DXC Technology Company (DXC) — Q4 2020 Earnings Call Transcript

Thank you and good afternoon everyone. I'm pleased that you are joining us for DXC's Fourth Quarter and Full-Year Fiscal 2020 Earnings Call. Our speakers on today's call will be Mike Salvino, our President and Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. This call is being webcast at dxc.com/investorrelations, and the webcast includes slides that will accompany the discussion today. After the call, we will post these slides on the Investor Relations section of our website. 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. 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 these 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 President and CEO, Mike Salvino. Mike?

Thank you, Shailesh, and I appreciate everyone joining us today. This is the first time we've connected since the COVID crisis, and I hope you and your families are staying safe. I'm going to start today's call by sharing some big picture context about what we've accomplished since the last time we spoke. I will then discuss feedback we've been receiving from our customers who are recognizing our outstanding operational performance during the COVID-19 crisis. Before I hand the call over to Paul, I will also provide an update on our transformation journey. Paul will then share our financials including an update on the actions we have taken to strengthen our liquidity and enhance our financial flexibility. Then I'll make some closing remarks before opening the call up for questions. I'm pleased with the quarter we have been making good progress with our customers. Since I started in September, we have been focused on improving customer delivery and building stronger customer relationships, and we have done both this quarter. On customer delivery, we have now fixed 35 of the 40 challenged accounts. Of the remaining five, two have decided to leave us and we are still working with the other three. Investing to fix these accounts was something I highlighted during my first earnings call and I'm happy to report this is pretty much behind us. The investment is also paying off, as we now have sold $2.1 billion in TCV over the last two quarters to these accounts. The work consists of renewals and new work. Some of this new work was previously put on hold and some of the work is in new areas, like analytics and engineering. New work is the best evidence to describe a turnaround. On building stronger customer relationships, we have significantly increased our focus on our top 200 accounts. During this quarter, I personally checked in with these customers numerous times, making sure I gave them an update on how DXC was doing by sharing with them that we were focused on delivering and asking them to please let me know if they ever see any issues. As unfortunate as the COVID-19 crisis is, and I don't want to minimize that point, the crisis has caused customers to see heightened needs for our capabilities, specifically having reliable and secure on-prem IT infrastructure, workplace, and mobility services. Customer feedback has been overwhelmingly positive for the way we've delivered and I could not be more proud of how our team at DXC has delivered. Clearly, the investment we have been making in our people in the business over the past seven months was the right thing to do. It allowed us to fully support our customers when they needed us most, and customers remember when you deliver in tough times. We have pulled together a slide with a sampling of quotes that captures some of the stories concerning how we've delivered for our customers. The IT challenges that our customers faced during the crisis have highlighted the criticality of our distinctive workplace and mobility services, our on-prem IT infrastructure, and cloud capabilities, and finally our ability to innovate and execute in a very demanding environment. Let me bring a couple of these quotes to life. For a major defense contractor, we delivered 1,200 folding image computers for their employees in one week. Also, in one day, we fielded a 200% surge in service desk calls to enable half of their employees to work from home. In addition, we delivered a dashboard showing their devices across their 119 locations, which delighted the customer. For a leading health tech company, we anticipated a surge in service desk calls from the employees working from home and we built a chatbot in 30 hours to reduce the call volume by 12% on the first day. The customer was thrilled, as you'll see in the quote. They highlighted our proactiveness, out-of-the-box thinking, speed, and collaboration, and I want to highlight for you all that this is the new DXC at work. I want to thank our 137,000 women and men who deliver every day for our customers. They have done a phenomenal job taking care of themselves, their families, and our customers during the COVID-19 crisis. Over 99% of our people are enabled to work virtually. This 99% number is industry-leading, which is expected because we've got the number one workplace and mobility business in the industry, but nonetheless, it was great to see us deliver for our customers. The actions we have taken to improve customer delivery and focus on our people have enabled us to meet and exceed our customers' expectations during this challenging time. I also want to take a moment and thank our customers for reaching out and recognizing the outstanding performance of our people. Our strategy to position DXC for growth has always been based on taking care of our customers and the people who do the detailed work. The financial payoff from this strategy will materialize over time, but I am very encouraged about our progress. As we discussed in the last couple of earnings calls, DXC's main fundamental challenge has been revenue runoff from existing contracts. With everything we've been doing for our existing customers, we should be able to stem future revenue runoff. I say this because over the last seven months, we've done a lot of work to secure our customers, improve delivery, and study our customers' IT estates. Here's the key findings from all this work. Our revenue runoff was not caused by cloud trends prompting customers to move away from DXC. Instead, this runoff was due to suboptimal customer delivery and weakening customer relationships. As a result, we lost roughly $1 billion of revenue in FY '20, and expect to lose a similar amount in FY '21 from price downs and termination decisions made by customers in the last 12 to 18 months. For FY '21, the impact will be more pronounced in the first half of the year. The good news is that this fundamental problem is absolutely within our control and fixable. In fact, we're making good progress on bringing the new DXC to our customers, which should help stem future revenue runoff. Now I'd like to turn to our people. We continue to hire talented people to serve our customers both at the account level and within delivery. My focus has been to reward our people who are closest to our customers. You might have heard we announced pay increases for people that are delivering the detailed work. The first phases of these increases were done in January and the final phase will be done in August. The health and safety of our people has always been and remains a top priority for me, as we navigate the COVID-19 crisis. I'm personally keeping our people informed of the evolving situation through town halls and emails on a regular basis. My leadership team has done a fantastic job throughout this quarter. We're meeting daily to ensure that we're supporting our people and our customers by acting on the information from our COVID-19 command center. This center works around the clock to monitor the evolving situation. It guides our actions to help reduce the spread of the virus, ensures our people can work safely in critical onsite roles and enables our people to work from home securely. Now, let me turn to our transformation journey, which consists of three initiatives focused on our customers, cost optimization, and the market. All of these initiatives will help us build the foundation for growth. Now I've already given you a lot of context on our first initiative, which focused on customer delivery and building stronger customer relationships, but I want to spend time clarifying our cost optimization and seize the market initiatives. Being well on our way to securing our customer base and taking care of our people, it’s now time to focus on the second initiative which is to optimize the cost. Our cost optimization will be initially focused on simplifying our management layers and taking the appropriate steps to right size our cost structure to our revenue. What I've learned by doing countless customer calls and account reviews is that we have too many people between our customers and the people doing the detailed work. This causes complexity and confusion. It also erodes profitability and shareholder value. By eliminating unnecessary layers, our people will be able to deliver for our customers faster, drive meaningful revenue growth, and help deepen customer relationships. This is why we are accelerating our cost optimization initiative. We expect to eliminate about $700 million of cost on an annualized basis, with about $550 million coming this year. We expect roughly 4,500 people or 3.5% of our workforce to be impacted. I also want to highlight a reminder that I communicated to our people four weeks ago that along with these actions, we will continue to run our business. This means we will continue to hire and exit people at all levels as we see the needs and the performance of the business changing. This cost optimization initiative will allow us to better serve our customers and help us seize the market, which is our third initiative. The current environment has reaffirmed that what we do at DXC is incredibly relevant. We see this demand as a revival of the on-prem IT estate market and this is an opportunity that is unique to us. I've mentioned before that we were going to tap into the strategic advisory capabilities of Virtual Clarity, a DXC company that we acquired this past year, to provide greater insights concerning how our customers are considering moving their existing on-prem IT estate to the cloud. We have worked with 95 of our top customers who represent nearly half of our key accounts to assess their current IT estate and the expected evolution of these estates to the cloud over the next two years. The data shows our customers aspire to move 20% of their current on-prem IT estate to the cloud over the next two years; however, after careful analysis and considering the technical feasibility risk and business case, along with the ability to execute, this number drops to 5%. In addition, we found these customers wanting to modernize over 60% of their on-prem IT estates and do not plan to touch the remaining on-prem estate in the next two years. This also highlights the criticality of IT estates that we run for our customers and the thoughtfulness concerning how they will move the next pieces of these estates to the cloud. These on-prem IT infrastructure capabilities have always been essential, but now they're both essential and top of mind for our customers. I want to underscore that reliable and secure work from home capabilities have become must-have for our customers. The work from home trend is becoming a demand game changer for our IT infrastructure, workplace, and mobility businesses, and we are eager to capitalize on these opportunities. You will hear from Paul that we are currently in the market with the workplace and mobility business, but given the importance of working from home to our customers, we're reevaluating retaining the business to capitalize on this strong demand. It is now time for us to focus on cross-selling our services to our customers that we have worked so hard to take care of, which is exactly what we are doing. We are currently in the market right now cross-selling to our top 200 accounts. We have spoken to 90% of them concerning our workplace and mobility offering, our IPO and cloud capabilities, and our analytics and engineering offering. All of these actions have enabled us to increase our qualified pipeline by 23% over the last couple of months. I am looking forward to working with our teams and customers to seize this market opportunity that this third initiative has created and convert this cross-selling pipeline into new revenue for DXC. Now let me please turn the call over to Paul.

Thank you, Mike, and greetings everyone. As usual, I'll start by covering some items that are excluded from our non-GAAP results. In the current quarter, we have restructuring costs of $4 million on a pretax basis or $0.01 per diluted share. Also, in the quarter, we had $92 million on a pretax basis or $0.28 per diluted share for transaction separation and integration related costs, primarily from external spend associated with assets under strategic review. In the fourth quarter, amortization of acquired intangibles was $148 million on a pretax basis or $0.45 per diluted share. Also, in the quarter, we recorded a $3.9 billion non-cash goodwill impairment charge or $15 per diluted share. Additionally, in the quarter, our annual re-measurement of pension assets and liabilities resulted in an accounting gain of $244 million. As of year-end, we have pension assets of $11.1 billion and pension liabilities of $10.2 billion for an overfunded position of $940 million. Excluding the impact of these special items, non-GAAP income before taxes from continuing operations was $292 million for the quarter and our non-GAAP EPS was $1.20, driven by a tax benefit from the release of the valuation allowance in a key foreign jurisdiction as well as the benefit from other tax planning initiatives. For the full year, restructuring, transaction, separation and integration costs amounted to $570 million on a pretax basis or $1.78 per diluted share. For the full year, amortization of acquired intangibles was $583 million on a pretax basis or a $1.73 per diluted share. Our full year non-GAAP earnings also include the impact of goodwill impairment losses in Q2, as well as the gain on HPE arbitration award. So for the full year, our non-GAAP income before taxes from continuing operations, which also includes the gain on the HP arbitration award, was $1.84 billion and a non-GAAP EPS was $5.58. I will now move to our first quarter and full-year results in more detail. As always, all revenue comparisons I will discuss will be in constant currency. GAAP revenue in the fourth quarter was $4.8 billion despite a stronger dollar during the quarter. Currency was a headwind up about $40 million for the quarter sequentially and $101 million headwind compared with the prior year. Our full quarter revenue, fourth quarter revenue represents a sequential decline of 3.3% in constant currency. The revenue decline reflects the impact of prior terminations, runoffs and price concessions, as well as a $49 million in onetime headwinds from the resolution of certain customer disputes in the quarter. Adjusted EBIT in the quarter was $352 million. Adjusted EBIT margin was 7.3% and our non-GAAP EPS was $20. In the quarter, two items were particularly noteworthy as they impacted our income from continuing operations and our EPS. First, the resolution of certain customer disputes impacted non-GAAP income before taxes from continuing operations by $73 million and non-GAAP EPS by $0.21. On the other hand, EPS in the quarter benefited from a low tax rate as a result of the release of the evaluation allowance in a key foreign jurisdiction and the benefits from other tax planning initiatives. Normalizing for a tax rate of 27% and excluding the charges associated with the resolution of those customer disputes, EPS in the quarter would have been $1.07. In the fourth quarter, bookings were $4.4 billion for a book-to-bill of 0.9 times. For the full year, GAAP revenue was $19.6 billion including a year over year currency headwind of $445 million. For fiscal '20, adjusted EBIT was $2.06 billion. Our adjusted EBIT margin was 10.5% and our non-GAAP EPS was $5.58. For the full year, bookings were $17.7 billion for a book-to-bill of 0.9 times. Turning now to our segment results, I will start with the GBS segment, which includes the following layers of buying enterprise technology stock application and industry IP as well as analytics and engineering, which now includes the data, analytics, advisory, and the engineering services of Luxoft. The GBS segment from now also includes the U.S. state and local health and human services business and the horizontal DPS business, both of which are under strategic review. GBS revenue was $2.3 billion in the fourth quarter down 1.5% sequentially. Adjusting for the impact of the resolution of certain customer disputes, revenue was flat sequentially. Year over year, GBS revenue was up 73% primarily due to the contribution from the Luxoft acquisition. In the fourth quarter, GBS segment profit was $223 million and profit margin was 9.7%. Adjusting for the impact of customer dispute resolution, the profit margin would have been 12%. GBS bookings for the quarter were $2.2 billion for a book-to-bill of 0.9 times, primarily due to a slippage of one large deal that we expect to sign in the current quarter. For the full year, GBS revenue was $9.1 billion. Segment profit was $1.3 billion. Margin was 14.3% and our bookings were $9 billion for a book-to-bill of one time. Turning to our GIS segments, our GIS segment consists of the IPO layer of the enterprise technology stack and our cloud and security business. It also includes our workplace and mobility business, which is under strategic review. GIS revenue was $2.5 billion in the fourth quarter down 4.9% sequentially and 16.9% on a year-over-year basis. The decline year-over-year is due to the runoff and termination of certain accounts, as well as the decision from a few customers to in-source services. GIS segment profit in the fourth quarter was $192 million and profit margin was 7.7%. Sequentially, GIS profit margin was down 100 basis points primarily from the impact of revenue runoff. GIS bookings for the quarter were $2.2 billion for a book-to-bill of 0.9 times, and for the full year, GIS revenue was $10.5 billion, segment profit was $1 billion, margin was 9.6% and bookings were $8.7 billion for a book-to-bill of 0.8 times. Now let me comment on the performance of the layers of the enterprise technology stack. IPO revenue was down 7.1% sequentially and 20.6% year-over-year. This layer of the stack has been impacted by terminations and price downs due to actions that were taken in the last 12 to 18 months. Book-to-bill was one time in the quarter, which is an early indication that the effort to secure and stabilize our customers is starting to pay off and for the full year revenue was $5.5 billion. Cloud and security revenue was up 3.1% sequentially and up 7% year-over-year. The revenue increase in this layer of the stack was driven by continued demand for IT modernization solutions. Book-to-bill was 1.1 times in the quarter and for the full year cloud and security revenue was $2 billion. Moving up to stacks, the obligation and industry IT layer was about 0.6% sequentially and flat year-over-year. We're seeing solid demand for our enterprise cloud application business. Book-to-bill for this layer of the stack was 0.8 times in the quarter, as customers pulled back on project work, a new application deployment due to COVID-19, as well as the slippage of one of the large deals I just referenced. For the full year, revenue was $5.5 billion, down 2.1% year-over-year. In the analytics and engineering layer of the stack, revenue was down 6% sequentially, primarily from softness in the automotive sector and some project delays in banking. Book-to-bill in the quarter was 1.3 times. Revenue for this layer of the stack was $1.8 billion, pro forma for this full year contribution of Luxoft. I'll just return to the three businesses under strategic reviews. Overall, these three businesses generated $5 billion in revenue for the year. As you all know, we announced the sale of our U.S. state and local health and human services business to Veritas Capital for $5 billion in cash. This business continues to perform very well. Our teams are diligently working through separation activities and we now expect this transaction to close earlier than expected and most likely by the end of our second quarter. We're in active discussions with interested parties for the horizontal BPS and workplace mobility businesses. Our horizontal BPS is performing well, despite challenges from COVID-19. For our workplace and mobility business, we're seeing strong demand in the current environment as a number of customers are looking to enable their employees to work remotely. Our pipeline has increased by $1 billion since the beginning of our fiscal year. As Mike mentioned, workplace and mobility has become an area of strategic importance for our customers in the current environment. So, we're also reevaluating the value creation potential of retaining this business while at the same time, we continue to pursue discussions with interested parties. Turning to other financial highlights, adjusted free cash flow in the fourth quarter was $131 million or 43% of adjusted net income. We generated solid free cash flow despite two large cash offloads, including payments for our annual 401(k) match and a contract settlement that we expect to recover from insurance coverage in the current fiscal year. For the full year, adjusted free cash flow was $1.34 billion or 92% of adjusted net income. Our capital expenditures including the payment of capital lease was $368 million in the quarter or 7.6% of revenue. For the full year, CapEx was $1.38 billion or 7% of revenue. During the quarter, we paid $63 million in dividends, and during the whole fiscal year, we returned $950 million of capital to our shareholders in the form of $214 million in dividends and $736 million in share repurchases. Cash at the end of the quarter was $3.7 billion. Our total debt was $9.9 billion including capitalized leases for a net debt to total capitalization ratio of 41.6%. Now I’d like to turn to our liquidity and the actions taken to enhance our financial flexibility. As we stated, one of our key strategic priorities is to maintain a strong financial position consistent with an investment-grade credit profile. In the last couple of months, we've taken several steps to strengthen our liquidity and financial position. We drew down a $4 billion revolving credit facility in two steps, $1.5 billion in March and $2.5 billion in April. We were able to build out our cash position during a challenging economic environment and we used our credit facilities to pay down commercial paper. We subsequently accessed the capital markets and raised $1 billion in bonds via our two senior notes with aggregate principal balances of $500 million each, due in 2023 and 2025. The proceeds were used to pay down debt and extend our maturity profile. As of April 30th, we have over $5.5 billion of cash on our balance sheet. We also had $10.2 billion in debt and $2 billion in capital leases. $6.2 billion of our debt, consisting of term loans and drawn revolver is subject to financial covenants. We recently modified our covenants from a 3 times gross debt to EBITDA to 3 times net debt to EBITDA for the next 12 months, which further enhances our flexibility. Our net debt to EBITDA at the end of fiscal '20 was 1.6 times and less than one time on a pro forma basis for the sale of the U.S. state and local health and human services business. After 12 months, this covenant will step down to 2.25 times net debt to EBITDA. We also completed the extension of about a billion dollars off your term loans by 12 months, further improving our debt maturity profile. As a result, we now have less than $600 million of debt maturing in the next 24 months. As previously communicated, we intend to use the proceeds from the sale of our state and local health and human services business to pay down our debt. Lastly, in this uncertain environment, we are also taking the prudent step of suspending our dividends. This decision aligns with our investment-grade financial policy. The pause in the dividend will give our board an opportunity to reevaluate the appropriate dividend payout following the completion of our strategic alternatives. So in summary, we're taking steps to ensure that the Company is well positioned financially and is able to withstand potential further market dislocations and disruptions. These steps underscore our commitment to maintaining a strong financial position consistent with an investment-grade credit profile, but it also gives us the flexibility to execute our transformation journey. Now stated with previously fiscal 21 is a transformation year for DXC. We are executing on a number of initiatives as part of our transformation journey. We're securing our customers, optimizing costs and executing on strategic alternatives while enhancing our liquidity and our financial position. We're working on all of these initiatives concurrently. While we added uncertainty from COVID-19 makes it very challenging to have a clear line of sight on the timing and the full impact of these actions on our financial results, we're therefore suspending our fiscal 21 guidance until we have better visibility into the COVID situation and we've progressed further along on these initiatives. We expect our transformation journey in COVID-19 to be pronounced in the first half of the fiscal year. For the current quarter, the revenue loss due to price concessions and previously terminated business combined with the impact of COVID-19 on our project work could result in a revenue decline of 8% to 10% sequentially. We expect revenue to stabilize sequentially thereafter. Our first-quarter EPS will be at a low point for the quarter reflecting the more pronounced impact of the revenue decline in Q1 as well as the impact of additional investments in the business and a higher level of interest expense in the quarter. Additionally, Q1 EPS only includes minimal contribution from the cost optimization actions we’re undertaking. The benefit of those cost optimization initiatives of $550 million for fiscal '21 or $1.60 per share will accelerate throughout the year beginning in the second quarter. Now, the interest expense in the first quarter is also not indicative of the annualized level for the remainder of the year, particularly when you factor in the pay down of debt from the proceeds of the sale of the U.S. state and local health and human services business. And with that, I will now turn the call to Mike for his closing remarks.

Thank you, Paul. I just wanted to take a moment to recognize all the great work that you and your team have done to position us for success during the COVID-19 crisis. I'm pleased with the progress we're making on our strategic initiatives, which should allow us to have a stronger balance sheet enabling us to execute our transformation. As part of our ongoing strategy, we will continue to assess the competitive position of our business portfolio and develop plans to unlock future value either organically or inorganically. In summary, we are making good progress on our transformation journey. We are fixing our delivery and customer relationships that will stem the revenue runoff that has impacted us in FY '20 and FY '21. We are executing our cost optimization plans to better serve our customers by eliminating complexity and confusion. Finally, we are seizing the market opportunity where the criticality of the IT estate is top of mind for customers, highlighting our expertise. This allows us to cross-sell our capabilities across the enterprise technology stack. All these points will create the foundation that will position DXC for growth. Now, before opening the call out for questions, I just want to wish you and your families all the best during this time and please stay healthy. Todd, please open the call up for questions.

All right. Thanks, guys. Glad to hear you're all doing well and safe. Mike, can you give us a deeper understanding of the conversations you're having with clients and the responses that you're getting back from these clients? They really recognized, I guess, the renewed focus DXC is getting on the ITO business. And then overall, would you say you think these conversations will help you conservatively capture what you're seeing in that $1 billion impact in '21?

Darrin, thanks. Look, the bottom line is I think we're making great progress. That's why we put together the customer quote slide. And what they're basically seeing is if you think about the environment right now, almost overnight, people had to start working from home. And the CEOs and CIOs that I'm talking to are saying, all right, look, what do I do with my existing estate? Because now I've got my entire workforce hitting that estate pretty much every day. So when I start talking about the IT estate again and say, hey, it's become relevant, is I think we've all experienced some level of slow times or what have you against what you're trying to do from a virtual standpoint. So that's top of mind for the senior level folks. How do I make sure I can bring my entire workforce together to communicate virtually, so those are the conversations, and then the key thing for us is the fact that it was an outpouring of appreciation. I really appreciate what you've done. It wasn't just showing up with normal-type things. It was finishing transitions that were important. It was thinking innovatively, and it was making sure that we went above and beyond the call of duty to get them where they need to be. So that's why I highlighted for you that the plan was always to go cross-sell these customers. That's why I focused on the customers to begin with. And what this has enabled us to do is look at those customers now and say, all right, what else can we be doing. I have been having discussions with analysts for a while now about the cloud. I'm very, very supportive of the cloud. But when I analyzed our IT estate and its criticality, I have been saying all along that it's not just going to move to the cloud quickly. The fact is now I'm sitting there going, we have the facts because we used Virtual Clarity. We made the investment in Virtual Clarity, and reached that over 60% number, and now we got to tackle that opportunity. And some of it is in that $2.1 billion that I mentioned and some of that is in the 23% qualified pipeline uptick over the last couple of months.

Okay. And just a follow-up on your comment around pricing and other factors. It sounds like you've done a pretty good bottoms-up analysis across your client base now. So we do feel pretty good about your conservatism or how comprehensive that review was around that $1 billion?

Yes. Look, I've taken my time, okay. The plan we've got set is at a very detailed level. Hence, the reason why I highlighted the Virtual Clarity stuff. I'm also very transparent about the 40 challenged accounts, okay. In seven months, we've stabilized the majority of those accounts and delivered in the COVID-19 environment. That's special. We've got a good team here. We're doing good stuff, okay.

Thank you. Hey, thanks, guys, and good to hear from you. Mike, I want to follow up on your last comment where 35 of 40 problem clients resolved—two of them are leaving. As a problem, this is behind you. I wanted to understand a couple of things. One is if I could figure out where I would see maybe the various financial impact of this. The amount mentioned was, I think, $73 million in the quarter seemed relatively small impact. Is there ongoing impact of pricing concessions? Is there ongoing impact on cash flow or terms, easier comps that you had to give? Where would I see the impact of that ongoing?

Ashwin, are you talking about the $2.1 billion of new work? Are you talking about the $1 billion of revenue run-off? What exactly—help me understand that a little bit more.

The combination of that and then taking that down to, are we going to be faced with sort of a structurally lower margin because you might have given significant price concessions to resolve these problems? Get a little bit into the solution. What was the solution? How did you fix these things so quickly so that we can understand what the ongoing impact is?

Okay. Here's the three things that we did, right. First of all, moving forward, obviously, we've got significant pricing discipline. So we're not doing that anymore. The second thing is, like I had mentioned, right out of the shoot, I started investing in those customers to get the delivery sound, all right. Because I didn't want to have any other discussions about revenue run-off, and now those discussions are over. Paul mentioned that the majority of that revenue run-off will be in the first half of FY '21. The last thing is securing our delivery operations, okay. We've put in place various mechanisms to make sure that not only were we delivering, but Ashwin, I'm calling these customers on a regular basis. I'm sitting in weekly meetings. I am having dialogues with these customers to make sure I hear not only what they're saying, but I'm also pushing on them a little bit when I hear what our competitors potentially are saying about us, all right. I'm giving them the facts around what we're doing at DXC. That's why when I thanked Paul about the liquidity process and the financial flexibility, all right, that we've got over the next 24 months, we've got the runway to go make this thing happen.

Understood. And you said an important thing. You kind of said it wasn't the secular impact of cloud. It was really suboptimal delivery, the way things were being done. Is it possible to kind of do an attribution analysis to figure out—you have had terminations, price downs, suboptimal delivery? Cloud is something of an impact. Maybe it's incorporated in the price downs. There's a short-term impact here from COVID. As we think of growth going forward, how should we consider that in terms of all these factors?

In terms of growth moving forward, before I give any other guidance, I want to get further down my transformation journey. The bottom line is this: when I think about what we're doing with these customers, it was really important for us to show up and deliver for them. When you show up and deliver for a customer, the immediate thing that happens is I had one of our largest customers tell me two weeks ago after delivering, you’re going to get the first shot at the new work, okay. What I have seen in the analysis, Ashwin, is made sure we understand and listen to the voice of the customer, and then we’re starting to cross-sell what's happening. The environment just helped us because outsourcing always does better in a down market, and our clients want cost savings. Not only are we coming to the table, but they're coming to the table. Paul, would you have anything else to add to Ashwin's comments about numbers or what have you?

No, Mike. I think we're seeing it across the board. This cross-sell that you're talking about, certainly, I mentioned $1 billion in new pipeline that just really got generated by the workplace business. The ability—and also to build actually on what you just said, Mike, because I think it's important for Ashwin to know. Our business is actually quite resilient in economic uncertainties. If you think about it, 30% of our business is only exposed to project work. We have the opportunity, as Mike has mentioned, of stabilizing the customer and securing them to meet their core need, which has shifted to make sure that their on-prem ITO environment is resilient and secure. That gives us a great opportunity to showcase the rest of our product offerings across the enterprise technology stack.

So, Ashwin, just to close on that, the bottom line is this. I’ve been saying since I showed up here that I have a hard time believing everything is just moving to the cloud because when I analyze these accounts and their critical nature, people have described us as being at the heartbeat of our clients. Our clients have described us as part of the fabric of what they do. That stuff is going to thoughtfully move to the cloud. And by the way, when it does move to the cloud, they still need our capabilities. All the knowledge, everything that we do on-prem is needed in the cloud, except for walking into a data center. So getting back out there in the market and having those discussions with clients and letting them know we care is going to turn the tone. A new DXC is showing up, and that's what we're doing.

Great. Thank you very much. I wanted to ask about—as you look at the cost run-offs and the progress you're making with your customers, as you referenced, the new DXC, how confident are you that the revenue run-offs will kind of end in fiscal year '21? And what do you need to see happen from this point for that to be the case so that you can kind of get yourself back into a firm footing and headed in the positive direction you want to be going from a financial perspective?

Okay. So four things. The first one is we need to continue to deliver for these customers, because that’s going to stem any future revenue run-off. Second, we got to continue to build trust. We have a huge opportunity to build trust in the COVID-19 environment, all right. I don’t want to minimize COVID-19, but we had a great opportunity to deliver for our customers. Now the key thing is what additional new work is potentially out there. That’s just in the existing environment every day. Upgrade—updating a network, updating a server, putting in patches, we need to be doing that. The third thing is the cross-selling, and the cross-selling is meaningful because now we've got an open door based on those relationships that they trust us. The last thing is we want to continue to optimize our cost. I wasn’t kidding about doing the analysis about the detailed people doing the work, and the number of layers between them and the customer and getting that more simplified and streamlined. That’s going to help us in that environment. So I see those four things, James.

Hey, good afternoon. Thank you, guys. I wanted to ask on the cost optimization plan. So how much of that $550 million is a net cost savings versus reinvestment that you may plan to make? And then Paul, just as it relates to the $700 million too, as we think about the following fiscal year?

The cost optimization of $550 million is all going to be net incremental to the bottom line. As I mentioned, not much of it was in the first quarter, so we're going to see it accelerate throughout the quarter. You'll see it starting to show up in the second quarter. From a timing perspective, some of these initiatives can be complex as we begin to execute them, and we're way on our way now to getting the work done. We'll have basically a carry-on effect in fiscal '22. That's the difference between the $700 million-plus we’re going after and the $550 million. That will add further to the run rate as we exit fiscal '22. We're not just done with that; this is really a part of the plan of continuing to optimize. Of course, there are other opportunities that we're looking at. We're looking at, for example, our real estate footprint in this new, redefined work environment. We're also looking at contractor costs or further opportunity within the pyramid of how we serve our customers. All these things are still top-of-mind for us as we progress through the year, and we start to look to fiscal '22.

Okay. As we think about cash flow then, how should we think about conversion here and really just absolute cash flow generation levels? I'm understanding you've given yourself more flexibility in financials. But from a cash generation perspective, anything changed in the model going forward?

It's hard to give you guidance at this point in time. I can tell you that a lot of people worry about customers potentially deferring payment in this COVID environment. Another interesting statistic is that only about 15% of our revenue comes from industries that are very high-risk exposed to COVID, like airlines, hospitality, or some consumer goods players or retail. The rest of it is 85% of our business coming from industries or customers in moderate to lower risk sectors. So that's a good sign for us. Right now, our cash flow has been solid. You can see from the data that I provided as of April 30 that we continue to generate solid cash flow. I mentioned that we were over $5.5 billion of cash at the end of April. So we're just watching the market carefully, managing our working capital, being very prudent in our spending. I can't give you a precise number in terms of netting—how much of the cash flow as a percent of net income, but in due time, as we get more clarity, I'll be able to provide that.

Hey guys. So I have a question on revenues and then a follow-up about the cost takeout plan. So first, on the revenues, your commentary has conveyed enthusiasm about the progress you're making with clients. On the other hand, it's hard to see the benefits from that progress in looking at the near-term financials and the outlook for the June quarter, which, of course, we understand is affected by COVID and the contract run-offs that seemed to have started in prior periods. With that as the backdrop, I want to ask, particularly, Mike, what are the metrics you're looking at concerning DXC's turnaround? And can you also comment on how those metrics are making you think the worst should be over on the revenue run-off as of the first half of fiscal '21?

The three metrics, Rod, that I would lay out is, first of all, the customer delivery and the relationships because that is going to stem the revenue runoff. Being conservative—I can't predict everything that every single one of these customers is going to do, but I can tell you that I've gone out of my way to make sure they’ve seen what I call the new DXC showing up. The first one is the delivery and am I hearing any problems that are out there. I’ve made myself personally available along with the leadership team. The second thing is we're obviously very serious about this second initiative, which is optimizing costs. There are too many people between the folks doing the work and the customers, so we need to clean that up. I also look at basic things in that bucket, too, right, around just the operational performance. Our P1s are down, our service level agreement penalties are down. Those are all metrics that I'm looking at. The final thing I gave you is a glimpse of the campaigns we're running, all right. We're at the front end of it, so I’m on my team every day about the cross-selling. The fact that we are at 90%—I would have liked to have been a little bit better on that—but given the 23% uptick, now what I’ll be measuring is the conversion of that qualified pipeline. It's those three things: customer delivery and relationships, optimizing costs, and cross-selling.

Great, thank you. Thanks for letting me in.

Rod, sorry about that.

No problem. So listen, in the past, we've seen firms pursue cost takeout and then sometimes there's a revenue trade-off. So my question is, how do you take out substantial costs without timing the progress on the customer service improvements that you're seeing and also just laying a better groundwork for growth? It sounds like you see ways to take out costs that may actually make things smoother with clients, but it would be great if you could explain more about how to avoid trade-offs on growth as you pursue the cost takeout.

Thanks, Rod. And again, sorry about cutting you off. Look, first, you got to over-communicate with the customers. My communication during this quarter is to highlight what we were doing in de-layering to our top 200 accounts. I’ve proactively communicated with them. When I’ve had virtual meetings or conversations, I’ve reiterated what we’re doing. It's not a surprise, okay? I’ve also given them some examples. The examples came from the second piece, which was the detailed analysis. I kept saying over the last seven months, I’m going to review these accounts. We went and did the work and identified the layers. When you identify the layers, you can actually give the customer some examples, and when they recognize that, they understand the concept. The last thing is, you have to take care of the people who are doing the work. That's why I wanted to highlight for you that we gave them raises. We started in January, and we will finish with the rest of the world in August. So, it’s really doing those three things: proactively talking to the customer, doing the detailed analysis, and taking care of the people. So Todd, thank you, Rod. Sorry, I interrupted you. You can close the call now.