Jonathan Ford - Head, Investor Relations Mike Lawrie - Chairman, President and Chief Executive Officer Paul Saleh - Chief Financial Officer.

Jim Schneider - Goldman Sachs Darrin Peller - Barclays Bryan Keane - Deutsche Bank Tien-Tsin Huang - JPMorgan Ashwin Shirvaikar - Citi Bryan Bergin - Cowen & Company Rayna Kumar - Evercore Ramsey El-Assal - Jefferies.

Good day, ladies and gentlemen and welcome to the DXC Second Quarter Earnings Call. Today’s program is being recorded. At this time, I would like to hand the conference over to Mr. Jonathan Ford, Head of Investor Relations. Please go ahead, sir..

Thank you and good afternoon everyone. I am pleased you are joining us for DXC Technology’s second quarter fiscal 2018 earnings call. Our speakers on today’s call will be Mike Lawrie, our Chairman, President and Chief Executive Officer and Paul Saleh, our Chief Financial Officer.

We have slides to our website at dxc.com/investorrelations, which will accompany our discussion today. Slide 2 explains that the discussion will include comparisons of our results for the second quarter of fiscal 2018 to our pro forma combined company results for the second quarter of fiscal 2017.

The pro forma results are based on historical quarterly statements of operations of each of CSC and the legacy Enterprise Services business of HPE or HPES, giving effect to the merger as if it had been consummated on April 2, 2016.

As a consequence of CSC and HPES having different fiscal year-end dates, the pro forma combined company results, include the results of operations of CSC for the 3 and 6 months ending September 30, 2016 and of HPES for the 3 and 6 months ending July 31, 2016.

Slide 3 informs our participants that DXC Technology’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.

On Slide 4, you will 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 quarterly reports on Form 10-Q and other SEC filings. I would like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call, except as required by law.

And now, I would like to introduce DXC Technology’s Chairman, President and CEO, Mike Lawrie.

Mike?.

Okay, thank you. Welcome, everyone. Thanks for your interest in DXC. As always, I have got four, five key messages. I will develop those in a little detail and then Paul will come on and then as always we will have an opportunity for some questions. So, first key message here is second quarter non-GAAP EPS was $1.93.

This includes a cumulative benefit of $0.26 from reclassification of leases, which I will cover in a moment. EBIT adjusted for restructuring, integration and amortization of intangibles was $876 million, including a cumulative benefit of $121 million from the lease reclassification.

Adjusted EBIT margin was 14.2% or 12.3% excluding the lease reclassification. We generated $589 million of adjusted free cash flow in the quarter. Second point, revenue in the second quarter was $6.163 billion on a GAAP basis. Excluding the impact of purchase price accounting, GAAP revenue was down 2.7% year-over-year and grew 2.5% sequentially.

In constant currency, revenue was down 3.5% year-over-year and was flat sequentially. Book-to-bill was 1.0x for the quarter. Third point, excluding the impact of purchase price accounting, our digital GAAP revenue grew 23% year-over-year and 15% sequentially.

Industry IP and BPS GAAP revenue was relatively flat year-over-year driven by the completion of several large healthcare contracts last year. The 7.5% growth in the insurance business partially offsets the decline in healthcare. And sequentially, industry IP, BPS GAAP revenue grew 4%.

And in the second quarter, our digital book-to-bill was 1.2x and our industry IP and BPS book-to-bill was also 1.2x. Fourth point, during the second quarter, we continued to achieve key merger integration milestones.

We are executing our synergy plan are on track to meet our targets of $1 billion of year one cost savings as well as $1.5 billion of run-rate cost savings exiting the year. We are also on track in the early stages of separating our U.S. Public Sector business in combining that company with Vencore Holding Corporation and KeyPoint Government Solutions.

As discussed in our announcement on October 11, this will create a separate mission-focused independent publicly traded technology company to serve U.S. government clients. And then finally for fiscal 2018, we continue to target revenue of $24 billion to $24.5 billion in constant currency.

We are increasing our fiscal 2018 target for non-GAAP EPS to a range of $7.25 to $7.75 reflecting the benefit from the reclassification of leases. On that basis, our adjusted free cash flow target will now be 90% of adjusted net income since net income will include the benefit of the least conversion and corresponding asset adjustments.

So, let me just develop each one of those points in a little more detail. As I said, second quarter non-GAAP EPS was $1.93. This included a benefit of $0.26 from the reclassification of leases which I will talk about in a moment. The effective tax rate was 31%.

Second quarter EBIT adjusted for restructuring integration and amortization of intangibles was $876 million. Adjusted EBIT margin on that basis was 14.2%.

Adjusted EBIT in the quarter included a cumulative benefit of $121 million or $0.26 of EPS from the reclassification of HPES operating leases to capitalize leases and a corresponding adjustment of those assets to fair market value. In subsequent quarters, we expect a continued benefit of roughly $60 million per quarter or $0.13 of EPS.

Excluding this benefit, adjusted EBIT would have been 12.3%, an increase of 630 basis points year-over-year and 80 basis points sequentially. The EBIT improvement reflects ongoing cost actions that we are taking consistent with synergy plans outlined at our Investor Day, including automation and supply chain efficiencies.

Our delivery teams continue to increase productivity and effectiveness through our global automation program, Bionics. By replacing manual tests with automated scripts, we minimized the labor required to support and run environments and we are also leveraging predictive analytics to reduce incidents by up 70%.

This significantly improves the stability of IP operations of our clients. In supply chain, we are consolidating suppliers to create global highly leveraged relationships to reduce cost and more effectively serve our clients.

We are working closely with third-party providers to ensure that the benefits of scale are translating into realized savings at an account level. We are also leveraging our internal delivery productivity initiatives such as service desk automation to help reduce external spend.

And collectively, second quarter cost actions generate approximately $110 million of in-quarter savings, which keeps us on track or $1 billion of fiscal 2018 synergy realization. Adjusted free cash flow for the quarter was $589 million or 106% of adjusted net income.

And for the year-to-date adjusted free cash flow was $1.2 billion or 116% of adjusted net income. Our revenue in the second quarter was $6.163 billion on a GAAP basis. In my comments to follow all year-over-year and sequential comparisons exclude the impact of purchase price accounting on revenue.

On a GAAP basis, revenue was down 2.7% year-over-year and grew 2.5% sequentially. In constant currency, revenue was down 3.5% year-over-year and flat sequentially. And total bookings in the second quarter were $5.95 billion for a book-to-bill of 1.0x. The second quarter GBS revenue was $2.3 billion.

On a GAAP basis, GBS revenue was down 3.2% year-over-year and grew 1.2% sequentially. Constant currency revenue was down 4.3% year-over-year and 1% sequentially. As was the case last quarter, a large portion of this year-over-year decline was driven by the completion of two large government contracts in the UK.

GBS bookings were up 2% sequentially with a bookto-bill of 1.1x for the quarter and in the quarter, GBS segment margin was 16.4% compared with 11.1% in the prior year. There was very little impact in GBS from the lease adjustments, so the margin improvement reflects the impact of our cost take-out actions.

In the second quarter, GIS revenue was $3.1 billion. On a GAAP basis, GIS revenue was down 4% year-over-year and was up 3.1% sequentially. Constant currency revenue was down 4.8% year-over-year and flat sequentially. GIS revenue reflects the continued moderation of headwinds in the legacy infrastructure business.

GIS bookings of $2.8 billion were up 38% year-over-year and represent a book-to-bill of 0.9x. In the quarter, GIS segment margin was 14.9% compared with 4.7% in the prior year.

Now, excluding the impact of the lease reclassification and corresponding fair value adjustment of the assets associated with those leases, GIS margin was 12.2%, up 750 basis points year-over-year and 240 basis points sequentially, again reflecting cost action and the automation and processes. In the second quarter, USPS revenue was $710 million.

USPS revenue was up 5.5% year-over-year and was up 4.2% sequentially. USPS bookings of $644 million were up 133% year-over-year and represented a book-to-bill of 0.9x. The USPS segment margin in the quarter was 15.4% compared with 10.1% in the prior year.

Again, excluding the impact of the lease reclassification and corresponding fair value adjustment of the assets associated with those leases, margin in the second quarter was 10.8%. And I will talk more in a moment about the separation of USPS business and the combination of Vencore and KeyPoint.

DXC also in the quarter continued to expand its client base by adding 27 new logo deals greater than $1 million in total contract value. Now, let me move to our digital industry IP and BPS results. On a GAAP basis, digital revenue was up 23% year-over-year and up 15% sequentially. Digital book-to-bill bill was 1.2x in the quarter.

And as we have discussed, digital cuts across all three of DXC’s reporting segments of GBS, GIS and USPS and includes enterprise cloud apps, consulting, cloud infrastructure, analytics and security. And enterprise cloud apps and consulting GAAP revenue was up 26% year-over-year and up 16% sequentially. Book-to-bill in the quarter was 0.9x.

The enterprise cloud apps team is continuing to drive this momentum by introducing 16 quick-start offerings to help clients plan, pilot and test enterprise and cloud application software accelerating their digital business solutions with software from DXC as well as our strategic partners.

Cloud GAAP revenue was up 33% year-over-year and was up 25% sequentially. Bookings were up 24% year-over-year with a book-to-bill of 1.4x. Drivers of the bookings growth in cloud include a deal with a major insurance company to provide a large scale digital transformation enabled by DXC’s cloud offerings.

Analytics GAAP revenue was up 30% year-over-year and up 2% sequentially. Bookings were up year-over-year 24% with a book-to-bill of 1.1x. Security GAAP revenue was down 4% year-over-year and was up 5% sequentially.

We continued to invest in this business through increased hiring of security consultants and we are already beginning to see growth in managed security services and this was reflected in our bookings for the quarter, which were up 78% year-over-year with a book-to-bill of 1.6x.

Industry IP and BPS includes our ITO offerings in healthcare, insurance, travel and transportation and banking as well as our industry business process services business. Industry IP and BPS GAAP revenue was relatively flat year-over-year and was up 4% sequentially and the book-to-bill was 1.2x in the quarter.

Industry IP GAAP revenue was down 3% year-over-year and was up 5.5% sequentially. The year-over-year decline reflects the completion of several large healthcare contracts during the second quarter of last year.

This was partially offset by a 7.5% growth in the insurance business and the book-to-bill in the quarter was 1.4x, including a large win with Lloyd’s Market Association and the International Underwriting Association of London.

We developed the transformation roadmap that builds on DXC’s deep industry vertical expertise, while leveraging our end-to-end offerings across both traditional and digital capabilities. BPS GAAP revenue was up 1.9% year-over-year and was up 2.5%. And the book-to-bill in the quarter was 0.9x.

The revenue growth is driven by the continued ramp up of our large insurance contracts such as MetLife. We also had several key wins in the second quarter at large global banks.

These deals leverage solutions such as our cognitive knowledge center, which significantly reduces call volumes handled by human operators by providing automated natural language answers to branch employees’ imports.

Now, as I previously discussed, a new transformation oriented sales motion is needed to capture the shift from traditional to digital that is occurring in the marketplace. We formed a new digital business team to shape a unified digital transformation approach leveraging assets from across the company as well as our partners.

The objective is to jointly develop digital roadmaps with our clients targeting clear business outcomes and efficiency gains in traditional IP, while unlocking greater share of wallet and overall revenue growth for DXC.

Now in the quarter, we continued to expand our partner offerings, including solutions to more effectively leverage the benefits of public cloud in greater breadth for our go-to-market alliance with PwC. We announced new application and managed services offerings for Microsoft Azure and the Azure Stack.

These offerings provide a wide range of services to accelerate and scale digital strategies across public and private cloud. They include application services, analytics offerings and hybrid cloud solutions based on the Azure Stack.

With VMware, we announced an expansion of our longstanding partnership with the unveiling of new DXC managed cloud services enabled by VMware’s next generation hybrid cloud services platforms.

This expansion allows clients to move existing workflows to AWS and also connect native AWS workflows to the enterprise while maintaining service visibility and operational control. Our alliance with PwC also continues to show positive momentum with a significant win during the quarter, with luxury brands, Bally, Jimmy Choo and Belstaff.

In collaboration with PwC, DXC will optimize their e-commerce, finance and accounting services to reduce operating costs and deliver process innovation.

We are also strengthening the pipeline with PwC by expanding areas where we provide services for each other if we can then take to market together and we currently have two dozen large accounts we are teaming to develop joint proposal for digital transformation.

We are also continuing to invest in the business and our people consistent with the plan we outlined at Investor Day. We recently announced the acquisition of Logicalis, a leading European provider of technology enabled solutions for the service management sector.

Combination of Logicalis with DXC’s Fruition Partners business further solidifies DXC’s one of the most experienced global integrators for ServiceNow, a key strategic partner. We will also continue to focus on the most important asset for services organization, our people.

DXC University now provides over 120,000 learning assets, including training courses, videos and e-books and more than 85,000 employees have completed training programs so far this year. We expanded our sales training and certification program beyond our go-to-market teams.

And almost 16,000 employees have completed the training and passed the certification exam, also established certification training programs with strategic partners, including AWS and Microsoft Azure. Gaining extraction of the dynamic talent cloud, our crowd sourcing platform that enable us to bring new people and skills to DXC in a more flexible way.

This platform links us to individual practitioners in the industry and we leverage algorithms to match specific skills to projects, assigned work, evaluate performance and then determine appropriate rewards. This allows us to better serve our clients while increasing the flexibility of our workforce and talent base.

We are rolling out the pilot globally and we have about 5,000 subscribers now engaged. Now, the fourth point, we achieved several key merger integration milestones during the second quarter and continue to execute on the build, sell, deliver operating model we have previously discussed.

We are on track to meet our targets of $1 billion of year one cost savings and $1.5 billion of run-rate cost savings exiting fiscal 2018. As we announced on October 11, we are combining our USPS business with Vencore and KeyPoint to create a separate mission focused independent publicly traded technology company to serve U.S. government clients.

The new company will be highly differentiated mission-enabled solution provider with meaningful scale and end-to-end technology solutions. It would be one of the top 5 independent IT service providers to the U.S. federal, state and defense sectors.

The company will have approximately $4.3 billion in combined revenues in a highly skilled workforce of more than 14,000 people. DXC will continue to serve global commercial and non-U.S. government clients across 70 countries. Our mission will remain the same.

Leading clients on their digital transformation journey with diversified next-generation IT offerings, industry-leading partnerships and innovation and delivery excellence for our clients, employees, shareholders and our partners, it will be business as usual.

We have launched planning and integration efforts targeting a deal close by the end of March of 2018. Prior to that, we will schedule an Investor Day for the new company. And then finally before I turn this over to Paul for fiscal 2018, we continue to expect revenue to be $24 billion or $24.5 billion in constant currency.

And as I said earlier, we are increasing our target for non-GAAP EPS to a range of $7.25 to $7.75 reflecting the benefit from the reclassification in the leases.

And on that basis, our adjusted free cash flow target will now be around 90% of adjusted net income since net income will include the benefit of the lease conversion and corresponding asset adjustments. So with that, I will turn over to Paul for a little more detail and then we will open it up to any questions as you may have..

Well, thank you Mike and greetings everyone. Before I review our second quarter results, I would like to take a moment to clarify the basis of our financial presentation. First, the pro forma results for second quarter of last year conformed to the same methodology we used in the first quarter.

And as such, all references to the unaudited pro forma statement of operations for the prior year include the results of operations of CSC for the 3 and 6 months ended September 30, 2016 and of HPES for the 3 and 6 months ended July 31, 2016. Also prior year pro forma non-GAAP results assume a flat quarterly tax rate of 27.5%.

In addition, fiscal ‘18 second quarter results reflect revenue adjustments for purchase price accounting, whereas the prior year pro forma does not. And lastly, non-GAAP results exclude restructuring, integration and amortization of intangibles consistent with CSC’s non-GAAP methods from prior years.

And with that, I will now cover some items that are included in our GAAP results in the quarter. In the current quarter, we had restructuring cost of $192 million pre-tax or $0.50 per diluted share. These costs represent severance costs related to workforce optimization programs and expense associated with facilities and data center rationalization.

Also in the quarter, we had $66 million pre-tax or $0.15 per diluted share of integration and transaction costs. Year-to-date, restructuring, integration and transaction costs amounted to $572 million pre-tax or a $1.45 per diluted share, which is in line with the $1.3 billion spend envelope we laid out for fiscal ‘18.

In the second quarter, amortization of acquired intangibles was $169 million pre-tax or $0.39 per diluted share. Excluding the impact of these special items, adjusted EBIT was $876 million or on a non-GAAP EPS a $1.93. Turning now to our second quarter results, revenue in the quarter was $6.163 billion on a GAAP basis.

Purchase price accounting reduced revenue in the quarter by $22 million representing a write-down of deferred revenue. For the full fiscal year, the deferred revenue write-down for PPA is now expected to be $230 million, which is better than our prior estimate of $335 million.

Excluding PPA, GAAP revenue was down 2.7% year-over-year and up 2.5% sequentially. In constant currency, revenue was down 3.5% and roughly flat sequentially. EBIT in the quarter was $876 million after adjusting for restructuring, integration and amortization of intangibles. Adjusted EBIT margin on that basis was 14.2%.

Adjusted EBIT in the quarter included a cumulative benefit of $121 million or $0.26 of EPS from the reclassification of HPES operating leases to capitalized leases and a corresponding adjustment of those assets to fair value.

In subsequent quarters, we expect a continued benefit of roughly $60 million per quarter or $0.13 EPS from this lease reclassification. Excluding the reclassification benefit in the quarter, adjusted EBIT would have been 12.3% compared with 6% in the prior year and 11.5% in the first quarter.

This improvement in our margin reflect cost actions we are taking to optimize our workforce, extract greater supply chain efficiencies and rationalize our real estate footprint. In the quarter, we continued to rebalance our workforce.

We reduced labor base by about 4% in the quarter through a combination of automation, best shoring and pyramid correction. We will also continue to rebalance our skill mix, including the addition of almost 4,800 new employees and the ongoing retraining of the existing workforce.

Also at the end of the quarter, our near shore and offshore labor mix was 54.5%. In supply chain, we are extracting greater procurement efficiencies. We completed renegotiations with key strategic suppliers, ensuring that we capture the benefits of our global scale and we continue to consolidate our overall supplier base.

In addition, we are implementing tighter procurement review practices across all of our regions. In real estate, we have rationalized 49 sites and eliminate 900,000 square feet of space during this quarter.

This represented 5% total square footage reductions in our facilities footprint and on a year-to-date basis would reduce our facilities cost by roughly 9%. So, in total, we delivered $110 million of incremental cost take-outs in the quarter and are on track to meet our $1 billion in-year and $1.5 billion exit run-rate of synergies for fiscal ‘18.

Non-GAAP diluted EPS from continuing operations in the second quarter was $1.93, including the cumulative benefit of $0.26 from the lease reclassification and corresponding asset revaluation. In the quarter, our non-GAAP tax rate was 31%, reflecting our global mix of income in certain tax attributes and key foreign jurisdictions.

Year-to-date, our non-GAAP tax rate was 27%, which is in line with the non-GAAP tax targets for the full year of 25% to 30%. Bookings in the quarter were $5.95 billion for an overall book-to-bill ratio of 1x. Now, let’s turn to our segment results. Global Business Services revenue was $2.3 billion in the quarter.

Excluding the impact of purchase price accounting of $6 million, GBS GAAP revenue was down 3.2% year-over-year and was up 1.2% sequentially. In constant currency, revenue was down 4.3% year-over-year and down 1% sequentially. In the second quarter, GBS segment profit was $380 million and profit margin was 16.4%.

This compares with 11.1% in the prior year. The impact of lease reclassification in GBS was minimal. So, the margin improvement reflects the impact of cost take-out actions in the business, particularly as we optimized our workforce in complex countries. GBS bookings were $2.5 billion in the quarter for a book-to-bill of 1.1.

Year-to-date, GBS revenue was $4.6 billion, segment profit was $662 million, margin was 14.5% and bookings were $4.9 billion for a book-to-bill of 1.1. Turning now to GIS, our Global Infrastructure Services revenue was $3.1 billion in the quarter.

Excluding the impact of purchase price accounting of $15 million in the quarter, GIS GAAP Revenue was down 4% year-over-year and up 3.1% sequentially. In constant currency, revenue was down 4.8% year-over-year and was flat sequentially.

In the second quarter, GIS segment profit was $469 million and profit margin was 14.9% compared with 4.7% in the prior year. Excluding $86 million cumulative impact from the lease reclassification and corresponding fair value adjustments of the asset associated with those leases, margin in the second quarter was 12.2%.

The year-over-year improvement in profitability reflects the impact of cost actions we are taking to drive greater operating efficiencies, including best shoring, labor pyramid rebalancing, workforce optimization from our Bionics automation program and supply chain efficiencies.

Bookings for GIS were $2.8 million in the quarter for a book-to-bill of 0.9x. Year-to-date, GIS revenue was $6.1 billion, segment profit was $759 million, margin was 12.4%, and bookings were $6.5 billion for a book-to-bill of 1.1. USPS segment profit – sorry excuse me, turning now to our USPS sector, revenue was $710 million in the quarter.

Our USPS revenue was up 5.5% year-over-year and up 4.2% sequentially. Our USPS segment profit was $100 million in the quarter and profit margin was 15.4% compared with 10.1% in the prior year.

Excluding $32 million cumulative impact of the lease reclassification and corresponding fair value adjustments of the assets associated with those leases, margin in the second quarter was 10.8%. Bookings for USPS were $644 million in the quarter for a book-to-bill of 0.9 times.

Now, year-to-date, USPS revenue was $1.4 billion, segment profit was $186 million, margin was 13.4% and bookings were $828 million for a book-to-bill of 0.6 times. Now, let me turn to other financial highlights for the quarter. Adjusted free cash flow in the quarter was $5 million or 106% of adjusted net income.

This reflects ongoing improvement in working capital management with an increased focus on collections and improved vendor terms. Adjusted free cash flow excludes proceeds from receivable securitization programs. And year-to-date, adjusted free cash flow was $1.2 billion or 116% of adjusted net income.

Our CapEx was $549 million in the quarter or 8.9% of revenue reflecting the cumulative impact of the reclassification of operating leases to capitalized leases. Year-to-date, CapEx was $804 million or 6.7% of revenue. Cash at the end of the quarter was $2.7 billion. Our total debt was $8.4 million including capitalized leases.

Net debt to total capitalization ratio was 27%. During the quarter, we returned $97 million of capital to our shareholders. This included $51 million in dividends and $47 million in share repurchase. And year-to-date, we have returned $138 million of capital to our shareholders in the form of $72 million in dividend and $66 million in share repurchase.

Now, in closing, let me review our fiscal ‘18 targets. We continue to target revenue for the fiscal year to be $24 billion to $24.5 billion in constant currency.

We are increasing our full year target for non-GAAP EPS from continuing operations to a range of $7.25 to $7.75, which includes the benefit of lease reclassification and corresponding fair value adjustments of the assets associated with the leases.

Our EPS target assumes a tax rate of 25% to 30% for the full year as we continue to work on tax planning strategies to optimize our effective tax rate. Our adjusted free cash flow for the fiscal 2018 will now be 90% of adjusted net income since net income will now include the benefit of the lease conversion and corresponding asset adjustments.

And with that, I will hand the call back to the operator for the Q&A session..

Thank you. [Operator Instructions] We will take our first question from Jim Schneider, Goldman Sachs..

Good afternoon. Thanks for taking my question. Good job on the quarter. I wanted to maybe start with revenue question came in a little bit better than our expectation, but can you maybe Mike help us with an update on your conversations with clients.

Any update on the dialogue regarding customer to synergies, specifically some of larger customers like the UK government, the U.S.

Navy etcetera and maybe just give us a sense of how your progress is going with up-selling existing clients to increase their contract size in exchange for cost synergies etcetera?.

Yes, it was the – in terms of the UK we continue to see a runoff there I am not sure I got this synergy, it’s more a reflection of some of the contracts concluding, but we still see pressure in the UK around some of the dis-synergies.

On a global basis, I would say the revenue dis-synergies are pretty much tracking as we thought, I would say, probably a little bit less than what we had originally planned at the Investor Day. In terms of conversations with clients, I mean I got to tell you, we just had our global customer advisory board in London several weeks ago.

We have got Americas Advisory Board going on this week in New York. I mean, the clarity of the messaging back to us is incredible. Every one of these clients is trying to figure out how they can improve their current IT operations. This is through automation, it’s through simplification. It’s a whole host of different things.

And then we continue to encourage them to take those savings and invest in other digital platforms, whether it be the modernization of applications or new cloud native applications, the deployment of those, or cybersecurity platforms or analytics are moving to a hybrid cloud environment.

So, we have done several deals very similar to the one that we announced before. So, the messaging back from the clients and our messaging to the clients has not changed one bit, they like our scale, they like the breadth of our portfolio, the partnerships that we have are clearly differentiated.

In many cases, we are showing up as one in front of those clients which they readily appreciate and simplifies their decision-making. So, I’d say the continued challenge we have, Jim, is to continue to attract and retain and retrain the talent necessary to capitalize on those opportunities.

And that’s one of the reasons we put this digital transformation even in place as we begin to pilot a different approach to some of these clients by helping build the methodologies and the tools and the process and procedures to help with a complete end-to-end digital transformation..

That’s very helpful color. Thanks.

And then maybe one for Paul, with respect to the $1 billion of any of your cost synergies, if I just mathematically look at the $140 million you achieved in the first quarter and I believe you said $110 million in the second quarter and run this through for the impact of the full year, even understanding we are kind of getting into the second half of the year now, any reason to believe you wouldn’t be tracking ahead of those or any reason to believe those cost synergies would slow materially heading into Q3 and Q4?.

We are just really are on track to meet and maybe slightly above that $1 billion. Again, the second half of the year will have less of an impact on the overall synergy realization. I think the things that we do in the first half of the year are so critical for us. And I think right now, we are tracking to the $1 billion to slightly above..

And Jim, we still have lot of work to do. So, this is not a lay down here and there is still a lot of work to do as we continue to integrate the company. So this is business as usual as we march forward here in the second half of the year..

Very helpful. Thank you..

Our next question will come from Darrin Peller, Barclays..

Thanks, guys. First question is just on overall growth.

I mean, I guess USPS accelerated quite a bit and maybe I missed it on the call, but I didn’t hear any good explanation as to what drove the year-over-year acceleration there? And then really on top of that, I mean when we look at the GBS and GIS segment sequentially, revenue looks fairly stable at this point.

Is there anything again that would – any seasonality or anything else or should we now start to expect that the majority of the revenue that you have been trying to address given the areas that you don’t think made sense from its global pricing.

Is that coming closer to finalization now so that we can have more sequential stable, maybe start to show some of the new add-ons benefit your year-over-year over the next few quarters?.

I would not draw that conclusion. I think there is still – there is many things in the second half of the year. We have got price-downs which is consistent with….

Okay..

Our season plan that needs to be factored. And so I would not get off the original sort of track that we have provided for you. What we are seeing is we are seeing moderation and some of the headwinds in the ITO business.

And more importantly, we are seeing good growth in our digital offerings as we reported this quarter and we are seeing pretty good growth in our industry IP and BPS, particularly when you adjust for run-off of some of these big healthcare contracts.

I would jump to any conclusions here that there is a significant change over what we have already talked about.

In the case of USPS, the USPS has a pretty significant backlog and as they hire more people and bring those people on, then they are able to build that revenue out and that’s up a partial explanation to why you saw slight acceleration in the revenue..

Okay..

And then candidly, we have had some acquisitions. So, we added Tribridge which is the big Microsoft Dynamics business that we bought out of Tampa and those businesses are also performing well, which is again providing some offset to the revenue dis-synergies and the decline in the ITO business..

Okay. So it sounds like the GBS, GIS core commercial side of your business could still see similar year-over-year declines at similar rates, maybe not worse, not much better in the near term, but obviously trending the right way.

And USPS, it sounds like that could be sustainable, I mean, it was an improvement overall just based on the math?.

Yes, except I will say to you that last year, you remember on the USPS side, everything has shifted by a little bit from a timeline. Remember, this is my first comment about – our second quarter basically is their first quarter so to speak. So, I think the comparison with the third quarter will be a little bit more difficult.

I would look at it much more sequentially, sequentially they grew..

Okay..

And they are in good position to continue to do well for the remainder of the year..

Alright. And then just – that’s helpful. Just a quick follow-up and then I will turn it back, but Paul when we look at the new guide for EPS of 750, midpoint 750.

Should we still expect the 20%, you guys have given 20% CAGR through 2020 and obviously I know you guys are just coming out of that, but is the CAGR held still on track just after the capital lease adjustments were made?.

I think you have to exclude the capital lease adjustment, because what the capital lease adjustment particularly when you start to adjust the asset to fair market value gives you that benefit that is going to be playing out over the next 2 to 3 years, 2.5 years in a sense from remaining life.

And so what I will suggest is when we got too wait a little bit till the end of this fiscal year, we will be updating basically when the USPS business spinning off and merging with those two other businesses and we will give you a better feel for what remained those targets will look like..

Okay, alright. That’s fair. Thanks, guys..

Up next we will hear from Bryan Keane, Deutsche Bank..

Hi, guys.

Paul, just want to follow-up on that, of the increase in the guidance to $0.75 it doesn’t look like that’s all lease reclassifications or is that all lease reclassification, just want to be clear there?.

I think there is in total about $0.53 in the sense of reclassification – the reclassification on the full year basis, $0.26 of it came into the second quarter, because there was a catch-up to the first half of the year and $0.13 per quarter.

So if you add that it’s about $0.53 for the full year and then we have done a little bit better than given the synergies a little bit better than we had expected in the first half of the year..

And then did you say the lease reclassifications continue for another couple of years.

So how do we model that going forward? I guess, it’s going to change, the model is going to change that divestiture, but I guess just for today’s purposes, would that continue going forward?.

I think it has at least a term I would say on average of about 2.5 years..

Okay, that’s helpful. And then I just wanted to ask on the overall ITO mix and digital mix of percentage of revenue, I guess once we divest the USPS business, what would be the total mix of business of ITO of DXC and of digital once we get rid of USPS? Thanks so much..

I don’t know. I mean, we have to remodel that. As I said the digital business cuts across all three reporting segments, GIS, GBS as well as USPS, but we have not sort of dissected that and segmented that yet.

What I would tell you in terms of the total mix, fundamentally, the digital business is growing about what we thought was growing and what we modeled in the Investor Day and the IP business is not growing quite as fast and that’s largely due to be a runoff in the healthcare business.

The insurance business is basically growing the way we thought it would grow and the PPS business continues to gain momentum as some of these large insurance contracts continue to come on stream.

So, by and large and the ITO business is declining a little bit less than what we anticipated, but the mix hasn’t fundamentally changed since the since the Investor Day..

Okay.

And then that ITO business mix, did that change, because I am trying to figure out that in the USPS numbers are not, is it a larger percentage or not as big in USPS?.

We do have some BPS business, particularly in state and then they do have their ITO. I think if you just really bear with us we will provide some of that breakdown a little bit more particularly after we falloff Form 10 we will be in a better position to share that information with you..

Okay, helpful. Thanks so much..

Up next will hear some Tien-Tsin Huang, JPMorgan..

Thank you.

Just wondering how bookings, I know you gave out book-to-bill measures, nothing too surprising, but how did bookings come in versus planned and would that rolling in traditional runoff, does it change your thinking around the next couple of quarters in terms of revenue production?.

No. I think as I said at the end of the first quarter, the bookings are tracking pretty much the way we had expected. I think what I have been most pleased about has been the digital bookings. So, we are seeing pretty good growth on the digital bookings. And that’s an important measure of the backlog and in future revenue generation.

The other thing I shared in previous call and we haven’t been able to really quantify we are still probably at least several quarters out as we have moved sales force to an annual build revenue measure and we are seeing some benefit of that, because it provides more focus in your revenue, that’s on a rolling 12-month basis.

So, we have seen some increase in our performance against that annual build revenue. The problem is in all candor we have no comparison with previous year. So, until we get a year under our belt and understand little bit more, it’s a little hard to ascribe a great deal of veracity or meaning to those numbers.

However, what is clear is that we are seeing more focus on that annual build revenue, which I think is important and it also takes some of the focus off of total TCB, which often drove a capital intensity, which as you know we are trying to reduce the capital intensity as we go forward.

So, there is a lot of knobs that we turned around sales compensation and how we are motivating the sales force so far, I think that’s going well, but we have a lot more to learn before I am going to be comfortable giving you some sort of an equation that you can use in the models..

Alright. That’s good to hear. Just on the – within the digital since you mentioned it, cloud obviously up strong digital. I guess security revenue this quarter looks a little bit different than the bookings, which was strong.

So, is that an area where we might see DXC sort of double down more on the security side, just trying to understand the priorities within the digital book?.

I would say to be candid price of disappointment in that security number. That security number is driven a lot by our consultants or advisors and that is a highly competitive market in terms of skills. So, the more people that you can hire, then the more billings you generate.

And as I said, we hired quite a few people in the quarter and that shows up in the improved book-to-bill, but the revenue in some respect demonstrates the fact that some of those people were not in place as we entered the merger and we progressed through the first quarter.

So, there is always a time lag on some of these trends, but you are right the book-to-bill is usually an early or leading indicator..

Okay. We’ll watch for that. Thank you..

Next up from Citi, we’ll hear from Ashwin Shirvaikar..

Thanks. So my first question is on digital growth it’s good to see that number.

I guess the question is as some of these digital contracts ramp and you prove out your digital capabilities are you seeing a difference in perception from your clients, which can kind of lead to resurgence in sort of good work the circle of demand from them or is it too early?.

Yes, I mean, yes, that not – that’s a good question. What we are seeing is when our clients understand the full breadth of our offerings, frankly, that does change their perceptions.

We see this show up all time when our clients are visiting our digital transformation centers in India, the UK or we just announced a new centers in Australia in the last about two weeks ago. So yes, that is changing the perception. The other thing is many of these digital solutions start out small.

So that’s why you’re seeing steady new logo ground around some of these new digital offerings and our quick start program is geared to that as well.

So many times we’re going in with our partners on offerings that start out much smaller in scope, but if you deliver you then have a chance to really grow and that is the difference it’s think of it more as a journey then as just one contract it’s in place for 5 years.

So over time as we deliver against those digital platforms in a digital roadmap one that does change the perception, yes, that does create a virtuous cycle and it also creates a backlog rather than see price pressures over a period of 5 or 10 years like a traditional ITO contract.

You actually see the opportunity to grow that contract and then grow that engagement over time. And that is a remix that we’re talking about of the business. So these digital offerings have a different composition they have a different profile than some of the more traditional businesses..

Got it. Good to hear. And one for Paul, Paul, yes, I get the segment level impact from the lease reclass.

Is that also tax impact that persists?.

A tax, did you say?.

Tax, yes, yes, right..

No, I think the tax rate that we apply, I think it all depends where the leases are in the USPS side, the leases are U.S. based. I don’t think it makes a ton of difference to the tax rates..

Got it.

And since it’s topical staying on tax rate, in your early analysis of the year proposal have kind of come out any takeaways that that we should take from that?.

Not yet, I mean we’ve got some really just basic modeling on this and don’t really have anything I feel comfortable sharing, yes, I mean, certainly would be a benefit. And I really want to see what comes out of the markup this week with the house and then what comes out it’s so still early days in terms of understanding that impact..

But having said that though it is the lower U.S. tax rate goes from 35% to 20% that’s there won’t be a plus for us from a mix perspective given our income and some of the other provisions again are so much in influx right now that the net that I think it would be of benefit to us..

Got it. Thank you. Congratulations, guys..

Next up is Bryan Bergin, Cowen & Company..

Hi, guys.

Can you about your non-federal government business, the public services businesses that and is that something that you can carve out and trying to understand if there are synergies there relative to your commercial business as well?.

Yes, there are some synergies, I mean we have a very large UK public sector business, we got a very substantial Australian public sector business, we’ve got a very strong business in France, we’ve got a very strong business in Germany and there are a lot of synergies between those public sector businesses and what we’re doing on the commercial side.

We share the same solutions, we share the same partnerships, we go to market. So yes, I don’t is not something that we are planning to carve out. The U.S. federal government is a very unique marketplace is just like the state Medicaid business that we have in the U.S.

that’s not being carved out, that’s part of our commercial business and is part of our worldwide health vertical, but the U.S. federal government is a slightly different, different animal, but in all cases whether it would be Australia, France or the U.K. it’s all about trying to drive this digital transformation.

We were in Australia couple weeks ago and the Australian government is taking a very strong position on digitizing their business processes and workflows and moving forward. So that’s exactly what the commercial clients are doing. So in that sense there is quite a bit of synergy..

Okay. And that’s helpful.

I heard the growth rates across digital, the industry IP and BPS, did you breakout share, where those are now as a share of revenue?.

No, what I said is the mix is about what we said it was when we did the Investor Day, nothing has shifted dramatically from there..

Alright. Thank you..

If you remember on Investor Day we were saying that our digital business is running at about $4 billion on a run-rate basis, it’s a little bit higher than that and then the industry I see it is a little bit less than the [indiscernible]..

Due to the run off in the UK, so net-net, it’s about the same..

Okay, thanks..

Next we will hear from Rayna Kumar, Evercore..

Good evening. You saw some really strong bookings across your newer work like cloud security and analytics.

Is that type of bookings growth sustainable going forward? And could you comment on the pricing trends you saw with these new bookings?.

Well, the pricing is of course much different in a lot of these digital businesses, because many of these are much more consumption based and over time as the volumes as the transactions grow then our revenue from those offerings increases.

So the dynamic, the pricing dynamics around many of these new offerings are entirely different than our traditional ITO business or our application maintenance and management business, which usually characterized by longer term contracts that have significant productivity improvements baked into that.

And that’s why I’m saying it’s really a different – a different world and we’re developing and piloting new pricing tools around these digital offerings that are more consumption – consumption base. So the trends within that are they have not materially changed at all.

We continue to see the pricing pressure due to productivity expectations and the more traditional business and it’s really way too early to understand the long-term consequences more as a service consumption based pricing in the new offerings..

Thank you..

Operator, we’ll do one more question and then we’ll close..

Okay. Thank you. Our final question will come from Ramsey El-Assal with Jefferies..

Thanks for squeezing me in here guys. I wanted to ask about synergy realization on the labor side and first on the optimization of your labor footprint meaning moving in the right shoring more headcount.

Can you talk about the challenges or points of friction in doing and doing that operational logistical political, how much runway is where are we out in the process, I know you talked about a pretty material move in the context of the merger.

So, sort of an update on where we are and sort of also on how – what are the challenges you faced kind of accelerating that shift or at least tracking?.

Yes, let me give you a couple of thoughts on that. One, I don’t really see the political so much. I think what you have to understand is that the labor dynamics around these digital transformation projects are much different than the labor dynamics around the outsourcing business.

So when you talk about digital offerings and digital transformation with our partners you do talk about much more client intimacy. These are projects that are often done locally sometimes with land and resource, but in any regard, they have really done very local. When we talk about right shoring, we don’t necessarily talk about offshoring.

Probably the biggest hurdle we have when we do choose to move workload to a right sourcing location is just the transition. So, you go as you have to ramp up the skill some place else before the skills in the current place could be redeployed or optimized. I would also say that automation is clearly adding a different dimension.

So rather than thinking about moving positions from point A to point B in many cases we can displace those and retrain those people around our digital profile. The other thing is as we rethink our labor strategies we are thinking much more about college graduates we are thinking about internships program, we are thinking about co-op programs.

We are thinking about different training programs, because the mix of our business as it changes over the next 3 or 4 years will have an entirely different labor dynamic than what we have seen in the traditional businesses.

So, it’s a combination of rethinking how you bring people in, that’s what our dynamic talent cloud is all about, it’s about retraining, it’s is about reskilling and it’s about a whole different approach to where we setup our locations.

I have said before we are looking at creating some lower cost facilities in the United States and moving some of our workload there.

So, it’s that mix of location that the type of businesses in the digital business requires more customer intimacy is it driven by productivity improvements and then that drives a whole reskilling, training and recruiting process. And that’s what makes this so exciting and I think so a dynamic as we move forward..

Alright, thanks so much. I will leave it there..

Okay. Well, listen guys, thank you again very much for your interest and look forward to catching up after the first of the year. Thank you..

Ladies and gentlemen that does conclude today’s conference. We would like to thank you all for your participation. You may now disconnect..