DXC Technology Company (DXC) — Q3 2023 Earnings Call Transcript

Thank you and good afternoon everybody. I'm pleased that you're joining us for DXC Technology's third quarter fiscal year 2023 earnings call. Our speakers on the call today will be Mike Salvino, our Chairman, President and CEO; and Ken Sharp, our EVP and CFO. This call is being webcast at dxc.com, Investor Relations. 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. The reconciliations can be found in the tables 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 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 quarterly report on our 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 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 strong Q3 results, where our execution drove record bookings along with margin, EPS, and free cash flow that all exceeded expectations. Next, I will discuss our transformation journey and how it has helped us drive these strong results. Ken will then discuss our financial results in more detail and provide our updated guidance. And finally, I will make some closing remarks before opening the call up for questions. In Q3, revenues were $3.57 billion, and our organic revenue growth was negative 3.8%. This was a direct result of the weak bookings in the first half of the year. However, our organic revenue grew for the second consecutive quarter sequentially, and it is notable that we have driven the same level of revenues in constant currency, excluding dispositions, for all three quarters in FY 2023. Our adjusted EBIT increased from 7.5% in Q2 to 8.7% in Q3, highlighting the strong execution of our cost optimization efforts while not negatively impacting our customers. Our non-GAAP EPS increased to $0.95. Our book-to-bill of 1.34 is the strongest book-to-bill result since I've been CEO. This quarter we almost hit on all cylinders by having five out of our six offerings deliver a book-to-bill of over 1.0. Overall, Q3 showed strong execution and has created good momentum for us. So now let me give you some additional color around our transformation journey, which is at the core of how we are creating these results. The first step is to inspire and take care of our colleagues. We are seeing improved attrition due to the way we are taking care of our colleagues and our efforts to change the culture at DXC. I am proud of how we are taking care of our roughly 4,000 colleagues in Ukraine, and we continue to be impressed by their resilience in taking care of their families and our customers. Concerning COVID-19, we were just awarded the President's Certificate of Commendation in Singapore. This prestigious honor has recognized organizations that made exceptional efforts, which had a significant impact in Singapore's fight against COVID-19. I want to thank the women and men of DXC, along with my leadership team, for their continued execution. And as we look to 2024, we will continue to take care of our people and continue to adjust and add to my leadership team to deliver on our commitments. The next step in our transformation journey is to focus on our customers. The key metric here is our Net Promoter Score, and our most recent NPS score was 27, near the top end of the industry benchmark. This solid customer delivery has driven sequential organic revenue growth in constant currency for two quarters in a row. The key thing I would like to highlight is that we have now delivered roughly the same level of revenue in constant currency, excluding dispositions, for all three quarters in FY 2023, and you will hear from Ken that we are guiding to a fourth quarter at a similar organic level. Now this is a great accomplishment as we have been a company with declining revenues for the past several years. Also, you will see our strategy for GBS and GIS working. In GBS, we continue to grow the business and expand margins. This is the seventh quarter of consecutive organic revenue growth. As a result, GBS continues to become a larger part of DXC, now accounting for approximately 49%, up from 48% in Q2, demonstrating that the business mix is trending towards the higher-value tech of GBS. In GIS, we continue to stabilize revenue and expand margins. We are seeing our increased financial discipline and ITO pay off as the demand we saw in the market translated into strong bookings this quarter, which we expect to drive future revenues. So you can see we are executing on both parts of our growth strategy to accelerate growth in GBS and moderate the declines in GIS. This execution of our growth strategy is why we expect to drive flat to 1% organic revenue in FY 2024. The third step is to optimize cost. Clearly, we are executing on our cost takeout numbers as we expanded our margins from 7.5% in Q2 to 8.7% in Q3. We continue to take a thoughtful approach to cost takeout by focusing on our entire organization while delivering for our customers. This approach gives us confidence that we can continue our efforts for the remainder of FY2023 and into FY2024. The other piece of our cost optimization efforts is portfolio shaping. You will hear from Ken that we were able to generate approximately $375 million of cash from the sale of data centers in the quarter along with the German banks in early January. In the area of seize the market I am extremely pleased with our bookings this quarter. A record book-to-bill of 1.34x brought us back to over 1.0x on a year-to-date basis for FY2023, and this shows strong momentum as we are completing FY2023 and heading into FY2024. In GBS, all three offerings delivered a book-to-bill of over 1.0x and we continue to see momentum in our engineering and software capabilities that we discussed last quarter. But this quarter we saw even greater success in applications. In GIS, our more disciplined approach to deal making has paid off. In Q3, we signed over $800 million of ITO deals that were delayed from the first half of the year and signed two new logos by closing deals with SAP and Georg Fischer in Modern Workplace. Again, this shows good execution and momentum as these deals will create future revenue. It is clear that there is demand in the market for our offerings and we need to be patient because we are taking work from our competition at better economics. Our final step is our financial foundation where we generated $463 million of free cash flow this quarter. The execution in this area was outstanding and it gives us great momentum to hit our yearly guide for free cash flow. This free cash flow result, along with the cash we generated from portfolio shaping, including the sale of the German banks in January, totaled $840 million. We anticipate that we will use approximately $400 million to pay down our debt further, enhancing our investment grade profile, and we plan to repurchase approximately $400 million of DXC shares to complete our previously announced $1 billion share repurchase program. Now, before I turn the call over to Ken, I want to reiterate what we said in our October 4 press release. Management has been approached by a financial sponsor regarding a potential acquisition of the company. Consistent with our fiduciary responsibility to maximize shareholder value, the company is engaged in preliminary discussions and is sharing information. We do not have any further update on this situation today, and we will not be commenting on it further. Now let me turn the call over to Ken.

Thank you, Mike. Let me provide you with a quick rundown of our Q3 performance. Q3 organic revenue declined 3.8%. Adjusted EBIT margin and non-GAAP diluted earnings per share were above the top end of our guidance range at 8.7% and $0.95 respectively. Free cash flow was $463 million in the quarter. The team is making great progress with what we expect will be two consecutive years of positive cash flow of at least $630 million. This is quite a turnaround from two years ago with over $650 million of negative free cash flow. Moving to our key financial metrics, third quarter gross margin declined 60 basis points on lower volumes. SG&A as a percent of sales increased 10 basis points. Depreciation was lower by 10 basis points. Other income increased 60 basis points primarily due to asset sale gains of $24 million and FX hedging gain of $11 million, partially offset by lower pension income. As a result, adjusted EBIT margin was flat compared to the prior year and up 120 basis points sequentially. EPS was up $0.03 compared to the prior year due to $0.08 from a lower share count, $0.06 from a lower tax rate, and $0.02 from lower interest expense. These benefits were partially offset by $0.13 from lower revenue and FX. Let's turn to our segment results. Our business mix continues to improve as our GBS revenue mix increased 110 basis points to 48.7% of DXC’s revenue. GBS grew 0.2% organically. The GBS profit margin declined 220 basis points year-over-year and was up 130 basis points sequentially. GIS organic revenue declined 7.4%. GIS profit margin increased 190 basis points year-over-year and was up 50 basis points sequentially, benefiting 80 basis points from settling a commercial matter in the current quarter. Turning to our offerings, Analytics and Engineering continued with solid organic growth of up 11.7%. Applications declined 6.8% on lower project revenue, coupled with a difficult prior year comparison as Q3 was the strongest growth quarter in FY2022. Insurance Software & BPS is up 3%. Our Insurance Software business is about $550 million of annual revenue and grew approximately 7% in the quarter. Security was up 4.2%. Cloud Infrastructure & IT Outsourcing declined 5.4%. Modern Workplace was down 15.3%. We are encouraged by the recent new logo wins. Let me tie the year-over-year organic revenue declines above with Mike's earlier point on sequential quarterly revenue. I am pleased to note that we've delivered three quarters of revenues that are flat on a constant currency basis excluding divestitures. Further, we are guiding to a fourth quarter that is also going in a positive direction all while on the backdrop of very strong Q3 bookings, demonstrating our momentum. Turning to our financial foundation. Debt is $4.7 billion. We continue to tightly manage restructuring and TSI expenses. These expenses totaled $55 million in the quarter, and year-to-date, restructuring and TSI is $147 million, down $124 million from the prior year. Capital expenditures and capital lease originations as a percent of revenue were 6.4% in the quarter, up 120 basis points as compared to the prior year. We continue to believe our capital intensity presents a long-term opportunity to improve cash flow. Free cash flow for the quarter was $463 million. On January 3, we closed the sale of our German banks. Customer deposits were $70 million lower compared to the start of the year, thus creating a free cash flow outflow. With the sale of our German banks for €300 million, we have substantially completed our $500 million portfolio shaping and asset proceeds goal. Last quarter, we announced a new $250 million asset sale proceeds goal. While selling these real estate assets will bring in real cash, we expect to incur a noncash loss that is not incorporated in our guidance. In Q3, we closed on four facility sales, yielding $56 million of cash proceeds and recognized a $16 million gain. The combination of our Q3 free cash flow, sale of our German banks, and our Q3 asset sales delivered $840 million in cash. To put a finer point on the $840 million of cash, it is over 12% of our market capitalization. We expect to deploy $400 million to repay a portion of our debt and we'll adjust our target debt level to $4.5 billion. With the bank sales, customer bank deposits are no longer part of our cash balance. Accordingly, we are reducing our target cash balance to $1.8 billion. With these new target levels, we have an additional $400 million available to repurchase our stock. Turning to our capital allocation on Slide 19. We repurchased approximately $600 million of our stock to date. With cash on hand, we feel good about our ability to deliver on our $1 billion share repurchase. Our Q4 guidance includes organic revenue decline of minus 2.6% to minus 3.1%, adjusted EBIT margin of 8.7% to 9.2%, and non-GAAP diluted earnings per share of $1 to $1.05. Turning to our FY2023 guidance, we expect organic revenue decline of minus 2.6% to minus 2.7%, adjusted EBIT margin of 8% to 8.1%, and non-GAAP diluted earnings per share of $3.45 to $3.50. As I mentioned earlier, our free cash flow was negatively impacted by $70 million due to lower customer bank deposits held in our German banks. Accordingly, free cash flow was adjusted to $630 million. As Mike and I reflected on our FY2024 guidance we gave almost two years ago, we envisioned a business that could grow with solid margins and good quality cash flow. We still envision that same business today. Let me provide you some context on our original FY2024 guidance. At the time, organic revenue was declining double digits, and we guided to organic revenue growth of 1% to 3%. Adjusted EBIT margins were approximately 6%, including 190 basis points of noncash pension income, and we guided to a 10% to 11% margin. Free cash flow was negative $650 million, and we guided to $1.5 billion of free cash flow. Lastly, let us not forget the $900 million of annual recurring restructuring and TSI costs that we guided to $100 million, all while expanding margins. From our vantage point, we have come a long way over the last two years as the business is on a much stronger foundation. Let me take a minute to update you on our preliminary FY2024 expectations. For organic revenue, we are working plans to drive the business to flat to 1% growth, adjusted EBIT margin to expand above FY2023 levels, but do not expect margins to exceed 9%. When we provided the FY2024 EBIT guidance, pension income was 65 basis points higher than where we are in FY2023. We are assuming pension income continues at a similar level and is a 65 basis point headwind from our original FY2024 guidance. Free cash flow is expected to increase above FY2023 levels, but we do not expect it to exceed $900 million. When we set our FY2024 $1.5 billion free cash flow guidance, we had $900 million of capital lease payments. The capital lease payments are not part of free cash flow, but they are a significant consumer of free cash flow, leaving $600 million of cash generation. As we sit here today, we expect to originate about $200 million to $250 million of capital leases in FY2023. Our lower originations over the last couple of years have driven down the capital lease payments to about $400 million next year. We will refine our FY2024 guidance on our next earnings call once we complete our annual planning process. With that, let me turn the call back to Mike for his final thoughts.

Thanks, Ken, and let me leave you with a key takeaway. We will achieve our inflection point at the end of FY2023 and deliver the business we have always envisioned in FY2024, albeit with slightly lower guidance. As we exit FY2023, you can see that we have cleaned up many of the challenges from our past that Ken just outlined. Our clear execution of our transformation journey has built a quality company that you can depend on to deliver revenue that is not declining, change the mix of the revenue to the higher-value tech offerings of GBS, expand both margins and EPS, win new work in the market as our offerings are relevant and in demand, generate strong free cash flow, manage our debt, and return cash to shareholders. Now this is great execution, but we didn’t come here to DXC to fix the challenges. With the momentum that we’ve created in the business, we have confidence that we are poised to deliver the business we had envisioned in FY2024, as we can see the ability to drive revenue flat to 1% growth, expand both margins and EPS, rotate the revenue to the new tech of GBS, and generate increased free cash flow. Getting this inflection point was no small task, and my management team and I are proud of the quality company we have created, along with being clear and excited about the future of DXC. And with that, operator, please open the call up for questions.

Hey Bryan.

Hey guys, how are you doing? Good afternoon. Thank you. Wanted to start on free cash flow. So Ken, just hoping to dig into the moving pieces here to make sure we understand this for 2023 and 2024. So can you first talk about some of the factors that drove the strong Q3 performance? Should we expect continued lumpiness in free cash flow generation going forward? Or does that start to smooth out? And then just to clarify on the last point you made there after capital leases, it sounds like the real net free cash flow difference in your fiscal 2024 post-capital lease payments is about $100 million, given you’ve taken the number down. So, a couple of combo questions on free cash flow to start, please.

All right. Great, Bryan. And look, if I need to clarify, feel free to jump back in. Look, it's great work from the team, right? We’ve been at this for a couple of years, right? If you wind the clock back, the business had negative free cash flow. We’ve done a lot of work. Probably the biggest, you look at it now two years in a row of positive cash flow over $600 million. So it’s really not lost on us, right? A lot of good work from a lot of people across the entire business. The biggest driver, right, if you had to just kind of look holistically at the business has been the focus on driving down the restructuring in TSI. So I think that’s been somewhere around $600 million swing year-to-year. So I think that’s a pretty big piece. In this quarter, we had built up some accounts receivable. It’s a little bit hard to tell on the balance sheet due to FX movements and so forth. But we had built up some AR in the last couple of quarters and brought that back down this quarter to kind of a more normalized level. So really, the team has done a nice job driving across the business. And then when you look to FY2024, I think the net is a good way of looking at it. The leasing was out of probably a little bit, it didn’t have the right economics from our perspective. So when we looked at it, and it also creates some, I would say, business oversight challenges. When you’re leasing a lot of assets, it’s not always as economic as you want it to be. So we went through a process of making sure that when you lease assets that it goes through the right economics and has the right hurdles to it. So when we did that, of course, we brought down the level of leasing pretty dramatically. I think everybody knows this, right, but it gets a little confusing on the cash flow statement. If you lease assets, they drop below free cash flow because they are financing purchases basically. If you buy them straight out, they go right through CapEx. So as we squeeze down on the leasing, certainly some of that capital ends up in the CapEx, which directly impacts free cash flow. So in that way, I see certainly a good way to look at it. I mean, certainly, I think when you look longer-term, we’ve got opportunities to improve it. Our CapEx as a percent of revenue is higher than a lot of our peers, so I think that’s a place we need to continue to work on. And then your question around the lumpiness of the cash flow. Q1 is always going to be a little bit, and I think most companies have this, right? There’s a lot of cash outflows that go through Q1. So I think in the future, you’ll see that continue to be a bit more of a negative quarter. We’ll work at it. Q2, I think we’ve got some work to do to make sure that we level that out. And hopefully, Q2 is more positive than this year. I think it was slightly positive, but I’d like to keep working that. Q3 and Q4 have always been pretty strong cash quarters. So we’ll keep at it.

Bryan, does that answer your question?

Yes, please. Just on bookings and demand, Mike, it’s good to see the broad-based performance across the offerings. Can you talk about near-term pipeline? Now you’ve got some of those larger deals over the line that you were holding back? And just any change in client sentiment and sales cycles and things like that, just given the macro?

Well, look, the client sentiment is pretty simple. The whole industry is focused on efficiency and cost savings. What we’re seeing is that the deals will be larger, just like the $800 million figure that we mentioned, and they’re taking a little bit longer. The other thing that we’re seeing out in the industry is the fact that customers are still focused on revenue, but it needs to have immediate impact. So when I boil that all up and look at our offerings, I focus on the ITO offering; there are not going to be too many audit committees at these company Boards that will take that spend down. And the reason is that they don’t want to face cybersecurity attacks. So we’re still seeing demand for that offering. The second is when you look at the modern workplace, we’ve still got a lot of companies supporting a significant part of their employee base in a virtual mindset. You can’t really curtail that spend too much. And when I look at the ability to drive revenue, that’s what our engineering business does. I’ve said repeatedly that we’ve got unique skills. I continue to see double-digit growth in that business, along with a solid book-to-bill. So from a demand standpoint, it’s hard not to be cautious. But look, I mentioned on the last call that I’m adjusting the sales model. I think focusing on what I call relationship selling in GBS, which means building deep relationships and then selling our offerings based on strategic points of view that will either drive revenue or decrease costs. The GIS business is always going to be there, and we need to continue to win in the marketplace. I love the new logos, and I love the better economics. So Bryan, that’s how I’d answer your question.

All right, great. Thank you, guys.

Thanks, Bryan. Brent, next question.

Hi, Ashwin.

Hi, Mike. Hi, Ken. Good evening and good to hear from you all. I want to go back to free cash flow, but talk about deployment. I see the deployment notes with regards to the immediate buyback and pay down. Could you talk a little bit more granularly about the timing of those? And it was interesting to see that tuck-in M&A was not specifically noted. Basically, what are you broadly thinking regarding the ongoing deployment of free cash flow?

Okay. So why don’t you take the immediate? I’ll take the long-term.

Sure. It sounds good, Mike. So just, Ashwin, on the timing, we put out a $1 billion commitment on share repurchase. Our perspective is that kind of looks like the end of this fiscal year when we file the K. Ideally, that would be the kind of ballpark timing we would hit. We always like to deliver on our commitment. So we’ll work at that. It always depends on what the share price does, volume, and all those things. Repurchasing shares is highly regulated, and there are processes you need to follow. So we’ll do that in good stead, so we should be in good shape. The debt retirements, I think you’re also asking about, we like to run conservatively. We like to keep our leverage ratios in line. We have some European commercial paper, which is of relatively short duration. There’s no cost to take it out, so we’ll reduce that. We’ve also got some preferred stock that has a higher yield that’s a mandatory redeemable. It also comes up at the end of the quarter. So we’ll clean that up and be in good shape. We do tend to keep a little bit of a cash buffer as well, so to the extent Mike wants to do some tuck-in M&As, we’ve always kept some reserves in one hand. I’ll let Mike take the remainder part.

So Ashwin, in terms of capital allocation moving forward, what I would say is focus on that inflection point. I made the inflection point about us getting to the end of FY2023. What you see is the revenues now aren’t declining. We’re changing the mix of our business to GBS. We’re expanding our margins and EPS, and we’re generating good quality free cash flow. So, as I look into 2024, one of the things we’ll be discussing here is that it feels like it’s time to start looking at the tactical tuck-ins. My two favorite slides in this deck are 15 and 23. If you look at slide 15, you see the stability of the revenue. We basically are now in the same amount quarter after quarter. So now it’s a matter of looking at new bookings and things that could be potentially complementary to our business. When you look at Page 23, you can see the challenges that we’ve come through. When we talk about the quality company, you can see how we measure that and how we’ll take things forward. So, there will be some balance to the capital allocation. I’m not ready to say one way or the other. We’re going to get through our 2024 planning, but we’ve gotten to that inflection point where I think it’s time to consider that.

Yes, I do. Thank you. So investors are obviously very interested in revenue visibility, and you’re guiding not just the next quarter, but you gave initial outlook for fiscal 2024, so speaking 15 months out. I just wanted to ask you to comment on your visibility in terms of the bookings you had, but also the pipeline replenished, the segment level granularity that you’re seeing the model going forward.

Okay. So look, in terms of visibility, there’s nothing better than seeing revenue being stable. We’re not fighting a lot of the challenges around customers or terminations or that sort of stuff. That’s why I give you all the NPS number each quarter, which again is at 27. We’re doing that while also continuing to expand our margins. When I look at that stability, that means step one should be completed, meaning we’re not going backward anymore. So now it’s time to go forward. We feel pretty comfortable that the revenues will be stable. I love the fact that the book-to-bill came in at 1.34x. We didn’t deplete the pipeline. I expect to continue momentum into Q4, and stacking up a few more quarters, Ashwin, I think we’re going to be right where we wanted to be. So that’s how I would answer that question.

Great. Thank you.

Brent, next question.

Hey, Bryan.

Hey, guys. How you doing? I kind of had a follow-up on that one on Ashwin’s question there. Because I guess in its history, DXC had trouble getting to that inflection point. And we’ve heard it from multiple management teams over the years that we’re going to see the inflection point, and it just has never come. Maybe you can just talk about…

You’ve never heard that from me. So the fact that I’m mouthing that is a pretty big deal.

Yes, and that’s what I’m trying to get at here because it feels a little more real this time. Because in its history, it hasn’t been able to do it. But it sounds like maybe with fixing the troubled contracts and fixing the mix of business, that we’re finally at a point that the visibility is strong enough that you feel confident this can be a positive organic growth, not only next year, but just from years to come.

Yes. I mean, Bryan, look, here’s what I see. Again, we focused on putting 15 in for a reason, okay? You can see all the adjustments that Ken and I talk about in terms of FX and disposition and so forth. But when you look at FY 23, the biggest thing we will have achieved is customers that count on us, stable revenue that is not declining, and the change of mix. We’re almost at 50%, which is all stuff that when Ken talked about how we envisioned the business two years ago, this is where we wanted to be. The reason why we kept saying that, hey, we’re also guiding towards a fourth quarter at about the same revenue: that’s a clear indication that as we flip to next year, if we continue to keep the book-to-bill, and when I look at book-to-bill, again, I know we had a great quarter, 1.34x. But the trailing 12-month book-to-bill is what I’m looking at that 1.06x that increased. That’s good stuff. The other good news is literally looking at the individual offerings. So if I go to the businesses first, GBS and GIS. GBS grew for the seven consecutive quarters. The point too, there was a tough comparator. We expect that business to be back up around 3% in Q4. Then when you look at our strategy for GIS, it’s awesome. The fact that we are literally taking our time with these deals, and the deals are out there. I can now stop talking about them; we could show you guys the results. $800 million is a big basket of deals at better economics. So when I talk about the clarity and excitement at DXC, you’re leaning into what you should feel now because I meant what I said. You’ve never heard me say, all right, flat to 1% within a very short timeframe. And look, I mean, we’re pretty happy about the fact that two years ago we called for 1% to 3%, and we’re still looking at that at 1% pretty closely.

Yes. My second one is just on the… I know you can’t comment about what’s going on with the strategic kind of review. But usually, these things take one or two months. This one seems to be taking longer. I’m just curious why the length of the period, and I’m a little concerned, does it have any impact on the business fundamentals, the length of the review?

I mean, look, I reiterated that we weren’t commenting on any further. I mean, look, the press release still stands that confirms that we’re still having discussions. That’s about all I’m going to say.

Anything on the… has it hurt anything in the fundamentals of the business, the review? Or do you think that’s not been…

No, not at all. I mean, there’s no way you can go expand margins, increase GBS, increase EPS, drive the free cash flow, and book 1.34x if it was really having a big problem.

Got it. Thanks so much.

All right, thanks, Bryan. Brent, next question.

Hi, Darrin.

Hey, guys. Thanks. Hey, Mike. It’s good to see the momentum on this trajectory you guys have been showing. I guess, I just want to circle back to a couple of the answers you gave on whether it’s the question Bryan was just asking or the question around M&A, but broadly, I mean, is the portfolio that you have now the right portfolio of assets for the next few years for DXC? I mean, I know you mentioned some tuck-ins, but anything else to divest? And then really where are you focused from a tuck-in standpoint if you’re going to make some moves? Or are we going to just digest what we have now and let the company operate and see if we can execute towards those fiscal 2024 targets?

Well, I mean, look, I think it’s a combination of all those. What I would tell you is where the market is right now, there should be some pretty good buys. If we were to do anything, we would do it in GBS because we’ve been saying all along that we need to change our mix. Now having said that, I’ve also said over and over again that the GIS business can be a good business for us, and we do think that can produce good cash for us. When I look at it, there is now a part of me that you know my history; I did eight tactical tuck-ins in seven years. In terms of stuff that we’re continuing to look at, you’ve now heard Ken say for two quarters that we have $250 million of data centers and facilities that we are going hard after, and we sold a few this quarter. So we will keep doing that. The next thing is, I look at countries in terms of this is still part of what I would call the cleanup, meaning I think we’re in too many countries that we shouldn’t be in. There’s not a real strategic reason that we need to operate there, but that was nothing more than taking HPE and CSC and putting it together and we can finally go after that. There are still a few other businesses like the dynamics business that we still would like to move on. You’ll see, I think a whole combination of those things, Darrin. We’re certainly not done. We’re going to continue to be aggressive with the business because we think it’s got a lot of merit. We have more clarity in terms of what we see now, and I think we can get more focused on some of the last few things that we need to clean up.

I do. And it goes back to the demand discussion that somebody asked earlier. I guess, the bookings, obviously some of it was like you talked about, last quarter pulling into this quarter, flowing in this quarter, which helped. But could we just revisit that for a minute in terms of what you’re seeing, in terms of what kind of projects are winning bookings now? Because the book-to-bill ratios are strong in both GIS and GBS this quarter. Even like you said, even modern workplace, I think you talked about having; it was great to see the new logos. Can you give us a sense of what you’re actually seeing and if there’s been a change in sentiment on demand from the enterprises that you’re working with?

Okay, so I’ll take each offering individually. What we’re selling in A&E is engineering, and a lot of our engineering projects are in automotive and we still see quite a bit of demand in banking. A lot of that work revolves around analytics, which helps our clients generate new revenue. In applications, we’re dealing with custom apps. Think of something I’m building from the ground up. We’re seeing ServiceNow and SAP. In insurance, Ken mentioned the insurance software business. We’re right at the heart of many of the insurers, because our software enables an insurer to write new books in business. The fact that business is growing by 7%, we’re not only selling the software; we’re implementing it and we're also running it. Then if you drop down into GIS, there’s always going to be security projects. So that 4.2% growth you saw this quarter is encouraging. ITO is ensuring that infrastructures that haven’t moved to the cloud and then the ones that have moved to the cloud are bulletproof. Our modern workplace offering; our uptime product is doing very well in the market. For SAP to have chosen us is a big deal. They sure know a thing or two about software. So that’s what we’re seeing, Darrin. I wish that I could be more clear that the sentiment out there is all positive; I read after every single one of my competitor’s earnings calls that the situation is going backward. But showing up with a one, three, four and saying that it may be somewhat lumpy, but we still see very good demand for our services in the market. So, to go back to the last point of your first question, do I think DXC has everything it needs to have to take this thing into the future? We definitely have a good foundation. I like Page 23. It can literally show you the course that we’ve been on in terms of fixing the business, getting to a quality business, and now where we’re going.

Yes. All right. That’s really helpful, Mike. Thanks.

Thanks, Darrin. Brent, next question?

Hi, Keith.

Yes, thanks. I did want to drill down on Modern Workplace a little bit. It’s a small part of your revenue, but it’s still over a point of drag on growth. How does that shape out over the next one to two years? Can you get it back to flat or what happens because it still is frankly a drag?

Okay. So Keith, let me give you the exact numbers. If you go back to Page 15, Modern Workplace mimics a lot of the overall business. If you look at the revenue for Q1, it was 447. Q2, it was 436. Q3, it was 433. That thing has basically stabilized out. Remember when I put the business up for sale? We lost several contracts because of the uncertainty regarding who would take over. So, I think we’re through that puzzle piece. The fact that we have good new logos coming our way, I think in Q4 you're going to see a fairly significant change in that negative growth. I do think we can get that business back to flat to grow.

Okay. And then I want to try to ask visibility a little bit differently. In terms of the pipeline as we’re progressing over the next couple quarters, how should we be thinking about book-to-bill? I mean, this quarter it was obviously pretty strong. You focus on the latest 12 months, but anything you want to call out as we think about the next couple quarters on book-to-bill that’ll give us confidence that the zero to one percent growth is not only attainable but sustainable?

Well, Keith, think of it this way. I’m literally guiding to minus 2.5 to minus 3 in Q4. That should suggest that the demand that I just knocked down is going to show up sometime in 2024, okay? Especially with the new logos in Modern Workplace. Those are not project-type things; that’s outsourcing-type work. The second thing I would tell you is having the business hit on all five out of six offerings shows that we still have relevancy in the market and demand. So look, can I tell you what’s going to happen to the economy? I mean, you look at everything, you read the scripts; people say this is the year of efficiency. We do efficiency well, Keith. If people want cost savings, and if they want someone to run something efficiently, that’s us. I mean, I can’t call out exactly what’s going to happen in 2024 or two or three months or two or three quarters down the path. But what I can call is that we feel good about Q4, and we feel good about the momentum we’ve created so far.

Okay, perfect. Many thanks. I’ll cede the floor.

Keith, thanks. Brent, next question?

Hey, Jason.

Thanks. Hi there. How are you? Thanks for taking the question. I just wanted to ask the first one on organic revenue growth. I know in the quarter it was a little below plan; I guess fourth quarter is coming in a little below what was previously expected. So just as you unpack that, I mean, where would you say the shortfall has been relative to what you had previously anticipated, which of the service lines?

It was Modern Workplace and Applications. We expected that we would turn Modern Workplace quicker than we did because I kept telling everybody that’s following the exact same transformation journey as ITO. You’ll see that we turned ITO within probably about a year, we thought we would turn that a little bit quicker. Then Applications, we expected to get more project revenue out of that. When you looked at our plan for FY 2023, it was back-end loaded and we expected to get a little bit more out of applications. But I think applications will, you’ll see a turnaround in Q4 based on the bookings we just received.

Okay. And then my second question was just more of a clarification, I guess, Ken, I think you’ve said in the script that there was some kind of commercial matter that was settled, and I don’t know if I got this right, so correct me if I’m wrong, helped GIS margins by 80 basis points in the quarter, is that what it was? And is that just kind of a one-off?

Yes. It’s kind of a non-recurring, so that’s why we called it out, but you got the numbers right.

Okay. So what is that about 40-ish basis points overall? It was 80 for GIS.

Yes.

Okay. Thank you, guys.

Yes.

Thanks, Jason. Brent, next question?

Hey. Hi. Thanks for taking the question here. I just wanted to also hone in on the booking side. You, Mike, you talked about not depleting the pipeline and demand is still good, but visibility obviously is driven somewhat by macro. Is there wiggle room if large deals slip or if project work gets pushed out for you to still see that inflection that you’re calling out here today? Also, similarly, just want to better understand, you mentioned better economics, including on uncompetitive takeaways. I’m a little surprised by that given the cost focus of clients, so just curious on what’s changed there, if you don’t mind elaborating on those two things on bookings? Thanks. Tien-Tsin, thanks for coming to my call. It’s good to hear your voice. Let’s just, yes, 100%. Let me start with that one first. So when you think about wiggle room, I mean, look at what we’ve done on the revenue on the back of 0.83 and 0.87. When I look at that 12-month trailing book-to-bill, I can go all the way out five quarters 0.92, 1.02, 1.02, 0.87, 0.83. Why am I doing this for you? There is wiggle room in terms of us making sure we can sustain that revenue. Like I said, the 1.34 is nice because that means that we're going to be executing against all those bookings come Q4 and then into FY 2024. So the backlog doesn't have to be perfect for us to get to our flat to 1% guide. Does that make sense, Tien-Tsin?

It does. It does. It’s important to go back to those.

Okay. Yes. The second question was...

The better economics market that I think you mentioned, including on the uncompetitive takeaways.

No. This is clear. When I say that, it’s ITO. If you think about what’s happening in the space, our competition is struggling a bit. What’s interesting about the market right now is I remember those days. When I took over DXC, we were the ones struggling in terms of customer satisfaction, in terms of our balance sheet, in terms of our free cash flow, all that stuff. If you go back to 2023, that's not where we are anymore. I’ve talked on numerous calls that we’re now the safe pair of hands. I’m talking to a CEO that literally likes the GIS space. As always, I’ve said that it is key to what we’re trying to get done because we believe it can generate cash. Now here’s the second piece. When those deals we’re looking at were done five or 10 years ago, the ITO space was a commodity space. It was a race to the bottom in terms of pricing. When those clients call us now, whether we’re joint with one of those competitors in a large client or it's a brand-new logo, we are very clear about the economics we will do. One of the things that I talk about is going to infrastructure-light. That means we definitely get cost-of-living adjustments that we pass on things like electricity, hardware upgrades, and software increases. Tien-Tsin, you knew that was the playbook I ran for us in the old place. When I say better economics, that's exactly what we’re doing. It’s taken me a little bit longer than I wanted, but we’ve stabilized a lot of delivery, and I like where we're at.

Yes. No, makes perfect sense. Appreciate your thoughts.

All right, Tien-Tsin, thanks. Brent, let’s take – let’s take one more question.

Hey, Rod.

Hey guys. I have a question about bookings traction and a question about capital intensity. I'll start on the bookings side. Your booking strength in the December quarter was pretty disconnected from the less good trends in the broader IT infrastructure services market. I want to ask, how much of your recent booking strength was due to push-outs from earlier in the year versus a real inflection point in your market traction? If you are seeing a real inflection point, can you share more about what’s enabling that inflection point?

Okay. So first, I'll talk about the bookings. If you take out the $800 million that we said was basically caught up in the first half of the year, we're still at a book-to-bill of 1.12. That’s just the math; that's a very strong quarter. I also look at it this way: we're back over 1.0 on a year-to-date basis. You can look at it that way; you can look at it at the trailing 12-month increasing from 1.04x to 1.06x. Either way you look at it, Rod, the demand was good. This is where I keep coming back to. We do well see not only the demand but also a need for our services out there. That’s what I keep coming back to. What we’re not going to do is raise revenue just to increase the book-to-bill, because on the GIS piece, we’ve talked about our discipline. We’ll get that at the right economics. Frankly, I like what we’re doing in GBS when you look at all those offerings producing a book-to-bill of 1.32x.

Yes, well it relates to the discipline topic in the GIS business. So maybe it’s a good topic to end on. Capital intensity in the business is something that has been wrestled with here for years. Can you talk about the levers you have to get capital intensity down while achieving better revenue stability in GIS?

Yes, sure. Yes, Rod, we've been – this goes back to our whole governance process. We’ve put a thoughtful approach around free cash flow and cash generation on deals. As Mike said, it just takes time to work its way through the system. That’s probably the first part. Your comment about historically, I think there wasn’t this cash culture and putting that in place, part of the business came out of a hardware business. We need to keep working that, right? We’ve even put some tools in place that are going live this quarter to better forecast, manage, and create accountability that ties back to the commercial team that Mike's been building out, which I think will be a big part long-term. Our focus is absolutely to support our customers, but we also need to ensure we’re getting the proper return on the business. When you look at the capital intensity and the margins in the GIS space, you could easily argue we’re not getting the right return. We’ll keep sharpening the pencil there and drive our way down, but there’s certainly an opportunity to make headway. If you look at our peers, you quickly get back to the GIS space; it ought to be somewhere around 5% of revenue, maybe 6% on a bad day. The GBS space ought to be kind of 1% to 2%. On that thesis, there ought to be an opportunity to get CapEx down to 3% to 4% with a little bit of work.

So Rod, let me leave you with these comments. When I look at that space during the three plus, three and a half years I’ve been here, we first talked about is there even a need for that business that work, that infrastructure work? I gave you all data that said that stuff’s not going to go away. Not everything will go cloud-based because of the frequent cloud conversation from our competitors. Second, nobody liked that business because it was perceived as commodity. There was a race to the bottom on price. Where are we today? There’s definitely a need because not all the mission-critical stuff has transitioned to the cloud. Some of it has, and some hasn’t. Also, the market isn't as commodity-driven as it once was due to the decline of competition. Our presence is vital, and it's significant for us to deliver on promises we’ve made, resulting in better economics. In closing, Ken was being very detailed; I would simply add that utilizing our balance sheet for deals is not something we want to continue to do over and over again.

I think it’s time to wrap. Thanks guys.

All right, Rod, thanks so much. Look, I appreciate everyone joining the call. Also, I want to thank everyone for making time for DXC this quarter, and I do really appreciate it. What I end with is this. We definitely have both execution and we’ve created great momentum in our business to get to what I think the inflection point will be at the end of FY2023. We expect to deliver, like we had always envisioned the business in FY2024. We’re very proud of the quality of the company we’ve created, and we’re clear and excited about our future. I look forward to updating you all in May. Operator, please close the call.