Neil DeSilva - Head, Investor Relations Mike Lawrie - Chief Executive Officer Paul Saleh - CFO & EVP.

Jason Kupferberg - Jefferies Edward Caso - Wells Fargo David Grossman - Stifel, Nicolaus Keith Bachman - Bank of Montreal Bryan Keane - Deutsche Bank Darrin Peller - Barclays Capital.

Good day, ladies and gentlemen, and welcome to the CSC fourth quarter 2016 earnings conference call. Today's conference is being recorded. And at this time I would like to turn the floor over to Mr. Neil DeSilva. Please go ahead, sir..

Thank you very much, and good afternoon everyone. I'm pleased you've joined us for CSC's fourth quarter 2016 earnings call and webcast. Our speakers on today's call will be Mike Lawrie, our Chairman and Chief Executive Officer; and Paul Saleh, our Chief Financial Officer.

As usual, the call is being webcast at csc.com/investor_relations and we've posted some slides to our website which will accompany our discussion today. Please note that we will be filing our 10-K for fiscal 2016 early next week. On the slides, on slide two, you'll see that certain comments we make on the call will be forward-looking.

These statements are subject to known and unknown risks and uncertainties which could cause actual results to differ materially from those expressed on the call. A discussion of risks and uncertainties is included in our Form 10-K, Form 10-Q and other SEC filings.

Slide 3 informs our participants that CSC's presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors.

In accordance with SEC rules, we've provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release, as well as in our supplemental slides. Both documents are available on the Investor Relations section of our website.

CSC will file with the SEC a proxy statement on Schedule 14A, and a registration statement on Form S-4 containing a prospectus.

Investors and security holders are advised to read the registration statement and prospectuses and the proxy statement when they become available because they will contain important information about the parties and the proposed transaction.

Many factors could cause actual results to differ materially from such forward looking statements with respect to the announced transaction, including risks relating to the completion of the transaction on anticipated timing, including obtaining shareholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, inability to achieve expected synergies, loss of revenues, delay or business disruption caused by difficulties in integrating the businesses of CSC and Enterprise Services.

Finally, I would like to remind our listeners that CSC assumes no obligation to update the information presented on the call, except, of course, as required by law. And now, I would like to introduce CSC's Chairman and CEO, Mike Lawrie.

Mike?.

our clients, our employees, our alliance partners, and shareholders, and we believe that this merger will create significant value for all four of those stakeholders.

Now in terms of what happens next, our merger and integration planning is already underway and is being led by dedicated teams at both CSC and HPE; and for our stakeholders, it will really be business as usual.

Through the pre-closing periods, we will maintain our client service and delivery excellence, and additionally we'll be keeping all of our stakeholders informed as we approach major milestones. Now, let me just go into a little more detail on each of those points.

As I said, we’ll be merging CSC with HPE Enterprise Services to form a $26 billion pure-play independent global IT services leader. CSC is an $8 billion IT services company with specific global strengths in insurance, in healthcare, and financial services.

HPE’s Enterprise Services is a global $18 billion IT solutions business with a leadership position in industries like transportation, pharma, technology, media, and telecom.

And together, we’ll be one of the world's largest pure-play IT services companies, we think, uniquely positioned to lead client digital transformations by giving them access to world-class offerings in cloud, in apps modernization, business process services, security, and mobility.

The merger of the two businesses is, I said, expected to produce the year-one realized, and I mean in-year synergies of approximately $1 billion post-closing, with a run rate of $1.5 billion cost synergies by the end of year one. We also expect that there will be opportunity for additional synergies in subsequent years.

And as joint owners of the merged company, CSC and HPE shareholders will share in the value of the synergies as well as future growth in earnings. Now again why -- why now? Today's announcement is a natural outgrowth of CSC’s and HPE’s individual multi-year transformation journeys.

Over the past several years, as everyone on this call knows, both CSC and HPE have been focused on revising our respective operating models, our labor mix, our skills, as well as our financial profiles to best position our business for profitable growth.

And as you know when our management team arrived at CSC four years ago, we inherited a fragmented operating model, low profitability based on unsupportable cost structures, and frankly a strategy that was not in tune with the changing marketplace, and we've delivered against many of our turnaround plans and returned CSC to health and profitability.

HPE has followed a very similar path and has also seen significant improvements in their business and some of those improvements were discussed on the HPE earnings call earlier this afternoon.

And similarly both companies recently engaged in spin-offs, last November, to more strongly focus on the needs of their respective clients and provide additional focus to their portfolios.

So this merger I think is a further refinement and extension of the strategies that drove our spin offs and builds on the significant progress that both companies have made to date. Now I want to delve into a little deeper of what we specifically see as the advantages of this merger. First of all, increased scale.

The combined company with $26 billion of annual revenue, 5000 plus customers, and as I said will be one of the -- among one of the largest IT services business in the world, and this merger truly moves the combined businesses into the upper echelon of global IT services players. Second is what I call complementary industry leadership.

CSC and HPE Enterprise Services, both have strong vertical expertise. As I mentioned CSC in insurance, healthcare, financial services, and HPE in pharma, transportation, and travel and telecom. Moreover together we will have a $3 billion plus next-generation business.

Third, we have identified an actionable -- and I underscore the word ‘actionable’ -- cost synergy roadmap. As CSC’s investors, you are aware we executed on a robust $1.9 billion cost takeout program over the last three or four years, culminating in the spin-off of our CSRA division last November.

And we believe we have found a very similar opportunity to complete the journey to efficiency and strength that Meg and the team at HPE Enterprise Services have started.

Fourth, we believe the combined company will have the financial platform to pursue the right business investments into next generation solutions while maintaining a strong free cash flow profile and an investment grade capital structure.

Fifth, we think our combined leadership team, CSC and HPE Enterprise Services will be able to drive significant results based on our proven track records of transforming businesses. So with that, let me just touch quickly on what this combined business will look like together.

CSC and HPE Enterprise Services will operate approximately 85 delivery centers and 95 data centers in over 70 countries servicing 5000 clients. 50% of our labor force will be operating in low cost geographies in 20 plus global delivery centers and importantly, this combination will be highly additive as there is little existing client overlap.

Out of CSC’s and HPE’s Enterprise Services top 200 accounts, there's less than a 15% overlap in the revenue streams.

And as I mentioned already, the combined company will be a leader in several priority industries and will have a $3 billion plus of next-generation offerings as well as be very well balanced between GBS, think of it as the application business, and global infrastructure business.

And also critically this combination brings together our organization strong alliance partner relationships which remain crucial to the execution of the combined business model. Now just a few details on the transaction.

As I mentioned, each of CSC and HPE shareholders will each own approximately 50% of the new combined company and will share in its future synergy realization and operational success.

The merger is designed to ensure that the combined company has a capital structure that is consistent with investment grade credit profile, and we plan to close the transaction by March 2017 subject to any regulatory approvals. And we're actively putting together the governance and leadership structure of both companies.

As I said, post-closing I will be serving as the Chairman, President and CEO of the new company. Meg Whitman will serve on its board of directors and the new company's board appointments will be split 50:50 between directors nominated by CSC and directors nominated by HPE.

CSC’s CFO Paul Saleh will continue on in his role after the transaction closes, and Mike Nefkens, the current EVP and GM of HPE’s Enterprise Services will be a key part of the leadership team and I will partner and work with him closely on building out the new organization. And other executives and directors will be announced at a later date.

And in entering this merger we're doing so with the firm belief that the potential benefits to our stakeholders, as I said, are significant. In terms of our clients, I would reiterate that the new company is being created specifically to drive digital transformations for them.

The combination will deliver technology independence and global access to top-tier offerings in cloud, mobility, application development modernization, business process services, big data and analytics, IT services workplace and security.

And for our employees, while as a business as usual for now there will be an even greater career development and growth opportunities available within the new company. This is a leap forward in our company's own transformation which will enable our people to better innovate, compete and adapt to this ever changing marketplace.

And our current strategic partners will extend their reach and capabilities through the new company's ability to innovate and compete at scale, and as I said, our partners are an integral part of the company's go-forward strategy.

And lastly, investors will have an opportunity for significant value creation as they will benefit from ownership of a new company with world-class operational and financial profile.

The combined company will have the scale, the innovation, the financial resources to achieve and sustain market leadership and the tax free transaction is designed for significant value capture of the cost of synergy potential. So as I said, this was an overview of this transformational step for CSC and HPE.

In terms of the next steps, our merger and integration planning is well underway and is being led by dedicated teams at both CSC and HPE Enterprise. And for our stakeholders, as I said, it will be business as usual.

Through the pre-closing period, we will maintain our client service and delivery excellence and will be keeping all of our stakeholders informed as we approach major milestones.

So I think this is an exciting day and exciting step forward in combining two fantastic companies into a new company with world-class capability, scale and fantastic capabilities and I think we’ll be uniquely positioned to take the next step in the ongoing transformation and value creation and service delivery for our customers.

So that’s all I was going to cover on the transaction. Again we can open this up to any questions that you might have during the Q&A.

I am going to turn to the earnings segment of this, and as is my practice, I’ll cover a couple key points and then turn it over -- and develop those a little more detail and then turn over to Paul for a more thorough discussion. So our fourth quarter non-GAAP EPS from continuing operations was $0.73.

And for fiscal 2016 our non-GAAP EPS from continuing operations was $2.52. In the fourth quarter, our commercial operating margin was 8.6% and for fiscal 2016, it was 9.3%. Our revenue in the fourth quarter was up 3% sequentially and down approximately 2% year over year in constant currency.

Our ongoing reinvestment into our offerings is translating into positive momentum across our business units as reflected in our book-to-bill of 1.3x for the quarter.

We will continue to make progress – I should say we continued to make progress toward our revenue crossover as we discussed at our Investor Day with over 60% year-over-year revenue growth in our next generation offerings in the fourth quarter.

And our next generation bookings also continued to be very strong in the fourth quarter with a book-to-bill of 2.8x. And for fiscal 2016 our next generation revenue grew over 54% year over year. The fourth point is CSC’s recently completed acquisitions of UXC and Xchanging represent a significant step forward for CSC as we enter fiscal 2017.

These acquisitions advance our strategy of delivering next generation capabilities to high value customers in growing markets. And additionally both UXC and Xchanging offer cost synergies in the second half of fiscal 2017.

And then finally for fiscal 2017 we're targeting revenue to be up in the low double digits on a constant currency basis, including the contributions of our UXC and Xchanging acquisitions.

And our non-GAAP EPS from continuing operations, our target is $2.75 to $3 per share and reflects the exclusion of the amortization of all purchase accounting intangibles. And our goal for free cash flow will be a 100% or plus of our next income. So let me just go into a little more detail on each of those points and then I'll turn it over to Paul.

As I said, our fourth quarter non-GAAP EPS from continuing operations was $0.73, up slightly on a sequential basis. And for fiscal 2016 non-GAAP EPS from continuing operations was $2.52, up 12% year over year despite our ongoing reinvestment into our business and the continuing impact of a rising US dollar.

In the fourth quarter, commercial operating margin was 8.6%. This was down 260 basis points sequentially and our operating margin was impacted by some strategic choices that we made to strengthen our business. These include our UXC acquisition which gives us a critical foothold in the mid-market enterprise application area.

This was consolidated into our financials in the fourth quarter at a near zero margin. And this is a direct result of the conversion of the business from IFRS to US GAAP.

Now the good news since our last call is that we now expect approximately $25 million to $45 million of total synergies from both UXC and Xchanging in the second half of fiscal 2017 which will help offset this IFRS to US GAAP accounting effect.

The second point is that we have made -- and are making a significant investment in our business process services or our BPS business.

We've established BPS particularly in our insurance market as a growing area of market leadership for CSC and have been actively investing in our capabilities, and we anticipate significant client traction as a result of providing business process services closely linked to our industry leading IP and that is driving an investment in building out that platform in anticipation of that demand.

And our sustained commitment to developing our next generation offerings as we've seen our strong next generation revenue and billings growth. These investments are paying off for CSC.

Major client wins in the fourth quarter such as AMP in the end-to-end cloud services infrastructure and the UK Metropolitan Police Service for MyWorkStyle have been strong confirmations for us of the value we're creating for our clients and for CSC by focusing on these next generation solutions.

And as we transition clients to these new solutions, it is often necessary to invest up front to start up these services. And I'd also anticipate the effects of these three trends that I just covered with you to persist through the first half of our new fiscal year.

In addition, our cost takeout got moved a little slower particularly in Europe in the fourth quarter and will begin to accelerate that as we move into the second quarter and the second half of our fiscal 2017. And for fiscal 2016 the commercial operating margin was 9.3%.

This was essentially flat year over year despite some of the investments and other trends that I just covered with you. Let's move to the second point here, which is in revenue. In the fourth quarter revenue was $1.8 billion which was up over 3% sequentially and down approximately 2% year over year on a constant currency basis.

For fiscal 2016 revenue was down 6.7% in constant currency. In the fourth quarter, global business services revenue was down 1% year over year in constant currency and up 6% sequentially from the prior quarter. And for fiscal 2016 GBS was down 3.8% in constant currency. Consulting in the fourth quarter saw a sequential revenue growth of 13%.

For the full year, as we've talked about before, consulting was down 9%. IS&S in the fourth quarter saw a good sequential revenue growth of 5% and for the full year IS&S was essentially flat in constant currency. Application revenue in the fourth quarter was up 4% sequentially and on a full year basis was down about 4.6%.

Big data revenue in the fourth quarter continued to grow strongly and was up 11% sequentially and was up also 20% on a year-over-year basis.

In the fourth quarter GBS operating margin was 11%, this was down 200 basis points sequentially and as I said for fiscal 2016 GBS operating margin was 11.6%, and this was down 110 basis points from the prior year, GBS operating margin reflected as I discussed the ongoing investments we're making to reposition our business and transition clients into our next generation BPS solutions, as well as I said a slower cost takeout particularly in Europe in the fourth quarter.

Global Infrastructure, in the fourth quarter, revenue was down 3.7% year over year in constant currency and was up slightly sequentially from the prior quarter. And for fiscal 2016, GIS revenue was down 9.6% in constant currency.

While we continue to face the industry headwinds that we've talked about, we are mitigating those effects both with the aid of our next generation offerings to offset the decline in our traditional offerings. In the fourth quarter GIS operating margin was 6%, up slightly year over year and down sequentially from the third quarter.

Part of the quarter-over-quarter trend is due to the typical annual price reductions which impact our fourth quarter as well as the one-off benefits in our third quarter results. For fiscal 2016 GIS operating margin was 6.8%.

This was up 90 basis points year over year and as we discussed at our Investor Day we continued to invest into GIS both to grow our next generation offerings and to flatten the rate of decline in our traditional business thereby narrowing the gap between the two.

In the fourth quarter total bookings for the company were $2.3 billion and represented a book-to-bill of 1.3x. Bookings were particularly strong in the UK and in the European regions in the quarter, and insurance, one of our key verticals, saw a growth of 45% year over year in its bookings in the fourth quarter.

GBS bookings in the fourth quarter were $1.1 billion. This represented a book-to-bill of 1.2 and GIS bookings in the fourth quarter were $1.2 billion which also represented a good book-to-bill of 1.4.

So our sustained investment in our sales organization is generating real momentum for our business with these second-half bookings not only up in the fourth quarter but the bookings in the second half of 2016 were up 10% over the same period in 2015 and we added 127 new logos in the fourth quarter spread amongst all of our regions.

Turning to this crossover point as we discussed at our Investor Day, in the fourth quarter revenue from our next generation offerings was up over 60% year over year in constant currency.

And as I said before, this allowed us to continue narrowing the revenue gap between our growing next generation offerings and our traditional business, where we continued to flatten the rate of decline and you saw that in the fourth quarter.

In fiscal 2016 next generation revenue grew over 54% year over year in constant currency and very much in line with what we talked about at our Investor Day in November. Let me just touch briefly on a few next generation highlights.

MyWorkStyle, our next generation virtualized desktop offering, saw its revenue in the fourth quarter up nearly 200% year over year and had a book-to-bill of 10x. Additionally our cloud business continued to grow well in the fourth quarter with another strong bookings quarter with a book-to-bill of 2x.

And our next generation network offering with our partner AT&T also continued its positive momentum in the fourth quarter with revenue up over 150% year over year and 21% sequentially, and a book-to-bill of 5x. So our total next-gen bookings in the fourth quarter continued to display strong momentum with a book-to-bill of 2.8x.

Much like in our third quarter where we saw our wins growing as well, we continue to invest in the necessary start-up services that we expect to recover as we enter into fiscal 2017.

We do expect this trend to persist in the first half of fiscal 2017 and for fiscal 2016 our next generation bookings grew over 70% for the full year on a year-over-year basis. Our next generation momentum is demonstrated I think by some very sizable client wins in the quarter.

The UK Metropolitan Police Service made a $200 million plus commitment to our next generation and the [ph] user solution MyWorkStyle. The implementation of CSC’s MyWorkStyle services and Agility hybrid cloud put CSC at the very center of the Metropolitan Police Service’s transformation journey to a digital world.

CSC will refresh renew and replace a range of their IT devices and services allowing their staff to conduct their critical work in a much newer more agile way. And in the fourth quarter we also saw another large next gen digital services win with AMP, a leading wealth management firm in Australia. Once again C.S.C.

is operating in a critical role for a client in the financial services industry and has been mandated to deliver to AMP a set of end-to-end infrastructure capabilities which spans across our workplace offering, our hybrid cloud offerings and our unified communication and network services, the two very substantial wins for us.

And as I've said, and what we've been asked for is little more details specifically on the UXC and Xchanging acquisitions. These have been transformational for CSC. We completed our acquisition of UXC in February and we did this for a couple of key reasons.

The combination made CSC a key player, one of the top players in the Australian IT services marketplace. And UXC allowed CSC to expand our services into the middle market which complements our scale and strengthen larger enterprises and UXC brings to see CSC multiple globally known consulting and service integration practices.

We're now targeting UXC -- in fiscal 2017 we're targeting revenues of between $410 million and $430 million which includes the impact of moving UXC from IFRS accounting to US GAAP. And in the beginning of May, we completed the Xchanging acquisition.

Again there were some clear strategic drivers behind this, bringing together our unique strengths and scale with those of Xchanging. This gives us a leadership position in the global insurance industry in both technology and business process services.

And in particular, Xchanging’s prominence among property and casualty insurers fits well with CSC’s historical leadership among life insurance firms.

Xchanging’s market leading software suite which is used by eight of the 10 top global insurers is a major addition to our deep portfolio of insurance IP and solutions, and CSC was also able to expand our business process services with the acquisition of Xchanging which gave us a foothold in the commercial non-life insurance market where Xchanging had significant presence.

So we're now targeting Xchanging in year fiscal 2017 revenues in the range of $520 million to $540 million. This also includes the impact of moving Xchanging from IFRS to GAAP. And for UXC and Xchanging together we anticipate now realizing between $25 million and $45 million of cost synergies. These will occur in the second half of our fiscal year.

And I've also announced today that Craig Wilson, the former CEO of Xchanging will become our new vice president and general manager of our UK, Ireland and Netherlands region. Craig brings a lot of experience to the table and we are looking forward to having him lead our UK business.

Beyond these two acquisitions, we also focused in the past quarter on extending CSC’s leadership in the ServiceNow ecosystem which we view as a crucial application area as we move forward.

And as you recall CSC acquired the number one ServiceNow integrator in the world Fruition Partners and in the first -- that was done in the first half of 2016 and we recently integrated UXC’s leading ServiceNow business in Australia which is called UXC Keystone into our Fruition platform, and we just completed this week the acquisition of Europe's leading ServiceNow integrator Aspediens.

So finally before I turn this over – I apologize for the length but there was a lot of information to convey today. We are targeting for next year GBS revenue to be up and GIS revenue to be down in the low single digits, both on a constant currency basis and inclusive of the contributions of our UXC and Xchanging acquisitions.

This equates to total revenue being up in the low double digits on a constant currency basis, and we're targeting non-GAAP EPS of $2.75 to $3, and as I said a free cash flow of more than 100% of our non-GAAP net income. So now I'd like to turn over to Paul for any additional detail on our fourth quarter of fiscal 2016 and our 2017 plan.

Paul?.

Thank you, Mike and good evening everyone. Before I review the fourth quarter and the full year, let me cover some items that are included in our GAAP results. First, in this quarter we had $78 million in pre-tax expenses or $0.51 per diluted share. Those are related to separation, restructuring and other transaction activities.

Second, we had a non-cash pre-tax charge of $118 million or $0.84 per diluted share, and that was related to our annual re-measurement of pension plan assets and liabilities. Third, we had a pre-tax charge of $100 million or $0.46 per diluted share associated with the retirement of our 6.5% coupon 2018 bonds.

Lastly, we had a $14 million or $0.10 per diluted share benefit from the adoption of a newly accounting standard for stock based compensation which was offset by an adjustment to our tax valuation allowances. Now these items have been excluded from our non-GAAP results for the quarter and the full year.

Now let me turn to our fourth quarter and full year results. Fourth quarter revenue was $1.8 billion, down 2.4% year over year in constant currency, and on a sequential basis fourth quarter revenue grew 3.3%.

Sequential growth was driven by higher revenue in BPS and consulting within our GBS segment and our GIS business was also up slightly sequentially. Commercial operating income adjusted for separation, restructuring and other transaction costs was $156 million in the quarter.

Commercial operating margin on that basis was 8.6%, down 260 basis points from the prior year, reflecting our continued investment in next generation offerings. In addition, the UXC acquisition was a headwind of 30 to 35 basis points to our margin due to the accounting effect of moving UXC from IFRS to US GAAP.

Earnings before interest and taxes adjusted for special items was $123 million and EBIT margin on that basis was 6.8%, down 110 basis points from a year ago. Our non-GAAP diluted EPS from continuing operation was $0.73, up from a year ago.

Now in the quarter our effective tax rate was 5.5% reflecting the benefit of our global mix of income on a full year basis. Bookings in the quarter were $2.3 billion and overall our book-to-bill was 1.3 times. For the full year revenue was $7.1 billion, down 6.7% in constant currency.

Commercial operating income adjusted for separation, restructuring and other transaction costs, was $660 million and adjusted commercial operating margin was 9.3% for the year which was flat with the prior year. Non-GAAP EPS from continuing operation was $2.52 for the year, which is up 12% from the prior year. Turning now to our segment results.

Global business service revenue was $941 million in the fourth quarter, down 1% year over year in constant currency and up 6% sequentially. Adjusted operating income for GBS was $104 million in the quarter.

Our operating margin on that basis was 11.1% compared with 16.3% in the prior year and that reflected the investment in our business process services platform and investment in our new banking JV with HCL.

In addition, our margin reflected the impact of lower profitability in our consulting business and the headwind of 60 basis points from the UXC acquisition. Our GBS bookings were $1.1 billion in the quarter for a book-to-bill of 1.2 times. And for the full year GBS revenue was $3.6 billion, operating margin was 11.6%, and bookings were $4.3 billion.

Now turning to the Global Infrastructure Services business. Revenue was $866 million in the quarter, down 3.7% year over year in constant currency. Now we're seeing the moderation of the decline of our traditional GIS business which was partially offset by strong next generation growth in cloud and MyWorkStyle.

Adjusted GIS operating income was $52 million in the quarter and our operating margin was 6%, up slightly year over year. Bookings for GIS were $1.2 billion in the quarter for a book-to-bill of 1.4 times. And for the full year GIS revenue was $3.5 billion, adjusted operating margin was 6.8% and bookings were $4.3 billion.

Now for the year our free cash flow was $319 million. Our free cash flow was approximately $66 million negative in the quarter but that was reflecting a delay in billings attributable to our migration to a new financial system in the Americas. For the full year CapEx was $591 million and CapEx in the quarter was $169 million.

For the full year, CSC returned $603 million of capital to our shareholders, $430 million came from dividends of which $117 million were ordinary dividends and $313 million was a special dividend associated with the separation of CSRA. And for the full year the company repurchased $173 million in shares.

During the fourth quarter, CSC returned $65 million to shareholders consisting of $20 million in dividends and $45 million in repurchases. And cash on hand at the end of the quarter was $1.2 billion and our net debt to capital ratio was 31.3% at the end of the year. So in closing, let me review our financial targets for fiscal ’17.

We’re targeting revenue to be up in the low double digits in constant currency. We're targeting non-GAAP EPS from continuing operations attributable to the parent of $2.75 to $3 and we expect stronger earnings in the second half of the year as synergies related to the UXC and Xchanging acquisitions are realized.

And our EPS target assumes a tax rate of approximately 20% for the full year. Our free cash flow target for fiscal ’17 is 100% or more of net income. And now I will hand the call back to the operator for the Q&A session. .

[Operator Instructions] At this time we will take a question. This will be from Jason Kupferberg with Jefferies. .

Thanks guys. Congratulations on the deal. Pretty interesting. Wanted to just get your initial view on what your year-one accretion can look like from HPE, inclusive of at least the initial $1 billion of cost synergies..

I think we'll give you those kind of numbers a little bit later. We’re just really right now just pointing you to the synergies of $1 billion in the year and $1.5 billion on exiting that first year, and the HPE services group will be providing their guidance for the full year. .

I think what we'll do as we get closer to the actual close, we’ll obviously do another investor day and analyst day, so we can share what this all looks like as we put it together and get committed to the execution..

And then if we look at those cost synergy numbers, I mean our preliminary math is you're looking at a combined overall cost base here of somewhere in the neighborhood of $24 billion or so when you bring the companies together. So even at the $1.5 billion number, I think you'd be looking at about 6% or so.

It sounds like you're very confident in the $1.5 billion, so could there be some upside here and once you get further along with the integration efforts?.

Yes, I think listen, we're very comfortable with the $1.5 billion. We've identified that, it's spread across a number of areas harmonizing policies. We've talked about 95 data centers and delivery centers, obviously that can continue to be consolidated.

There is a significant, we think, improvement capability because of the increased scale that we’ll have now on a global basis. We're about 50% right shoring, so there is some opportunity there. So yeah, there's a significant opportunity. You are right, the $24 billion cost basis, there's probably room to grow that as well over time. .

And then just lastly on the fiscal ’17 guidance, can you clarify how much accretion, if any, is in the non-GAAP EPS from UXC and Xchanging, in other words, excluding intangibles and then are you assuming a crossover point to positive constant currency organic growth before the end of the fiscal year?.

From the GAAP that we talked about at the Investor Day, we saw a continued improvement in the fourth quarter on that GAAP. With these acquisitions now. I mean, that crossover point will be achieved in the first quarter of this year. So with the full quarter of UXC and then Xchanging, that crossover point will now occur in the first quarter.

If you go back on just a pure organic basis, yeah, I think that that GAAP is going to cross over roughly when we talked about, but probably we're not going to talk about it that way if I talk about it more now in total of our next generation offerings versus the decline in the traditional business, but even this quarter, you saw – you continue to see the flattening out of that decline.

We've seen that now for two or three quarters, that continued in the fourth quarter and the continued ramp up of the next generation revenue streams and the highlight there of some of the key wins was very important for us in the fourth quarter..

We’ll move along to Edward Caso with Wells Fargo. .

Hi, good evening. I was curious, the legacy EDS had a lot of federal government business and you just spun off your CSRA. Is there a piece of revenue here that you're going to have to spend, because I believe you're committed not to compete in the U.S.

federal space?.

Yeah, the way the transaction is structured, we have several options of what to do with that business. It’s a good business. We liked the business before, that's why we spun off CSRA and merged the CSC NPS business with SRA last year.

HP’s got a very strong -- HP Enterprise Services has a very strong business in the federal government, and what I'd say is post-close all options and I underscore the word ‘all options’ would be on the table. But that decision will be approached and looked at after we close the transaction. .

Obviously great book-to-bill again, how much of that is incremental business and how much of that is recompete?.

I don't know whether I have the exact numbers, Paul, if I remember correctly, I think somewhere around 50% of that was new business and 50% of that was recompete business. This quarter was a little stronger on new.

That’s why I want to be a little careful on the number because I just don't have it in front of me, but the Metropolitan Police, for example, was a completely new incremental win for us. Most of the new logo business that I talked about was also a new business.

Paul, do you have any detail on that?.

No, Mike, I think –.

About 50% was incremental new business, and the rest was recompete or extensions of existing contracts. .

David Grossman with Stifel Financial has the next question. .

Thank you. So Mike, I think I understand the scale on the cost synergies and the benefits of the merger. But I guess I'm still trying to get my arms around some of the strategic benefits and perhaps my knowledge of HP’s service business is somewhat dated.

But if I recall, they didn't have a particularly strong professional services organization, and I'm just trying to get a better feeling in terms of how the market is shifting and how their native capabilities that they bring to your portfolio, how that really enhances kind of your strategic position in the marketplace?.

That’s great question. First and foremost as I said it brings scale. That's very important. They have made a fair amount of progress over the last two years in terms of dealing with their headwinds.

They had many of the same headwinds that we had, traditional clients either moving away from them or contracts that were in a wind down phase and mode that caused them a significant revenue headwind. They too are seeing those revenue headwinds abate.

They have a strong cloud business, they've got a strong cyber business, they have got a strong big data and analytics business. They've got a good applications business. So they too have made investments in some of these new offerings and that too is offsetting the headwinds in their traditional business.

The thing that was amazing to me when we went through all of this is the very little overlap of the top 200 clients there's less than a 15% overlap. So that gives us an opportunity to expand our footprint in their customer base and for them to expand their footprint in our customer base. We have agreed to a partnership agreement with HPE.

So we will have access to their solutions across their networking and their storage and their server and their software businesses which will also give us the opportunity to expand the profile. So global scale is one, reach, lack of overlap of very solid skill base.

This gives us a critical mass now of skills in new areas like cloud, cyber, the other business areas that I just mentioned to you.

And I think most importantly for us, as we see more and more clients making a more dramatic shift to this next generation cloud infrastructure and the modernization and deployment of new applications, that takes scale and it takes financial commitment.

And this combination gives us a balance sheet and a financial structure that will allow us to really help major clients around the world make that transformation to the digital world. .

And maybe in that context about the balance sheet since you brought it up.

Can you help us understand what the balance sheet looks like post -- first of all, post the close of the Xchanging deal, since that probably wasn’t in the 3/31 numbers? And then what the incremental -- I think you said it was about $2.5 billion of debt, plus you had another $1.5 billion of a payment that you're making to them.

So what should we think about both kind of today what the balance sheet looks like in terms of leverage and then how much is the increment we need to add post close of this transaction?.

So I think what you think about this, if you add the two companies together on a pro forma basis you would have about $7.5 billion in maybe gross debt and net debt of about, maybe $5.5 billion or so in net debt. And the ratios will be very consistent, as Mike has indicated, with an investment grade profile..

And that net debt includes the pension, Paul?.

No, the net debt is just the cash position that we would have on the balance sheet. Right now it's about $1 billion, I think probably by the time of the close, it would be somewhat closer to $2 billion of cash on the balance sheet. And most of the capital structure will be very flexible. .

Right, but does the debt number include the pension liability for both companies?.

No it does not. I think it will be minimal on both sides, and it would be probably less than $1 billion for both. .

Right.

And then how much was the incremental leverage to close Xchanging then, or what does that do the balance, since that was after – just so we know where you are right now?.

Some of it came -- I think it would be about $500 million or $600 million more debt indebtedness. As a result of that transaction. We had already bought 10% of the stock prior to closing the transaction. .

I got it.

And just one last one, what is your FX assumption for this year in your guidance?.

Right now we are assuming flat. We don't know exactly what the dollar is going to be doing. .

Okay. So the report on a constant currency would be about the same..

That’s actually what we have said. .

We’ll now take the next question from Keith Bachman, Bank of Montreal. .

Hi gentlemen, thanks very much. Mike, I wanted to go back to the cost savings. Originally when EDS was bought, Mark Hurd spent a lot of time taking costs out mix, spent the last five plus years taking incremental costs out, you've obviously been very aggressive with CSC.

So when you talk about $1.5 billion, on what would be pro forma revenues of $25 billion or $26 billion, that's almost 6%.

So are you talking about taking incremental costs out, or is this really duplication of overlapping resources?.

It's a little of both. There is clearly a duplication, I mentioned a couple of areas like the data centers and delivery centers. There's absolutely no question about that. I think there'll be obviously some synergies that we can get across the sales forces, delivery organizations. So the other area is real estate.

Real estate, we think, is going to be a significant area of consolidation. And then as I mentioned, procurement, this will allow us to do much more from a global procurement standpoint, the support functions, all of those things are built into that synergy roadmap. And these synergies by the way don't come all from HPE Enterprise Services.

This really is across both organizations. .

If I could just ask one, a bit more on Xchanging and UXC, how much was the revenue in the quarter, you got a little bit of help – but you mentioned the cost synergies that you think you get from this I think $25 million to $50 million or $40 million, what do you –.

$25 million to $45 million, now that will come largely in the second half of the year, fiscal 2017 and the reason for that is we are taking some actions in Europe and that has a longer period of time, and likewise with UXC the time to get those synergies fully captured will be the second half of the year.

And just going back on the synergies we've taken a lot of costs out of CSC over the last couple years. And in some cases -- in some cases we will actually be making an investment in some of ours. So some of our support functions will have access to news kills, new capabilities and allow us to actually invest more.

Some of our IT systems, for example, we've made some investments in our financial systems. We will continue with that, some of our HR systems and our customer facing sales force system, so it's not all about just taking cost out.

There will also be an opportunity to reinvest in people and reinvest in some of these critical functions, because we now have more scale. .

Right. Well, that's a great point, because a lot of times when HP was taking costs out they would reinvest.

So if you have a $1.5 billion that you earmarked as potential cost savings, is there a amount that you think about that investors at least notionally would see on the bottom line? In other words, would you drop half of that at the bottom line, or 75%, or is there any kind of guidepost that you can identify how investors should be thinking about that?.

I really don't have a specific guidepost for that. As I said we've identified the net synergies, we've identified where we think we need to make investments back in our business. And when you add that all up, we're quite comfortable with $1 billion in year one, and a run rate of $1.5 billion out of exiting the first full year of operations.

But yes, we will invest in people, we're going to invest in skills, we're going to continue to invest in our offerings. We've made -- and I talked about it this quarter -- but we made a substantial investment in these offerings and they are starting to pay off.

I mean we're actually starting to win significant business now as a result of these offerings. And this has been a long process over the last two or three years but it's really beginning to pay dividends with these book to bills and these significant new wins.

So the beauty of this is that it takes us to the next level of scale which gives you more maneuverability in terms of these investments while at the same time giving you a significant cost synergy much of which can be returned to the shareholders in the form of better operating performance. .

I want to build on what Mike said, because the synergies here are so critical. We believe we spent quite a bit of time the two teams together, we had over 20 different categories of synergy opportunities. And we went one by one to make sure that we understood the opportunities.

We then tried to stretch the opportunities except to make sure that we felt very comfortable in committing that we could get the billion dollars of in-year synergies and that run rate of $1.5 billion. And so we've looked at our cost structure, we looked at the benefit that will come from scale.

But I also wanted just to stress that some of these synergies also are going to come, and they're not necessarily eliminating or consolidating just the real estate or taking advantage of the procurement scale and the like. But some of them, as Mike mentioned, are the alignment of some of our standards and our policies across the two companies.

They do things very well in certain areas, we do things very well in other areas and bringing the best of both worlds together, so many of those synergies also come from the realignment of similar practices and policies and accelerating also the cost synergies that -- the cost reductions that we were doing independently.

So together we will get to where we need to be faster. .

And let's plan on two last questions, operator. .

Thank you. We will move along at this time to Bryan Keane, Deutsche Bank. .

Yeah, hi, just a couple clarification questions.

I guess, first in the quarter how much acquisition revenue was in the quarter and was it equally split between GBS and GIS?.

About $30 million to $40 million. .

$30 million to $40 million?.

Yes. .

Was it just in GBS or was it also in GIS?.

No, I think it was actually primarily in the GBS business, a little bit in GIS, maybe about 20% of it. .

And then just on the quarter itself, the Street was looking for 9.2% operating margins and you guys did 7.6%, so it was quite a bit lower and you guys had a much lower tax rate than anticipated.

Were the investments known or did you guys just take the opportunity with the lower tax rate that you’re going to have to invest going forward?.

Yeah, we did. There is a little bit of both. If you look at this, I said probably 30 to 50 basis points, these are rough numbers, I would associate with the fact that we integrate the UXC at basically a zero margin.

We did make some investments, the most notable one we’ve been making for the last quarter or so but we increased that was in our BPS platform. Because we are expecting to grow that business pretty significantly, and that does require an investment in the platform and in the people and in some of the skills that we have supporting that business.

And then we continue to make an investment in some of the offerings, I mentioned a couple, MyWorkStyle, what we're continuing to do in our cloud business.

And then as we have begun to transition some of our clients from a more traditional infrastructure to a hybrid cloud structure, there are some upfront costs that we incur in that transition that will recoup as we go through the year. So we expect some of these trends to definitely persist through the first half of our new fiscal year.

So those were the primary drivers of the 180, 200 basis point of lower margin, and they were spread pretty equally across, as I said, UXC, the investment in our BPS platform and our reinvestment in the offerings.

The other thing I would say is that we moved a little slower than what in all candor I had anticipated in some of our cost takeout activities, primarily in Europe. .

Yeah and you mentioned some lower profitability in some contracts too within the quarter?.

No, it wasn't lower profitability. It was the transition of some of our clients from our more traditional offerings to our next generation offerings. .

The lower profitability I was referring to was in the consulting business. If you look at it on a year-over-year basis we saw, just because of the repositioning that we've been making in that business, the profitability was lower on a year-over-year basis even though the revenue was –.

The revenue was beginning to come back in that business..

Right..

And then just on the guidance, just so we have it, just thoughts on constant currency without the acquisitions for the two segments and then tax rate and operating margin..

I think we said actually for the combined entity we were going to be going up low double digit on constant currency. The contribution from those acquisitions, again as Mike mentioned, they're going to be more integrated within our business but the assumptions that we're making is that they'll add about $1 billion of top line revenue.

And in terms of the tax rate, I mentioned it in my comment it will be about 20% for the full year. .

Okay. Last one for me then just on the acquisition. If I look at Enterprise Services, it looks like they did about $19.8 billion in revenue but you guys are talking about $18 billion in revenue.

So just trying to reconcile what they did last year versus what you guys will pull forward, will there be some divestitures or is that just natural drop off of some of the –.

No, I think they're keeping two businesses, they are keeping their network services business, the CMS and also contributing to the lower comparability to what you're describing. .

We’ll take the final question from Darrin Peller with Barclays. .

Thanks guys. I'm just trying to understand, when I look at the growth inflection you said organically, I think you mentioned before the first quarter you’d see go positive obviously with the deals.

But again that's just a bit of a follow on to Bryan’s question, that's not pro forma organic growth for, as if you owned the deals last year though, is that correct?.

That's absolutely correct. .

So that inflection you said is kind of back to where we thought it would be from the Investor Day, so perhaps sometime during fiscal ‘17?.

Yes. I mean the gap -- I mean to be quite straightforward about this, we were looking at several hundred million dollars in gap between the decline in our traditional business and the growth of our next generation offerings.

That's now below $100 million a quarter and that has been narrowing now for almost two years as these new offerings that we keep talking about come on stream and we get them installed that we build them with our customers.

With the acquisition of UXC and Xchanging that just accelerates that crossover point to almost exactly what we talked about at the Investor Day.

So on a purely organic basis, yes, we expect that gap to continue to close and probably cross over sometime in the second half of fiscal ’17 but with these acquisitions that crossover has been accelerated into the first -- think of it as the first quarter of 2017. .

And that’s helpful. Now when we look at the mix of revenue going forward pro forma for the integration, you have -- you said $26 billion of potential revenue, and I know in CSC standalone pre even these deals you've had around $700 million of what we call growth revenues, right, in the next gen solution revenues.

I mean can you give us a sense of the type of profile of this revenue mix going forward? I mean I ask only because I know that HPE’s services side was obviously declining last year.

And so I am just trying to understand how much there is – are we back to a story where those pieces of that business that has to be purged kind of like there was in the legacy CSC, but there's a growth inflection coming from part of that combined with what you will have pro forma, how should we think of the mix of that business that's going to be growing versus what potentially is going to have to run off?.

Yeah, I think we think of the profile, we've got $3 billion plus business in next generation. And that is growing on both our side and on the HPE Enterprise Services side.

They've got probably roughly – again these are rough numbers here, about $8 billion, think of it as GBS type business, so application business, mobility, those kinds of offerings in the marketplace. And then the balance is more of the traditional IPO although they too have been transitioning some of their clients to much more of a cloud environment.

So the profile of the business, our profile around next generation offerings gets strengthened pretty dramatically with this merger. .

The percentage of your total revenue goes up I guess in terms of the profile?.

That’s exactly right. And the growth rates go up and as a result -- and as I said many of the – well, I don’t call them troubled but run off contracts that HPE Enterprise Services had, whether that be GM or Bank of America or some others just like we've had run off on some of our large contracts, much of that is behind them.

They've also had some very significant new wins over the last year or so which is contributing to their revenue stream, things like Deutsche Bank and Nokia, just to mention a couple, which have added some incremental revenue to their mix. The other thing is that we will be picking up as part of this is HPE and HPI.

Those are outsourced contracts that will now become part of the new company’s profile. So when you add that all up it is a much healthier mix towards the new and growing segments than what we've had, and because of the critical mass, it allows us to recruit people to those platforms more easily, retain people more easily.

In short, we've gotten to critical mass -- critical mass in these very important emerging segments. .

So last question, is it when we look at the pro forma entity even a year out after the deal closes, I mean it may be too early to ask this, but is it an organic growth -- growing story even if it's just anything greater than zero percent I guess is what I'm trying to figure out. .

Yeah, I think first of all, we don't see significant revenue dis-synergies because of the very little overlap as I mentioned before. So I want to do a little more work on this before I commit to, is this a 2% growth, 3% growth, what is it, that's all work that we need to do over the ensuing months as we put the integration teams together.

So we'll have a better handle on that when we get a little closer to closing the transaction. But the big thing here -- the big thing here from a short term value creation is the synergies. There just are not that many opportunities that come along that present this type of synergy opportunity.

It reminds me a little bit of where CSC was three or four years ago. It is that type of value generative opportunity. But at the end of the day this takes CSC or NewCo or whatever you want to call it, we haven't decided on the name yet. But this really takes us to a different level.

It gives us the critical mass, it gives us the skills, it gives us the financial wherewithal to now be able to really control our destiny. We made these acquisitions, we made around Xchanging and UXC, and ServiceNow -- these are fantastic from our point of view acquisitions and we're bring great people and skills.

But they were smaller and as a result it was a slower process to really get the critical mass in these new areas and offset the decline in the traditional business. This allows us to get to that point and get the scale necessary to compete with anybody -- compete with anybody in the market and that's what's so exciting about this.

Years ago I talked about, you’ve got to get fit, you've got to win more and then you've got to take a leadership position. This catapults the commercial business into a leadership position globally just as our spinoff and merger between NPS and SRA, created a leader in the federal government IT space.

So this is all about creating a leadership position, a new foundation and a new starting point. .

Okay. Makes sense. Congrats guys, thanks. End of Q&A.

Thank you everyone for being on the call. We will talk to everyone next quarter. Thank you. .

And again this does conclude today's conference call. Thank you all for participation..