CSC INVESTOR DAY 2012
September 10, 2012
CSC 2012
Forward-Looking Statements
All written or oral statements made by CSC at this meeting or in these presentation materials that do not directly and exclusively relate to historical facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent CSCs expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. These statements are subject to risks, uncertainties, and other factors, many outside of CSCs control, that could cause actual results to differ materially from the results described in such statements. For a description of these factors, please see CSCs most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
CSC 2012
September 10, 2012
Non-GAAP Reconciliations
This presentation includes certain non-GAAP financial measures, such as operating income, operating margin, Earnings Before Interest and Taxes (EBIT), free cash flow, capital expenditures and capital intensity. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States (GAAP). A reconciliation of non-GAAP financial measures included in this presentation to the most directly comparable financial measure calculated and presented in accordance with GAAP accompanies this presentation and is on our website at www.csc.com. CSC management believes that these non-GAAP financial measures provide useful information to investors regarding the Companys financial condition and results of operations as they provide another measure of the Companys profitability and ability to service its debt, and are considered important measures by financial analysts covering CSC and its peers.
CSC 2012
September 10, 2012
Agenda
12:30 1:10 1:10 1:30 1:30 2:00
Mike Lawrie, President and CEO Paul Saleh, CFO Q&A
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September 10, 2012
Key Messages
CSC is a strong, global enterprise Recent company financial performance is not indicative of CSCs assets, skills, and capabilities We understand the root causes of our problems We believe the business can be fixed and have developed a comprehensive multi-year transformation plan We are working on a new financial model to improve shareholder value We have identified some key risks that may impact our transformation Execution of strategy is well under way
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Brief Overview of CSC a Strong, Global Enterprise
Our assets and capabilities
2,500+ clients 96,000 employees Over 70 countries Strong relationships with federal (Dept. of Defense, civil agencies) as well as state and local governments Substantial IP in healthcare, insurance, and banking
iSoft healthcare solutions serve over 13,000 provider organizations in 40 countries Core insurance administration platforms support more than 500 million policies globally Half of the worlds reinsurers use CSC reinsurance solutions Banking software Hogan processes more than $1.7 trillion in U.S. deposits
Industry-leading cloud and cyber offerings
Developed proprietary cyber tools based on our deep understanding of advanced, weapons-grade malware CSC positioned in Leaders Quadrant of Magic Quadrant for Public Cloud IaaS 13 cloud data centers operational globally, 4 more in development
Deep domain expertise across industries and offerings (scientists, engineers, astronauts, insurance experts) Contract backlog of $36B
One of the last remaining independent IT services companies with global reach
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Diverse and Global Client Base
Financial Services
Healthcare
Sirirai Hospital, Thailand
Manufacturing
Diversified
Public Sector
Ministry of Health, Malaysia
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CSCs Global Footprint Spans Six Continents
Service Desk Locations (29) Data Centers (34) Delivery Centers (24)
UK: 8,000 Employees
Germany: 3,000 Employees
United States: 40,000 Employees
Continent North America Europe Australia Asia South America Africa
% Revenue 62 25 7 4 <1 <1
% Employees 43 23 3 29 <1 <1
India: 23,000 Employees
Australia: 3,000 Employees
CSC has a presence in over 70 countries
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50+ Years of Entrepreneurship Innovation Excellence
First publicly traded software company
First automated traffic control system for the Panama Canal
First local govt. contract ever awarded
Industry leader with critical projects (Kuwait rebuild)
System software growth
Public sector growth
Commercial growth
Recognized industry leader
1960
1970
1980
1990
2000 2012
First computerbased system for sports/ entertainment ticket sales
First real-time automated air cargo handling system at Londons Heathrow Airport
One of first $1B outsourcers
Leading position in insurance and infrastructure services
FROM BIRTH
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INGENIOUS
CSC Has Underperformed in the Last Few Years
Root causes of our underperformance ...
Strategy didnt recognize shift in industry trends (e.g., fewer outsourcing mega-deals) and led to misalignment of resources Incentives were misaligned (e.g., revenue focus) Weak discipline around contract and delivery management Company fragmented into several units the whole was less than the sum of its parts leading to fragile financial controls and systems This led to an unaffordable cost structure
impacted our portfolio in many ways
Over-indexed toward rapidly commoditizing traditional infrastructure Business became too capital intensive Large number of high-risk infrastructure and application projects Proliferation of customized, non-standard offerings, which added cost, complexity, and sluggishness to our business
which reflected in our financial performance
Revenue FY08 FY12 $ Billion
15 10 5 0
and reached a tipping point in FY 2011/2012
$1.5B NHS contract charge and $2.7B in goodwill impairment SEC investigation in FY 2011 40 major contracts underperformed Lost more than 50% of our market cap from May 2011 to December 2011
OI FY08 FY12 $ Billion
1 0 -1
1200 800 400 0
FCF FY08 FY12 $ Million
In the process, CSC lost its identity and its value proposition
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CSCs Unique Value Proposition
Substantial IP and industry-focused solutions
Leader in European life insurance policy administration Process ~11 million contracts, policies, and loans worth $7.6B in premiums iSoft touches 13,000+ healthcare providers and 70 million patients in 40 countries Designed and implemented super-precise dispatching system for Swiss Federal Railway
Extraordinary skills and domain knowledge
Team of PhDs working to develop and lead emerging Climate and Energy market Working with industry experts through CSC Leading Edge Forum to address global technology challenges More than half of CSCs Homeland Security and Law Enforcement Division leaders formerly U.S. DHS and DOJ officials
Introduced first hybrid cloud BizCloud
One of the last remaining independent IT services companies with global reach
Conducting naval aviation simulator training programs for U.S. Navy Developing courses for Defense Cyber Investigations Training Academy (DCITA) Supporting CDC on World Trade Center program for treatment of workers affected by 9/11 Processed more than 40 million visas in 20+ languages and 100 countries
Standard architecture across public and private clouds Part of Defense Industrial Base program to protect U.S. DoD from network attacks Building our own global threat intelligence capability, and global cybersecurity information architecture
Leading next-generation infrastructure offerings
Deep experience in federal government, defense, intelligence, and civil agencies
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CSC Vision, Mission, and Strategy
Vision
next-generation technology solutions and services provider. Our clients achieve superior returns on their technology investments through our best-in-class industry solutions, passion, and domain expertise of our people, and our global scale
Mission and Purpose
To be the worlds leading
superior value for our customers, shareholders, and employees by being the industry leader in next-generation technology services and industry-specific solutions through leveraging the worlds best talent and global scale
Strategy
1 2 Expand market coverage and drive demand 3 4 Scale nextgen infrastructure offerings 5 Rationalize and standardize offerings 6 Disciplined, transparent, accountabilityoriented management system
To create
Fix the foundation
Move up the value chain
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CSC Turnaround Strategy
Strategy
Fix the foundation Improve cost control through Opex reduction, balance sheet cleanup, capital intensity reduction, and centralized procurement Better discipline around contract management and portfolio optimization Increase data transparency through overhaul of financial and HR systems Right leadership in right roles Rationalize spans and layers Expand market coverage and drive demand Clear definition of roles of verticals, regions, and offerings Redefine client coverage model for Global 1000 and regional clients Expand presence with Global 1000 companies Align incentives across various offerings to drive cross-sell in accounts Nurture talent and domain knowledge Establish strategic alliances and partnerships
3 5 Year Turnaround Goals
Cost reduction of ~$2B over next 3 5 years 7 10% reduction in procurement costs ~50% reduction in organizational layers Appropriate spans of control average span of
7 direct reports 25% reduction in cost of HR and Finance transactional activities Capex ~50%, or lower, of total capital allocated
FY12
# of Global 1000 clients % of accounts with cross-sell % of commercial revenue from Global 1000 ~200
In 3 5 years
300 400
40 50% 5 6% 65 70%
~50%
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CSC Turnaround Strategy (Contd)
Strategy
Move up the value chain Strengthen portfolio of industry-specific software and solutions Improve utilization and development of existing IP assets Create higher value for clients and improve CSCs profitability by shifting portfolio mix to higher margin offerings such as industry-specific software and applications
3 5 Year Turnaround Goals Improved profitability of CSCs offerings portfolio
Business/industry-specific consulting Industry-specific business process services Industry-specific software and applications Horizontal applications Next-gen infrastructure (cloud, cyber, big data) Traditional infrastructure (data center, network)
Profitability >15% 10 15% <10% In 3 5 years
FY12 Revenue %
<20% <5% <5% <15% <5% >35%
20 25% 10 15% 10 15% 10 15% 20 25% 15 20%
Scale and lead in next-gen infrastructure offerings in cloud, cyber, and big data Incubate cloud, cyber, and big data offerings directly under CEO Develop detailed economic model and value proposition for cloud, cyber, and big data offerings Accelerate adoption of next-gen offerings across business Increase collaboration between NPS and commercial to leverage existing capabilities and cross-sell next-gen offerings
Revenue
FY12
In 3 5 years
$1 1.5B
Cloud offerings ~$100M
Cyber offerings
$1 1.5B ~$600M $1 1.5B Negligible
Big data offerings
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CSC Turnaround Strategy (Contd)
Strategy
Rationalize and standardize offerings Focus on differentiated, less capital-intensive offerings Standardize, consolidate, and streamline service delivery through global delivery networks Exit non-strategic low-margin offerings Adopt standardized offering life-cycle management (OLM) processes Drive meaningful innovation throughout the organization Disciplined, transparent, accountability-oriented management system Laser focus on operational metrics, with clear accountability Disciplined approach to drive value to customer and CSC Invest in world-class talent and retention Drive and support innovation Forward-looking strategy relative to market trends and opportunity
3 5 Year Turnaround Goals
2,000+ customized, non-standard offerings
~150 global standardized offerings
OLM process
~700
~250
CSC Management System
Operations Review
Deal Committee
Strategic Investment Committee Ethics and Compliance
Sales Excellence
Focus Account Compliance Remediation Review
Business Review
Cost Takeout
Senior Leadership Team
Strategic Business Planning
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Multi-Year Transformation Plan to Recapture Our Leadership
Low Intensity of effort High
Get fit Value
Win more
Lead
200 300 BPS margin improvement
300 400 BPS margin improvement
~$18B ~$16B $5+
$16B
$0.67
$3+
Time
Revenue
EPS*
Revenue
18 mos
EPS
3 yrs
EPS
Revenue
5 yrs
FY 2012
FY 2014
FY 2017
1 Fix the foundation 2 Expand market coverage and drive demand 3 Move up the value chain 4 Scale next-gen infrastructure offerings 5 Rationalize and standardize offerings 6 Disciplined, transparent, accountability-oriented management system
*Adjusted
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CSCs New Operating Model
Global Industries Public Sector (incl. Federal) ($6.5B)1
CEO direct reports
(FY12 revenues) Consulting Industry Software and Solutions Applications End User Services Connectivity Global Infrastructure Services (~$4.7B) Unified Communications and Collaboration Data Center Storage and Compute Global Enterprise Service Management Cloud (~$100M) Cyber (~$600M) Big Data
Financial Manu- Diversified Healthcare Services facturing (~$800M) (~$3B) (~$3B) (~$2.5B)
Regions (~$15.8B) Chief of Staff
Global Business Services (~$5.5B)
Global Sales and Marketing Operations
Finance
HR
Legal Corporate Strategy & Business Development Contract Performance & Quality Control
Global, standardized processes (FP&A, Sales, HR, Procurement, Offering Life-Cycle Management, etc.)
~$5B in revenues from NPS, excluding cyber NOTE: New operating model to be fully operational by FY 2014
(1) Includes
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Key Markers of Success
FY 2012
Other Consulting Traditional infrastructure (15% 20%)
In 5 Years
Consulting (20% 25%)
20
20 7
Industry software and solutions Applications Next-gen infrastructure (20% 25%) Applications (15% 17%)
Revenue Mix (%)
Traditional infrastructure
37 4
11
Next-gen infrastructure
Industry software and solutions (20% 25%)
Revenue ($B) YoY Revenue Growth (%) EPS ($) EBIT (%) FCF (% of Net Income) Capital Intensity (%)
~$16B ~0% $0.67* 2%* NMF** 70%
~$18B 3% 5% $5+ 7% 9% >100% ~50% or less
*Adjusted **NMF = No Meaningful Figure
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New Financial Model
200 300 BPS of margin improvement 300 400 BPS of margin improvement
Customer-committed savings and reinvestments
Revenue growth of 3% 5%
Cost takeout Customer-committed savings Incremental restructuring Business reinvestments Enterprise systems Sales Training Standardized offerings
$5.00+
$3.00+
Revenue mix
Revenue flat to down
Cost takeout ($1.0B $1.2B)
Net Operating Leverage
Revenue
$0.67*
Revenue
Net Operating Leverage
FY 2012
FY 2014
FY 2017
2.7%* 6.4%*
Commercial** operating margin (%) Public sector operating margin (%)
10% 12% 8% 9%
*Adjusted **Commercial comprises MSS and BSS
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Looking Ahead: Key Risks
Operational risk due to transformation effort Delays in award decisions for government contracts putting pressure on NPS Headwinds in CSCs biggest industry vertical financial services Macro-economic turmoil in Europe Uncertainty in U.S. healthcare industry
We have incorporated these risks in our financial model
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Strategy Execution Progress To Date
Onboarded new leaders in the top leadership team
1 2 3 4 5 6
Fix the foundation
Launched $1B cost takeout program Contract performance and risk management processes being redesigned
Expand market coverage and drive demand Move up the value chain
Segmented Global 1000 and regional accounts Clearly defined coverage and account management principles Developing vertical-specific strategy for each vertical Rolling out new incentive structure to promote higher margin offerings Developing new life-cycle management methodology for software assets Accelerating as a service enablement of our software assets Creating a standard transformation journey for customers to transition to the cloud
Scale next-gen infrastructure offerings
Building a playbook to cross-pollinate cybersecurity offerings across commercial and NPS Actively pursuing new leader for Big Data Inventory of all offerings completed, and rationalization in progress
Rationalize and standardize offerings
Appointed global leader for Offering Life-Cycle Management Global service network design on track
Disciplined, transparent, accountability-oriented management system
Each leader accountable to deliver against a transformation program Instituted new CEO management system to be replicated across all business units Designing new enterprise Delegation of Authority matrix to drive consistency
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Agenda
12:30 1:10 1:10 1:30 1:30 2:00
Mike Lawrie, President and CEO Paul Saleh, CFO Q&A
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22
Roadmap to Consistent Financial Performance
Cost Takeout Opportunity
1 2 3 4
New Financial Model
Improved Cash Flow Performance
Cash Flow Priorities
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1. Cost Takeout Program
Value Lead (5 years) Win more (3 years) Get fit (18 months) Time
Supply chain and procurement savings Workforce optimization Enterprise overhead reduction Contract management discipline Enterprise system optimization Increased use of shared services Standardized offerings
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Supply Chain and Procurement Savings
Key Levers Total Spend
Category sourcing
Spend Spend Total data Business requirements Sourcing opportunities $7B Sourcing plans and execution Contracts renegotiations
$7B
Top 10 categories make up 80% of addressable spend
Top 10 categories make up 80% of addressable spend
Demand management
Contractual obligations Timing of purchases Compliance with preferred vendors
Total spend
Customer specified
PassOther non- Addressable through discretionary spend
Procurement operations
Procurement operations
Procure-to-pay process New governance structure Supplier performance PassCustomer Total
spend specified
through
Other nondiscretionary
Demand management
Category sourcing
Addressable spend
Target savings of $350M $400M
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Workforce Optimization
Key actions
~50% reduction in reporting layers Appropriate spans of control
Workforce targets
Skills, knowledge External Greater utilization of offshoring Demand Supply
Seven direct reports, on average
Spans and layers gaps Internal Simplified role taxonomy
Consistent implementation of policies around:
Contractors New hires Underperformers
Increased utilization of existing offshore resources
Target savings of $250M $300M
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Enterprise Overhead Reduction
G&A
Streamlining
IT
Re-prioritizing
Facilities service
Consolidating
corporate and BU functions business activities
excess
levels
Redirecting
space
Redefining
Consolidating Eliminating
redundancies
service delivery to low-cost centers
space
standards
Zero-basing
activities and benchmarking against best-in-class companies
Rationalizing
IT projects Renegotiating real estate leases
Exiting
owned and leased facilities
Target savings of $200M $250M
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Contract Management Discipline
Strengthening contract management process
Capture Contracting Delivery Renewal High
Improving performance of focus accounts
Balancing portfolio of risks and returns
Consistent contract process Tighter bid review and approval Economic game plans Risk identification and mitigation Team composition Scope definition Governance Continuity of coverage Transition plans Performance tracking against bid model and timelines
RISK
Detailed review of account performance Action plans to close gap to bid model Tighter focus on contractual commitments Change control discipline Contract renegotiation Acceleration of offshoring activities
Avoid/ Improve
Strategic Small Bets
Target Portfolio
Strategic Investments
Low Low
Sustain or Grow
High
RETURN
Target savings of $200M $250M
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Cost Takeout Summary
($ Millions)
Opportunity
Supply chain and procurement savings Workforce optimization Enterprise overhead reduction Contract management discipline Total
Target Savings
$350 $400 $250 $300 $200 $250 $200 $250 $1,000 $1,200
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Additional Cost Takeout Opportunities
Increased Use of Shared Services
Sterling Chennai Prague
Transaction Activities
Shared Services Cost Reduction
25%
Business Units
Current State
Procurement Accts. payable Payroll Benefits administration Travel & expense
Additional Activities
HR recruiting Tax Labor sourcing Inter-company transactions Contract compliance General accounting Treasury operations Fixed assets Billing Master data maintenance Analytics Sales support
Standardized processes
Automated controls
Common tools and systems
Data consistency and transparency
Enterprise systems optimization
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Standardized and Rationalized Offerings
From
Thousands of offerings Limited standardization Inconsistent delivery standards
~700 ~250 ~150
To
Rationalized and standardized global offerings Global delivery services Consistent offering life-cycle management
Focus on differentiated, less capital-intensive offerings Standardize and consolidate service delivery Exit non-strategic, low-margin offerings
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2. New Financial Model
200 300 BPS of margin improvement 300 400 BPS of margin improvement
Customer-committed savings and reinvestments
Revenue growth of 3% 5%
Cost takeout Customer-committed savings Incremental restructuring Business reinvestments Enterprise systems Sales Training Standardized offerings
$5.00+
$3.00+
Revenue mix
Revenue flat to down
Cost takeout ($1.0B $1.2B)
Net Operating Leverage
Revenue
$0.67*
Revenue
Net Operating Leverage
FY 2012
FY 2014
FY 2017
2.7%* 6.4%*
Commercial** operating margin (%) Public sector operating margin (%)
10% 12% 8% 9%
*Adjusted **Commercial comprises MSS and BSS
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3. Key Drivers of Cash Flow Improvement
Actions
Cost takeout Portfolio review Operational efficiencies Optimized geographic mix of taxable income Use of valuation allowances R&D credit opportunities Streamlined legal entity structure
Objectives
EBIT
500 700 BPS improvement
Taxes
35% or less
Working Capital
DSO improvement Lower unbilled receivables Better supplier terms Shift in capital ownership model Disciplined demand management Less capital-intensive offerings mix Higher hurdle rates on capital
Total DSO <67 days DSO excluding unbilled <37 days
Capital Expenditures
~50%, or lower, of total capital allocated
FCF of more than 100% of Net Income
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Strengthening Credit Profile
Liquidity Profile Cash: $1B (Q1 2013)
$316M onshore $684M offshore (accessible tax effectively)
Debt Maturity Profile Current
Free Cash Flow from operations
FY 2013 target: $300 $350M
Potential divestitures of non-strategic assets Access to capital markets
Bond market Commercial paper Bank loans
Illustrative
Objectives
Smooth maturity profile Ample access to liquidity Strong investment-grade credit profile
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Optimizing Capital Allocation
CSC Cash Usage Past 5-year average
Acquisitions
~25%
Peer Comparison*
Capex
Capex
~60%
10% 25% 10% 50% 20% 80%
Acquisitions Capital allocated to shareholders
Capital to Shareholders
~15%
Long-Term Objectives
Reduce capital intensity Generate returns in excess of cost of capital Return more cash to shareholders
* Peer
group includes Accenture, CACI, Capgemini, CGI Group, Hewlett-Packard, IBM, ManTech, SAIC, Unisys, and Xerox
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4. Cash Flow Priorities
Reinvest in core business
Pursue bolt-on strategic acquisitions Ensure strong financial position with ample access to liquidity Return more cash to shareholders from FCF
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Agenda
12:30 1:10 1:10 1:30 1:30 2:00
Mike Lawrie, President and CEO Paul Saleh, CFO Q&A
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Thank You
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