惠普 (HPQ) 2007 Q4 法說會逐字稿

Good afternoon, Ladies and Gentlemen.

Welcome to the EDS fourth quarter and full year 2007 earnings call.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Dave Kost, Vice President, Investor Relations.

Mr.

Kost, you may begin.

Thank you very much, John.

Hello, everybody and welcome to our fourth quarter and full year 2007 earnings call.

With me today on the call are our Chairman, President, and CEO, Ron Rittenmeyer, and CFO, Ron Vargo.

You should have received an e-mail from me with a copy of our press release, as well as the presentation to be used on today's call.

I'd like to remind you that the presentation, along with the webcast, are available on our website, and will be archived there for the next 30 days.

The information to be covered on today's call, which is not historical in nature, including statements regarding financial guidance or future financial performance and the value of our new contract signings, constitutes forward-looking statements within the meaning of the Federal Securities laws.

These statements are subject to numerous risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties, see the Risk Factors section of our most recent Form 10-K.

We disclaim any intention or obligation to update these forward looking statements, whether as a result of subsequent events or otherwise, except as required by law.

In addition, we refer you to the slides posted on EDS.Com that accompany this call.

Among other information, these slides and our earnings release present a reconciliation of the non-GAAP financial information to be discussed today and should be reviewed in connection with this discussion.

With that let me turn the call over to Ron.

Thanks, Dave.

I'd like to take you through some of our business highlights and then I'll turn it over to Ron Vargo to talk about the finances.

On page 3 of our slides for the Fourth Quarter Summary results, EPS of $0.55, which is 17% on a year-over-year basis, revenue of 5.8 billion, 2% up.

Organic was down 3% and Ron will talk a little bit about that, but it is in line with our overall guidance and it really, free cash flow, etc, all came inappropriately.

The next item of free cash flow at 563 million, 44% over year ago and we did hit the 55 day DSO target that we said we would.

Contract value came in at 6.1 billion, that's the-- second half turned out actually to be the strongest sales performance period, the best second half really since 2001.

We did have a slow start to the year, as everybody knows, we had a very strong finish in '06 and we came out a little bit slower because of that but we ended up again very solidly.

Overall we had seven contracts in that quarter with TCV over 100 million and we had very strong bookings in both healthcare and transportation, which we feel good about.

Next slide, page 4, year results, EPS of $1.56, which is 58% on a year-over-year basis.

Revenue of about 22.1 billion, up 4%, organic came in flat, somewhat helped by foreign exchange.

Overall free cash flow of 892 million, which was slightly higher than 2006 but the quality of the free cash flow was better, and Ron will talk somewhat about that as well.

From a bookings standpoint, we came in at 19.5 billion, and I know that will be compared to the 26.5 in 2006 but I do think we have to consider that those two very large mega deals, both GM about Navy, which are very, very unusual given their size.

So we tried to keep those a little bit excluded so that we were looking at, what I call our base business year-over-year, so our bookings were really up 2% on a year-over-year basis.

The other thing of course is we do start out the year in a, using a constant currency foreign exchange rate for the year, so this year because of that, there was somewhat of about, there was probably a billion dollars that got lost up in that noise on a comparison year-over-year.

But from the 19.5 to the prior year, we were up about 2%, which we think was solid performance given somewhat the late start we had in the year.

Once again fourth quarter, the fact is we did have some key deal shift.

I think what's important is the deals that shifted in the fourth quarter actually were all deals that we had been down selected to one, so we're not in a competition on these deals that slid.

These are deals that we've already been chosen for, we're just in the contracting phases and quite candidly, it's just that December is not a month where you can always get everything brought to the table and fully contracted, so we believe that will also be a good start to this year.

Fourth quarter signings, on the next page, the Americas region, particularly the U.S.

and Latin America, they had very strong booking quarter.

They signed about 69% of the total TCV, and in Q4, when you look at our service line, split it was weighted a little higher with ITO deals at 58% of the bookings.

Application continues to show really good performance and that's in line with a strategy we talked about at about 30% of our signings.

BPO business posted 12% of the TCV, as you can see on this slide.

When we look at it from a vertical industry standpoint, we had our strongest fourth quarter performance from the healthcare and the financial services team.

Again, we signed seven contracts with TCV greater than a hundred million during the quarter.

And just to highlight a few, which you probably have already read about, is the Bristol-Myers Squibb signing was a very good signing, new logo, of course, a seven year IT services extension with Continental Airlines was important, as well as a contract extension with Indiana Medicare, which really leveraged our leading edge interchange health system.

So all in all quarterly signings were strong.

We're happy with the momentum in the market and we feel good about it.

So let's look at the next page, slide 6 which is our update on sales effectiveness.

The full year we had 28 wins over a hundred million versus 26 in 2006.

Again, that's the third year in a row with mega deal signings in the upper 20's.

Existing client bookings were up 4% year-over-year, that really reflects a turnaround in existing account sales improvements so we're very, very bullish about that.

Our new logo signings in the Q4 were the second highest in a fourth quarter period in the last five years, and we accomplished this without any deals over 1 billion, which of course comparing the 2006 where we actually had three of those, so we think it was a very strong solid year from a sales effectiveness standpoint.

Let's take a second to talk about the pipeline.

We added sales and sales support capacity, as well as increasing our AP sales capacity.

We made several improvements in our sales process that's going to help us in our existing client base, and we feel our pipeline remains really robust.

It's up 10% versus a year ago, with strength coming from both ITO as well as the broader applications market that we've been talking about.

AP's domain practice deals such as SAP and Testing, which are typically less than 10 million but good quality deals, are up 21% from a year-over-year basis from a pipeline perspective.

And from an industry standpoint, energy, healthcare, financial services, and manufacturing, really have the strongest year-over-year growth in the pipeline.

The good news to us is all regions are showing very healthy pipeline and growth.

Page 7, when I look at applications, our revenue was up, it was 1.7 billion which is flat versus a year ago and if you'll recall a year ago, we had some strong end in EMEA on applications.

The booking in pipeline is very strong and we are beginning to transition to a greater offshore mix, which obviously does some impact, I think everybody understands it masks your actual growth because of the way you price it from an offshore standpoint.

Application services increased to 31% of total revenue, which is up from 30% last year when we ended, and signings were 30% of the total TCV in the fourth quarter.

For full year, '07 AP signings were about 32% of TCV.

The pipeline truly continues to improve and finally, margins were down slightly due to the investment in the buildout of this business model.

Over time, we clearly expect margin expansion in AP's to translate into real bottom line improvement.

That's why we're doing it.

Our applications momentum over all I think in summary continues to improve.

Let's turn to the next slide, which is our Best Shore slide, as you can see the bar graph, we're now up to about 41,000 employees, we have about 27,000 of those in India, which is by far our largest Best Shore location.

We've established an updated goal of achieving 60,000 EDS employees in our Best Shore location over the next two and a half to three years, and given our existing size and scale, our primary focus is now on improved integration of our global delivery as well as our quality improvements.

Turnaround improvements on recent client service desk migration to us are really very, very solid proof points so we feel very good about this.

Turning to the next slide, which is quality which I know you've heard me speak of frequently, we're making significant strides in this area.

Quality improvement continues to be what we believe is one of our most important responsibilities for every employee.

Our severity one incidences continue to decrease significantly and we continue to hold out zero outages as a mind set that we want to go to.

For 2007, compared to 2006, our severity one incidences decreased by over 74%, and this improvement has really driven by utilizing the global services network, new software tools and process changes.

All of these improvements are sustainable and obviously feed a lot into our productivity and we believe that's a very strong differentiator for us in the market.

So, in summary of 2007, I would say it was a good quarter and a good full year.

We clearly are not satisfied with the pace of the improvement and we expect to focus on that pace as we get into 2008.

I'm pleased with the overall recent sales booking trends that have developed in the back half of '07.

Quality continues to be, I think, a significant differentiator for our business and our trends continue to show great improvement.

And I also believe that by any measure, we have made a significant progress in the last year and a half with changing our Best Shore labor mix, which really has enhanced not only our competitiveness but our overall productivity.

And clearly, we still have work to do and we accept that.

And then finally I think we have a very strong balance sheet and cash position, which really gives us some flexibility, so if I had to say, what is our priority going forward, it's focused on margin about free cash flow improvements and that is the number one project that we are focused on.

Looking ahead in 2008, Ron is going to talk about the guidance, which I would say we have maintained that guidance that we spoke about on November 2 at our Third Quarter Earnings Release.

And we've maintained that guidance across-the-board in EPS, operating margin, and in revenue, and free cash flow, so Ron will talk about that, so no changes to that.

From a growth stand point, we're going to continue to invest in sales, expect the pipeline will fuel much more growth.

Best Shore, when I look at that overall Best Shore content, it now exists in almost every deal we're doing and we will continue to use that as a leverage point.

We believe there is very solid market demand for applications modernization and industry solution, particularly among our broad clients base, so we feel very good about that.

As far as the macroeconomic risks, I mean, we are clearly very carefully monitoring and evaluating any impact in each of the markets that we service, and we believe that at this point, we still see market strength in what we do.

We are going to scale back, if needed, in areas that show up, but we are just as pure, just from a pure solid good business sense, really focused on our discretionary spending as we look at our own margins and free cash flow.

But at this point, we believe that from a macroeconomic standpoint, we haven't seen anything that puts us in a serious state of concern, but it's certainly something that we are monitoring and very aware of.

On an operational standpoint, we are going to continue to drive earlier execution on workforce management.

I expect a heavier impact in the first half.

I think it's important to us to continue to improve our overall margins and cash flow efforts.

We're going to be aggressive with process improvements through best practices.

You'll hear more about that at the, on the security analyst meeting in a week or so, and I think that 2008 is clearly a year for us, where we make a difference in our applications business.

We are running it now as a profit center versus just as a delivery organization, and measuring it with accountabilities accordingly.

We are using our practices and industry structure to help feed this and develop it and take in accountability down to the levels that are important for execution.

So, execution is what we do.

It's an important part of our 2008 and 2009 margin expansion.

I didn't put M & A on here but clearly M & A continues to be something we're going to look at for enhancements, but it's not going to be just the single thing that we're doing in 2008 and 2009 to improve our business.

If anything it will be there as an enhancement.

So that is my, that completes my part and I will now hand it over to Ron Vargo to talk about the financial section.

Ron?

Great, Ron, thanks, and good afternoon to everybody.

I'll be covering results for the quarter and be discussing a bit about our 2008 guidance, so let's go to slide 13, summary results for the fourth quarter.

Total revenues were 5.8 billion, up 2% as reported and down 3% on an organic basis.

Adjusted earnings per share of $0.55, up $0.17 versus the fourth quarter of 2006, and reported earnings of $0.36 were impacted by the early retirement offer that we charged in the fourth quarter and I'll talk a bit about that later.

So down 10% versus the fourth quarter when including all items between GAAP and adjusted.

Free cash flow, as Ron said, was 563 million, an improvement of 171 versus last year, and finally quarterly bookings of 6.1 billion.

And again, it was a very strong quarter and seasonally as you know, the fourth quarter is typically an extremely strong quarter for EDS and it was again in 2007.

Slide number 15, 14 I'm sorry, the earnings per share reconciliation between GAAP and adjusted earnings, GAAP earnings were $0.36 and adjusted earnings were $0.55.

The major item, of course, impacting GAAP was the $0.18 impact from our early retirement offer, which we completed in the fourth quarter and which we discussed in some detail with you in our third quarter call.

So, fully expected to see a charge in the 17 to 18% area.

We also had another penny impact, primarily related to a writedown related to in-process R & D, associated with our acquisition of Sabre Holdings in the fourth quarter, along with a few other items relating to discontinued ops and prior restructuring.

Slide 15, the fourth quarter adjusted income statement, and this slide contains summary level items from our income statement, again adjusted to exclude certain items, and a detailed walk from the GAAP income statement to this adjusted format is included in the appendix.

Key highlights include revenue, up 128 million, primarily due to the impact of FX, which was partially offset by a 4Q, '06 Verizon termination payment and some revenues in the fourth quarter of '06 from our divestiture of GFS, our divested business GFS.

You will recall that it was December 2006 when EDS transitioned services back to Verizon and at that point we did receive termination payment related to that transition.

Operating profit showed a 10% improvement as a result of productivity and lower severance levels, which were partially offset by that fourth quarter '06 Verizon termination payment , as well as contract price reductions and other contract run-off.

This lead to an operating margin improvement of 50 basis points over the fourth quarter of '06.

And finally, the net effect of interest and other in taxes was positive.

Interest and other improved primarily because of the interest rate impacts on some of our swap debt.

And our tax expense for the quarter was 31.2%, a bit better than we anticipated and our tax rate for the full year came in at about 33.5% better than anticipated, primarily as a result of adjustments in foreign and state jurisdictions, which more than offset the impact that we've discussed with you in prior calls, resulting from the German tax rate change.

Fourth Quarter and full year free cash flow, as mentioned, free cash flow for the quarter was a strong $563 million, driven by higher earnings and strong fourth quarter receivable collections, which lowered our DSO to 55 days.

This was partially offset by other working capital items.

Total free cash flow for the year came in at $892 million and key changes from 2006 include cash flow from earnings up $415 million on a year-over-year basis, working capital actually negative year-over-year by over $300 million.

But the receivables collection improvement again came in very strong in the quarter but it was more than offset on a full year basis from a number of changes, including client pre-payments in 2006 that have impacted deferred revenue in 2007, higher severance accruals in 2006, in which the payments were made in 2007, and higher deferred contract costs associated with some of our larger contracts.

Net capital expenditures came in higher than last year by 103 million, but this was driven primarily by lower asset sales, and lease related proceeds, which in total were down over $200 million.

So if you look at core capital expenditures, we actually improved on a year-over-year basis, and so the quality of our free cash flow in '07 was actually better than the quality of the free cash flow in 2006.

Balance sheet, on this slide, I'll review briefly selected year-to-date balance sheet movements, and the most notable movements include cash and marketable securities up $177 million.

Key components of this change were the free cash flow of $892 million offset by net share repurchases during the year and acquisitions during the year, including the fourth quarter Sabre acquisition as well as dividends, so we offset substantial share repurchases and acquisitions and still grew our cash by $177 million during the year.

Deferred contract costs, although higher year-over-year on a sequential basis versus the third quarter deferred contract costs were flat, actually down $1 million, and deferred revenue was down by a little less than 200 million, primarily related to a large UK government contract pre-payment in 2006.

Shareholder's equity increased by $1.8 billion and there were several factors contributing to that increase.

Obviously, net income but also we had strong performance in our pension assets in both the U.S.

and UK, which contributed to the increase in shareholder's equity and we also benefited from the weak dollar in other comprehensive income from foreign exchange benefits, and all of that was offset by net share repurchases during the year.

So we continue to maintain an extremely strong balance sheet with equity at now $9.7 billion and debt to total capital ratio at the end of the year at about 26%.

Just a brief word on our new share repurchase program.

The Board authorized a billion dollar program in December of 2007.

We got off to a modest start to that program and we purchased a little under $60 million worth of shares, a little under 3 million shares and expect to continue to repurchase shares during the 18 month program from December, starting in December 2007.

Now for just a brief update on that early retirement offer, as you recall this was a U.S.

only program.

It was principally a non-cash charge because the funding will come from the U.S.

pension plan.

The financial impact in the fourth quarter was a pre-tax charge of $154 million, relating to the approximate 2,400 individuals who took early retirement, or $0.18 per share on an EPS impact.

Cash flow, again immaterial due to the funded status of our EDS U.S.

retirement plan.

And as we look out into 2008 and beyond, we expect to backfill approximately 25% of those positions and that should generate savings of greater than $125 million annually and obviously help offset some of the Verizon impact in 2008.

On a full year 2007 basis, significant year-over-year progress in financial metrics.

Revenues 22.1 billion, up 4% and flat organically.

Adjusted earnings of $1.56, up 58% and again, we walk you from reported to adjusted in the appendix.

Our full year operating margin was 5.8% and we fell a little short of our own goal of 6% or greater, in part due to some contract weakness and in part due to some of the signings that occurred a little bit later in the year rather than earlier.

And again, I think as we look out into 2008, we would expect the turnaround in that contract weakness as well as benefits from strong signings in the second half of 2007.

We generated $892 million of free cash flow, and signings were 19.5 billion.

Now, let me just turn to 2008.

First, just a business context on slide 23.

Top line growth, we expect approximately a 2% year-over-year increase in revenues, as growth should more than offset the impact of the Verizon termination and higher run-off in pricing impacts, compared to 2007 versus 2006.

This estimate includes revenues from Sabre but excludes currency effects, which did have a great impact in 2007 obviously.

And again, we expect TCV to be greater than $20 billion in the year and we're targeting a 1 to 1 book-to-bill ratio.

Operating margin, we're looking to expand margins before the impact of workforce management charges, and again, we do have the impact from the Verizon termination and run-off, as well as workforce charges, which we have told you would be in the range of 200 to $250 million.

Our global standardization and best practices will continue to drive productivity, as will a continued shift in the global labor mix, and we expect improved contract execution and start-ups to be significant drivers of year-over-year performance.

Free cash flow, we continue to target free cash flow in the area of 900 million for 2008, driven by working capital improvements, we anticipate significant year-over-year improvements that will more than offset lower cash from earnings and a bit higher capital intensity during the year, which we would expect to be in the 5.5 to 6% of revenue range, due in part to anticipated growth in our data center facilities.

Now, let me share with you just the broad numbers for our full year 2008 guidance, and as Ron Rittenmeyer said, there is no change in the guidance that we provided to you at the end of the third quarter.

Revenue of 22.5 billion plus or approximately 2% greater than 2007.

Adjusted earnings of approximately $1.35, free cash flow of approximately $900 million and TCV of greater than $20 billion.

So just to be clear, the adjusted earnings of $1.35 are net of the impact of workforce management charges.

Our first quarter guidance is 5.1 to 5.3 billion of revenue, and approximately $0.05 of earnings, which I'll talk about in a minute.

We would put a range on that, we would put a range of about $0.03 to $.07, so let's flip to the first quarter 2008 earnings per share outlook chart.

What I've shown you on this chart is the first quarter of 2007 versus the guidance for 2008.

First quarter of 2007, we actually generated $0.31 of profit but we had $0.13 of the $0.31 related to the recognition of $100 million of the total of 225 of Verizon payment, which occurred in the first quarter.

And we also, as we discussed on our first quarter call with you last year, saw an acceleration of $0.06 of earnings in the quarter, which was unanticipated due to timing of events impacting '07, which we thought would impact-- first quarter of '07 which we thought would impact the second quarter of '07.

So net of those items, earnings would have come in closer to $0.12 a share.

We also expect to spend $0.08 in the first quarter of 2008 in workforce management charges, and incur slightly higher interest and other costs as a result of lower interest rates and some benefits that we saw on our swaps in the first quarter of 2007.

And while we will benefit from year-over-year improvement in productivity and from some of the ERO benefit in the first quarter, this will not be enough to impact the earnings outside of the range of $0.03 to $0.07 a share.

So for the balance of 2008, obviously we continue to expect sequential improvement from contract performance, savings from our early retirement offer, operational productivity, and the net effect of new contract growth in revenues and profitability.

So, let me turn it back to Ron Rittenmeyer for a

Thanks, Ron.

Just a couple points.

We believe we had a good year in 2007.

Some pretty solid improvements overall, both in the quality of what we did and what we reported, but clearly, we realize it's not enough and as I said earlier we are going to be focused on, from a margin and free cash flow standpoint.

Not only focused in terms of how we looked at operating but it's also how we do deals.

Our business model is improving to capitalize on that and how we hold people and how we're going to measure people.

The economic slowdown that everybody is concerned about and the question about the macroeconomic issue that I mentioned, we do believe it is important and it is something we're watching, but we also feel we're in a pretty good position.

48% of our business is outside the U.S., 30% of our business is with the government, primarily in the U.S.

and the UK, and a high percentage of our revenue is under long term contract, which also runs very mission-critical businesses and systems for these clients that can't just be walked away from.

We believe what we provide is a solution that creates a lot of value and opportunity for clients that allows them other ways to improve their business, so again, I think we feel relatively comfortable that we have a very good model in these times.

Investment in our business has been needed and the last few years we're making those investments.

We talked about the applications as an example of that throughout '07, and we're going to continue that in 08 and we think they will really drive some serious payback.

In Q4, we completed the acquisition of Sabre Solutions, which is an applications company that has real leverage platforms for state and local agencies on a global basis.

We're excited about the business, it's off to a great start and we think that's going to be a major add to our overall business portfolio.

And we started the share buyback, which Ron mentioned, and we will continue to focus on that and move forward.

And we'll provide a lot more color obviously when we meet on the, I think it's February 19 at the security analyst meeting where we'll get into more detail by each group.

So, with that, I'm going to turn it over to Dave and I guess we'll take questions.

Okay, John, with that I'd like to open up the call for questions and I'd like to ask you to limit your questions and be mindful of all of the others in the queue.

John?

I'll begin the question and answer session.

(OPERATOR INSTRUCTIONS).

Our first question comes from Rod Bourgeois from Bernstein.

Please go ahead.

Hi, guys, yes.

I just wanted to clarify the 2008 EPS guidance of $1.35.

If I'm reading this correctly, if that is exactly the guidance that you gave three months ago, when you gave adjusted EPS guidance of $1.35.

When I compare that number to consensus of $1.65, it appears the consensus number excludes a $0.30 workforce management charge, and so I guess what I'm trying to make sure I understand is your $1.35 EPS guidance consistent with an EPS number of $1.65 excluding the workforce management charge of $0.30?

Yes, Rod, it's Ron Vargo.

You got it right.

I mean, what we're saying is, we are maintaining the same guidance that we provided in November, which is $1.35 a share in 2008 and that $1.35 is net of what we said in November, approximately $0.30 of workforce management charges.

So we eat those, if you will, when we report our results, we report our results net of those workforce management charges.

In the call last November, we actually did say that we would expect about $0.30 of workforce management charges, so we let you decide how you want to treat those.

I don't think first call should be showing a number before the effect of those workforce management charges.

We don't try to adjust them out, very frankly.

And we also, Rod, this is Ron Rittenmeyer, we also want to focus on getting those earlier in the year, because the earlier we deal with this, the better for us going forward.

So when we talked about it in November, I thought we were very clear about yes, we were going to make this investment.

We spent a lot of time I think dealing with the issue around transition year and what does that mean and where are you going and so I'm not quite sure how the two numbers are sitting out there, but that's where we were.

Okay, great.

And another clarification for Ron Vargo.

Your 2008 free cash flow guidance of $900 million, that includes the negative effect of 200 to $250 million of workforce management charges?

Yes, it does.

It's all in.

Okay and what were the workforce management cash charges in 2007?

I don't think we disclosed that, but we certainly paid significant workforce management cost in the first quarter relating to accruals that we had from the fourth quarter of '06, so on a net basis, probably slightly, maybe 15, 20% lower --

In '07.

-- in '07 than what we're anticipating in '08.

It's definitely higher in '08.

Alright, so the workforce charges are going up in '08, and I'm assuming, are you keeping your target of about 1.1 billion in free cash flow for '09?

Yes.

And if so is that because you essentially get rid of a couple hundred million dollars in workforce management charges?

Well, this is Ron Rittenmeyer.

I think it's for a lot of reasons, that's one of them, okay?

But as we said, it becomes fungible.

Some of it is workforce management, some of it is just as you do that, you change processes and pick up other efficiencies so our line of sight is built around a lot of things and I don't want to just tie it to one thing, Rod.

And then Ron Rittenmeyer, on the margin side it looks like your margins were below your plan in Q4, so how much of that is timing, because of push outs on contracts versus an execution issue or something related to pricing and what does that mean for your margin trajectory for 08?

Is this, does the push out in Q4 help '08 or are you behind where you wanted to be as you entered 2008 on the margin front?

Well, let's be frank.

I think that some of it, it's kind of all of the above, but let me talk about what I mean by that.

Clearly, Rod, I never shy from these things.

There is some contract execution issues.

We had a lot of start ups last year and we had a lot of contracts come up last year and some of that is that heavy signing in '06.

So I think that there were some opportunities where we could have done better and I don't want to hide from that, but I believe we have got that, while there is nothing that I would say was a burning platform, there were just fundamental issues that we could have done better than what we did.

So there is some of that as performance that carried in '07 that will get much better in '08, so that's part of it.

And you talked a little bit about, does that mean the revenue from the revenue standpoint that's also part of it, which we should pick up now based on the pipeline of where we see us going, so I guess when I think about all of that together, I believe that there's clearly some execution opportunity.

Some of it, some of it comes out in the investments that we made in our business around SAP and Applications.

I would expect that to start coming back in late '08, early '09.

And so I think you hit on, when you asked the question you covered all of the areas, so I'd have to say all of those areas are probably, probably play somewhat of a role.

But I'm very much, I think very much from a focus is got to be execution number one, getting a return on our investments and making sure our business plans on our investments that we're making are very, very tight and very buttoned-up, which is an area that we've really put a lot of focus on as we've come into the end of the year going into next year.

So I don't know if that answered what you were asking

No that helps.

I'll take the rest off line, thanks.

Thank you, Rod.

Our next question comes from Abhishek Gami from Banc of America.

Please go ahead.

Great, thanks.

How far along are you in running your APs business as a profit center in terms of infrastructure and process?

I would say we've certainly got the framing of it done.

We've started to make the transitional pieces that you would need from a leadership, organizational and reporting standpoint.

We've hired several new senior leadership people in the fourth quarter, and we're in the midst of doing some more hiring right now.

So I don't know if I could put a number on it Abi, but I would say that we've clearly invested in the tools with SAP, we've added the leadership, we've done some of the organizational things that need to be done to make our business perform at a contract level on a global basis, that's a pretty big change, and most of those things are well under way from a tools standpoint, etc.

The other thing we've done is we really aligned it very heavily by industry, so and tied into the hiring and consulting pieces we already had in the industry, so I'd say we're certainly past the half way mark and I think we're making pretty rapid progress and it's a very big focus.

Thanks, Ron.

Will you say it's fair to say that ultimately, you can benchmark the margins and growth rates of some of the offshore players who clearly say are the leaders at least in maximizing those metrics, or is there some other reason why those metrics are not the most applicable to look at?

Well I think the answer is yes to both.

You do want to benchmark to the offshore players, they're real players.

You'd be silly to ignore them and we would be less than thoughtful if we sat here and tried to justify why we wouldn't do that, so we will do that.

But I do think some degree there is an apples and orange mix here, while they're moving, trying to move more to the onshore model versus, which, they're trying to move somewhat to an offshore model for them but we're trying to move to an offshore model the opposite way.

So you got to be a little careful in terms of how you look at that but I think fundamentally, there are metrics relative to percentage of work being done where and how that fits, as well as price point, rate cards, those kinds of things, stuff we probably don't disclose.

But I think that for us, on the development side, that's very, very applicable, so your point is correct, but it's in the details of that that I think you have to be smart.

The other side I think that we shouldn't discount is we have still a significant maintenance business, and that isn't easy to benchmark to offshore players, because the maintenance business for us is a very profitable business, a very sound business and a pretty substantial business.

Also gives us access that is something that the we don't want to discount.

So while it may not be the high end margin growth, it has a lot of other attributes besides making a good margin, it makes a very good margin but it's also got other attributes in terms of access and knowledge that you don't typically get, so you got to look at both of those when you talk about that.

Thanks, that's very helpful.

Next question?

Next question comes from George Price with Stifel Nicolaus.

Please go ahead.

Thanks very much.

Just wanted to clarify one of the prior questions.

The cash impact from the workforce management action, is that, I mean from a magnitude perspective, those are ultimately all going to be cash, but from a timing perspective, that's a question but from a timing perspective, are they all going to hit in '08 or is anything, as you move through the year, you make an accrual for that?

Is anything going to linger from a pay out perspective into '09?

Yes, George, Ron Vargo.

So, I would expect us to front end load a lot of this workforce management cost, which would imply that most of that would be cash payments in 2008 and wouldn't carry over into 2009, so --

It's a little hard though, George, early on to make that totally definitive, because Ron's right.

I agree with Ron but I would just say that some of that also depends on other factors, like (inaudible), there's just other dynamics that I really don't want to get into but I think the majority is correct.

Yes, like if you're letting someone go abroad where you may have to, I gotcha.

Yes.

Just clarification, the '08 EPS guidance, what are you assuming in that in terms of share repurchases?

Yes, I think you can assume that we would execute on our share repurchase plan ratably across the next 16 months or so, which would, net of any new shares that would creep into the share count from comp programs, would give you about a 530 million average share count for the year.

For 2008?

Yes.

530.

And then last question, just doing a back of the envelope calculation, maybe I need to go over this with you a little bit more off line but just, it seems like the ERO, given the 25% backfill and some other basic assumptions, it seems like it should give you more than, it could give you more than sort of the 55 bips of operating margin that's implied.

What's your feeling on that?

Is the 125 million, just to clarify, is that the annualized benefit or the benefit that you'll see in '08?

Yes, well, I think,George you're right, first that should generate a higher annualized number and I think there's a little conservatism built into that number for '08 because we do have some people still on, who have stayed on on a contractor basis for a few months into 2008, which, and they will be leaving in early 2008 before we get that kind of full year impact.

Yes, that's true.

The thing that, let's just enter a little practical side of an ERO.

I mean, we have looked at that from a full, but people do have to say because, first of all we don't know who they are until we pull the plug.

The day that they submit their names and we're done, theoretically they 're either done immediately or pretty quickly thereafter.

And some of those skills obviously, some of the jobs they're doing you have to bridge a little bit because even if you hand it over to a lower paid individual or to, or you decide that you're going to change the process, it's sort is of hard to do that in ERO until you know exactly who stood up and took, the rules are such that we can't just pick who goes.

They self-select, so and that's not really something publicly we deal with until the last minute because most people wait until the very last week to finally submit their name.

A lot of people go out and investigate it but we don't know who is going to take it so, some of this is a timing question, I think is where Ron is going and we're trying to be realistic about it.

Just to clarify, the 125 million, is that the anticipated benefit in '08 or is that an annualized?

No, that's the anticipated benefit in '08.

Okay, thank you.

Next question comes from Adam Frisch with UBS.

Please go ahead.

Thanks, guys, just want to start off on the EPS question, I think the $1.35 is the right number, considering the restructuring charge in the last several years, so I appreciate you doing that and clarifying it.

Ron Vargo, on the free cash flow situation in '08, the $900 million or so, it seems like a big number given the Verizon payment in '07, flattish EPS, presumably the pay out of severance which you talked about would be a little bit bigger in '08 related to restructuring.

So how does free cash flow get to 900 million and are there going to be any chunky items in there, like sometimes in the past whether it's a building or asset sales or other one-timers that we should be aware of?

Yes.

The short answer is " No".

I agree with you, 900 million on lower earnings, you say where is it coming from, but we had a significant use of working capital this year as you know, and we think that's where most of the turnaround is going to be in terms of the getting back to full 900 million.

Adam, when I talked about execution, I mean, I think we have fairly good line of sight about what we have to get done, and we're very focused on it.

So, like we talked about 55 days, that was done through execution, and I don't want to overplay that card but we are aware of that and I think that it's a solid target.

I don't think it's a target that I'm sitting back, you know what I'm saying?

Relax , that is

Yes.

Hell, I didn't have that target for this year, so I think we know the job in front of us and it's, our free cash flow tends to be a bit chunky and you know that.

And I'm very focused on improving the quality of this and not including things like asset sales without disclosing them.

Okay, cool.

And being very aware of that.

So the working capital changes are more like on lower deferred than doing better --

A variety of things.

Yes, payables, deferreds, things like that.

The other thing is, as you know, and we reconcile for you in the back of this deck, we finance some capital too, so --

We're up front about that.

If we're looking at data center capital, we may do some sale and leasebacks if those make sense as well.

And we'll be very up front and disclose that if we do that.

That's what I was going to ask you, on page 35, CFTs, is there going to be a material increase in '08 on those?

At first, I'll be up front.

We like CFTs, we think they're the right thing to do.

We think they, structured properly, they lay the risk off of EDS, and help the overall deal economics by not putting our capital at risk, so we're not forecasting a huge increase in CFTs but on a deal by deal basis --

We'll look at them.

As well you should, I agree with that.

The other comment I want to make about this is also, we're going to be very up front with you guys talking about free cash flow on investments.

So to Ron's point, we're going to do the right kind of thing here.

We're not going to make things though just to make free cash flow reported better, if it doesn't make sense to the company, so we're going to disclose that, be very up front about it and talk about it.

Okay.

Definitely welcome.

I just wanted to ask one last question, what would revenue growth be on a percentage basis without the Sabre acquisition?

It would probably be 1 to 2%.

Okay, so it's not helping all that much, just adding about a point or so?

Yes.

I have one other thing I want to talk about revenue too, as I said last year, we are also looking at revenue relative to returns, so I mean, in those numbers as we look at it, there is some revenue that we're going to continue to investigate as to the quality of the revenue and whether we're getting enough for it and what that means to us.

Okay.

Thanks a lot, guys.

I really appreciate it.

Sure.

Thanks.

Next question comes from Jim Kissane from Bear Stearns.

Please go ahead.

Just following up on the working capital comments, is the 55 days for DSO sustainable, is that the right number to use for '08?

We think it is.

I think you'll see some volatility, again, Jim as you usually do in the first quarter, because we get, we have some structural events in the fourth quarter.

Last year, we actually had a kick up in the DSO because of some terms with a couple of our customers, which won't happen in 2008, so we think it's sustainable.

But my job is to try to make it sustainable from quarter to quarter to quarter.

I know we'll have another volatile first quarter, but we're targeting 55 or better for year-end 2008.

And when you're done with the big cost action this year, will your cost structure be right sized or in sync with where the market is today or do you expect further big actions in '09, 2010?

Will our cost structure we right sized?

Ron, you might want to weigh in on this, but I think we will have a relentless focus on our cost, year-over-year.

Yes.

That's a broad question to just say yes.

I'm thinking about big actions.

Well I guess I don't know where you're heading, but if you're saying are we going to do something material, I can't answer that right now.

I could tell you that I am very, as a company, we are going to be focused on a couple things.

One, we're going to be focused on closing deals that are good quality, which includes being measured by free cash flow, which is a new measure we're putting in relative to how we develop.

When I say new measure, it was always there but it's now going to be a measure that gets looked at very hard.

We're also going to focus on least possible cost, in terms of how we operate.

So that's different than saying, I want to be the lowest price, but it is, internally we've got to think about every nickel that we spend and how we spend it.

On the deal side we have to think about the value we bring and how to price it, so there are two different categories we're really focused in moving down the street on.

So I don't have anything specific to tell you and I don't think this is the place to talk about other actions I'm going to take until I get ready to take them.

Just Ron, last thing, pricing on renewals and just pricing trends generally?

Yes.

Pricing trends generally are always an exciting experience.

I would say that clearly there's no, the horses aren't out of the barn in terms of prices going up rapidly but I do think prices are relatively stable.

We're not having rapid declines in any specific area, but pricing is always something that is, I look at pricing as, the markets divided into two camps.

There's rational pricing that goes on in normal business and then there's irrational pricing we see where sometimes competition goes in with prices we don't know how the heck they got there from here.

We have walked away from some deals in the fourth quarter that we felt that the pricing was getting on the verge of irrational, and we're going to continue to do that, but I would say on balance, I think the market is relatively stable.

Thanks, Ron.

Operator, we really only have time for one more question, sir.

Lat question comes from Bryan Keane of Credit Suisse.

Please go ahead.

Yes, hi.

Just a couple of clarifications.

I guess Ron, 2008 revenue growth of 2%, I guess what's the organic growth number, I guess that I'm looking for, ex- acquisitions and ex-currency.

Is that about 1% for the year?

I'd say that's right, about 1%.

And then on slide 30, I saw the U.S.

Government profit was down 34% year-over-year and it said due to contractual price reduction.

Can you just talk a little bit about that and what that looks like going forward?

I think it will stable out.

We should get some, we had a lot of signings this year.

We had a lot of opportunities now because we've been allowed into a lot of opportunistic deals with the government that the next step then is to bid them and get them.

But the contract issue was, we're going to, when we negotiate deals such as Navy, we negotiate into those deals certain price reductions and then it's our job to figure out how to cover that cost and how to deal with that.

So some of those things take us a while to actually implement because as changes occur in the contract, separating the cost factors take a little bit of time.

So within the Navy contract, there was a price reduction and there was some others, but we have, we've sustained that and we understand it and I think going forward we feel okay about it.

The contract gets a heck of a return and we're very comfortable with it.

Let me just add one thing to that, Ron.

The quarter-over-quarter variance that you're looking at there was also impacted negatively by a couple of other items.

We had an incentive payment in the fourth quarter '06 that didn't repeat at that level in '07, and we had some contract performance that will improve in 2008 from the fourth quarter of 2007.

So I don't want you to walk away thinking that that kind of difference is going to be reported every year or every quarter forward.

But it sounds like it will linger a little bit if you renegotiate some of the prices?

Oh, yes.

It will linger.

We don't forecast, obviously contract, at the contract level for you.

We don't even forecast at the region level, but there will be an impact but it's not going to be nearly as big as this, as you start looking out over full year 2008.

Okay and just a final question, I guess I was looking at the total contract value and you guys are saying that it's flipped from 4Q into 1Q.

How much was that, that your down selected got split that will push into the first quarter?

So what we said was we had a number of contracts in which we were down selected to one, and those contracts, several of them we expect to sign in the first quarter.

Others could linger during the year.

We really don't quantify it nor can we really forecast what our first quarter TCV is going to be, but we think we'll have a good strong first quarter.

Would you have hit your 21 to $23 billion guidance if those deals would have closed I guess?

Well, look, the answer is probably we would have, yes, we would have, but I don't want to get into that in great detail but yes, had those, it's an interesting statement.

We're down selected to one and now we have to get the contract , things could happen and there are a billion rules on how you report.

Unfortunately, not everybody reports the same in TCV, I've learned.

I think TCV is a difficult thing to report when you're trying to get contracts on a quarterly basis, it should be looked at as a trending tool, but generally speaking, yes.

The answer is we would have hit

Well I guess I'm just a little surprised that the 20 billion guidance for 2008, considering you had some slippage into 1Q, I would have thought that the 20 billion would have been a little higher.

It could have been but, you'll notice I said greater than 20 billion.

It's hard when I'm dealing with numbers, I'm dealing with some contracts that are billion dollar contracts.

And if I have to talk about something on a quarterly basis without, and things move and, people write articles to talk about how our bookings are way down and next quarter they write how they're way up.

I don't know exactly how to handle that in a realistic way with everybody, except to explain these deals do move back and forth, first quarter could be great and fourth quarter next year we could have somewhat the same problem.

So you're dealing with a billion dollar, there are a couple deals out there that are very big deals that, if they dont's sign by the end of March and it becomes April, then, you know what I'm saying?

It's just not, it's a difficult thing to do on a quarterly basis.

Yes, it might be helpful to look at bookings without renewals in it since sometimes those are the big chunky ones and we can get a better idea what the growth is.

Dave Kost is smiling at me because we have that conversation quite frequently.

Okay, all right thanks a lot.

Uh-huh.

Okay, so before we wrap up this call, I want to remind everyone that we'll be holding our 2008 security analyst meeting in New York on February 19.

Be sure to call my office to register if you haven't already done so, and with that, Operator I'd like to thank everyone for joining us on the call today.

I know some of you are still in the queue with questions, feel free to call my office and we'll be glad to talk them through.

Thanks very much.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.