DXC Technology Company (DXC) Earnings Call Transcript & Summary

All right. The clock is ticking, so we'll get started. This is the DXC Technology session. Thanks, everyone, for joining. My name is Tien-Tsin Huang. I followed the IT services sector here at JPM and really excited to have the DXC team. It's been a while since we've had DXC at the conference. It's a name I've covered for over 20 years. And so special place in my heart always to follow DXC and with the new management team here means a lot to me. Raul Fernandez, President and CEO; Rob Del Bene, CFO. Thank you both for being here.

Thank you. Thank you so much.

So I'll get into the questions. We'll open it up to the audience, but I thought, Raul, I'll start with you, right? You come to DXC with a really interesting background. I think I asked you this a couple of earnings calls ago, but I think it's worth saying again, right, you're a founder, entrepreneur, CEO of Dimension Data, name I'm familiar with from the old days, You're an investor, you're in the Board of Broadcom, GameStop and of course, co-owner of Monumental Sports. I'm a Virginia kid. So that's close to home for me. So that's a pretty unique blend of things here to help you lead DXC. What does that help you or how does that inform your thinking around DXC? And why did you take this job. I'm sure it was something that you strongly consider and you took a head on? Maybe start with that.

Great. Well, thank you. Yes. So I took an interim role coming in and stepping in and really my goal in the very beginning was just to bridge it. And as I got deeper in the first 45 days of being there, meeting with customers, meeting with employees, meeting with partners looking at how we were operating go-to-market, back office, I quickly realized that there were many ways to win. That the next chapter was about doing things that should have been done 7 years ago at the combination of CSC and HP into DXC. And in some cases, as you said, even before then, right? There's legacy, legacy, legacy systems that come stacked from the CSC days, et cetera. I put together what I call a [ '23 and me ] chart of the company, which is all the companies that make up the company that we are today. And it's a great, deep, rich heritage of technology, companies that have disrupted in the past. But unfortunately, the management teams in the recent history have not stepped back and done a proper and complete reset of business systems, reset of legal entities, reset of all of the back functions that support all of those things. And that became glaring to me as something that I didn't fully appreciate as a Board member, not until you really dive in. And so I saw a lot of opportunities. So it's not about doing 1 or 2 things better. It's about doing about 50 things better. And all 50 things, you think, "Oh, wow, that's a big list. Is that manageable? " It's almost like a punch list as you finish a house. I need to get this thing done over here. And then I need to get a totally different thing done over here. They all may not matter in isolation. They all may not make that house better in isolation. But when you put all 50 together, it takes an okay house and makes it a great house. And that's what I'm doing operationally. Transforming, fixing a lot of the things on the back end, while performing, executing on better client-centric delivery. And again, I'm 5 months into this. So at month 2, after I realized it I also looked around our management team and I said, "Hey, we all have full-time day jobs running the functions we're running, but it seems like there's a full-time job here to really keep us on track to transform. So -- if any of you can do this as your night job, raise your hand, nobody raised their hand because everybody is really, really busy on what they have to do." And I said, "Okay, we really need to bring somebody in that's going to keep us honest on pace, on track". And that's when we came to the conclusion, we needed a Transformation Officer, Patrick Thompson, who you can read the bio, we were able to find a couple of great candidates really quickly and move very quickly. I think 1 of the things that I've learned going back to your question about working with super big companies that are best-in-class at acquisitions, integrations, growth like Broadcom some that have been melting iceberg or ice cubes and I got off the GameStop board right at the frenzy is that I've seen the best and I've seen the worst. And I've also seen speed and I've seen less than optimal movement to try to address that stuff. And so from working with very small startups that have all the great things of a small start-up, figuring it out, doing it, just finding an answer to very large companies where there's more of a command and control structure I think I've been able to leverage from that experience base and try to bring the best up in the right place at the right time. You can't infuse that in all places. You can't just go, okay, everybody act like an entrepreneur, that doesn't happen. You can't snap your finger and change culture but you can do it slowly. So opportunity to win in many different ways. Talent, I looked around and I said we have got some really good people and especially with customers who, in some cases, we may have had a rocky road in the past. Very, very satisfied, very happy where I saw a good foundation of what we were doing to grow more in that account and more importantly, to grow other parts of our offerings in that account. Every time I meet with the CEO, I obviously know what we're doing for them now, whether it's an ITO work or Modern Workplace or security. But I always come up with something that, hey, do you know that we do this kind of work as well and I'll bring it up. And I'm shocked that I'm like at the 99%, Oh, no, I didn't know you had that capability as well. Can you send somebody. So cross-selling, story telling packaging up the great legacy, the history and the current great work that we do across our client base and using it internally is, again, of those levers that's pretty small. But if you pull it along with the other things you're going to pull, will make a big impact.

Okay. Good. I figured -- I threw this question in there because I thought I do want to expand on everything you just talked about, but when we talk to investors, the skeptics will very easily say. It's a legacy services provider that's in perpetual turnaround mode. What's your response to that? And why this is going to be different this time around, just shake the stigma?

Yes. So for sure, the -- there are some things at least that I saw and I see and I'm working on right now that should have been done. So the turnarounds, the restructurings that were done in, let's just say, the short 7-year history, right, as a stand-alone entity named DXC. There were 5 Enterprise Business Systems when the first CEO took over, there were 5 when the second CEO took over and there were 5 when the third CEO took over. They're not going to be 5 at the end of my tenure. So again, 1 thing that was basic should have been dealt with the first 100 days or the first 9 months was not done. And that's a big thing, right, with enterprise ERP system. And then there are a bunch of little things like that. So I do think this is a real reset on fundamental work that was never done before, along with a real reset to rebalance our global footprint and costs with the current economic environment. Having said that, once we -- once that's executed, I feel like we've handled the things in the past, and therefore, we have a stronger foundation to grow off of.

So the fact that it hasn't been addressed, the 5 enterprise systems, is it the risk of actually executing this and getting to 1 system very difficult in your mind, Is there execution risk and giving there? I know that's what you guys do for a living. But at the same time, it's a lot given some of the historical M&A of the company?

No. It's -- from a technology standpoint, it's not harder than anything else we do every day. I think it's a combination of not having both the leadership and the follow-up and the consequences for not doing certain things. And when you stack things on top of each other and you don't go back and go deep, they tend to get entrenched they tend to get a whole culture and life to themselves, and that needs to be broken and needs to be dealt with, and that's what we're doing.

And what's the timetable on getting some of the systems into 1?

Well, we don't have a -- we're not publicly announcing the date of that, but I can tell you that the work is happening immediately. And again, going back to having somebody that is literally every day, every week, every month, every quarter, accountable is huge for us.

Agreed. No, that's great. So 1 of the hings when you first got on the call, you underlined it, and I put it down in my question list, enhanced execution, it was something that you referred to quite a bit. What does that mean? And how might it change DXC for the better?

Yes. The mix of the people that come together to engage with the client both for current delivery as well as net new opportunities. And the operations, whether it's sales operations, business operations that support them is not streamlined, is not optimized for -- to the right size. And so streamlining kind of that supply chain of what we do in engaging with a customer to deliver what we've won or to deliver something that we just won is a lot of enhancements along the way at -- in every business group that is responsible for that. And so again, it's a different way of saying a lot of different changes across the board, both on the perform side as well as the transform side to deliver a better result at the client, obviously, keeping the client centric, being profitable and then ultimately being in a better position to grow.

Okay. Good. I like it. So let's dig into the business a little bit, and then we'll come back to some of the numbers and get Rob into the conversation. So let's start with GBS, if you don't mind. And you should know this well, of course, given Dimension Data. But what is DXC is right to win in this business. I know it's very competitive, both in terms of winning customers but as well as attracting talent.

Yes. One of the things that, again, I was in going around the world and going around with customers, meeting very happy customers, meeting customers that are happier now than they were before , meeting customers that had some issues that -- we've got talent and access to talent. Are they optimized? Are they in the right geographies? Are we -- no, I think every service organization goes through that on an ongoing basis. It's not something you do once a year. It's something you do continuously. We need to do a catch-up We also need to do a consolidation of all the geographies. Again, there's another item of not going back and saying, what's critical mass how do we define success for critical mass? Do we have it here? Okay, we do keep it if we don't, then what do we do with the geos that are not part of that critical mass or not critical for us to be successful. So the skills are there. The referenceability is there. The history of the relationships are there. The existing contracts are there. One of the things that has been failing is, again, this cross-selling. So from a -- do we have the fundamentals to compete? Yes. Do we have the fundamentals to compete at a higher level? Absolutely, we do. And that's on us to apply some better and best practices that we have from other businesses. And then we have the demand? And we absolutely do. The demand is there. I would argue that for us, the issue is less anything macro and the issue in the near term is just getting better organized and operating better. At some point, after we've cleared that hurdle, then yes, macro issues will start to put into -- but the first hurdle is self-made that we need to knock down.

I see. Right. Because I got that question quite a bit. The second half outlook with GBS getting better. Is that a macro dependent. I mean, it sounds like no.

It's not a macro dependent comment. We're just looking at our performance historically, cyclically, I'll let Rob comment a little bit on the cyclical nature. And then just the momentum we had coming in and how we see that momentum burning out or burning down in terms of wins from second half versus first half.

No, that's right. Our bookings in the second half of fiscal '24 were better than 1.0 in GBS and they were strong. And we think that will help in the second half of fiscal '25. And also, our pipelines have improved since the beginning of the fiscal year. So those 2 factors are why we guided slightly higher in the second half for GBS.

Okay. Good. So digging in further the GBS, the analytics, engineering and the applications business, that's now being reported as Consulting and Engineering Services. I know that includes the Luxoft business. We've had some of your competitors there at this conference. Why the change in the structure? And then how would you describe -- or what's the identity of consulting and engineering, if you were to describe it succinctly?

Yes. I think it's next-generation technology skills and people. Dealing with digital challenges that aren't necessarily legacy-ish related a bit more growth, how do our customers attack markets more effectively ahead of our customers deal with the whole supply chain of what they do from B2B to B2C. And it is, today, a combination of some applications that are one-off tomorrow, there'll be more enterprise, they'll be tied to more enterprise rollouts with partners such as SAP and ServiceNow and Microsoft. But they are best-in-class for any digital challenge that your company or entity may have globally. And that's the other thing that I appreciated that it is big and there's negatives with being big, but it is -- there are certain positives where you can have presence in many geographies and still in our hybrid world, presence matters and being in front of the customer matters and being able to make a difference and show up and show and do -- and show what you're building matters. So that's another positive that we've got.

Got it. On the call, you mentioned that the consulting and the engineering business had below-average margins. Why is that?

Yes. So one of the things that I did in the very beginning was I looked at every business unit, and I said, let's come up, let's just pick the comp group that you're going to be measured to. So ITO, Modern Workplace. Let's look at Kyndryl, let's maybe look at Unisys. And let's look at what's best in class there and what are key metrics and then measure yourself against it. And then do a gap analysis and then say, okay, how are we going to close this gap. So first thing we want to do is close the gap to get to average. And then after that, we use that foundation to go above and beyond that. So by every business unit, we've picked in the consulting and engineering -- engineering and consulting services, just as a reference, the EBIT could be at a higher level than it is and should be. And so we're targeting that. We're targeting gross net margins, billability you -- think about the full dashboard of metrics, we can be operating that at a much better. And I'd say that across the board, the only 1 I'd say is operating at a really good level and therefore, the investments on hyper growth and mixing the margin -- or mixing the flavor of revenue is the insurance business.

Right. But before we get into insurance, just to be clear on the consulting side, the restructuring that you talked about, was there any revenue-producing head count that was impacted within that was impacted with the [ layers ]

Revenue producing? No. I mean, I think in the past, there's been a tendency to look at -- not look enough at no revenue players in reduction and kind of ignore back-office functions that are duplicative, et cetera. Now we're taking a very fresh look at the operation support and what's the right mix and balance and ratio there.

And this ties back to the comments about systems and processes and having disparate processes more so than systems. We've had several different people management systems -- resource management systems. So the consolidation of the common processes, consolidation of systems will allow us to get better utilization in that business because our utilization is below par. So we have room there to reduce the structure without impacting revenue and also have a very sharp focus on enterprise applications as opposed to custom applications, which is a majority, 2/3 of our portfolio today. So we have room for portfolio improvement there as well. And both of those will contribute to margin improvement.

Good. So it's not -- to close it out. It's not a your subscale issue. It's really -- fixing some of these issues around. Okay.