively.

Lastly, concerning the revenue outlook, what gives you confidence for the consulting business to improve? The execution seems repeatedly problematic.

Yes, I believe we have made significant improvements. We have noticed positive traction in the U.K. as demand is increasing, and we are succeeding in closing those deals. We see similar progress in Australia. However, we have the most work to do in the United States. While there remains a considerable hurdle to cross, I am confident in the business's ability to fix itself based on the results from regions where we have instituted changes.

This is Amit Singh for Jason. Just quickly, as we consider revenue growth expectations, it seems many issues can be rectified by CSC management. As you look forward, when can we expect an inflection point for positive top-line growth? Can we see that in 2016? Your NPS bookings appear down around the high 20% range over the last two quarters, and while commercial bookings were strong this quarter, there was pushback from last quarter into this quarter. When do you project that inflection point will arrive?

I can’t guarantee a specific timeline. I think the first step is to observe sequential growth in some quarters. The second key metric is to see our sales being executed around new offerings. It's vital to highlight wins such as BlueScope Steel, which showcases our trend toward integration across various service offerings. The overall growing pipeline reflects this expansion. However, if I could predict the exact inflection point, I would share it, but I can't say for certain. All indicators point positively toward our recent investments beginning to pay off, though.

All right, perfect. Just one clarification; with regard to the pension and SEC settlement charges, should we expect anything in the fourth quarter or has that all cleared through the P&L this quarter?

In the pension area, we will likely see another measurement period at the end of the year across all of our plans. As far as the SEC matter, I believe that's mainly included in Q3, and we should not have any additional charges in that regard.

Not to beat a dead horse on the revenue side in commercial, but if you look over the next couple of quarters, it sounds like you have confidence that the execution issues will be rectified. Do you also believe that at least on a year-over-year basis, we won't see a worse decline in revenue over what you reported this quarter?

I think that begins to moderate. Right now, we anticipate some sequential growth in the fourth quarter, although not substantial growth. We'll see if we can execute against that. The goal is to achieve that first sign of sequential growth. We saw minor commercial revenue growth earlier in the year but then saw a decline. This pattern appears similar to what we experienced with NPS a year ago; the improvement came much later than we anticipated. The key is to capture some sequential growth, which we are targeting and addressing. We are also focused on productivity and cost measures to ensure we maintain good profitability moving forward.

As a follow-up, when we consider fiscal '16 and look at your cost takeout plan, can you comment at a high level on whether we should anticipate gross takeout numbers being directionally up or down? Also, what are some of the main priorities regarding those takeout efforts in the next few quarters?

We previously mentioned several areas of focus, including workforce optimization, examining our labor mix in lower-cost regions, and addressing the overall pyramid structure of our workforce. We still have excellent opportunities in our G&A functions to rightsize overall costs. We plan to achieve additional savings through procurement initiatives and real estate consolidation, which will contribute to the cost takeout benefits we anticipate for next year.