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