DXC Technology Company

Thank you for standing by. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the DXC Technology Q2 earnings call. 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to John Sweeney, Vice President of Investor Relations. John, please go ahead.

Thank you. Good afternoon, everybody. I'm pleased that you're joining us for DXC Technologies' second quarter fiscal year 2024 earnings call. Our speakers in the call today will be Mike Salvino, Chairman, President, CEO, and Rob DelBene, our EVP and CFO. The call has been webcast at DXC's Investor Relations website, 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 the SEC rules, we provide reconciliation to measures of the respective and most directly comparable non-GAAP measures. These reconciliations can be found in the tables, including in today's earnings release and in the webcast slides. Certain comments you 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 quarterly report on Form 10Q and other SEC filings. I'd now like to remind our listeners that DXC technology assumes no obligation to update the information presented on this 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 update on our overall business performance. Next, I will update you on our performance of our GBS and GIS businesses. Rob will then discuss our financial results in detail and our guidance. And finally, I will make some closing remarks before opening the call up for questions. We are pleased with our financial performance in Q2, as our leadership team continues to strengthen and execute on our offering-based operating model. Organic revenue for Q2 was minus 3.6%, above our guidance, and consistent with our Q1 performance. Our GBS business performed better than we expected at 2.4% organic revenue growth, and GIS showed progress, going from organic revenue of minus 9.9% in Q1 to minus 9.1% in Q2. Our EBIT margin was 7.3%, which is better than our guidance, and quarter on quarter was an 80 basis point improvement due to both GBS and GIS margins improving. ETS was $0.70 at the high end of our guidance, and book-to-bill was $0.81, and our trailing 12-month book-to-bill is now $1.02. Free cash flow was $91 million, which was an increase over the minus $75 million we delivered in Q1. This execution shows that we are beginning to see the benefits of our new offering-based operating models. where we are now running global offerings with the goal of driving revenue growth and expanding margins, EPS, and free cash flow. The Q2 results clearly showed we achieved all four goals when compared to Q1 performance. As you have heard consistently from us over the last several quarters, our management team is laser-focused on transitioning DXE from stability to higher performance. That work started with reinforcing our financial foundation and customer relationships and moved on to ensuring we have the right talent in the right places to execute on our growth and expansion goals. With the moves that we have made over the last several months, I now believe we absolutely have that team in place. In Q2, we added two more senior executives to our leadership team to strengthen our ability to run our offering-based operating model, and consistently deliver on our financial commitments. Howard, Andrew, and Rob mark three senior executives with significant senior management experience and expertise in critical parts of our business that have joined us to play key roles for DXE alongside the other talented members of our senior leadership team. Howard will be running our applications offering and be accountable for our AI strategy, Andrew will be running our modern workplace offering, and obviously Rob is our new CFO, who has been making a huge impact in driving our financial performance. Howard has joined us from IBM. He is an IT services expert with proven experience in creating growth strategies and executing against them, as he did at IBM with their cloud business. Prior to IBM, Howard was the CTO of Bank of America, which gives him a unique perspective of what customers want in an IT service provider. Howard is the perfect choice to lead our applications offering. Andrew joins us after working for some of the largest and well-respected brands in the technology industry. Most recently, he was the Chief Digital Officer at Microsoft, where he was our customer for the modern workplace services we provide to them. Prior to Microsoft, I worked with Andrew at Accenture, where he was the CIO and delivered innovative digital services to a very demanding workforce. His ability to run global P&Ls and deliver these services makes him the perfect choice to run our global modern workplace offering. Howard and Andrew, combined with Chris, who runs ITO, gives us three former CXOs of Fortune 500 companies leading almost 70% of our revenues. These three bring deep customer and industry relationships to DXC and the ability to attract top talent to help us deliver on our financial targets. Now, turning to our GBS business, GBS grew organically for the 10th consecutive quarter in Q2 and now accounts for 49.7% of our total revenue. As we have stated repeatedly, consistently growing this high-value business and having it become the majority revenue source of DXE is important to our overall growth strategy. As you can see from the results this quarter, we're delivering on that goal. The 2.4% organic revenue growth was moderately ahead of our growth expectations for the quarter due to the stronger performance across all three offerings. Also, I was pleased to see us expand margins from 11.3% in Q1 to 12.5% in Q2. Our insurance offering has benefited the most from our new operating model because it's been in the model the longest. Our insurance offering delivers a SaaS model to our customers, and we are the world's largest provider of insurance software and VPS solutions to the industry. Under our new model, Ray can now focus on selling these capabilities to existing customers and delivering services more efficiently. His team has done an outstanding job of beginning the modernization process of our insurance software products, positioning our insurance offering for further growth. This is just one example of how our right model and right leader approach is clearly making a positive impact and starting to generate solid financial performance. I believe that kind of production across DXE is only beginning. Another key attribute of our growth strategy is selling our GBS offerings to our GIS customers. On a yearly basis, we generate roughly 370 million in revenue by selling analytics and engineering to our GIS customers, and this is growing 11% in FY24 so far. The new operating model is allowing Michael and his team to continue having success in a very tough market. Another example, of us having the right model and the right leader is our applications offering, which generates roughly 1.2 billion of revenue by selling to GIS customers. But it is not growing in FY24 so far. Fixing this is one of Howard's highest initial priorities, as we have charged him with responding to the AI demand and getting our customer base ready to accept this technology. Moving now to our GIS business. where this quarter we moderately moved it in the right direction, shrinking the decline in revenue from minus 9.9% in Q1 to minus 9.1% in Q2, while margin increased from 5.2% in Q1 to 5.8% in Q2. Like GBS, all three offerings performed better than our expectations. Let me highlight the progress we have made in the quarter to continue fixing our IPO business. We have discussed moving to an infrastructure light model. As part of this effort, and as we've communicated on prior calls, we plan on selling facilities. Chris and Rob are making progress on this initiative with plans to sell facilities in the back end of the year. Executing on this will allow us to sell underutilized assets, making us more efficient overall and helping us fix the margin of the GBS business moving forward. We recently assigned a deal to become the partner of choice for AWS. This partnership incentivizes us and our customers to move their systems that are essential to their operations to the cloud. We plan to use this deal to move some of our customers that are using a data center that is on-prem and sub-optimized to the cloud to improve the cost economics for our customers and ourselves. Now let me turn the call over to Rob to discuss the details of our financials.

Thank you, Mike. Before I get into the numbers, I would like to say the team has made good progress with the implementation of the offering-based operating model with improved execution, and I expect us to build on this performance going forward. I'll now provide you with a quick rundown of our 2Q performance. Organic revenue is down 3.6%. which came in above our organic revenue guidance range and in line with first quarter's performance. Of the 3.6% year-to-year decline, 160 basis points came from a reduced level of low margin resale revenues, which was in line with our expectation. Adjusted EBIT margin came in at 7.3%, also above our guidance range. The margin increased 80 basis points sequentially, and was down 20 basis points on a year-to-year basis. Within this number, there's a significant reduction of 60 basis points from the pension income contribution on a year-to-year basis. So, without the pension income, our non-GAAP EBIT margin moves from 6.3% in 2Q23 to 6.7%. Non-GAAP EPS was 70 cents at the high end of our guidance range, down 5 cents year-to-year, and up 7 cents sequentially. SG&A was well managed in the quarter with spending in line with our expectations. Free cash flow for the quarter was 91 million, benefiting from our continued focus on working capital management and a lower level of CapEx. In the quarter, our book to bill was 0.81, and the trailing 12 months is now 1.02. The level of bookings through the first half of the year is similar to the first half of fiscal 23, and the 0.81 is factored into our annual guidance. Looking forward, based on our pipelines, we expect book-to-bill to improve in the second half of the fiscal year. Moving to our key financial metrics. Our second quarter gross margin of 23.4% was up 120 basis points year over year. and 230 basis points sequentially, benefiting from our cost reduction initiatives. SG&A was 9.4% of revenues, up 60 basis points year over year. Depreciation and amortization was down 7 million compared to the prior year. Other incomes decreased 28 million year to year, driven primarily by a $25 million decline in non-cash pension income. Taking this all together, adjusted EBIT margin was down 20 basis points year-over-year. Excluding pension income in both periods, the EBIT margin would have been up about 40 basis points year-to-year. Net interest expense increased 9 million year-over-year to 25 million, primarily due to a higher level of variable interest expense on short-term debt. Non-GAAP EPS was down 5 cents compared to the prior year driven by a $0.03 decline from higher interest expense, a $0.06 reduction from a higher tax rate, and a $0.06 reduction due to lower pension income. These increases were partially offset by a $0.09 improvement due to lower share count driven by our ongoing share repurchase activity. Now, turning to our segment results, our business mix continues to trend to our higher margin GBS segment. As a percentage of total revenue, GBS is now very close to 50% of revenues. We anticipate that this trend will continue and that shortly the GBS segment will be the majority of our revenue. GBS grew 2.4% organically and posted the 10th consecutive quarter of organic growth, which reflects the deep industry-based customer value delivered by the GBS teams. The GBS profit margin declined 20 basis points year over year, with a decrease driven by the impact of lower pension income. Turning to GIS, organic revenue declined 9.1% with a modest reduction of the decline sequentially. GIS profit margin decreased 40 basis points year over year, again, driven by the reductions in pension income. Now, let's take a closer look at our offerings. Analytics and engineering revenue performance was up 5.3% below the first quarter growth rate. we're seeing a moderating level of demand as customers are more cautious due to the current macroeconomic environment. Applications revenue declined 80 basis points, similar to first quarter performance. While our applications performance has been stable, we are expecting to see improving book-to-bill performance in the second half of the year based on the opportunities we see in our enterprise applications business in public sector and in banking. Insurance software and BPS continued to grow with revenue up 5.2%. The insurance SaaS component of the portfolio accelerated to high single digit growth. The insurance platform and deep industry BPS skills of our team is resonating in the market. Security declined 1.8% year to year. Cloud infrastructure and IT outsourcing revenues declined 9.8% year to year organically. The year-to-year performance continues to be impacted by two primary factors that I outlined in the first quarter earnings call, the impact of which were anticipated in our 2Q guide. The first is declines from contracts that were terminated some time ago and continue to wind down. The second factor is a decline in resale revenues, which drove 41% of our second quarter decrease in cloud and ITO. The modern workplace business declined 9% year to year. And as with ITO, the business performed as expected in our 2Q guide. Our expectation is that the sequential performance and revenue will stabilize through the second half of this year. Turning to financial foundation metrics, debt levels decreased modestly in the first quarter to 4.5 billion. Restructuring and TSI expense increased to 38 billion. with the increase entirely due to the restructuring of facility leases, part of our effort to right-size our facility footprint. We are tightly managing restructuring and will continue to evaluate opportunities to streamline our operations. Operating lease payments and related expenses were $91 million, down $17 million year-to-year, reflecting continued management of our real estate commitments. In the quarter, capital expenditures were 157 million, down 38 million year-to-year. Finance lease originations were 24 million flat year-to-year. As a percentage of revenue, capital expenditures and lease originations declined to 5.3% of revenues as we tightly manage our capital and leasing commitments. As I mentioned earlier, free cash flow for the quarter was 91 million, bringing our first half total to $16 million, slightly better than last year's performance. We have several large drivers of cash expenditures in the first half of the year, such as bonus payments, payments to suppliers for annual renewals of software and related maintenance, and cash taxes. These cash outflows will be significantly lower in the second half of the fiscal year, and combined with a higher adjusted EBIT, and continued progress on working capital efficiency, we are maintaining our free cash flow goal of 800 million. Turning to capital deployment, we made continued progress on our billion-dollar share repurchase program for fiscal year 2024. Year-to-date, TXC has repurchased about 10% of our shares outstanding. This is in addition to the 7.4% of shares that we repurchased in fiscal year 22 and 10.6% in fiscal year 23. It is important to note that in aggregate, our $1 billion share repurchase program will be funded through free cash flow and our asset sale program. And just to note, there's approximately 500 million remaining for the second half of the fiscal year. Turning now to third quarter, we expect Q3 organic revenue to decline from minus 4 to minus 5, reflecting the weaker demand environment. adjusted EBIT margin of 7 to 7.5%, and non-GAAP diluted EPS of 75 cents to 80 cents. Turning to our full-year guidance, we are reaffirming our organic revenue growth from negative 3% to negative 4%, our adjusted EBIT margin of 7% to 7.5%, and EPS from $3.15 to $3.40. We are also maintaining our free cash flow guidance of 800 million. We have increased the tax rate. Our non-GAAP EPS guidance reflects a tax rate of 30% up from our previous expectation of 29%. We are making progress on our 250 million asset sale program, which is a planned source of cash in fiscal year 24. In 2Q, we realized 61 million bringing our year-to-date asset sale total to 65 million. We have a portfolio of assets that will enable us to achieve a $250 million objective and expect to execute by the end of the fiscal year. These cash-generating transactions could result in a non-cash loss that is not factored into our guidance. And as we have more clarity on the specific assets and timing, we'll provide an update in 4Q guidance. With that, let me turn the call back to Mike for his final thoughts.

Thanks, Rob. And let me leave you with a few key takeaways. We are starting to see the benefits of our new operating model in our financial performance, and we are focused intently on making sure this continues. We believe we now have the right model and the right leaders to run the global offerings for the three businesses where we need to make the most improvements. Having three ex-CXOs now running applications, ITO, and modern workplace is a big win for us because they have deep relationships with existing CIOs that will prove impactful for us. Our goal for DXE is to grow revenue and expand margins, EPS, and free cash flow. Quarter on quarter, we make positive progress on each. Concerning revenue growth, we grew GBS for the 10th straight quarter. We moderately slowed the decline in GIS. We also continued to sell our GBS offerings to GIS customers, and with the addition of how we're driving our applications offering, we expect to do even more. And we continue to make our high-value GBS business a larger part of our overall revenue, now at 49.7%. While making that progress on revenue, we expanded margin 80 basis points, ETF 7 cents and free cash flow turned positive as we delivered $91 million in the quarter. I am pleased with our financial execution for the quarter. Expect that this execution will continue, and I look forward to updating you on our Q3 progress in February. Operator, please open the call up for questions.

Thank you. At this time, I would like to remind everyone in order to ask a question, Press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And again, that is star one on your telephone keypad to ask a question. Our first question comes from the line of Brian Bergen with Cowan. Brian, go ahead.

Hi, this is Zach Gageman. Hey, this is Zach Gageman for Brian. First question on a demand outlook. So The trailing 12-month bump gains remains above one, but the quarterly book-to-bill was below one for the second consecutive quarter. So in this context, we're just looking to dig into what gives you confidence for the revenue affirmation for fiscal 24, which implies a 4Q revenue acceleration. And perhaps you can give some context around individual stack layer assumptions that underpin this 4Q revenue improvement.

Okay, so, Zach, first of all, the bookings in the first half of the year was factored in our guidance when we gave you guidance last quarter. I would tell you the key takeaway from this earnings report is our ability to convert the pipeline to revenues. It's significantly improved. We talked about project work that we saw on the back end of the year. That clearly has accelerated by us beating our revenue number. So, And basically what we're seeing is this shows that our operating model is really starting to work. We talked about that last quarter that our detailed leaders need to get side-by-side, shoulder-to-shoulder with our customers and start driving the project stuff, and that's what we've done. And we think we can continue. So what we see in our bookings, our bookings have always been lumpy. If you look at last year, if you look at the year before, they are lumpy. And we're focused now on replenishing the project work. And as I look forward, based on our pipeline, we expect Book to Build to improve, particularly in the area of GBS. So that hopefully gives you the color you're looking for. Next question. Do you have another question?

Yeah, on free cash flow, just wanted to dig into the factors that are giving you confidence here in being able to achieve that $800 million outlook that was affirmed.

Yeah, sure. Zach, this is Rob DelBene. As I mentioned in my remarks, there are several factors that hit free cash flow in the first half of the year that won't be repeated in the second half. So the first is bonus payments. They're always skewed to the first half of the year. And I can give you a rundown of the numbers in more detail. Our impact in 1Q was 130 due to bonus payments. We have vendor payments that are normally skewed for the first half of the year, primarily for software and maintenance annual renewals. And our projections are that the second half of the year will be significantly lower due to the skew into the first half of those annual payments in the range of $450 million. So those two factors alone are 580. The cash taxes are projected to be lower in the second half of the year as well in the $80 million range. And the remainder, we're confident, will come from second half EBIT being better than first half and continued working capital improvements. And we have, you know, we've identified specifically where we think we will make those improvements. So that's, you know, the pretty detailed bridge to get to the $800 million.

Appreciate that caller. All right, Zach, thanks so much. Jessica, next question.

Great, thank you. Your next question comes from the line of Gates Schwarzman with Citi. Gates, please go ahead.

Hey, this is Gates Schwarzman calling in for Ashwin. You went through the free cash flow bridge. You also had noted that you repurchased a quarter of your shares since early 2022. Is that the main use of cash going forward, or are there any M&A opportunities or other uses like further restructuring that might take precedence?

Look, we basically, when you look at our capital allocation, we have 1A, 1B, 1C. So 1A will be the buyback. 1B will be our debt, which I think we've continually made sure that we stayed at investment grade profile or better. And then 1C will be our investments. If you go look at our SG&A for this quarter, we've made investments around our brands. We've also made some investments and some outside help to evaluate some of our SG&A costs. And then the third thing we'll do is I highlighted for you the uptick in our insurance business in terms of us modernizing our software that's positioning that offering for growth. So that's how I'd answer that question.

Thank you. Do you have another question, Bob? Yeah, I have one follow-up. I would like to ask if it's possible to walk through the offerings, get an idea of non-discretionary revenue in the base versus what clients can push out. I'm asking this because as we see the critical track record lately, some of the items we thought were safer, like cloud and IT, have stepped down, while some that we thought were more prone to cost-cutting, like analytics and applications, have done better than expected. Thank you.

So, look, what I would tell you is we'll break your question into the two pieces, GBS and GIS. So, On GBS, we see our GBS business continuing to grow, but at a lower rate. Due to A&E, we believe in a tough market. We think Michael's done a nice job selling applications or analytics and engineering on to our GIS customers, but we are seeing that slow a little bit. I don't think that's any new news to anybody. Applications continue to be flat. And with the addition to Howard, we think he can definitely improve on that. But right now, we're keeping it flat. And then the final thing is we've been pretty bullish around insurance, just in terms of what Ray's doing in the market and so forth. So we continue to see growth there. If you then turn the page to GIS, we think that basically the GIS business will maintain what it's doing today. Both Chris with ITO and Andrew are very focused on positioning both of those businesses for future success. And I gave you some details around what Chris is doing with ITO. So, you know, I would highlight those two things again, being he's working with Rob to take our underutilized assets, the facilities, and put them, make sure that we can sell them, because the longer we hang on to them, you know, the less value that they have, all right? So we're pushing hard to make sure that happens this year. The second thing is AWS, and we're pretty happy about that, to say the least. I say that because for years now, we have not gotten our fair share of the cloud business. And with AWS, with us being that partner of choice, that clearly puts us into the cloud migration and the cloud operations business that, like I said, traditionally we have not participated as well as we wanted to. When you look at the cloud industry right now, what we see is they're focused on the essential systems that run customer operations, and that's our ITO business. And when somebody like AWS gives you that partner of choice credential, that's a big deal. And what they see is they see a firm like us that has great customer relationships that are trusted because this essential stuff is not easy to run. And they also know that we can make the migration work successfully. And the tidbit I'll give you is we're expecting AWS, when I say they'll incentivize us and work with us, they're going to train roughly 15,000 of our women and men on AWS to make that happen. So that's quite a bit of scale. So that's what we see. Hopefully that gives you what you need. Yep. Thank you. Jessica, next question.

Yes. Your next question comes from the line of James Friedman with Pasquahanna. James, go ahead.

Hi, thank you for taking my question. So, you know, you've had some impressive accomplishments in especially the free cash flow and the free cash flow per share. And I was wondering if you could kind of unpack how you're achieving that, Rob, because it really stands out on both the numerator and denominator.

Yeah, one of the, there are several, as you would imagine, there are several factors that contribute to the free cash flow performance. It starts with, you know, the value delivered by the teams and the offerings that we have, the profitability of those offerings. Another big contributor is the significant cost reduction activities that the teams have embarked on. And last year, they were very successful in achieving the cost reduction goals. This year, we're on track with our cost reduction goals, and that will continue. The third area of emphasis has been on management of capital outlays and management of longer-term commitments like leases. And we are very focused on both. And we've been successful in steadily driving the commitments down over time. Now, that's not to say if we had great opportunities, we wouldn't deploy capital. But the management system has been very tight. And then there's just continued emphasis on the working capital metrics and driving those numbers down. So those are the four main elements of of what we think has delivered the progress on free cash flow.

Perfect. Nice job. I'll drop back in the queue. Thank you.

Thanks, James. Jessica, the next question?

Yes, your next question comes from the line of Rod Bourgeois with Deep Dive. Rod, your line is open.

Okay, great. Hey, Rod. Hey, there. Hey, I want to talk about the cyclical demand trends and how they've affected your business here. When you reported three months ago and updated guidance, your project-based revenues were weak, and that was the case for the industry at large. I think at that time you would assume that project-based revenues were positioned for some improvement in the second half of the fiscal year, and I think some of that was due to your new operating model showing some benefits. So I just wanted to see if you could share how those project-based revenues are tracking for the second half. Do you see improvement there? And Also, maybe, do you have other sources of revenue upside to offset, you know, projects if the projects were to remain weak due to the cyclical challenges? Thanks.

So, Rod, I'll tackle the second one first. Certainly, we do. I mean, we're running an outsourcing business. So, basically, that's still our bread and butter. And converting that stuff from backlog is, quite frankly, something you talk quite a bit about, right, in the industry, meaning taking your pipeline and converting it to revenue. So the reason why we went to this operating model, all right, and I call it basically, you know, right model with right leaders, is the fact of can you take the pipeline and convert it to revenue? Now, the quickest is the project stuff. And what we're seeing is in terms of the industry is we're seeing analytics and engineering in a tougher market, all right? But that's being picked up by insurance, that software business doing better than we expected. And then I would say that applications has a chance, all right? With Howard's leadership, what we see in the industry, one of the comments I made he's charged with getting clients ready for AI. That doesn't mean that he's implementing AI. That means that clients need to get ready for AI. All right. You got to get ready with your data. You got to get ready for your applications. You got to understand the bias in your data and so forth. And that's good work for us. So I look at applications in the back half. We think it's flat, but Howard could potentially do a little bit better. When you look at GIS, we see the cloud infrastructure stuff. I'm very encouraged with how Chris has positioned that business now with the relationship with AWS and also what he's doing on the margin. And then, look, I have full confidence in Andrew because he's The best part about Andrew is he used to be our client, and he knows what we do well. He knows where we need to improve. He knows how to sell the stuff, and that's basically what he did at Accenture. So when I look at the demand, the demand should be getting better in GBS, all right? I don't see that demand is going to change much in GIS. It will be lumpy. But that's what we see, Rod. You have another question?

Yeah, I do. So thanks to Rob for outlining the free cash flow drivers to get you to the $800 million target. That's clearly a key metric here. I want to ask another question about free cash flow kind of from a different angle. You know, clearly the industry is experiencing these cyclical challenges, and that's impacting your project-based revenues this year. If you weren't seeing cyclical challenges in your project-based revenues this year, would you then be in a position for free cash flow north of $800 million? In other words, I'm trying to get a take on to what extent the cyclical demand challenges are impairing your free cash flow power this year.

Yeah, there's – I mean, the way I'd answer that is we're adjusting our capacity based on demand. So there's always, you know, there's always some leverage with more demand and more revenue, right? There's always operating leverage as a result. So the higher the demand, you know, over time, the higher the free cash flow. But the way I'd answer it is for this year in particular, we're managing our structure going forward. and operating within the envelope of demand that we see on the table, right, and in our pipelines.

So, Rod, the other thing I would add to Rod's comments is we keep overlooking the operating model. So it takes most companies a year or two to get these operating models right. We now are starting to see the benefits of it because after last year, quarter, right? Every transformation hits some bumps, but I couldn't be more proud of the execution of our team this quarter. And what that means is we're getting to a lower level of detail than DXC has ever seen with our customers. And that detail not only produces new project work, it also makes us have the ability to manage our margins a lot better to generate more free cash flows. So when I talk about the right model, right leader approach, to me that's the catalyst that we're giving to the market at this point in time. And you're starting to see a team really starting to deliver now versus, you know, being able to, you know, and having a consistency around hitting our financial performance. So we don't have much more on the free cash flow. We're happy with where it is and where it's going to be, and we'll go forward from there. So, Jessica, next question.

Yes, and just a quick reminder to folks, if you'd like to ask a question, please press star 1 on your telephone keypad. And your next question comes from Brad Clark with Bank of Montreal. Brad, go ahead.

Hi, thank you. Two-part question. First, you mentioned cost reduction as a driver of pre-cash flow, and it's been a focus for, you know, some time during this, you know, economic cycle and to BFC in general. How much room do you see left in cost reduction activities for DFC, you know, as you're looking forward? And, you know, if an economy starts to improve, how much would that remain a focus? And then the second part is on modern workplace. You know, it sounds like this is mostly an execution-based improvement rather than a demand-based improvement. You know, with the new leadership, you know, in position and with experience with the business, You know, what is going to be some of the focuses to improve execution and, you know, sort of how long does that take to play out? Thank you.

Okay. So, Brad, first I'll take your cost point. Look, there's always four levers that we're focused on. I think we've drained the details on us focusing on facilities today. All right. That will change our fixed cost over time. All right. And that will play out through the rest of this year. Second is the increase in margin this quarter was solely due to the reduction of contractors and us continuing to optimize our staff to the revenue we have. And that's not going to change. All right. I was very pleased on the execution. And again, I'll give that benefit to our new operating model. with our six leaders now running these global offerings. And then the final one is onshore-offshore. So that's one we've got to continue to focus on. The onshore ticked up a little bit, so we need to go back and look at that. But there's more room there, and we certainly haven't said we're done yet. So I like the opportunity we have there, whether the environment is good or bad. All right. On modern workplace, modern workplace, there is demand. All right, let's make no bones about that. The demand environment is there. Everybody hasn't gone back to being in offices full time. So being virtual is still a big piece of what's going on in the market. And we think we've got a great solution. So from an execution standpoint, My expectation is, one, you will see Andrew knock down a few more deals that we weren't able to get in past quarters. The second thing you'll see him do, all right, is look at the value proposition, because the value proposition isn't just maintaining PCs and so forth. It's also helping with the employee experience. And that's what I know Andrew's good at. That's what he did and passed stops at Accenture and Microsoft. And we expect that he's going to show the market how to do that. And then finally is the cost piece, meaning, you know, I think we've done well on the cost, but I think there's more that we can do. So those would be the three things he's focused on. And I do think he's going to make some good improvement. I think that business is close. So that's why we're leaning into it. Jessica, next question.

Great. Thank you so much. That's currently all the questions that we have in the queue. So at this point, I will turn the call back over to Mike for closing remarks.

Jessica, thanks so much. And I appreciate everybody joining the call today. We obviously are pretty excited about our execution. Our execution was aligned with our expectations and in some cases even better. I think my team's making great progress on our new operating model, and you're starting to see that show up in the financial benefits as we've stabilized our business now and the numbers are now moving again in the right direction. I think the catalyst from our standpoint that we're focused on is the right model and the right leaders to drive our financial performance, and I expect this performance to continue. With time, the operating model on our team does nothing but get better, which means consistent financial performance from DXC. So with that, I look forward to updating you on our Q3 performance in February, and have a nice evening.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.