DXC Technology Company (DXC) — Q4 2017 Earnings Call Transcript

Good day, and welcome to the CSC Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Neil DeSilva, DXC Technology's Head of M&A Investor Relations. Please go ahead, sir.

Thanks very much. Thank you, and good afternoon, everyone. Welcome to CSC's Fourth Quarter and Fiscal Year 2017 Earnings Call and Webcast. Our speakers on today's call will be Mike Lawrie, DXC Technology's Chairman, President and Chief Executive Officer; and Paul Saleh, DXC Technology's Chief Financial Officer. The call is being webcast at dxc.technology/investorrelations, and we've posted some slides to our website which will accompany our discussion today. On the slides, on Slide 2, you'll see that, as previously disclosed, effective April 1, 2017, CSC became a wholly-owned subsidiary of DXC Technology Company, an independent public company formed in connection with the spinoff and combination with CSC with the Enterprise Services business of the Hewlett Packard Enterprise Company or HPES. CSC common stock was suspended from trading on the New York Stock Exchange effective as of the opening of trading on April 3, 2017. CSC filed a Form 15 with the SEC on April 18, 2017, to deregister the shares of CSC common stock. DXC common stock began regularly trading under the symbol DXC on the New York Stock Exchange on April 3, 2017. DXC Technology is today reporting CSC's results for the fourth quarter and fiscal year 2017 on a standalone basis, as CSC is deemed the acquirer in this combination for accounting purposes under U.S. generally accepted accounting principles, and therefore, CSC is considered DXC's predecessor. As such, the financial information set forth herein relates only to CSC and its subsidiaries and does not include the financial results for HPES for any period. Corresponding pro forma financial information will be disclosed at a subsequent date. Beginning with DXC's first quarter 2018 ending June 30, 2017, DXC will report on a consolidated basis representing the combined operations of CSC and HPES and their respective subsidiaries. Slide 3 informs our participants that certain comments we make on the call will be forward looking. These statements are subject to known and unknown risks and uncertainties, which would cause actual results to differ materially from those expressed on the call. A discussion of risks and uncertainties is included in our Form 10-K and other SEC filings. Slide 4 informs our participants that CSC's presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we have 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. I would like to remind finally our listeners that DXC Technology assumes no obligation to update information presented on the call except, of course, as required by law. And now I would like to introduce DXC Technology's Chairman and CEO, Mike Lawrie. Mike? Okay, Neil, thank you. Again, good afternoon, everyone. In short, this is the last call we'll do around CSC. So this is CSC's fourth quarter and the fiscal year for CSC that ended March 31. As I always do, I've got 4 or 5 key points here which I will go through in a little detail and then turn it over to Paul, and then we'll open it up to Q&A. So our fourth quarter non-GAAP EPS from continuing operations was $1.15. And for fiscal 2017, non-GAAP EPS from continuing operations was $3.10. In the fourth quarter, our commercial operating margin was 13.1% and for fiscal 2017 it was 10.6%. And we generated $204 million of adjusted free cash flow in the fourth quarter, and for fiscal 2017, adjusted free cash flow was $610 million, which was up 91% year-over-year. Now the second point is that revenue in the fourth quarter was up over 7.5% year-over-year in constant currency, inclusive of our Xchanging and UXC acquisitions. And for fiscal 2017, revenue was up 10.2% over fiscal 2016, and we had a book-to-bill of 1.1x for the quarter. Third point, our momentum in next generation or digital technologies continued in the fourth quarter. Our next-gen revenues were up over 50% year-over-year in constant currency and our next-gen book-to-bill was 1.6x. And for fiscal 2017, our next-generation revenue grew over 75% year-over-year. The fourth point I'd like to make is, as everyone knows, on April 1 we completed our merger between CSC and the Enterprise Services business of HPE, and this was done on schedule. We then launched DXC Technology at the New York Stock Exchange on April 3, which was our day 1. Our integration is proceeding as planned. And as a combined company, we have progressed in our first 8 weeks through a number of operational milestones as well as advanced key partnerships. And then finally, as we discussed at our recent DXC Technology Investor Day, for fiscal 2018 we're targeting revenue to be in the $24 billion to $24.5 billion, our non-GAAP EPS from continuing operations target is $6.50 to $7, and our adjusted free cash flow target is 100% or more of adjusted net income. Now let me just go into a little more detail. Fourth quarter non-GAAP EPS from continuing operations for CSC was $1.15, reflecting both the impact of positive factors like a more favorable tax rate and our CSRA payment, as well as negative factors such as our currency headwinds and IFRS to US GAAP conversion in our acquisitions. For fiscal 2017, non-GAAP EPS from continuing operations was $3.10, up 21% year-over-year, reflecting the same factors as our fourth quarter. And in the fourth quarter, the commercial profit margin was 13.1%, and this was up 130 basis points sequentially. Year-over-year, our margin was up 450 basis points, reflecting the cost synergy realization in the fourth quarter of our UXC and Xchanging acquisitions as well as the typical seasonality in the second half of our fiscal year. And for fiscal 2017, commercial operating margin was 10.6% and this was up 130 basis points year-over-year, despite our ongoing reinvestment into our business. And our adjusted EBIT margin in fiscal 2017 was 8.2%, which was up 115 basis points year-over-year. Adjusted free cash flow for the quarter was $204 million. And for fiscal 2017, adjusted free cash flow was $610 million or 136% of adjusted net income. Adjusted free cash flow was up, as I said, 91% year-over-year. Now let me turn to the second point here around revenue. So revenue was $1.9 billion in the fourth quarter. This was up 7.5% year-over-year, essentially flat sequentially. For fiscal 2017, revenue was up over 10% in constant currency, again, inclusive of our Xchanging and UXC acquisitions. In the fourth quarter, Global Business Services, or GBS, revenue was up 14.2% year-over-year in constant currency and flat sequentially from our last quarter. For fiscal 2017, GBS was up 18% in constant currency. Just breaking that down a little more for the fourth quarter, IS&S or industry software and solutions business was up approximately 28% year-over-year in constant currency, which included the contribution of Xchanging's global insurance business. And for fiscal 2017, IS&S was up 27% in constant currency. Digital applications, the combination of our previous consulting and apps business, was up over 4% year-over-year in constant currency. And for fiscal 2017, digital applications was up approximately 12% in constant currency, inclusive of UXC and Xchanging. GBS's operating margin was 13.8%, up 50 basis points sequentially. And for fiscal 2017, GBS's operating margin was 12%, up 30 basis points from the prior year. GBS's operating margin reflected the ongoing investments we're making in our next-gen and BPS solutions, as well as the accounting impact of transitioning our UXC and Xchanging acquisitions from IFRS to U.S. GAAP. In the fourth quarter, our global services or GIS revenue was flat year-over-year in constant currency and was down 2.6% sequentially. For fiscal 2017, GIS was up 2% in constant currency. The GIS operating margin was 12.4%, which was up 230 basis points sequentially. And for fiscal 2017, GIS's operating margin was 9%, it was up 220 basis points from the prior year. GIS's operating margin reflected operating efficiencies and positive second half mix shift toward our cloud-based software solutions. Turning to bookings. Our bookings in the fourth quarter were $2.1 billion and represented a book-to-bill of 1.1x. GBS bookings of $1.1 billion represented a book-to-bill of 1x compared to 1.2x last year. And GIS bookings of $1 billion represented a book-to-bill of 1.2x compared to 1.4x last year. CSC continued to introduce our portfolio of digital and industry IP solutions to new clients. We added 155 new logos in the fourth quarter, with over 70% of these coming from outside of the Americas. Revenue from our next-generation offerings was up 50% year-over-year and up 11% sequentially, and our book-to-bill was 1.6x. For fiscal 2017, next-generation revenue grew 75% year-over-year. And I just want to touch briefly on a few recent next-gen highlights. MyWorkStyle, our next-generation digital workplace offering, continued its positive momentum in the fourth quarter with revenue up 64% year-over-year. And our next-gen network offering, delivered with our partner AT&T, saw its revenue up 33% year-over-year in the fourth quarter and our Storage as a Service revenue was up 17% year-over-year. We also continued to extend our next-gen digital momentum in the most recent quarter in several ways, with a sizable new digital win in the fourth quarter with a leading client in the aerospace and defense vertical making a $150 million commitment to MyWorkStyle in which DXC will refresh and replace a range of IT services, allowing their staff to conduct their critical work in a newly responsive way leveraging the latest tools and technologies. And in March, we also completed a strategic investment in Virtual Clarity, a leader in digital transformation advisory services. This partnership will allow us to better help our clients define their strategy and understand how to effectively operate in a hybrid world that includes leading cloud environments such as Microsoft Azure and Amazon Web Services. Now just a couple of points on an update on DXC Technology. The creation of DXC Technology on April 1 was a significant milestone for both CSC and HPE. We've been up and running for nearly 8 weeks now, making progress on the comprehensive integration plan we developed over the 10 months since announcing the merger in May of 2016. We'll have much more detail on DXC's first quarter on our next earnings call in August. But for now, let me provide just a few highlights from our first couple of months operating together. Our day 1 activities went smoothly, both operationally and from a systems standpoint, and that's really a testament to the hard work done by our integration planning teams. And I do want to just take a moment to publicly acknowledge and thank them for their efforts. More significantly, the response to the launch of DXC has been very favorable from our key stakeholders and especially our employees. Our sentiment tracking analysis post-day 1 showed strong affirmative responses from our clients, our partners, as well as our industry analysts. The DXC name and brand has been well received. Our key stakeholders have a good understanding of our brand, what it stands for, and they've shown that they're open to DXC's leadership in the industry around digital transformation. Now on day 1, we launched a brand campaign that began with media placements in the key global media as well as a year-long campaign focused on the business traveler. If any of you have passed through airports in San Francisco or Singapore or Sydney, you may have seen us, and there will be more locations to come, as well as campaigns online and in global media. Our brand-building work underscores our pivot to digital solutions through our stronger focus on our clients' missions and our role in guiding them through this rapidly evolving IT landscape. And DXC Technology's Board of Directors convened and approved the establishment of a share repurchase program for the new company with an initial authorization of $2 billion for future repurchases of outstanding shares of our common stock. The board also declared a dividend of $0.18 per share, payable in July of 2017, and announced a dividend policy targeting $0.72 per share for full year fiscal 2018, which represents a 29% increase over the dividend policy paid by CSC in fiscal 2017. Importantly, we've also advanced 4 significant partnerships recently that demonstrate commitment to leading the next cycle of the IT services industry. First, with Microsoft, DXC services for Azure, an extension of our hybrid cloud solution. As traditional hosting and outsourcing services transition to new digital solutions, clients require a cloud platform with a common operating model that can be consistently delivered across both traditional private cloud infrastructure and hyperscale public clouds. Together, DXC and Microsoft will enable consistent service management of Azure services across private DXC data centers and Microsoft's public cloud. Secondly, DXC has also expanded our alliance with Amazon Web Services, making DXC a preferred provider for AWS hybrid and innovation cloud enablement services. Building on DXC's existing global AWS migration to managed services offerings, this step forward lets us combine AWS's cloud infrastructure with DXC's ability to provide hybrid offerings like VMware Cloud on AWS and AWS edge services to accelerate our clients' use of cloud services. And third, DXC today announced a partnership with MphasiS to jointly pursue application migration opportunities. As you may recall, HPE had an equity stake in MphasiS, a publicly listed IT services provider in Bangalore that it sold to Blackstone Group. Now since that disposition, Blackstone has continued to develop MphasiS, allowing DXC to now leverage their technical expertise, talent management capabilities and cloud-enabling app migration capabilities with our global reach, broad client base, and domain knowledge in the industries that we jointly target. And we also announced today that, building on our long-standing strategic alliance with AT&T, DXC will be the first IT services company to launch a third-party virtual network function based on AT&T's FlexWare. By employing AT&T FlexWare, DXC can enable clients to provide significantly improved network services and security across their cloud networks. And in this way, DXC will allow clients to maximize investments, reduce capital outlays, and enhance operational scale and consistency for cloud platforms. Now before I turn this over to Paul, I'd just like to reiterate again, for fiscal 2018, we expect revenue to be $24 billion to $24.5 billion, excluding FX. Our reporting segments for fiscal 2018 will be GBS, GIS, and USPS. And we're targeting non-GAAP EPS of $6.50 to $7 and adjusted free cash flow to be 100% or more of adjusted net income. So with that, I'd like to turn it over to Paul for some additional comments on CSC's results in the fourth quarter and our full year fiscal 2017.

Thank you, Mike, and hello, everyone. As Neil mentioned, this is our last quarter reporting CSC's standalone results. Our next reporting period will include DXC's first quarter fiscal 2018 results, and we will provide comparable pro forma historical financial results for DXC for fiscal 2017 at that time. Before I discuss the fourth quarter and full year results for CSC, I want to highlight some items that are included in the GAAP results. In the current quarter, we incurred restructuring costs of $153 million pretax, or $0.93 per diluted share, mainly due to restructuring actions in the U.K. and Germany in preparation for CSC's merger with the Enterprise Services business of HPE. We also had transaction and integration costs of $147 million pretax, or $0.76 per diluted share, related primarily to our merger with HPES as well as our acquisitions of UXC and Xchanging. Additionally, we recorded a pretax charge of $86 million, or $0.47 per diluted share, due to the annual remeasurement of pension plan assets and liabilities. Excluding the effects of these special items, our non-GAAP income from continuing operations before taxes was $199 million, or $1.15 per share, compared to $109 million, or $0.82 per share, in the previous year. Now turning to our fourth quarter and full year results, revenue for the quarter was $1.9 billion, reflecting a 7.5% year-over-year increase in constant currency, driven by contributions from our UXC and Xchanging acquisitions, as well as growth in our next-gen offerings and BPS business. On a sequential basis, revenue decreased slightly by 1.2% in constant currency due to seasonality in our GIS business. In the fourth quarter, the profitability of our combined GBS and GIS segments was $248 million after special items, with a profit margin of 13.1%, compared to 8.6% in the prior year. The profit margin reflects about a 100 basis point contribution from a net incremental benefit of an IP-related payment from CSRA, partially offset by new investments in the business and a larger-than-expected IFRS to GAAP impact from recent acquisitions. Adjusted EBIT for the quarter was $216 million after special items, and our non-GAAP diluted EPS from continuing operations in the fourth quarter was $1.15, up from $0.82 in the prior year. Our tax rate for the quarter was 11.1%, benefiting from tax planning strategies that materialized this quarter, as well as our global mix of income, compared to a negative tax rate of 6.4% in the previous year. Bookings for the quarter were $2.1 billion, resulting in a book-to-bill ratio of 1.1x. For fiscal 2017, total bookings were $8.6 billion, remaining flat compared to the prior year. For the full fiscal year, revenue reached $7.6 billion, up 10.2% in constant currency, consistent with our prior guidance for fiscal 2017. Adjusted for special items, commercial operating income was $807 million, yielding a 10.6% margin for the year. Adjusted EBIT was $627 million for the year, and our profit margin on that basis was 8.2%, up from 7.1% the previous year. Non-GAAP EPS from continuing operations was $3.10 for the year, reflecting a lower tax rate due to our ongoing tax planning strategies. Now let’s turn to our segment results. Our Global Business Services revenue was $1.043 billion for the quarter, representing a 14.2% year-over-year growth in constant currency and remaining flat sequentially, driven by acquisitions and growth in our Business Process Services and next-gen offerings. In the fourth quarter, GBS segment profitability was $144 million after special items, yielding a GBS profit margin of 13.8%, up from 11.1% in the previous year, mainly due to synergies from our acquisitions of Xchanging and UXC. Sequentially, our GBS margin increased by 50 basis points. GBS bookings in the quarter were $1.1 billion, resulting in a book-to-bill ratio of 1x. For the full year, GBS revenue was $4.2 billion, with an 18% increase in constant currency, operating margin of 12%, and bookings totaling $4.9 billion. Regarding Global Infrastructure Services, revenue was $846 million in the quarter, showing no year-over-year growth in constant currencies and a 2.6% sequential decline. GIS revenue benefited from our acquisitions and growth in next-gen cloud solutions, which helped to offset contract wind-downs and seasonal price reductions. GIS segment profitability in the quarter was $104 million after adjusting for special items, translating to a profit margin of 12.3%, which includes the net incremental benefit from the CSRA IP payment. Normalizing for this payment and accounting for offsetting headwinds, the profit margin in the segment was 8.5%, an increase year-over-year. GIS bookings in the quarter were $1 billion, corresponding to a book-to-bill ratio of 1.2x, highlighting our continued strength in next-gen solutions. For the full year, GIS revenue amounted to $3.4 billion, with an adjusted operating margin of 9% and bookings of $3.6 billion. Moving on to other financial highlights, CSC's adjusted free cash flow for the quarter was $204 million. For the entire year, adjusted free cash flow was $610 million, an increase from $319 million the prior year, representing 136% of adjusted net income. This reflects our strong operational performance, enhanced working capital management, and disciplined capital spending. CapEx in the quarter was $98 million or 5.2% of revenue, in line with our capital-light strategy. For fiscal 2017, CapEx totaled $542 million or 7.1% of revenue. In the fourth quarter, CSC returned $20 million to shareholders through dividends, totaling $78 million for the year. Our cash reserves at the end of the quarter stood at $1.3 billion, with a net debt to total capitalization ratio of 33%. In conclusion, CSC has met its financial targets for fiscal 2017, with revenue increasing by double digits in constant currency, non-GAAP EPS of $3.10, and adjusted free cash flow of $610 million. We successfully completed the merger with HPES and launched DXC Technology. We are now focused on executing our integration and cost synergy plans as outlined at our recent investor day. We will provide updates on our progress towards fiscal 2018 targets during the upcoming DXC earnings call, where we will discuss our first quarter results for DXC. I will now hand the call back to the operator for the Q&A session.

Paul, maybe if I could touch base with you. Nice exit rate in terms of margin trajectory. How do you think about where your focus is going to be for fiscal '18, given your previous 11% to 12% EBIT margin targets and what you've accomplished so far? Can we think about this as more of a run rate and then the focus is more on the HPE side as you look through the year? Or is there still a substantial focus on legacy CSC?

As we discussed during the Investor Day, our current efforts are aimed at realizing synergies from the merged organization, not solely from HPES. We clearly outlined that this includes optimizing the workforce and consolidating overlapping functions. Additionally, integrating our facilities presents another opportunity, along with harmonizing our policies. It is important to note that these efforts are comprehensive and not restricted to one area.

And also automation plays across the entire state. We are in the early stages of doing some things, for example, in our call centers and introducing some new technology to automate some of that. So that will affect not only ex- CSC installations and implementations but also ES.

Got it. Maybe just as a follow-up, when I spoke with UXC in particular, they were very excited about the combination with CSC. And now that you have an even larger platform combining with HPE Services, understanding it's still early days, but maybe could you point out where you see the most substantial advantages with the consolidated platform and where you might bring the capabilities of the acquisitions you've made and leverage them across the broader platform?

Yes, that's a great question. I think we've got fantastic leverage, for example, in some of our enterprise apps practices, like SAP, Oracle, Microsoft. I think you know that UXC had a very strong Microsoft practice, and we see some real benefits around the merger there. ServiceNow. ServiceNow had a very strong practice in Australia as well as Fruition in the United States, and that is a huge opportunity for us in the ES installed base. So yes, there is a lot of leverage. I'd also say there's some very strong consulting capability around cyber in UXC and that certainly will be benefited by the great strength that ES brings from a cyber standpoint. And I think the big thing is, we just finished up a 2-day sales conference where we brought our whole worldwide sales team together to really kick everything off, and I've got to tell you, they were blown away by the partnerships and the partnership network that we have put together with all of our strategic partners. And I think all of those partnerships can be extensively leveraged across the ES installed base. Our partners are even more excited about gaining access to that installed base.

The book-to-bill numbers look very promising. I'm interested in knowing how the quality of the book-to-bill and customer retention might impact the business moving forward. I realize this may be an unusual question, but I'm curious about how it could potentially influence future operations. Looking ahead, do you think achieving a book-to-bill ratio of 1 is a reasonable goal? I understand that this is a complex issue, and I’m trying to gain a clearer picture of your overall pipeline perspective.

We will be adopting different metrics moving forward, and we're in the process of refining this. For instance, we are shifting the salesforce to focus more on annual billing metrics. To be straightforward, we will be reducing our emphasis on Total Contract Value. I've been wanting to transition away from TCV because it often appears inflated and is significantly higher than what actually contributes to our income and profit over a given time period, specifically a year. Therefore, we'll be focusing more on annual billing metrics. We may still reference TCV or a similar metric to assess our book-to-bill ratio, but our approach will shift slightly with the combined company.

Okay. Yes, I know duration and everything else makes it tricky to use. So fair enough. And then I guess just...

The other thing that's happening here is we're seeing a big increase in smaller transactions. I mean, we're planning to do 75,000 transactions in DXC this fiscal year. And we're also seeing a big increase in our SaaS model. So I said before, the IT landscape is evolving here, and we're going to have to adjust some of the metrics by which we look at the business. And we'll share some of that thinking when we talk again in August. And that will also evolve over time. But what I'm trying to get to here is a much better handle on how sales relates to our revenue and profit in a given increment of time and then a handle on what the total backlog is as we look out, because that helps us with our workforce management programs. Does that make sense?

Okay. We'll stay tuned for that. I’m curious about the $1 billion in savings and what you can share regarding the difference between the June quarter and the rest of the year. Do you have any new insights on how quickly that will be realized?

There are no new updates since our Analyst Day. We made some changes in the fourth quarter as we planned, to prepare for monetizing those savings, which will happen not all in the first quarter but in the first half of the year. We are largely following the path we outlined during our analyst meeting in April.

Mike, if you could just start off by maybe giving us a little more color on, I know it's only been about a month or a little more than that since your Investor Day, but incremental feedback you're having from your discussions with clients around either revenue opportunities or dis-synergies or even just the integration side. Anything change at all in terms of further color you can give us would be great, to start off, and then just a quick couple of questions for Paul after.

I'm really pleased with the integration effort so far. We're operating as one company. Recently, we gathered our entire worldwide sales team in Dallas, and both Paul and I addressed them. We're all communicating about the business in a unified manner. Each region now has a cohesive management team, and our offering organization is starting to come together. Steve Hilton discussed how we've consolidated our delivery organization. From an integration perspective, everything is going well. Our partners have expressed surprise at how quickly we've adapted—within just seven weeks, we reached this level of operation. Employees value the transparency we maintain, as we share the same information with them that we do with our investors and analysts, which keeps everyone aligned on our goals. We're making progress on our synergy plans, streamlining the organization, and improving procurement, as we outlined in our analyst meeting. Importantly, everything has worked smoothly from the start. We merged our salesforce instances, billing systems, and financial systems effectively. We successfully closed out April and were able to analyze the numbers based on our new structure. There's certainly a lot of hard work ahead, and I don't want to downplay that. However, for the past month and a half of operations, everything has gone well. I speak to eight to ten clients a week, and they are generally quite satisfied. They haven't experienced any disruptions in service and are noticing some innovation and new ideas being introduced. Overall, things are progressing as we outlined during our analyst meeting.

So would you say the guidance you gave around dis-synergies is coming in a little in line or better or basically it's too early to tell? But the conversation sounds strong.

I think it's still early. I think it's still early. I don't want to call that yet. There's a lot of things that are on the table that we've got to work our way through, so I think there will be some dis-synergies, but it's way too early to make a definitive call on that.

And just quickly on the organic side. I mean I know it's tough right now, but last quarter CSC standalone was probably negative 1%, negative 2% growth, and the HP side was probably negative, I don't know, 3%, 4%, 5%. I think it was negative 5%. Is there any direction you can give us, I mean in terms of the organic trends, if you were to either pro forma out for the deals you've done? Is that in line, similar rates now? It's a little hard to parse.

I think it's pretty much along the lines that we talked about. It's going to be a little more difficult now that we've get everything smashed together. But as I've said before, the so-called crossover points sort of varied a little bit quarter-to-quarter. Third quarter, our organic growth was a little positive; in the fourth quarter, it was a little on the negative side. Now when you throw in the acquisitions like UXC and Xchanging, which is really how we look at the business, I mean, we're getting substantial now revenue growth from these new offerings, including our acquisitions. I think the revenue case that we laid out at the analyst meeting from a constant currency basis is still the range that we see operating in as we go through fiscal 2018. So really no change.

Just one last question. Paul, for a bit of housekeeping, you mentioned that the USPS business would be reported separately. Is this for reasons related to potential financial strategies? Also, are we still expecting the tax rate to be in the mid-20s, or is it difficult to assess right now given the current business mix?

Yes, those are very good questions. The reason we want to separate the USPS business is that historically, if you recall, we had our commercial business of GBS and GIS, so it will align a little more readily that way if we split the USPS business. It also has a different set of customers and different cadence of business. And so that's the work that's underway right now. And in terms of the tax rate, we have had a number of tax plans in place and we were very fortunate to be able to land them in the fourth quarter, and that resulted in a lower tax rate in our fourth quarter. Now when I look forward to 2018, it's a little bit trickier to read it, just because at one point we thought that the U.S. administration may pass some tax reform. Not sure exactly how that will play out. I think the guidance that we have given you, which was in the mid-20s to 27%, 28% or so, is going to hold for now until we get some greater clarity of which way the administration goes. Otherwise, we'll have to just really accelerate other tax planning strategies to optimize our rate across the world.

I was wondering if you can maybe just give us a sense about, relative to the $1 billion of cost takeout, you talked about some of the actions you took in legacy CSC in terms of the restructuring. But could you maybe go through for us, Paul, each of the 4 buckets, whether that's workforce, supply chain, policy, or facilities, and kind of lay out for us what activities have already taken place so far and kind of what we can expect in terms of the inning we're at in each of those 4 buckets?

Yes, as you know, we couldn't start a lot of this until the merger was complete. We initiated some actions on the CSC side, particularly in Europe, to get a head start. The harmonization of business policies is largely progressing as planned. Regarding workforce optimization, we are delayering the organization and starting to implement the planned cuts, which are also in progress. We now have the organizational structure mostly defined with an average of 7 layers of management across the company globally, and about 6 of those layers are named, which creates surplus that we monitor through our labor management process. This tracking takes time, depending on the country involved. Our supply chain efforts are also moving forward; we have secured most agreements with key suppliers and are establishing a more centralized procurement system to manage these agreements effectively. This is new, especially for ES, and is still in the early stages. We've already made a couple of facility changes, including consolidating locations in London. Overall, things are progressing mostly as we expected, with some ups and downs; certain areas are doing better than anticipated while others are not, but on the whole, we are moving forward as planned.

Jim, what I will add to what Mike was saying, in terms of timing of some of these actions, you saw us take some restructuring actions in the fourth quarter, particularly in Germany, because that is a market that we had long overdue of taking some cost actions there. And the way we look at it in terms of our plan, we break it down into 3 major buckets, if you think about it. Internal labor, we have contractor labor, and then we have other purchases that impact the P&L and the balance sheet in terms of hardware, software, and some of our indirect spend. And so the sequencing a little bit of what you are seeing is more of the action that Mike was mentioning which has to do with the internal labor and the reorganization and consolidation of our effort. There are certain things that are on the indirect spend, for example, that is easier to get to, such as travel policies and alignment of some of those other benefit plans. And then we're attacking now, some of the other buckets that are equally important, such as contractors and some of the spend in software and hardware. And then keep in mind that, when it comes down to some of the labor cost take-out, that's why you'll see it phase very rapidly over the course of the year with actions we take in the first quarter but it will accelerate in subsequent quarters, because you have to think about complex and noncomplex countries, and sometimes there is a period of time from notification to exit.

Yes, this ramps up as we go through the fiscal year. But I'll tell you, this tracking, Jim, sorry to try to get you more than you asked for here, but I'll tell you, we track this stuff. I mean, every Thursday morning, 7:00 a.m. Eastern Daylight Time, I mean, we know every person that's hired, we know what level of the pyramid they're coming in at. We know what country they're coming in at. We know every person that's leaving, what skill they have that's walking out the door. We are managing this thing very, very tightly. So we know exactly what's going on, and then we make adjustments as we go forward.

That's helpful. And then maybe if I can try a different way on the revenue side of things. Maybe, Mike, can you provide a little bit of anecdotal color among some of your largest customers, the kind of discussions you've had around larger customers about what they're telling you in terms of dis-synergies, and then, probably just as important, how the conversations are going in terms of the cross-sell and upsell of contracts that you mentioned during the Investor Day, where you hope to get kind of additional revenue from an existing outsourcing customer, for instance?

I mentioned during the analyst meeting how we are leveraging our ITO base to generate additional incremental revenue, and this is progressing well. We have secured a few significant contracts that we have either signed or are close to finalizing. We are becoming increasingly confident in our capabilities. However, the feedback from customers has been very clear. They expect us to ensure good delivery, stating that they rely on and trust us to deliver. Additionally, they are looking for our innovative ideas and value the partnerships we have, such as those with Microsoft, AWS, and AT&T, which are important to our client base. They want reliable delivery and assistance in navigating this digital transformation that all clients are experiencing. Initially, it was just a theory that our customers would respond this way, but it is now evident that there is an opportunity for us, and we have the approval to pursue it. It is now our responsibility to take advantage of this opportunity.

Paul, did you call out the constant currency, the foreign exchange impact in the quarter?

No, we did not, but I want to say it's about $0.06 or so.

But how about on the revenue side?

On the revenue side, I think you can see the difference. I'll get you that as you ask something else.

Yes. I just wanted to ask about where we stand with the IFRS. Are we closer to the middle of that journey than the beginning? Will this just get diluted in the numbers of the larger company?

Certainly, we were hoping to achieve more conversion from IFRS to GAAP. The issue is that some contracts required modifications from the customer to realize the associated revenue and profitability. Unfortunately, due to the ongoing merger, we couldn't secure our customers' attention to implement these changes. However, we will receive those benefits; this isn't money that is lost. I believe we will see these benefits reflected in our fiscal 2018 as part of DXC.

I'll also make it quite brief. I was wondering if you could drill down into that healthy 1.6x book-to-bill for next-gen, understanding it's just legacy CSC, but can you give us a little more granularity there on the products and services? Are there any key drivers to call out? Or is it broad-based?

No, there are several drivers. One is MyWorkStyle, which has performed consistently well for us in 2017, and we continue to see many opportunities, including some significant wins. The $150 million win I mentioned was attributed to MyWorkStyle. Our Storage as a Service continues to expand along with our network offerings with AT&T, which we recently enhanced with the FlexWare announcement this week. We also experienced strong business growth around our cloud software, especially our Agility Platform, which contributed to margin expansion in the second half of our fiscal year. Overall, we have seen broad-based growth across many of our new platforms. However, I want to emphasize that these figures are not substantial. As we noted during our Analyst Day, they still represent a smaller portion of our overall revenue. Nevertheless, we are pleased that they continue to grow at the anticipated rates, and the growth appears to be widespread.

Lastly, regarding talent and staffing for your next-generation and digital offerings, how adequately staffed are you to take advantage of this opportunity? Is your growth affected by the need to find the right people to implement, or are you satisfied with your current staffing levels?

No, we are definitely limited by the available skills. For instance, in security, we could be growing faster than we currently are. Recent events from a few weeks ago have only emphasized this issue. We made an investment in a consultancy called Clarity. Instead of trying to hire a large number of new employees, we are focusing on graduate programs to bring in new talent and train our existing workforce. Additionally, we are exploring creative ways to access the necessary skills. As I mentioned at the Analyst Day, we have a significant transformation planned for our workforce over the next three years, and we still have a long way to go to achieve that. However, we are actively trying to innovate and find different methods to acquire those skills. Does that make sense?

Jamie, this is Paul. I think the FX impact was about $55 million or 3 points. So 7.5% was the constant currency growth, 4.5% on a GAAP basis, $55 million of revenue impact from the dollar to local currency.

That concludes our call. Thank you, everyone, for joining us for CSC's final call covering fourth quarter and full year fiscal 2017. We look forward to our next call, which will cover our first quarter as DXC Technology.

Thank you, guys.