Good day, everyone, and welcome to the DXC Technology Third Quarter Conference Call. A reminder that today's call is being recorded. And at this time, I'd like to turn the conference over to Jonathan Ford, Head of Investor Relations. Please go ahead, sir.

Thank you and good afternoon, everyone. I'm pleased you're joining us for DXC Technology's third quarter fiscal 2019 earnings call. Our speakers on today's call will be Mike Lawrie, our Chairman, President and Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. The call is being webcast at dxc.com/investorrelations and we've posted slides to our website, which will accompany the discussion today. Slide 2 informs our participants that DXC Technology's presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release as well as in our supplemental slides. Both documents are available on the Investor Relations section of our website. On Slide 3, you'll see that certain comments we make on the call will be forward-looking. These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of risks and uncertainties is included in our annual report on Form 10-K and other SEC filings. I would like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call, except as required by law. And now, I'd like to introduce DXC Technology's Chairman, President and CEO, Mike Lawrie.

Okay. Thank you and good afternoon, everyone. As usual, I have my four, five points to make and then I'll turn this over to Paul and then we'll have plenty of time for any of your questions. First, non-GAAP EPS in the third quarter was $2.23. Adjusted EBIT was $840 million and adjusted EBIT margin was 16.2% and we generated $503 million of adjusted free cash flow in the third quarter. In terms of revenue in the third quarter, revenue was $5.178 billion on a GAAP basis. The constant currency, revenue was down 2.6% year-over-year and was up 4.3% sequentially. Bookings were up 3% year-over-year and 22% up sequentially for a book-to-bill of 1.1x. The third point around digital, in constant currency, our digital revenue grew 16.9% year-over-year and 9.5% sequentially, driven by strong bookings in the first half of the year, particularly in cloud. Digital bookings in the quarter were up 85% year-over-year for a book-to-bill of 2.1x. Bookings were very strong across all digital offering families and cloud had a 3.3x book-to-bill in the quarter. Industry IP and BPS revenue was up 2.6% year-over-year and 6% sequentially, and the industry IP-BPS book-to-bill was 0.8x. Fourth, we continue to make strategic investments in digital assets and capabilities. As you know, we recently announced our plan to acquire Luxoft, a global at-scale digital innovator with differentiated offerings and platforms, deep vertical expertise and a world-class digital talent workforce. Luxoft has over $900 million in revenue and has been growing at strong double-digit rates. We also announced our plan to acquire the Services division of EG, one of the leading integrators of Microsoft Dynamics 365 in Northern Europe. And then finally for fiscal 2019, we continue to target revenue in the range of $20.7 billion to $21.2 billion and we're raising…

Thank you, Mike, and greetings, everyone. As usual, I'll start by covering some items that are excluded from our non-GAAP results. In the quarter, we had restructuring costs of $76 million on a pretax basis or $0.21 per diluted share. These costs represent severance related to workforce optimization programs, particularly in complex countries and also expenses associated with facilities and data center rationalization. Also, in the quarter, we had $107 million pretax or $0.29 per diluted share of transaction separation and integration-related costs, including the acquisition of Molina. Year-to-date restructuring, transaction, separation and integration costs amounted to $723 million pretax or $1.94 per diluted share. In the third quarter, amortization of acquired intangibles was $134 million pretax or $0.35 per diluted share. Excluding the impact of these special items, non-GAAP income before taxes from continuing operations was $786 million and non-GAAP EPS was $2.23. Now, before I turn to our third quarter results in more detail, I'd like to point out a correction that we included in the non-GAAP section of our press release regarding adjusted free cash flow. In the second quarter, DXC expanded the use of its receivable facility and should have excluded the benefit of that expansion from adjusted free cash flow. Year-to-date, adjusted free cash flow has now been revised to accurately reflect the net impact of the receivables facility and that resulted in a $223 million net cumulative reduction year-to-date. As a result of that correction, adjusted free cash flow for the first nine months was $1.2 billion or 68% of adjusted net income. Now, let me move on to our third quarter results in more detail. GAAP revenue in the third quarter was $5.178 billion, a sequential increase of 4.3%. Adjusted EBIT in the quarter was $840 million. Adjusted EBIT margin was 16.2%, reflecting…

[Operator Instructions] And we'll go first to Jim Schneider at Goldman Sachs.

Good afternoon. Thanks for taking my question. Mike or Paul, I was wondering if you could maybe talk a little bit more about the labor fill-in. It sounds like that digital hiring is progressing well, but can you maybe talk about at what point, is it one, two or three quarters out, you feel like you'll be in a position to kind of fully get staffed and get traction on all the digital work that you've already booked? And maybe talk about kind of when you kind of get normalized run rate to where you want it to be?

Yeah. I think we will get there probably in the early part of next fiscal year, think of that as the first half. We've made -- we've talked about this at the end of the second quarter. We clearly fell behind in the hiring. And we've made a big investment in the processes and our tools and frankly much better planning at the account level. I can't tell you what little discipline does because that gives us a much better demand signal. And then we are able to turn the hiring machine and the processes on to get that done. The other thing to tell is we, Jim, have centralized a lot of this digital hiring. So we've put a very thorough skills taxonomy together and we're hiring these people into our digital delivery centers and then we're deploying those people as the projects get firmed up and signed by the customer. That's a whole different process than trying to do this account by account. We're also seeing a significant improvement in the quality of the people and the skills that we're bringing in. So I think to net this out, I think we'll get to more of a steady state in terms of hiring sort of the first half of next fiscal year, but we'll continue to remix the workforce. I mean, Paul talked about 14,000 reduction, it's true, but on the other side of that is we've hired thousands of people into these new businesses. And that remix of the workforce both re-skilling of existing as well as bringing new people in that's going to continue for a long time. So I think these digital delivery centers, I think that's helped us. We're getting better candidates. The tools to processes, the discipline and frankly people see that we're attracting, they see really good career opportunities in digital as they look out over the next medium to longer-term. And one of the point, it's probably longer answer than you're looking for, but I mean Luxoft has really helped in terms of their brand and their reputation in the digital space as well. So I think this was a strong signal that we were serious about really jump-starting or catapulting us and our skills into a slightly different space than where we were prior to the second quarter. Paul, I don't know if you want to add anything?

No, Mike, I think you captured it. Also, as we do this, the demand -- actually, our bookings are growing 89% on a year-over-year basis and also our pipeline is growing rapidly.

That's good color. So I wanted to follow up on what you just kind of left of with, which is bookings. Clearly, good to see that recovery there. Can you maybe talk a little bit about, although we know the GIS bookings can always be very lumpy, can you sustain that same level of booking spend we saw this quarter into the next couple of quarters based on your current visibility? Maybe talk about the pipeline, especially very near-term. And then anything you can say relative to any potential new logos or how much you see kind of digital playing into the near-term bookings environment?

Yeah. I -- listen. The big deals in GIS are lumpy. That's not going to change. I mean, are we working on a lot of big deals? Yes, we are. When exactly they're going to close? I don't know, that gets a little lumpy. I think it can continue in the fourth quarter and even into the first quarter based on what we see in the pipeline. But the more important trend is underneath that. And that is what I'll call shorter duration project work. I think I've mentioned this before, but we now are compensating many of people in our delivery organization for what we call delivery-led growth. These are shorter-term projects, where we can sign people very quickly and generate incremental revenue. Our digital projects are largely of shorter duration. They usually start out smaller and then tend to expand and scale over time. So the dynamics of our bookings are changing as our business model and portfolio begins to shift our total reliance on big deals, big TCV deals. That reliance is beginning to diminish as we move the portfolio to a much higher number, higher volume of digital projects. We consider that good. When we looked into Luxoft's book of business, it's the exact same profile that we're beginning to experience in our business. So that I think bodes well as we go forward.

And next, we'll move to Joseph Foresi at Cantor Fitzgerald.

Hi. So I had kind of a -- well, to be as straightforward as I can be, Mike, you've been known as somebody who has been very good at unlocking shareholder value. As you look at the balance between potentially doing more acquisitions, divestitures or other ways of unlocking shareholder value, maybe you can give us some insight into what your thought process is around that over the short and long-term? Are you more likely to be in the digital market to continue to buy stuff, divestitures, taking on acquisition for cost cutting?

Yeah. I think we're always looking for ways to enhance shareholder value, you know that, you said that. We have all options on the table all the time. Candidly, I don't see a lot of divestitures as I look out because we have really remixed the portfolio quite dramatically over the last couple of years. I do think we'll see some more smaller tuck-in type acquisitions, particularly in the digital space. So as -- assuming we get the Luxoft transaction completed, there's a whole series of smaller opportunities that can be added to that business model. We continue to look for areas, where we can strengthen our IP portfolio, like we did with Molina in healthcare. We're continuing to look at other practices to strengthen our really very strong position in Microsoft Dynamics 365 as well as ServiceNow, where we've made significant investments. So I'd say that part of our capital allocation model that we've talked about will continue. And then, of course, the mix of returning share -- returning money to our shareholders as we've done, we've returned over a $1 billion, we obviously thought our stock was a very good buy and have continued to plow money into that as well. So I don't see any major changes in the capital allocation model as we go forward. We got to tighten up, as Paul said, on our working capital management, particularly our day sales outstanding and -- that's difficult because there's a pretty strong push to try to extend those terms particularly on these large ITO contracts. That's another thing. As we look out longer, we see working capital moving in our favor. The shorter-term projects have a propensity to pay in a much quicker cycle than many of these large ITO contracts. So that's how we're thinking about it going forward is we've got a capital allocation model, we're going to stick with that, we're very pleased with the Luxoft transaction, we think it's a quality acquisition at a fair price and I think there'll be things that we'll be able to add on to that platform as we go forward. Does that answer your question?

It does. And then just a second one from me. On the digital, as you start to play catch-up, maybe you can help us understand what advantage you have in trying to displace an Accenture? Or is this merely a massive shift that everyone can participate in? I'm just trying to get your thoughts around sort of what the crucial piece of the puzzle is as we try to accelerate it.

Yeah, that's a good question. That's a -- listen, that's a good question. First of all, I think the market is expanding very rapidly and I think there is plenty of room for everyone to play. And if you look at the results of many of the players in this space, they're all relatively strong. The thing that I think really came to life for me was -- and this came around, Luxoft in particular, is the different space that they are in. They are much more in, what I'll call, the business executive space, taking on digital projects that candidly, one, DXC didn't see and in many cases weren't really considered because of the brand reputation we have around being able to run infrastructures and big application sets, those kinds of things. That is really going to change. And then the underlying thing that's so important is all of these smaller digital projects ultimately have to get, they have to get integrated into mainstream IT in order to really see the transformative benefits of these digital projects. And that's what our unique value proposition is and we're staying with that along with our partners and our partners bring a lot to the table here. And again, the Luxoft acquisition, many of our partners work with Luxoft and our clients are all, all on a digital journey. Different places in that journey, but all on that digital journey. So as I said many, many times, this is a generational shift and there is plenty of addressable market for everyone to participate in right now.

Moving next to Rod Bourgeois at DeepDive Equity Research.

Hey, guys. Hey. It appears that your digital investments have caused your GBS margin expansion to somewhat taper off here. I'm wondering, if you can dimension how much extra digital investment you're now making perhaps compared to where you were a year ago? And if you could also help gauge how much of that digital investment is prone to be kind of the new normal of investment versus an extraordinary investment that you're making now as you ramp up this digital talent engine?

Well, listen, we talked about the margin and not much as we're 30 basis points or something like that. So yes, Rod to answer your question, we are making a slightly larger investment in the hiring of these digital skills than we have before. And that became very apparent to us as we exited the second quarter some of those issues. So we have ramped that up. I would call this a new normal. I think we will get to more, as I said earlier on a previous question, we'll get to much more of a steady-state as we continue to remix our workforce. So in many cases what you're seeing here is you're continuing to see an expansion of some of the margins in GIS because frankly that's where a lot of the remix is taking place and you're seeing a slight deterioration in the GBS margins. Overall, the margins for the Company continue to expand. So I think it's a broader picture. It's going to be a remix. I don't think we'll continue what this sort of extraordinary effort to bootstrap ourselves in the digital hiring, but I honestly hope we have the demand going forward long-term that we continue to do that. And in many cases, we're hiring teams of people, not just individuals because a lot of these digital projects require scrum leaders, they require data scientists, they require software engineers. So more and more as we remix this business portfolio, these aren't individual skills that get applied, there are teams that get applied to a digital business solution. And that's a different way of managing your workforce as well.

Got it. And then, hey, on the demand side in the part of your business that's project-based and more reliant on discretionary spending, are you seeing any change in demand pattern, any hesitation on client decision-making or pullback in capital spending at all?

I am not. I mean, the digital demand remains pretty strong. There isn't a -- I just got back from a -- one of my trips and met with quite a few CEOs, I mean, everyone knows they got to do this. Again, our value proposition is we come in and we help clients figure out how to reduce the operating expenses of their existing IP estate. Okay? And there isn't a CEO that I've met that is not interested in it. And this isn't just high in the sky. I mean, this is things like platform DXC, which is our architecture with our partners, it's Bionix, it's all of those things that we can do. And then we go to our clients and say we want to be able to participate in many of these digital projects. And we usually start out with a simple, what we call, ideation process, where we get the client and us together, that's why we've made this investment in the Digital Transformation Center. So we go and we problem solve. And that usually results in some sort of statement of work or project that may not be huge, some of these are measured in hundreds of thousands of dollars, not millions. But you go in, you rapidly prototype that, you demonstrate that it works and then you take the next step and you begin to scale. And that's how we see more and more of that occurring every day, every week, every month. And frankly, I think it's a much healthier business mix as we move forward. But yes, that does involve some investment in these digital delivery centers and people and teams and so on and so forth, but that's not going to impact the overall margin profile of the Company as we go forward.

And we will go next to Jason Kupferberg at Bank of America Merrill Lynch.

Good afternoon, guys. So certainly nice to see the re-acceleration in the digital revenue growth. So that 17% number, where do we go from here? Are you expecting some further near-term acceleration just as the hiring scales?

Yeah. I -- listen, I'm really pretty pleased with the progress we made this quarter in terms of sequential revenue growth, continued very good strong performance in digital, while continuing to drive margin expansion. I'm very pleased with that. But I want to do even more. So I'm not really going to be happy until I see the digital business growing 20%, 21%, 23%. I think it can happen. Now, I think it will continue to require us to go to market differently, source these opportunities differently, as I just explained with Rod's question, and then continue to hire into that demand. As I said, we use this annual build revenue as sort of a metric internally, it's not ready for prime time yet in terms of audibility, but we use it internally. And we have seen an acceleration of this as we've gone through this year. I mean, the first -- we got off to a fairly slow start in the first quarter, we picked up some steam in the second quarter. Third quarter is the first quarter we've actually made our internal objectives around our digital sales. So we're beginning to see that pick up steam. Now, we got caught short as we fully admitted, we got caught a little short because the demand got out a little bit in front of our ability to then source the people. And as I said, sourcing people is not individuals, it's more teams. And sometimes you can't get started with these projects until it's a whole team. Doesn't do any good to have just the data scientists show up for analytics, if you also require software engineering as well. So that's the gap that we are closing. But I think the demand is there. This is a generational shift. We're making acquisitions. We're making investments. We're beginning to see that revenue tick up a little bit. We're beginning to see the sales tick up. So those are encouraging signs. But I can promise you, it's not going to be a straight line here as we go forward, there's always going to be some twists and turns in the road, but we're really comfortable with the business model that's beginning to emerge.

Okay. So just to follow up on the supply side of that. So beyond the 1,000 plus, I think you said you already hired since the end of October. If you think about what you still need to hire as you try and complete the backfill process, I think you said through the first half of fiscal '20, how much of that additional hiring to come is going to essentially be kind of retraining some existing DXC personnel versus net new headcount?

I'd say just over the next couple of months, I'd like to hire another couple thousand people in digital and we want to retrain a couple thousand. So right now, I'd say it's somewhat of a even mix between reskilling as well as hiring. And then I think the other thing that we'll have a little better insight on is once we get the Luxoft transaction closed and we begin to understand that hiring platform and how that works, that will also bring a new dimension to our digital skills.

And we'll go next to Bryan Keane at Deutsche Bank.

Hi, guys. Just wanted to ask about the new adjusted free cash flow guidance of 70% to 80% of adjusted income. I think previous guidance before was 90% plus conversion going towards 100%. So just want to understand the differences now from the model today versus previous and then how do we get back to 90% plus free cash flow conversion in the future?

Yeah. I think we -- what it is just the day sales outstanding. We saw an increase in DSOs of about five to six days. That represent roughly about probably $300 million plus in the sense of cash usage that we need to go and attack. I think it's just -- again, the fourth quarter is always also the year-end, calendar year-end is usually not the best -- everybody hangs on to their cash for their balance sheet purposes. But having said all of these things, we must do a much better job at working capital and we have just really marshaled the entire organization, all of my CFOs around the world are now just really on point to just really drive collection and particularly past due also. We were expecting to have done a little bit better job on past due receivables and we saw little bit of a pause here, but it's on us and we're going out and trying to get that rectified ASAP. Longer-term, it doesn't change the guidance that we have given and the targets of 90% or 100% by the 2022.

In short this is more operational than it is model issue. And we did see -- we had a lot of volatility in the market as you guys well know in December. And what we did see is people holding on to their cash a little more tightly, if you will. We did the same thing by the way from a payable standpoint. So again, I think this is more operational around day sales outstanding. That's fixable. It doesn't change the model long-term.

Okay. And then just as a follow-up, looking at Molina and some of the other acquisitions that have been completed or about to be completed, how will that fold into the model? And will that help revenue a little bit in the fourth quarter and beyond? Thanks.

I think not much in the fourth quarter. Some of it showed up in the third quarter. I think all of it was very consistent with the model that we gave you before that acquisition, again, aside from Luxoft, which was a little bit off to the side right now, it was about a 1% to 2% of our top line coming from this acquisition. Molina contributed about $50 million, but it was part of what we had given you in terms of what we were expecting to do in the second quarter and we came in a little bit better overall for the business and from a revenue standpoint in the third quarter.

And we'll go next to Darrin Peller at Wolfe Research.

Hey. Thanks guys. Just when we look at the digital trends that obviously are accelerating as you talked about, can you just give us some more color on the sourcing of that with regard to the partnership model that we've talked a lot about it and as you guys have talked a lot about in the past, I'm curious to hear how that's been trending recently in terms of the additive to the digital bookings we're seeing and now the conversion to revenue?

Yeah. Our sales bookings -- we track a couple of things with our partners, but I don't want to get overly complex here. but sort of sales WIP, meaning where we are partnering directly and go-to-market together, sell through stuff that we actually sell-through or they sell through us or we sell through them and then co-sell too. And in every one of those categories, this year is a first year I've seen it, where we're beginning to see an increase and it's playing out. So we will sit down with the Microsoft and we'll sit down with an AWS or we'll sit down with an AT&T and we will select accounts, where we're going to work together in that account. And what we're finding is when we do partner more deeply like that, when I say partner, I'm talking about joint proposals, not two separate proposals that get stapled together in the lobby before we make the presentation. I'm talking about an integrated proposal. And we're seeing win rates go up dramatically, and I mean dramatically, like 20 points when we do that. Now, that is not only obvious to us, but it's also becoming clearer and clearer to our partners. Our partners do source incremental opportunities that we can go after. And already, already, just in working within the regulatory framework of what we could do with Luxoft, I see all kinds of opportunities. I mean, we've identified through the -- just some joint work that we've been able to do again within the construct of what we can do from a regulatory standpoint, hundreds of millions of dollars of opportunities that we never saw before. So yes, I think the partners and I think some of the acquisitions that we are doing, some of the things we've done with PwC that we've talked about in the past, all these are contributing to us seeing more opportunities. And that's driving then the hiring, not only of our services people and -- but also our sales because we're increasing our sales force at the same time because you need the sales force now to begin to qualify and help put all these proposals together. So we are increasing that. We talk about digital skills and certification and all the other programs that we have with our partners to retrain DXC people, but we're -- at the same time, we are hiring, we're increasing our sales force. This is the first time we've done this in years because we see the opportunity to deploy them around meaningful opportunities.

All right. That's great to hear. And just quickly, you mentioned Luxoft again. But look, I mean, have you had any chance to speak to either your clients or Luxoft clients further since your announcement in terms of just feedback and how they feel about it? Thanks again guys.

Yeah, I have, I've spent quite a bit of time doing that as a matter of fact. They view it as very positive. They see the business rationale behind it. We're trying to keep this as separate as possible for obvious reasons. Most -- I got to tell you, I mean, the -- it's more -- it's done quite a bit to change the brand perception of DXC that we're really serious about this. I went out to the Consumer Electronics Show out in Las Vegas, I never have been there in five years and I was just amazed at the customer feedback and the projects that we are working on with Luxoft. So yes, we've gotten positive feedback from our partners. We've gotten positive feedback from Luxoft clients and certainly our clients. Now, having said that, there's a wait-and-see, there's not that much we can do right now. So right now, it's more talk than it is actual action. But we will certainly get into that once we get the transaction closed. And we are in the process now of planning all the revenue synergies and all the other things that go along with getting prepared to close the transaction.

And operator, we'll take one more call. And then, we'll close -- sorry, one more question.

Thank you. Thank you. And that's from James Friedman at Susquehanna.

Hi. Thanks for sneaking me and it's Jamie. I just wanted to ask about the Q4 assumptions. So Paul or Mike, if I look at the midpoint of the implication on the Q4, it's $120 million plus above consensus. I realize you're talking about some FX challenges, but even at the midpoint of the lower half, you're still above. And my question is, how should we be thinking about cadence? You talked a lot about milestones, like both of you used that word a couple of times in your prepared remarks. Are there milestones in the Q4 that you're anticipating that will some of the revenue?

No. What I'm looking at to be quite candid is continued sequential growth. That's what I'm interested in. I want to continue to see this business grow sequentially quarter-over-quarter. Then underneath that, I'm looking very carefully at where we are with our digital revenue, what that pipeline looks like, what the sales performance is and then I'm also looking very carefully at the runoff and price downs and when those price downs occur in our ITO market. So it's a fairly, not complex, but it's a reasonably involved formula. And at the end of the day, the most important thing I'm trying to drive across the Company is continued sequential growth and continued strong digital performance underneath that. Now, our IP portfolio is also beginning to grow. That is not growing as much as it needs to grow, but it is beginning to grow. So Jamie, that's what I'm looking for is continued sequential growth as we go forward.

Just ask one follow-up on this slide 11, you don't have to look at it, you know what I'm talking about. But the CapEx as a percentage of revenue, that was a big theme especially in the CSC days. 3% seems low, but since our conversation is about the free cash flow, I was just wondering, like how should we be thinking about that going forward because I'm just wondering what the sustainable run rate of that is? Thank you.

We indicated, if you remember, that our goal was to be in the 5%, 7% longer-term as a percentage of revenue. This quarter was a little bit more unusual because we had the -- some asset dispositions that helped to offset the CapEx, but I would say to you somewhere in the 5%, 6%, it would be a good number to use.

And that does conclude the question-and-answer session. I'll turn the program back to our speakers.

Okay. Thank you, guys. Thank you.

We'll close the call now. Thank you, operator.

Thank you. And once again, that does conclude today's conference. Again, I'd like to thank everyone for joining us today.