DXC Technology Company

Good evening. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the DXC Technology Q3 FY22 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 once again. Thank you, John Sweeney, Vice President of Investor Relations. You may begin your conference.

Thank you, and good afternoon, everybody. I'm pleased that you're joining us for DXC Technologies' third quarter 2022 earnings call. Our speakers on the call today will be Mike Salvino, our president and CEO, and Ken Sharp, our EVP and CFO. This call is being webcast at dxc.com, Investor Relations, and the webcast includes slides that will accompany this discussion today. Today's presentation includes certain non-GAAP financial measures which we believe provide useful information to our investors. In accordance with SEC rules, we provide a reconciliation of these measures in your respective and most directly comparable GAAP measures. These reconciliations can be found in the tables including today's earnings release and in the webcast slides. Certain comments we make on the call will be forward-looking. These statements are subject to known and uncertain risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties will include in our annual report on Form 10-K and our SEC filings. I'd now 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 with that, I'd like to introduce DXC Technology's President and CEO, Mike Salvino. Mike?

Thanks, John, and I appreciate everyone joining the call today, and I hope you and your families are doing well. Today's agenda will begin with an update on Q3, which was another strong quarter of operational execution for DXE. Next, I will cover how we are consistently delivering on our transformation journey. As a result of this execution, organic revenue, margin, and EPS all continue to improve. In addition, you will see the outstanding results for book-to-bill and free cash flow. The best part about this performance is we expect it to be sustainable. Then I will hand the call over to Ken to share our Q3 results along with our Q4 and full-year guidance. Finally, I will add some closing remarks before opening the call up for questions. Regarding our Q3 performance, our revenues were $4.09 billion compared to $4.03 billion in Q2. Our organic revenue continued to improve as we progressed from minus 2.4% in Q2 to minus 1.4% in Q3. I see this as significant improvement, as only a year ago our organic revenues were minus 9.7%. I was also very pleased to see the organic revenue growth in GBS accelerate from positive 3.4% in Q2 to positive 7% in Q3. Our strategy to grow DXC relies on GBS consistently growing, and we are clearly delivering against this piece of our growth strategy. Our adjusted even margin was 8.7%, up 170 basis points as compared to last year, driven by our operational work that we are doing to optimize our business. Our non-GAAP diluted EPS was $0.92 in the quarter, which is up 10% as compared to $0.84 last year. While the quarter was strong across the board, the two strongest financial results were book-to-bill and free cash flow generations. We delivered $5 billion in bookings for a book to bill of 1.23. This gets us to a book to bill of 1.08 on a trailing 12-month basis. And in Q3, we delivered $550 million in free cash flow. Now let me turn to the progress we are making on our transformation journey. The first step of the journey is to inspire and take care of our colleagues. Hiring was a major focus of ours, and we ramped up our hiring engine to meet the high level of demand and to activate more project work. In the quarter, we increased our headcount by 3% and increased project work by 13%. We continue to see our people-first strategy and our virtual-first model is resonating in the market and helping us in our recruiting efforts. We recently hired Christy Grinnell as our new CIO, and she specifically called out our virtual first model as one of the key items that drew her to DXE. In addition, I am pleased with how we continue to deliver for our people through the COVID pandemic. It is due to all these points that our attrition at DXE has stabilized, and it remains below industry average. Focus on the customer is the next step of our transformation journey and continues to be the primary driver of our success in improving organic revenue. A key metric that we measure is our net promoter score, and I'm happy to report that we continue to see improvement. Currently, our 12-month rolling NPS score is at the upper end of the industry best practice range of 20 to 30. Another piece of our growth strategy is to run our customers' mission-critical systems, which mainly make up our GIS business, and ultimately have these customers award us new work. Running these mission-critical systems builds trust with our customers. This strategy is being successful because we are winning more work from our customers in both GIS and GBS, and our revenues are clearly not going backwards. A great example of this strategy working is the new agreement with Lloyd's. When I started DXE a little over two years ago, Lloyd's was contemplating a significant reorganization without DXE, which would have caused a negative impact to our revenue. Running Lloyd's mission-critical systems well has built trust that enabled us to be chosen to build the future at Lloyd's, which will be the most advanced insurance marketplace in the world. DHC will re-architect and develop a cloud-native platform running on AWS to replace their legacy mainframe platform. Simply put, leveraging the trust we have built with our customers by running their mission-critical systems is how we are stabilizing our revenues and setting ourselves up for growth. Now let me turn to our cost optimization program. We continue to make progress in optimizing our costs and delivering for our customers without disruption. Managing our costs includes executing portfolio shaping initiatives. We have identified businesses with roughly 500 million in revenues that are not strategic and will not help us grow. Selling these businesses will improve our organic revenue growth and our overall margin. We expect the sale of these businesses to result in an additional $500 million in proceeds within the next 12 months. At the same time, we are focused on prudently investing in assets that will enable us to grow. A great example of this is our recently announced relationship with ServiceNow. Here we are leveraging our proprietary technology called PlatformX. which is a data-driven, intelligent automation platform that helps us detect, prevent, and address issues before they happen within our customers' cloud and on-prem IT estates. Nelson Hall named DXC's PlatformX as a leader in cognitive and self-healing IT infrastructure management, reflecting DXC's ability to deliver immediate results through automation. We believe that the ServiceNow relationship will help us execute on a unique opportunity to drive growth in the enterprise service management market due to our capability with PlatformX. Next, seize the market is where we are focused on cross-selling to our existing customers and winning new work. We had a strong quarter of bookings totaling $5 billion and a book-to-bill of 1.23%. 58% of the bookings were new work and 42% were renewals. We're winning in the ITO market, and this is helping us with our organic revenue growth, significantly limiting the declines from double-digit to low single-digit negative declines. Modern workplace is following a very similar path. Our strong 12-month book-to-bill of 1.1 gives us confidence that like ITO, we can take this business from double-digit to low single-digit decline in the next 12 months. Analytics and engineering is a great story as we are converting our strong book to bill of 1.29 on a 12-month basis and growing this business 18.7% in Q3, which is helping us consistently grow our GBS business. We are seeing increased opportunities in the market. We have shown the ability to win, and the investment we have made in execution is paying off, with good deals turning into good revenue, as you can see in ITO and analytics and engineering. Now, let me turn the call over to Ken.

Thank you, Mike. Turning to slide 11, our transformation journey remains on track with strong progress across all four key metrics. Organic revenue improved 100 basis points from Q2 to a decline of 1.4%. Adjusted EBIT margin is up to 8.7%. Year over year, our adjusted EBIT margin expanded 170 basis points while we substantially reduced our restructuring and TSI expense. Q3 book-to-bill was 1.23 and 1.08 on a trailing four quarters. From our perspective, looking at book-to-bill over a trailing four quarters is more meaningful than looking at one quarter in isolation. Non-GAAP diluted earnings per share was $0.92, up $0.08 compared to the prior year. Our earnings per share expanded despite 23 cents of headwinds from taxes. The tax rate headwinds were more than offset by increased margins and lower interest expense. Moving to our segment results on slide 12, GBS continues its strong performance, accelerating organic revenue growth to 7%. our third consecutive quarter of organic revenue growth. GBS is benefiting as we leverage our relationships with our Platinum customers. Our GBS business has higher margins and lower capital intensity, so as we grow this business, it has a disproportionately positive impact on margins and cash flow. Our GBS profit margin was 16.2%, up 200 basis points compared to the prior year. GIS organic revenue declined 8.3%. GIS profit margin was 4.8%, an improvement of 110 basis points compared to prior year. Our focus with GIS, year to four, has been on improving delivery, to deliver for our customers while stabilizing the margins. As we set up for next year, we are putting in place a program to drive costs out of GIS to move the margins forward. Turning to our enterprise technology stack, analytics and engineering revenue was $545 million, and organic revenue was up 18.7%. We continue to see high demand in this area. Of note is the success we are seeing with our platform revenue increased 4.8%, also accelerating. BPS, our smallest layer of the enterprise technology stack, generated $116 million of revenue, and organic revenue was down 8.3%. We expect the declines in this business to moderate as we move forward and put our new strategy in place. For our GBI layers of our technology stack, our book-to-bill was 1.28 and 1.17 on a trailing 12-month basis. Cloud and security revenue was $471 million, and organic revenue was down 12.2%. IT outsourcing revenue was $1.11 billion, and organic revenue was down 1.9%. Let me remind you that this business declined 19% in Q3 FY21. This is a significant improvement that we indicated last quarter. We expect IT outsourcing to continue to decline in low single digits, ideally 5% or better.

Lastly, modern workplace revenue was $561 million.

and organic revenue was down 16% as compared to prior year. We remain positive about our prospects, and our strong book-to-bill of 1.11 over the trailing 12 months is expected to stabilize modern workplace as we move through FY23. For our GIS layers of the technology stack, our book-to-bill was 1.18, and 1.01 on a trailing 12-month basis. As you think about organic revenue growth prospects for GIS, our focus on improving the quality of revenue by expanding margins, reducing capital intensity, and driving cash flow may create headwinds for organic revenue growth. For example, using our capital to buy laptops bearing the risk, and ultimately recovering our cash over three to four years with relatively low returns does not feel like a great economic model. At the end of the day, we would prefer to provide our offerings and services and forego the revenue associated with buying the assets to improve the underlying economics. Next up, let me touch on our efforts to build our financial foundation. This quarter, we made particularly strong progress with cash generation and continued reduction of restructuring and KSI expense. With regard to financial discipline, remediating our material weakness is a top priority. We are in the late stage of our efforts to remediate the material weakness, and we have fully implemented our 11-point remediation plan. As a result, we expect to remediate our material weakness in Q4. I should note, as it relates to the material weakness and governance more holistically, we are clear-eyed on how we think about governance. We do not find our current governance score to be acceptable. We are working hard to ensure we improve its trajectory like many things at DXC. We are finishing the unfinished homework, creating a sustainable business, brick by brick in addition to our material weakness remediation we are committed to improving our pay practices as part of good governance our board members and management are continuing to engage with our shareholders to proactively take their feedback as we work together to design and set our short-term and long-term incentive structure. Our focus is to set metrics and targets that are highly aligned to what our shareholders want, all the while incentivizing management to improve the company's performance, creating and enduring in sustainable business. The execution of the transformation journey has made measurable improvements, allowing us to put the business on a firmer financial foundation, expanding margins and generating and keeping more cash. Slide 15 shows the results of the structural improvements we have made. We reduced our debt from $12 billion to $4.9 billion and are now below our targeted debt level. We have reduced our quarterly net interest expense to $23 million, a $31 million reduction as compared to prior year. As you recall, we were able to term out a significant portion of our debt last quarter with principally all of our outstanding borrowings at fixed rates. We expect to continue the lower interest expense at approximately $25 million per quarter. We also continue to make progress on reducing, restructuring, and PSI expense. This reduction contributed $195 million to cash flow during the quarter as compared to the prior year. Further, this also achieves one of our goals of narrowing the difference between GAAP and non-GAAP earnings. I should note that while we have been reducing restructuring and PSI expense, we have also been able to expand margins. Lastly, as you can see, we have also reduced operating lease cash payments from $156 million in the third quarter of the prior year to $117 million in the third quarter of FY22. Moving to Chart 16, let's talk about the focus we've brought to capital expenditures, including capital leases. Our capital expenditures were reduced from 219 million Q3 FY21 to 146 million Q3 FY22. We are closely managing our capital lease originations, which ultimately means our capital lease debt and associated payments continues to decline. In FY20, we had a 270 million quarterly run rate for originations. while our last two quarters averaged less than $60 million. We made $207 million of capital lease payments in Q3 last year, which is now down to $184 million in the current quarter. For Q4, we expect a further reduction of capital lease payments to approximately $140 million. A metric we like to look at to gauge capital efficiency is capital expenditures and capital lease originations as a percentage of revenue. We are now tracking at 5.2% for two consecutive quarters, down from roughly 10% in FY20. Clearly, our focus has been on improving our cash flow. Specific to new business, we have been focused on structuring our transactions to have lower capital intensity in favor of cash flow. As you can see from my prior comments, our focus on driving structural changes has improved our ability to generate and hold on to more cash. Cash flow from operations totaled an inflow of $696 million. Free cash flow for the quarter was $550 million, an increase of $956 million as compared to prior year, and moves our year-to-date free cash flow to $650 million, or $150 million above our full-year guidance. Further, cash in the quarter was negatively impacted by two previously disclosed payments totaling approximately $130 million. These payments were offset by much stronger performance due to improvements in the business and benefits from timing on payments and receipts in the quarter. We expect this timing to create some headwinds in Q4 cash flow. Slide 18 shows our trended cash flow profile. Our progress in Q2 and Q3 gives us confidence as we work towards delivering our longer-term FY24 guidance of $1.5 billion in free cash flow. Moving to slide 19, let's revisit our relatively simple capital allocation formula. We are targeting a debt level of approximately $5 billion and a cash level of $2.5 billion. With debt at our target debt level, cash over $2.5 billion is excess cash, which we expect to deploy. Based on this formula, we expect to self-fund stock repurchases of $1 billion over the next 12 months. The $1 billion in repurchases will be funded from a combination of cash generated from operating our business as well as proceeds from our portfolio-shaping efforts. We recently executed a number of sale agreements and expected to best businesses and assets with approximately $500 million of revenue and will generate $500 million of proceeds in the next 12 months. These businesses are not synergistic and cannot be leveraged more broadly in a platinum channel. As you will see in our 10Q, we entered into an agreement to sell our German financial service subsidiary that includes both of our banks for approximately $340 million. As noted in the liquidity section of our previously filed financials, the German financial services business has cash held on deposits for the bank's customers. The current cash balance related to these deposits is $670 million. We also announced an agreement for the sale of our Israeli business for $65 million. The valuation for these assets are accreted to our valuation. Further, we do not expect these related to achieving our FY24 longer-term guidance for organic revenue growth, adjusted EBIT margin, and free cash flow. We continue to assess our portfolio to ensure we have businesses that are aligned to our strategy and not a distraction for our management teams. Now, let me cover our progress on share repurchases. In Q3, we repurchased $213 million of common stock, bringing our FY22 year-to-date repurchases to $363 million for 10.6 million shares. Our share repurchases are self-funded. As noted, we expect to repurchase $1 billion of our common stock over the next 12 months as we firmly believe our stock is undervalued. Turning to the fourth quarter guidance, revenues between $4.11 billion and $4.15 billion. If exchange rates were at the same level as when we gave guidance last quarter, our fourth quarter revenue guidance range would be $20 million higher. Organic revenue declines minus 1.2% to minus 1.7%. Adjusted EBIT margin in the range of 8.7% to 9%. Non-GAAP diluted earnings per share of $0.98 to $1.03 per share. For Q4, we expect a tax rate of approximately 26%. As we look to the end of FY22, I would like to update our current fiscal year guidance. Based on the strengthening U.S. dollar, our revenues are expected to be negatively impacted by approximately $40 million. We now expect to come in at approximately $16.4 billion. Organic revenue growth range of minus 2.2 percent to minus 2.3 percent, which is slightly lower than our previous range. Adjusted EBIT margin, 8.5 percent to 8.6 percent. We continue to expand margins while significantly lowering restructuring and TSI expense and are now guiding to 400 million for FY22. To put this all in context, we expect to spend 500 million less on restructuring and TSI expense than last year, while expanding margins by over 200 basis points. Our focus is to embed these types of expenses over time into the normal performance of the business and believe we have taken significant strides in doing so. Non-GAAP diluted earnings per share of $3.64 to $3.69. Lastly, we are increasing... free cash flow guidance to over $650 million, a $150 million improvement to our prior FY22 guidance. Fourth quarter cash flow is expected to be impacted by timing, which boosted Q3 cash flow. And in addition, a $100 million payment in Q4 to terminate a financial structure put in place a number of years ago. We are reaffirming our guidance for FY24. This reflects our strong execution and driving forward on our transformation journey. Overall, we are making great progress driving efficiency in the business and generating strong free cash flow. We are utilizing those cash flows to drive significant value for our shareholders through our stock repurchase program. With that, I will now turn the call back to Mike for his closing remarks.

thanks ken let me leave you now with a few key takeaways as i think about finishing out fy 22 we are making great progress during our june investor day we committed to making progress on all nine of these points and let me quickly give you an update on each when in the market and a book to bill of greater than one our trailing 12-month average is now 1.08 Sequential revenue stability. This year, we've produced relatively stable revenues in Q2, Q3, and we expect this to continue in Q4. Strengthening the balance sheet. Our debt is now at $4.9 billion, and our refinancing has significantly lowered our interest expense. Achieve organic revenue growth of minus 1 to minus 2 in FY22. This is where we're coming up a little short, anticipating negative 2.2 to negative 2.3% organic revenue growth. Remediate material weakness and improve governance score. As Ken indicated, we will remediate the material weakness in Q4, and we have plans to continue to improve our governance score. Reduce restructuring in TSI. We have taken it from over $900 million to roughly $400 million FY22. Continue margin expansion. We have expanded margins every quarter throughout FY22. Improve free cash flow. We exceeded the $500 million guidance for FY22. And finally, resume capital deployment to shareholders. We have repurchased $363 million and plan to do another $1 billion over the next 12 months. In addition to this progress, we are also committed to portfolio shaping. What this means is we are making the right bets and investments, like what we are doing with Platform X and ServiceNow, and divesting assets that are not core to our strategy and will not help us grow. Our portfolio shaping is anticipated to drive $500 million in excess cash in the next year. In closing, I am confident that by staying focused on our transformation journey, we will continue to deliver on our commitments, both in the short term and the long term. And with that, operator, please open the call up for questions.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And we'll take our first question from Ashwin Shubhakar with Citi.

Ashwin, go ahead. Hey, Mike. Hey, Mike. Hi, Ashwin. Hey, congratulations. I guess my first question is, you know, the last four quarters, it's been quite a turn in your cash flow. And I get the points you made in your prepared comments. Could you comment on what investors should expect as it relates to sort of a good net income to free cash flow conversion? conversion ratio. And then in terms of use of cash, if you don't mind revisiting what you said on slide 19, are you saying no acquisitions at all? Or could you kind of just clarify that point?

Okay. So, look, I'll start, and then I'll hand it over to Ken, and then, Ken, you hand it back to me on the acquisition. So, look, in terms of the last four quarters, Ashwin, what you're seeing, and this is the thing that we talk about all the time, is the operational execution. And what that operational execution is doing across the board is literally starting now to drive the free cash flow. And what was interesting is when we were in Q1 and we went minus 300, I know that was a little hard to believe, but what we could see was that the business was starting to turn. both in terms of what we were doing in terms of driving good revenue, along with good margin, along with just stopping certain things and putting in the operational rigor that we needed to do. Ken, do you want to comment on the other piece, and then I'll go to the acquisition stuff?

Yeah, sure, Mike. So, Ashwin, look, we've been working pretty hard. The finance team, Mike's team, kind of down in the bowels of the organization, making sure that we're executing pretty disciplined fashion, right? And I think if you look at the kind of quarter over quarter, there's some pretty good structural improvements around, you know, bringing down the restructuring and TSI costs to about $195 million, you know, dealing with the interest that we dealt with last quarter when we refinanced our debt. That's about $70 million or so. capital expenditures and capital leases. So just being more disciplined, managing the contracts, managing our performance. And the great news is when you have happy customers, you know, they tend to pay you and things work so much better. And that's what Mike and his team have really brought forward. So what I would say, just kind of maybe looking back, right, because it is a little hard your first two quarters in as CFO, you print some negative cash. Maybe it's my first three quarters but it's nice to see the almost billion dollars in cash generation since then and now we're year-to-date at 650 million so as you think about cash conversion i think it's a great question um certainly it's something that's on our mind we'd certainly like to see that that correlation between you know earnings and cash flow gap earnings and cash flow to get really close. And that's something we certainly guided to when you think about FY24. That should give you a pretty good perspective of where we think we'll be. But we'll certainly kind of keep you updated on that. And as far as percentages, I think you'd probably maybe let us work through that next quarter as we guide for 23 and 24. We can be a little clearer on that. But we think we're absolutely in a better place for sure. With that, I'll turn it back to Michael on the acquisition piece.

Ashwin, so look, on your acquisitions and what's on slide 19, we talk about building a strong foundation, and we still got work to do, right? I mean, sometimes our team makes this look easy, and there's still a lot of work that we need to do as it relates to, for instance, the Platinum Channel and, for instance, still what I'd like to see happen with some of our offerings. The other key thing is I believe we've got enough to grow. and when i think about our growth equation around gbs consistently growing and then gis driving to a negative low single digit we've got what we need to get there all right so i look at the next 12 months and say the best use of that cash is the return to the shareholders and we never say never So we're not – I know there's a big red X on that slide, but we look at stuff all the time, and if we think it's the right thing to do, that we can absolutely create it, bring it in as part of our growth agenda, then absolutely we'll do it. Ashwin, did you have a second question?

I did have a second question. Thank you. Thank you for that response, and also thank you for the cash flow performance. The question on bookings – As you deliver on your bookings, you know, presumably I would think, you know, industry reputation goes up, you're attracting talent. Are you seeing the top of your funnel grow in size as well? Is there a way to quantify that or comment on that?

Well, look, I mean, the bookings – Are we seeing the top of the funnel increase? I would tell you we are seeing an increase in a better number of qualified deals. And that's what I'm looking at in terms of quality. Because when you produce a $5 billion quarter, which is a big quarter for us, that means the quality that was sitting there was something that we really could convert. And I understand that the Q2 number wasn't where we needed to be. But, Will, we've got a team that can convert the pipeline into good deals. And that's why I said, I mean, Ashwin, the market right now, we see it as a lot of opportunities. Here's the good news. We are winning. And with the execution that we're invested in, we're turning those good deals into good revenue. And that's what I would highlight that what we're doing is, And for instance, the two that I called out, both analytics and engineering, there's no question. And that's more of a project-based business. And then when you look at an outsourcing-based business, look what we've done with ITO. I mean, that's converting good deals to good revenue. Otherwise, there's no way you can take the business from minus 17.7 to a minus 1.9. When most people kept telling me when I joined that we had secular issues with that, and I kept saying, no, we have customer delivery issues, and that's what we're going to go fix. And I think we've done a pretty good job with that.

Understood. Thank you. Okay, next we'll go to Brian Keene with Deutsche Bank.

Hey, guys, just want to ask about the GIS segment profit margin. It slipped a little bit sequentially to 4.8. Just thinking about some of the factors there and what might be the outlook in that segment, because obviously there's some room for improvement there going forward in the out years.

Ryan, so let me give you a little color there. You'll see what is that on slide 12? slide 12 you'll see that what we did originally is we put together a plan to take out a chunk of cost in that business which we successfully did and then make sure that we focused on no customer disruptions. So we let that bed down. As Ken mentioned, our next step now is we're in the 2023 planning, and we're putting together our next program. And our next program, that's why I had Ken highlight those four areas, meaning we're still going to be focused on contractor reduction. Now we're including our data centers and our co-location leases. Brian, which I think we can take a nice chunk of cost out of that. Scaling our GIDCs is important. And then to try to tie a few things together, automation will be the last. That deal that we cut with ServiceNow around Platform X, that was literally the automation that I've been talking about for a while, that we can monitor cloud and on-prem estates. And now to have ServiceNow validate that and say they want to go out in the market with us, to go to the enterprise service management market and hopefully dominate it, that's a good win. So what we'll do is we will take the next chunk out of that. I think we can. But, again, we're going to be very focused on making sure we're delivering for our customers too.

Got it. And then as a follow-up, just thinking about the portfolio pruning, I think you mentioned it was about $500 million in revenue, which will generate about the equal amount in proceeds. Just trying to figure out how fast or how much of a decline that piece of business was in and what maybe the margin impact was there. Just trying to get to an EPS impact versus the proceeds. Thanks.

Brian, so we call it portfolio shaping, not pruning. That's a better word, don't you think? So what we're doing is, look, let's be clear. If I think something's a distraction – for our team and it is not where it needs to be, then that's what we're looking at. And you've seen over the course of my two-plus years that if I think that's happening, we're going to action it. So those businesses, when Ken literally has said they will be accretive, they will not impact our FY24 numbers and they will be accretive to our organic revenue and margin, Look, I'm not going to give you the details, but safe to say they weren't performing where they need to be. The second thing is strategically. I mean, Brian, if I came to you and said, why don't you put your assets in our bank, you'd scratch your head, okay? Because that's not a platinum account offering. And there's a number of things that look like that. And to me, that's a distraction. And what we need to do is do the hard work, much like I said when I answered Ashwin's question, because there's still stuff that we can go do to make DXC a much better place. So, Brian, thanks for that question. Next question. Thanks.

Anything further, Mr. Keene?

No, that's it. Thanks so much. Okay.

Thank you. We'll take our next question from Lisa Ellis with MoFET Northampton.

Terrific. Thanks, guys. I was looking back at my notes from when DXC bought Luxoft, and I It looked like about half of Luxoff's headcount was in Russia and in the Ukraine at the time. Can you just comment on whether or not they're the foundation of analytics and engineering that's performing fantastically well? Are you seeing or do you anticipate any disruption to that business given the conflict in the region, or how should we be thinking about that?

Okay, so Lisa, first of all, it's half of analytics and engineering. Remember, we still had, before we bought Luxoft, we had DXC capability in that space. But look, when I look at that situation, gang, this is what we do. It's what we do for a living. We run customers' mission-critical systems. So we've had business continuity plans in that region for a while.

We've also operated in the Ukraine for 15 years.

...years in Russia for 20 years, and we've managed through events like this, and we've done a nice job supporting both our customers and our colleagues in this. So look, if need be, we're ready to support a movement of our folks to Poland. And when I say that, we've outfitted all of our folks with technology, so think computers, cell phones, network connections. We've also secured lodging. We've also had multiple town halls communicating with them and getting their buy-in, that that's a good plan. Now, in terms of the stats, the stats are we have 4,000 colleagues in the Ukraine out of our 130,000-plus. And they're across three main cities. These folks drive roughly about $250 million in annual revenues, and 70% of those revenues come from 20 customers. And we obviously have been communicating with those customers and are coordinated around what to do there if we need to. So I think, Lisa, we've got a very good plan, and we'll continue to execute. Thank you.

Okay, good. Yeah, no, and thanks for the clarification on the size of that business. A follow-on one, again, I'm just, you know, looking at the growth of that business. I like this concept of the platinum in that digital engineering business, I would imagine, because a portion of it came from Luxoff. The customer base might still be, you know, a bit different. Is that part of what's driving that growth, or is that kind of, you know, is that an example of sort of this cross-selling into the platinum channel? Yeah.

Exactly. So one of the things when I talk about doing the hard work, before I got here, we didn't have any Platinum accounts. So now our team in the various businesses are laser focused on those customers to make sure that we deliver, we're proactive, and we listen. So taking an offering like Luxoft into those Platinum accounts, It's huge. Now, the only way we can do that is you heard me talk about running mission-critical systems. What happens is when we run these mission-critical systems, when we do the GIS business, we build that trust, which gives us more just call it plate appearances using a baseball analogy. Those plate appearances allow us to introduce new offerings like Luxoff, like analytics and engineering, because, Lisa, quite frankly, DXC was never known for that work. A lot of times we'll show up at our clients, and they will be surprised at a lot of the examples we have, for instance, in the banking space or in the automotive space. So what we're doing is we're planting a lot of seeds in those areas. And you know that business is you started with delivering five or ten people. Five or ten people grows into 50 people very quickly when you deliver. So that's exactly our strategy, and I appreciate you asking the question.

Thank you. Good stuff.

Okay, next we'll go to Brian Bergen with Calend.

Hi, thanks. This is Zach Gaiseman on for Brian. First question, we were looking to dig a bit more into the moving pieces within GIS. ITO trends notably better, but kind of surprised by the weakness in cloud and security, particularly against some of the more well-known industry tailwinds in those areas. So could you help us better understand the current dynamics that's weighing on that stack layer?

Okay, so when we look at GIS, let's take a step back again because when I look at what we were focused on doing in FY22, it was to stabilize the revenue, and I think we've done that. If you look at page 11, When you look at what we've done year over year, we've gone from minus 9.7 to minus 1.4. And then I look at it also as quarter over quarter, and we've increased our revenue Q2, Q3, and we're guiding towards increased revenue in Q4. So when I look at the equation to grow DXE, the first thing we've got to do is consistently grow GBS, and we just printed our third quarter of growth at 7%. And the second thing we've got to do is we've got to get GIS into negative. If you look at page 13, the real piece that we've got to focus on is modern workplace. The cloud business has been lumpy for us. We've had some good quarters and we've had some bad quarters. What I can tell you is that we're building the right team, and it looks like we've got some decent momentum in that business having a book-to-bill of 1.23%. When I look at the GIS weakness and the revenue weakness, it literally has come, for the most part, from modern workplace into strategic alternatives. which, quite frankly, it seems to have the market right now, there seems to be a lot of that going on. And I'm happy that we're through that. So when we put that business up for strategic alternatives, we thought that there would be revenue declines. And what we saw in 22, they were a little bit deeper than we thought. The good news is the uptime solution, which is our new solution that we use at DXC, is really taking shape in the market. Now, why do I tell you all that? Because that business is sitting at minus 16%, and I think it's going to follow the exact same track as ITO. So look what we've done with ITO. Minus 17.7 now to minus 1.9. So if we do anything close to that, we will end up getting GIS right where we want it, and DXC will ultimately grow. So hopefully that gives you enough color on your question. It does. Thanks for the bridge there.

And just our follow-up is on cost savings. I think back at the analyst day, one of the levers you guys focused on as it relates to improved margins was reducing the contractor mix, which stood at 17% last year. Any update on the mix today and any... to move away from contractors with attrition expected to kind of remain at elevated levels. I know I heard you guys say you're below industry average, but it sounds like attrition is kind of here to stay on an elevated basis over the coming quarters.

Okay, well, thanks for that question.

So let me talk a little bit about attrition. And the first thing is when you think about what we're doing, First, our people-first strategy is resonating. So you'll see that we are changing the culture. And I appreciate what the women and men of DXC are doing to do that. The second is our virtual-first model. Meaning people love it. And uptime, which is the modern workplace solution, is totally supporting us to be able to do that in a very effective manner. And then the last thing is I think we're doing a very good job taking care of our colleagues during the COVID situation. So all that boils into us stabilizing our attrition and staying well below the industry average. So, look, when I think about the employee base as a whole, I think we're doing a very good job. Thank you. What's the next question, David?

Sorry about that. We have Tianxing Wang with J.P. Morgan.

Hey, thanks so much. Good to be back with all of you guys. A couple questions. I guess first I'm just thinking of the quality of the backlog and the pipeline. Just curious about the mix of larger deals versus some of the short cycle work and just new logo versus new renewals. I know you talked about last quarter, Mike, that you saw a little bit of a push out. It sounds like you signed some of those bigger deals. Just curious how things are looking now so far in this calendar year.

Okay, well, look, the – One of the things that we have done with book-to-bill now is we think the 12-month, the rolling 12-month average is the best way to look at it. We said we were at 1.08. I expect to keep that number over 1. Quite frankly, I expect to be over 1 in Q4, too. When you look at new logos or what I say new work versus renewals, that's 58%, 42. is a very good mix still. I think that's our third quarter with us driving that kind of new work. And the reason why that's so important is if you go back to 11 and you see the organic revenue, I mean, that's the stuff that we're driving through to take us from minus 9.7 to minus 1.4.

Yeah, that makes sense. I get it. So just on the free cash flow and the cash generation, good work there. So the billion dollars in And share repurchase, should we expect that to be a programmatic or opportunistic sort of idea, or is there some other structure you might put in place to enact that? Just curious about the execution on that. Thanks.

Yeah, and we've been doing share repurchases. We're pretty programmatic as far as timing, and we stay pretty disciplined with it. It's important for us to stay self-funding around it, so we look at where our cash is and where we expect to have cash and work with the banks, of course, and buy back the shares kind of on a periodic basis. So we'll continue to do that. Our expectation is we'll be in the market, and that's kind of how it works. Okay. Makes sense. Thanks for the time.

Yep. Thanks for the questions. David, next question.

Next we'll go to James Fawcett with Morgan Stanley.

Hey, guys. This is Sean. Thanks for taking our questions. I want to build on some of the questions that we've had earlier. Can you talk through the progress of the Luxoff penetration into your platinum accounts? Are you seeing any prices powering analytics and engineering there? And are you – Like, what are you seeing from a runway perspective?

So in terms of pricing power, we've definitely been able to increase our prices in that segment of our business. In terms of runway, I would tell you it's still very early innings, and there's a lot of juice still left in that tank, okay? But again, I continue to look at the analytics and engineering business as, remember, it's a combined business. And when I think analytics and engineering, it's not just the stuff we do in banks and automotive, but it's also things like data cleansing. Because the way we've tackled that market is we do a lot of what I call the hard work. And when you cleanse the data and you're the person bringing all those data lakes and so forth together, then it just goes to show you that, look, we'd be the right person to then do the analytics on that data because we know the data the best. and that's what dxe had before we built luxoft and bringing the two together is you know it's pretty phenomenal as you can see with us uh us getting 18.7 in that segment that's a good call thanks for that james did you have another question yep uh look i appreciate the commentary on your attrition stabilizing can you talk through some of the attrition you're seeing at the top of the tech stack particularly in analytics and engineering Look, in terms of the top, that's not the issue. The issue is how quickly can we hire? And that's what I said on the last call. Like, we need to rev up our hiring engine because I thought we fell short in Q2, and I think I was very clear on that. So what I was pleased to see is that the hiring engine allowed us to increase our headcount by 3%. When you look at our margins, we also built a little bit of a bench, right, that I was okay with us eating into our longer-term margins a bit to do that. Because in the market right now, not only do you have to show up with the capabilities and the skills, but if you've got the deep relationship, James, first one to the door is usually going to get the work. And that's what we've seen. So that's basically what we're doing. Fair enough, James? All right. David, next question.

All right. Next we'll go to James Friedman with Susquehanna.

Really good work here, guys. I got a couple. You know, Ken, in your prepared remarks about BPS, talking about moderating the declines, you alluded to, but I don't think you elaborated on potential new strategy. That was your language. So could you elaborate on that one?

Yeah, sure. We've got some businesses, and as we've been working through our portfolio, that really align well with the BPS and the insurance business. So I think from our perspective, longer term, right, is how we leverage that customer base, bring them together, and do more with it. And that's kind of where we're working through now on what's that strategy to tackle the market.

Mike, you're prior answer about driving costs out of GIS in 23 it was it's a great answer I heard you say before but could you just sorry could you just repeat it because there's a lot of moving parts there so taking costs out of GIS starting in 23 okay so it's basically the exact same equation we did to begin with okay except now the new entrant is data centers and co-locations which

you know kevin or ken loves okay because we've got a huge opportunity there too um but the levers of these first one is the contractors which that's already been discussed on this call and what we'll do is continue to drive those down um and look our focus is to make sure we're delivering as much of the work as we can at dxc with our own people and it's really hard in my mind to motivate and change the culture when you've got contractors in so it's kind of personal all right is what i would tell you the second thing is scaling our gidc's what that means is if we do have attrition and we are hiring new people let's hire them in the right spots And let's make sure we're filling up the centers that we want in terms of where we can get the best talent for our skill set. Third is automation. And that's why I couldn't be more pleased about Platform X. I mean, that's something that we built internally. And now to be able to take that to market with somebody like ServiceNow is huge. And then the last one is innovation. data centers. So we've got not only these data centers that we've owned, but we also have these co-location leases. And if you look at what Ken and the finance team has done in the real estate area in the last 12 months, we're going to be able to take another chunk out of that because the data centers are not filled at 100% capacity. And then these co-locations, to be quite blunt with you, I've never seen before. So we're going to clean that stuff up. Hopefully that gives you the color.

Yeah, that was great, Mike. Thank you. Thank you. It seems consistent, a little more elaborate. And then if I could just ask, are you allowed to say about the share or purchase, like what are you thinking about the time? Do you want the proceeds first from the sale, the self-funded share or purchase time in?

Yeah, we probably wouldn't get too far in the timing on that. But, you know, look, we think our stock is undervalued. Clearly, last quarter, we went into the market and bought some stock back. We would expect to do the same thing based on our formula. So we thought certainly our formula is $2.5 billion in cash, and we're sitting with excess cash today. So we feel good about where we are. And Mike said earlier our debt's sitting at $4.9 billion. So clearly we've done what we needed to do on the debt, and we actually have some more payments that continue to come due on these capital leases as we've been bringing it down. So expect our debt to continue to come down a bit, and we've got excess cash. So we think we're in a great spot.

So, look, thanks for that question. David, we'll take one more question, and then I'll close the call because we're right at the top of the hour right now.

All right, next we'll go to Rod Bourgeois with Deep Dive.

Hey, guys. Hey, thanks for fitting me in here. Very nice to see the increased free cash flow outlook. So I just want to ask, I mean, you've talked about the margin levers. That's very helpful. Besides the mix shift that's happening, which is clearly positive in the business, what are the main levers remaining to reduce capital intensity? And I'd especially like a view on whether you have a path to make free cash flow smoother or less lumpy and less seasonal. If you can give us an update on the capital intensity outlook, that would be really helpful.

Rod, you won it all. I mean, are you serious? I mean, the free cash flow, all right, I mean, make it less lumpy. I'd love to have that, all right? And what I can commit to you is that we're working really hard, all right, around it. But you can see the levers, right? You can see some of the capital levers that I've mentioned. And, you know, those are real, and we've got to get after those. to be able to drive more free cash flow. But I'll let Ken go through it, and then I may have a few more comments after that.

yeah rodney i just think you'll see a greater and greater focus over time as we look at uh specifically the gis layers of the stack and making sure we're being thoughtful with the kind of the capex up front the returns that we expect and the timing of cash flow and that dialogue has really been in process for you know a couple quarters at the longest And I think Mike and his team are really working through how to, you know, engage with the customers, get something done that doesn't have us be a bank where we're buying capital, putting on our books. I mean, certainly in some cases you're going to do that. But there's assets that, you know, you immediately deliver to a customer and then you have them on your books. Those are really not appealing, right? So how to work that balance and strike that balance is important to us on the CapEx side. So we think we can kind of work that. And I think we've seen some kind of early day wins on that. I would also add, like, when you look at our structural cash improvements, you know, the restructuring and TSI is certainly a big piece. The interest is done. Everything's termed out. For the most part, the capital lease has looked continue to come down. But I think we have goodness there. Capital expenditures, you have to, for me, put capital lease originations in there. And right now, we're doing more debt pay down on the capital lease side. So when you think about our payments sitting at $180 million this quarter, going down to $140 million next quarter, I think that's just more cash we're going to keep at the end of the day. I know geography that shows up below the free cash flow line But I think that's important, and it's a bit of the untold story, candidly, because when we gave the $1.5 billion FY24 guidance, we had $900 million of capital lease payments that went out. And I think it was actually you that we were talking to offline, and you made the astute point of, hey, that means you really only have $600 million in cash flow. So the mere fact we're tackling the stuff underneath and holding on to more cash, I'm actually surprised we don't get more accolades around that and all these great write-ups that you guys all do because I think we've all done collectively a phenomenal job getting the business in a better place from a capital structure, capital usage standpoint. I'm pretty excited about it. I do think we have some things to kind of work through. Certainly going forward, cash taxes right now is a bit elevated for me. I don't like it. I like to pay less tax like every other person. So we've sold a lot of businesses, had some gains, and hopefully that'll normalize over time, and you'll see that come down as well. But I do think we're in a lot better shape now than we were, I think, when you asked me that question about the $900 million. So I've

pretty good about where we are so ron it's mike um do you have a follow-up question no this is exactly what i what i'm looking for i mean i think this is the key to the evaluation it's always been the struggle in this business is the free cash flow generation making it steadier and and on the rise and so this is this detail is super helpful

Rod, thanks so much. And look, before I close the call, what I wanted to do is thank all the women and men of DXE for their hard work in continuing to change our culture and clearly make DXE a better place for our customers, our colleagues, and our shareholders. And with that, operator, please close the call.

And this does conclude today's conference. You may now disconnect.