DXC Technology Company (DXC) — Q4 2019 Earnings Call Transcript

Thank you and good afternoon, everyone. I'm pleased you're joining us for DXC Technology's fourth quarter and year-end 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 the webcast includes slides to accompany the discussion today. Slide two informs our participants that DXC Technology's presentation includes certain non-GAAP financial measures and 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. On slide three, 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. I’d now like to introduce DXC Technology's Chairman, President and CEO, Mike Lawrie.

Okay. Jonathan, thanks very much. Welcome, everyone. Thanks for taking time today. As is my habit here, I've got four or five points; I'll go through those, go into a little more detail and then turn it over to Paul. And then we'll have plenty of time for Q&A. First, fourth quarter non-GAAP EPS was $2.19. For fiscal 2019, non-GAAP EPS was $8.34. Adjusted EBIT was $827 million in the quarter and the adjusted EBIT margin was 15.7%. For fiscal 2019, adjusted EBIT was $3.27 billion and the adjusted EBIT margin was 15.8%. We generated $917 million of adjusted free cash flow in the fourth quarter; and for fiscal 2019, adjusted free cash flow was $2.1 billion. Revenue in the fourth quarter was $5.28 billion on a GAAP basis. In constant currency, revenue was down 1% year-over-year, and was up 1.7% sequentially. And for fiscal 2019, revenue was $20.75 billion, and we had a book-to-bill of 1.1x in the quarter and 1x for the year. In constant currency, digital revenue grew 22% year-over-year, and 11.6% sequentially in the quarter. For fiscal 2019, digital revenue grew 15.8%. In the fourth quarter, industry IP and BPS revenue was down 1.4% year-over-year and was roughly flat sequentially. And for fiscal 2019, industry IP and BPS revenue was down 0.3%. And in the fourth quarter, our digital book-to-bill was 1.8x and our industry IP and BPS book-to-bill was 0.9x. On my fourth point, we continue to make strategic investments in digital assets and capabilities, including the accelerated hiring efforts I talked about before. We also expect to complete the acquisition of Luxoft by the end of June. Now, I'll go into each of these points in a little more detail, and then I'll cover our targets for fiscal 2020 and turn it over to Paul. As I said, fourth quarter non-GAAP EPS was $2.19 and the effective tax rate was 24.3%. For fiscal 2019, non-GAAP EPS was $8.34 and the effective tax rate for the full year was 23.2%. Fourth quarter adjusted EBIT was $827 million and the adjusted EBIT margin was 15.7%, roughly flat year-over-year and down 50 basis points sequentially, reflecting the investments in digital talent that we’ve previously discussed, as well as the upfront savings we’re providing to clients to help accelerate their digital transformations. For fiscal 2019, adjusted EBIT was $3.27 billion, and the adjusted EBIT margin was $15.8%, an improvement of 200 basis points. The margin improvement reflects ongoing execution against our key cost-saving levers, and the savings were in line with our fiscal ‘19 targets that we've discussed before. GBS segment profit margin was 20.4%, which was up 100 basis points year-over-year and 220 basis points sequentially. This reflects ongoing workforce optimization as well as the seasonality in the business. For fiscal 2019, GBS margin was 18.9%, and this was up 240 basis points from the prior year. In GIS, segment profit margin was 14.1%, this was down 50 basis points year-over-year and down 340 basis points sequentially, reflecting the investments I just discussed, and the milestone achievement payments that I highlighted last quarter. And for fiscal 2019, GIS margin was 15.8% and this was up 270 basis points from the prior year. Adjusted free cash flow for the quarter was $917 million or 155% of adjusted net income, reflecting improvements in working capital. For fiscal 2019, adjusted free cash flow was $2.1 billion or 90% of adjusted net income. Now, turning to revenue. Revenue in the fourth quarter, as I said, was $5.28 billion on a GAAP basis. In constant currency, revenue was down 1% year-over-year and was up 1.7% sequentially. Bookings were up 18.9% year-over-year and 2.5% sequentially for a book-to-bill of 1.1x. Digital growth continues to offset more of the decline in our traditional business. Sequentially, digital revenue in the fourth quarter more than offset the decline in the traditional business. Now, this balance between digital growth and traditional decline will continue to be lumpy as we go through the next year. But, this is the revenue dynamic that we talked about before that will ultimately support long-term growth for the Company. For fiscal 2019, revenue was $20.75 billion on a GAAP basis and book-to-bill was 1x. In the fourth quarter, GBS revenue was $2.2 billion, and this was down 3.1% year-over-year in constant currency and up 0.9% sequentially. The year-over-year decline reflects headwinds in the traditional applications business, including the completion of several contracts in addition to the impact of accelerated cloud adoption. One of the drivers of increased cloud adoption is the ability to lift and shift existing workloads, which often eliminates the services associated with rationalizing and refactoring applications. GBS bookings in the quarter were up 40% year-over-year and up 27% sequentially for a book-to-bill of 1.3x. For fiscal 2019, GBS revenue was $8.68 billion, and a book-to-bill of 1.1x. In the fourth quarter, GIS revenue was $3.09 billion, which was up 0.6% year-over-year in constant currency and up 2.3% sequentially, driven by strong growth in our workplace and mobility business. Overall, GIS bookings of $2.97 billion were up 3.7% year-over-year, and represent a book-to-bill of 1x. For fiscal 2019, GIS revenue was $12.07 billion with a book-to-bill of 0.9x. Now, turning to digital and our IP and BPS results. In constant currency, digital revenue was up 22% year-over-year, and it was up 11.6% sequentially. Digital bookings continue to be very strong with a 1.8x book-to-bill in the quarter, driven by continued strength in our cloud infrastructure and digital workplace bookings. For fiscal 2019, digital revenue grew 15.8%. Digital growth in the quarter was driven by enterprise and cloud applications, cloud infrastructure, and as I said, digital workplace. All three businesses grew more than 20% year-over-year. The strong demand we're seeing for these capabilities is also reflected in our digital bookings and pipeline, both of which are up more than 50% year-over-year. We’re partnering with many of our clients to help generate savings to fund large digital transformations. In many cases, we provide these savings through lower operating costs on traditional services, which initially reduces revenue and profit on the account. In return, we secure commitments from the client to expand DXC’s wallet share and future digital spend, which allows us to grow revenue and profit over time. A good example where we're leveraging our installed base to accelerate digital transformation is a contract we signed during the fourth quarter with a major global airline. Building on our long-standing relationship with the client, we signed a seven-year transformation deal that provides upfront savings for the clients to reduce operating costs. In return, the client is committed to leverage those savings to fund digital transformation work with DXC. This results in an initial reduction in revenue and profit on the account but drives top-line and bottom-line growth over the full lifecycle of the contract. Now, let me talk about the offering families within digital. In constant currency, cloud infrastructure grew 25% in the quarter and was up 8.9% sequentially, driven by the accelerated cloud adoption I just talked about. Book-to-bill in the quarter was 1.5x including the large airline deal as well as deals with the Australian tax office and a large European financial services institution. For fiscal 2019, cloud infrastructure grew 22% in constant currency. Enterprise cloud apps and consulting grew 20% year-over-year and 13.3% sequentially. Bookings in the quarter were strong with the book-to-bill of 1.4x. Wins in the quarter included a next generation SAP deal with a South American utility provider and a CRM transformation program leveraging Salesforce.com for a large oil and gas company. Analytics revenue was down 4.9% year-over-year in constant currency and was up 3.2% sequentially. We're seeing good bookings momentum in this business, particularly in the automotive sector. DXC’s robotic drive solution streamlined data analysis and algorithmic training to reduce the time and cost to develop autonomous vehicles. These solutions are very complementary to Luxoft’s automotive offerings. We believe the combined company has a compelling value proposition in the space. Bookings in the quarter were up 67% year-over-year from a book-to-bill of 1.3x. We’ve continued to build on this momentum and recently signed a deal with BMW Group, leveraging DXC's robotic drive solutions. We’re supporting BMW's autonomous vehicle development program, gathering massive amounts of road travel data from the global BMW test fleet. Using DXC's digital solution, BMW’s R&D teams will achieve significantly faster autonomous drive development cycles. Not all areas of digital have done as well. Our security business was down 1.3% year-over-year in constant currency and down 1.5% sequentially as growth in Asia and Southern Europe partially offset the decline in the UK and Northern Europe. Book-to-bill in the quarter was strong at 1.2x. In constant currency, Industry IP and BPS revenue was down 1.4% year-over-year and was roughly flat sequentially. Industry IP and BPS was down 0.3%, roughly flat for fiscal 2019. We continue to ramp revenue on some of the large insurance BPS contracts that I talked about before. This is offsetting declines we're seeing in some of our more generic BPS business, particularly in the UK and Europe where a few clients in-sourced the work. Bookings in the fourth quarter were up 59% year-over-year, including a large deal with the California Department of Health Care Service. Now, turning quickly to point four. We continue to make significant investments in our digital talent, including accelerated hiring in our fastest growing capabilities, expansion of our digital transformation centers and capabilities, and the ongoing build-out of our joint practices with partners such as AWS and Microsoft Azure. During the fourth quarter, we hired an additional 2,000 people in our digital capabilities with an emphasis on software engineers, dev ops engineers, SAP consultants, data scientists, and security engineers. We're making these investments to continue scaling the digital go-to-market model I've previously discussed. For example, DXC has entered into an engineering relationship with DreamWorks Animation to develop a cloud-based pipeline for digital content creation. We're jointly shaping the solution with DreamWorks, leveraging our cloud, security, and analytics solutions. DXC will also expand our access to digital talent through the Luxoft acquisition. We'll leverage Luxoft’s established presence in key markets such as Eastern Europe to attract digital talent and will apply Luxoft’s talent acquisition and management platform in support of DXC’s broader digital capabilities. We expect to complete the Luxoft acquisition by the end of June. This acquisition builds on DXC's unique value proposition as an end-to-end mainstream IT and digital services market leader and strengthens the Company's ability to design and deploy transformative digital solutions for clients at scale. The addition of Luxoft will bring clients new capabilities in digital engineering, additional depth in key verticals, and an expanded portfolio of digital offerings. While we continue to operate Luxoft as a separate entity to protect its strong brand and established recruiting engine, DXC will undertake several changes to quickly apply Luxoft’s strengths and capabilities to our broader business and help drive growth. First, we're combining the existing industry expertise from both companies to create market-leading verticals in automotive and financial services. These two verticals will serve more than 20 major automotive OEMs and more than half of the top financial institutions in America and Europe. DXC and Luxoft's go-to-market teams will also work together to innovate and cross-sell solutions in other industry sectors where the company has a significant base of global business, including insurance and healthcare. Now, to my fifth point before I turn it over to Paul for fiscal 2020. We expect revenue in the range of $20.7 billion to $21.2 billion, reflecting the impact of currency as well as the revenue dynamic between digital and traditional, I previously discussed. This target assumes that Luxoft closes, as I said, at the end of June. We're targeting non-GAAP EPS of $7.75 to $8.50, and adjusted free cash flow to be 90% or more of adjusted net income. Now, let me turn this over to Paul.

Thank you, Mike. And greetings, everyone. As usual, I will start by covering some items that are excluded from our non-GAAP results. In the current quarter, we had restructuring costs of $47 million on a pre-tax basis or $0.13 per diluted share after-tax. These costs represent severance related to workforce optimization programs and expenses associated with facilities and data center rationalization. Also in the quarter, we had $96 million on a pre-tax basis or $0.24 per diluted share after-tax, related to transaction, separation, and integration costs associated with recent acquisitions such as Molina, as well as activities related to the Luxoft acquisition. For the full year, restructuring, transaction, separation, and integration costs amounted to $866 million on a pre-tax basis, or $2.31 per diluted share after tax, driven by the cost of exiting more resources in complex countries and the higher than expected costs of exiting the shared IT environment with HPE. In addition, we had additional transaction costs associated with our digital acquisitions. In the fourth quarter, amortization of acquired intangibles was $138 million on a pre-tax basis, or $0.37 per diluted share after-tax. For the full-year, amortization of acquired intangibles was $539 million on a pre-tax basis, or $1.42 per diluted share after-tax. Also in the quarter, our annual re-measurement of pension assets and liabilities resulted in an accounting charge of $143 million. As of year-end, we had pension assets of $11.3 billion and pension liabilities of $11 billion for an overfunded pension position of $327 million. Excluding the impact of these special items non-GAAP income from continuing operations was $778 million for the quarter and non-GAAP EPS was $2.19. For the full-year, non-GAAP income before taxes from continuing operations was $3.06 billion and non-GAAP EPS was $8.34. Now, move on to our fourth quarter and full-year results in more detail. GAAP revenue in the fourth quarter was $5.28 billion, and $20.75 billion for the full year. Adjusted EBIT in the quarter was $827 million. Adjusted EBIT margin was 15.7%, relatively flat year-over-year and down 50 basis points sequentially. Adjusted EBIT in the quarter reflects additional investments we are making in our digital business, including additional digital transformation centers, acquiring new digital talents, and enhancements to Platform DXC and Bionix. For fiscal 2019 adjusted EBIT was $3.27 billion; adjusted EBIT margin was 15.8%, up 200 basis points compared with the prior year. The year-over-year margin improvement reflects continued progress on our cost takeout plans, in line with our targets for the year. Throughout fiscal ‘19, we accelerated the redeployment of our Bionix automation program, which combined with our other workforce optimization levers, allowed us to reduce our labor base by roughly 10,000 people or 7% on a net basis, as we continue to shift the balance of our workforce to digital capabilities. In supply chain, we're consolidating our supplier base, managing demand, leveraging our scale to renegotiate and restructure agreements, and shifting more of our work to strategic vendors. Turning to facilities. We eliminated an additional 4.6 million square feet this year, and we also rationalized nine data centers. Since the merger, we have reduced our facility’s footprint by more than 30%. So, in summary, we delivered over $500 million of in-year savings, which is roughly in line with our full-year target. As we previously discussed, we reinvested roughly half of those savings throughout fiscal ‘19, and primarily those investments went into digital capabilities. In the quarter, our non-GAAP tax rate was 24.3% and for the full year, the non-GAAP tax rate was 23.2%, reflecting the net benefit of certain tax attributes in foreign jurisdictions. In the fourth quarter, bookings were up $5.8 million for a book-to-bill of 1.1 times, and for the full year, bookings were $20.7 billion for a book-to-bill of 1x. Now, let's turn to our segment results. GBS revenue was $2.19 billion in the fourth quarter. In the fourth quarter, GBS segment profit was $447 million and profit margin was 20.4%. The improvement in profitability reflects ongoing workforce optimization and the seasonality of that business. For the full-year, GBS revenue was $8.7 billion, segment profit was $1.6 billion, margin was 18.9%, bookings were $9.3 billion for a book-to-bill of 1.1. GIS revenue was $3.09 billion in the fourth quarter. GIS segment profit in the fourth quarter was $436 million and the profit margin was 14.1%. The profit margin reflects investments we're making in Platform DXC, Bionix, as well as digital talent acceleration. GIS margin also reflects the timing of exiting resources in some of our complex markets. For the full-year, GIS revenue was $12.1 billion, segment profit was $1.9 billion, margin was 15.8%, and bookings were $11.5 billion for a book-to-bill of 0.9 times. Turning to other financial highlights. Adjusted free cash flow in the fourth quarter was $917 million, that’s 155% of adjusted net income, reflecting tighter working capital management. For the full year, adjusted free cash flow was $2.1 billion or 90% of adjusted net income, which is in line with our original target for the full year. Our cash flow performance continues to exclude the impact of our receivables facility, even though these transactions represent an outright sale of receivables with no recourse to DXC. Our CapEx was $316 million in the quarter or 6% of revenue; and for the full year, CapEx was $1.15 billion or 5.5% of revenue. Cash at the end of the fourth quarter and at the end of the year was $2.9 billion. Our total debt was $7.4 billion, including capitalized leases for a net debt to capitalization ratio of 23.6%. During the quarter, we paid $51 million in dividends and repurchased $91 million of shares for a total of $142 million in capital returned to shareholders. For the fiscal year, we returned $1.55 billion of capital to our shareholders in the form of $210 million in dividends and $1.34 billion in share repurchase. Now, let me close by covering our fiscal ‘20 target, which assumes that the Luxoft transaction will close by the end of June. We're targeting revenue for the fiscal year to be in the range of $20.7 billion to $21.2 billion, and that includes roughly $250 million of currency headwinds from a stronger dollar compared with fiscal ‘19. The revenue target reflects the impact of accelerated cloud adoptions in our traditional platform and application businesses. We're working with our clients to accelerate their digital transformation efforts by offering upfront savings on traditional services we provide. Near-term, these actions reduce revenue and profit on those accounts, but in return, we expect to gain a greater share of their IT spend in digital, which should translate into higher revenue and profits over time. Our fiscal ‘20 target for EPS is $7.75 to $8.50, reflecting the incremental investments we are making in our digital business, as well as the near-term impacts of our efforts to accelerate clients’ digital transformations. The EPS target also assumes a higher tax rate for fiscal ‘20 of 26% to 28%, reflecting a changing mix of tax attributes in foreign jurisdictions, and delays in the implementation of our tax planning strategies. This is pending further clarification of U.S. tax reform regulations. These delays, however, do not impact our long-term targets for tax of 22% to 25%. I also would like to mention that we are working diligently to complete the filing of our 10-K by May 30th. However, because of certain audit procedures regarding updates to the U.S. tax reform regulations, we may file the 10-K in early June, within the extension period allowed by the SEC. Lastly, our adjusted free cash flow target for fiscal ‘20 is 90% of adjusted net income. Now, I'll turn the call back to the operator for the Q&A session.

Hi. Thank you. It’s Jamie at Susquehanna, and good results here. Paul, I just wanted to ask about the EPS guidance. I see that you are adjusting your tax assumptions fairly considerably from where we were. But, how should we be thinking about the margin cadence from here? So, what should we be thinking about margin going forward?

First of all, the 26% to 28% range is higher than we expected for fiscal '20 due to uncertainties regarding certain regulations and clarifications. Once these are clarified, we will be able to implement our tax strategies. Until then, we are taking on more risk and not fully optimizing our taxes. Regarding margin progression, we anticipate a dip in the first quarter, which is typical when compared to the previous year. However, we will also witness the effects of the acceleration in cloud and digital transformations we are executing with our clients, along with the upfront savings provided to them; this will also affect our margins, especially in GIS. Nonetheless, we expect to see at least a one-point improvement every quarter from the first quarter through the end of the year. This is contingent upon Luxoft starting to contribute in the second quarter, albeit that contribution to margins will be limited to about 10% from the Luxoft business.

And with regard to Luxoft, I realize you're saying end of June, but what is contemplated in terms of the revenue contribution for the year?

I think about $700 million right now, and I would just really expect it to be relatively equal per quarter, somewhere around the $225 million to $230 million.

Okay. And then, last one. Mike, in your prepared remarks, you talked about the increase in digital hiring. Where are you in that journey? I know it seems like you made some great hires. But, yes, how are you doing on the staffing side, so you can fulfill that side of the demand?

I think the hiring issue is behind us. We’ve demonstrated that we can hire. We've made a significant commitment to these digital transformation centers. We're planning to hire probably 1,500 people or so per quarter. I don't expect any problems with that. As we go forward, some of the skills may remix a little bit. In other words, we may need some additional analytic skills and less in some other areas, so we'll continue to combine that. We're also very comfortable with this whole process we've put in place where customers come to these centers. We ideate with them, they get assigned to statements of work or proof of concepts. I really feel good about what we've been able to get done here on the digital skills. We're not having problems finding people, recruiting people, or onboarding them, and they’re beginning to contribute positively to the business as we go forward. We saw some of that in the growth that we reported. We're also continuing to reskill hundreds of current DXC employees. We're able to continue to move people off of the offerings where we have revenue run-off, retraining and reskilling so we can deploy them on other opportunities.

Can you share more about how you are proactively investing with your clients by providing savings on the initial work to attract their digital spending? With the growth rates you are seeing in digital, could you provide an example of what this looks like with a large client, specifically how much the revenue decreases at first, how long that lasts, when it stabilizes, and if it eventually turns positive?

Sure. Let me provide a little color for you. I won't use any specific names here, but an example would be a proposal I was working on this week, where we would extend somewhere around $30 million in operational savings in a year; that’s in year, $30 million of operational savings. In return, we would be the service provider that would move applications to the cloud, provide some additional analytics, cybersecurity, and operational optimization. That would be worth somewhere in the neighborhood after we get through the first 6 to 12 months, probably $40 million to $50 million of incremental revenue. So, we’re getting more and more comfortable with this model, which is to provide those operational savings and then the customer commits to specific projects and workloads. Some of the revenue from these new projects are admittedly delayed a bit; it could be 90 days, could be 120 days, or a little longer than that. But we’re comfortable now that we’re starting to get this model into more of a standard process, and we're really encouraged by the receptivity on the part of our clients to this approach. They can fund these digital programs through the operational savings we provide, and all we've got to be willing to do is to live with a little deferred recognition of some of the revenue and profitability. When we can grow these, then our view is we can take a lot of this traditional business and use that as an asset to fund future growth in the account and reposition DXC as not only a great operator of infrastructure but also a trusted digital partner.

Is that also allowing you to exclusively source the digital work because you're taking a more proactive approach?

Yes. We’re getting commitments on revenue spend around digital. Now, that could be different projects which doesn't say, okay you are going to provide the cloud migration or you’re not going to do this. But what it does do is it says we will commit to spend x amount of money with you in other digital projects. A lot of this is done with our partners as well. So, increasingly, we are going to these clients and say we will do this together with our partners, which gives us a lot more credibility but helps us from a skill standpoint to really get access to a broader set of skills. I tell you, we’ve been talking about this thing for a year and a half, saying here is we're starting to see some real traction and beginning to scale this. And that's what I think this next year is going to be all about scaling this.

One last one for me. I saw the other 8-K that you added Mike Salvino to your Board, who is very deep into the BPO space. Can you just comment on sort of how you're thinking about the Industry IP and BPS business? Is that an area where you might look to maybe make an acquisition of one of the stand-alone players in that space to be fit up or vice versa, sort of just an update on how you're thinking about that.

Yes. I'll make a comment on the acquisitions. The BPS space, particularly in the healthcare business, as you know, we did acquire Molina this past year, which gave us some additional states and some real capabilities within the healthcare BPS space. We have had some very significant wins that we are now in the process of scaling around insurance BPS. Mike not only brings that skillset to the Board but I think he also brings to the Board a person who has gone through some of these transformations where you see significant run off in your legacy business and how to reinvent that business and drive it in a new direction. It’s very helpful to have that expertise from someone who has actually lived through that. We are very pleased that Mike joined the Board.

I would like to know if there are any updates to your medium-term outlook regarding revenue and margin in light of the current outlook. Additionally, as you consider the ramp in the upfront savings program, does this alter your expectations for the timing of revenue stabilization?

Actually, I mean, these are rough numbers. These are not audited by Deloitte. But fundamentally, we crossed over this quarter. So our sequential growth in digital was greater than our sequential decline in the traditional business. That happened this quarter. On a year-over-year basis, I think this quarter now it's just like $30 million or $40 million, which fundamentally is at that point. As we go through next year that will be lumpy. The reason that is lumpy is each quarter slightly differs. Some quarters you have a little more revenue run or a discontinuance or a price down, so you can't say, okay, gee, crossed here in the fourth quarter, therefore, it's over. No, no, this is great. We have narrowed this gap dramatically in the last year, and we're going to see some ups and downs as we go through the seasonality and the unique quarter layout of the revenue stream.

Yes, it did. Did any changes in the way you've articulated in the past on those targets?

No.

Okay. And then, just as far as free cash flow generation in '20, reverting your target there, how should we be thinking about capital allocation progression and share repurchases at current levels?

We will continue to seek opportunities in the market, and we have the capability to invest in buying back shares as well as reinvesting in the business, as we have done over the past year.

As you aggressively ramp up digital skill sets, can you help quantify that wage inflation that you might be seeing with these new skill sets?

What you said? I'm sorry. I missed the last part of it.

Could you quantify wage inflation as you continue to ramp up on digital skill sets?

We haven't seen that much wage inflation. A lot of these digital skills are people who are much earlier in their career. We're also augmenting this with graduate programs. We are experimenting with some very unique things. For example, we are helping to pay tuition costs of some students, graduate students, who then agree to stay with us for three years after graduation. We’re working with the universities on curriculum around some of these digital, particularly data scientists skills, analytic skills, and some other very important skills to our business going forward. We are having quite a bit of success attracting some of these newer, early in career people because they’re doing some really interesting projects. We have this little video tape that we show on this BMW autonomous driving program that we play in effort to show them exactly what we are talking about. To answer your question, no, we're not seeing a lot of wage inflation.

Got it. That's very helpful. And just a follow-up from the margin question that was asked previously. Could you quantify how much you expect EBIT margin, adjusted EBIT margin to be down in the first quarter? And then just the commentary surrounding the margin progression throughout the year? Is that one point increase sequential or year-over-year?

I think it's sequential. The first quarter will be probably closer to a 14 type of percent on an EBIT margin perspective down from the fourth quarter where we were at 15.7%.

Thanks, guys. Can you hear me, okay? It just said that line is open…

We can hear loud and clear.

Thanks, Mike. When considering guidance, we're anticipating around negative 1% constant currency organic growth for the revenue outlook this year. This is an improvement compared to negative 3% constant currency last year. Given the strong visibility you have now and the robust digital expertise reflected in your book-to-bill ratio of 1.1, are there any one-time items that you are comparing against that you would like to highlight, or any conservatism we should take into account? Additionally, could you provide some insight into the key components, such as the expected digital growth rate and the performance of Industry IP versus the legacy areas?

No, there’s nothing unusual. As I mentioned, we are increasing our efforts to provide customers with upfront savings, which will allow us to capture a larger share of their overall IT spending on digital initiatives. This is why we are seeing a slight decline in the first quarter, but we expect to recover some of that throughout the year. There is also some seasonal impact from Q4 to Q1; last year, for instance, this was about $300 million. This first quarter is projected to be a bit higher due to our initiatives to speed up digital transformation efforts. After this period, we anticipate a consistent increase in revenue throughout the year, especially with Luxoft joining in Q2, Q3, and Q4. Regarding margins, as I mentioned earlier, we expect a sequential progression of about a point from our first-quarter figures.

Just a quick follow-up on the Industry IP and BPS side. It seems like the digital side is doing as well as you expected. That side of the business, Industry IP and BPS, I think it's a tad lighter than we thought it would be. I'm just curious to hear if there are certain verticals that you're really going to be able to help accelerate? Is there something going on there, that's a little surprising to the downside or maybe just more color on what you see there?

Yes. We have invested over the last year on what we call a Digital Insurance Platform. Fundamentally, this takes different components we had in our IP portfolio as well as some of the IP from our partners and we put that into what we're referring to as a Digital Insurance Platform. We have now sold this to a few large insurance companies. As a matter of fact, I was just in India last week and went through this approach with a couple of customers that we're visiting. We expect that to begin to gain traction this coming fiscal year. It really has only been in the market three to four months. The lead times on these things are quite lengthy, because they're significant transformation projects. We are getting more and more encouraged that that investment will begin to pay off. To be candid, I can't model that. I don't have enough customer wins and experience implementing this new platform to be able to share insights on how it's going to play out this year. We've also done some of the same things with our healthcare platforms, and there too we’re beginning to see some traction. But I just don't have enough visibility yet. We have been disappointed by the IP performance over the last year, roughly flat, and we're hoping to get a couple of points of growth that is definitely holding us back a little bit. We have made the investment and we're going to continue to invest, and we've got the platforms now, we’ll see how this begins to play out.

One of the things that is actually showing up in the numbers for this year is that there were a couple of contracts where the customer decided to in-source work.

That’s why that segment is not showing the growth that we would otherwise expect. That should hopefully be something going forward that will be behind us.

So, I’m wondering if you have substantial room in your fiscal ‘20 earnings guidance to invest significantly in digital and your plans for wallet share expansion. I guess specifically I wanted to ask if you can quantify the magnitude of digital investment that you're planning for fiscal ‘20. Also, if you could provide some dimensioning of the amount of investment you're making in these upfront client savings deals, presumably with the idea of expanding wallet share. Is there any way to quantify how much investments are being made there?

No. I got it. Pull may add to this. Roughly, these aren't exact numbers, but thinking of this as probably a $100 million or incremental to what we have spent in the past, around $0.25 to $0.35 per share, roughly.

And I think...

And fairly level loaded through the year?

Yes. We’re making these investments now. We continue to invest in Platform DXC, which we view as critical to our digital workload and digital projects. We are branding this differently, as Platform DXC, the customers are working with rebranded ex-company platform. It’s not a proprietary platform, it’s very open and built on our partners' technology like ServiceNow and others. We continue to invest in that and we're also continuing to invest in Bionix. We got very good yield out of Bionix. Bionix is advanced analytics, it’s lean as well as the tooling that goes along with that. Those are the two sort of generic investments we're making, cutting across our whole portfolio, and then the investments I mentioned we're making in digital, particularly in skills acquisition and in some cases hiring ahead for demand. One thing to note, in this digital world, it’s not like the old ITO world, where you wanted to contract and had a transition time of six or eight months and skills were a monthly or 60 days later, it wasn't the end of the world. A lot of these digital projects are very perishable. People wanted to work; it’s measured in weeks, not months. We're building more of a bench in these digital transformation centers to be able to respond. The large digital projects are not prescribed offerings. They really result as a part of an ideation process, minimally viable product or proof-of-concept, which also requires people to actually run that process and then get assigned to the actual project. So to summarize, Digital, Platform DXC, Bionix, and the investments in healthcare and insurance make up the bulk of that. Yes, we are investing more. We see the opportunity and the growth and we're getting more comfortable with this model as we go forward.

Hey, Mike, let me approach your question from a different angle. It's encouraging to hear the progress in hiring digital talent. As you approach the market for digital talent, can you explain your unique value proposition to attract new talent to DXC? When you're coming at this market from a different position than the other players, do you have a way to articulate what's unique about your talent value proposition?

Yes. That’s a very good question. We differentiate around a couple of variables. One is, we have an incredible client base. Two, we're working on some extremely innovative projects like the BMW project. We have an unbelievable relationship with our partners. These recruits see what we are doing with Luxoft and how we're entering that space from a digital engineering standpoint, and our global footprint gives them an opportunity to grow from a career path perspective. Those are fairly compelling value propositions. We’re not having a lot of difficulty recruiting. I just did a Town Hall Meeting in our New Orleans digital delivery transformation center. It was like entering a new world. The diverse group of people was vibrant and engaging. I looked out at the audience of probably 300 or 400 people. The attitude is so different; it’s like a whole different world, very exciting. As we continue to drive more of this digital revenue, that becomes more and more what the company looks like. Combining that with our operational capabilities from our ITO business and application business, presents a great opportunity to co-create with the clients.

Operator, we will close the call now. Thank you.