DXC Technology Company

Good day, and welcome to the DXC Technology Fiscal 2020 First Quarter Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Jonathan Ford, Head of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. I'm pleased you're joining us for DXC Technology's First Quarter Fiscal 2020 Earnings Call. Our speakers on today's call will be Mike Laurie, our Chairman, President, and Chief Executive Officer, and Paul Soleil, our Chief Financial Officer. Call is being webcast at dxc.com slash investor relations, and we've posted slides to our website, which will accompany the discussion today. Slide two informs our participants that DXC Technologies' 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 three, you'll see that certain comments we make on the call will be forward-looking. These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of risks and uncertainties is included in our annual report on Form 10-K and other SEC filings. I'd like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call, except as required by law. Now, I'd like to introduce DXC Technology's Chairman, President, and CEO, Mike Lor.

Okay, thank you. Good afternoon, everyone. I'm going to follow my standard format, then turn this over to Paul, and then we'll be available for any questions. First, our non-GAAP EPS in the first quarter was $1.74. The adjusted EBIT was $652 million, and the adjusted EBIT margin was 13.3 percent. And we generated $72 million of adjusted free cash flow in the first quarter. Revenue in the first quarter was $4.89 billion on a GAAP basis. In constant currency, revenue was down 4.2 percent year over year, pretty much in line with what we expected. And the book to bill was .9X for the quarter, reflecting a couple of delays in some deals that we had expected to close in Q1. In the first quarter, the digital revenue grew 35% year over year, primarily driven by enterprise and cloud apps, cloud infrastructure, and our digital workplace. Our industry IP and BPS revenue grew 3.5% year-over-year, and the digital book-to-bill was 1.3x, and the industry IP and BPS book-to-bill was 1.2x. On my fourth point in June, we completed the acquisition of Luxoft, which strengthens DXC's value proposition as an end-to-end mainstream IT and digital services market leader. We also announced a joint DXC in Microsoft Azure digital transformation practice, building on our longstanding relationship with Microsoft. In the next few days, we also plan to announce a strategic partnership with Google Cloud, which will enable enterprise clients to modernize IT and integrate digital solutions, capitalizing on the Google Cloud platform. And I'll talk a little bit more about that in a moment. And finally, we now expect additional currency headwinds for the full year. Combined with some of the delays in these deals, as well as additional pressure on our traditional business, we're revising our revenue guidance for the full year to a range of 20.2 to 20.7 billion. And given this lower revenue and some delays in cost savings, which I'll talk about in a moment, our non-GAAP EPS target is now $7 to $7.75, and we continue to target adjusted free cash flow of 90% or more of adjusted net income. Now, let me just go into a little more detail. As I said, the first quarter non-GAAP EPS was $1.74. The effective tax rate was 20.1%. The first quarter adjusted EBIT was $652 million, and the adjusted EBIT margin was 13.3%, including the impact of the investments I discussed last quarter, an accelerated mixed shift to digital, and some delays executing resources in high-cost, complex countries. And I'll provide a little more color on these points. As we discussed, we continue to make significant investments in digital talent, including both hiring new employees and upskilling our existing workforce. We also are expanding our digital transformation centers and investing in joint practices with partners such as AWS, Microsoft, and Google. These investments are necessary to continue building on the strong momentum we have in the digital business. and we continue to plan on roughly 100 million of incremental investments this year. The first quarter also has the most impact from the accelerated client savings we discussed last quarter. We're seeing these trade-offs translate into greater opportunities and a qualified digital pipeline, which was up roughly 80% year over year in Q1. During the quarter, we saw an acceleration in the shift from traditional infrastructure to digital solutions. For example, our cloud infrastructure business was up 36% year over year, which was faster growth than what we had expected. And as we migrate client workloads out of the legacy environments, there are stranded costs that we have to address. including assets as well as people. Given the accelerated pace and expanded scope of cloud migrations, we weren't able to get these costs out during the first quarter, but we're taking action and expect to remove the stranded costs by the end of the third quarter. Our delivery team was also behind on its fiscal 20 cost improvement plan, particularly on workforce actions in high-cost countries. As we continue to expand deployment of our Bionics Automation Program into additional geographies and client environments, it is taking longer to eliminate the headcount as we automate activities. And in some cases, we're required to implement the full automation solution prior to removing any of the resources. Now, we're implementing actions to improve execution and second-half profit, including accelerated labor pyramid improvements, reductions in non-billable and underutilized resources, and further optimization of non-labor spend, such as hardware maintenance and software rates. And as I said, adjusted free cash flow for the quarter was $72 million, or 15% of adjusted net income, reflecting lumpiness of cash flow, including the timing of our sales commission payments, our fiscal 2019 bonus payments, and prepaid software enterprise license agreements. However, we continue to expect adjusted free cash flow to be 90% or more of adjusted net income for the year. Now, let me turn to revenue. As I said in the first quarter, revenue was $4.89 billion on a GAAP basis. All revenue comparisons I'll discuss will be in constant currency. In the first quarter, revenue was down 4.2 percent year-over-year, in line with what we expected, and the book to bill in the quarter was 0.9, reflecting some delays on some large deals. In the first quarter, GBS revenue was 2.2 billion, which was up 0.5 percent year-over-year. The year-over-year improvement reflects continued momentum in our enterprise and cloud applications business, as well as the addition of Molina and two weeks of the Luxoft business. As I discussed last quarter, accelerated cloud adoption is eliminating some of the services associated with rationalizing and refactoring traditional applications, and this dynamic is an ongoing headwind for legacy application services. GBS booked a bill in the quarter was 1.1, and bookings were up 22% year-over-year, reflecting strong bookings in enterprise cloud apps, analytics, and industry IP and BPS. GIS revenue was 2.7 billion in the first quarter, down 7.6% year-over-year. This reflects the accelerated client savings we discussed last quarter. as well as increased momentum in digital migrations. Cloud and digital workplace both grew more than 35% year over year. And similar to the dynamic I discussed in traditional applications, these accelerated shifts pressure the traditional GIS business as clients lift and shift existing workloads to recognize immediate savings. Over time, we typically grow revenue by migrating additional workloads, into our multi-cloud environment, but the initial shift often results in less near-term revenue. And we're also seeing some slowdown in additional add-on project work in the legacy environment as more investment is made in the digital solutions. Now, to offset these traditional headwinds, we're taking a much more aggressive approach on the GIS pipeline development. We've expanded our sales efforts targeting large infrastructure outsourcing opportunities for new clients with a focus on deals that involve modernization of the traditional environment while at the same time investing in digital projects. We're still early in this process. However, we're seeing good traction. Total infrastructure pipeline in the first quarter was up 32% year over year and 22% percent sequentially, and we expect to drive additional revenue during the second half of the year. The GIS book to bill in the quarter was .7x, reflecting the lumpiness in large deal signings and some of the delays that I had mentioned previously. Now, let me move on to our digital industry IP and BPS results. Digital revenue was up 35% year-over-year, including two weeks of revenue from Luxoff. Excluding Luxoff, digital revenue grew 31%, and the book to bill in the quarter was 1.3x. Now, as I discussed, we're seeing good enterprise spend environment in digital, particularly with respect to enterprise cloud migrations. As we partner with our clients on these transformations, we continue to see strong momentum in our cloud infrastructure solutions. This business grew 36% year over year, reflecting accelerated migrations and continued demand for multi-cloud solutions. And we're seeing good traction in this business across geographies and across industries. For example, during the first quarter, we want to deal with a major European aerospace and defense company to provide cloud migration, security, and analytic services. We're leveraging our knowledge of the legacy estate to modernize the client's IT architecture and help them thrive in a highly competitive market. We built an agile platform that enables development and deployment of solutions such as next-generation smart factories, asset use optimization, and application of artificial intelligence to everyday business challenges. Enterprise cloud apps and consulting continues to perform well with a 17.1% year-over-year growth, including strong growth in our Americas region, particularly in our Microsoft ServiceNow and SAP practices. We're also partnered with Salesforce to win a major multi-year deal with four global luxury retail brands. We are providing development and support services on Salesforce, Commerce Cloud, supporting roughly 35 B2C websites globally. Security revenue performance improved in the quarter and grew 5.7% year over year with particular strength in Asia and Europe. And during the quarter, we want a multi-year deal to provide managed security services for major European car manufacturer leveraging standard DXC offerings as well as partnered offerings with Micro Focus, Fortify, and Carbon Black. The solution includes threat intelligence, security event monitoring, vulnerability management, forensic investigations, and regulatory and policy compliance controls. We also saw improved performance in industry IP and BPS. Revenue was up 3.5% year-over-year in constant currency, driven by a 7% growth in our industry IP offerings. And with the addition of Molina, we're seeing strong demand in our U.S. state Medicaid business. During the first quarter, we signed add-on deals with Tennessee, California, and Ohio worth over $100 million each. and Industry IP and BPS booked the bill in the quarter was 1.2x. Now, my fourth point, during the first quarter, we completed the acquisition of LuxOff, which strengthens DXC's unique value proposition as a leading end-to-end IT services provider. As we previously announced, LuxOff will continue to be led by Dimitri Lushinin, who will report directly to me. LuxOff brings a 13,000-person workforce that provides digital strategy consulting and engineering services for companies across North America, Europe, and Asia. LuxOff will retain its brand and operate as a DXC technology company, but we've already launched joint go-to-market efforts to cross-sell solutions to both companies' current clients and to target new clients across industry verticals. Processes and incentives have been put in place to promote and reward cross-selling, and we're encouraged by the early progress we're seeing in the joint pipeline of opportunities. The acquisition also expands DXC's access to digital talent by leveraging Luxoff presence in key markets especially Eastern Europe, and by broadly deploying Luxoff's unique talent acquisition and management platform. We're undertaking several changes to quickly apply Luxoff's strengths and capabilities to DXC's business. Within Luxoff, we're creating industry-leading verticals in automotive and financial services. These two verticals will serve more than 20 major automotive OEMs and more than half of the top financial institutions in the Americas and Europe. And two key digital offerings, the Internet of Things and blockchain, will also be combined within Luxoff. Now, we continue to expect Luxoff to provide roughly 700 million in revenue during the last three quarters of the fiscal year, in addition to the two weeks of revenue we were able to recognize by closing the deal in the middle of June. Returning to our partnerships, we recently announced a joint practice with Microsoft Azure. The DXC and Microsoft Azure digital transformation practice enhances our deep and long-standing relationship with Microsoft. This joint practice will provide clients with a highly integrated approach to modernizing their IT systems on Azure. And the result will be a reduced time to digital and a more rapid movement of client workloads from legacy IT to a modern cloud architecture on Azure. In addition, we recently signed a strategic partnership with Google Cloud. This partnership will allow us to modernize mission-critical IT for enterprise clients and integrate digital solutions capitalizing on the Google Cloud platform. Now, under our partnership agreement, DXC will also be launching Centers of Excellence for Google Cloud Platform, and Google Cloud artificial intelligence to provide clients with secure, agile, and scalable cloud-based digital platforms that leverage our advanced analytics capability. And we'll be providing more information on this as the partnership evolves. The Microsoft Azure and Google Cloud practice complement our ongoing cloud work with AWS, Oracle, and VMware to give our clients access to the largest cloud providers in the world. And my fifth point before I turn this over to Paul is we now expect an additional $150 to $200 million of currency headwind for the full year. And as I discussed, we're also seeing more impact on our traditional business as accelerated client migrations pressure near-term revenue. And combined with some of the delays I've talked about, we're revising our revenue guidance for the full year to a range of $20.2 to $20.7 billion. In addition to this lower revenue outlook, delays in some of our cost savings actions will lower our margins, and our non-GAAP EPS target is now $7 to $7.75. And as I said, we continue to expect adjusted free cash flow to be 90% or more of adjusted net income. And with that, I will turn it over to Paul.