DXC Technology Company

Technology's fourth quarter fiscal year 2024 earnings call. Our speakers on the call today will be Raul Fernandez, President and CEO, and Rob DelBene, our EVP and CFO. The call has been webcast at DXC 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 SEC rules, we provide a reconciliation of these measures to their 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 no 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 in Form 10-K and other 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's president and CEO, Raul Fernandez. Raul?

Thank you. I will give a brief introduction, review our financial performance, update you on the progress we are making with our offerings. Then Rob will take us through the fourth quarter financial results and discuss our fiscal year 25 guidance. I will also make some final remarks before opening the call up for questions. In Q4 of fiscal year 24, total revenue declined 5% on a constant currency basis, above our expectation. Adjusted EBIT margin of 8.4%, down 50 basis points year over year. Non-GAAP EPS of 97 cents was also above our guidance range. Free cash flow equaled $155 million for a total of $756 million for the full year. This is the third consecutive year that DXC has achieved free cash flow of more than $700 million. While we met or beat expectations in Q4, we know we can operate at a higher level and are not satisfied with the current state. In my five-month tenure, I have met with more than three dozen customers globally, along with thousands of our employees in small and large settings, in person and virtual. I've engaged with dozens of investors and have successfully recruited very strong, experienced executives to join our team. I believe we have a global team that is re-energized to make the company better and more effective. I've also gotten a deeper understanding of all of our business units, So let me quickly recap a few thoughts, starting with insurance. DXC is the largest provider of insurance software and insurance business process services globally, from origination to claims processing. We are the category leader providing software and services in three out of four insurance segments, life and wealth, global specialty, and reinsurance. As an example, our technology and services process one in five property and casualty transactions worldwide. Our global customer base includes 21 of the top 25 global insurance carriers. In short, we are a key strategic technology partner supporting global insurance companies with their customers, their agents, and their employees. The strong recurring and reoccurring revenue coupled with 90-plus percent customer retention and an average customer tenure of 18 years, makes this a very interesting business unit for me to focus on. As Rob will comment, the insurance software and services business, representing approximately three-fourths of the total insurance revenue, grew at a very respectable 4.5% in the quarter. It's an incredibly strong foundation to build on and continue to grow and also to rotate our revenue mix more towards SAS and reoccurring services. So we are actively working on a focused plan to further accelerate the growth of this business unit and also highlight the value of its leadership role in the industry and its mix of software and reoccurring services. Continuing with GBS, We're bringing together the best capabilities of our analytics and engineering and applications business, now called Consulting and Engineering Services, with industry veteran Howard Beauville as our general manager. Our Consulting and Engineering Services business has a rich and extensive history of driving transformative change for some of the world's biggest brands. In financial services, we provide core banking solutions to numerous banks globally. Within automotive and manufacturing, we are deeply involved in their digital transformation. We enable major auto brands to operate their research and development efforts for autonomous driving on our platform, enabling the ingestion and analysis of large data sets. We have built and run in-car infotainment systems across most of the luxury brands. While our technology solutions and operations are critical for our customers, our execution is below average, and we are focused on improving the profitability of our consulting and engineering services business unit. Moving on to security, a key thing to note about our security business is that it is an enabler of many of our other services. Customers in our ITO and modern workplace rely on us to provide services in a secure, resilient way. Our security teams embed themselves in those offerings to do that in cooperation with our clients. We have over 3,000 security professionals operating across eight global security operations centers where we provide around-the-clock coverage for our customers. As cyber threats increase by the day, not a week goes by that our teams are not called in to assist companies dealing with a security incident. The pace and complexity of these attacks are growing as the regulatory requirements for companies dealing with them. Our focus in the security business is to continue to leverage our expertise to enhance our GBS and GIS offerings while also focusing on accelerating growth of our standalone services. With the recent addition of several industry veterans, we expect to enable that growth. Moving on to cloud and ITO. For our cloud and ITO offering, we provide business and mission-critical services for some of the world's most essential workloads. As I have spent time in the business, I meet more and more customers who reiterate how critical our work is. Many of the world's largest airlines, energy companies, financial institutions, along with government organizations, count on DXC for the systems at the heart of their business. Our teams around the globe work 24-7 to keep their operations running seamlessly and securely. This is a core competency of the company. We operate across the entire technology domain, from legacy core mainframes all the way through the most cutting edge serverless cloud environments on AWS, Azure, and Google Cloud. As our customers modernize their estates, moving onto more cloud and modern architecture, often with the help of our GBS business unit, we are well positioned to help them securely operate across multiple environments. This is the foundation we are building on as we pivot our focus in this business to high-quality, profitable, cash-generating service revenue and away from the heavy hardware, software, and data center outsourcing-style deals of the past, with drove higher revenue at the expense of profit. Continuing with Modern Workplace, we support over 7 million devices and employees all day, every day. The employee experience is more mission critical than ever. Today we operate services with a combination of human and non-human workforce globally and at scale. Driven by AI, we believe we will reach a point soon where at least 75% of our workforce capacity is non-human. We are building and demonstrating expertise in how to manage the non-human workforce at this scale. In dialogue across our customer base, the message is clear. Embracing AI technology is a central part of their digital strategy going forward, and we are well positioned to lead this. As I mentioned before, and it's even more clear to me now, there were missed opportunities in the past to rationalize systems, processes, legal entities, go to market, and delivery functions. Therefore, to strengthen our market position, we are undertaking a restructuring initiative aimed at simplifying and enhancing our operational efficiency. We will simplify our processes, increase visibility to eliminate redundancies, reduce costs, improve resource management, and ultimately drive a more streamlined, agile, and competitive organization. One specific example of this enterprise initiative is consolidating our five acquired enterprise business systems and optimizing our backend office functions. We anticipate not only a material reduction in our operating costs, but also improvements in our service delivery and responsiveness to our customers. We are also aligning our organizational structure to support streamlined operations with improved and faster decision-making. This realignment will make us more competitive. Now, Rob will walk you through the financials.

Thank you, Raul, and good afternoon, everyone, and thanks for joining our call. Today I'll review our fourth quarter financial results and then provide you with our outlook for the full year and for the first quarter of fiscal 25. Total organic revenue growth declined 4.9% year to year ahead of our fourth quarter guidance. GBS revenue was nearly flat while GIS top line declined 9.3%. Adjusted EBIT margin was 8.4% above the top end of our guidance representing an 80 basis point improvement sequentially driven by our cost reduction initiatives. Margin was down 50 basis points year-to-year, primarily driven by lower non-cash pension income and the impact of gains from asset sales booked in the fourth quarter of fiscal 23. Non-GAAP EPS was 97 cents, down 5 cents from last year's fourth quarter. The year-to-year change was driven by a negative 13 cent adjusted EBIT impact, higher taxes of $0.08, and a non-controlling interest impact of $0.03. These reductions were partially offset by a $0.19 benefit from our share repurchase program. Free cash flow, defined as operating cash flow less capex for the quarter, equaled $155 million compared to our expectation of about $200. The shortfall was due to a combination of a smaller benefit from working capital and higher than anticipated cash tax levels. For the year, our free cash flow totaled $756 million, which was the third straight year above $700 million, demonstrating consistency of cash generation performance. And now I'll turn to our fourth quarter key financial metrics. Gross margin equaled 23.6%, flat year to year as we continue to drive workforce optimization and reduce our real estate footprint in the face of declining revenue. SG&A was 8.7% of revenue, down 70 basis points year to year, largely driven by ongoing spending management and a $10 million non-recurring insurance reimbursement. Depreciation and amortization was flat year to year as a percent of revenue, down $17 million, reflecting continued capital discipline. Other income for the quarter was $39 million, a year-to-year reduction of $48 million, which is 120 basis point impact to EBIT margin, driven by lower pension income of $26 million and lower gains on asset sales of $19 million. Now turning to our segment results. For GBS, organic revenue performance was nearly flat year-to-year, with the deceleration largely driven by the ongoing challenging market environment for analytics and engineering and applications. GBS profit margin equal 13.3%, down 40 basis points year to year, but up 140 basis points sequentially, primarily driven by more favorable mix of higher margin services revenue. For GIS, organic revenue declined 9.3%, largely consistent with our performance throughout the year. We have taken a very disciplined financial approach with new deals and renewals, and this has been reflected in our bookings and revenue performance of both cloud and ITO and modern workplace. GIS margins declined 40 basis points year-to-year, with operational improvements more than offset by a lower level of pension income. Let me now provide some detail on our individual offerings, first in GBS. Both analytics and engineering and applications organic revenue declined 1% year to year, as performance continues to be impacted by the current challenging market environment. While the revenue declined, the book-to-bill ratios for these two businesses were 1.0 or better, with strong renewal activity that does not provide incremental short-term revenue, but provides longer-term revenue stability. Insurance organic revenue increased 1% year-to-year. Embedded in this performance is our insurance software and services business, which represents approximately three-quarters of the total. That continued its strong momentum up 4.5% in the quarter. Normalizing for a significant large perpetual license sale in the fourth quarter of last year, the insurance software and services business grew approximately 9% year-to-year. The insurance book-to-bill was 0.8x. As a reminder, bookings in this business can vary significantly quarter to quarter based on the timing of large renewals. For example, last quarter we had two significant renewals and our book-to-bill was 1.58. Now moving to our GIS segment. Security declined 9% year-over-year on an organic basis with a book-to-bill ratio of 0.96. Cloud infrastructure and IT outsourcing organic revenue declined 7%, an improvement from double-digit declines we saw in the prior three quarters due to a significant resale transaction delivered in the quarter. The book-to-bill was 0.75x, the result of the ongoing challenging ITO market and our selective approach to new deals. Modern workplace organic revenue declined year-to-year in the mid-teens, impacted by resale revenue, which was down 30%. Book-to-bill performance this quarter was a strong 1.29x due to several large renewals. Now turning to our financial foundation. We sequentially reduced our total debt levels by $450 million, and for the full year, our total debt levels have been reduced by $300 million. That interest expense for the quarter was $20 million, up $3 million year to year, reflecting the higher interest rate environment on our short-term borrowings. Restructuring and TSI expense was $21 million, and for the full year was $118 million, about half of the level spent in fiscal 23. Operating lease payments of $84 million were down $9 million year to year due to the management of our real estate footprint. The fourth quarter capital expenditures were 125 million and lease originations were 21 million. Our finance lease and asset financing payments continued to trend down. And as a percentage of revenue, capital expenditures and lease originations declined to 4.3%, down more than a point year over year, representing a multi-year low. Turning to capital deployment, as I mentioned, In the fourth quarter, we deployed approximately $450 million of cash to reduce our debt levels. We accomplished this by retiring our outstanding balance of commercial paper and continuing to decrease our lease portfolio. We returned $138 million of capital to shareholders, repurchasing 6.2 million shares at a weighted average price per share of $22.30. For the full year, we repurchased over 18% of our shares outstanding at a total cost of $883 million. Since the beginning of the fiscal year 22, we have reduced our share count by more than 30%. As we enter a new fiscal year, I would like to provide clarity on our updated financial priorities. Our plan is to deploy our capital to accomplish two things. First, given our recent revenue performance, we will execute a restructuring program to address excess capacity, largely concentrated in GIS, and right-size our infrastructure throughout the company to improve profitability. The second priority is to further reduce debt levels, including significantly minimizing finance lease originations. Now turning to our full year 25 guidance. we expect our total organic revenue to decline 4% to 6%. In GBS, we expect our full year outlook to be slightly positive with the first half performance in line with our fourth quarter fiscal 24 and with a return to growth in the second half of the year. In GIS, given last year's bookings and the resulting impact opening backlog, Combined with continued expected lower resale revenue and deal selectivity in fiscal 25, we anticipate full-year organic revenue to decline in the low double-digit range. Our guidance for adjusted EBIT margin is 6% to 7%. This guidance primarily reflects the impact from lower year-tier revenue and investments we're making in the business to drive productivity improvements. Additionally, we will be executing on the previously mentioned restructuring action to improve margins on a sustainable basis going forward with the impact of the savings largely materializing in late fiscal 25 and into fiscal 26. As I've mentioned on previous calls, we continue to rationalize our real estate portfolio. These potential sales will provide a cash inflow outside of free cash flow but will have a negative impact on our adjusted EBIT margin. The potential loss in these sales is not included in the guidance, as the market remains difficult and the timing is uncertain. And with this expected adjusted EBIT margin levels, our full-year non-GAAP diluted EPS guidance is $2.50 to $3, with an assumed non-GAAP effective tax rate of 30%. Our free cash flow guidance for fiscal 25 is about $400 million. There are two main drivers contributing to the lower year-over-year level, and without these changes, free cash flow would be at levels consistent with fiscal 24 performance. As I previously mentioned, we will be reducing our debt levels in fiscal 25, and a component of our debt reduction strategy is significantly reducing finance lease originations which were 185 million in fiscal 24. This change in funding approach will reduce our overall debt levels, but will increase our capital expenditures impacting free cash flow. Also impacting free cash flow will be spending related to the increased level of restructuring, which will be an increase of approximately $250 million year to year. Our expectation is that the restructuring savings will put us on a sustainable path of free cash flow generation above fiscal 24 levels in fiscal 26. As a reminder, our Q1 free cash flow is seasonally lowest, primarily due to the timing of bonus payouts and certain annual supplier payments. Consistent with prior years, cash flow generation will be strongest in the second half of the year. And now our first quarter outlook. In GBS, we anticipate that revenue performance in A&E and applications will continue to reflect the current challenging market environment. And in GIS, services revenue will decline in the mid to high single-digit range, with resale taking the GIS decline to double digits. With these factors, we expect total company organic revenue to decline 7% to 8%. We anticipate adjusted EBIT margins in the range of 5.5% to 6%, a function of the lower revenue and first quarter seasonality, which has consistently impacted our results in prior years. And finally, non-GAAP diluted EPS of 55 cents to 60 cents. With that, let me turn the call back over to Raul for key takeaways.