DXC Technology Company (DXC) — Q4 2023 Earnings Call Transcript

Thank you, and good afternoon, everybody. I'm pleased that you're joining us for DXC Technology's Fourth 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 Investor Relations website, and the webcast includes the slides that will accompany the discussion today. Today's presentation includes certain non-GAAP financial measures, which we believe provide useful information to our investors. In accordance with 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 risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of the 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 obligations 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. I hope you and your families are doing well. Today's agenda will begin with an overview of our solid Q4 results where we delivered another strong quarter across our financial metrics. Next, I will discuss our transformation journey and provide insights concerning how the work we did in FY23 positions us for success in FY24. Ken will then discuss our financial results in more detail and provide an update on our guidance. And finally, I will make some closing remarks before opening the call up for questions. We are pleased with our performance in Q4 and in FY23 as it shows that we can execute and positions us for more progress in FY24. Revenues were $3.59 billion and our organic revenue was minus 2.9%. We have driven roughly the same level of revenue in constant currency, excluding dispositions for all four quarters in FY23, which positions us to continue improving our revenue performance in FY24. Our EBIT margin increased from 7% in Q1 to 8.9% in Q4. This shows that we can continue to invest in our business early in our fiscal year and still deliver on our EBIT margin goals for the year. We see a similar EBIT margin progression in FY24. We delivered over $700 million in free cash flow and increased it throughout the year. This positions us to expand free cash flow in FY24. Our non-GAAP EPS increased to $1.02, growing 21.4% year-on-year. This is the first time we've exceeded $1 in a quarter over the past three years, which shows that our capital allocation strategy is working. And finally, we delivered another strong quarter of book-to-bill at 1.04. In the quarter, 4 out of our 6 offerings delivered a book-to-bill over 1. Now I will turn to our transformation journey and give you more details concerning how we drove the execution of our numbers in the quarter and position DXC for success in FY24. The first step is to inspire and take care of our colleagues. We've done a good job changing the culture of DXC, and we've also built a strong team that is executing, and I'm happy with how we've been able to add talent to our team. To enhance our execution, we have changed our operating model to be led by our offering leaders. Our new operating model gives our organization clarity and places seven of our most experienced leaders into the market focused on growth, differentiation, coaching our people, and actively managing the details of our business. GBS is a great example. Our A&E, along with our insurance offerings, have been the main reason we have driven consistent growth in GBS for eight straight quarters, and GBS continues to become a larger part of our overall revenue. Michael Corcoran and Ray August, who lead A&E and insurance, respectively, were early adopters of our new operating model, and they have achieved both market growth and differentiation. Michael and Ray are just two of the seven experienced leaders now driving our business through our offering-led operating model that went live on April 1. The next step on our transformation journey is focused on our customers. In FY23, our efforts to focus on our customers translated into revenue stability. As Ken will show, we have had four consecutive quarters of similar revenue once currency and divestitures are removed. We feel strongly that our revenue is now stable, is higher quality, and is trending more towards GBS due to our customer delivery and our enhanced relationships we have developed. Our Net Promoter Score for the quarter was 29, which is near the top end of the industry benchmark range. We wanted to give more insight into what our customers thought of us as we have seen the external perception of DXC change, so we hired an outside firm to do a deeper survey of our customers. What we got back gives us confidence that we are positioned for future success concerning revenues because our customers view the work we do for them as essential. They want us to help them evolve to their technology future, and they trust us. This has been our platform since I arrived at DXC, focused on delivering for our customers in GIS as this will build trust in DXC and ultimately change our external perception, which will allow us to grow GBS, and that's exactly what we've done. The fact that GBS has grown now consistently over the last two years and continues to become a larger part of our overall revenue is an outstanding proof point that this strategy is working. In FY24, we expect to be even more aggressive with this strategy due to our new operating model that takes our most experienced leaders and focuses them on spending even more time with our customers doing relationship selling, which was the change we made in our sales approach two quarters ago. The third step is to optimize cost. We have built a team that knows how to drive cost optimization and expand margin, as you saw that in FY23, driving EBIT margin to a high of 8.9% in Q4. The expansion of margin throughout the year was a function of our cost optimization initiatives that focused on staff optimization, contractors, real estate, and data centers and third-party expenses. In FY24, we will stay focused on these items with an increased emphasis on contractors and data centers. Specifically in the ITO space, we are moving towards what we call infrastructure-light, which means we will not use our balance sheet to do deals; we will shed a significant number of our data centers and will shed existing contractors in favor of full-time employees. These are the key items around our more disciplined approach to deal-making and managing our ITO work. These items, along with us managing the decline of our pension income that does not generate cash, will produce higher quality margin for us in FY24. In the area of seize the market, our new sales approach is working as we have delivered another quarter of a book-to-bill over one. The relationship selling that we are doing in GBS delivered a book-to-bill of 1.04. The book-to-bill of GIS was 1.03 which shows that we are taking work from our competition and our more disciplined approach to deal-making is working. We are seeing that our external reputation has changed and that our customers see the work we do for them as essential, which speaks to our GIS business. And they want to work with us to help them evolve to their technology future, which speaks to our GBS business. Another proof point that we are making the right moves in the market and changing our external reputation of being a trusted partner is the 2023 Gartner Outsourced Services Magic Quadrant where we moved into the Leaders Quadrant, increasing our ability to deliver and completeness of vision. In FY24, we will continue to focus on our sales approach, which should be even easier with our new streamlined operating model. We believe that the market needs our services and that we are uniquely positioned to continue to deliver a book-to-bill of one. The final step is our financial foundation. Our execution in this area has placed us in a position of financial strength heading into FY24. In FY23, we were able to maintain our solid investment-grade credit profile, deliver over $700 million of free cash flow for the second straight year, and deliver on our $1 billion commitment to repurchase our shares. In FY24, we plan to do more of the same: maintain our investment-grade credit profile, expand our free cash flow, deliver higher quality revenue margin and EPS, and repurchase another $1 billion of our shares. And with that, let me turn the call over to Ken.

Thank you, Mike. Let me provide you a quick rundown of our Q4 performance. Q4 organic revenue declined 2.9%, adjusted EBIT margin 8.9%, and non-GAAP EPS $1.02. Both are at the highest level in the last three years. Free cash flow of $269 million in the quarter, as you can see, the team continues to make great progress on cash generation. Moving to our key financial metrics. Fourth quarter gross margin was up 250 basis points due to lower payroll and contractor expense resulting from our cost optimization efforts, positive impact from divestitures, and lower retail. SG&A as a percent of sales increased 160 basis points. Depreciation was lower by 10 basis points. Other income decreased 60 basis points, primarily due to lower pension income. As a result, adjusted EBIT margin was up 40 basis points. Non-GAAP earnings per share was up $0.18 compared to the prior year due to: $0.11 from a lower tax rate, $0.08 from a lower share count, $0.04 from expanded margin, $0.03 from lower interest expense. These benefits were partially offset by $0.08 from lower revenue volumes and other factors. Now turning to our segment results. Our business mix continues to improve. As a percent of total revenue, GBS is now at 48.8%, up 10 basis points sequentially. GBS grew 3.3% organically, our eighth consecutive quarter of growth. The GBS profit margin declined 80 basis points year-over-year. Turning to GIS. Organic revenue declined 8.5%. GIS profit margin increased 190 basis points year-over-year and was up 110 basis points sequentially, benefiting from the cost optimization initiatives and lower levels of retail revenue. Retail revenue is at a lower margin, so lower retail revenue improves the quality of revenue. Turning to our offerings. Analytics and Engineering continued with solid growth, up 8.5%. Applications declined 0.5%, a significant improvement from the last quarter's decline of 6.8%. Insurance Software & BPS is up 5.9%. We continue to see good momentum in our Insurance Software business. Our Insurance Software business benefited in the quarter by approximately 300 basis points due to restructuring in existing customer contracts into a perpetual IP license with upfront revenue recognition. Security was down 0.4%. Cloud Infrastructure & IT Outsourcing declined 10.5%, largely driven by a decrease in retail revenue of $84 million or approximately 600 basis points. Modern Workplace was down 5.3%. As you will note, this is a significant improvement from our prior performance that we expect will continue to narrow in the upcoming year. Revenues on a sequential constant currency basis, excluding divestitures, continued with only a modest decline from Q3. This momentum that Mike and team created will be key to our success to deliver our organic revenue improvement. Turning to our financial foundation, we achieved our target debt level of $4.5 billion. We continue to tightly manage restructuring and TSI expense. Our restructuring and TSI expense was $232 million for the year, $68 million lower than our guide. We have been focused on improving the quality of earnings and limiting this kind of non-GAAP adjustment. Going forward, we will utilize restructuring only to accomplish our facilities' rightsizing efforts as they are non-operational. This labor restructuring started when DXC was formed and has gone on far too long. Operating lease payments and the related expenses were down approximately $80 million for the full year, resulting from our successful efforts to reduce our facilities footprint. Capital expenditures and capital lease originations as a percentage of revenue were 6.3% for the full year, down 70 basis points from FY22. We continue to believe our capital intensity presents a long-term opportunity to improve free cash flow as we pursue an infrastructure-light model. DXC has a strong and stable debt position with manageable debt maturities and a low interest rate. Almost all of our debt is fixed rate with an effective interest rate of 1.5%. Our debt is denominated approximately 60% euros and other currencies and 40% U.S. dollar to better match our operations. As a result, we have a high degree of financial flexibility and maintain access to significant liquidity. Our net debt to adjusted EBITDA ratio of 1.1 demonstrates our strong commitment to an investment-grade credit profile. Turning to chart 19. Let me touch on how our noncash pension income has impacted our adjusted EBIT margin. As you can see, our adjusted EBIT margin, excluding noncash pension income, has expanded from 6.6% to 6.8% in FY23. And we are now expecting a further 95 basis-point margin improvement in FY24. We view pension income as non-operational as it is non-cash earnings. As pension income comes down, the quality of our margin improves. In the fourth quarter of FY23, as part of our efforts to improve our financial foundation, we executed on a pension plan buyout for one of our larger plans. The buyout removes the funding risk from DXC's balance sheet and should allow approximately $180 million of the surplus to fund other plans in the same country. These plans are expected to have future funding requirements. The buyout resulted in a loss of $361 million. In addition, the annual pension mark-to-market loss of $1.1 billion was primarily due to the returns on the planned assets for investments in our UK plans. Both of these non-cash items are excluded from the Company's non-GAAP results. In aggregate, our pension plans remain overfunded by $699 million. The team continues to make great progress on cash generation. And as a result, we have delivered two consecutive years of positive free cash flow over $700 million, a $1.4 billion improvement from FY21. As you recall, our FY23 free cash flow was negatively impacted by $70 million due to lower bank customer deposits at the German banks we divested. So, excluding the impact of the lower bank customer deposits, our free cash flow would have been over $800 million. As you think about our asset sales, they have generated significant deployable cash and reshaped our portfolio to be more focused on our core business and yield a positive margin impact. Over the past fiscal year, proceeds from the sale of non-core assets contributed more than $500 million of capital for deployment. As we previously discussed, we are targeting an incremental $250 million asset sales, principally data centers. Our robust capital deployment has reduced DXC shares significantly. We repurchased 46.7 million shares or approximately 18% of the outstanding stock since the beginning of FY22. By improving our free cash flow and reducing our outstanding shares, we have significantly increased our free cash flow per share and expect to continue that trajectory in FY24. Turning to our capital allocation. We completed our prior commitment to repurchase $1 billion of our common stock. Our Board increased our outstanding share repurchase authorization by $1 billion to $1.4 billion. We are targeting a new incremental $1 billion share repurchase. Ultimately, we expect our share repurchase to be funded by excess cash from free cash flow and asset sales. Due to the quarterly progression of cash flows and the episodic nature of asset sales, we expect temporary fluctuations in debt above our target debt level. We continue to believe DXC presents an attractive valuation. Assuming the current share price, our incremental $1 billion share repurchase would equate to about 19% of the current outstanding shares. Our Q1 guidance is as follows. We expect Q1 organic revenue to decline by 2% to 1%. We expect higher project revenues specifically in GBS and narrowing declines in ITO and Modern Workplace, ultimately improving organic revenue performance throughout FY24. Adjusted EBIT margin of 7.5% to 8%. We expect to expand adjusted EBIT margin during the year as our margin optimization efforts take hold and offset the lower pension income that is negatively impacting our margin by 70 basis points. Non-GAAP diluted earnings per share of $0.80 to $0.85. Turning to our FY24 guidance. Organic revenue growth of negative 0.5% to positive 0.5%, adjusted EBIT margin of 8% to 8.5%, incorporating a 70 basis point pension income headwind; non-GAAP diluted earnings per share of $3.80 to $4.05. Our non-GAAP earnings per share guidance reflects a tax rate of 29% and our expectation for the timing of our new $1 billion share repurchase. Free cash flow of $900 million. Our historical pattern is that we generate strong free cash flow post Q1 throughout the remainder of the year, like we achieved in FY22 and FY23. Due to the timing of receipts and disbursements, we expect Q1 FY24 free cash flow to be negative. Let me touch on the announcement today. As I reflect on my 2.5 years at DXC, I appreciated the opportunity to work closely with Mike, his leadership team, and the finance team. Together, we built a solid financial foundation and fixed many of the challenges at DXC. This has clearly been a team effort across DXC. While I will not be on the next phase of the journey for personal reasons, I look forward to the great things yet to come and wish Mike and the whole DXC team all the best in the future. I will be transitioning my responsibilities to Rob, who you will meet in the summer. And of course, I will be available to help make sure it is a seamless transition. With that, let me turn the call back to Mike.

Thanks, Ken, and let me leave you with the key takeaway. Due to all the work we did in FY23, we are well positioned for success in FY24. Our clear execution of our transformation journey by our talented team in FY23 has delivered a better culture, stronger customer relationships, a better sales model, revenue stability, expanded margins and free cash flow, and we've maintained our investment-grade credit profile while returning $1 billion back to shareholders. This is great execution, and I'm happy that our focus in FY24 will not be on fixing challenges but delivering higher quality revenue, margin and EPS, expanded free cash flow, and returning another $1 billion to shareholders while maintaining our investment-grade credit profile. I can tell you that my team is excited and proud because we've worked hard to get DXC to this point. And with the execution momentum we've created, along with our new operating model, we are excited and confident about delivering in FY24. Now before I open the call up for questions, let me thank Ken for all of his hard work and the time that he's spent with me and the team over the last 2.5 years. Together, we have built a solid financial foundation and fixed many of the challenges at DXC. I want to welcome Rob to the team. I look forward to working with him to drive DXC forward from a solid financial foundation and execute against our numbers. I'm also looking forward to a smooth transition from Ken to Rob and introducing Rob to all of you over the summer. With that, operator, please open the call up for questions.

I wanted to ask about the IT services demand in the market right now. On one hand, we're hearing some weakness at other IT vendors and the macro is weighing on some demand. But on the other hand, it looks like DXC is guiding to improving organic growth. So, can you just help us understand what you're seeing in the demand environment and how that might impact your guide?

Thank you, Bryan. I mentioned in my prepared remarks that we are strongly pursuing this area. We are aware of our competitors' actions and the current uncertainties in the market, which led us to conduct a survey. The results indicated that our business remains highly stable, and our customers consider us essential for their operations. This means that they rely on us to function effectively. Additionally, the survey revealed that once we establish this essential role, customers expect us to adapt to their technological needs. Currently, customers prioritize cost savings and projects that deliver quick benefits. We've moved away from innovation-driven projects and a lot of experimentation. Our unique position stems from our ongoing strategy to enhance our GIS business, which supports our ability to sell our GBS business. Being seen as essential drives customer spending in the GIS area. However, we are experiencing some decline in hardware sales, which Ken and I have discussed. We are focusing on resale revenue, which has decreased in Q4 and will continue to decline slightly in FY24, ultimately benefiting our margins in the long run. We acknowledge the uncertainty, primarily in hardware and some project-related areas, mostly concerning innovative projects. However, due to our ITO work and our essential role, clients are still willing to invest in us, as reflected in our book-to-bill ratios across the board. Furthermore, because of our strong relationships with clients, they want us to evolve, which brings project opportunities in GBS. Hopefully, that gives you a sense of what we are observing in the market, Bryan. Do you have another question?

Yes. Just a follow-up for Ken. And Ken, we're sorry to see you go. Obviously, the free cash flow improvement is kind of evident with the guide. We were at $737 million this fiscal year. Maybe you could help us just bridge to that $900 million or about $900 million in free cash flow for this fiscal year you're guiding to.

Do you want me to take it first?

Sure, Mike. Go ahead.

Okay. So Bryan, the bridge is take $737 million and then last quarter, remember, we took out Fondsdepot, that's $70 million, right? So $737 million plus $70 million gets you to $800 million. Where we see the other $100 million coming from is us managing CapEx better, all right, us also driving our margin. So, we feel pretty confident in that number. Now, the other key thing that you should have taken from Ken's prepared remarks is there's a pattern. What I call is there's a rhythm. There's a rhythm of DXC now in our margin and also within our free cash flow, where we make investments in Q1, and we pay, quite frankly, a lot of our software vendors. We pay our bonuses in Q1 and then we generate increased margin and also increased cash flow throughout the year. And now, we've done that for two years. We've done that with the same team. And that's why we feel confident in the $900 million. Did I miss something?

Yes, just maybe real quick, Mike, just to add to it. We think Q1 is probably coming in approximately down $200 million. And we fully expect to pull that back through the rest of the year like we've done the other two years that Mike mentioned.

First off, Ken, I do want to say I'm disappointed to see you leaving, so wish you the best, begrudgingly, in the next part of your journey. Two things for me is when you think about your work, this is coming up in all of our coverage universe, including with IBM last week. But just maybe comment on what you think gen AI does. If you have a person times a rate model that drives a lot of your revenue, what does gen AI do for that? And the second question is just wanted to help understand if you think about the movement towards sort of flat revenues for the year, what does your booking trends need to be as we migrate through the years? We're just over 1 for this quarter. Just give us a sense about how you expect that book-to-bill to trend over the year, and that's it for me. Thank you.

So Keith, the first one on ChatGPT, first of all, that’s an awesome piece of technology because it's finally bringing AI to the mainstream. And if you've looked back on my background, that's one of the things I brought to DXC roughly almost four years ago. So, we're on the forefront of using AI with our ITO business and the product that we've built is called Platform X. And when you think rate times hours, what Platform X does to us, I'll give you two use cases. Platform X monitors the IT estate. And the first use case is we use AI to predict when hardware is going to fail. A lot of our hardware providers will tell us that the hardware should be up and running for three years, four years, sometimes seven years. And what we have is predictive analytics. And we have built those algorithms to accurately predict when something is going to tip over so we can get in front of the client, all right, and make sure that that doesn't happen. So, when you think rate times hours, we are doing project work, proactive new project work because of AI. Now, let me give you the cost savings example. The cost savings example is we don't need as many people now because the other AI algorithm that we've written in Platform X literally takes a failure point, and we basically map that to the bots that we have. We have a library of bots that we can deploy when something goes wrong. So, when something goes wrong, AI looks at it, understands the issue. It predicts and takes the right bot. We implement the right bot, and the thing gets fixed with no human intervention, which again, that's the piece where we're driving our cost down because of it. So, I would tell you three things on AI. The first one is we're going to continue to evolve. I love the fact that it's mainstream because a lot more people understand the fact that you have to build the algorithms first. The second thing is we got 20,000 people that do Analytics and Engineering. And part of that analytics is data. And with that number of people, we have been able to create data sets that will train these algorithms. And then the final thing is, look, not only are we doing it for ourselves, we're doing it for our clients. So, love AI. I think it will be something that we can use to our advantage to both drive revenue and also reduce costs. Now, in terms of the revenue, I think that's your second question, right, Keith, how do we stabilize the revenue, what the book-to-bill got to be?

Yes.

Okay. So look, I mean, we always shoot every quarter to have a book-to-bill over 1. What you saw last year, which is why the slides in our deck on revenue are so important, particularly slide 15, is that you remember our book-to-bill last year was 0.87, 0.83, then I believe was 1.36 last quarter and then 1.04. And what you're able to see by us is that we can keep that revenue very stable, all right? So, what I would tell you is our goal absolutely is to get over 1.0. You've seen that the bookings can be lumpy. So, as long as we're in and around 1.0 for the entire year, our revenue should be in good shape. Hopefully, that gives you a good flavor about that question.

I wanted to start by asking about the organic growth in fiscal '24. If we were to exclude the revenue headwinds you mentioned regarding resale, what would the year-over-year growth suggest about the organic trajectory of the business?

What I can share about the organic growth of the business is that when we examine our steady revenues, specifically over the last two quarters, we saw a decrease of 3.8% last quarter and a decrease of 2.9% this quarter, with guidance now indicating a decline of 1% to 2%. There are two key points regarding our revenue. Firstly, I anticipate we will see positive growth towards the end of this year. Secondly, you'll notice that GBS will become a more significant and dominant contributor to our revenue in fiscal year 2024. The main point to emphasize is that we are committed to executing our business strategy as promised. We have consistently recognized the importance of our GIS business because meeting our customers' needs is crucial for changing our industry perception, which we have achieved. This progress will enable us to finally achieve revenue growth in fiscal year 2024.

And maybe, Mike, just to add to that, the decline in resale this quarter was about 170 basis points of organic revenue growth. So, the business performed on a services level much better.

When we consider resale, our operating committee has focused on enhancing resale revenue since the margins are very slim. I recognize that our clients require this and prefer a comprehensive solution for implementing ITO and cloud services. However, this contributes to our more disciplined approach to dealmaking. I want to emphasize what we've mentioned regarding infrastructure-light strategies, which are crucial. By avoiding the use of our balance sheet, not investing in data centers, and minimizing contractors or employees, we improve our margins and subsequently increase revenue. Each year we address certain challenges, and this year, tackling resale will be our focus. When we discuss improving the quality of our revenue, that's our intention. Bryan, do you have another question?

Yes. Just one follow-up on the outlook on '24 growth guidance. Can you give us any other color on the underlying stack performance assumptions there that are embedded within that overall headline growth range?

Yes. I can confirm that GBS will grow more than it did in FY23, which includes analytics, insurance, and apps. On the other hand, GIS will decline more than it did in FY23. As indicated on Page 14 of our presentation, the security business remains quite stable for us, driven by our ITO efforts. We anticipate that our ITO performance will fall significantly below FY23 levels. I have mentioned for several quarters now that we are finally going to address Modern Workplace, and you can see that it improved this quarter from a decline of 15.3% to a decline of 5.3%. I expect it to stabilize in the next quarter. So, we will see more growth from GBS and less from GIS, which will define our mix for FY24. I hope that clarifies things, Bryan.

But the GIS will shrink at a lower rate, Mike, is that correct?

Yes.

Ken, sorry to see you go. Hope all's well on your end. I guess, let me start with macro concerns abound. And there's a fixed number of things that enterprise spenders do when those concerns come up when you apply sort of normal approach that's taken. How would you kind of get one level below and within GBS, for example, talk about the impact that you might expect to see on Analytics versus Applications versus Insurance? And the same thing for GIS. How are you kind of risk mitigating the outlook that you're providing?

Certainly. To begin with GIS, the revenue has shown significant stability, especially over the past two quarters, and we expect this trend to continue into FY24. Companies will keep investing in ITO and cloud services primarily to safeguard against potential security threats. Another key offering in GIS is Modern Workplace. Despite hopes for a full return to the office, this hasn’t materialized yet, so supporting a remote workforce remains crucial. We have two main offerings that are vital to our clients' needs, and we are witnessing ongoing demand, which includes a focus on cost savings. There is also competition in the market where other companies are struggling to meet customer demands, presenting opportunities for us. We need to be selective as we will not compromise the progress made in GIS. On the GBS side, our Apps and A&E business operates on a value-based selling model, emphasizing relationship sales. As part of our operating model transition, we've assigned seven senior leaders to focus on relationship building, coaching our team, and managing details. This approach has led to a robust pipeline for GBS. The insurance sector is strong, as it requires our software, and we effectively deliver value and cost savings to that industry. Overall, we're optimistic about our projections for FY24 and maintain our stance. However, should there be any revenue challenges, it would likely stem from resale or project work. Additionally, reflecting on last year's strategic response to the Russian situation, we've established ourselves as a unique player in the industry because we do not utilize Russian resources for our A&E work, which stabilizes revenue and enhances our market position. That’s an overview of our business for you.

Right. No, I definitely appreciate the steady performance. Ken, I can't let you go without one more free cash flow question. The bridge to fiscal '24 from what you have here, what are the main elements of that bridge, if you could kind of drill down into that?

Yes. Ashwin, thanks. And just touch on what Mike said earlier, right? We produced $737 million this year, add back the lower bank customer deposits, like we fortunately no longer own banks, so we won't have that headwind next year, which I would still characterize as non-operational. So that puts us at $800 million this year. Our margin we're guiding to is 8% to 8.5%, and it includes 70 basis less pension income. And I think we all know by now pension income is noncash. So right there off the bat, the margin improvement that we're targeting with the lower pension income will certainly drive more cash flow. And then, just we talk about working capital, it's been a user of cash. I think when I first got here, we had about negative 13% working capital. We're now down to negative 3% of revenue on working capital. So, we don't feel like we need to keep paying down the working capital to make the business kind of more normal from a payable standpoint. And that's kind of closer to the peer group. So, we don't think working capital will be a consumer going forward. And then the CapEx, as Mike talked about earlier, I think we feel pretty good that we've been working through each and every deal, and we'll come out on the other side with a better CapEx profile. A good proof point is this year's 70 basis-point decline in CapEx and capital leases as a percent of revenue.

Ken, you'll definitely be missed, and thanks for all the progress you've contributed on cleaner financials and moving to a more capital-light model just as a couple of examples there. And welcome, Rob, to the CFO role. Guys, I want to ask about the competitive intensity topic. Are you seeing an ability to win competitive deals without using your balance sheet or sacrificing on profitability terms? I guess, in particular, are you experiencing a change in the ITO market that's enabling the infrastructure-light model to come to fruition?

100%. I don't know how to answer that any other way, meaning we see demand in that market, all right, because of the fact that we've delivered for our customers. I keep talking about us being a safe pair of hands. It is definitely, we have customers coming to us with our competitors' work, okay? So, that's first and foremost. I've told you guys that we have been very choosy about that work. And what we're not going to do is be a bank so we can take extended payment terms because that's the way this market has been. We also are not going to fund a lot of the transitions or increases in energy and so forth. So, we will sit on the terms, Rod, to get us to the deals that we want and actually the terms that we want so that we don't go backwards, okay? And that's really important to me because all the progress we've made in this revenue, it's still got to be revenue that we can generate good margins. The last thing I will tell you is we've also seen progress on us not only getting better terms but also getting better prices. Because again, at the end of the day, that ITO market is about keeping those estates up and running, making sure they don't get penetrated. And the final thing is it's just not a headache that CEOs want to have, okay? So, us being that trusted partner was happy to see how we moved in the Gartner Quadrant, right? I mean, that's totally a third-party viewpoint of the world, and I like the position that we have in the market right now. And what we're going to continue to do is be choosy about the work. But we're also going to sell on top of those trusted relationships the GBS work. Rob, is there another question you have?

Yes. The follow-up is just about the new operating model. Can you give us a little more background on what prompted you to move to the new model? And what's the main difference in the new model versus the prior one? And is that new model mostly in GBS or does it also flow into GIS as well? So just some more color on the background there.

Thanks, Rod. So first of all, the operating model goes across the entire company. And when I came in here, the business ran by region, right? So, we talk about what Ken and I have done on the financials to make it more transparent, to also get them to a better spot and so forth. But when you're running financials, all right, in the business by region, there's no differentiation. There's no good analysis on what's happening, right, with each offering. And there's really not a person that's driving that from revenue through margin through collections and basically operating these businesses like their own. So, what the new operating model does is it's something I'm used to from my past. If you go look at the major service providers that are out there, typically, they are driven by an offering. Why? Because you can get the differentiation. What I like about it is we've literally chosen our top leaders, and we put them into the market to focus on growth differentiation. But the other thing is I keep talking about the culture. And in this business, you have to manage the details, which means you’ve got to get to the account level and you've got to drive the account. And it starts with the relationship with the customer, then it gets into the actual value that we provide because a lot of our book-to-bill right now, Rod, is based on the value that those customers see in what we're providing. It's not just delivery anymore. But they're literally seeing the cost savings and they're seeing the new ideas brought to the table where we can help them meet their financial performance. So, that's what the new offering model does. I'm really excited about it. I will tell you that we've been planning for this for an entire year. And Ken's done a lot of good work. Rob will definitely take it to the next step with his IBM background, all right? Because when you look at people like IBM and Accenture, they're used to running that model and driving the business, all right, for increased revenue and then margin expansion, EPS expansion, and free cash flow. So that's why we're doing it. Like I said, I'm excited about it and I think everybody will see the fruits of it very shortly.

Ken, you will be missed terribly. Hey. Mike, I know you opted not to give any sort of new longer-term guidance, which makes sense, I think, at this point. But can you give us a sense for as you're reflecting sort of starting into a new fiscal year, how you would articulate your sort of medium-term goals for DXC at this point?

So what I would do is the first thing I would say is go back to that inflection point. So the great news is that we've got a leadership team here that can execute. We have shown everybody that we can recruit really good talent. And now this game is going to be about all about execution. And what I would tell you plain and simple is I see a company that will grow revenue and, like I said, expand margin, EPS, and free cash flow. Those are our goals, all right? Those align to what we're trying to do and what we will implement in FY'24. And I think having those goals will propel us to be a company that will be a very stable company that can compete well in the IT services market for years to come. Lisa, do you have a second question?

Yes, sure. Just maybe related to that, I know you called out in the prepared remarks about $250 million in additional asset sales. You've done a lot of portfolio reshaping very effectively over the last few years. Is that sort of done at this point, or are there additional things we should be anticipating potentially, either additional divestitures or you did on the investment side? Thank you.

Thanks, Lisa. Our focus right now will be on that second piece I talked about infrastructure-light, which is shedding our data centers, okay? So that's a fixed cost that when you're going through the transformation that we're going through, you got to be able to shed those. And I'm used to running what I call infrastructure-light at the old place, and basically, you don't own data centers. And what we're looking to do is that $250 million is focused on data centers and some facilities. So we plan on delivering that in FY24. And I think we've got a very good handle and beat on delivering that $250 million.

I wanted to ask about the topic of infrastructure-light and what is new or different in this area. It seems we've discussed this for some time, including your intention to rely less on the balance sheet and pursue outsourcing deals. I understand you're planning to sell some data centers, but in terms of go-to-market strategy, deal terms, and deal structure, what are the actual changes? It feels like the concept of infrastructure-light has been a focus ever since you started, Mike.

Okay. So Jason, the first thing that changed is the competitive landscape. So, when I got here, all right, we were not in the position we are today. And Jason, you cover the industry, you know what our competition is doing. You know the people that you put us up against, and I would tell you we're on the top of that heap right now, all right? So that's the first thing that's changed. Now, based on us being in that position, that front position, we can now ask for different terms. And we can also start shaping our business because of that, all right? So, this isn't just something we've been talking to. We've been preparing for this for quite some time. Many people said that we ought to get rid of that business. And strategically, I thought that was the wrong thing to do. And now, it's proving out to be the right thing to do because we're able to shape that business and grow off the back of those customer relationships. So, the main things I would tell you to focus on are our balance sheet is a lot cleaner than it's ever been. That's point one. So, we're implementing that appropriately. You'll see throughout the year how we implement the folks on data centers. And then, the last thing is the contractors. So, a lot of our competition, and in fact, DXC, when I got here, was very, very heavy on contractors, and flipping those contractors to employees allows us to generate more margin. Remember, each contractor, we're probably paying a 7% to 10% premium on. And having that focus will definitely clean up our margin. So look, with that, Jason, I appreciate the question. Look, in closing, I want to thank Ken for all of his efforts. I want to welcome Rob. He will be a great addition to the team. I think we've been executing incredibly well. We've definitely got the right team, and I am definitely looking forward to delivering in FY24. Basically higher-quality revenue, margin, EPS, and the key thing will be expanding our free cash flow. And while we're doing that, we expect to maintain our investment-grade profile and deliver another $1 billion back to our shareholders. And with that, operator, please close the call.