DXC Technology Company (DXC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to day 2 of Citi's Technology Conference. I'm Ashwin Shirvaikar. I'm Citi's payments, processors and IT services analyst, and I would like to welcome you and also introduce the next company that we'll be speaking with. We're delighted to bring DXC Technology. From DXC, we have Max Salvino, who is the CEO; Ken Sharp, who's the CFO; and also John Sweeney, who heads up Investor Relations. Folks, thank you for doing this. I appreciate it and really looking forward to this conversation.

Thanks, Ashwin.

Yes. So I thought maybe a good first question would be to investors who are just now coming back to the name after maybe a hiatus of a year or 2. It may look to them like DXC is still restructuring the same thing that they saw maybe a couple of years ago. But then, of course, the current management team has achieved a lot in a couple of years. And that's perhaps different partly because I think you're seeking to balance multiple priorities. You're not just focused on cost, for example. So can you maybe speak to the broad approach in terms of clients, employees, the portfolio offering and so on?

Ashwin, thanks. So look, the approach is this. We're running a very structured playbook. And when I say playbook, it's got 3 phases. First phase is over, that's the stabilization phase. That was done in FY '21, and we say stabilization. This is where we sought to implement what I call the 5 steps of the transformation journey. Those steps stay the same through each phase. The goals just change in each step. So now we're in building the foundation for growth, meaning simply put, everything we do this year will help us grow as it relates to us hitting our 2024 targets that we put out there. So when you look at our transformation journey in the steps, there's 5 steps, and we always start with our people. In the industry right now, people are talking about the retention of their employees. Our People First strategy is showing the fact that DXC's story is resonating in the industry. When you look at our new leadership team, it's roughly 75% new people. And what I've learned through 35 years of being in this space, people follow people. And what we're seeing is the new leadership team is able to attract people and also inspire the folks that have been here, because my view simply is in the 2 years since I've been CEO, we've gone from an uninspired workforce to one that's inspired and motivated and engaged. And we showed specific facts around that during our Investor Day in June, where our employee engagement went up from 56 to 72 or for those that want to go to glassdoor, there's no question, the trend on glassdoor from a people standpoint has improved. The second step on the transformation journey is focus on our customers, very proud about what we've done here, because when you look at the Investor Day in June, you'll see people like American Airlines, FedEx, Deutsche Bank, Lloyds, Brighthouse, Microsoft all give testimonials about how DXC is important, not only on running their mission-critical systems as it relates to infrastructure, but also the transformation to the cloud. And the reason why we're so important is whatever you're doing today on-prem, you need to be doing in the cloud, and they realize we have that knowledge, and we're best equipped to move them to the cloud. So when you look at our NPS score, we also showed that it's increased by 44 points. And then if you look upper left, you now see that the sole reason that we are stabilizing revenue is because of those customer relationships because we're starting to show up proactive. We're starting to show up innovative, not just delivering. The third step of the transformation journey now look upper right is optimized cost. This is where we are literally simplifying our organization. When you simplify your organization, you take out on one at layers. My view is we went from a very complex organization to deal with our customers and colleagues to now simplifying it. And that's what's enabled us to expand our margins from 4.2% to, in Q1, 8%. The fourth step on the journey is the seize the market, and this is where we've gone from losing in the market to now winning. And the evidence of that is 5 quarters of a book-to-bill of over 1.0. People ask, okay, well, since the book-to-bill is 1.0, why aren't you growing it? What I would highlight for this community is look at basically Q1, Q2, Q3 of FY '21, okay? All roughly minus 9% to minus 10%. So it takes a while to bring this new revenue on. And remember, the book-to-bill is a combination of renewals and new work and you want both because if all of it was new work, people would be asking what about the annuity stream, all right, in terms of revenue. And if all of it was just renewals, then there's no way to do what we're doing with this business. If you look now at Q4, Q1 and then the guide for Q2, we're basically cutting that negative revenue decline in half each quarter, going from 9.7% to 6.5% to now 3.7%. I guided Q2 to minus 1 to minus 3, all right? So again, all evidence that the transformation journey is working. And then last but not least, Ashwin, is build the financial foundation is the fifth step. And what the finance group has done under Ken's leadership is phenomenal. You go look at -- we've been very focused on our investment-grade profile, all right? And we're in very good standing now with the rating agencies. We've paid down $7 billion of debt. You saw in the last 2 weeks, we were out in the market, extending our maturities and also cutting some of the towers and decreasing our borrowing costs and being very proactive, all right? That's huge. And then last but not least, you guys all see the fact that, look, we are improving our free cash flow, and we're also improving our earnings power all while making these numbers a lot easier to understand and more transparent. So that's what I would say. We go on from having a story when I showed up here 2 years ago, my anniversary -- the more important anniversary, Ashwin, is today, it's my 25th wedding anniversary, and I'm spending it with you, so you should be honored. But that's the more important anniversary. So look, we have made a lot of progress. We feel very confident that the progress will continue, and we talk a lot about the trajectory that we're on in the sense that we think we can keep the momentum going.

Yes. Yes, absolutely. Well, first of all, congratulations on 25 years. That's fantastic.

Big deal.

Yes. Yes, it is. I completed mine 2 years ago, so...

Congrats.

It's always [indiscernible]. So you already said that you're past the stabilization phase, and you're kind of talking about this in terms of years or phases, so maybe the baseball analog of what inning are you in may not be fully appropriate. But in terms of just carrying forward the current foundation phase and what investors should expect in, say, coming quarters or over the next 12 months, how would you and Ken sort of talk about that in terms of investor expectations or markers that we should look for?

Okay. So the markers -- so first part is big baseball fan. My youngest son plays college baseball, so I'd probably watch it way too much. So early innings is what I would say, okay? And there's still -- when we talk about the momentum, there's still a lot, right, that we can achieve. I mean we made no bones about it here at DXC. We fully expect to catch our peer group, okay? And that peer group trades at 16x EPS. So what that peer group has is positive revenue growth along with double-digit margins, okay, and very clear free cash flow, which is exactly what we put out there in 2024, right, plus 1 to plus 3, 10% to 11% adjusted EBIT margin. And you can see how hard Ken and I are working on the free cash flow, right? Starting Q1 at minus $300 million, but then confirming the $500 million, we're very, very focused on it. We feel confident in that. So I would say, Ashwin, early innings. The key to that whole success though is the focus on the customers and the focus on our people, okay? Because what's happening right now in the industry is technology's hot. So whether you think about basically supporting a virtual workforce, you got to have tools to do that. When you think about folks working virtual like if your existing IT estate hangs or shuts down, for instance, not good or gets penetrated with a ransomware attack, it's brought the whole infrastructure piece, Ashwin, back into the game. Like people now care about these environments. Before COVID, everybody was like, oh, look, don't invest in the existing environment. Why? Because everything is moving to the cloud. Now it's back, because people aren't moving to the cloud as fast as they thought because now the phase that we're in, going back to phases, is this is now the mission-critical systems. Those systems don't move that quickly. Most of the stuff that moved to the public cloud early was the stuff that was pretty easy to move, and it wasn't mission critical. Now we're in the mission-critical stuff, and DXC is firmly in the center of that industry because, again, we've got the knowledge of 175, what we call platinum accounts, we know their IT estates, and that knowledge helps us rationalize applications and move that infrastructure to the cloud. So the reason I say it's still early innings, we got a lot to do still. Those customers, when you guys do your channel checks, they're all doing some form of movement or a transformation, and we're right in the middle of that.

Okay, right. So in terms of quarter-over-quarter revenue stabilization, the chart that you pointed to kind of went from down 9%, down 10% to down 3-ish. That trend, I would imagine, should continue. Margin expansion, hopefully, should continue in spite of the investments. One question I do get from investors is it's been a while since we have seen a "normal year" from DXC. Is that anything to point to or consider in terms of quarter-over-quarter sequential trends? I know way back when the March quarter would be hardly strong quarter because there was a lot of license revenue and cash flow in there. But anything you could help investors with as it relates to first half versus second half or any particularly strong or weak quarters, things like that.

Okay. So if you think about our first half versus second half, I mean, the second half, from a revenue standpoint, obviously needs to get better for us to hit our minus 1% to minus 2% guide. So that's the focus there. That's just the straight math. And again, we feel confident about our minus 2% to minus -- or minus 1% to minus 2% guide for FY '22. I liked your question around a stable year because when you look at what we're going to do this year and then where we're headed towards 2024, there shouldn't be a massive amount of fluctuation. You end this year at minus 1 to minus 2, then you go plus 1 to plus 3, so over the next 24 months, what we're doing is we're putting all the pieces in to grow, and then we're showing growth. I mean, this thing shouldn't spike one way or the other on revenue. And then you've seen a propensity for me to invest in our people, invest in the business and invest in shareholders, right, with some of the recent buybacks Ken and I did to get rid of the dilution from the employee base, right, the rewards. So margin will steadily increase, right? You shouldn't see these massive swings from 4.2 to 8, right? We should steadily climb towards that 10 to 11, all while we're doing the right thing for the business, okay? Ashwin, the last thing is I think it goes unnoticed too much the work that Ken is doing. Every quarter, we continue to adjust the thinking of our business in terms of long-term stuff. So when you look at what we did, again, with free cash flow last quarter, we dealt with stuff that long term is going to put us in a much, much better situation, all right? Dealing with that long-term take-or-pay contract, which means take or pay, I mean, kitchen English, we're buying software and hardware ahead of what we needed. You know, because I've known you too long that that's a major no-no to do in the IT services space. Because as soon as we buy it, guess what, it starts to [ appreciate ], fair enough, versus buying the stuff when you need it. So unwinding stuff like that, being proactive, for instance, with the bond offering, all that stuff puts us on solid foundation to say, okay, the swings are over. You can depend that DXC is going to deliver the revenue, the margin, the EPS because the stuff is all settling down. Trust me, I know Ken doesn't want to, and I don't want to get on calls and talk about like these major swings. I mean, I'm used to talking about growth, both in terms of revenue and margin instead of being the cleanup person. Fair enough?

Yes. Yes. Fair enough. Fair enough. So maybe since you brought up both in the first couple of questions with regards to building a good financial foundation as well as the work that Ken and his organization are doing, maybe I can ask a margin question and pull that up. In terms of the various steps that build up to the margin target, and there are various items in real estate, contractor conversion using people more efficiently but also getting the billing rate up because you've changed the mix, things like that. So what are 2 or 3 of the more important things in the next 12 months and in the next 3 years?

Okay. So I -- All right. So let me do 12 months and then I'll do 3 years, okay, in terms of what's on my mind and Ken's lockstep in sync with me on this. So we're after those 4 cost levers, okay? That is what is single-minded focus. What we showed in our Investment Day is, again, being the veterans that we are of the IT services industry, you do not run an IT services firm with more than 10% contractors. You don't. And if you're anywhere close to that, you'd better be flipping those folks every 6 months to full time. Because again, that's how you build the culture, that's how you build the stickiness to retain people because when you're retaining people, you shouldn't have any delivery issues. You're not losing that knowledge, it's not walking out the door. So when we think about that and you think about basically the contractors, we started, Ashwin, at 23%. And we showed that we're making progress to 17, and we expect to continue to drive that towards 10%. So that's first thing. So when I said to your earlier question, we're in the early innings, we still got more to do. There's more juice in that tank, okay? All right. Second is real estate. People blow that off. But for us, it's a big deal because the integration between EDS and HP and HP to CSC, not done, okay? I mean we got way too many buildings and Ken is doing a great job dealing with that footprint, along with having a virtual first mindset. We want the women and men of DXC to work virtually. That doesn't mean that we won't come together and build camaraderie. That doesn't mean that some of the folks won't be physical location people. But we've done very well, all right, since March of 2020 in terms of delivering for our clients in a virtual manner and giving them that flexibility. That modern workplace solution that we're rolling out with Microsoft is outstanding. The key thing there is not only can we deal with the technology, but now it's a better employee experience, all right, in terms of a virtual mindset, the look and feel's better what they can actually get access to, to help them be virtual, whether it's a chair, believe it or not, that's a big deal. It could be a headset. It could be a number of things. But the last thing is the data. What people miss is the data that, that service now provides, you can do weekly pulse surveys, you can figure out mentally, physically how is your workforce doing. And then the one that I like the most for my team and probably other leaders who will use it is during my meetings, how many of my leadership team is firing off e-mails. Everybody gets a chuckle out of that. But if we were all meeting face-to-face, you wouldn't dare fire up your PC and start doing e-mails. So on the virtual environment, why would you do that? So it's that data to really start running a virtual workforce that, quite frankly, matters, all right? So anyhow, moving back, the third layer is our GIDCs and everybody sort of talks about this, but now us being clear about the 20 centers we want to scale and be able to get the right scale, right level at the right location, that's what we're hiring in. So I talk a lot about hiring the top folks, Ashwin, 75% of leadership team and then their direct reports is 50%. The ingestion of new talent coming into these centers is key. And then the last one that I did a review last Saturday morning on it is Platform X. And the simple way to think about Platform X is these cloud estates, along with the infrastructure estates, Ashwin, need to be monitored. We've literally run the single biggest instance of ServiceNow, okay? So we can monitor those estates better. We understand what needs to be changed and then we launched the appropriate bots to go fix them. And if we don't have a bot, we go do it manually. My point in all this is when you do it automated, you free up people, okay. Now, those people, we don't want walking out the door, and you ask, okay, well, if they're not walking out the door, how are you going to increase margins. We're going to increase margins because there's no better workforce to transition. If you look lower left of this slide, the new work, there's no better workforce to transition the new work faster and at better margins than people that have done it before. So that's why we're freeing these folks up, so that they can move on to the next client instead of doing manual stuff over and over again. So I look at what we got to get right in the next 12 months as those 4 items. Now you asked about the next 3 years. The next 3 years, we're very focused on, and that's why we continue to show you the separation of GIS and GBS. We want to move those clients up the stack. Come on -- I mean we know the GBS businesses, analytics and engineering applications are higher-margin businesses than what we have in GIS, all right? And us progressively showing that those -- that GBS business is growing, that's huge because the math here long term is this. GIS, we need to get to stability. So think minus 2 to 0, okay? GBS, and it's at minus 9 now and it came down from minus 20 a year ago when people said there's no chance, right? You're going to be able to fix that, which is not true because we are. And the way we fixed it is we got in sync with our clients again about these existing IT estate. The key thing is GBS went positive, Ashwin, in the last quarter, plus 2. We expect that to continue. So if I get GIS to minus 2 to 0, something like that, and we get GBS roughly around, right, 3, 4, 5, that's how you get to the 2024 numbers and the fact that we've already signaled a big win, which GBS went positive, that should show people, okay, 12 months, we got it right. We got to keep GBS there over the next 3 years, all -- from now until 2024, all while we continue, right, to get better with GIS. Fair enough? I mean, the algorithm is not that complicated, and that's why we continue to show you GBS and GIS. Now let me just say one more thing, and then I apologize for taking too long. We do like the transparency we're giving right to our investors too now in breaking GBS and GIS up into analytics and engineering applications and so forth. I mean, Ken and I don't love the questions right around like, okay, why is the cloud and security of 0.85 because the stuff is going to get lumpy, but I think it's important that we show you where the businesses are or the layers are that make up those 2 businesses because those 2 businesses are pretty much equal. $2.2 billion for GBS per quarter and $2.3 billion in revenue for GIS. So you can see how the algorithm works, right? Get the thing to stable GIS, grow GBS, and I think it's a good bet people are making [ in ] what we're doing.

Yes. Yes, absolutely. Thank you for those details. But it leads to a couple more questions. One is digital transformation, you can look at any transcript. And CXOs mentioned digital transformation 1, 2, 3 times in a conversation earnings call, same thing. When many investors think of digital transformation, they often focus on the cool front-end stuff. But you mentioned mission-critical. Mission-critical can also go digital, that's kind of what you're doing. So if you could align maybe the enterprise tech stack that you talk about and the pieces of it to the digital transformation of your clients, right? I think that might have closed the loop with regards to how you're aligned with the needs of your customers. Does that make sense?

Yes. Awesome. Great question. So let's go -- we'll go bottom stack to top real quick and take less than 3 minutes. If you go to the very bottom, right, it's infrastructure. What needs to happen there from a digital standpoint is you've got to modernize this stuff, all right? And when you modernize, you can do like the stuff that I'm talking about with Platform X. Like why would people be trying to monitor the servers and so forth versus [ buys? ] That's digital. That's as good as digital as you're going to get, all right, in terms of anything. So that's what we're doing, and that's why we continue to talk about Platform X. Okay. Next step, digital modern workplace. You tell me one company that doesn't, right, aspire to do better dealing with their people on a virtual standpoint, and how are they going to do it? So again, our offering there called Uptime on customer #1. That is what's allowing us to have roughly 130,000 women and men work virtually. That's digital, all right? That's what our clients also want, right, especially as the pandemic continues to stay afloat. People are going to continue to work virtually. So that's digital. Next, cloud and security, I don't have to do much talking there, all right, moving these workloads to the cloud. It is funny because we got everybody now talking about hybrid, all right. Simply put, forget hybrid. What we are doing with our clients is giving them a blueprint to say, here's how much stays on-prem, here's what goes to private, here's what goes to public, both in terms of data applications and infrastructure. And that's digital, okay? Getting those pieces in the right location is critical, along with making sure we're secure, okay? So I'm not going to talk much about security. It goes without saying that the amount of technology now that's being put into these IT estates, Ashwin, is significant, right? Because it feels like every day, we wake up with another ransomware attack and it's real. This stuff is real. And you've got to be able to put in that monitoring stuff, right, to make sure that stuff is secured because it's definitely an environment where people need to pay attention to not only the monitoring but the technology that's there. Okay, applications. Application is pretty simple. I mean the way we look at it is from a digital standpoint is something headed towards end of life, because, again, most CFOs want to sweat that asset. They're not looking to like put in SAP again, right, or Oracle or ServiceNow or what have you. So you look at end-of-life and we get a pretty significant basket of clients that where some of these applications are heading towards end of life that need to be [indiscernible]. And we forget about why we have these debates, whether it's on-prem or in the cloud. Remember, we're doing all this to harvest the insights, like to get better data, all right? And us with our Luxoft asset, I mean, look, we can compete with anybody in the space. And I've been doing analytics and engineering, whether it's machine learning or just cleaning up the data for a decade now because the key thing to scale that is you got to keep the data clean. Otherwise, it doesn't make any difference how much AI or machine learning you have. It just won't scale because the data is not clean. So anyhow, I always smile, Ashwin, at the digital word, okay? Because it's like high performance or best practices or world class of our past history. Everything seems to be digital now. But when you go talk to our customers, that's what they're talking about. And we're right in the middle of each one of those, but just call it transformations that are being done in those -- in the layers of the stack.

Right, right. Absolutely. And obviously, all of this translates to a book-to-bill that's greater than 1. One question about that, and then I do want to talk about talent and M&A. So in terms of book-to-bill, and you made it clear, it must contain the sustaining piece of renewals. And then there's new logos, new wins, new work that you do. But there's also probably more healthy if it's a balance, if, in other words, your book-to-bill is not driven by 1 large win or -- 1 or 2 large wins, basically. You need lots of singles, lots of doubles and the occasional home [indiscernible]. And that's probably the healthy mix. So is that where you are today? Or is your book-to-bill being driven by very large [indiscernible] here, a very large [indiscernible] there.

No. I mean I think it is a healthy mix, all right? We've got -- I mean the way we track it, right, is we look at deal size, all right? So think less than $5 million, all right, $5 million to $20 million, $20 million to $100 million and stuff that's over $100 million, right? So that's usually been my algorithm in terms of how healthy is the book-to-bill. And then what I show you all is what the mix is between renewals and new work. And like I said, I mean, right now, when you look at the far left of this picture, Q1 of FY '21, our new work was 33%, not enough. Not enough to make an impact, all right, in terms of the negative growth. But with new work over 50%, you start making that impact, okay? And the renewals are important because that just means I'm showing you all that people aren't leaving us and the fact that look what we do matters. So that's, Ashwin, is what I pay the most attention to. It's not so much size of deal. It's what's the mix. Because like I said, renewals continues that foundation of decent revenue, all right? The new work allows me to start cutting into the negative revenue growth and ultimately will get me to the targets that we put out there for '22 and '24.

Yes. Okay. So talent, right? And look, the management team, the G&A piece of it, the sales part, I mean the folks for whom you put press releases out when you hire them, outstanding, right? I mean that's for everyone to see. People are coming from all sorts of other good companies and that says something. Could you talk about layers below? So rank and file, the people who are day in, day out in front of the customer doing the work, the hiring and retention of basically the vast majority of your employees and the branding. If you don't mind, the -- how strong of a brand is DXC becoming in that -- in those layers?

I think that -- so first of all, the DXC brand is definitely resonating in the market, all right, meaning we're seeing people that want to join DXC now than we've ever seen before. You'll see that we also are getting a little bit more vocal in the market. We closed the New York Stock Exchange yesterday. Before this call, I met with 50 of our top leaders, right? which are the people below the direct reports to me and then some are direct reports to those direct reports, all right? And we spent literally over an hour just talking about, Ashwin, the culture because what's going to make these numbers stabilize and what's going to make this company incredibly sound is the cultural change. And I talk about a People First strategy, but I spend a lot of time talking about the rebuild culture and what I'm looking for from those leaders. And we talk about being able to understand what it's like to be one of the new hires, okay? How easy is it to do my job? How much attention, how much of my voice will somebody hear? So why do I tell you all that? I tell you all that because people want to be in an environment where they're acknowledged, recognized and rewarded. Acknowledged means that you're listening to me, right? Recognized means you're saying, "thank you." Rewarded means that we're compensating you for what you've done. That's why I said on the last earnings call, basically, we paid bonuses for 45,000 folks and then did merit increases for roughly 77,000 folks. Okay. Why do I tell you all that? Because that means that people see that we're treating people incredibly well and they've got good career progression here at DXC. That's not the case with all my competition. And that's been my track record. Listen, if I know anything about being in this industry, Ashwin, as long as I have, talent follows talent, okay? And that's all there is to it. You treat people right. They ultimately will follow you and they will do well by our customers.

That's good philosophy. One last question as we run up on time here. M&A, right? So M&A and divestitures, I think the portfolio cleanup, if you will, that's all, I would say, and correct me if I'm wrong, the vast majority of that is now behind you. As we kind of go into kind of the build phase and the growth phase, what sort of M&A are you looking for as your balance sheet improves? Should we look for something more transformational? Or is it just going to continue to be tuck in?

No. I mean so transformational, no. I mean, I'm not a transformational guy, all right? I mean the Luxoft acquisition was substantial. That to me is transformational, okay? In terms of the divestitures, look, we still have some things that, although they're not big, they need to move on. They would be better with somebody else, okay? So you will still see some of that go through what I call, right, the foundation phase. That's how you build the foundation for growth. You get rid of the stuff that you shouldn't be focused on. So we'll still continue to do that under Ken's leadership. Now M&A, the way I think about M&A is you know at the old place, I did 8 acquisitions in 7 years. The key thing that I'm doing right now, as I talk about the 175 platinum accounts, that's a channel. They get them the right offering, I got a chance that -- they got a chance to buy it. And what I'm doing right now is I'm building that muscle inside of DXC with Luxoft. I'm literally taking Luxoft to those because the overlap of customers was not that substantial. Ashwin, this year, I don't need anything else. I don't need to buy anything else to hit these numbers. Quite frankly, I don't need to buy anything to hit the 2024 numbers, all right. I've got the scope and scale I need. But I am focused on building that muscle. And when I've got that muscle built and I'm used to tactical tuck-ins being around $100 million to $200 million that I can take directly through that channel, right? That's the key, all right? And that's what I've done in my background. That's the stuff that you just don't go buy revenue. When you buy it, you've got to actually put it through your business. So us doing that right now with Luxoft because you saw in Q1, the analytics and engineering piece was 12.9% growth. We expect that to continue to be good. That's us taking that business into our Platinum channel. And it sounds so simple, Ashwin, but so many people don't do it. And I'm maniacal about like, let's make sure we focus on those customers. So anyhow, that's the way I think about M&A.

Okay. Well, on that note, we're kind of out of time here. So I want to thank you very much for your insights and for coming to our conference. It has been really appreciated.

Ashwin, thanks for having us seriously. All right. Appreciate your time.