DXC Technology Company (DXC) — Q3 2019 Earnings Call Transcript

Thank you and good afternoon, everyone. I'm pleased you're joining us for DXC Technology's third quarter fiscal 2019 earnings call. Our speakers on today's call will be 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've posted slides to our website, which will accompany the discussion today. Slide 2 informs our participants that DXC Technology's presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release as well as in our supplemental slides. Both documents are available on the Investor Relations section of our website. On Slide 3, you'll see that certain comments we make on the call will be forward-looking. These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of risks and uncertainties is included in our annual report on Form 10-K and other SEC filings. I would 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 now, I'd like to introduce DXC Technology's Chairman, President and CEO, Mike Lawrie.

Okay. Thank you and good afternoon, everyone. As usual, I have my four or five points to make and then I'll turn this over to Paul and then we'll have plenty of time for any of your questions. First, non-GAAP EPS in the third quarter was $2.23. Adjusted EBIT was $840 million and adjusted EBIT margin was 16.2%, and we generated $503 million of adjusted free cash flow in the third quarter. In terms of revenue in the third quarter, revenue was $5.178 billion on a GAAP basis. The constant currency revenue was down 2.6% year-over-year and was up 4.3% sequentially. Bookings were up 3% year-over-year and 22% up sequentially for a book-to-bill of 1.1x. The third point around digital, in constant currency, our digital revenue grew 16.9% year-over-year and 9.5% sequentially, driven by strong bookings in the first half of the year, particularly in cloud. Digital bookings in the quarter were up 85% year-over-year for a book-to-bill of 2.1x. Bookings were very strong across all digital offering families and cloud had a 3.3x book-to-bill in the quarter. Industry IP and BPS revenue was up 2.6% year-over-year and 6% sequentially, and the industry IP-BPS book-to-bill was 0.8x. Fourth, we continue to make strategic investments in digital assets and capabilities. As you know, we recently announced our plan to acquire Luxoft, a global at-scale digital innovator with differentiated offerings and platforms, deep vertical expertise, and a world-class digital talent workforce. Luxoft has over $900 million in revenue and has been growing at strong double-digit rates. We also announced our plan to acquire the Services division of EG, one of the leading integrators of Microsoft Dynamics 365 in Northern Europe. And then finally for fiscal 2019, we continue to target revenue in the range of $20.7 billion to $21.2 billion, and we're raising our non-GAAP EPS target to a range of $8.15 to $8.30. So let me just go into a little more detail on each of those points before I turn it over to Paul. As I said, the third quarter non-GAAP EPS was $2.23. The effective tax rate was 20.4%. Third quarter adjusted EBIT was $840 million and the adjusted EBIT margin was 16.2%, up 160 basis points year-over-year and 30 basis points sequentially. This margin improvement reflects continued execution of the levers that we have previously discussed. GBS segment profit margin was 18.2%, which was down 10 basis points year-over-year and 70 basis points sequentially. This reflects the investments we're making to accelerate digital hiring and expand our digital transformation capabilities. In GIS segment, profit margin was 17.5%, up 320 basis points year-over-year and 120 basis points sequentially. The GIS margin expansion was driven by our ongoing global deployment of Bionix, delivery center rationalization, and the benefit of some final milestone achievements on a few of our contracts. And adjusted free cash flow for the quarter was $503 million or 81% of adjusted net income. Now, let me go to revenue. As I said, revenue in the third quarter was $5.178 billion on a GAAP basis. In constant currency, revenue was down 2.6% year-over-year and was up 4.3% sequentially. Bookings were up 3% year-over-year and 22% up sequentially for a book-to-bill of 1.1x. Since the end of October, we've hired over 1,000 digital employees. As we previously discussed, we centralized digital hiring efforts with a strong focus on our digital transformation centers. These roles include AWS and Azure architects, data scientists, DevOps engineers, and others. We've also identified an additional 2,000 current DXC employees to be re-skilled in digital technologies. We're rapidly correcting the hiring delays that we discussed in the second quarter and will continue to accelerate hiring and training efforts in support of our fastest-growing capabilities. Now, we also believe that the Luxoft acquisition will allow DXC to accelerate its digital hiring efforts and reduce the time to fulfill digital demand for clients. Luxoft's established digital delivery footprint will also improve the client proximity for many of DXC's digital capabilities. In the third quarter, GBS revenue was $2.17 billion, down 4% year-over-year in constant currency and up 3.7% sequentially. The year-over-year decline was driven by the ongoing headwinds in legacy application services as well as the completion of several large transformation projects we've previously discussed. GBS bookings in the quarter were up 3.1% sequentially for a book-to-bill of 1x. GIS revenue in the quarter was $3 billion. GIS revenue was down 1.5% year-over-year in constant currency and was up 4.8% sequentially. The sequential revenue growth reflects the good progress made in our digital business, including cloud infrastructure, cybersecurity, and our digital workplace offering. Overall, GIS bookings were up 38% sequentially and the book-to-bill in the quarter was 1.1x. This reflects continued strength in our cloud and digital workplace offerings and the bookings associated with them. Now, let me turn to digital industry IP and BPS. In constant currency, digital revenue was up 16.9% year-over-year. Digital bookings continue to be very strong with a 2-to-1, 2.1x book-to-bill driven by our cloud infrastructure and as I said our digital workplace offerings. Our digital pipeline is also up more than 90% year-over-year, which reflects the strong demand we're seeing for digital solutions. For example, we signed a large deal with a European automotive manufacturer that includes analytics, multi-platform cloud, and security. The solution includes deep learning and simulation platforms designed to accelerate the R&D for autonomous vehicles. We're the only provider who could demonstrate the ability to deliver these infrastructure and analytics capabilities at scale. In constant currency, our cloud infrastructure business grew 32% in the quarter and was up 13.4% sequentially, again reflecting the strength of our cloud bookings during the first half of the year. Book-to-bill in the quarter was 3.3x, including expanded deals with a major European bank and the automotive manufacturer I just highlighted. Our security business grew 4.5% year-over-year in constant currency and 11% sequentially, driven by strong growth in Northern Europe and Asia. Book-to-bill in the quarter was 1.4x, including a deal with a large financial services provider, where DXC is partnering with CrowdStrike to provide managed endpoint threat detection and response services. We're also seeing increased demand for our operational technology security solutions in the manufacturing and energy sectors. Enterprise cloud apps and consulting grew 2.7% year-over-year and 3% sequentially. Bookings in the quarter were strong and the book-to-bill was 1.4x. Wins in the quarter included a ServiceNow deal with a major US food manufacturer. The solution leverages platform DXC and will migrate their existing IT services management processes onto a ServiceNow platform. We also won SAP S/4HANA deals with a European satellite operator and a multinational technology company. In constant currency, industry IP and BPS revenue was 2.6% year-over-year and 6% sequentially, reflecting the acquisition of Molina Medicaid health solutions, which expanded our business supporting state agencies in the administration of Medicaid programs and adds to our overall healthcare IP portfolio. Now, moving to my fourth point, we continue to make investments in digital assets and capabilities. As we discussed in November, we acquired argodesign, a digital design consultancy based in Austin. Argodesign will enhance DXC's capabilities in interface design and user experience, which are key elements in developing and delivering digital transformation solutions at scale. During the third quarter, we also completed the acquisitions of BusinessNow and TESM, which will further expand our industry-leading ServiceNow practice. As we said, we recently announced the planned acquisition of Luxoft Holding. We believe this transaction will create significant value through revenue synergies and access to a broader pool of digital talent. Luxoft strengthens DXC's portfolio of digital offerings with proven capabilities in high-growth areas, including analytics and business intelligence, user experience, IoT, and blockchain. Luxoft also has a very strong outsourced engineering business. Luxoft has a highly skilled digital workforce of more than 13,000 people and as I said earlier an established digital recruiting engine. More than 80% of Luxoft's workforce has a master's degree or Ph.D., and their engineering talent is primarily housed in Central and Eastern European delivery centers. This market provides a significant source of digital talent. We're estimating $200 million to $300 million of incremental revenue for the combined company by fiscal year '22. We believe there's an opportunity to expand wallet share with each company's respective clients. Further, we'll be able to expand Luxoft's existing platforms into additional geographies and industries. Luxoft's digital talent acquisition capabilities will also accelerate DXC's ability to capitalize on digital demand from our clients. And we remain on track to close the Luxoft transaction by the end of June. And in January, we announced a plan to acquire the Microsoft Dynamics practice of EG. The combination of EG with DXC Eclipse will extend DXC's leadership as a global Dynamics 365 systems integrator and will greatly enhance the scale of DXC's capabilities in the Nordic region. And then my final point before I turn it over to Paul is we expect additional sequential revenue growth in the fourth quarter. We're still targeting revenue in the range of $20.7 billion to $21.2 billion, although we are currently trending toward the lower half of that range, given some of the currency headwinds that we see. We're increasing our non-GAAP EPS targets to a range of $8.15 to $8.30, reflecting our accelerated pace of share repurchases and a lower tax rate than originally planned. So I'll turn it over to Paul and then we'll be back for questions.

Thank you, Mike, and hello, everyone. I will begin with some exclusions from our non-GAAP results. This quarter, we incurred restructuring costs of $76 million before tax, which is $0.21 per diluted share. These costs are related to severance from workforce optimization programs, especially in complex countries, and expenses for facilities and data center rationalization. Additionally, we recognized $107 million before tax, or $0.29 per diluted share, in costs associated with transaction separation and integration, including the Molina acquisition. Year-to-date, total costs for restructuring, transaction separation, and integration reached $723 million before tax, or $1.94 per diluted share. For the third quarter, amortization of acquired intangibles amounted to $134 million before tax, which is $0.35 per diluted share. Excluding these special items, non-GAAP income before taxes from continuing operations was $786 million, with a non-GAAP EPS of $2.23. Before discussing our third quarter results in detail, I want to note a correction in our press release regarding adjusted free cash flow. In the previous quarter, DXC broadened the use of its receivable facility and should have excluded its impact from adjusted free cash flow calculations. Consequently, year-to-date adjusted free cash flow has been revised to reflect this adjustment, resulting in a cumulative reduction of $223 million this year. Adjusted free cash flow for the first nine months is now $1.2 billion, which is 68% of adjusted net income. Now, let’s delve into our third quarter results. GAAP revenue for this quarter was $5.178 billion, marking a sequential rise of 4.3%. Adjusted EBIT stood at $840 million, with an adjusted EBIT margin of 16.2%, demonstrating good progress in our margin improvement initiatives. For the fiscal year, we expect to achieve our $575 million cost reduction goal. During this quarter, we continued workforce optimization and improved procurement efficiencies, reducing our headcount by approximately 3,000, excluding the Molina acquisition. Over the year, total headcount has decreased by more than 14,000 due to ongoing productivity initiatives, including our Bionix automation program. In supply chain management, we are driving procurement efficiencies, leveraging consumption-based purchase agreements for infrastructure and software, as well as enhancing our category management capabilities to better optimize our strategic supplier relationships and consolidate vendors. In real estate, we closed an additional 1.5 million square feet this quarter, shutting down seven data centers and planning to exit two to three more this fiscal year. We're also investing in the business this fiscal year, accelerating digital hiring, continuing the deployment of Bionix, and expanding our digital transformation centers while building key offerings such as AWS and Microsoft Azure solutions. Our non-GAAP EPS tax rate this quarter was 20.4%, reflecting our global income mix and timing of certain tax attribute changes in key markets. For the full year, we now anticipate the tax rate will be at the lower end of our previous estimate of 24% to 28%, implying a tax rate slightly above 30% in the fourth quarter. Year-to-date revenue totaled $15.5 billion, with adjusted EBIT at $2.4 billion and bookings at $14.9 billion, resulting in a book-to-bill of 1. Year-to-date GBS revenue was $2.17 billion in the third quarter, with a 3.7% sequential increase. GBS segment profit was $395 million, and profit margins were 18.2%, including investments in expanding our digital capabilities. Year-to-date, GBS revenue is $6.5 billion, segment profit is $1.2 billion, margin is 18.5%, and bookings are $6.4 billion with a book-to-bill of 1. GIS revenue was $3.01 billion this quarter, reflecting a 4.8% increase in constant currency. GIS segment profit was $528 million with a profit margin of 17.5%. This reflects our efficiency initiatives, including delivery and data center rationalization benefits from some contract milestones. Year-to-date, GIS revenue is $9 billion, segment profit is $1.5 billion, margin is 16.4%, and bookings are $8.5 billion with a book-to-bill of 0.9. Other financial highlights show adjusted free cash flow in the third quarter at $503 million, or 81% of adjusted net income. Year-to-date adjusted free cash flow is $1.2 billion, with performance affected by an increase in day sales outstanding from extended payment terms on large traditional contracts. We are actively working to enhance our working capital management and incentivize our teams for better collections performance. Given the remaining time this fiscal year, we're adjusting our adjusted free cash flow target to 70% to 80% of adjusted net income. Our CapEx in the quarter was $153 million, or 3% of revenue, which includes benefits from asset sales. Year-to-date CapEx totaled $829 million, or 5.4% of revenue. We ended the quarter with $2.5 billion in cash and a total debt of $7.56 billion, yielding a net debt to total capital ratio of 26.9%. Following the announcement of the Luxoft acquisition, all three rating agencies reaffirmed DXC’s rating and outlook. This quarter, we paid $54 million in dividends and repurchased $797 million in shares, returning a total of $851 million to shareholders. So far this year, we have returned $1.4 billion in total capital to our shareholders, including cash dividends and $1.2 billion in share repurchases. We anticipate returning capital to our shareholders in the fourth quarter as well, but at a more moderate rate. In conclusion, we continue to aim for revenue between $20.7 billion and $21.2 billion. However, given current currency headwinds, we are trending toward the lower half of that range. We have raised our EPS target to a range of $8.15 to $8.30 due to our accelerated share repurchase pace and a lower tax rate than initially expected. I will now hand the call back to the operator for our Q&A session.

Good afternoon. Thanks for taking my question. Mike or Paul, I was wondering if you could maybe talk a little bit more about the labor fill-in. It sounds like that digital hiring is progressing well, but can you maybe talk about at what point, is it one, two or three quarters out, you feel like you'll be in a position to kind of fully get staffed and get traction on all the digital work that you've already booked? And maybe talk about kind of when you kind of get normalized run rate to where you want it to be?

I believe we will likely achieve that in the early part of next fiscal year, primarily in the first half. We mentioned this at the end of the second quarter, acknowledging that we fell behind in hiring. We've invested significantly in our processes, tools, and improved planning at the account level. The added discipline has provided us with clearer demand signals, enabling us to activate our hiring processes more effectively. We have also centralized our digital hiring, establishing a comprehensive skills taxonomy. We're bringing individuals into our digital delivery centers and deploying them as projects are finalized and signed by clients. This approach is much more streamlined compared to tackling it account by account. Additionally, we're seeing a marked improvement in the quality of candidates and the skills we're acquiring. To summarize, I anticipate reaching a more stable hiring state in the first half of next fiscal year, though we will continue to adjust our workforce. While Paul mentioned the reduction of 14,000 positions, we have also brought in thousands of new hires for these emerging business areas. This ongoing workforce transformation includes reskilling existing employees and integrating new talent. Our digital delivery centers are contributing positively, leading us to attract better candidates. The improvements in our processes, discipline, and the appeal of career opportunities in digital are becoming more apparent. Moreover, Luxoft's strong brand and reputation in the digital sector have bolstered our efforts. Overall, this sends a clear message that we are committed to advancing our skills into a newer, more progressive space compared to where we stood before the second quarter. Paul, do you have anything to add?

No, Mike, I think you captured it. Our bookings are growing 89% year over year, and our pipeline is expanding rapidly.

That's good color. So I wanted to follow up on what you just kind of left off with, which is bookings. Clearly, good to see that recovery there. Can you maybe talk a little bit about, although we know the GIS bookings can always be very lumpy, can you sustain that same level of booking spend we saw this quarter into the next couple of quarters based on your current visibility? Maybe talk about the pipeline, especially very near-term. And then anything you can say relative to any potential new logos or how much you see kind of digital playing into the near-term bookings environment?

Yes, the significant deals in GIS can be unpredictable, and that won’t change. We are actively working on many large deals, but I can't specify when they will close, as that can be somewhat uncertain. I believe this trend might continue into the fourth quarter and possibly the first quarter based on our pipeline. However, the more crucial trend to note is the increase in shorter-duration project work. As I've mentioned before, we are now incentivizing many personnel in our delivery organization based on what we refer to as delivery-led growth. These are shorter-term projects that allow us to quickly onboard people and generate additional revenue. Our digital projects typically have shorter durations, starting small but often expanding and scaling over time. Therefore, the dynamics of our bookings are evolving as our business model and portfolio shift away from a heavy dependence on large deals. This reliance is decreasing as we transition to a greater number and volume of digital projects, which we view positively. Moreover, when we examined Luxoft's business, we found it shares the same characteristics we're starting to see in ours. This is a promising indicator for the future.

Hi. Mike, you've established a reputation for effectively unlocking shareholder value. As you consider the balance between pursuing more acquisitions, divestitures, or other methods of enhancing shareholder value, could you share your thought process on this in both the short and long term? Are you inclined to focus more on the digital market by continuing to acquire, divest, or implement cost-cutting acquisitions?

We're constantly seeking ways to enhance shareholder value, and we keep all options available. However, I don't anticipate many divestitures since we've significantly reshaped our portfolio in recent years. I expect we'll pursue smaller tuck-in acquisitions, especially in the digital area. Once we finalize the Luxoft transaction, there will be numerous smaller opportunities to integrate into that business model. We're also focused on strengthening our IP portfolio, similar to what we did with Molina in healthcare. Additionally, we are exploring other practices to bolster our strong position in Microsoft Dynamics 365 and ServiceNow, where we’ve made substantial investments. Our capital allocation strategy will remain consistent, including the returns to shareholders; we've returned over $1 billion because we believe our stock is a solid investment. Therefore, I don't foresee any major changes in our capital allocation approach moving forward. We do need to improve our working capital management, especially regarding our day sales outstanding, which is challenging due to the push to extend terms on large ITO contracts. However, we believe that working capital will increasingly work in our favor over time, as shorter-term projects tend to pay out more quickly than these large contracts. So, our strategy is to adhere to our capital allocation model, remain satisfied with the Luxoft acquisition, which we view as a quality deal at a fair price, and identify future opportunities to enhance the platform. Does that address your question?

It does. And then just a second one from me. On the digital, as you start to play catch-up, maybe you can help us understand what advantage you have in trying to displace an Accenture? Or is this merely a massive shift that everyone can participate in? I'm just trying to get your thoughts around sort of what the crucial piece of the puzzle is as we try to accelerate it.

That's a great question. The market is growing rapidly, and there's ample opportunity for everyone involved. Many players in this space are performing well. What stood out to me, particularly with Luxoft, is their focus on the business executive sector, where they tackle digital projects that DXC hasn't prioritized, mainly due to our reputation for handling infrastructure and large applications. This perspective is set to change. It's crucial to note that all smaller digital initiatives need to be integrated into mainstream IT to truly realize their transformative potential. This is where our unique value proposition comes into play, and we're committed to that alongside our partners, who add significant value. Furthermore, many of our partners collaborate with Luxoft, and our clients are all on a digital journey, albeit at different stages. As I've mentioned numerous times, this represents a generational shift, and there is plenty of market opportunity for everyone to engage.

Hey, guys. Hey. It appears that your digital investments have caused your GBS margin expansion to somewhat taper off here. I'm wondering, if you can dimension how much extra digital investment you're now making perhaps compared to where you were a year ago? And if you could also help gauge how much of that digital investment is prone to be kind of the new normal of investment versus an extraordinary investment that you're making now as you ramp up this digital talent engine?

Well, listen, we talked about the margin and not much as we're 30 basis points or something like that. So yes, Rod to answer your question, we are making a slightly larger investment in the hiring of these digital skills than we have before. And that became very apparent to us as we exited the second quarter some of those issues. So we have ramped that up. I would call this a new normal. I think we will get to more, as I said earlier on a previous question, we'll get to much more of a steady-state as we continue to remix our workforce. So in many cases what you're seeing here is you're continuing to see an expansion of some of the margins in GIS because frankly that's where a lot of the remix is taking place and you're seeing a slight deterioration in the GBS margins. Overall, the margins for the Company continue to expand. So I think it's a broader picture. It's going to be a remix. I don't think we'll continue this sort of extraordinary effort to bootstrap ourselves in the digital hiring, but I honestly hope we have the demand going forward long-term that we continue to do that. And in many cases, we're hiring teams of people, not just individuals because a lot of these digital projects require scrum leaders, they require data scientists, they require software engineers. So more and more as we remix this business portfolio, these aren't individual skills that get applied, there are teams that get applied to a digital business solution. And that's a different way of managing your workforce as well.

Got it. And then, hey, on the demand side in the part of your business that's project-based and more reliant on discretionary spending, are you seeing any change in demand patterns, any hesitation on client decision-making or pullback in capital spending at all?

I am not seeing any hesitation. The digital demand remains quite strong. I just returned from a trip where I met with several CEOs; everyone recognizes the need for this. Our value proposition is that we assist clients in reducing the operating expenses of their existing IP estate. Every CEO I've encountered is interested in this. This is not just theoretical; it involves practical solutions like our platform DXC and Bionix. We engage with our clients to participate in various digital projects, often starting with an ideation process at our Digital Transformation Center. This collaboration usually leads to a project statement of work, which can start small, often in the hundreds of thousands of dollars rather than millions. We quickly prototype these solutions, demonstrate their effectiveness, and then scale them up. We are seeing this trend grow every day and believe it's creating a more balanced business mix moving forward. While this requires investment in digital delivery centers and teams, it will not negatively affect our overall margin profile as we progress.

Good afternoon, guys. So certainly nice to see the re-acceleration in the digital revenue growth. So that 17% number, where do we go from here? Are you expecting some further near-term acceleration just as the hiring scales?

I'm really pleased with the progress we've made this quarter, especially in terms of sequential revenue growth and strong performance in digital, while also driving margin expansion. However, I want to achieve even more. I won’t be satisfied until I see our digital business growing by 20%, 21%, or even 23%. I believe that can happen, but it will require us to approach the market differently and source opportunities in new ways, as I mentioned in response to Rod's question, along with continuing to hire to meet that demand. We use annual build revenue as an internal metric; while it’s not ready for external reporting yet, we’ve observed an acceleration in this area throughout the year. We started the year slow in the first quarter but gained momentum in the second quarter. The third quarter is the first time we’ve met our internal goals for digital sales, indicating that we’re beginning to gain traction. We acknowledge that we fell short since demand outpaced our ability to source the right talent. Sourcing isn't just about individuals; it’s about teams. Projects often can't start until we have an entire team in place. It’s not helpful to only have data scientists if we also need software engineering. We're closing that gap. I believe the demand is substantial, and this represents a generational shift. We're making acquisitions and investments, and we're starting to see revenue and sales increase slightly. Those are positive signs, but I can assure you that the path forward will not be linear; there will certainly be some challenges ahead. That said, we are becoming more comfortable with the business model that is emerging.

Okay. So just to follow up on the supply side of that. So beyond the 1,000 plus, I think you said you already hired since the end of October. If you think about what you still need to hire as you try and complete the backfill process, I think you said through the first half of fiscal '20, how much of that additional hiring to come is going to essentially be kind of retraining some existing DXC personnel versus net new headcount?

I'd say just over the next couple of months, I'd like to hire another couple thousand people in digital and we want to retrain a couple thousand. So right now, I'd say it's somewhat of an even mix between reskilling as well as hiring. And then I think the other thing that we'll have a little better insight on is once we get the Luxoft transaction closed and we begin to understand that hiring platform and how that works, that will also bring a new dimension to our digital skills.

Hi, guys. Just wanted to ask about the new adjusted free cash flow guidance of 70% to 80% of adjusted income. I think previous guidance before was 90% plus conversion going towards 100%. So just want to understand the differences now from the model today versus previous and then how do we get back to 90% plus free cash flow conversion in the future?

We noticed an increase in day sales outstanding by about five to six days, which translates to roughly over $300 million in cash that we need to address. The fourth quarter, being the year-end, often sees clients holding onto cash for their balance sheets. However, we must improve our management of working capital. I've mobilized our entire organization, and all CFOs globally are focused on enhancing collections, especially on past due accounts. We anticipated better performance on past due receivables, but we experienced a slowdown. It's our responsibility to correct this promptly. Long-term, this does not alter our previous guidance and targets of 90% to 100% by 2022.

In summary, this is more about operations than the model itself. As you're aware, there was significant volatility in the market in December. We noticed that people were holding onto their cash more tightly. We also adopted a similar approach regarding payables. Therefore, I believe this issue relates more to day sales outstanding, which is something we can resolve. It does not affect the long-term model.

Okay. And then just as a follow-up, looking at Molina and some of the other acquisitions that have been completed or about to be completed, how will that fold into the model? And will that help revenue a little bit in the fourth quarter and beyond? Thanks.

I think not much in the fourth quarter. Some of it showed up in the third quarter. I think all of it was very consistent with the model that we gave you before that acquisition, again, aside from Luxoft, which was a little bit off to the side right now, it was about a 1% to 2% of our top line coming from this acquisition. Molina contributed about $50 million, but it was part of what we had given you in terms of what we were expecting to do in the second quarter and we came in a little bit better overall for the business and from a revenue standpoint in the third quarter.

Hey, thanks guys. Just when we look at the digital trends that obviously are accelerating as you talked about, can you just give us some more color on the sourcing of that with regard to the partnership model that we've talked a lot about it? And as you guys have talked a lot about in the past, I'm curious to hear how that's been trending recently in terms of the additive to the digital bookings we're seeing and now the conversion to revenue?

Our sales bookings involve tracking several aspects with our partners, but I want to keep it simple. We focus on sales work in progress, which includes our direct partnerships and go-to-market strategies. This encompasses sell-through activities whether we sell through our partners or vice versa, as well as collaborative selling efforts. This year, for the first time, I'm seeing an increase across all these areas, and it’s becoming evident. We collaborate closely with companies like Microsoft, AWS, and AT&T, selecting specific accounts to work on together. When we enhance our partnerships by submitting joint proposals rather than separate ones, we see significant improvements in our win rates, with increases up to 20 points. This perspective is not just our observation; our partners are also recognizing it. They help identify additional opportunities for us to pursue. In our collaboration with Luxoft, we've already pinpointed hundreds of millions of dollars in opportunities within the bounds of regulatory guidelines, which we hadn’t noticed before. The partnerships we’re nurturing, along with our acquisitions and our work with PwC, are helping us discover more opportunities. This, in turn, is leading us to expand our workforce, including both services and sales staff, as it's crucial to have more sales personnel to qualify and assemble these proposals. We are also enhancing our digital skill training programs for our employees while simultaneously hiring more sales staff. This is the first time we've increased our sales force in years, motivated by the chance to engage in substantial opportunities.

All right. That's great to hear. And just quickly, you mentioned Luxoft again. But look, I mean, have you had any chance to speak to either your clients or Luxoft clients further since your announcement in terms of just feedback and how they feel about it? Thanks again guys.

I have spent a considerable amount of time on this, and the feedback has been very positive. Our partners see the business rationale behind it and understand the need to keep things separate for various reasons. I must say, this has significantly changed the brand perception of DXC, showing that we are serious about our direction. I attended the Consumer Electronics Show in Las Vegas, which I hadn't done in five years, and I was impressed with the customer feedback and the projects we are collaborating on with Luxoft. We've received positive feedback from our partners, Luxoft clients, and certainly from our own clients. That said, there's a wait-and-see approach right now, and we can't take much action until the transaction is closed. For now, there's more discussion than concrete action, but we are preparing for the integration of revenue synergies and other necessary steps for closing the transaction.

And operator, we'll take one more question before we close.

Hi. Thanks for sneaking me in; it's Jamie. I just wanted to ask about the Q4 assumptions. So Paul or Mike, if I look at the midpoint of the implication on the Q4, it's $120 million plus above consensus. I realize you're talking about some FX challenges, but even at the midpoint of the lower half, you're still above. And my question is, how should we be thinking about cadence? You talked a lot about milestones; both of you used that word a couple of times in your prepared remarks. Are there milestones in the Q4 that you're anticipating that will some of the revenue?

No. What I'm looking at to be quite candid is continued sequential growth. That's what I'm interested in. I want to continue to see this business grow sequentially quarter-over-quarter. Then underneath that, I'm looking very carefully at where we are with our digital revenue, what that pipeline looks like, what the sales performance is and then I'm also looking very carefully at the runoff and price downs and when those price downs occur in our ITO market. So it's a fairly, not complex, but it's a reasonably involved formula. And at the end of the day, the most important thing I'm trying to drive across the Company is continued sequential growth and continued strong digital performance underneath that. Now, our IP portfolio is also beginning to grow. That is not growing as much as it needs to grow, but it is beginning to grow. So Jamie, that's what I'm looking for is continued sequential growth as we go forward.

Just ask one follow-up on this slide 11, you don't have to look at it, you know what I'm talking about. But the CapEx as a percentage of revenue, that was a big theme especially in the CSC days. 3% seems low, but since our conversation is about the free cash flow, I was just wondering, like how should we be thinking about that going forward because I'm just wondering what the sustainable run rate of that is? Thank you.

We indicated that our goal was to be in the 5% to 7% range in the longer term as a percentage of revenue. This quarter was a bit unusual due to some asset dispositions that helped offset the capital expenditures, but I would suggest that aiming for somewhere around 5% to 6% would be a reasonable estimate.

Okay. Thank you, guys. Thank you.

We'll close the call now. Thank you, operator.