DXC Technology Company

Good day, everyone. My name is Kellyanne, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the DXC Technology Q1 2023 Earnings Conference Call. Today's call 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 would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. At this time, I'd like to turn the conference over to Mr. John Sweeney, head of marketing and investor relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. I'm pleased that you're joining us today for DXC Technologies' first quarter fiscal year 2023 earnings call. Our speakers today on the call will be Mike Salvino, our chairman, president, and CEO, and Ken Sharp, our EVP and CFO. The call is being webcast at dxcinvestorrelations.com. 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 and provide a reconciliation of those measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in 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 risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our annual report on Form 10-Q and other SEC filings. I'd now like to remind our listeners that DXC technology assumes no obligation to update information presented on the call, except as required by law. And with that, I'd like to introduce DXC Technologies Chairman, 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 overview of our Q1 results. Next, I will update you on the progress we are making with our transformation journey. Ken will then discuss our financial results in more detail and our updated guidance. And finally, I will make some closing remarks before opening the call up for questions. Our transformation journey is creating value, but as you can see with the shortfalls in the quarter, we need to do better. The good news is we have the right plan for FY23. We are laser focused on executing this plan with my team of operators. And the work that needs to be accelerated is within our control. We've done a nice job of investing in our business that has produced a stronger quality company and deeper customer relationships that have positively changed our reputation in the industry. When I talk about the quality of company that we are, I want to highlight we continue to improve our free cash flow generation. Debt and capital allocation is being well-managed. We have portfolio shaped and sold off businesses that were distractions to our strategy. We've consistently grown GBS and narrowed the declines of GIS while moving our revenue mix towards the higher value business of GBS. And finally, we've improved our governance significantly. Concerning customer relationships, the NPS score that we communicate during these calls shows that we now have deep customer relationships because we are delivering. Our customers trust us with their mission-critical systems and now trust us with their higher-value business needs, which is evidenced by the consistent growth of our GBS business. New and existing customers are turning to us for their ITO and modern workplace needs, because of the quality of company we have built and our reputation that we deliver for our customers. As you heard last quarter, our plan for FY23 was to begin the year with lower margins and to increase them throughout the year. We are accelerating our cost optimization to reduce $500 million in cost by the end of the year. Not only is my management team focused on this, but so am I. I want to remind everyone that roughly the same team of operators took out $700 million of annualized cost in FY21 while delivering for both our customers and colleagues and clearly expanding our margin. It's this experience that gives us confidence that we can do it again. The Q1 results are as follows. Revenue was $3.71 billion and minus 2.6% organic. Book-to-bill was 0.87 in the quarter. This shortfall was within our control. We purposely pushed out deals in the areas of ITO and modern workplace due to poor economics. All that being said, we are currently at a trailing 12-month book-to-bill of 1.06, and we expect to be back over 1 in Q2. Adjusted EBIT margin was 7%, and EPS was 75 cents. And finally, free cash flow was negative $12 million, which is a significant improvement from the negative $304 million that we produced last year. Now, let me give you some additional color around our transformation journey. The first step is to inspire and take care of our colleagues. It is very clear that people want to join DXC, which used to be an issue in the markets. I'm very pleased by the way we have taken care of our people impacted by the Russian-Ukraine conflict and COVID-19. Concerning our customers, our most recent MPS score was 30, which is on the high end of the industry benchmark range. I mentioned earlier that customers are now trusting us with their higher value business needs, and our analytics and engineering offering is a great example of where we have consistently performed well in the markets. From one of the world's leading retailers, we are changing the way their loyalty program works to enable the company to increase revenues and decrease costs. We are transforming their loyalty technology and data to better ingest and manage the right data. This data-led transformation is delivering their customers more personalized offers so that they can use their loyalty points where they are most impactful across all channels. This has increased loyalty and spending, which has helped the retailer grow. In addition, the transformation has lowered costs by managing the right data versus all the data. Analytics and engineering is an offering that we have consistently grown in double digits, which has helped us with our strategy to grow GBS. In Q1, the 2.8% growth in GBS is the fifth quarter of consecutive growth. And we narrowed the declines of GIS, producing negative 7.2% growth due to the improvement in modern workplace. Optimized cost is the next step. As I stated earlier, we have high confidence that our cost optimization will improve our margins and make DXC easier for our colleagues to work here, easier for our customers to work with us, and position us well for the future. We expect to eliminate $500 million of cost. This is comprised of the following areas, staff optimization, including increasing productivity and offshoring, contractor conversions, office and data center space, network and telecommunications, and third-party spend in the areas of hardware and software. I also want to highlight a reminder that I discussed with my management team that along with these actions, we will continue to run the business. This means we will continue to hire for the businesses that are growing like GVS and to scale the offshore presence of our global delivery network. The fourth step is seize the market. Our Q1 book-to-bill of 0.87 was a direct result of more disciplined deal-making, and our trailing 12-month book-to-bill is still a healthy 1.06%. New work for the quarter was 57%, and renewals were 43%. As I said before, we pushed out a number of deals in the ITO and modern workplace areas because we believe we can get better economics. The demand in the ITO and modern workplace market is there, and customers want providers that are financially stable, are investment-grade, and will deliver. That is now DXE, and due to these points, our reputation has changed in the industry, and that is why we are now the safe pair of hands. Deals are coming our way, and we are being very disciplined in our deal-making. Providers have given customers aggressive deals in the past with hopes that they can improve the economics over time, and the old DXE was part of that trend. We all know that these deals were hard to economically make work. The new DXC is focused on doing good deals from the start, and although this disciplined deal-making may have a short-term impact on our book-to-bill, we believe that it will help us longer-term improve margins and deliver for our customers. All that being said, we expect Q2 to be back over 1. And finally, I am pleased with the Financial Foundation and how far we have improved the quality of DXC over the last couple of years. We're doing a nice job improving free cash flow, and the business is producing results that has helped us manage our debt below $5 billion. We've also delivered $900 million to shareholders through our capital allocation program while being below our target debt level. And finally, we have significantly improved our corporate governance. And with that, now let me turn the call over to Ken.

Thank you, Mike. Turning to our progress on the transformation journey, we continue to move forward on our key initiatives. Q1, organic revenue declined 2.6%, 10 basis points or $4 million below the bottom end of our guide. Adjusted EBIT margin of 7% with 50 basis points below the bottom end of our guide. Year over year, we improved free cash flow performance by $292 million. Free cash flow was 88 million, better than the expectation we gave on the Q4 call. As a reminder, Q1 cash is seasonally impacted, including software vendor payments and incentive payments. Non-GAAP diluted earnings per share of 75 cents, five cents below the bottom end of the EPS range. Moving to the income statement on slide 12. The first quarter gross margin declined 40 basis points compared to prior year, primarily due to increased direct costs as a percent of revenue and unfavorable FX movements. We invested in our global delivery network in order to improve our delivery and ultimately allow us to optimize costs. While we are making these investments and doing the knowledge transfer, it is leading to higher costs. In addition, we made investments to deal with demand in the GBS marketplace as well as to exit Russia. Finally, we need to optimize cost to drive higher margins in GIS. SG&A as a percent of sales increased 10 basis points as we made investments in certain corporate functions. Other income decreased 40 basis points due to lower non-cash pension income. Our preference is to move towards a stronger balance sheet by reducing pension exposure. As a result, adjusted EBIT margins declined 100 basis points. Our cost optimization efforts have moved at a slower pace than anticipated as we were thoughtfully building our plan. Net interest expense is favorable, benefiting from lower interest expense and higher interest income. EPS was down 9 cents compared to prior year and was impacted by 12 cents from lower margins, 10 cents from unfavorable FX rate movements, 2 cents from the higher tax rate. These impacts were partially offset by 15 cents due to lower interest expense and a lower share count. For revenue, the continued strengthening of the U.S. dollar is resulting in $1 billion of headwinds or an additional $374 million from our prior guidance. FX is having a more meaningful impact on margins due to a higher concentration of cost in U.S. dollars. Year over year, FX is negatively impacting adjusted EBIT margin by approximately 50 basis points, or an additional 25 basis points of margin impact from our prior guidance.

Next.

Let's turn to our segment results. We continue to see improvement in the business mix as GBS becomes a larger portion of the business. For the quarter, GBS increased 180 basis points to 47.4% of total revenue. GBS has consecutively grown for five quarters and is our higher value business with higher margins and lower capital intensity. GBS continues to grow organically, up 2.8%, driven by strong analytics and engineering demand. The GBS profit margin was down 250 basis points to 11.9%, impacted by higher costs than FX. GIS organic revenues declined 7.2%. GIS profit margin was 6.5%, an improvement of 70 basis points. benefiting from lower costs, a gain on sale of assets partially offset by FX. With our cost optimization efforts, we expect to see improvements in our segment margins in the second half of the year that will continue through FY24. Turning to our six offerings that comprise GBS and GIS, starting with GBS, analytics and engineering continued its strong organic growth up 15.7%. Applications declined 2%. Insurance, software, and BPS generated $368 million of revenue, up 0.3%. Moving to our GIS offerings, security was down 0.3%. Cloud infrastructure and IT outsourcing is performing in line with our expectations, with declines moderating at negative 4.4%. Modern workplace was down 16.1% and improvement from the fourth quarter of down 19.6%. We expect to see continued improvement in modern workplace throughout FY23. The GIS book to build has been impacted by our increased pricing discipline Mike mentioned earlier. We have taken a more disciplined approach to ensure we achieve reasonable economics that appropriately cover our cost of capital. At the end of the day, we believe the market realizes for large-scale IT infrastructure type work, DXC is the safe pair of hands. We believe our competition has been forced to be more rational. As a result, we expect to be able to sign work with better economics. Slide 16 demonstrates how DXC continues to benefit from its financial foundation. Debt continues to decline due primarily to FX impacts on Euro-denominated debt. Currently, about 60% of the outstanding debt is Euro-denominated. At $4.8 billion in debt, we are below our target debt level of $5 billion. We continue to reduce our restructuring and TSI-related cash outflows. These expenses totaled $35 million in the quarter, down significantly from prior years. Capital expenditures and capital lease originations as a percentage of revenue were 6.4% in the quarter, down from 11.9% in Q1 FY22. We continue to thoughtfully examine our capital expenditures and capital leasing as our capital intensity presents a significant opportunity to improve cash flow. As we think about cash generation and capital available for deployment, let me take a moment to discuss the interplay of capital or finance lease debt reductions and cash available for capital allocation. In FY23, we expect to repay $500 million of capital leases, reducing debt Based on our efforts to better manage fixed asset purchases via capital leasing, we expect to reduce borrowings in FY23 to approximately $200 million of capital lease originations. So between the capital lease repayments and the lower originations or borrowings, our debt would be reduced by approximately $300 million. The $300 million of capital lease debt reduction provides flexibility to either borrow for capital allocation by staying at our target debt level or further deliver. Our expectation is to hold our $5 billion target debt level, yielding cash available for capital allocation of $500 million. Moving to slide 19, given our current valuation, we believe the best capital allocation decision is to repurchase our stock. We have returned $900 million to our shareholders by repurchasing 27.8 million shares. We're over 10% of our outstanding shares since the start of FY22. As of the end of June, we are halfway through our recent $1 billion share repurchase program and are on track to complete this prior to reporting our fiscal year results. Further, we are on track to achieve our $500 million of cash proceeds due to our previously discussed portfolio shaping initiative. Turning to our guidance for the second quarter, revenue of $3.55 to $3.58 billion, two key items addressed in our revenue guidance. Foreign currency is expected to be a headwind of 7.2% or almost $290 million year over year. Divestitures are expected to produce revenue by about $93 million. Organic revenue growth of minus 1.5% to minus 2.5%. Adjusted even margin 7% to 7.5% as we continue to face headwinds from higher costs as a percent of revenue and FX. Non-GAAP diluted earnings per share of 70 cents to 75 cents. Our updated FY23 guidance, revenue of $14.6 billion to $14.75 billion. We now expect foreign currency to be a $1 billion year-over-year headwind. This is an increase of over $300 million as compared to prior guidance. The vestiges are expected to reduce revenues by about $325 million. Organic revenue remains unchanged at a decline of 1% to 2%. Adjusted EBIT margin in the range of 8% to 8.5%. This reflects higher than anticipated cost as a percent of revenue and a FX impact of about 25 basis points. We expect margins to improve through the second half of the year as we execute on our cost optimization efforts. Non-GAAP diluted earnings per share of $3.45 at $3.75, down 40 cents from our prior guidance. Free cash flow of $700 million, reduced by $100 million. We are reaffirming our guidance for FY24. This reflects our confidence and our ability to execute. While we have more progress to make with our margins, let's put it in perspective. Over the last couple years, we have improved our margins while offsetting headwinds. including divesting a large portion of our business, revenue declines due to legacy terminations, lower pension income, and significantly reducing restructuring and PSI. While our cost optimization initiatives ramp slower than anticipated, we believe we have the right plan with the right operators to accelerate our margins. With that, let me turn the call back to Mike for his final thoughts.

Thanks, Ken. And let me leave you with a few key points. Our transformation journey is creating value, and we are confident that we are taking the right steps for DXC in the short term that will set us up for success longer term. I'm pleased with the quality of company DXC has become with our stable debt, sound capital allocation strategy, free cash flow generation focus, investment grade profile, improve governance, and our consistent growth in GBS. I'm also pleased with the work our team of operators has done to change our reputation in the industry and deliver for our customers to become the safe pair of hands. We have a good plan, and we are laser-focused on accelerating our cost optimization to improve our margins, and we will deliver. And finally, I like the way the ITO and modern workplace market is breaking our way. And it is up to us to win the new work at economics that benefit DXC longer term. And with that, operator, please open the call up for questions.

Thank you. And as a reminder, to ask a question that will be star one, we'll pause for just a moment.

We'll hear first today from Brian Burgin with Cowen.

Hi, guys. Good afternoon. Thank you. I wanted to start first just on a demand question. So just can you talk about how client conversations are progressing just as it relates to the macro uncertainty? Is this causing any change in deal cycles or conversion? Understanding you've talked about some push-outs that are your own conscious decisions, but are you seeing anything there in cycle timing, conversion? And if you could break that down between maybe U.S. and ex-U.S. clients, if you're seeing any difference in behavior there.

Okay, so Brian, good to hear your voice, and thanks for the question. Let me first start by saying we're not seeing a real difference between Europe and the U.S. and APAC. So let's put that aside. The second thing is now let's look at the demand by GBS and by GIS. The GBS demand is definitely there, and we're seeing it in our results. Because you can't grow the analytics and engineering business 15.7% and also have the book to bill of 1.17 if the demand wasn't there. You will also see I'll comment on the margin at some point in time again through this call. But the investment that we made, one of the investments we made in Q1, and this is on me, is that we did build a bench for GBS. That market is literally a market that if you can show up with the right skilled people at the client's doorstep first, you're going to win the work. But they really, really want to see the skills. And I think everybody on the call knows that the demand environment for the skills is hot. So we invested, we built a bench. So we're seeing good demand there. I don't see any issues. And I love the way that we've now broken the insurance business out and we're more laser focused on doing work for those insurance companies now in contrast we see GIS and GIS I would also tell you the demand is there if you go look at the marketplace you'll see that there are customers in in the ITO and modern workplace segments that are trying to figure out what do they do with their work moving forward. And I made in my prepared comments, they're focused on do you deliver for your customers? Are your customers referenceable? That's why I talk so much about our customers in my script. Then the second thing is our investment grade profile. And third is financially, are you doing okay? And that's why I talked about the quality of company. And I also talked about the safe pair of hands. So we're definitely seeing the deals come our way. Now, here's the deal. Traditionally, those customers have been given deals where the providers have invested in them up front, only to turn around and then hope to get the economics better moving forward. And we have said, when I talk about our disciplined deal-making, we're not doing that anymore. So we want the deal to be good for both the customer and us right off the bat. Uh, so look in this quarter, we had, it wasn't just a couple of deals. It was three or four deals that we pushed out because we got to the terms, we got to the economics and we didn't like the economics. Do I think those deals are lost? No, because we believe now that, that those, those customers know that we are the ones that will deliver. So, and like I said in the call, I expect that our book to bill will come back over one in Q2. So, demand environment is decent for us. I don't see any issues with the demand. Okay. Okay. I appreciate that. Was that the color you're looking for or not?

Yes, it was, Mike. So, I appreciate that. And I was going to ask about the risk of loss of those deals, but you kind of answered that for me. So maybe I'll ask a free cash flow follow-up here. Just, Ken, how are you projecting free cash flow cadence over the course of the rest of this year? And the reduction of $100 million, is that comparable to margin, kind of half FX, half operational?

Hey, Brian, so let me just, I'll do a pivot real fast because the deals that we pushed out, One, those are large deals. Two, do I expect that they're lost? No. All right. And it's not like we're not actively working with them right now to show why the pricing that we gave them was the right pricing. Fair enough? Yeah, understood.

Okay, free cash flow. Yeah, so just maybe two quick things. So the guy down of $100 million probably rounded a bit, but it's really margin or 100% margin. We thought it was sensible to take that off and then fully expect cash to build throughout the year and expect to have some good quarters in front of us.

All right. Thanks, guys. You're welcome. Next question, Kelly.

We'll take our next question from Brian Keene with Deutsche Bank.

Hi, guys. Good afternoon. I guess I'll ask about the margins. I think you gave guidance for the first quarter almost two months into the quarter already for first quarter, and I'm just a little surprised to see the margin shortfall in GBS, and I guess you guys were too. I'm just surprised that it surprised you the way it did since you were already two months in when you gave the guidance. So just maybe a little color on why the surprise and how long is it going to take to fix.

Well, Darren, so I'm not sure it's a surprise. okay so when i look at what we did in terms of the investment and the investment you can make pretty quick the the margin is based on the fact that look we're investing in our global delivery network all right what that means is we're fixing the onshore offshore mix of this company we're also uh invested in automation but when you look at what we've done with our centers which is basically we have staffing bubbles All right, which means we had two people doing the job of one because we're doing the knowledge transfer from onshore to offshore. We also, when you look at Russia, right, we scaled Serbia, we scaled Poland, we scaled Romania. So from that standpoint, we increased that stuff. And whether we increased it one month, two months, or three months, and I wouldn't call it a massive surprise. The second part of the investment was the bench for GBS. And when I look at the demand for GBS, I think that's prudent. So we're making some short-term calls that we think longer term are going to serve us incredibly well.

And I would also add, Darren, I mean, there's a lot of moving pieces in Q1. So you think about the pension impact, Russia, that Mike was talking about dealing with it, the unprecedented move in FX. So I would say just maybe on the FX side, it did catch us off guard a little bit on the cost side and the concentration of US dollars. And we're certainly working it back. And then, you know, our cost optimization, which we talked about in our scripts, and we've been building up to this, trying to be really thoughtful with it and make sure that we build the knowledge transfer capability offshore to move the work as appropriate. And we've probably moved out a little slower on that. than we would like. I think when you put all that in, it's safe to say we missed our guide. I get your point about your two months into the year, but there's just a lot of moving pieces in Q1.

And that's Brian, not Darren, correct? Yeah, sorry. Brian, sorry about calling you Darren. That's not good. Sorry about that.

That's all right. I'm sure hopefully Darren can come up with some other questions. But my one follow-up is, You know, I think the key then is going to be the confidence in the long-term outlook, which was reiterated. You know, if margins are dropping, I think investors are going to lose confidence in the fiscal year 24 outlook of adjusted EBIT margin of 10% to 11%. Why is that still the right margin target, and how confident are you that you can hit that and that doesn't have to eventually come down?

No, two things, Brian. I mean, the bottom line is we have – We are structurally fixing this business. So when you look at the onshore-offshore piece, once we get there, we will have better margins in the GIS business. And then that's basically a machine. So when you look at that, that's why I called out, look, two years ago, we took cost out. Roughly $550 million, I believe, in the current year. $700 million in terms of annualized. And then we let it bed in. We make all of our decisions based on looking through the eyes of our customers and colleagues. And then we knew we were going to take this out again. So when I look at that, all right, fair enough. So the staffing bubble, we didn't move as quick as we should have on. But at the end of the day, once we get done with 23, we should be at a very good position to hit our FY24 numbers. And that's why we reiterated them. Great. Thanks for the call, guys.

See you, Brian. Sorry again. Okay, Kellyanne, who do we have next?

I would like to remind everyone, if you do have a question, that is star one at this time. We'll hear next from Rod Bourgeois with Deep Dive Equity Research.

Hey, guys. So I have a question about your overall turnaround journey. You clearly showed some good turnaround progress through the March quarter, and then you've hit some bumps here in the June quarter. Also, during the June quarter, we saw reason for some concern that there could be some margin tradeoffs that you would encounter as you pursue better growth. So my question is, is it appropriate to say that you're hitting a number of margin tradeoffs that are seemingly required to drive the revenue growth that you're targeting. And if that's an accurate portrayal in your go-forward turnaround journey, how do you overcome the recent bumps in the road to reach your long-term margin targets? I mean, how do you get past the near-term trade-offs in order to get to the long-term target? Thanks. Okay, so Rod, let's break this up into

revenue and margin and let's let's start with uh the margin so in the short term right the decision we made was to invest in the gdn to hire the folks offshore so that we uh we could transfer the work and when i look at that and we get through the knowledge transfer um and put uh put the ukraine situation in the Serbia, Poland, and Romania, look, we're going to be in good shape. You're going to see that we're doing that in basically Q1 and Q2 because that's the guide on margin. And then the margin literally increases through the back half of the year because you've got the machine working. So that's the way I would say that both short-term, long-term. In terms of revenue, short-term, long-term, We have two things going on. First, we built the bench. We invested in the bench and GBS. And you'll see, you know, we can see our GBS pipeline up. We can see that the book to bill is still very solid. Then the other thing is, look, I've been very clear with you all. We are sorting out the GIS market and those deals are there to be had in the market that we're in, whether you think we're in a recession or not. anytime we're in this kind of market, there are not only more outsourcing deals, but they're bigger. And when they're more and they're bigger, customers usually want increased cost reductions. And we think we can command pricing that is really consistent with how we look at our margins long-term, a.k.a. the 10% to 11%. So anyhow... That's the way I see it, Rod. When you talk about basically where we're at as a company, look, we also said this thing was never going to be a straight line. Great example of not being a straight line was free cash flow last year, right? Nobody thought when we started at minus 304 that we were going to get to 743. So my view is, look, we're making good investments. The decision we're making in the short term, we've got a good plan. and high confidence will continue to create value. I hope people have taken to heart everything else we've done, right, in terms of the quality of company, whether it's the debt, the capital allocation, whether it's the improved governance score. And then I continue to look at consistently growing GBS when a lot of other folks are struggling in that area as a good shining star.

Okay, great. And then, so let me just ask a quick follow up on this. You've got some competitors, particularly in the infrastructure business that are really struggling. And there's a lot of messy, call it messy contracts in that infrastructure business historically. Are you seeing clients willing to pay a premium to sort of get out of a messy historical legacy contract and into something where the service can be better and, you know, with a client willing to invest in digital and a more modern approach to the infrastructure problem that they're trying to solve? Are you seeing clients willing to pay up to move out of these legacy deals?

So the short answer to your question is yes, and that's what we're focused on. So let me give you some color around that. So when you get to these points, Rod, where you've got these large deals and they're paying up, we have to literally go through line item by line item in terms of why that's appropriate. So whether it's inflationary costs, whether it's costs of, hey, here's the way the deal should have been constructed to begin with, or whether or not it's just, look, here's the model that we will be using, all right, to to make sure we're delivering and let's not walk past that last point meaning here's the model we will be using meaning a lot of times with some of this stuff rod 100 offshore is not the right answer so you've got to have a nice mix of onshore offshore so literally those are the conversations we're having with the demand in the market and it's it takes a little while to get them to understand that actually they've got a good price and they're not going to have to worry about the delivery moving forward so hopefully that gives you the color rod that you're looking for no that's helpful thanks scott thanks rod kellyanne who's the next question we'll hear next from jamie friedwin with susquehanna hi uh the analytics and engineering um

business performed well. It was up almost 16% year over year. I was just curious because I would think of that as somewhat discretionary, but it still was a juggernaut here. If you just give us some context about why that may be performing well in this environment and how you see it going forward.

Thanks, Jamie. Basically, I'll just go back to the example we gave you during the script. what we're seeing with analytics and engineering is we're able to deliver both increase helping a client increase their revenues or growth and then decrease their costs. So when I gave you the example during the script of the retailer and specifically the loyalty program, what's going on there is we're literally dealing with both the technology and the data. And as you can imagine with loyalty, there's a lot of data and, instead of trying to deal with all the data, dealing with specific data so that their loyalty points can be used at the right moment has really created a really nice situation for this retailer in the sense that they've seen more demand and then the costs have gone down. So it's interesting that you have categorized it as discretionary because a lot of times these customers have dealt with both their infrastructure, cloud, and now what they're trying to deal with is this data and get more out of the technology they've put in place. And that's what our analytics and engineering business does. So we're proud about the 15.7. We expect that it's going to continue to perform in double digits because, you know, that's what it's been doing for several quarters now. So thanks for that question.

Thanks for that, Mike. And Ken, in terms of free cash flows, good free cash flow quarter, but was wondering any call outs for next quarter for the cadence for the year? You did mention the seasonality in the Q1. I heard you say that, but anything else we should be aware of in terms of cash flow?

Yeah, no, I don't think there's anything, Jamie. I mean, I think the second quarter should be a good cash flow quarter and, you know, I think the rest of the year as well. So, I think we're heading into kind of more cash generation going forward. Got it. I'll drop back in the queue.

Thank you. Thanks, Jamie. Kellyanne, next question.

That will be from Brad with BMO.

Hi. Thank you for taking my question. I wanted to start off asking about the application thickness within GBS and sort of the expected trajectory there. you know, perhaps flatten out to where it's sort of flat on growth versus being sort of a detriment to growth? You know, you mentioned the demand within broader GBS and obviously within analytics and engineering, but could you hone in on what your sort of view is for that business and how it fits in strategically?

Well, okay. Well, strategically, it's a key part of what we're doing in GBS. And to break that business apart, right, there's really four pieces. There's a custom business application that's where we just build stuff from the ground up for clients which we're really good at there's an sap enterprise piece there's an oracle piece and then there's a service now and what we do is is um you know we do all four of those for clients the demand that we're seeing is particularly in custom um custom apps uh sap and and service now So that negative two was negative two last quarter as well. And we do see that flattening out throughout the year. But that's a good business for us. And again, what we're leaning into is really the custom build. And the reason why the custom build is we're so good at that is because once you're running that infrastructure, put the infrastructure with the applications, typically our engineers can develop good stuff. So that's a good business for us. Don't lose sight of the fact that the performance of that is going to be just fine.

Brad, do you have another question? Yeah, just a quick follow-up for Ken on the free cash flow. I believe you said it's reflective of the margin sort of cadence is the reason for the $100 million difference. Can you just perhaps talk about the FF impact and how we should be thinking about that for free cash flow? You mentioned more extreme on margins than revenue and just want to make sure I have that understanding. Thank you.

Yeah, and I appreciate the question, Brad. We have about, you know, kind of a ballpark 800 million more in costs than U.S. dollars when you look at it kind of on a pro rata basis. And so, therefore, when the dollar strengthens like it has, it's caused not only the revenue dollars and profit dollars to come down, it's caused margin compression as well. And that's what's really impacting the margin in addition just to the dollars coming down.

Kellyanne, let's take the next question.

Thank you. That will come from Lisa Ellis with Moffitt Nathanson.

Hey, good afternoon, guys. Mike, I just wanted to ask, this is a follow-up on the bookings dynamic and what you're talking about, about pricing those deals in a different way. Are there investments that you're making or you're realizing you need to make in your sales team and the go-to-market model that you know, to be able to sell this way, to sort of shift to selling more value or, you know, sort of a different value proposition perhaps than they've done before? Or is this, do you view it just like literally very temporary with this quarter and once you get these deals closed, you're kind of off to the races? Or is it, you know, something that requires a bit more investment?

Well, I mean, look, it is something that's systemic that we're putting in place in terms of DXE. So, And it's not about, right, the sales folks. I mean, it's about our reviews of those deals. And we got to be clear that we can hit those margins instead of hoping in the future that some things are going to happen. Okay. And Lisa, as you know, those deals come to us, all right, with a certain price expectation because that's the price they've been paying for several deals now or several years now. As you know, those deals are a lot of times 5, 10, 15 years old that these folks have been running those things. So the clients are coming to us with a specific price for scope. And what we're doing is sitting down and taking them back through the scope, taking them back through. Here's why that was probably underbid. and then here's how we're going to deliver it for you. And then obviously we stack that up with the references that we have in the market so that they can hear from those references that we do deliver. Because that's where those folks are at now. They've had enough fun with the people that they've been dealing with. There's too much uncertainty as it relates to what's going to happen with their company and so forth. And that's why I keep coming back. I know it sounds cliche, but the quality of company that we've built That's leading us to take on these new inquiries. So it's not so much what the sales team's doing. It's literally the operating committee that I've established reviewing those deals and making sure we're not going to do them at a lower price. And if I need to get on these calls and say, hey, the book to bill was 0.87. Do I really like to do that? No, but I also don't like when the the margins going backwards all right especially on the new work so as you can see lisa not only are we fixing the delivery model but we're also making sure we're shutting off the funnel coming in that the deals should help us get to that 10 to 11 margin in fy 24. okay okay and then my follow-up is on gis and

Apologies, I'm doing this out of my memory, so I might have it wrong, but my recollection is that when you initially set the 2024 outlook, your expectation for GIS was to get it to flattish or maybe modestly down, and it's still running three-quarters out at minus seven or so. So can you just help us a bit? I mean, GBS is humming along, as you've highlighted very nicely, but can you help us a bit with sort of how we should think about bridging GIS over the next year or so to get to that 2024 number.

Okay. Well, Lisa, thanks for the comments on GBS because obviously I'm very happy with that business too. Look, taking the or narrowing the decline of GIS by 80 basis points, you're starting to see it's heading in the right direction. Because we literally have stacked up the last three quarters of minus 8, minus 8.3, minus 8. So literally breaking through that number and starting to push it down is solely focused on one thing and one thing only, and that's the performance of modern workplace. Okay? And it's not that hard of an equation. As modern workplace has gone from, I think it was minus 19 last quarter to minus 16 this quarter, We've been very clear that we expect that that business is turned around. We have new work coming on. We're seeing the work come on. And as modern workplace gets fixed, so does GIS. It's literally that simple.

Okay. Okay. Great. Thank you.

Thanks, Lisa. Kellyanne, any other questions?

At this time, Mike, I'd like to turn things back to you for closing remarks.

All right, Kellyanne, thanks so much. Look, in closing, what I would tell you is that we've made some very good short-term decisions around investing in DXE. We think those are going to position us well in the future. I'm very proud of the quality of company and the quality of customer relationships that we've built. And the closing comment is we are laser-focused on making sure we take out this $500 million. And we've got a team of operators that is very good, and we've got high confidence like we did in FY21 that we will take the cost out again. So with that, we'll close the call, and I look forward to updating everybody in the fall on Q2. Kellyanne, you can close the call.

Thank you. This does conclude today's conference. Thank you again all for your participation, and you may now disconnect.