DXC Technology Company (DXC) — Q1 2023 Earnings Call Transcript

Thank you, good afternoon, everybody. I'm pleased that you're joining us for DXC Technology's First Quarter Fiscal Year 2023 Earnings Call. Our speakers today on the call will be Mike Salvino, our Chairman, President and CEO; and Ken Sharp, our EVP and CFO. This call is being webcast at DXC 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-Q 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 Chairman, President and CEO, Mike Salvino. Mike?

Thanks, John. And I appreciate everyone joining the call today and I hope you and your families are doing well. Today's agenda will begin with an overview of our Q1 results. Next, I will update you on the progress we are making with our transformation journey. Ken will then discuss our financial results in more detail and our updated guidance. And finally, I will make some closing remarks before opening the call up for questions. Our transformation journey is creating value. But as you can see, with the shortfalls in the quarter, we need to do better. The good news is we have the right plan for FY 23. We are laser-focused on executing this plan with my team of operators. The work that needs to be accelerated is within our control. We have done a nice job of investing in our business that has produced a stronger, higher quality company and deeper customer relationships that have positively changed our reputation in the industry. When I talk about the quality of the company that we are, I want to highlight we continue to improve our free cash flow generation; debt and capital allocation are being well managed. We have shaped our portfolio and exited businesses that were distractions to our strategy. We've consistently grown GBS and narrowed the declines of GIS while moving our revenue mix towards the higher value business of GBS. And finally, we have improved our governance significantly. Concerning customer relationships, the NPS score that we communicate during these calls shows that we now have deep customer relationships because we are delivering. Our customers trust us with their mission-critical systems and now trust us with their higher value business needs, which is evidenced by the consistent growth of our GBS business. New and existing customers are turning to us for their ITO and modern workplace needs due to the quality of company we've built and our reputation for delivering. As you heard last quarter, our plan for FY '23 was to begin the year with lower margins and to increase them throughout the year. We are accelerating our cost optimization to reduce $500 million in cost by the end of the year. Not only is my management team focused on this, but so am I. I want to remind everyone that roughly the same team of operators took out $700 million of annualized cost in FY '21 while delivering for both our customers and colleagues and clearly expanding our margin. It's this experience that gives us confidence that we can do it again. The Q1 results are as follows: revenue was $3.71 billion and down 2.6% organic; book-to-bill was 0.87 in the quarter. This shortfall was within our control. We purposely pushed out deals in the areas of ITO and Modern Workplace due to poor economics. All that being said, we are currently at a trailing 12-month book-to-bill of 1.06 and we expect to be back over one in Q2. Adjusted EBIT margin was 7%, and EPS was $0.75. And finally, free cash flow was negative $12 million, which is a significant improvement from the negative $304 million that we produced last year. Now, let me give you some additional color around our transformation journey. The first step is to inspire and take care of our colleagues. It is very clear that people want to join DXC, which used to be an issue in the market. I'm very pleased by the way we have taken care of our people impacted by the Russia and Ukraine conflict and COVID-19. Concerning our customers, our most recent NPS score was 30, which is on the high end of the industry benchmark range. I mentioned earlier that customers are now trusting us with their higher value business needs. Our analytics and engineering offering is a great example of where we have consistently performed well in the market. So one of the world's leading retailers, we are changing the way their loyalty program works to enable the company to increase revenues and decrease costs. We are transforming their loyalty, technology, and data to better ingest and manage the right data. This data-led transformation is delivering their customers more personalized offers so that they can use their loyalty points where they are most impactful across all channels. This has increased loyalty and spending, which has helped the retailer grow. In addition, the transformation has reduced costs by managing the right data versus all the data. Analytics and engineering is an offering that we have consistently grown in double digits, which has helped us with our strategy to grow GBS. In Q1, the 2.8% growth in GBS is the fifth quarter of consecutive growth, and we narrowed the declines of GIS producing negative 7.2% growth due to the improvement in Modern Workplace. Optimized cost is the next step. As I stated earlier, we have high confidence that our cost optimization will improve our margins and make DXC easier for our colleagues to work here, easier for our customers to work with us, and position us well for the future. We expect to eliminate $500 million of cost. This is comprised of the following areas: staff optimization, including increasing productivity and offshoring, contractor conversions, office and data center space, network and telecommunications, and third-party spending in the areas of hardware and software. I also want to highlight a reminder that I discussed with my management team that along with these actions we will continue to run the business. This means we will continue to hire for the businesses that are growing like GBS and to scale the offshore presence of our global delivery network. The fourth step is to seize the market. Our Q1 book-to-bill of 0.87 was a direct result of more disciplined deal-making, and our trailing 12-month book-to-bill is still a healthy 1.06. New work for the quarter was 57%, and renewals were 43%. As I said before, we pushed out a number of deals in the ITO and Modern Workplace areas because we believe we can get better economics. The demand in the ITO and Modern Workplace market is there. Customers want providers that are financially stable, investment grade, and deliver, and that is now DXC. Due to these points, our reputation has changed in the industry, and that is why we are now seen as a safe pair of hands. Deals are coming our way and we are being very disciplined in our deal-making. Providers have given customers aggressive deals in the past, hoping that they can improve the economics over time, and the old DXC was part of that trend. We all know that these deals were hard to economically make work. The new DXC is focused on doing good deals from the start. Although this disciplined deal-making may have a short-term impact on our book-to-bill, we believe that it will help us longer-term improve margins and deliver for our customers. All that being said, we expect Q2 to be back over one. Finally, I'm pleased with the financial foundation and how far we have improved the quality of DXC over the last couple of years. We're doing a nice job improving free cash flow, and the business is producing results that have helped us manage our debt below $5 billion. We've also delivered $900 million to shareholders through our capital allocation program while being below our target debt level. Lastly, we have significantly improved our corporate governance. And with that, now, let me turn the call over to Ken.

Thank you, Mike. Turning to our progress on the transformation journey, we continue to move forward on our key initiatives. Q1 organic revenue declined 2.6%, 10 basis points, or $4 million below the bottom end of our guide. Adjusted EBIT margin of 7% was 50 basis points below the bottom end of our guide. Year-over-year, we improved free cash flow performance by $292 million. Free cash flow was $88 million better than the expectation we gave on the Q4 call. As a reminder, Q1 cash is seasonally impacted, including software vendor payments and incentive payments. Non-GAAP diluted earnings per share of $0.75 were $0.05 below the bottom end of the EPS range. Moving to the income statement on Slide 12, the first quarter gross margin declined 40 basis points compared to the prior year, primarily due to increased direct costs as a percent of revenue and unfavorable FX movements. We invested in our global delivery network in order to improve our delivery and ultimately allow us to optimize costs. While we are making these investments and doing the knowledge transfer, it is leading to higher costs. In addition, we made investments to deal with demand in the GBS marketplace, as well as to exit Russia. Finally, we need to optimize costs to drive higher margins in GIS. SG&A as a percent of sales increased 10 basis points as we made investments in certain corporate functions. Other income decreased 40 basis points due to lower non-cash pension income. Our preference is to move towards a stronger balance sheet by reducing pension exposure. As a result, adjusted EBIT margins declined 100 basis points. Our cost optimization efforts have moved at a slower pace than anticipated, as we were thoughtfully building our plan. Net interest expense is favorable, benefiting from lower interest expense and higher interest income. EPS was down $0.09 compared to the prior year and was impacted by $0.12 from lower margins, $0.10 from unfavorable FX rate movements, and $0.02 from the higher tax rate. These impacts were partially offset by $0.15 due to lower interest expense and a lower share count. For revenue, the continued strengthening of the U.S. dollar is resulting in $1 billion of headwinds or an additional $374 million from our prior guidance. FX is having a more meaningful impact on margins due to a higher concentration of costs in U.S. dollars. Year-over-year FX is negatively impacting the adjusted EBIT margin by approximately 50 basis points or an additional 25 basis points of margin impact on our prior guidance. Next, let's turn to our segment results. We continue to see improvement in the business mix as GBS becomes a larger portion of the business. For the quarter, GBS increased 180 basis points to 47.4% of total revenue. GBS has consecutively grown for five quarters and is our higher value business with higher margins and lower capital intensity. GBS continues to grow organically up 2.8% driven by strong analytics and engineering demand. The GBS profit margin was down 250 basis points to 11.9% impacted by higher costs and FX. GIS organic revenues declined 7.2%, GIS profit margin was 6.5%, an improvement of 70 basis points benefiting from lower costs, a gain on sale of assets, partially offset by FX. With that cost optimization efforts, we expect to see improvements in our segment margins in the second half of the year that will continue through FY 24. Turning to our fixed offerings that comprise GBS and GIS, starting with GBS, analytics and engineering continued a strong organic growth of 15.7%, applications declined 2%, insurance software and BPS generated $368 million of revenue, up 0.3%. Moving to our GIS offerings, security was down 0.3%, cloud infrastructure and IT outsourcing is performing in line with our expectations, with declines moderating at negative 4.4%. Modern Workplace was down 16.1%, and improvement from the fourth quarter which was down 19.6%. We expect to see continued improvement in modern workplace throughout FY 23. The GIS book-to-bill has been impacted by our increased pricing discipline Mike mentioned earlier. We have taken a more disciplined approach to ensure we achieve reasonable economics that appropriately cover our cost of capital. At the end of the day, we believe the market realizes that for large scale IT infrastructure types of work, DXC is the safe pair of hands. We believe our competition has been forced to be more rational. As a result, we expect to be able to sign work with better economics. Slide 16 demonstrates how DXC continues to benefit from its financial foundation. Debt continued to decline, due primarily to FX impacts on euro-denominated debt. Currently, about 60% of the outstanding debt is euro-denominated. At $4.8 billion in debt, we are below our target debt level of $5 billion. We continue to reduce our restructuring and TSI-related cash outflows. These expenses totaled $35 million in the quarter, down significantly from the prior year. Capital expenditures and capital lease originations as a percentage of revenue were 6.4% in the quarter, down from 11.9% in Q1 FY '22. We continue to thoughtfully examine our capital expenditures and capital leasing as our capital intensity presents a significant opportunity to improve cash flow. As we think about cash generation and capital available for deployment, let me take a moment to discuss the interplay of capital or finance lease debt reductions and cash available for capital allocation. In FY 23, we expect to repay $500 million of capital leases, reducing debt. Based on our efforts to better manage fixed asset purchases via capital leasing, we expect to reduce borrowings in FY 23 to approximately $200 million of capital lease originations. So between the capital lease repayments and the lower originations or borrowings, our debt would be reduced by approximately $300 million. The $300 million of capital lease debt reduction provides flexibility to either borrow for capital allocation by staying at our target debt level or further deleverage. Our expectation is to hold our $5 billion target debt level, yielding cash available for capital allocation of $500 million. Moving to Slide 19, given our current valuation, we believe the best capital allocation decision is to repurchase our stock. We have returned $900 million to our shareholders by repurchasing 27.8 million shares. We've repurchased over 10% of our outstanding shares since the start of FY 22. As of the end of June, we are halfway through our recent $1 billion share repurchase program and are on track to complete this prior to reporting our fiscal year results. Further, we are on track to achieve our $500 million of cash proceeds due to our previously discussed portfolio shaping initiative. Turning to our guidance for the second quarter, revenue of $3.55 billion to $3.58 billion. Two key items addressed in our revenue guidance: foreign currency is expected to be a headwind of 7.2%, or almost $290 million year-over-year. Divestitures are expected to produce revenue reduction by about $93 million. Organic revenue growth of minus 1.5% to minus 2.5%. Adjusted EBIT margin of 7% to 7.5% as we continue to face headwinds from higher costs as a percent of revenue and FX, non-GAAP diluted earnings per share of $0.70 to $0.75. Our updated FY 23 guidance revenue of $14.6 billion to $14.75 billion. We now expect foreign currency to be a $1 billion year-over-year headwind. This is an increase of over $300 million in comparison to prior guidance. Divestitures are expected to reduce revenues by about $325 million. Organic revenue remains unchanged at a decline of 1% to 2%. Adjusted EBIT margin is in the range of 8% to 8.5%. This reflects higher than anticipated costs as a percentage of revenue and an FX impact of about 25 basis points. We expect margins to improve through the second half of the year as we execute on our cost optimization efforts. Non-GAAP diluted earnings per share of $3.45 to $3.75, down $0.40 from our prior guidance. Free cash flow of $700 million reduced by $100 million. We are reaffirming our guidance for FY '24. This reflects our confidence in our ability to execute. While we have more progress to make with our margins. Let's put it in perspective. Over the last couple of years, we've improved our margins while offsetting headwinds, including divesting a large portion of our business, revenue decline due to legacy terminations, lower pension income, and significantly reducing restructuring and TSI. While our cost optimization initiatives ran slower than anticipated, we believe we have the right plan with the right operators to accelerate our margins. With that, let me turn the call back to Mike for his final thoughts.

Thanks, Ken. And let me leave you with a few key points. Our transformation journey is creating value. We are confident that we're taking the right steps for DXC in the short-term that will set us up for success longer-term. I'm pleased with the quality of company DXC has become with our stable debt, sound capital allocation strategy, free cash flow generation focus, investment grade profile, improved governance, and our consistent growth in GBS. I'm also pleased with the work our team of operators has done to change our reputation in the industry and deliver for our customers to become the safe pair of hands. We have a good plan, and we are laser-focused on accelerating our cost optimization to improve our margins. And we will deliver. Finally, I like the way the ITO and Modern Workplace markets are breaking our way, and it’s up to us to win the new work at economics that benefit DXC longer term. And with that, operator, please open the call up for questions.

Hi, guys. Good afternoon. Thank you. I wanted to start first just on demand question. So just can you talk about how client conversations are progressing? Just as it relates to the macro uncertainty? Is this causing any change in deal cycles or conversion? Understanding, you've talked about some pushouts that are your own, conscious decisions, but are you seeing anything there in cycle timing, conversion? And just if you can break that down between maybe U.S. and ex U.S. clients if you're seeing any difference in behavior there?

Okay. So Bryan, good to hear your voice. And thanks for the question. Let me first start by saying we're not seeing a real difference between Europe and the U.S. and APAC. So let's put that aside. The second thing is, now let's look at the demand by GBS and by GIS. The GBS demand is definitely there, and we're seeing it in our results. You can't grow the analytics and engineering business 15.7% and also have the book-to-bill of 1.17 if the demand wasn’t there. You will also see I'll comment on the margin at some point in time again through this call. But the investment that we made—one of the investments we made in Q1—and when this is on me is that we did build a bench for GBS. That market is literally a market that if you can show up with the right skilled people at the client's doorstep first, you're going to win the work. But they really, really want to see the skills. And I think everybody on the call knows that the demand environment for the skills is hot. So we invested; we built a bench. So we're seeing good demand there. I don't see any issues. I love the way that we've now broken the insurance business out, and we’re more laser-focused on doing work for those insurance companies. Now, in contrast, we see GIS, and GIS, I would also tell you, the demand is there. If you look at the marketplace, you'll see that there are customers in the ITO and Modern Workplace segments that are trying to figure out what do they do with their work moving forward? And I made in my prepared comments they’re focused on, are you delivering for your customers, or are your customers referenceable? That's why I talked so much about our customers in my script. The second thing is, our investment grade profile. And third is financially, are we doing okay? That's why I talked about the quality of the company. I also talked about safe pair of hands. So we're definitely seeing the deals come our way. Now, here's the deal. Traditionally, those customers have been given deals where the providers have invested in them upfront, only to turn around and then hope to get the economics better moving forward. We've said, when I talked about our disciplined deal-making, we're not doing that anymore. So we want the deal to be good for both the customer and us right off the bat. Look, in this quarter, it was three or four deals that we pushed out. Because we got to the terms, we got to the economics, and we didn’t like the economics. So I think those deals are not lost because we believe now that those customers know we are the ones that will deliver. I said in the call, I expect that our book-to-bill will come back up over one in Q2. The demand environment is decent for us. I don't see any issues with the demand.

Okay. I appreciate you answering my question.

Bryan, is that the color you were looking for? Was that the color you were looking?

Yes, it was. So appreciate that. And I was going to ask about the risk of loss of those deals. But you kind of answered that for me. So maybe I'll ask the free cash flow follow-up here. Just Ken, how are you projecting free cash flow cadence over the course of the rest of this year? And the reduction of $100 million, is that comparable to margin, kind of half FX, half operational?

Hey, Brian. So let me just pivot real fast because the deals that we pushed out are large deals; do I expect that they're lost? No. And it's not like we're not actively working with them right now to show why the pricing that we gave them was the right pricing. Fair enough?

Yes. Understood.

Yes. So just maybe two quick things. So the guide down of $100 million, probably round that a bit, but it's really margin or 100% margin. We thought it was sensible to take that off and then fully expect cash to build throughout the year and expect to have some good quarters in front of us.

All right, thanks, guys.

Hi, guys. Good afternoon. I guess I'll ask about the margins. I think you gave guidance for the first quarter almost two months into the quarter already for first quarter. I'm just a little surprised to see the margin shortfall in GBS. I guess you guys were too, I'm just surprised that it surprised you the way it did since you were already two months in when you gave the guidance. So just maybe a little color on? Why the surprise and how long is it going to take to fix?

Well, Bryan, so I'm not sure it's a surprise. Okay. So when I look at what we did in terms of the investment. The margin is based on the fact that look, we're investing in our global delivery network. What that means is, we're fixing the onshore offshore mix of this company. We've also been investing in automation. But when you look at what we've done with our centers, which is basically we have a staffing bubble. That means we had two people doing the job of one because we're doing the knowledge transfer from onshore to offshore. We also, when you look at Russia, we scaled Serbia, we scaled Poland, we scaled Romania. So from that standpoint, we increased that stuff, and whether we increased it one month, two months, or three months, and I wouldn't call it a massive surprise. The second part of the investment was the bench for GBS. And when I look at the demand for GBS, I think that's prudent. So we're making some short-term calls that we think longer term are going to serve us incredibly well.

And I would also add, Bryan, there's a lot of moving pieces in Q1. So think about the pension impact and the unprecedented move in FX. I would say just maybe on the FX side, it did catch us off guard a little bit on the cost side and the concentration of U.S. dollars, and we're certainly working it back. Our cost optimization, which we talked about, we’ve been building up to this, and we've tried to be really thoughtful with it as we build the knowledge transfer capability offshore to move the work as appropriate. We finally moved out a little slower on that than we would like. I think we put all that in, it's safe to say we missed our guidance. I get your point about your two months into the year but there's just a lot of moving pieces in Q1.

And that's Bryan, not Darren, correct?

Yes, sorry. It's Bryan.

Bryan, sorry about calling you Darren, that's not good. Sorry about that.

That's right. I'm sure. Hopefully, Darren can't come up with some other questions. But my one follow-up is, I think the key then is going to be the confidence in the long-term outlook, which was reiterated. If margins are dropped, I think investors are going to lose confidence in the fiscal year 24 outlook of adjusted EBIT margin of 10% to 11%. Why is that still the right margin target? And how confident are you that you can hit that and that doesn't have to eventually come down?

No, two things, Bryan. I mean, the bottom line is, we have—we are structurally fixing this business. When you look at the onshore offshore piece, once we get there, we will have better margins in the GIS business. That's basically a machine. When you look at that, that's why I called out look, two years ago, we took cost out roughly $550 million, I believe in the current year, $700 million in terms of annualized. And then we let it bed in, we make all of our decisions based on looking through the eyes of our customers and colleagues. We knew we were going to take this out again. So when I look at that, all right, fair enough. The staffing bubble. We didn't move as quickly as we should have but at the end of the day, once we get done with '23, we should be in a very good position with our FY '24 numbers. That's why we reiterated them.

Great. Thanks for the color, guys.

See you, Bryan. Sorry again. Okay, Kellyanne, who do we have next?

Hey, guys. So I have a question about your overall turnaround journey. You clearly showed some good turnaround progress through the March quarter, and then you hit some bumps here in the June quarter. Also, during the June quarter, we saw reason for some concern that there could be some margin trade-offs that you would encounter as you pursue better growth. So my question is, is it appropriate to say that you're hitting a number of margin trade-offs that are seemingly required to drive the revenue growth that you're targeting? If that's an accurate portrayal, how do you overcome the recent bumps in the road to reach your long-term margin targets, how do you get past the near-term trade-off in order to get to the long-term target?

Okay. So Rod, let's break this up into revenue and margin. And let's start with the margin. In the short-term, the decision we made was to invest in the GDN and to hire the folks offshore, so that we could transfer the work. When I look at that, and we get through the knowledge transfer, and put the Ukraine situation into Serbia, Poland, and Romania, look, we're going to be in good shape. You'll see that we're doing that in basically Q1 and Q2 because that's the guide on margin. The margin literally increases through the back half of the year because you've got the machine working. That's the way I would say that both short-term and long-term. In terms of revenue, we have two things going on. First, we built the bench, we invested in the bench in GBS and you’ll see, we can see our GBS pipeline up, we can see that the book-to-bill is still very solid. The other thing is, I've been clear with you all. We are sorting out the GIS market. Those deals are there to be had in the market that we're in whether you think we're in a recession or not. Anytime we're in this kind of market, there are not only more outsourcing deals, but they're bigger. When they're more, and they're bigger, customers usually want increased cost reductions, and we think we can command pricing that is consistent with how we look at our margins long-term, aka the 10% to 11%. That's the way I see it, Rod, when you talk about basically where we're at as a company. We also said this thing was never going to be a straight line. Great example of not being a straight line was free cash flow last year. Nobody thought when we started minus three or four that we’d get to 743. My view is, look, we're making good investments, the decisions we're making in the short-term—we’ve got a good plan and high confidence we will continue to create value. I hope people have taken to heart everything else we've done right in terms of the quality of the company, whether it's the debt, the capital allocation, the improved governance score, and then I continue to look at consistently growing GBS. When a lot of other folks are struggling in that area is a good shining star.

Okay, great. And then let me just ask a quick follow-up on this. You've got some competitors, particularly in the infrastructure business, that are really struggling. Are you seeing clients willing to pay a premium to sort of get out of a messy historical legacy contract and into something where the service can be better? Are you seeing clients willing to pay up to move out of these legacy deals?

So the short answer to your question is yes. And that's what we're focused on. So let me give you some color around that. When you get to these points, Rod, where you've got these large deals, and they're paying up, we have to literally go through line item by line item in terms of why that's appropriate. Whether it's inflationary costs, whether it's the cost of, hey, here's the way the deal should have been constructed to begin with, or whether or not it's just look, here’s the model that we will be using. All right, to make sure we're delivering. And let's not walk past that last point—meaning here's the model we will be using—100% offshore is not the right answer. You've got to have a nice mix of onshore and offshore. Those are the conversations we're having with the demand in the market. It takes a little while for them to understand they actually have a good price and they won't have to worry about the delivery moving forward. Hopefully, that gives you the color Rod that you're looking for.

Now that's helpful. Thanks, guys.

Thanks, Rod. Kellyanne, who's the next question?

Hi. The analytics and engineering business performed well, was up almost 16% year-over-year. I was just curious, because I would think of that as somewhat discretionary. But it still was a juggernaut here. So if you could just give us some context about why that may be performing well in this environment and how you see it going forward.

Thanks, Jamie. So basically, I'll just go back to the example we gave you during the script. We're seeing with analytics and engineering that we're able to deliver both increased helping a client increase their revenues or growth, and then decrease their costs. When I gave you the example, during the script of the retailer, specifically the loyalty program, we're literally dealing with both the technology and the data. As you can imagine, with loyalty, there's a lot of data. Instead of trying to deal with all the data, we deal with specific data, so that their loyalty points can be used at the right moment. This has created a really nice situation for this retailer in the sense that they've seen more demand, and then the costs have gone down. It’s interesting that you have categorized it as discretionary, because a lot of times, all these customers have dealt with both their infrastructure and the cloud. Now what they’re trying to deal with is this data and get more out of the technology they've put in place. We're proud about 15.7% growth; we expect that it's going to continue to perform in double digits because that's what it’s been doing for several quarters now. Thanks for that question.

All right. Thanks for that, Mike. And then, Ken, in terms of the free cash flows, good free cash flow quarter, but I was wondering if there are any call outs for next quarter for the cadence for the year? You did mention the seasonality into Q1? I heard you say that, but anything else we should be aware of in terms of cash flow.

Yes, no, I don't think there was anything Jamie. I mean, I think the second quarter should be a good cash flow quarter and I think the rest of the year as well. I believe we're heading into more cash generation going forward.

Got it. I'll drop back in the queue. Thank you.

Thanks, Jamie. Kellyanne, next question?

Hi. Thank you for taking my question. I wanted to start off asking about the application business within GBS and sort of the expected trajectory there. It could perhaps flatten out to where it's sort of flat on growth versus being sort of a detriment to growth. You mentioned the demand within broader GBS and obviously within analytics and engineering, but could you hone in on what your sort of view is for that business and how it fits in strategically?

Well, strategically it's a key part of what we're doing in GBS, and if we break that business apart, there are really four components: custom applications that we build from scratch for clients, the SAP enterprise piece, the Oracle piece, and ServiceNow. We handle all four for clients. The demand we're observing is particularly strong in custom apps, SAP, and ServiceNow. The negative growth we experienced last quarter has also been negative, but we expect it to stabilize throughout the year. It's a solid business for us, and it's important to remember that its performance will be just fine. Brad, do you have another question?

Yes, just a quick follow-up for Ken on the free cash flow. I believe you said it's reflective of the margin—a cadence in the region for the $100 million difference. Can you guess perhaps talk about the FX impact and how we should be thinking about that portfolio to free cash flow? You mentioned it was more extreme on margins and revenue, just want to ensure I have that understanding. Thank you.

Yes, I appreciate the question, Brad. We have about $800 million more in cost than U.S. dollars when you look at it on a pro-rata basis. Therefore, when the dollar strengthens, like it has, it's caused not only the revenue dollars and profit dollars to come down, but it’s caused margin compression as well, and that’s what's really impacting the margin besides just the dollars coming down.

Kellyanne, let's take the next question.

Hey, good afternoon, guys. Mike, I just wanted to ask this is a follow-up on the bookings dynamic, and what you're talking about pricing those deals in a different way. Are there investments that you're making, or you're realizing you need to make in your sales team and the go-to-market model to be able to sell this way to sort of shift to selling more value, or a different value proposition perhaps than they've done before? Or is this, do you view it just like literally very temporary with this quarter, and once you get the job closed, you’re off to the races? Or is it something that requires a bit more investment?

Well, I mean, look, it is something that's systemic that we're putting in place in terms of DXC. It's not just about the sales folks, I mean, it's about our reviews of those deals and we got to be clear that we can hit those margins, instead of hoping in the future that some things are going to happen. Clients are coming to us with a specific price for the scope and what we're doing is taking them back through the scope, showing them why that was probably underbid and then here’s how we’re going to deliver it for you and then, obviously, we stack that up with the references we have in the market, so that they can hear from those references that we do deliver. That's where folks are at now; they’ve had enough fun with the people they’ve been dealing with, there's too much uncertainty as it relates to what’s going to happen with their company. That's why I keep coming back—our quality of company has led us to take on these new inquiries. It’s not so much what the sales team is doing. It's literally the operating committee that I have established, reviewing those deals and making sure we're not going to do them at a lower price. If I need to get on these calls and say, hey, the book-to-bill was 0.87 do I really like to do that? No, but I also don't like when the margin is going backwards, especially on the new work. The fact that we’re fixing the delivery model also ensures we’re shutting off the funnel coming in that the deals should help us get to that 10% to 11% margin in FY '24.

Okay. And then, my follow-up is on GIS. Apologies, I’m doing this out of memory, so I might have it wrong, but my recollection is that in your initial set of 2024 outlook, your expectation for GIS was to get it to flattish or maybe modestly down, and it’s still running three quarters out at minus seven or so. So can you just help us a bit? GBS is humming along as you've highlighted very nicely, but can you help us a bit with sort of how we should think about bridging GIS over the next year or so to get to that 2024 number?

Okay. Lisa, thanks for the comments on GBS because obviously I'm very happy with that business too. Look, just taking the or narrowing the decline of GIS by 80 basis points, you're starting to see it's heading in the right direction because we literally stacked up the last three quarters of minus 8, minus 8.3, minus 8. Breaking through that number and starting to push it down is solely focused on one thing—performance of Modern Workplace. It’s not that hard of an equation. As Modern Workplace has gone from I think it was minus 19 last quarter to minus 16 this quarter, we've been very clear that we expect that business to turn around. We're seeing the new work come on. As Modern Workplace gets fixed, so too does GIS. It’s literally that simple.

Okay. Great. Thank you.

Thanks, Lisa. Kellyanne, any other questions?

Alright, Kellyanne, thanks so much. Look, in closing, what I would tell you is that we've made some very good short-term decisions around investing in DXC. We think those are going to position us well in the future. I'm very proud of the quality of the company and the quality of customer relationships we've built. The closing comment is we are laser-focused on making sure we take out this $500 million and we've got a team of operators that is very good, and we've got high confidence, just like we did in FY '21 that we will take the cost out again. So with that, we'll close the call and I look forward to updating everybody in the fall on Q2. Kellyanne, you can close the call.