DXC Technology Company (DXC) Earnings Call Transcript & Summary

[Audio Gap] base of over 130,000 across 70 countries. They serve 6,000-plus clients across geos and verticals, including 200 of the Fortune 500 companies across a span of verticals and geos. So with that, I would call upon the VP of Investor Relations, John Sweeney, to take it from here and share the latest and greatest regarding the business in more detailed presentation. Thanks a lot.

I'm going to take you through how DXC has been executing on the goals of its transformation journey. The company has made significant progress over the past couple of years, and it's now delivering strong financial results. As you'll hear today, we're really excited because we're just getting started. We think our solid financial performance is going to -- and our improving business trajectory is going to continue for years to come based on how we currently manage the business. Now just a quick history of DXC. We're a Fortune 500 global IT services company formed in 2017 with the merger of CSC and Hewlett Packard Enterprise Services business. We serve the totality of our customers' IT offerings across 2 operating segments: Global Business Services, or GBS, and that's where we provide digital solutions and consulting services; and Global Infrastructure Services, or GIS. So GIS is about 53% of the business and GBS is about 47%. In our industry, trust and the ability to address the clients' needs are paramount. DXC helps global companies run their mission-critical systems and operations while modernizing IT, optimizing data architecture and ensuring security and stability across the public, private and hybrid clouds. The world's largest companies and public sector organizations trust DXC to deploy services to drive new levels of performance, competitiveness and customer experience. We have over 130,000 colleagues, operations in over 70 countries, and DXC works for nearly half of the Fortune 500. And this is what we're really excited about. So in FY '22, you can really see the financial results of our transformation journey. In that year, we narrowed our organic revenue decline by 620 basis points. We increased our non-GAAP diluted EPS by about 44%. We improved margins by 230 basis points. And the highlight of last year, and this is where we've been doing an awful lot of work getting into the details throughout the organization, we drove a $1.4 billion improvement in free cash flow. So we're going to talk about how we generated that and how we drove those results. It all really starts with our transformation journey. And this is what under the leadership of Mike Salvino has changed the entire trajectory of the business. Our focus has been on 5 pillars: inspire and take care of our colleagues; focus on our customers; optimize cost; seize the market; and build a firm financial foundation. So it's the execution of this program that stabilized DXC, and we believe this is going to be our blueprint for future growth. Just looking at the numbers on a quarterly basis. As you can see, our most recent quarter, our revenues were down 2.8%. Now that was impacted by about 75 basis points because of the Russia invasion of Ukraine. We've got some business there. Our adjusted EBIT margin was 8.5%, and year-over-year, that's up 100 basis points. And again, that was impacted by about 40 basis points as a result of Russia's invasion of Ukraine. Our trailing 12-month book-to-bill was 1.1, and our non-GAAP diluted earnings per share was $0.84, up $0.10 compared to prior year. So I told you earlier, there's 2 segments here: GBS and GIS. So GIS is a business that we've got to a growth trajectory. We were down mid-single digits last year. We turned that around, and we've had 4 consecutive quarters of organic revenue growth. Organic revenue growth is very important to us. Traditionally, the company was very focused on revenue growth, which meant deal-making and other things to get the revenues, but the company never grew on an organic basis. So this, for us, is really important because it's the first time we've proven that we can grow the business organically. Our GBS segment profit was 14.5%. Now that was down 130 basis points compared to prior year, but that's where we were most impacted by Russia's invasion of Ukraine. Our GIS revenue performance was down 8%. In this segment, our organic revenue growth is following a [Audio Gap] and we expect to continue to improve and just to do better as we move forward. And GIS profit margin is low at 5.9%. It was up 180 basis points year-over-year. We think we can do a lot better as we move forward. We think we can get this business to 10% in the near term. Now a key part of this, and what's going to drive GIS forward, is fixing the GIS business. Now we need to reinvigorate the economics of GIS, and this is really a top priority and something you're going to see from us in FY '23. So there's 2 parts to our business optimization. First, we've got to improve our disciplined execution with a focus on driving healthy revenues, and we're going to do that through focusing on service revenues and steering away from lower-quality revenues. Obviously, pricing is very important. Structuring the deal so we don't leverage the balance sheet, that's something we've done in the past that we're not going to do going forward and then having good commercial oversight. In terms of disciplined execution, for us, it's the right processes, the right metrics, the right incentives, to ensure that the team is committed to signing profitable new business with favorable economic terms. We're actively solutioning underperforming relationships, and we're reviewing our contract base to make sure that we can provide a high level of service but also to make sure that we're getting a proper return on the business. In terms of cost optimization, there's clearly a lot of opportunity in front of us. We plan to address underutilized data centers and office buildings, software agreements, contractors, delivery and offshore mix. And we believe that we've got enough levers. If we bring them all together, we can get GIS to a 10% margin in the near term. We're super proud of this. This is our financial foundation. It's the final step in the transformation journey. And really, for us, this is the step that translates the benefits from the other step into something that drives the true earnings power of DXC and through the bottom line and cash flow. We think an awful lot about cash flow. Throughout the transformation journey, we've instilled financial discipline. We've strengthened the balance sheet. We've improved cash generation, capital efficiency. We've lowered -- we used to have a $1 billion a year spend on restructuring and TSI, and we started allocating capital because we believe that our stock is undervalued. Now this may be a little detail, but this shows you the evidence that we really truly are building our financial foundation. We took our debt from $12 billion just a couple of years ago to under $5 billion now. And back when we had the higher debt levels, the rating agencies had us a negative watch. Our investment grade was at risk, and that's really important for our customers because our customers need a strong financial performance -- a strong financial partner to manage their critical infrastructure. Now this has also helped lower interest rates. We also had a well-timed refinancing last year, but they've come down from $83 million a quarter to $29 million in the most recent quarter. In total, FY '22 interest expense was down $124 million year-over-year, and that mainly translated into free cash flow. We continue to reduce our quarterly restructuring transaction, separation and integration expense. I'll tell you more on that later. And we took our operating lease payments down from $156 million to $113 million in the most recent quarter. Now we did this by moving to a virtual first model. We're shutting down our offices as the leases come up. We actually gave up our headquarters in Tysons Corner, and we moved it out to a small office out in the suburbs. Just tells you the kind of -- the amount that we're deep into the details of making sure that we're driving efficiency. Our real estate initiatives and lower operating leases alone drove $100 million of the $1.4 billion improvement in our free cash flow, okay? And to get a little more financial geeky here, capital expenditures -- and our favorite metric is capital expenditures plus lease origination because we believe that's the true investment that we're putting into the business. We've taken that down from 10% a year in FY '20, and we've taken it down below 7% and the more recent quarters around 5%. We think we can take another 2 or 3 percentage points out of capitalized leases and lease originations. All right. And I think Ken Sharp, our CFO, when he sees problems, he sees opportunities, right? So high debt, you've got an opportunity to take down your interest costs. One of the biggest opportunities he saw when he came on board a little over 1.5 years ago was that we were spending on average $900 million a year on restructuring and TSI expense. It's not really clear that we had a great return on that investment, and our TSI expense was bloated with banker adviser fees from previous acquisitions, continuous consulting arrangements. And when Ken came in, he put the brakes on this, shutting down the code so folks couldn't build it anymore, and he got a restructuring under control. In FY '22, we reduced restructuring and TSI by $550 million in spending, which was a key component of the $1.4 billion improvement in our free cash flow, and that's sustainable, too. Going forward, our plan is to reduce restructuring and TSI to about $100 million by FY '24. So in total, this is an $800 million improvement in the free cash flow generating capability of the organization. And this is where this all shows up, right? Our trended free cash flow profile, we were deeply negative for quarterly free cash flow. Quarter in, quarter out, we were wading through all the sins of the past. And I think the real reason we've been able to do this is because we're down in the details, and we're managing everything at a very low level. As we continue to work on a transformation journey, we believe that the structural changes we put in place and the ongoing focus we put at DXC are going to help us to generate and to hold on to more cash. All right. And this is what we do with the cash, right? So it's about executing on our disciplined capital allocation program. So we've got a very simple capital allocation model. We target our debt of about $5 billion. We see that as a sustainable level of debt for the business. And then we've got a maintenance cash level of about $2.5 billion. Anything above $2.5 billion is available for deployment. All right. So we don't just have free cash flow generation at our disposal. We also have portfolio shaping as well. And as I said before previously, the company was extremely acquisitive, and we bought some assets that were not entirely complementary to our strategy. As an example, we own a couple of German banks. My CFO likes to joke that his worst nightmare is like getting a knock at 6:00 in the morning, and there's some German-speaking regulator coming to his door. Banks don't make a lot of sense for us to own. We're selling those banks as part of the portfolio shaping we announced, $500 million. That's going to be closed by the end of the year. And that's additional capital that we can put in to fund the $1 billion share repurchase program that we announced a couple of quarters ago. And it's not just the banks. We've got a prison software business that we can't sell to anybody else. It's very niche. And we've got other opportunities that we're looking at as well. So we continue to look at portfolio shaping opportunities, particularly ones that increase the value of DXC, reduce complexity and allow management more time to focus on the critical aspects of the business. The ones that accelerate our FY '24 target, that's the bogey we're all working towards. And then we're looking for opportunities that are accretive to our overall valuation. The banks were selling at a very high multiple, double digits, and we're able to turn around and buy our stock at 4x EBITDA. That's something that our CEO, CFO would do all day if they could. So as you see, we have 2 sources to fund our share repurchase program, driving increased free cash flow generation and portfolio shaping. And on a combined basis, this has allowed DXC to repurchase 7% of its shares in FY '22. And we've got on record stating that we're going to do the remaining $770 million of our $1 billion program over the next 3 quarters. That's another 10% of our shares that we're going to repurchase this year. So a really important part of our efforts to transform DXC is to work on our corporate governance and improve it. Our management team is committed to improving our corporate governance. As a result of all of the acquisition activity, our financial system was not as stable as it should be, and we had a material weakness. We just remediated that just this last earnings call when we published our 10-K. So really pleased that the legacy material weakness is remediated. And just full credit to the SOX team. There's a lady by the name of Jamie Musson, who has actually in her career remediated 8 material weaknesses, something nobody aspires to ever do in their lives. But she came on board. Ken brought her in. And she's embodiment to the kind of people from Chris Voci, our Controller, that has brought it across the board to improve the discipline and instill what we need in the organization to drive it forward. All right. And our efforts to pass say-on-pay this year, we proactively engaged many of our shareholders, obtained their feedback, and we've used their feedback to shape our pay practices. So you're going to see all the improvements we've made fully detailed in our upcoming proxy. This chart shows where we've been, where we are and where we're going. So we think a lot about our FY '24 goals. It's important to realize that the performance in FY '22, the guidance for FY '23 -- now I'm not reaffirming guidance. I'm restating what we said in our last earnings call. But our longer-term FY '24 guidance is something that it's probably fair to say the Street didn't have a lot of confidence on. But given our execution over the last year, I think people are increasingly starting to believe that we're going to get there. So for organic revenue growth, we improved 620 basis points in FY '22. We're going to further narrow the declines this year, and then we're going to turn positive 1% to 3% in '24. With regard to margins, again, we're up 230 basis points year-over-year, slight margin improvement in '23, and we're going to get to 10% to 11% in FY '24. And then for EPS, we're at $3.50, and we expect that to increase in FY '23. And we're on track to deliver $5 to $5.25 in FY '24. And again, free cash flow, our strongest proof point. I can't say it enough, and I'll probably never get an opportunity in my career to say it again, but we had $1.4 billion improvement year-over-year in free cash flow. We tackled the issues that negatively impacted our ability to generate and hang on to cash, including reducing restructuring, TSI, interest expense, cutting operating and financial leases. And you can see from the presentation, we're really in the details and focus each -- on driving each one of those individual levers. So to finish up, it's really clear that DXC is in a better place. We're making excellent progress on our transformation. We're building a strong financial foundation, and we think we're set up for success as we move forward. Russia's invasion was a tragedy, but really proud of what our team has done, taking care of our colleagues in the impacted region. Our analytics and engineering team, that business, I think, will end up in a better place. It's now more resilient. It's more diversified from a global delivery platform. And because we exited Russia now, we've got a lower geopolitical risk. While the situation is unfortunate, I think the team has managed really well, and I don't think it's going to have a significant impact on our business going forward. Our leadership team under Mike, I think they now have clarity of the actions that need to be accomplished to drive continued improvement. And they're very clear eyed on how to maximize the portfolio, both for GBS and for GIS. So we're solidly executing on strategy. We're going to deliver on the goals of the transformation journey, and we've made rapid progress on a number of fronts in a pretty short period of time. We want to say thank you to our 130,000 people who work day in, day out, driving us forward. And this gives us confidence on our ability to continue to achieve our growth goals. So DXC now, as you look at it, it's a very different place than when I walked in about 1.5 years ago. We did an Investor Day last year, and you can see our customers saying, DXC, the planes won't fly without DXC. We've got really a lot more confidence from our customer base. And now with the team we have who understands what needs to be done, we fully expect our momentum to continue and to deliver on our long-term goals. All right. Thank you for your time, folks. If I've got a couple of minutes, I'm happy to take questions. All right. Thank you very much. Have a good day.