Good day and welcome to the DXC Technology’s Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Shailesh Murali. Please go ahead, sir.

Thank you and good afternoon everyone. I'm pleased that you are joining us for DXC Technology’s second quarter fiscal year 2021 earnings call. Our speakers on today's call will be Mike Salvino, our President and Chief Executive Officer; and Neil Manna, our Senior Vice President and Corporate Controller, Interim Chief Financial Officer. This call is being webcast at dxc.com/investorrelations and the webcast includes slides that will accompany the discussion today. After the call, we will post these slides on our Investor Relations section of DXC’s website. Slide 2 informs our participants that DXC Technology's presentation includes certain non-GAAP financial 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 tables included in today's earnings release and the webcast slides. 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 these 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 President and CEO, Mike Salvino. Mike?

Thanks Shailesh. And I appreciate everyone joining the call today. And I hope you and your families are doing well. I'm going to start today's call by giving you an update on our strong Q2 performance. I will then highlight the progress we're making on our transformation journey. Our strong Q2 performance was driven by executing against our three key areas of our transformation journey which are focused on customers, optimize cost and seize the market. Next, I will discuss the good progress we have made on our strategic alternatives initiative, and then I'll hand the call over to Neil to share our Q2 financial results and guidance for Q3. Finally, I will make some closing remarks before opening the call up for questions. We delivered a strong Q2 and I'm very pleased with how we are executing against our plans to stabilize revenue quarter-on-quarter, improve margins sequentially, and achieve a book-to-bill of 1.0. For Q2, our revenues were $4.55 billion exceeding the top end of our guidance by $100 million. The quarter-on-quarter revenue stabilization trend is expected to continue in Q3 on a like for like basis. Now when I say like for like I mean excluding the US State and Local Health and Human Services business. Adjusted EBIT margin came in at 6.2% also higher than the top end of our guidance highlighting the effectiveness or our cost optimization program. Like revenue we expect margins to continue to expand in Q3 on a like for like basis. And our book-to-bill for the quarter was 1.1 underscoring the success and bringing the new DXC, which focuses on customers and our people to the market. We expect this trend of achieving a book-to-bill 1.0 to continue in Q3. I'm excited about the level of stability we are achieving by executing…

Thank you, Mike, and greetings, everyone. I am also very pleased with the solid progress we continue to make on our transformation journey. We are executing well and delivering for our customers. Financially, our second quarter featured quarter-on-quarter revenue stability and sequential margin expansion. We exceeded the top end of our guidance on both revenue and adjusted EBIT margins. We strengthen our balance sheet to the execution of our strategic alternatives initiative. We continue to commit it to be committed to an investment grade credit profile. We are also winning in the marketplace as evidenced by our book-to-bill ratio of 1.1. I will now turn to our details second quarter financial results and start by covering the items that are excluded from our non-GAAP results. In the second quarter, we had restructuring costs of $265 million on a pretax basis, or $0.83 per diluted share. These costs relate primarily to the cost optimization programs we discussed previously. Looking forward to Q3, we expect the restructuring costs to be between $125 million and $150 million for the quarter. Also in the quarter, we had $101 million on a pretax basis, or $0.29 cents per diluted share of transaction, separation and integration related costs, primarily driven by the external spend associated with the assets under strategic review. In Q3, we expect these costs to increase primarily as a result of transaction and separation charges associated with the sale of our US State and Local Health and Human Services business. In the second quarter, amortization of acquired intangibles was $152 million on a pretax basis, or $0.46 cents per diluted share. Also in the quarter, we had a tax related adjustment that contributed $0.01 per diluted share. Excluding the impact of the special items non-GAAP income before taxes from continuing operations was $212…

Thanks, Neil. And let me share four key takeaways on our progress we are making at DXC. First, we're bringing the new DXC to the market, and we have demonstrated solid momentum in executing on our transformation journey. This is translating into quarter-on-quarter revenue stability, sequential margin expansion in a book-to-bill number of 1.0. Second, we now have a strong balance sheet due to the sale of the US State and Local Health and Human Services business and using the net proceeds to pay down $3.5 billion in debt. We also expect to complete the sale of the Healthcare Provider Software business by the end of the fiscal year and again use the proceeds to pay down debt further strengthening our balance sheet. Third, we believe we can create more value by keeping the workplace in horizontal BPS businesses. We're excited about our ability to apply the transformation journey to these two businesses. In order to improve the financial contributions they are making to DXC. Fourth, we have built a strong leadership team that is executing on our transformation journey, bringing the new DXC to our customers and our people. In closing, I'm very pleased about the progress and the level of stability we have achieved. Our balance sheet is stronger, we are enhancing our customer relationships, we're taking out costs without disruption, and we are improving our position in the market and winning more. We expect all this positive momentum to continue in Q 3. And with that, operator, please open the call up for questions.

[Operator Instructions] Our first question in queue comes from Rod with DeepDive Equity Research.

All right. Thanks. Hey, Mike. So troubled account was the main topic for DXC over the last few quarters. I did notice that you didn't talk about troubled accounts in your update today. So I'd like to ask, what's your status with these troubled accounts? Or at least the accounts that were previously considered troubled? And to what extent are you concerned about DXC's relationships at its large clients at this point?

Okay, so thanks, Rod. Look, when I reflect back on my first year at DXC, I would say my two biggest achievements are around strengthening our balance sheet and our customers. When I think about the 40 troubled accounts, in my mind, we've moved past that. Right, so I communicated that 38 out of the 40 were fixed and in my mind right now we're in the enhancing our customer relationship phase. And it's not just with 40. It's with our top 200 accounts that we're focused on. And when I say focused on, we're focused on obviously delivering to them with without disruption. Second is we're focused on proactively reaching out to them, so that we can listen to their needs. And we're seeing a lot of needs in the ITO space right now, people want the technology to just work, all right, along with the transformation narrative, but we're seeing quite a bit of demand of just hey, can you just make sure this technology works. And then the last thing is cross selling to them. So we're having a lot of discussions with them. And part of the thing, Rod, that we're seeing now is people are starting to talk about the new DXC. And we think that's great, because that's why I mentioned that I was pleased about the momentum of us improving our brand in the market and winning more. So, look, the momentum on the customer side, Rod, is good, I think we're making good progress. And we're making the right calls in the customer area. But we've definitely moved beyond troubled accounts.

All right, great. And then just a follow up, I'm looking at the cloud layer of the stack; your growth in cloud did improve from the prior quarter. But cloud is clearly one of the big growth trends in this industry. And relative to that trend, your cloud growth is somewhat lackluster here. So can you give us some color on your cloud business? I know a growth turnaround there doesn't happen overnight. But I'd like to ask about your outlook for the DXC's cloud business and its strategy there. Thanks.

Okay, so Rod, the -- like I just talked about in terms of customers, right, that's where my focus has been. Most of it has been in fixing the ITO layer, which is where the business has traditionally had the most revenue run off. But as we are stabilizing that, which you can see in these numbers, when we look through both GBS and GIS, and we looked at the stack, my expectation is as we build a deeper relationship with the customers that we're going to get better at selling up the stack. So when I look at the thing as a whole, what Neil mentioned is when you look at ITO, cloud and security applications, and analytics, and engineering, you add all up all those together. That is where we've spent the majority of our time on our transformation journey, no question. And last quarter, the quarter-on-quarter growth was negative 7%. Now it's negative 1.8%. And two out of those four, have a positive growth trend. So obviously, I'm focused on Cloud. But I'm also focused on analytics and engineering, analytics and engineering and applications as well. But going back to your cloud question that layer, like you said, went from 11%, to roughly 2.8%. It's got a strong book-to-bill. I like that momentum. I think that momentum will continue as we get into Q3. And like I've always said, our strategy is an and strategy. It's not one or the other. The ITO business is real. And clients are asking for help there. And we're not saying it's one or the other. We have to do that and do the cloud. So I was actually pleasantly surprised with the cloud growth now, when it was negative last quarter.

Our next question in queue comes from Reina with Evercore. Please go ahead.

Good evening, thanks for taking my question. It's really good to see the strong book-to-bill and then that potentially going into 3Q as well. Can you talk a little bit about the sustainability of one times or greater book-to-bill going forward? And I'll ask my follow up question up front, if you can talk a little bit about the strength in your pipeline and the timeline of converting that into revenue. Thank you.

So, Reina thanks for the question. In terms of the book-to-bill, we're obviously very focused on the next quarter. I like what Neil laid out in terms of our guidance. We're still managing quite a few things here, Right? With we still got one of the assets that we have to complete. We're bringing the other two businesses then, we're executing against our transformation journey and COVID-19 still looms out there in terms of the next wave. But we're very bullish about a book-to-bill for 1.0 greater in Q3. I also mentioned that we do see a solid pipeline. And that solid pipeline, as you can see is across the stack, right, because that's why we put down the book-to-bill numbers for this quarter. And so that it was going to continue in Q3.

Our next question comes from Ashwin Shirvaikar with Citi.

Thank you, guys. Hope you're well, good to hear from you. I guess my question is to ask perhaps for an update in terms of the de-layering and the simplifying the organization that you've spoken about in the past, Mike, and once that's done, what's next in terms of sort of looking at margin improvement, there sort of a revenue mix portion a pivot to maybe higher value services. Can you talk a little bit about the trajectory that we should expect?

Ashwin thanks, always good to hear from you. So look, when the update on the de-layering is we definitely said, we're on pace to achieve our $550 million for this fiscal year, we did better than expected in Q2, we took out roughly $60 million in costs, we expect that level to continue in Q3. And then when it's over this is part of the transformation journey and what I call the playbook. So what we'll do is we will then pivot and we're starting to build some of that capability now. We'll pull -- we'll continue, right, our optimization on the pyramiding, the offshoring and the contractor conversion. So that's one. The second is the use of technology. All right, meaning us applying technology to these environments is a key, all right. And one of the things that we've done is we've taken the best of platform DXC and Bionix and now we call it platform X. And we are piloting that right now. And then the third thing is we will continue to look at consolidating our real estate footprint and data center. So Ashwin, there's more levers to pull on, I think we're taking a very prudent approach. I know you've heard me say that we've been taken out cost and not disrupting the business probably two or three times. Because that's important. Okay, because what we're not going to do is hurt our customers, nor people by doing this. Alright, so we're taking a very focused approach.

Got it, okay. And then the other question as the look at bookings, and tracking time to get a bead on spender behavior, enterprise spending behavior, anything with regards to the pace of decision making, contract sizing, new contracts already signed, should we expect normal ramps, things like that, as we as the lookout, what are clients telling you?

Okay, so here are the five things that I'm seeing in the market, all right. And that's what this is -- these five things are pushing our book-to-bill of 1.0 or greater. The first thing is that CIOs are making decisions. And when you look at our pipeline, it's up 11% quarter-on-quarter. Okay. The second thing is everybody's talking about transformation. So that was going back to an earlier question about the cloud, a lot of discussions about the cloud. The third is people want to automate, all right, because in this COVID-19 area, right, they basically want to see greater automation so that they have got more flexibility with their workforce. Now, points four and five are the key things to the DXC story. The fourth thing is you can't do those first three, unless the environment works. Okay, so when you've got this many people still working remotely and we're dealing with the next wave of COVID and so forth. People are talking to me, CIO, CEOs are talking to me about, hey, upgrade it make it work as efficiently as possible. And then Ashwin the last thing the fifth point is when you're dealing with these environments, one of the biggest things operationally you needs to deal with is downtime. And we've seen an unprecedented amount now of our ability to get downtime to upgrade these environments. So that's what's fueling a lot of our pipeline. That's what's fueling a lot of the deals. So we feel good about the position that we're in the IT services space.

Our next question comes from Lisa with MoffettNathanson.

Terrific. Thanks, guys. And nicer revenue stabilization here. Great to see that. Mike, no rest for the weary. Now that you've completed this strategic review of DXC's portfolio, how are you thinking about M&A going forward? Meanings are there some high growth areas you're eyeing potentially for tuck-in acquisitions? And or would you consider another big scaled merger at this point? And then maybe I'll ask my follow up just upfront, which is just around restructuring and transaction related costs, which have been pretty persistent and a bit of a drag on cash flow. I'm just wondering if you have sort of line of sight at this point into now that you've got a lot of the restructuring done of and the transactions underway of when we might see those go down? Thank you.

Okay, so Lisa thanks. And I always check in on your seven points about how you're tracking our progress. So thank you. All right. I can recite them. On the -- look on the M&A front, when I talk about us getting to a certain level of stability, we're now getting to a point where I can run this business. Okay. And I don't want to put any small piece on that because that's what we've been trying to get to where things are starting to quiet down a bit. And now we can drive this business and start competing in the space. So I'm 100% focused on DXC, I think we've got the right strategy, we're showing people whether it's your seven points, or the ones that I talked about, which are strengthening the balance sheet right, stabilizing net revenue, expanding the margins and winning in the market, that's what we're focused on. So I don't see any major transactions in our future. Now, that doesn't mean that I'm not going to continue to look at the portfolio because we're already -- always studying that. Now in terms of your second question, restructuring, okay. My favorite topic, restructuring and transaction costs. Okay. So, look, having just completed this, they should be coming down, right. We will definitely can give you more details around that as we are now finalizing what I call the strategic alternatives initiative. But that's the direction, Lisa, they're headed. Okay.

Our next question comes from James with Morgan Stanley. Please go ahead.

Hey, this is Jonathan on for James. Thanks for taking my question. To expand on Lisa's point around M&A. Can you talk more broadly about capital allocation now that you've paid down the debt with the Health and Human Service proceeds?

Okay, so basically look, our capital allocation, I think I've been incredibly consistent. That's my number one priority, as COVID hits and so fourth is to maintain an investment grade credit profile. We're constantly reevaluating our capital allocation. But we're still, like I said, dealing with a number of moving parts. So just to go back room through them in terms of our strategic alternative initiative, we still need to close the Healthcare Provider Software business. Second is, I now want to significantly apply our transformation journey onto the two businesses that we're going to retain. And again, that's no small piece, right? I mean, we've been letting those businesses run as is as they have gone through this strategic alternative. So it will be good for us to get after those businesses. And then in terms of the Covid, that's basically where we're at. So we'll continue to look at it. But right now, I think we're taking a very prudent approach to our money to our guidance, as we're managing through all this.

Got it. And on the workplace mobility asset and the horizontal BPS asset. Can you talk to us some of actions you're looking to take around those? Is there any reinvestment that's expected to take place? And if so, is that contemplated your margin guidance?

Yes, so the bottom line is what we're going to do with those businesses, so I don't want anybody to misunderstand. We're bringing those businesses back in, but we are definitely going to run them differently. And the three things we're focused on is one strengthening the management team. To give you a specific example, and workplace, we've already hired a new leader, Mike McDaniel. It's somebody that I've worked with, in my past, for a number of years, and Mike will do a great job driving that business. Second is we're looking to change the value propositions. So if I use workplace again, workplace now is not just about the distribution of devices, and supporting them, today, the focus of that business is around employee experience, employees want the ability to connect better with their colleagues, and also their companies. And that's where we're headed with our value proposition. And then third are deeper relationships with some of our partners. We're in discussions right now, again, on workplace with one of the industry leading IT providers to sort out how we can even better and closer work together to capture that opportunity. So Jonathan, that's our focus with those businesses at a high level. But remember, the transformation journey is let's go after and get those customers nailed down. Let's make sure we're optimizing our cost. All right. But we also want to make sure we're cross selling. So yes, there are investments we're making, but it's not just with those two businesses. It's across the board.

Our last question in queue comes from Jason Kupferberg with Bank of America.

Hey, guys, thanks for taking my question. This is Kathy on for Jason. I just wanted to ask about I know you guys have been talking about like the prior termination price downs, run off, and those have affected 2Q. I just wanted to know, like, are those expected to gradually subside throughout the end of the fiscal year? Or sort of how long are those impacts still going to last? Thank you.

So thanks for your question. So look, we've been talking about those run offs for a while now. We are pretty much through them. And that's why we continue to talk about the revenue stabilization. Because what I, the year-on-year compare is a tough one. And what I'm trying to show you all is we've gone from green shoots to real hard evidence that the revenue is stabilizing. So we're through those. And that's also why I talked about our customer relationships, that I don't see those customer relationships, being in the troubled area anymore, in fact, we're enhancing them.

Okay.

So, look, with that. I want to thank everybody for joining the call tonight. I think we're making strong progress on our transformation journey and bringing the new DXC to our customers and our people. We're confident that the momentum we've created in Q2 will continue in Q3. And with that, I want to wish you and your families all the best and operator, please close the call.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.