DXC Technology Company (DXC) — Q4 2022 Earnings Call Transcript

Thank you, and good afternoon, everybody. I'm pleased that you're joining us for DXC Technology's Fourth Quarter and Full Year 2022 Earnings Call. Our speakers on the call today will be Mike Salvino, our President and CEO; and Ken Sharp, our EVP and CFO. This call is being webcast at dxc.com Investor Relations, and the webcast includes slides that will accompany this discussion today. Today's presentation includes certain non-GAAP financial measures, which we believe provide useful information to our investors. In accordance with the SEC rules, we provide a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release and in the webcast slides. Certain comments we make on the call will be forward-looking. These statements are subject to known and uncertain 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'd now like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call, except as required by law. And with that, I'd like to introduce DXC Technology's President and CEO, Mike Salvino. Mike?

Thanks, John. I appreciate everyone joining the call today, and I hope you and your families are doing well. Today's agenda will begin with an update on the progress we have made in driving our transformation journey. There is no doubt that DXC is in a better place. Next, I will update you on Ukraine and Russia. Ken will then discuss our Q4 results and FY '23 guidance. And finally, I will make some closing remarks before opening the call up for questions. I'm pleased with what we've accomplished in FY '22. The next two slides show quantitatively and qualitatively the progress we have made that has put DXC in a dramatically better place. Beginning with the numbers, we narrowed the total organic revenue decline by 620 basis points. Our growth strategy has two parts, consistently grow GBS and shrink the negative declines in GIS. We have achieved the first part of our growth strategy by consistently growing GBS for four consecutive quarters in FY '22. While we did shrink the organic revenue declines in GIS, we expected better results, which we plan to achieve in FY '23. Considering adjusted EBIT margins, we delivered a 230 basis point increase, and our non-GAAP diluted EPS was up $0.44. The highlight of the year was our free cash flow performance. We drove $743 million in free cash flow. This is a $1.4 billion improvement compared to FY '21 and is a clear indication that we have built a team that can execute. Now let me turn to our qualitative results, discussing each of the five steps of our transformation journey. The first step is to inspire and take care of our colleagues, which was highlighted by how well we've taken care of our people through COVID and now conflict created by Russia's invasion of Ukraine. Concerning our customers, we continue to increase our NPS score, which is now at 31% and above the industry best practice range of 20 to 30. Optimized cost is the next step. We made good progress in portfolio shaping by divesting businesses that did not fit our strategy, and we drove out costs across the organization. Our cost takeout activities will accelerate for the GIS business in FY '23. The fourth step is seize the market where our book-to-bill numbers continue to show that we can lead in the IT industry. Our trailing twelve-month book-to-bill of 1.1 is a great result. And finally, in terms of our financial foundation, Ken's team has done a great job executing three initiatives: improving our free cash flow; refinancing our debt; and remediating the material weakness. All three of these items have put DXC in a stronger financial position. We continue to stand with the people of Ukraine, and our thoughts are focused on a rapid resolution of the conflict. While Russia's invasion of Ukraine has been a tragedy, this has not and will not have a significant impact on our business. Let me take you through how we've delivered on the commitments we made on March 4. First, we've done a great job caring for our people in the region. I would like to thank our DXC colleagues across the organization for coming together to deliver excellence for our customers and colleagues. Our transformation journey starts with our people, and we are honored by the commitment, dedication and caring we have seen from our people in the region and throughout the company over the past few months. In terms of our 4,000 colleagues in Ukraine, we have successfully moved many of them to Western Ukraine, Poland and Romania. And I would like to highlight their productivity has been above 85% since the conflict began. By the end of June, we will also have successfully relocated our nondomestic and corporate Russian employees out of Russia. Our second commitment was to exit Russia. In April, we exited the Russian market and successfully took care of our customers and colleague of that business. This action fulfilled DXC's commitment to exit the region and will reduce our revenues by approximately $140 million per year. Our solid execution of these commitments has enabled us to have strong customer retention, has made our business better and positioned us to effectively deal with the conflict as it continues. As we move into FY '23, our leadership team knows what we need to do within GBS and GIS. This clarity gives me confidence that the momentum created in FY '22 will continue in FY '23. GBS is a business that we've consistently grown and is comprised of a set of digital offerings that are high value for our customers and for DXC. This business is highlighted by our engineering offering, which enables DXC to help our customers grow. In fact, a number of our customers refer to us as their growth partner. We use deep engineering skills to create products, services, and experiences that make our customers more relevant and vital to their customers. An example is our relationship with one of the world's largest automotive manufacturers. Car buyers want a digital experience that will help them minimize disruption to their vehicles, and we all know cars are full of sensors that produce all sorts of data. Our engineering teams use this data to provide diagnostics and preemptive failure analysis. Overall, this lowers maintenance, improves the car's performance and leads to a better driver experience. The engineering offering is just one example, but you can see why we're excited about the future of GBS. It's a business that's differentiated, is high-value for our customers in DXC, and now represents roughly 47% of the total revenues of DXC. GIS is comprised of a set of offerings where the work is mission-critical, making this business high-value for our customers. Based on the financial performance of this business, it is currently lower value for us. In FY '23, our top priority is improving the financial performance of GIS. The focus of this attention will be on driving organic revenue growth in Modern Workplace and driving margin improvement for cloud infrastructure/ITO. From Modern Workplace, we expect to see fleet of last year's labor drive improve organic revenue in '23. We anticipate that Q4 will be the low watermark in organic revenue declines. And by the end of FY '23, Modern Workplace is expected to turn positive. For cloud infrastructure/ITO, we are committed to taking out cost to increase margin, which will be done by fixing contracts, reducing contractor and real estate costs, and optimizing the assets of our data centers. Finally, we will continue to portfolio shape, to run a company that has higher value to our customers and DXC.

Thank you, Mike. Turning to our progress on our transformation journey. There is no doubt we are in a much better place. Our Q4 organic revenue declined 2.8%, impacted by 75 basis points due to Russia's invasion of Ukraine. Adjusted EBIT margin of 8.5%, year-over-year, our margin expanded 100 basis points. Margins were impacted by 40 basis points related to taking care of our Ukraine and Russian colleagues and exiting our Russian business. Our trailing twelve-month book-to-bill is 1.11. Non-GAAP diluted earnings per share of $0.84, up $0.10 compared to the prior year. Moving to our income statement on Slide 11. During the fourth quarter, gross margin was lower by 210 basis points due to accelerated hiring and higher utility costs in Europe. SG&A as a percentage of sales was down 180 basis points as our business optimization efforts yielded results. Other income increased due to a gain on sale of assets. In total, adjusted EBIT margin expanded 100 basis points. Interest benefited from our debt retirement and refinancing. Q4 was $4 million higher than anticipated due to unwinding a legacy financial structure. Adjusted EPS is up 13.5%, boosted by increased EBIT margin, lower interest, and a lower share count. Our EPS for Q4 came in below our guidance by $0.14 due to three items aggregating $0.17: $0.04 Russian invasion of Ukraine; $0.06 increased European utility costs; and $0.07 higher tax rate. For FY '23, we expect additional costs related to taking care of our colleagues and exiting Russia and our tax rate will be back to a normalized level of 25%. Turning to our segment results. A key part of Mike's strategy is to continue to improve the business mix and ultimately move GBS to be a larger portion of the business. For the quarter, our GBS mix improved 160 basis points to 47.2%. GBS continues with its fourth consecutive quarter of organic growth of 3.4%. GBS growth was impacted by about 150 basis points due to the Russian invasion of Ukraine. Our GBS profit margin was 14.5%, down 130 basis points year-over-year. GBS margins were impacted by about 100 basis points due to Russia's invasion of Ukraine. GIS organic revenue declined 8%. GIS profit margin was 5.9%, an improvement of 180 basis points benefiting from operational improvements as well as a gain on the sale of assets. We continue to work plans to move the GIS margin forward. As Mike articulated, our growth strategy has two parts: first, consistently grow GBS, which we feel good about; second, moderate the GIS organic revenue declines. We see early success with our IT outsourcing business. Our GBS and GIS businesses are each comprised of three offerings. Turning to our GBS offerings. Analytics and Engineering continued its strong organic growth, up 19.7%. Applications decreased 0.6% due to timing. We expect applications to return to growth in Q1. EPS generated $112 million of revenue, down 12.8%. Moving to our GIS offerings. Cloud and Infrastructure and Security was down 6.9% with a book-to-bill of 1.04. It's great to see that our IT Outsourcing declines moderated in the low single digits for two consecutive quarters with a decline of 2.1%. Modern Workplace was down 19.6% due to a difficult compare as the prior year quarter included a higher-than-normal level of resale of approximately $60 million or 930 basis points of growth rate. We believe the fourth quarter represents the low watermark for Modern Workplace based on our investments in the business and its ability to win in the market. For FY '23, we plan to make three updates to how we operate and report our offerings. First, we will bring our insurance and banking software assets and related business process outsourcing together; second, combine our cloud infrastructure with our IPO infrastructure business; and third, security will be stand-alone. Slide 14, debt was reduced to our target debt level and remained there the entire year. Interest is down significantly. And restructuring and TSI expense were reduced by $565 million. We also reduced operating lease payments by $132 million. Lastly, capital expenditures and capital lease originations as a percentage of revenue was 7% in FY '22, down from roughly 10% in FY '20 and presents a significant opportunity to improve cash generation as we look forward. Slide 15 demonstrates how our progress translates into improved cash flow. Our performance in the last three quarters of FY '22 provides a solid platform to build off of in FY '23 and ultimately gives us confidence as we work towards delivering our longer-term guidance of $1.5 billion in free cash. I should note that this cash improvement has come while we've had capital leases and related financing payments that sit outside of free cash flow. Cash flow from operations in the quarter totaled an inflow of $271 million. Free cash flow for the quarter was $93 million. For the full year, we delivered $743 million of free cash flow, exceeding our initial guidance of $500 million. As Mike mentioned earlier, our financial foundation is in a much better place. We achieved a lot in the year, improving transparency into our performance, strengthening our balance sheet, significantly improving free cash flow, reducing restructuring and TSI expense, and executing on our capital allocation program. Now that our financial foundation is much improved, we will pivot to providing more details on our business optimization efforts, particularly focused on improving GIS margins led by our Chief Operating Officer, Chris Drumgoole. Turning to Chart 18. Let me expand a bit on what Mike discussed earlier that improving GIS economics is a top priority. Let's think about our business optimization in two parts: first, improving disciplined execution with a focus on driving higher-quality revenues; and second, optimizing costs that will allow us to expand margins. On disciplined execution, this starts with putting disciplined processes, metrics and incentives in place to ensure our team is committed to signing profitable new business with favorable economic terms. We are moving away from leveraging our balance sheet to sell work that does not yield quality revenue with appropriate margins and cash flow. We are actively solutioning underperforming relationships and renewing our contracts to ensure we can provide a high level of service but also make a proper return to allow us to invest in our business. Cost optimization. There's clearly a lot of opportunity in front of us, whether it is addressing our underutilized data centers and office buildings, software agreements, contractors, delivery standardization, or offshore mix. We feel that we have enough levers to improve the GIS margin to circa 10%. We believe more than ever, we can make these changes as the competitive landscape has improved. Moving to capital allocation on Slide 19. We returned $634 million to our shareholders, repurchasing 18.8 million shares or over 7% of our outstanding shares. We expect to repurchase an additional $770 million or about 10% of our outstanding shares over the next three quarters. We continue to believe our stock is undervalued. As a reminder, when our debt is at our target debt level, we expect to deploy any cash over $2.5 billion. Additionally, we expect to generate $500 million of cash from our disclosed portfolio-shaping. Related to portfolio shaping, we are committed to ensuring we have the right portfolio to drive organic growth. We will continually assess our portfolio with specific focus on GIS to ensure our portfolio is aligned to our strategy and value creation to reduce complexity and allow management more time to focus on the critical parts of the business. Moving to governance. Mike and I are committed to improving our corporate governance. To be clear, our low governance score is not and will not be our brand. In that vein, we are remediating our weaknesses. As part of our efforts to pass say-on-pay, we have proactively engaged many of our shareholders, obtained their feedback and used their feedback to reshape our pay practices. You can see the improvements we committed to make that will be fully detailed in our proxy. Turning to our FY '23 guidance. Revenue of $14.9 billion to $15.05 billion. Two key items we are addressing in our revenue guidance. Foreign currency is expected to be a headwind of 4.6% or almost $800 million based on the strengthening U.S. dollar; divestitures that are announced and closed will lower revenue by approximately 2% or about $300 million. We have additional divestitures in process, including Fondsdepot Bank, and we'll update you accordingly. Organic revenue growth of minus 1% to minus 2%, which is a combination of continued growth in GBS and moderating declines in GIS. Adjusted EBIT margin of 8.5% to 9%. Our margin guidance takes into consideration a $100 million decline in our noncash pension income for FY '23 and a $50 million of costs associated with taking care of our colleagues in Ukraine and Russia as we reposition our business to put it in a better place and exit Russia. The noncash pension income is due to expected returns on our pension assets exceeding pension costs as several of our pension plans are overfunded. We are focused on locking down these plans and further de-risking our balance sheet. Non-GAAP diluted earnings per share $3.85 to $4.15, or a 15% growth at the midpoint. Free cash flow $800 million. Our guidance for the first quarter of FY '23 revenue of $3.7 billion to $3.75 billion; foreign currency is estimated to be 6% or about $250 million headwinds; divestitures are expected to reduce revenue by about $100 million. Organic revenue decline of 1.5% to 2.5%. Adjusted EBIT margin in the range of 7.5% to 8% due to the lower noncash pension income of $25 million and a cost to reposition our Ukraine and Russia business. Non-GAAP diluted earnings per share of $0.80 to $0.85. Free cash flow of minus $100 million due to seasonally high level of cash payments in Q1. We are reaffirming our guidance for FY '24. This reflects our strong progress on our transformation journey and our belief in the company's capability to execute over the next two fiscal years. As we think about our FY '24 goals, it's important to realize how far we've come as we've improved the transparency of the financials and the investability of DXC. We improved year-over-year cash generation by $1.4 billion. We tackled the issues that negatively impacted our ability to generate and hang on to cash. And we are in the process of reshaping our portfolio to drive higher value for our customers. As we close on FY '22, let me point out two key points that demonstrate we are in a better place. First, GBS never grew before FY '22 and has now grown four consecutive quarters. Second, GIS is no longer declining double digits. We will bring this positive momentum into FY '23, which sets us up well for FY '24. With that, I'll turn the call back to Mike for his final thoughts.

Thanks, Ken. I agree that DXC is in a better place. In FY '22, we made excellent progress on our transformation journey, driving our financial performance and building a strong financial foundation. While Russia's invasion of Ukraine is a tragedy, our team has done a tremendous job taking care of our colleagues. Our Analytics and Engineering business will emerge in a far better place. It is more resilient, has a more diversified global delivery platform and has lower geopolitical risk. While this situation is unfortunate, we have been able to manage it well, and it has not and will not have a significant impact on our business. Over the last 2.5 years, it is clear that we have put DXC in a far better place, and I'm excited to embark on FY '23. My leadership team has clarity on the actions that we need to accomplish on our portfolio and how to improve its trajectory. We fully expect our momentum to continue and deliver longer term. And with that, operator, please open the call up for questions.

Ashwin, it's Mike. How are you doing?

I'm sorry, I was muted. I thought I had learned that after two years. My first question relates to the mention of contracts that need improvement in performance. Is this different from when you first arrived? There were problematic contracts at that time. Could you clarify that for us? Additionally, if there are any problematic contracts now, what is the reason for that, and how do you plan to address it?

Okay. So Ashwin, this is unrelated to fixing the original problem contracts. What I meant is that our team now has great clarity. For the first time since I've been here, most of my management team has been in their roles for over a year. They are effectively managing their teams, strategies, policies, and procedures. The clarity we have about what we need to do for the GIS business has never been better. We're raising our standards for what success looks like at DXC. When I consider fixing some of the contracts, we simply won’t manage contracts that don't generate the right margin. If we're not receiving COLA, we will ensure we get it. We are stepping up our management of this business. There aren't many of these contracts, but we are focused on making sure they are resolved.

Yes. Maybe Ashwin, just to jump in real quick, too. I think that when we had problem contracts previously, it was around the customer relationship side. And I think Mike and his team did a phenomenal job improving that. When we talk about underperforming contracts, it's just where we think we can actually generate better margins. We have happy customers. And I think we believe that we ought to have the right margins to be able to ensure that we're investing in our business and our workforce, and that’s our focus. And we think this is just an additive as we move the business forward and create a sustainable business.

But Ashwin, in this market, there are two things to consider. First, it's important to ensure you are compensated for the work you do, and the second is to focus on margin. Looking at the GIS business on Page 12, we have been managing margins around 5.5% to 6%. We will continue to address this and take the necessary steps to stay on track. However, we are not categorized among problem contracts. This is supported by our NPS score; there’s no way our NPS score would be 31 if we had numerous clients dissatisfied with our delivery.

It seems that based on what you said, there are factors in the current environment such as wage inflation and the timing of pricing that you are addressing as you move forward. Additionally, could you clarify your comments regarding pensions and the potential upside for earnings per share? It would be helpful to understand what opportunities are available and perhaps the size of those opportunities, as I may have missed some details.

Yes. So Ashwin, our pension income generally runs greater than our pension expense. So we have a gap, and it's noncash, a GAAP profit. It was running somewhere around $300 million last year, and it'll be down to $200 million this year. There are a couple of reasons, right? One is the interest rates have certainly crept up. I think that impacts everybody that has a defined benefit plan. And we've also been, I think, relatively thoughtful with our pension surpluses. We've started to move into, I would argue, maybe a little bit more conservative investments. And we're looking to see if we can lock down those pensions and maybe wind them down, certainly in all within the rules. And while the participants do well with that, I'm certainly trying to figure out how to unlock some of that potential surplus that we have in these plans.

Just first off, a clarification on the outlook. In the fiscal '23, can you give us any sense on the divestitures and the portfolio-shaping? Was there any margin or free cash flow assumption or impact that you can quantify there?

Yes. I'd look at the margin impact to be roughly about what our business runs at. So I wouldn't say it's accretive on the margin side, but arguably, a little bit maybe right around the 8.5% to 9% range we're at.

Okay. And free cash flow, nothing to call out specifically on the divestiture piece, just to clarify that?

No, I think we're good on the free cash flow piece. I mean, at this point.

Okay. So then when we look at that $800 million number, you obviously did a lot of proactive measures in fiscal '22. Do you have anything chunky in there that you're undertaking as well?

We try to make sure we leave a bit of room on the free cash flow. So we can deal with some of the legacy stuff that pops up from time to time. So I would say we've tried to be thoughtful with that in general.

Okay. And then one last question for you. Setting aside Russia and Ukraine, can you share what you're hearing from clients? Have you noticed any significant changes in client decision-making recently? Also, when you created the fiscal '23 outlook, what kind of economic environment did you consider?

We evaluated the situation and noted that our book-to-bill ratio was 1.2, indicating we aren’t facing significant challenges at the moment. Despite the concerns surrounding Europe, we haven’t experienced any adverse effects. As I mentioned, we operate two distinct businesses. Our Global Business Services (GBS) segment continues to grow, driven by Analytics and Engineering, which saw nearly 20% growth, even amidst the complications arising from the Ukraine and Russian conflict. This 19.7% growth rate is commendable, and we have successfully managed to implement price increases during this period. On the other hand, our Global Information Services (GIS) sector has proven to be resilient in downturns. Having been in the outsourcing industry for over 30 years, I can confidently say that this business serves as a reliable revenue stream, supported by long-term contracts with cost-of-living adjustment clauses. Currently, we are recognized as a stable option in providing essential systems, which has led to increased demand in the GIS area. Regarding margins, considering the ongoing inflation and economic challenges, we have accounted for salary increases, additional costs related to Ukraine and Russia, utility cost inflation, and necessary investments for business growth. Specifically, we are committed to investing in the insurance segment, which has shown potential for us. Lastly, on the topic of personnel, I am monitoring our workforce situation. Our attrition rates are in line with industry averages, and we have been able to attract quality talent, especially as we expanded our centers and global delivery network to address the issues related to Russia and Ukraine. Therefore, I believe we are proceeding steadily. We are neither overly aggressive nor too pessimistic about our goals. I hope that provides a clear picture of our perspective for fiscal year '23.

Yes. That was great. Appreciate it.

Mike, let me ask the GIS question a little bit differently. I know it was weaker than expected. And I guess in the history of DXC, it's probably been typically weaker than expected. So Slide 18, you have a plan to improve it. Why is this planning going to work when many plans haven’t worked to improve GIS?

I've been at this for 2.5 years, and I can confidently say that our team is now capable of achieving our goals. Let me revisit our strategy. First, we focused on ensuring we deliver effectively for our customers, and the positive NPS score reflects that. Second, we aimed to strengthen our relationships to facilitate open discussions about adjusting the scope of our services. Third, we're concentrating on areas that need adjustment, such as removing purchases of computers and software from our balance sheet. Clients can acquire those directly without our involvement. Additionally, we need to focus on our contracts and profitability; there are many opportunities for improvement. We should proactively communicate with clients about our initiatives, including reallocating resources or providing some financial support to address contractors and data center needs. This proactive approach is only possible because we're delivering results now, and I believe we're equipped with the right team. Moreover, the competitive landscape has shifted; DXC is now perceived differently due to our investment in GIS, which emphasizes people and relationships rather than just financial resources. Clients are looking to us to manage their contracts, which is encouraging for our revenue prospects. On the cost side, we've prepared for upcoming challenges, as illustrated in our presentation. Our team has been working diligently over the past year to analyze contractors and real estate costs. Ken and his team successfully reduced approximately $93 million in real estate expenses. Next, we'll address the excess data center capacity, which we acknowledge has been an issue. While this response was lengthy, it illustrates our extensive preparations and commitment to our strategy. GBS is on a growth trajectory, and we are dedicated to advancing our plans for GIS as part of our overall growth strategy.

Got it. No, that's helpful. And just as a follow-up. Ken, on the guidance, it looks like fiscal year '23 may be a little lighter due to some of the call-outs, especially the unfortunate Ukraine-Russian situation. But fiscal year '24 didn't change. So you're going to grow margins at least 100 basis points in fiscal year '24 over '23 and a couple of hundred basis points in revenue. So can you just talk about the jump from fiscal year '23 to '24? It looks like a sizable jump, but maybe there are some one-timers in there and some improvements that help that jump.

Well, Bryan, let me take that question. So if you look at what we've delivered on Page 5 over the past 12 months, you look at the 620 basis point improvement in organic revenue, you look at the 230 basis point improvement in adjusted EBIT, you look at what we've done in free cash flow, we basically have to deliver the same results over the next 24 months. We never said this thing was going to be a straight line. We definitely like the trajectory we're on, and I would keep coming back to what gives me confidence around '24 is the management team in place, okay? This is a team now that literally has got their hands around, like I said, the team, the strategy, their policies, and procedures; never been clear. So that's a key point. And literally, the math that's pretty simple to do is you take Page 5, you see where we landed with '22. If you say that we'll continue, this team will continue to execute, which we've done to date, you'll see that not only will we deliver on the FY '24 guidance, we'll usually be on the upper end. Hopefully, that gives you some color on the way we looked at it.

Okay, guys. I want to start with a question about portfolio-shaping. You mentioned portfolio-shaping in your comments on GIS. I was hoping you could talk about your criteria for portfolio-shaping and give us your thoughts on how portfolio refinements would enhance DXC's overall value.

All right, Rob, thanks for the question. Let's focus on four main criteria. First, we now have control of this business, and you've seen the progress we've made in 2022. It's our responsibility to identify businesses that will genuinely contribute to higher value. Specifically, the GBS business, which you can see on Slide 13, focuses on digital solutions. The engineering work we perform is top-notch and holds significant value for both DXC and our customers. Therefore, high-value potential is the first aspect we want to evaluate. The second aspect is complexity. Over the past 2.5 years, I've aimed to reduce the complexity of our operations. If we can simplify things and prioritize managing businesses that are essential, that's our goal. Third, we place great importance on the fiscal year 2024. If we can help achieve our targets by divesting a segment, we will pursue that option. Lastly, we consider valuation. It’s crucial that we evaluate the sum of DXC's parts, and if divesting a part can unlock substantial value at a favorable valuation, we will proceed. In summary, if we can increase DXC's value, simplify our operations, accelerate progress towards our FY 2024 goals, and achieve a good valuation, we will take action. This is the approach we've taken with Fixnetix, Japan systems, the German banks, and so on. I hope this provides more clarity on our thought process.

Got it. And the guidance for workplace revenues, it's pretty encouraging. You're guiding to the ability to get to positive growth by the end of the fiscal year. What are the levers that are giving you the confidence in getting workplace revenues heading in that direction?

We have two key factors. The first is that, over the past year, we've applied the same strategy that helped us improve ITO. Initially, ITO was down by 9% at the start of the year, but now it's stabilized at around minus 2%. The investments we've made in Modern Workplace and the work we've accomplished this year lead us to believe that while the fourth quarter is likely our lowest point, we expect significant improvement. Similar to ITO, Modern Workplace has several large contracts, meaning the revenue arrives in substantial amounts. As we continue to transition the new business we've sold over the last six months, we understand that the book-to-bill ratio may seem slow to some. However, we have a clear view of when that revenue will materialize, and we anticipate that Modern Workplace will show positive results in fiscal year '23.

This is Brad Clark on for Keith. I wanted to visit the pricing comment you made and the ability to pass on some price increases. Can you just dive a little bit deeper into the pricing environment? What do the conversations look like with customers? Where have you seen more openness, I guess, to have that conversation with some customers and others?

Okay. Thanks for the question. So look, the price increase is usually in the Analytics and Engineering space. And the conversation is pretty simple. After we've created a certain amount of value in terms of doing a quick pilot and so forth, the conversation goes to, all right, well, what's the value we're going to create moving forward? And as we look at the value that we're going to create moving forward and staffing that team up, people know how critical these engineers are to get. That's why we think we've got a unique position in the engineering space because we can continue to create and recruit these engineers to get the work done. So because they're in such demand, because everybody talks about it quite a bit, there has been an uptick in terms of us being able to give a little price increase to a number of the customers just because if they don't use all the resources, those resources can be quickly moved to other projects. So that's basically the conversation. I've been thrilled about it because we've been leaning in. Our bench gets cleared pretty quick. And when you've got that low of a bench, you better get as much money as we can for those folks.

First one for me was on the trailing twelve-month book-to-bill. You highlighted that's running at 1.11. That's a really strong number. But then the FY '23 revenue guide is down 1% to 2% on an organic basis. Can you just help us bridge those two factors a bit? Like what are the other kind of levers or drivers underneath there? Is there weakness in the backlog? Or is there an FX impact? I'm just reconciling those two numbers.

There is no foreign exchange impact. We are simply taking on large amounts of work. Regarding your question about the anticipated increase from fiscal year 2023 to 2024, it may not seem like a significant change if we are spending 6 to 9 months converting large contracts. Much of our revenue comes from projects, which can convert quickly, but outsourcing deals require more time, usually between 6 to 9 months. You can see where the conversions are taking place based on my comments. The reason for the guidance is that revenue is expected to materialize in the latter part of fiscal year 2023.

Got it. Okay. Yes. That's very helpful. So there is a duration impact on the ITO side. For my second question, looking at Slide 9 regarding the actions for improving GIS, I noticed a good list of initiatives. I'm particularly interested in the investments made to assist clients with their cloud migration efforts that are affecting this business, as many clients are modernizing or moving their workloads to the cloud. Is that included in this? Additionally, could you provide an update on how much work you're currently doing with clients, especially considering the significant improvement in relationships over the past couple of years?

Yes, Lisa, it's definitely included. When I examine our cloud infrastructure and IT operations, it's not just about on-premises work, but there is a significant amount of cloud-related projects we are involved in. This is something Ken pointed out. As we move into Q1, we'll provide more details on our Global Business Services and Global Infrastructure Services, particularly regarding the cloud infrastructure aspect. That's certainly part of our focus. The discussion around optimizing our data center assets is what you are highlighting, and that is clearly our target now. Reflecting on our journey, the initial focus was on managing contracts, fulfilling obligations, and reducing costs. Now, we are in a position to assess our real estate and data centers, including the assets contained within them—deciding whether they should transition to the cloud or remain on-premises, and how to strike that balance, especially for underutilized data centers. That's the essence of optimizing data center assets. Clarity is key. This is the first time our team has been assembled, and I've mentioned hiring talented individuals. It's encouraging that this talent has remained and is actively driving our objectives. I hope this provides you with enough insight, Lisa.

My first question is regarding the metrics on the GBS side, where growth rates have been particularly strong in the key areas we mentioned earlier. If this is sustainable, it should eventually benefit the entire organization. I think the focus now is on the GIS business gaining momentum. With that in mind, could you provide more details about the types of contracts your booking team is securing in the GIS area? Specifically, what kinds of work are you engaging in, and what is currently resonating? Also, in connection with Lisa's question and Bryan's as well, what trends are emerging that may lead to significant contracts later in the fiscal year that will really drive growth?

The key point is the focus on Modern Workplace. Daniel has excelled with the contracts, resulting in a book-to-bill ratio of 1.12 over the past year, indicating a solid backlog that we need to manage. Many of our clients have large teams, which takes time to translate into revenue. During our previous challenges, we noted the revenue losses, particularly in this area. Modern Workplace represents our substantial contracts. Additionally, the competitive landscape in ITO is crucial, as it involves modernizing IT operations by updating servers and networks, both on-premises and in the cloud. I won't delve deeper into the competitive landscape, but it's reassuring to know that DXC is viewed as a financially stable company with a strong team and good client feedback. We recognize the opportunities available and are committed to pursuing them effectively and at appropriate pricing.

Okay, can I just ask one follow-up?

No, Darrin, hold on for a moment, because you brought up a good point about GBS. If you look closely at our business, you'll see that GBS accounts for nearly half of what we do. Ken mentioned it being around 47.2%, which is a significant change from the past. Throughout this transformation journey, we have built a business that is now worth approximately $7.6 billion in digital services, allowing us to compete effectively in high-value markets. It’s crucial for us to continue growing this part of our business, and I am very pleased with our progress. We are also making further improvements to GIS, and I am optimistic about the future of DXC.

That's great. I appreciate it. Very quickly on the financials, you've achieved a significant amount with your team. Considering the transition from approximately $800 million to $1.5 billion for 2024, which has been reaffirmed, it appears you have accomplished a lot already. I'm curious what the next step will be to effectively make that bridge.

You're discussing the transition into fiscal year '24. This is one of the things we are focusing on.

Yes. Exactly.

Yes, I apologize. We have certainly examined the details of the business closely. When considering the progress, the $1.4 billion change significantly exceeded our guidance for this year, which is fantastic. Looking ahead from '23 to '24, we have some restructuring in TSI expenses that will affect cash flow, and that should decrease by a couple of hundred million dollars. We're very focused on capital expenditures and cash usage, as the business has been operating with 6% to 7% in CapEx. There are definitely some adjustments we can make in that area. You heard Mike mention software costs and similar items. We need to be more strategic in our capital deployment. There is also a significant focus on margin improvement and working capital. Additionally, our bank consumed some cash this year, which we do not expect to continue because it won't be part of the portfolio moving forward. Fluctuations in deposits can negatively impact cash flow, which may seem unusual, but that's how bank accounting functions. I believe this will ultimately be resolved. We feel confident about achieving our goal of $1.5 billion, as we have many levers to pull, and we will continue to work on them, just as we did last year.

Darrin, the key is that I'll let Ken keep 14 and 15 in the presentation, which provides a lot of detail about our opportunities. We evaluate eight factors on a quarterly basis, starting with restructuring and TSI. I am very pleased with our commitment, reducing that from over $1 billion to approximately $300 million and continuing to drive it down. It includes all the elements Ken discusses, such as leases and interest expense. This approach ensures we are financially responsible in managing our cash and using it effectively for capital allocation. I recognize it's a team effort, but Ken has done a great job with our new finance team in achieving this.

Yes. Maybe even just touch on something Mike said, the capital leases, which if you think about when we started our journey, they were burning around $900 million. I think we guided this year to $500 million, that all sits outside of free cash flow. And to Mike's point about hanging on to more cash, the $1.5 billion becomes even more meaningful with that number ticking down. So we think that's just a great result as well.

Josh, I know we’re at the top of the hour, but let’s take one more question if we can.

I'll be real quick. I'm just wondering, do you expect to exit this fiscal year at breakeven organic revenue growth? And I’m just curious just given all the commentary around pricing, is there an assumption of positive net pricing in the revenue growth outlook for this year?

No. So Jason, regarding pricing, we didn't factor that into our revenue growth. We've been working on this for 2.5 years, observing the rhythm and trajectory of the business. To reiterate, the growth path was never intended to be linear. I’m pleased with the momentum we’re experiencing. We have to continue delivering at the same level over the next two years as we have just done. I believe we have a solid expectation for 2023 and I can definitely see 2024 ahead, feeling confident in our ability to reach those goals. I appreciate everyone joining the call. I want to emphasize how pleased I am with our team's accomplishments and the momentum we've built in 2022, and I'm excited about carrying that forward into fiscal year 2023 while working towards our long-term objectives. I hope everyone enjoys a nice holiday weekend. Josh, please wrap up the call.