DXC Technology Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2021

There are 12 speakers on the call.

Operator

Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to DXC Technologies Q2 FY '22 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

SY. Thank you. John Sweeney, Vice President, Investor Relations of DXC, you may begin your conference.

Speaker 1

20. Thank you. Good afternoon, everyone. I'm pleased that you're joining us for DXC Technologies' 2nd quarter FY 'twenty two earnings call. Our speakers on the call today will be Mike Saldino, our President and CEO and Ken Schar, our Executive Vice President and CFO.

Speaker 1

Q2. This call is being webcast at dxc.com's Investor Relations website and the webcast includes slides that will accompany the presentation today. Q2. Today's presentation will include certain non GAAP financial measures, which we believe provide useful information to our investors. 2018.

Speaker 1

In accordance with SEC rules, you provide a reconciliation of these measures to their respective and most comparable GAAP measures. 2018. These reconciliations can be found in the tables included in today's earnings call on the webcast slides. Certain comments we make on this call will be forward looking statements. 20.

Speaker 1

These are known and uncertain risks and uncertainties which could cause actual results to differ materially from those expressed on the call.

Speaker 2

2019.

Speaker 1

And with that, I'd like to introduce DXC Technologies' President and CEO, Mike Salvino. Mike?

Speaker 3

Q2. 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 SY. On our Q2 performance, which shows hard evidence that we are delivering on our transformation journey and building the foundation SYT. The work we are performing as we execute our transformation journey.

Speaker 3

Then I will hand the call over to Ken to share our Q2 financials, SY. Guidance and more details of the financial results driven by our strong operational execution. Q2. Finally, I will make some closing remarks before opening the call up for questions. Regarding our Q2 performance, our revenues were 4.0 SYD.

Speaker 3

Our organic revenue growth continued to show progress as we improved from minus 3.7% SY. In Q1 to minus 2.4 percent in Q2. Also, I was very pleased to see that the GBS business segment grew for the SYD. 2nd quarter in a row from positive 2% in Q1 to positive 3.4% in Q2. 2.

Speaker 3

We also continue to improve the organic revenue of the GIS business segment from minus 9.1% in Q1 to minus 8% in Q2. Now all of these results show our organic revenue is on the right trajectory. 2018. Our adjusted EBIT margin was 8.6% and was driven by the operational work that we are doing to optimize our business. 2018.

Speaker 3

This is the 3rd straight quarter of both improving organic revenue growth and sequential margin expansion, and we expect both trends to continue Q3. Book to bill for the quarter was 0.91, which came in below our goal of 1 due to the timing of a couple of deals. 2nd, we expect to be back above 1.0 in Q3. Our non GAAP EPS was $0.90 in the quarter, 2018, which is up $0.41 as compared to $0.64 a year ago. Finally, we are encouraged by the strength of our Q2 free cash flow, SYT, which moved us into positive territory.

Speaker 3

On a year to date basis, we have now produced roughly $100,000,000 in cash. 2. Now let me turn to the progress we are making on our transformation journey. The first step is inspire and take care of our colleagues. We are executing a people first strategy and attracting and retaining talent is fundamental to enable our growth.

Speaker 3

2. We know our strategy is working. We saw a higher percentage of our employees complete our September employee engagement survey, and we are showing improved and stable 2. These engagement scores give us confidence that we have a motivated workforce and we will be able to manage attrition, which we've seen an uptick. To offset this increase in attrition and demand, we hired and onboarded more colleagues than any other quarter SY.

Speaker 3

Key advantage to our hiring efforts is that we have implemented and are running a virtual first model. Q2. Hiring has been a focus for us and will continue. While hiring improved, we left some open demand and project work unconverted Q2, and we are focused on capturing this moving forward. Focus on the customer is the second step of our transformation journey and continues to be primary driver of our success in improving our organic revenue growth.

Speaker 3

A key metric that we measure is our net promoter SYT. The last time we gave you our NPS score was during the Investor Day in June and it was 18, almost within SYT of the best practice range. This is the most positive our customers have been since I arrived. This improvement is due to our Strong service delivery and gives us the ability to sell up the enterprise technology stack from our GIS business to our GBS business. 2.

Speaker 3

Now let me remind you that the way we will get to growth is to deliver the GIS services that are critical for our customers and build trusted relationships. 2. Once these trusted relationships are built, we can move our customers up the enterprise technology stack towards the services of our GBS business. 2. This is exactly what we are doing and the organic revenue trajectory of GIS, GBS and the overall business is great evidence SY.

Speaker 3

Now let me turn to our cost optimization program. We continue to make progress in optimizing our costs and delivering for SYD. I mentioned at the beginning of this call that we are doing the operational work to make DXC efficient, SYD. I've already commented on some of the operational work we are doing like motivating our colleagues, SY-two. In addition to this work, we are also improving the efficiency of our service delivery, 2.

Speaker 3

Let me provide you with some additional color concerning the operational work we are doing with real estate. This quarter we closed our Tyson facility and SYD and are moving to a much smaller footprint in the DC area where our colleagues that need to come into a facility will share space versus having dedicated space. 2. This work emphasizes our commitment to a virtual first model, reduces our carbon footprint and represents our desire to maintain a much smaller SY. NextE is the market is where we are focused on cross selling for our existing customers and winning new work.

Speaker 3

As I previously mentioned, we had 2 SYD. The great news about these deals is they were both hybrid cloudITO deals with long standing SYT. Specifically, we are helping these customers modernize their existing IT estate and building new private cloud capability to run their mission critical applications. In Q2, 59% of our bookings were new work and 41% were renewals. 2017.

Speaker 3

The new work continues to increase due to the focus on another piece of our strategy, which is our Platinum customer channel. Taking our offerings through this channel is another key foundation piece for growth. We are now starting to see evidence that we are being successful taking Luxoft, which drives our analytics and engineering services 2. Our platinum customer channel, the evidence is that analytics and engineering grew 17.3% in Q2, 2, which is clearly helping us create growth in our GBS business segment. Now let me give you an example of what the platinum customer of the future looks like at DXC.

Speaker 3

SYT. Our revenues were roughly $80,000,000 per year split 1 third GBS and 2 thirds GIS. SY. By continuing to deliver our GIS services for this customer, we were offered the opportunity to sell our GBS services. The result SY.

Speaker 3

Now split fifty-fifty as we are now providing them analytics and engineering services. 2. We're in the early innings of this strategy, but we feel confident that we can implement this approach to our other platinum customers, SYK. Successfully delivering GIS services and growing GBS services to have the same or more revenue at better margins. Q.

Speaker 3

Now let me turn the call over to Ken.

Speaker 2

Thank you, Mike. Turning to our quarterly financial performance on Slide 11. 2. As you can see, our progress continues. Our organic revenue improved to a decline of 2.4% 2017.

Speaker 2

We're a 130 basis point improvement from Q1. This represents our 3rd consecutive quarterly improvement. 2017. As you can see, we have come a long way from double digit organic revenue declines in Q1 FY 'twenty one to low single digit declines in FY 'twenty two. Our adjusted EBIT margin continues to improve as well, delivering 8.6% in Q2, up 60 basis points as compared to the Q1.

Speaker 2

2018. Year over year, our adjusted EBIT margins have expanded 240 basis points or 460 basis points, 2018. Excluding the disposed businesses, our book to bill for Q2 was 0.91, 2018. Below our goal of 1 due to timing and remains over 1 year to date. Further, we expect to deliver a book to bill 2018.

Speaker 2

For Q3 and for the full year, non GAAP diluted earnings per share Q2 was $0.90 up $0.06 from Q1 and a healthy 41% increase as compared to the prior year. 2017. Our earnings per share expanded due to increased margins, lower interest expense and a lower tax rate. 2017. Moving to our segment results on Slide 12.

Speaker 2

Our GBS segment continued its strong growth performance SY. Posting a second quarter of positive organic revenue growth of 3.4%, an improvement from 2% in the 1st quarter. 2017. The GBS growth is a positive sign as we continue to deliver higher value for our customers. Q2

Speaker 4

FY

Speaker 2

2018. Our GBS margin was 15.9%, up 150 basis points Q1 and up 180 basis points compared to prior year. Our GIS segment 2018. Organic revenue declined 8%, a full 110 basis point improvement compared to the 1st quarter 2018, an improved 380 basis points compared to the decline from prior year. GIS margins were 5.5%, 2018, an improvement of 390 basis points compared to prior year.

Speaker 2

Turning to the Enterprise Technology stack. 20. Analytics and Engineering revenue was $520,000,000 up 17.3%. Analytics and Engineering book to bill was 0.9 SYD1.13 year to date. We continue to see high demand in this area.

Speaker 2

2. The applications layer was up 1.5%, book to bill was 0.94% and 1.13% year to date. DPS, our smallest layer of the enterprise technology stack at $118,000,000 of revenue 2018. Was down 13.7 percent. Book to bill was 0.69 and 0.91 year to date.

Speaker 2

Q2. Cloud and security revenue was $521,000,000 down 1.5%. Book to bill 2018. Was at 0.8 in the quarter and 0.82 year to date. IT outsourcing revenue was 1,050,000,000 2018, down 9.6 percent.

Speaker 2

IPO book to bill was 0.81.92 year to date. 2017. We expect our IPO declines to continue to gradually moderate as we move through FY 'twenty two. The 2 deals Mike mentioned earlier that slipped out of Q2 that were subsequently closed 2. We're in the ITO and cloud and security layers of our technology stack and would have boosted our GIS book to bill 20.

Speaker 2

For the quarter to over 1.1. Lastly, modern workplace revenues were 581,000,000 Q2, down 10.9% as compared to prior year. This is an improvement from last quarter when modern workplace SYT. It was down 19.7% year over year. Book to bill was 1.2 and 1.1 year to date.

Speaker 2

2. Next up, let me touch on our efforts to build our financial foundation. This quarter, we made particularly strong progress Q2 FY 2018. As Mike pointed out earlier, we've made measurable improvements 2018. Driving our business to improve our financial foundation that will ultimately allow us to increase our deployable cash, 2018, affording us more opportunities to create value.

Speaker 2

We reduced our debt from $12,000,000,000 to $5,100,000,000 Q2. The refinancing of all of our high rate bonds during the quarter culminates our collective efforts to transform the business, 2. There is no simpler and clearer way of seeing 2. The impact that Mike and his team have made improving the operations of the business 2 than what was accomplished with our debt over the last year. Net interest expense has been reduced 2023,000,000 in the Q1 of FY 2021 to 45,000,000 this quarter with the full benefit of our refinancing, 2.

Speaker 2

We anticipate interest expense to be reduced to approximately $33,000,000 in Q3. Q2. We also continue to deliver on reducing restructuring and TSI expense while increasing our margins. Q2. This not only improves our cash flow, it also narrows the difference between GAAP and non GAAP earnings.

Speaker 2

2017. Finally, capital lease and asset financing is an area that was overused. In the last year or so, 2017. We've significantly curtailed new capital lease originations from $1,100,000,000 in FY 2020 2 and are on track to reduce originations to approximately $500,000,000 this year. 2018.

Speaker 2

These efforts to better manage this form of financing allowed us to reduce our debt and ultimately our capital lease cash outflows 2017. From $245,000,000 in Q1 FY 2021 to $177,000,000 this quarter, 2017. We expect further reductions in our quarterly cash outflows to around $150,000,000 per quarter 22 and further below that level going forward. We delivered these reductions while also 2018. Better managing capital expenditures.

Speaker 2

Our capital expenditures were reduced from 225,000,000 and Q1 FY 2021 to $159,000,000 Q2 FY 2022. Based on our reductions to 2. Capital lease originations, a more meaningful metric to demonstrate our progress is CapEx spend and capital lease originations

Speaker 5

20. As a percent of revenue,

Speaker 2

CapEx and capital lease originations as a percent of revenue were 10.2% for FY 2020, 2020. 8% for FY 2021 and now down to 5.3% for Q2 FY22. Delivering 5.3 percent is a good step forward related to better managing our capital spend Returning to our debt on Slide 16, I want to spend a minute on our recent refinancing. 2018. This chart shows how the refinancing further solidifies our financial position by extending maturities.

Speaker 2

2017. We now have no bond maturities before FY 'twenty six, lowering maturity towers and reducing annual interest expense Q2 and cash outflows by about $50,000,000 a year. From our improved balance sheet, let's move to cash flow. Q2. Cash flow from operations totaled an inflow of $563,000,000 SY.

Speaker 2

Free cash flow for the quarter was $404,000,000 up 33% compared to prior year 2019 and moves us to positive free cash flow for the first half of FY twenty twenty two of $100,000,000 2017. The Q2 was impacted by previously disclosed cash tax payments related to business disposals, SYT accelerated interest payments due to our refinancing and a payment related to restructuring a vendor relationship SYD to take greater control over our delivery. Further, as part of our strategy to focus on customers,

Speaker 5

2.

Speaker 2

SY. Our 3rd quarter has 2 discrete non recurring cash payments, 2018, including a $60,000,000 payment associated with a legacy vendor that has a pay for pay agreement and a 90,000,000 2018. Payment associated with COVID relief legislation where we deferred certain tax payments and now 2018. Slide 18 Q2. To absorbing a number of non recurring cash outflows of over $1,700,000,000 to put the business on a better trajectory, Q2.

Speaker 2

Building our foundation, these cash outflows include $700,000,000 tax payments associated with taxable gains on our divestitures, 2017. $500,000,000 to normalize vendor payments,

Speaker 3

dollars 332,000,000

Speaker 2

related to readying the U. S. State and local Health and Human Services business for sale, dollars 114,000,000 to end an AR securitization program, dollars 88,000,000 2017. To end a value destructive take or pay agreement, the $1,700,000,000 headwinds put into perspective SYD, the $749,000,000 negative free cash flow. A key driver of improving cash flow 2 is to continue to reduce our restructuring and PSI spend.

Speaker 2

Our restructuring focus and we believe are a prudent investment in the business Q2 to reduce restructuring in PSI from an average of $900,000,000 per year over the last 4 years FYD. I would like to take a moment to update our capital deployment expectations from Investor Day. Q2. The Investor Day chart calls for 55% of our free cash flow to be used to pay debt and Capital Lease Obligations. As a result of our progress, our cash outflows for debt and capital lease financing are now expected to be about 20% of our free cash flow.

Speaker 2

Q2. That leaves 80% of our expected free cash flow to invest in our business and or repurchase our stock. I should note, we like the business we have and believe that we have the right level of investment in GBS and GIS. SYD. Create more value by continuing to focus on driving the transformation journey across our business, improving the fundamentals 20 20 20 20 4.

Speaker 2

Related to acquisitions, our focus is to ensure our SYD. Our next question comes from the line of David. Please go ahead. Hi, good morning, everyone. I wanted to welcome everyone to DXC Technologies Q2 FY2019.

Speaker 2

Hi, good morning, everyone. I'm very pleased with the timing of our business. Q2. We will have a clear path to deliver value. Related to our debt, we have a clear line of sight to achieving our targeted debt level of $5,000,000,000 near term as we have scheduled debt repayment via our capital lease financing and commercial paper.

Speaker 2

2018. Our preference is to maintain approximately $2,500,000,000 of cash

Speaker 5

2. We will determine how best to

Speaker 2

deploy the cash as we do not expect to leave significant levels of excess cash SYT generating no meaningful returns on our balance sheet for an extended period of time. At this point in our journey, we favor share repurchases 2019 as our valuation is attractive. In Q2, we repurchased $83,000,000 of our common stock, 2022 year to date repurchases to $150,000,000 or 3,900,000 shares. Our share repurchases are a disciplined approach to capital allocation and are expected to be self funding Using a rather simple formulaic approach of deploying cash in excess of $2,500,000,000 when we are at our target debt level of approximately $5,000,000,000 We remain very focused on our investment grade credit profile. 20.

Speaker 2

Turning to our Q3 guidance, we expect revenue between $4,080,000,000 $4,130,000,000 2. If exchange rates were at the same level as when we gave guidance last quarter, our 3rd quarter revenue guidance range would be $90,000,000 higher. Organic revenue decline improves to down 1% to down 2.5%, SYT. Adjusted EBIT margin of 8.6 percent to 8.9 percent. Non GAAP diluted earnings per share is 2019.

Speaker 2

We are pleased by our progress as we look to the second half FY 2022. I would like to update our current fiscal year guidance. Based on the strengthening U. S. Dollar, our revenues are SYD.

Speaker 2

This is expected to be negatively impacted by approximately $200,000,000 which has been reflected 2nd our revised guidance range of $16,400,000,000 to $16,600,000,000 reaffirming organic revenue growth at SYD, down 1% to down 2%, increasing adjusted EBIT to a range of 8.5% to 8.9%, 2018. Increasing non GAAP diluted earnings per share to $3.52 to $3.72 per share 2019 and reaffirming free cash flow guidance of $500,000,000 We are reaffirming our guidance for FY 'twenty four. Q2. This reflects our strong execution in driving forward on our transformation journey. 2.

Speaker 2

Before I turn the call back to Mike, I want to reflect a moment as I'm closing out on my 1st year at DXC. 2. We are clear eyes on the value we are driving with the transformation journey. We feel strongly there is more opportunity in front of us 2018 to continue to improve the business and the underlying economics. With that, I will now turn the call back over to Mike for his closing remarks.

Speaker 3

2. Thanks, Ken. Let me leave you with the following key takeaways. We are building the foundation to make DXC operationally efficient, S Wide. By focusing on the operational work of motivating our colleagues and hiring new talent, Moving to a virtual first model, making service delivery more efficient and implementing better IT tools and reducing real estate, 2.

Speaker 3

The good news is the financial results that Ken just took us through reduced debt, shrinking restructuring and TSI costs, 2018. Increased margin and EPS and stronger free cash flow are all sustainable and a result of the operational work we are doing. 2018. This gives us confidence that we will achieve our FY 'twenty four double digit margin guidance. On growth, SYT.

Speaker 3

Q2 confirms that we're on the right trajectory for growth. Our focus on delivering and fixing the GIS business develops trusted relationships with our platinum customers. We are then taking our GBS offerings to our platinum customers, selling up the enterprise technology stack. 2017. The evidence that this is working is in our organic revenue results of GIS, GBS and the overall company.

Speaker 3

2018. This also gives us confidence that we will achieve our FY 'twenty four guidance of 1% to 3% growth. 2. In closing, I'm confident that by staying focused on our transformation journey and building the foundation, we will continue to deliver in the short term 2018 and ultimately deliver our long term financial targets of margin, growth and free cash flow. Operator, please open the call up for questions.

Operator

2. Q2. Your first question comes from Bryan Keane from Deutsche Bank. Please go ahead. Your line is open.

Speaker 6

2. Hi, guys. Good afternoon. Just want to ask about the bookings and demand picture. I guess kind of 2 part question.

Speaker 6

2. Obviously, the bookings fell a

Speaker 3

little bit below 1 in

Speaker 6

the quarter, but you didn't have to change your organic growth for the fiscal year 2. And that might just have

Speaker 4

to be done just due

Speaker 6

to a timing issue. So can you just explain that a little bit? And then secondly, there was some talk about 2018. It seemed like the demand was strong enough that if you had some more

Speaker 3

The focus for us is around year to date, we're over 1. That gives us a lot of confidence. And like Ken said, Total year, we should be over 1. So I don't see a problem in the demand. That's why I called out a couple of deals.

Speaker 3

2. If you look at the couple of deals, they were hybrid cloud and ITO deals. So when you look at our page 13, 2. You would see that, that would push that book to bill for GIS up around 1.1. So the deals are there.

Speaker 3

We're definitely winning in the market. The comment I made in terms of demand and projects is that when I talked about us getting 2. Additional at bat because we're delivering on GIS now is the fact that it's there for us to take. SY. And I think we got to continue to be more aggressive.

Speaker 3

You guys know that ever since I've been here, I've been very customer SYT focused. And with that focus, I think we can do even more in the market. So that was the purpose for my comment. We do have the people. I called that out in terms of I think we're managing the attrition well.

Speaker 3

So like our positioning and like what we're doing in the market, Brian. 2.

Speaker 7

Got it. And then how do you do more?

Speaker 6

I mean, what is that going to take for you guys to fulfill that extra push SYT. J. Rice:] I

Speaker 3

Q2. I think it's continuing to deliver and continuing to knock on the doors of our platinum accounts. The reason I gave you guys the example SY. The platinum account at the end of my prepared remarks is the fact that when we are delivering, we do get those opportunities. 2.

Speaker 3

And we get those opportunities, you're seeing that now we're growing GBS. I mean the key green shoot in this whole organic revenue story Is the fact that GBS now has grown for the Q2 in a row. Before I got here that business had never grown. 2. So like what we're doing, have confidence in terms of us being able to compete in the market and so far so good.

Operator

2018. Your next question comes from Tien Tsin Huang from JPMorgan. Please go ahead. Your line is open.

Speaker 5

2. Thanks so much. These are really helpful. I want to ask on GBS since you mentioned that just the demand environment seems pretty good there, Mike. Do you see Continued progress there on the revenue front.

Speaker 5

Can you bring that into the mid single digits or higher? And I'd say on the margin front as well, with the high watermark 15.9%, can you bring the margins up even higher from that level? Thanks.

Speaker 3

Yes, I mean that progress Tien Tsin is That's pretty special because when you look at the top of the stack, which is what we've been saying all along, right? Let's make sure we deliver 2. The critical applications in GIS to make sure we get those at bats and then start selling through that platinum channel. So when you look at that, The GBS, I mean analytics and engineering, I will tell you we can compete with anybody. That 17.3%, that's good work, 2.

Speaker 3

Okay. The second thing is, I know it's small growth, but applications, that's the 2nd quarter in a row we've grown applications 2. So again, we're competing in the high end work and what we need to continue to do is make sure that Q2. We're also fixing the GIS business. And what you're seeing there Is that we got to continue to stay focused on modern workplace.

Speaker 3

Modern workplace saw some really good results this quarter going from 19.7 negative to now 10.9. Now that business is going to continue to be lumpy because we're still seeing some runoffs. 20. But the other thing I'm happy to report is when I look at the ITO business, remember all those customer runoffs we had because of non delivery and so forth. For the most part, that stuff now is done and we can start seeing good progress in ITO in the second half of the year, Tien Tsin.

Speaker 5

2. Okay. That's encouraging to hear. My quick follow-up just maybe for Ken just on the I know good work in reducing the capital lease obligations. On Slide 20, just 2 to run the business.

Speaker 5

I just want to make sure I understood that. Thanks.

Speaker 2

Yes, that's correct, Tien Tsin. So we'll keep $2,500,000,000 of cash on the balance sheet. And when we have excess cash, we'll look to deploy it. When we have excess cash, we'll look to deploy it.

Operator

Your next question comes from Jason Kupferberg from Bank of America. Please go ahead. Your line is open.

Speaker 8

Hey, thanks guys. Just wanted to start on the organic growth side, Q2. Based on what you're guiding to for Q3, that implies there will be a ramp in Q4 to get to the full year target, which is unchanged. Can 2. Can you just talk to us a little bit about the visibility on that additional acceleration in the force order?

Speaker 8

I think you probably need to get to positive Q3 in Q4, if I'm not mistaken. Thanks.

Speaker 3

So Jason, look, in terms of what we're doing, The guide in Q3 is not only solid, but also it winds us up 2019. Directly for FY 'twenty two. And when I look at our strategy in terms of the GIS business and the GBS business, Look, that's going to get us there. What we're focused on with GIS, just to be specific, when you look at Page 12, 2. We're looking to drive that to negative single digits over time.

Speaker 3

Now I keep saying it's going to be lumpy this year, SYD. So it's going to sort of hang around the 8% range as we fix modern workplace. So that's sort of the SYD. The top end of the equation is I've also been very clear that GBS Now is growing and it's going to continue to grow. So when I look at the business, that's how we're going to get to our minus 2 to minus 2 for the full year and I would tell you the visibility on that is pretty good.

Speaker 8

Excellent. Excellent. Q2. So on free cash flow, I was curious just regarding the Q3 outlook. I know you called out that there will be a couple of non recurring 2 items.

Speaker 8

But how should we be modeling the overall free cash flow in the Q3? I know you'll then have typical favorable seasonality in Q4 to get to the SYT. But I want to make sure our expectations are calibrated for the current quarter there. Thanks again.

Speaker 2

2. Yes, I mean, we haven't really given quarter to quarter free cash flow guidance, but I think if you back those items out, I would expect to be around 2018. Plus or minus $50,000,000 positive, maybe $50,000,000 negative, dollars 100,000,000 call it $50,000,000 to $100,000,000 somewhere in that range.

Operator

2018. Your next question comes from James Faucette from Morgan Stanley. Please go ahead. Your line is open.

Speaker 9

Hey, this is Jonathan on for James. Thanks for taking our questions. You mentioned an uptick in attrition. Where across the technology stack are you seeing more or less attrition? Q2.

Speaker 9

And what's contemplated in your guidance on a directional basis as it relates to that?

Speaker 3

What's contemplated in our guidance is that, one, we're managing it well. SYD. And we're managing incredibly well because ever since I've gotten here, we've taken a people first strategy. That means we're taking care of our folks. The second thing that we're seeing in the market is the fact that not only our people, but future recruits like our virtual first mindset.

Speaker 3

The third thing is we continue to keep a pulse on our folks. So that's why I mentioned the September employee engagement Results in terms of we had more people participate and we also have a very motivated workforce. So and then the last thing 2. I do think our footprint is an advantage for us. So having said that, we're doing great on analytics and engineering 2.

Speaker 3

And being able to keep up with that demand. And then our other focus is in application and cloud. So that's the stuff that we're focused on in terms of

Speaker 9

SYD. And a quick follow-up. What are you seeing in terms of the pricing dynamics across this Technology Stack. Presumably, there's some pricing pressure given the mix there and as well as SYD. The cost of labor.

Speaker 9

So are you able to pass on that pricing to your end customers?

Speaker 3

I mean, look, the pricing, all you got to do is look at 12, All right. 12%. We are definitely getting good margins for our GBS business. And then love the right SYT-twelve because you will see the discipline in terms of the new deals we're also doing in GIS, okay? So when we grow, 2.

Speaker 3

Progress and us having the ability to raise guidance on both margin and EPS is strong. And on the revenue, we're doing

Operator

SY. Your next question comes from Ashwin Shirvaikar from Citi. Please go ahead. Your line is open.

Speaker 10

2. So my first question was what percent of GBS currently

Speaker 8

2. And the reason I'm asking

Speaker 10

is, does it make sense 2. You're making progress on also perhaps building out GBS independent of DIs just to go out and get its own and wanted

Speaker 3

2. So look, the thing with GBS, GBS, SY. A lot of that is being fueled by analytics and engineering. So then you take the next cut of analytics and engineering and what's fueling analytics and engineering, that's Luxoft, SY. Okay.

Speaker 3

Luxoft, when we bought that, we knew there wasn't a lot of overlap. Hence, the reason why I called out in my FY2018. That we are now starting to see us taking Luxoft through that platinum channel. That's goodness, because not only did Luxoft have their own customers and they continue to go get their own customers, but now 2. We're also seeing conversion on the platinum accounts and that's again good tenants of green shoots for growth.

Speaker 3

2018. Hence the reason why we have confidence that we'll get the organic revenue where it needs to be.

Speaker 10

Q2. Got it. Okay, understood. And then restructuring in KSI, as I sort of look at what you've done year to date 2. And the full year projection, it would seem like the 20.

Speaker 10

Current level probably be maintained for the next couple of

Speaker 6

quarters. I just

Speaker 10

want to make sure 2. That's accurate and what leads to sort of the quarter to quarter step up, step down, any particular 2 callouts on what you're specifically doing there. Sorry if I missed that one.

Speaker 2

Yes. We've guided the $550,000,000 for the 2018. We're running probably a little bit light of that at this point. What I would say, Ash, when we've taken a very disciplined focus Effort on every dollar of spend. So we make sure there's business cases.

Speaker 2

It's being deployed thoughtfully. So you could see it tick up in the second half of the year to get to the $550,000,000 but I would just say we're working diligently to manage it. So I would say that $550,000,000 is a good number, But if we don't need the money, we certainly won't spend it.

Operator

Your next question comes from Rod Bourgeois from DeepDive Equity Research. Please go ahead. Your line is open.

Speaker 11

All right. Hey, thanks guys. Hey, so Mike, just a big picture question. I Q2. I wanted to ask about what stage of turnaround you're in.

Speaker 11

You clearly have margin on the SYD, despite all the talent challenges out there. And you actually had a string of 5 quarters with book to bill Above 1, it was actually a little above 1.1 until you experienced a couple of delays apparently this quarter. 2. So just stepping back, it would be great to hear where this now places you on the turnaround trajectory. SY.

Speaker 11

Can you give us a sense of what inning you're in and if you're at any kind of inflection point given the progression of clients and what's happening in the pipeline?

Speaker 3

2. Okay. Rod, thanks for that question. I'll stay with your baseball analogy. How about that?

Speaker 3

And 2. In my mind, we are in the early innings for both, all right, organic revenue and also Margins. So let's tackle the margin first because the margin is the progression is clear that we're delivering. SY. Remember the cost levers that we're dealing with, and they're mostly all related to our people.

Speaker 3

So the first one is we have SY. We have a bias towards making sure that our own people do the work for our clients and customers SY. Instead of contractors, so we're very focused on contractor conversion. 2nd is

Speaker 5

we want

Speaker 3

to get the right people in the right location. That's why I mentioned the footprint. SY. So that's scaling our GIDCs. 3rd is the virtual first model.

Speaker 3

So that's why I continue to talk about real estate. We should be minimizing 2. We're definitely taking down our real estate footprint. And then last thing is let's not have our folks do stuff that we can automate. 2.

Speaker 3

So when I look at those four levers of cost, I would say we're definitely in the early innings because there's still much more to do. 2019. That's what gives us confidence that we can reach the double digits in FY 'twenty four. Quite frankly, that's also what gives us confidence to raise the guidance 22. In terms of the margin and EPS for FY 'twenty two.

Speaker 3

Now look on revenue, what I would tell you there is the payoff is going to SY. But we're seeing a lot of good things happening. So when I talk about green shoots, green shoot number 1 is NPS is up. That means customers are happy with our delivery. 2nd is we're definitely getting to see more at bats.

Speaker 3

Those at bats are coming both in terms of the GIS business, but we're now SYT. Seeing all those at bats happening in GBS, but what will happen is those will convert over time. And the best proof SY. Of those that that's converting is the fact that we are growing analytics and engineering. We're also growing applications.

Speaker 3

So 2. Look, when I see when I say the early innings, I would also say that the margin is a little bit ahead of the revenue. 2. But the revenues there, I think over time, you're going to continue to see that the strategy we laid out 2. To deliver the GIS business and to continue to try to grow up the stack at GBS is one that will serve us incredibly well.

Speaker 11

2. That's helpful and thanks for dealing with the baseball analogy. Can you also speak to the competitive landscape 2. It does seem you have 2 large infrastructure competitors that are amidst some pretty big distractions. 2.

Speaker 11

It would be helpful just to hear how your competitive position is tracking in your major markets. Thanks. 2. When I look at that,

Speaker 3

I like the hand that we have, Rod. And when I look at it, it's SYD. Especially in analytics and engineering. When I look at GIS, look, we just need to stay focused. I mean, we're laser SYT.

Speaker 3

We're also in those platinum accounts where we can expand, we will. 2017. And again, I like our position there too. Your

Operator

2. Your next question comes from Bryan Bergin from Cowen. Please go ahead. Your line is open.

Speaker 7

Hey, guys. Good afternoon. Thank you. Question on bookings here. So hoping you could dig in a bit more on GBS book to bill performance in the quarter.

Speaker 7

And then Mike, Q2. Just more broadly, you've had a good mix of new work in bookings, but can you comment on renewals? I hear your commentary around GIS discipline, so hoping you could dig in a little bit

Speaker 3

more Q2. Okay. So Brian, what are you tell me a little bit more about what you're looking for on GBS, the first part of your question.

Speaker 7

2. Yes. So when we look at GBS book to bill in the quarter, so that was 0.95. Just comment there on anything that SY. May have slipped in that segment as well or if it's just some lumpiness.

Speaker 7

And then on the renewals, anything to tease out around GIS 2. Discipline as it relates to renewals in that business?

Speaker 3

So look on the top portion that's to be honest with you that's why we gave you the year to date stuff Because I'm not really that concerned about it at all and the fact that I'm guiding towards 1.0 in Q3, we should be fine. 2. In terms of the renewals, I always say, look, we're going to continue to have a healthy dose of both SY. Because we had to continue to renew the work we have, but also win new work. And a SYD.

Speaker 3

A lot of that new work is still coming on our existing client base. And that's why I give you both numbers because 2. When I started this whole endeavor 2 years ago, people thought that the revenue was going to run away from us. SY. And clearly, we're showing now it's not.

Speaker 3

And that's why I continue to show you the renewal number. Q2. I always want the new work to be a little bit higher than the renewals. So that's why I like the numbers we've got so far.

Speaker 7

2. Okay. And then just on the platinum accounts, it was a good example you provided. Curious how broad based are those types

Speaker 3

SYT. J. Rice:] 20. Early innings. So those take time to do, right?

Speaker 3

So think about the journey that we've been on. 2. The first step was to get those customers to believe in us again. The second step was to then deliver for them, 2. All right.

Speaker 3

And that just doesn't happen overnight. 3rd step 1 then was to start talking to them and being proactive and innovative with them. 2. And that's not just one conversation. And the reason I gave you that example is that that's the way these things can look.

Speaker 3

They take time. That's why I answered Rod's question the way I did in terms of early innings. But we have confidence that 2. The front end account executive model that I'm putting in place is going to be able to deliver those type customers for us in the future.

Operator

2018. Your next question comes from Jamie Feldman from Susquehanna. Please go ahead. Your line is open.

Speaker 4

Q2. Hi, it's Jayden Susquehanna. I had a couple of kind of housekeeping questions on FX, but I did want to tease those out maybe 20. Better for Ken, but by the way, this Slide 22 disclosure on FX is a great slide. Q2.

Speaker 4

But I wanted to ask, I see that you're calling out $200,000,000 of FX impact on the year. 2. Did you say what it is for the Q3? I saw that you had $57,000,000 in the Q2. So that's the first one.

Speaker 4

What's the Q3 FX,

Speaker 8

if you happen

Speaker 4

to have that, I know it's very detailed. And then is your bookings adjusted for FX too because If not, would that have impacted the book to bill at all?

Speaker 3

You take Q2, I'll do the book 2.

Speaker 2

All right. So the Q3 FX impact is about $90,000,000 Jamie.

Speaker 5

2. Got it. Okay.

Speaker 3

And Jamie, listen, on the book to bill, no, I'm not that the FX that flat out is Knocking down the deals, all right. And look, the great part about where we are now is 2. We're pretty specific about what we can do in each quarter and to be able to have that forecast figured out and the deals that we need to land. 2. I really like the fact that we've got that discipline and that's quite frankly why I called out a couple of deals and better yet the fact that they're behind us And we're now fully into Q3.

Speaker 3

That's good news.

Speaker 4

Got it. I'll drop back in the queue. Thanks for that.

Operator

Q2. We have one last question from Keith Bachman from BMO.

Speaker 6

Yes, Mike and Ken, you guys trying to cut me off?

Speaker 8

No, go ahead.

Speaker 7

Yes, I appreciate you guys. Now you get even

Speaker 3

more time, so go ahead.

Speaker 6

SYD. I got my seventeen questions lined up, but

Speaker 3

I wanted to drill down

Speaker 6

on the first one is 2. In terms of the cash flow and the distribution, essentially when you reach the targets, you're prioritizing buybacks, Q2. It sounds like over M and A. And I was just wanted to tease that out a little bit. And particularly as you're on your journey here to try to get the positive growth rate.

Speaker 6

Why not tilt a little bit more to selective M and A to try to accelerate that form SYD. And I'm not saying use M and A to get growth, but once you buy some companies, it helps you as you even anniversary get in new areas like

Speaker 3

2. So Keith, I will start and Ken will weigh in. The key thing that Ken said is we've got what we need.

Speaker 6

Right.

Speaker 3

Okay. And what we've got to do is kind of continue to Execute what we have, all right. So think about the strategies we're putting in place for growth, all right. Delivering fixed GIS piece 1. Piece 2 is the platinum customer channel and being able to take new things like Luxoft through that channel.

Speaker 3

20. So my point right now is we've got more than enough to get us to where we need to be for FY 2024. 2. Now having said that, you should have also heard that if something falls in our lap, we will absolutely do it, all right? And look at it, 2.

Speaker 3

We got the money and don't take Ken's comments as etched totally in stone. I mean, We can pivot one way or the other, but we definitely think we're undervalued right now. So therefore, SY. We think a good use of the cash is to buy our stock. The last thing I will tell you is we continue 2.

Speaker 3

To go through this business and do the hard work around making sure that we don't have any distractions call from the Enterprise Technology stack. So we continue to divest small piece of this business is that quite frankly We are not 100% focused on our enterprise technology stack. So 2. Keith, I look at that work and I look at how we're undervalued and I say, okay, best use of the cash right now, in the short term, 2. All right.

Speaker 3

All while we continue to balance that investment grade profile, okay. So that 2. I think that balance is important.

Speaker 2

Yes. And maybe just to add to that, because the conversation around free cash flow versus excess cash, Q2. I think it's an important concept. So when we laid it out at Investor Day, we spent some time talking about free cash flow. 2.

Speaker 2

The reason excess cash comes to the forefront is really what Mike talked about a few seconds ago, which is 2. As we dispose of assets that are non core, aren't really productive for us, we'll generate cash

Speaker 5

2.

Speaker 2

And we also want to use that cash to deploy that cash in an appropriate fashion.

Speaker 4

Okay, Okay. Well, why don't I leave

Speaker 6

it there. I'll ask my other questions and follow-up, but I appreciate it. Thanks very much.

Speaker 3

Hey, Keith. Sorry about that. That's okay. 20. Look, in closing, what I want to do is thank everybody.

Speaker 3

We really appreciate your interest in DXC. Look, our team really believes that we are building the foundation to make DXC operationally efficient, sustainable and ultimately grow. 2. And I am confident that we just stay focused on our transformation journey and continue to build the foundation we'll deliver.

Operator

SY. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
DXC Technology Q2 2022
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