DXC Technology Company (DXC) — Q4 2018 Earnings Call Transcript

Thank you and good afternoon everyone. I'm glad you could join us for DXC Technology's fourth quarter and year-end fiscal 2018 earnings call. Our speakers today are Mike Lawrie, our Chairman, President and Chief Executive Officer, and Paul Saleh, our Chief Financial Officer. The call is being webcast at dxc.com/investorrelations, and we have posted slides on our website to accompany today's discussion. Slide 2 details that our discussion will include comparisons of our results for the fourth quarter and full year of fiscal 2018 to our pro forma combined company results for the fourth quarter and full year of fiscal 2017. The pro forma results are derived from the historical quarterly statements of operations for both CSC and the legacy Enterprise Services business of HPE, treating the merger as if it had been completed on April 2, 2016. Due to CSC and HPES having different fiscal year-end dates, the pro forma combined company results reflect the operations of CSC for the three and twelve months ending March 31, 2017, and HPES for the three and twelve months ending January 31, 2017. Slides 3 and 4 in our presentation include certain non-GAAP financial measures and further adjustments to these measures, which we believe offer useful supplemental information to our investors. In line with SEC rules, we have provided a reconciliation of these measures to their respective GAAP measures, available in the tables included in today's earnings release and in our supplemental slides. Both documents can be found in the Investor Relations section of our website. On Slide 4, you will notice that some comments made during the call will be forward-looking. These statements are subject to various risks and uncertainties that could cause actual results to differ significantly from those discussed on the call. A discussion of these risks and uncertainties is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K that we will file in the coming days, and other SEC filings. I want to remind our listeners that DXC Technology is not obligated to update the information presented in this call, except as required by law. Now, I would like to introduce DXC Technology's Chairman, President, and CEO, Mike Lawrie.

Okay, thank you. Welcome everyone. Thanks for taking the time this afternoon. As is my practice I've got four or five key points which I'll go over briefly and then get into a little more detail before I turn it over to Paul and then we'll have plenty of time for any questions that you may have. So, first point here is our fourth quarter non-GAAP EPS was $2.28. For fiscal 2018 our non-GAAP EPS was $7.94. Adjusted EBIT was $1.17 billion in the quarter and adjusted EBIT margin was 16.2%. For fiscal 2018 adjusted EBIT was $3.499 billion, and adjusted EBIT margin was 14.2%. We generated $557 million of adjusted free cash flow in the fourth quarter and for fiscal 2018 adjusted free cash flow was $2.427 billion. Our revenue in the fourth quarter was $6.294 billion, on a GAAP basis and revenue grew 4.3% year-over-year and was up 1.7% sequentially. In constant currency revenue was down 1.3% year-over-year, is roughly flat sequentially, and for fiscal 2018, revenue was $24.556 billion, the book-to-bill in the fourth quarter was 0.9, and for the full year it was 1x. In the fourth quarter our digital revenue grew 21.6% year-over-year and 8.5% sequentially. For fiscal 2018 digital revenue grew 17%. And in the fourth quarter our industry IP and BPS revenue was up 7.9% year-over-year and was up 5.7% sequentially. For fiscal 2018 our industry IP and BPS revenue was roughly flat. In the fourth quarter, our digital book-to-bill was 1x and our industry IP and BPS book-to-bill was 0.7. Throughout fiscal 2018 we achieved key merger integration milestones and exceeded our synergy targets, delivering $1.1 billion of year one cost savings as well as $1.6 billion of run rate cost savings exiting the year. Also the separation of our U.S. public sector business in combination with Vencore Holding Corporation and KeyPoint Government Solutions will close at the end of this month forming Perspecta. And for fiscal 2019, we are targeting revenue of $21.5 billion to $22 billion which excludes the USPS business. And our non-GAAP EPS target is $7.75 to $8.15 and our adjusted free cash flow target is 90% or more of adjusted net income. So let me just delve into little more detail in each of those. As I said our fourth quarter non-GAAP EPS was $2.28 and the effective tax rate was 29.4%. For fiscal 2018 non-GAAP EPS was $7.94 and the effective tax rate for the full year was 28.3%. Fourth quarter EBIT adjusted for restructuring integration and amortization of intangibles was $1.017 billion, and adjusted EBIT margin on that basis was 16.2%, which was up 600 basis points year-over-year and up 127 basis points sequentially. For fiscal 2018 adjusted EBIT was $3.499 billion and the adjusted EBIT margin was 14.2% an improvement of 460 basis points. This margin improvement reflects execution of the synergy plans we outlined at our Investor Day last March including workforce optimization, supply chain efficiencies, policy harmonization and facilities rationalization. Our delivery teams continue to drive increased productivity, while improving service levels for our clients. We've scaled your Bionix automation program to more than 50,000 employees in our delivery centers. These improvements address capabilities such as service tasks, incident management, server provisioning to eliminate labor, reduce disruptions and accelerate resolutions. For example, we deployed runbook automation to diagnose the most common application faults in developed scripted resolutions which then trigger predetermined corrective actions. In centers where this has been implemented roughly 70% of instances are auto diagnosed and resolved. During fiscal 2018, our Bionix program reduced our delivery labor expense by more than 3%. In supply chain, we've scaled our labor improvement actions to extract greater efficiencies from third-party spend including reduction of hardware and maintenance expense. Through our relationship with Turbonomics we were able to optimize workflows and cloud environments to increase utilization of virtual machines and reduce the infrastructure cost. We're also enhancing our delivery capabilities to handle more data center maintenance work internally, which reduces third-party expense, as well as dependence on equipment manufacturers. We're further lowering maintenance expense through the deployment of consistent architectural standards, and client solutions, which improves predictability and reduces overall support costs. Collectively we delivered $1.1 billion of year one synergy realization versus our target of $1 billion. And adjusted free cash flow for the quarter as I said was $557 million or 84% of adjusted net income and for fiscal 2018 adjusted free cash flow was $2.427 billion or a 105% of adjusted net income. Now let me turn to revenue. Revenue in the fourth quarter was $6.294 billion on a GAAP basis. Revenue grew 4.3% year-over-year and was up 1.7% sequentially. In constant currency revenue was down 1.3 year-over-year and was roughly flat sequentially. Book to bill in the fourth quarter was 0.9x. For fiscal 2018, revenue was $24.556 billion on a GAAP basis, and in constant currency revenue was $24.2 billion in line with the target of $24 billion to $24.5 billion. Book to bill for the year was 1x. Now in the fourth quarter GBS revenue was $2.361 billion. GBS revenue grew 3.3% year-over-year and grew 2% sequentially. And this I think reflects the continued shift from traditional application services to enterprise and cloud applications. We're working with our clients to standardize and rationalize our application portfolios, which typically involves a shift from legacy custom applications to packaged enterprise applications such as Workday, SAP, Oracle and Microsoft Dynamics. Through the consolidation of application providers these workload transformations often result in greater revenue for DXC while lowering the overall cost for our clients. GBS book to bill in the quarter was 0.9x and for fiscal 2018 GBS revenue was $9.254 billion, and a book to bill of 1.1x. In the quarter GBS segment margin was 19.9%, compared with 12.4% in the prior year. And for fiscal 2018 GBS margin was 16.9% which was up 480 basis points from the prior year. In the fourth quarter GIS revenue was $3.223 billion. GIS revenue grew 3.3% year-over-year and 2.5% sequentially. GIS revenue reflects growth in cloud and platform services as well as mobility and workplace. Workplace and mobility grew 7.8% year-over-year and was up 67% year-over-year in bookings. This includes a new logo win with a major automotive manufacturer. Working with Microsoft, Citrix and ServiceNow DXC will deliver workplace and mobility services for the entire company across more than 125,000 users and 1,400 locations. Overall GIS bookings were $2.9 billion which were up 11% year-over-year and represented a book-to-bill 0.9x. For fiscal 2018 GIS revenue was $12.479 billion and the book-to-bill was also 0.9x. In the quarter, GIS segment margin was 14.8% compared with 11.4% in the prior year, reflecting productivity improvements in the automation process. In fiscal 2018, GIS margin was 13.6% which was up 340 basis points from the prior year. During the fourth quarter USPS revenue was $710 million, USPS revenue was up 11.1% year-over-year and was down 2.2% sequentially. USPS bookings of $522 million represent a book-to-bill of 0.7x. For fiscal 2018 USPS revenue was $2.83 billion and a book-to-bill of 0.7x. The USPS segment margin in the quarter was 17% and this was up 710 basis points year-over-year, and 180 basis points sequentially. And for fiscal 2018 USPS margin was 14.8%, which was up 390 basis points from the prior year. I'll talk more in a moment about the separation of USPS business and the combination with Vencore and KeyPoint. And during this first quarter of operation DXC expanded its client base by adding more than 90 new logo deals greater than $1 million in total contract value. Now let me turn to digital. Our digital revenue was up 21.6% year-over-year and was up 8.5% sequentially. Digital book-to-bill was 1x in the quarter and as we've discussed digital cuts across all three of DXC’s reporting segments of GBS, GIS and USPS and includes enterprise cloud apps and consulting cloud infrastructure, analytics and security. And for fiscal 2018 digital revenue grew 17%. Enterprise cloud apps and consulting revenue was up 38% year-over-year and up 88.5% sequentially. Book-to-bill in the quarter was 1.2x. This growth reflects continued traction with our clients including a recent app transformation deal with a major communications provider. By consolidating its portfolio under a single service provider we are reducing their operational costs, driving consistent and improved service levels and reducing overall risk through more stable business operations. We're also deploying application development as a service which gives the client access to a highly flexible resource pool while providing predictable pricing for project work. Cloud revenue was up 29% year-over-year and was up 12.6% sequentially. Bookings were up 50% year-over-year with a book to bill of 0.9x. Drivers of the revenue and bookings growth in cloud include a major deal with a large healthcare company. DXC partnered with the client to create an everything as a service solution across hardware, software, facilities and services incorporating offerings from Microsoft Azure, Dell EMC, HPE, HP and AT&T. This transformation allows the client to reduce its operating budget while also avoiding significant capital expense. In selecting DXC the client highlighted our experience in clinical healthcare technology infrastructure, our unique healthcare cloud on Azure solution and strong existing application support. Analytics revenue was down 3.8% year-over-year but was up 9% sequentially. We continue to gain traction across our client base as we drive adoption of Artificial Intelligence. For example we're working with automotive manufacturers to accelerate autonomous driving R&D, and we detect possible money laundering crimes for financial institutions. Book to bill in the quarter was 0.7x. Security revenue was down 1.3% year-over-year and was up 1.4% sequentially. We continue to invest in expanding our security consulting capabilities, as well as our standard mobile security delivery platform. Book to bill in the quarter was 1x. Industry IP and BPS includes our IP offerings in healthcare, insurance, travel and transportation and banking, as well as our industry BPS business. Industry IP and BPS revenue grew 7.9% year-over-year and was up 5.7% sequentially. Book to bill was 0.7x in the quarter. For fiscal 2018 industry IP and BPS revenue was roughly flat. Industry IP revenue grew 7.3% year-over-year and was up 5.9% sequentially. Industry IP growth was primarily driven by strong revenue performance in our healthcare sector, including growth in our state Medicaid accounts. Book to bill in the quarter was 0.4, reflecting the lumpiness of contract awards in this segment. BPS revenue was up 8.5% year-over-year and up 5.5% sequentially. Book to bill in the quarter was 1.1x. Revenue growth reflects the continued ramp up of our large BPS contracts with insurance companies. We also continue to modernize our portfolio with a focus on robotics for shared services, including the launch of Bionix as an offering. Bionix provides an industrialized operating model leveraging analytics and Artificial Intelligence, Lean process design and leading automation capabilities to create comprehensive high-performance approaches to services delivery. DXC launched Bionix in response to client demand for greater IT performance and the need to digitally transform traditional IT environments and processes. In the quarter we continue to expand our offerings and partnered solutions including the launch of DXC Open Health Connect, a digital health platform that allows healthcare providers to improve quality of care and patient outcome by providing data when and where it is needed across the healthcare ecosystem. We co-created Open Health Connect with a large academic and research hospital system in New York and have also worked with several of our strategic partners including Microsoft and ServiceNow. In response to our client's need for an accelerated process to evaluate and transform their applications state we created the DXC Modernization Studio. The studio features 48 client experience datasets with data from 500,000 enterprise applications. DXC leverages the studio provide clients with an assessment and recommendation in as little as two weeks, a process that used to take up to six months. And we're investing in our people and we're investing in our business consistent with the plan we outlined at Investor Day. We recently announced the acquisition of Sable37 and Ebix which will be combined with DXC's Eclipse practice to significantly expand our Microsoft Dynamics 365 Cloud capabilities globally. This represents a key part of our strategy to leave the Microsoft partner marketplace and accelerate digital transformation journeys for our clients. We also continue to invest on our people. DXC employees completed more than 1.5 million hours of training with a heavy focus on digital certifications and AWS, Microsoft Azure and Dynamics, ServiceNow and Agile development. We also expanded our sales training and certification program beyond our go-to-market teams and more than 17,000 employees have completed the training and passed the certification exam. And we continue to expand the DXC Dynamic Talent Cloud, our cloud sourcing platform that enables us to bring new people skills to DXC in a more flexible way. We are working with partners such as Upwork, PoliTricks, HackerEarth and LinkedIn to scale the platform and we now have more than 7,000 subscribers engaged. Once again DXC was ranked in the top 20 on Corporate Responsibility Magazine's ranking of the 100 best corporate citizens. This ranking recognizes DXC's performance across seven categories; environmental impact, climate change, employee relations, human rights, governance, finance, philanthropy and community support. One the fourth point that I wanted to just get into little more detail before I turn it over to Paul, we continue to achieve key merger integration milestones during the fourth quarter and really successfully completed the overall year one integration roadmap for DXC. We delivered $1.1 billion in year one cost savings versus the target of $1 billion and $1.6 billion of run rate cost savings exiting fiscal 2018 versus the target of $1.5 billion. The separation of U.S. public sector business in combination with Vencore and KeyPoint to form Perspecta will close at the end of the month. Integration activities for Perspecta have gone well and the company is set to begin operating as a stand-alone company. The operating model is in place and the leadership has begun to execute as an integrated team. And importantly, the response to the launch of Perspecta has been consistently favorable from key stakeholders. Perspecta held its Investor Day earlier this month and will begin trading on the New York Stock Exchange on June 1st. The Perspecta management team will continue meeting with investors, employees and partners over the coming weeks to discuss the new company and we at DXC plan to hold a separate Investor Day this fall. Now finally, during our first year DXC did track a bit ahead of plan on revenue. And when we set our revenue target at $24 billion to $24.5 billion, we expected 2 to 3 points of revenue dissynergy during the year. We continue to see this playing out. But, so far we have seen less impact than what we had expected. Profits during the first year were also better than expected as we were able to accelerate many of the cost takeout synergies, including reduced management layers and global deployment of our automation program Bionix. We also benefited from lease reclassification, tax reform and a one-time FX gain. Turning to next year, for fiscal 2019 we expect revenue to be $21.5 million to $22 billion which excludes the USPS business. There are several positive things contributing to that target, as well as a couple of mitigating factors. We continue to accelerate the growth in our digital and industry IP offerings and our BPS business is also demonstrating strong momentum. We do expect some additional revenue dissynergies next year, as well as the ongoing headwinds in traditional services that we have previously discussed. Also, the revenue from our HPE contract associated with the merger will normalize this year at a bit lower rate and we continue to gauge the potential impact of Brexit in our UK business. We're targeting non-GAAP EPS of $7.75 to $8.15 and adjusted free cash flow to be 90% or more of adjusted net income. And with that, I'll turn it over to Paul and then we'll come back to answer any questions.

All right thank you Mike and greetings everyone. Before I review the fourth quarter and full year for DXC I'd like to take a moment to clarify the basis of our financial presentation. First, all the references to the unaudited pro forma statements of operations from the prior year include the results of operations of CSC for the three and 12 months ended March 31, 2017 and of HPES for the three and 12 months ended January 31, 2017. Second, the fiscal '17 pro forma statements of operations and those have been now revised to reflect purchase price accounting and lease adjustments as if the merger had occurred on April 2, 2016. In addition we have continued to assume a flat tax rate of 27.5% in the prior year pro forma non-GAAP results. And lastly our non-GAAP results exclude special items such as restructuring, integration, separation and amortization of intangibles consistent with DXC's non-GAAP method from prior years. And with that I'll now discuss the items that are excluded from our non-GAAP results this quarter. In the current we have restructuring costs of $208 million pretax or $0.50 per diluted share. These costs represent severance related to workforce optimization programs and expense associated with facilities and data center rationalization. Also in the quarter we had a $124 million pretax or $0.33 per diluted share of integration, separation and transaction related costs. Amortization of acquired intangibles was $153 million pretax or $0.37 per diluted share in the quarter. Also in the quarter our annual re-measurement of pension assets and liabilities resulted in a gain of $203 million. So adjusted EBIT excluding the impact of these special items was $1.017 billion for the quarter and non-GAAP EPS was $2.28. For the full-year restructuring, integration, separation and transaction costs amounted to $1.2 billion pretax or $3.06 per diluted share which is below the $1.3 billion spend envelope we laid out for fiscal '18. Amortization of acquired intangibles was $591 million pretax or $1.37 per diluted share for the full year. Adjusted EBIT for the full year was $3.499 billion and non-GAAP EPS was $7.94. Turning now to our fourth quarter and full-year results in more detail. Revenue in the quarter was $6.294 billion on a GAAP basis. Revenue was up 4.3% year-over-year and 1.7% sequentially. In constant currency revenue was down 1.3% year-over-year and roughly flat sequentially. For the full year revenue was $24.556 billion on a GAAP basis, in constant currency revenue was $24.2 billion in line with our fiscal 2018 target of $24 billion to $24.5 billion. EBIT in the quarter was $1.017 billion after adjusting for special items. Adjusted EBIT margin on that basis was 16.2% compared with 10.2% in the prior year and 15% in the last quarter. For the fiscal year 2018, adjusted EBIT was $3.499 billion and adjusted EBIT margin was 14.2% up 460 basis points versus the prior year. The improvement in profitability reflects cost actions taken to optimize our workforce, harmonize our policies, extract greater supply chain efficiencies and rationalize our real estate footprint. In the fourth quarter we continue to rebalance our workforce. We've reduced our labor base by an additional 2.2% in the quarter through continued deployment of our automation program Bionix as well as additional best shoring and pyramid correction. For the full year we've reduced our labor base by 12.6%, net of new hires and contractor conversions. We continue to rebalance our skill mix, including the hiring of roughly 20,000 new employees during the year with a significant focus on digital capabilities. In supply chain we continue to extract efficiencies from our third-party spend and we've reduced third-party labor expense by roughly 6% during the year. We're also reducing our hardware and maintenance expense by optimizing workflows to improve utilization of virtual machines and leveraging internal capabilities where feasible for the highest volume maintenance activities. In real estate we eliminated an additional 160,000 square feet of space during the quarter and for the full year we've reduced our total square footage by 4.7 million square feet, representing a reduction of almost 20%. So in summary we delivered more than $1.1 billion of in year savings, which translates to roughly $1.6 billion of run rate savings exiting the year. Excluding USPS in year savings were approximately $1 billion in fiscal '18 and run rate savings exiting the year were $1.4 billion. In fiscal 2019 we're targeting an incremental $400 million of in year savings in addition to the run rate benefit from the actions taken during fiscal 2018. Now the combined savings of $800 million will be partially offset by $200 million to $250 million of headwinds including stranded G&A costs, the FX benefits and the off to cap lease impacts. We're also planning to reinvest an incremental $200 million to $250 million from those savings in the business in line with the capital allocation model we outlined at our Investor Day. Now these investments include the continued deployment of the DXC digital platform Bionix, enhancements in our digital workforce and capabilities, BPS Agile and Robotic process automation and Blockchain capabilities. Non-GAAP diluted EPS from continuing operations in the fourth quarter was $2.28, adjusted for special items. And for the full-year non-GAAP EPS was $7.94. In the quarter our non-GAAP tax rate was 29.4%, reflecting our global mix of income and an unfavorable valuation allowance related to tax attributes in certain foreign jurisdictions. And for fiscal 2018 our non-GAAP tax rate was 28.3%, which was in line with the non-GAAP tax targets for the full year of 25% to 30%. Bookings in the quarter were $5.4 billion for an overall book-to-bill ratio of 0.9x. And for the full year bookings were $23.67 billion for a book-to-bill of 1x. Now let's turn to our segment results. Global Business Services revenue was $2.36 billion in the fourth quarter. GBS revenue was up 3.3% year-over-year and was up 2% sequentially. In constant currency revenue was down 2.2% year-over-year but flat sequentially. In the fourth quarter GBS segment profit was $470 million and profit margin was 19.9% compared with 12.4% in the prior year and 18.6% in the third quarter. This margin improvement reflects cost take-out actions. GBS bookings were $2.04 billion in the quarter for a book-to-bill of 0.9x. Now for the full-year GBS revenue was $9.254 billion, segment profit was $1.563 billion, margin was 16.9% and bookings were $10.2 billion for a book-to-bill of 1.1x. Turing now to Global Infrastructure Services revenue was $3.223 billion in the quarter. GIS revenue was up 3.6% year-over-year and was up 2.5% sequentially. In constant currency revenue was down 3.2% on a year-over-year basis but flat sequentially. In the fourth quarter GIS segment profit was $477 million and profit margin was 14.8% compared with 11.4% in the prior year and 14.7% in the third quarter. Profitability improvements in GIS reflects the impact of cost actions we have taken to drive greater operating efficiencies including best shoring, labor pyramid rebalancing, benefits from our Bionix automation program and supply chain savings. Bookings for GIS were $2.86 billion in the quarter for a book-to-bill of 0.9x. For the full year GIS revenue was $12.48 billion, segment profit was $1.7 billion, margin was 13.6% and bookings were $11.6 billion for a book-to-bill of 0.9x. Now turning to the USPS business, revenue was $710 million in the quarter up 11.1% year-over-year and down sequentially. USPS segment profit was $121 million in the quarter and profit margin was 17% compared with 9.9% in the prior year and 15.2% in the third quarter. The year-over-year margin improvement reflects cost actions taken during the year. Sequential margin improvement was driven by cost optimization ahead of the spin-off, as well as the timing of milestone and award fees. Bookings for USPS were $522 million in the quarter for a book-to-bill of 0.7x. For fiscal 2018 USPS revenue was $2.82 billion, segment profit was $417 million, margin was up 14.8% and bookings were $1.9 billion, for a book to bill of 0.7x. Now let me turn to some financial highlights for the quarter. Adjusted free cash flow in the quarter was $557 million, or 84% of adjusted net income and this reflects the annual 401(k) match payments and seasonally higher payroll taxes. Adjusted free cash flow does not include any proceeds from receivables securitization program. For fiscal 2018 adjusted free cash flow was $2.427 billion or 105% of adjusted net income. Our CapEx was $471 million in the quarter or 7.5% of revenue and for the full year CapEx was $1.76 billion, or 7.2% of revenue. Now, during the quarter we returned a $123 million of capital to our shareholders, consisting of $51 million in dividends and $72 million in share repurchases. And for the full year we've returned $311 million of capital to our shareholders, of which a $174 million was in dividends and a $137 million was in share repurchase. And for fiscal 2019 we expect to resume our pace of share repurchase in line with our capital allocation model. Now today our Board authorized an increase in our quarterly dividend to $0.19 per share, as well as $0.76 per share for the full year of fiscal 2019. DXC will not adjust its dividend as a result of the spin out of our USPS business. Therefore, shareholders will receive this dividend in addition to any dividend paid by Perspecta. Cash at the end of the quarter was $2.6 billion. Our total debt was $8.4 billion including capitalized leases. Net debt to total capitalization ratio was 25.8%. Now as part of the USPS spin off DXC is expected to receive $984 million from Perspecta. On that basis, the net debt to total capitalization of the company would be 18.8%. Now let me close with fiscal '19 targets, all of which will now exclude USPS. Our targeting revenue for the fiscal year to be $21.5 million to $22 million. This compares with $21.7 billion in fiscal '18. Our fiscal 2019 target for non-GAAP EPS from continuing operations is $7.75 to $8.15. Now this compares with roughly $6.70 for fiscal 2018, which was recast to exclude earnings-per-share associated with the USPS business and adjusted for any stranded G&A cost. Our EPS target assumes a tax rate of 24% to 28% for the full year and our adjusted free cash flow target for fiscal 2019 is 90% or more of adjusted net income. Now I hand the call back to the operator for a Q&A session.

I want to start with asking Paul can you talk about the cadence of revenues and profit improvement for the quarters through fiscal '19 as the layout and perhaps also provide clarification on some of the basic stuff and I can expect in FX will impact kind of the mixed pack state and the share comp that you are using?

Yes. Currently, our guidance for the full year is between $21.5 billion and $22 billion, specifically for the commercial business since USPS will be spun off on June 1st. I want to ensure that everyone understands this. We anticipate a consistent performance throughout the year, with slightly higher growth in the second half. The tax rate is expected to be between 24% and 28%, and using the midpoint seems appropriate. We plan to resume share buybacks, which means we expect to retire more shares this year than last and aim to catch up on our capital, aligning with our capital allocation model.

It's difficult to determine the long-term impact of the industrialization of Bionix, but we anticipate it will have significant effects. At this point, I'm unable to quantify the extent of that impact. However, as we implement this capability across various aspects of our business, we are observing notable reductions in labor costs, which translates to increased productivity. We are proceeding cautiously and systematically, focusing on one offering and function at a time, starting with the call centers before expanding to other areas. This initiative goes beyond just labor efficiency; it also involves a comprehensive approach to analytics along with various disciplines and methodologies aimed at driving improvements. Our synergy target includes more than just labor efforts; we will pursue further facilities rationalization and continue to strategically relocate our resources globally. Our ongoing emphasis on our talent pyramid includes a major initiative to recruit students, interns, and co-ops to help lower overall labor costs. Progress with the Talent Cloud is promising, with 7,000 subscribers now able to access postings for tasks, jobs, and project components, which will be available to both internal employees and external candidates. This will reduce friction and provide valuable skills at a lower cost. Altogether, I view this as an integrated program designed to enhance synergies as we move forward. I hope that clarifies things.

I just wanted to know about operating margins for GIS and for GBS. Just how we think about those throughout the year? Will they improve year-over-year each quarter as we go through the year? And then secondly, on the investments I know we're talking about $200 million and $250 million, just curious exactly what those investments are going into, and should we think about that as an annual expense in the business so even beyond this fiscal year that's something that's kind of necessary to keep the investment going into business?

Yes, we concluded this year at the high end of our margin range, which reflects better performance in synergy than we initially forecasted. We experienced fewer dissynergies on the revenue side and anticipate some of those dissynergies will continue. Additionally, there are further cost synergies expected. However, the main takeaway is that we are investing back into the business, not just cutting costs. We will invest tens of millions in our Bionix program this year, as well as in our digital workplace offerings, which are gaining traction in the market. We are also investing in cybersecurity and analytics. We are collaborating with partners to transition some of our industry intellectual property to different cloud platforms, such as moving some healthcare IP to Azure. Our investments extend to IoT and Blockchain as well. These areas of our offering portfolio will see continued investments because we are witnessing returns in terms of increased sales and revenue. Additionally, we are heavily investing in our people by focusing on re-training and re-skilling employees, especially those who aim to prepare for new opportunities in the market. Those are the three main areas of our ongoing investment.

In terms of the margin on the GBS side, we expect them to be in the high double digits to 20%, starting a little lower in the first quarter and then increasing throughout the year due to typical seasonality in our GIS margins. After the separation, margins are expected to be between 13% and 16%, and we anticipate growth as these margins reflect the investments we are making in the business. I hope this answers your question.

When I look at the last year and certainly we have been busy with kind of some of the cost cuts and of course the USPS spin and when you look into the next like 12 to 18 months I mean you outlined some of your priorities but kind of can you more broadly outline what some of the major priorities are and in particular can you talk about some of the work that we will be doing that's going to drive revenue growth or are you going to be looking to do some larger deals?

I would say that all of the above. Our fundamental priorities for the next 12 to 18 months are to drive productivity and enhance the quality of our service delivery, as this is a significant cost element in our business. Improving productivity while maintaining high service levels has a very positive impact on our business. Customer satisfaction has actually increased during this first year of integration. Continuing to improve our cost structure and delivery productivity remains a critical objective. We are making significant strides in our digital offerings, as I have previously detailed, and we are changing our approach to market by investing more in our large accounts and digital resources. We recently opened a digital delivery center in New Orleans, highlighting our commitment to digital investment. We're also working with our delivery teams to drive growth, which we refer to as our delivery led growth initiative. Another priority is to enhance our workforce management, focusing on accurately predicting our skill requirements, sourcing talent, onboarding, retention, and facilitating movement between projects. The re-skilling of our workforce is crucial, especially as we aim to increase the percentage of revenue from digital sources to counterbalance challenges in our ITO and legacy businesses. We will continue to focus on the quality and productivity of our delivery. This is how we aim to drive growth and manage costs, while also seeking opportunities for acquisitions that align with our outlined strategy, as we have done in previous years. Absolutely. That's essentially our entire strategy. We recently held our global customer advisory board, and that's precisely what we're doing; we closed another deal today as part of that strategy. We enter with an understanding of the automation, analytics, and other capabilities we possess, which allow us to reduce the costs of existing infrastructure. We then present opportunities for clients to reinvest in their businesses through our additional offerings, such as application modernization, cybersecurity, and analytics. The strategy is to free up funds through a more streamlined and efficient IT infrastructure, enabling clients to redirect those savings towards digital platforms that facilitate their transformation journey. This approach remains consistent since our Investor Day and is now gaining traction with our larger clients. The IT industry is known for discussing initiatives long before they materialize, but enterprise institutions worldwide are finally reaching a critical mass in many areas we've been discussing for five to six years. This progress gives us optimism, as many of our offerings are aligning with the accelerating digital transformations of our primary client base, which consists of large enterprises globally. I believe Blockchain is a widely applicable technology that will transform many aspects of transactions. Consider our portfolio; insurance claims and healthcare claims are areas where Blockchain can definitely be utilized. The supply chain is another area with numerous intermediary transactions where Blockchain is expected to eventually eliminate or significantly reduce many of these intermediary steps in the complete transaction and payment systems.

I was wondering if you can maybe provide us a little bit of color on the revenue trajectory you expect as you head throughout the year. I think Paul you referenced the back half of the year being a little bit better from a revenue standpoint. Would you expect to be executing any M&A throughout the year that could help that ultimate revenue trajectory and I guess maybe where you expect you might be from a revenue growth standpoint exiting this year?

I will let Paul answer, but as I mentioned, we will pursue additional acquisitions. We have a pipeline of opportunities we are considering. Jim, we just don’t know when these will close as they each have their own timelines. Most of what we are pursuing aligns with our overall strategy of enhancing our digital offerings, with Ebix and Sable37 being strong examples in the Microsoft Dynamics space. I do anticipate some assistance from these potential acquisitions, but the timing of their occurrence is uncertain, and I cannot predict their impact on revenue for the entire year, as this is definitely time-dependent. Typically, our revenue tends to be lighter in the early part of the year and stronger in the latter half, as we observed last year. Some of this seasonality is just how the year unfolds, and we would expect that to continue as we move through fiscal '19. Paul, you may want to add?

And I think Mike you captured it, if I look at it this whole year we've seen an improvement throughout the year for first quarter and second quarter sequentially all the way through the fourth quarter. We will see a similar pattern in fiscal '19. If you look at the target that we have set out and if you take the midpoint of those targets it would be relatively flat year-over-year with a similar type of progression.

So Mike growth is definitely improving, although, on an overall basis, it remains negative year-over-year. Are you seeing any light at the end of the tunnel as it relates to the legacy business and perhaps you can share some of the data points that may give us a better sense of just how that legacy business is trending and whether it is actually starting to plateau?

I view the situation through the lens of the revenue generated from our new offerings. If you recall our Investor Day last March, we outlined projections regarding our digital growth, industry intellectual property, and business process services growth. This has been mostly in line with our expectations, though we have seen slightly lower growth in the first year than anticipated. Additionally, we had predicted a decline in our traditional legacy businesses, particularly in IP and application maintenance and management, and we projected what that decline would look like. However, the decline turned out to be less severe than we anticipated. This year, we did not experience the expected rapid decline, but we also did not see as much growth in some of our new offerings, which has influenced our current situation. When we assist clients in lowering their infrastructure costs, the benefits are typically realized more quickly than the revenue generated from digital platform growth. Without naming specific clients, let me illustrate this: We helped a client reduce their infrastructure costs by approximately 10% to 15%, began billing at a lower rate shortly after the agreement, and then started to see reinvestment into digital platforms like application modernization and enterprise cloud applications. We are starting to see revenue from that account, and we are forecasting growth for the first time in seven years. There was, however, a brief period where the revenue dipped slightly before it began to rise. This is complex to model because individual transitions, such as to a digital workplace or a new cybersecurity offering, can vary significantly in duration. Each client's case is unique. We aim to provide a broad overview, but the overall revenue model we discussed during the Investor Day remains intact over the two to three-year period. Does this provide the clarity you were seeking?

Yes we will. I think you can see already, initially our margin expectations were 14% to 15% and now we are already closer to the 15%. So it would be probably more likely the 15% to 16% if I had to make a guess now. And then the revenue I do believe is going to be fine because we were already factoring I guess sort of the USPS business was going to be in the same range of the 3% to 4% growth over that timeframe from before. So we will have an opportunity to update some of these.

So we're going to now close questions. Paul wanted to have a final comment before we close the call.

I want to ensure that as we set the targets for fiscal '19, you understand the EPS. We are targeting a range of $7.75 to $8.15 for fiscal '19. For fiscal '18, we reported $7.94. If we exclude the USPS contribution of $1.03 and account for additional stranded costs of about $0.20, we arrive at $6.70. Therefore, on a year-over-year basis, it's important that everyone has the correct understanding. We are looking at growth from $6.70 to $7.75 to $8.15 for the commercial DXC business, representing a growth of 16% to 22% on a comparable year-over-year basis.

And with that operator we will close the call.