Good day everyone. My name is Kellyanne, and I will be your conference operator for today. At this time, I would like to welcome everyone to the DXC Technology Q1 2023 earnings conference call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. John Sweeney, Head of Marketing and Investor Relations. Please go ahead, sir.

Thank you, good afternoon, everybody. I'm pleased that you're joining us for DXC Technology's First Quarter Fiscal Year 2023 Earnings Call. Our speakers today on the call will be Mike Salvino, our Chairman, President and CEO; and Ken Sharp, our EVP and CFO. This call is being webcast at DXC Investor Relations, and the webcast includes slides that will accompany this discussion today. Today's presentation includes certain non-GAAP financial measures, which we believe provide useful information to our investors. In accordance with the SEC rules, we provide 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 and in the webcast slides. Certain comments we make on the call will be forward-looking. These statements are subject to known and uncertain 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-Q and other SEC filings. I'd now 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 with that, I'd like to introduce DXC Technology's Chairman, President and CEO, Mike Salvino. Mike?

Thanks, John. And I appreciate everyone joining the call today and I hope you and your families are doing well. Today's agenda will begin with an overview of our Q1 results. Next, I will update you on the progress we are making with our transformation journey. Ken will then discuss our financial results in more detail and our updated guidance. And finally, I will make some closing remarks before opening the call up for questions. Our transformation journey is creating value. But as you can see, with the shortfalls in the quarter, we need to do better. The good news is we have the right plan for FY 23. We are laser focused on executing this plan with my team of operators. And the work that needs to be accelerated is within our control. We have done a nice job of investing in our business that has produced a stronger quality company and deeper customer relationships that have positively changed our reputation in the industry. When I talk about the quality of company that we are, I want to highlight we continue to improve our free cash flow generation, debt and capital allocation is being well managed. We have portfolio shaped and [sawed-off] [ph] businesses that were distractions to our strategy. We've consistently grown GBS and narrowed the declines of GIS, while moving our revenue mix towards the higher value business of GBS. And finally, we've improved our governance significantly. Concerning customer relationships. The NPS score that we communicate during these calls, shows that we now have deep customer relationships because we are delivering. Our customers trust us with their mission critical systems. And now trust us with their higher value business needs, which is evidenced by the consistent growth of our GBS business. New and existing customers are turning…

Thank you, Mike. Turning to our progress on the transformation journey, we continue to move forward on our key initiatives, Q1 organic revenue declined 2.6%, 10 basis points, or 4 million below the bottom end of our guide. Adjusted EBIT margin of 7% was 50 basis points below the bottom end of our guide. Year-over-year, we improved free cash flow performance by $292 million. free cash flow was 88 million better than the expectation we gave on the Q4 call. As a reminder, Q1 cash is seasonally impacted, including software vendor payments and incentive payments. Non-GAAP diluted earnings per share of $0.75, $0.05 below the bottom end of the EPS range. Moving to the income statement on Slide 12, the first quarter gross margin declined 40 basis points compared to prior year, primarily due to increased direct cost as a percent of revenue and unfavorable FX movements. We invested in our global delivery network in order to improve our delivery and ultimately allow us to optimize costs. While we are making these investments and doing the knowledge transfer it is leading to higher costs. In addition, we made investments to deal with demand in the GBS marketplace, as well as to exit Russia. Finally, we need to optimize costs to drive higher margins in GIS. SG&A as a percent of sales increased 10 basis points as we made investments in certain corporate functions. Other income decreased 40 basis points due to lower non-cash pension income. Our preference is the move towards a stronger balance sheet by reducing pension exposure. As a result, adjusted EBIT margins declined 100 basis points. Our cost optimization efforts have moved at a slower pace than anticipated, as we were thoughtfully building our plan. Net interest expense is favorable, benefiting from lower interest expense and higher…

Thanks, Ken. And let me leave you with a few key points. Our transformation journey is creating value. And we are confident that we're taking the right steps for DXC in the short-term that will set us up for success longer term. I'm pleased with the quality of company DXC has become with our stable debt, sound capital allocation strategy, free cash flow generation focused, investment grade profile, improved governance and our consistent growth in GBS. I'm also pleased with the work our team of operators has done to change our reputation in the industry and deliver for our customers to become the safe pair of hands. We have a good plan. And we are laser focused on accelerating our cost optimization to improve our margins. And we will deliver. And finally, I like the way the ITO and Modern Workplace market is breaking our way. And it's up to us to win the new work at economics that benefit DXC longer term. And with that, operator, please open the call up for questions.

Thank you. [Operator Instructions] We will hear first today from Bryan Bergin with Cowen.

Hi, guys. Good afternoon. Thank you. I wanted to start first just on demand question. So just can you talk about how client conversations are progressing? Just as it relates to the macro uncertainty? Is this causing any change in deal cycles or conversion? Understanding, you've talked about some push outs that are your own, conscious decisions, but are you seeing anything there in cycle timing, conversion? And just if you can break that down between maybe U.S. and ex U.S. us clients if you're seeing any difference in behavior there?

Okay. So Bryan, good to hear your voice. And thanks for the question. Let me first start by saying we're not seeing a real difference between Europe and the U.S. and APAC. So let's put that aside. The second thing is, now let's look at the demand by GBS and by GIS. The GBS demand is definitely there and we're seeing it in our results because you can’t grow the analytics and engineering business 15.7%. And also have the book-to-bill of 1.17, if the demand wasn't there. You will also see I'll comment on the margin at some point in time again through this call. But the investment that we made, one of the investments we made in Q1 and when this is on me is that we did build a bench for GBS, that market is literally a market that if you can show up with the right skilled people, at the client's doorstep, first, you're going to win the work. But they really, really want to see the skills. And I think everybody on the call knows that the demand environment for the skills is hot. So we invested we built a bench. So we're seeing good demand there. I don't see any issues. And I love the way that we've now broken the insurance business out. And we're more laser focused on doing work for those insurance companies. Now, in contrast, we see GIS, and GIS, I would also tell you, the demand is there. If you go look at the marketplace, you'll see that there are customers in the ITO and Modern Workplace segments that are trying to figure out what do they do with their work moving forward? And I made in my prepared comments they're focused on, do you deliver for your customers or…

Okay. I appreciate for answering my question.

Bryan, is that the color you're looking? Was that the color you're looking?

Yes, it was. So appreciate that. And I was going to ask about the risk of loss of those deals. But you kind of answered that for me. So maybe I'll ask the free cash flow. Follow up here. Just Ken, how are you projecting free cash flow cadence over the course of the rest of this year? And the reduction of 100 million, is that comparable to margin kind of half FX half operational.

Hey, Brian. So let me just I'll do a pivot real fast because the deals that we pushed out. One, those are large deals; two, do I expect that they're lost, no. All right. And it's not like we're not actively working with them right now to show why the pricing that we gave them was the right pricing. Fair enough?

Yes. Understood.

Okay. free cash flow.

Yes. So just maybe two quick things. So the guide down of 100 million, probably round that a bit, but it's really margin or 100% margin. We thought it was sensible to take that off, and then fully expect cash to build throughout the year and expect to have some good quarters in front of us.

All right, thanks, guys.

We will take our question from Bryan Keane with Deutsche Bank.

Hi, guys. Good afternoon. I guess I'll ask about the margins. I think you gave guidance for the first quarter, almost two months into the quarter already for first quarter. And I'm just a little surprised to see the margin shortfall in GBS. And I guess you guys were too, I'm just surprised that it surprised you the way it did since you were already two months in when you gave the guidance. So just maybe a little color on? Why the surprise and how long is it going to take to fix?

Well, [Darren] (sic) Bryan, so I'm not sure it's a surprise. Okay. So when I look at what we did in terms of the investment. In the investment, you can make pretty quick. The margin is based on the fact that look, we're investing in our global delivery network. All right. What that means is, we're fixing the onshore offshore mix of this company. We're also investing in automation. But when you look at what we've done with our centers, which is basically we have a staffing bubble. All right, which means we had two people doing the job of one because we're doing the knowledge transfer from onshore to offshore. We also when you look at Russia, right, we scaled Serbia, we scaled Poland, we scaled Romania. So from that standpoint, we increased that stuff, and whether we increased it one month, two months or three months, and I wouldn't call it a massive surprise. The second part of the investment was the bench for GBS. And when I look at the demand for GBS, I think that's prudent. So we're making some short-term calls, that we think longer term are going to serve us incredibly well.

And I would also add, [Darren] (sic) Bryan, I mean, there's a lot of moving pieces in Q1. So you think about the pension impact Russia, that Mike was talking about dealing with it, the unprecedented move in FX. So I would say just maybe on the FX side, it did catch us off guard a little bit on the cost side and the concentration of U.S. dollars, and we're certainly working it back. And then, our cost optimization, which we talked about in our scripts, and we've been building up to this, trying to be really thoughtful with it, and make sure that we build the knowledge transfer capability offshore to move the work as appropriate. And we finally moved out a little slower on that than we would like. I think we put all that in, it's safe to say we missed our guide, I get your point about your two months into the year, but there's just a lot of moving pieces in Q1.

And that's Bryan, not Darren correct.

Yes, sorry. It's Bryan.

Bryan, sorry about calling you Darren, that's not good. Sorry about that.

That's right. I'm sure. Hopefully, Darren can't come up with some other questions. But my one follow-up is, I think the key then is going to be the confidence in the long-term outlook, which was reiterated, if margins are dropped, and I think investors are going to lose confidence in the fiscal year 24 outlook of adjusted EBIT margin of 10% to 11%. Why is that still the right margin target? And how confident are you that you can hit that and that doesn't have to eventually come down?

No, two things, Bryan. I mean, the bottom line is, we have -- we are structurally fixing this business. So when you look at the onshore offshore piece, once we get there, we will have better margins in the GIS business. And then, that's basically a machine. So when you look at that, that's why I called out look, two years ago, we took cost out roughly 550 million, I believe in the current year 700 million in terms of annualized. And then we let it bed in, we make all of our decisions based on looking through the eyes of our customers and colleagues. And then, we knew we're going to take this out again. So when I look at that, all right, fair enough. So the staffing bubble. We didn't move as quick as we should have on but at the end of the day, once we get done with 23, we should be at a very good position that our FY 24 numbers and that's why we reiterated them.

Great. Thanks for the color, guys.

See you, Bryan. Sorry, again. Okay, Kellyanne, who do we have next?

[Operator Instructions] We'll hear next from Rod Bourgeois with DeepDive Equity Research.

Hey, guys. So I have a question about your overall turnaround journey. You clearly showed some good turnaround progress through the March quarter, and then you hit some bumps here in the June quarter. Also, during the June quarter, we saw reason for some concern that there could be some margin trade-offs that you would encounter as you pursue better growth. So my question is, is it appropriate to say that you're hitting a number of margin trade-offs that are seemingly required to drive the revenue growth that you're targeting? And if that's an accurate portrayal, in your go forward turnaround journey, how do you overcome the recent bumps in the road to reach your long-term margin targets, I mean, how do you get past the near-term trade off in order to get to the long-term target? Thanks.

Okay. So Rod, let's break this up into revenue and margin. And let's start with the margin. So in the short-term, right, the decision we made was to invest in the GDN, to hire the folks offshore, so that we could transfer the work. And when I look at that, and we get through the knowledge transfer, and put the Ukraine situation into Serbia, Poland, and Romania, look, we're going to be in good shape, you're going to see that we're doing that and basically Q1 and Q2, because that's the guide on margin. And then, the margin literally increases through the back half of the year, because you've got the machine working. So that's the way I would say that both short-term long-term. In terms of revenue, short-term long-term, we have two things going on. First, we built the bench, we invested in the bench in GBS and you'll see, we can see our GBS pipeline up, we can see that the book-to-bill is still very solid. Then the other thing is, look, I've been very clear with you all. We are sorting out the GIS market. And those deals are there to be had in the market that we're in whether you think we're in a recession or not. Anytime we're in this kind of market, there are not only more outsourcing deals, but they're bigger. And when they're more and they're bigger customers usually want increased cost reductions, and we think we can command pricing that is really consistent with how we look at our margins long-term, aka the 10% to 11%. So anyhow, that's the way I see it, Rod, when you talk about basically where we're at as a company. But we also said this thing was never going to be a straight line. Great example of not being a straight line with free cash flow last year, right? Nobody thought when we started minus three or four that we were going to get to 743. So my view is, look, we're making good investments, the decision we're making in the short-term, we've got a good plan, and high confidence will continue to create value. I hope people have taken to heart, everything else we've done right in terms of the quality of company, whether it's the debt, the capital allocation, whether it's the improved governance score, and then I continue to look at consistently growing GBS when a lot of other folks are struggling in that area is a good shining star.

Okay, great. And then so let me just ask a quick follow up on this. You've got some competitors, particularly in the infrastructure business, that are really struggling. And there's a lot of messy -- call it messy contracts in that infrastructure business historically. Are you seeing clients willing to pay a premium to sort of get out of a messy historical legacy contract and into something where the service can be better? And with a client willing to invest in digital and a more modern approach to the infrastructure problem that they're trying to solve? Are you seeing clients willing to pay up to move out of it these legacy deals?

So the short answer your question is yes. And that's what we're focused on. So let me give you some color around that. So when you get to these points Rod, where you've got these large deals, and they're paying up, we have to literally go through line item by line item, in terms of why that's appropriate. So whether it's inflationary costs, whether it's costs of, hey, here's the way the deal should have been constructed to begin with, or whether or not it's just look, here's the model that we will be using. All right, to make sure we're delivering. And let's not walk past that last point meaning here's the model we will be using, meaning a lot of times with some of this stuff, Rod, 100% offshore is not the right answer. So you've got to have a nice mix of onshore offshore. So literally, those are the conversations we're having with the demand in the market. And it takes a little while to get them to understand that actually, they've got a good price and they're not going to have to worry about the delivery moving forward. So hopefully that gives you the color Rod that you're looking for.

Now that's helpful. Thanks, guys.

Thanks, Rod. Kellyanne who's the next question?

We will hear next from Jamie Friedman was Susquehanna.

Hi. The analytics and engineering business performed well was up almost 16% year-over-year. I was just curious, because I would think of that as somewhat discretionary. But it still was a juggernaut here. So if you just give us some context about why that may be performing well in this environment and how you see it going forward.

Thanks, Jamie. So basically, I'll just go back to the example we gave you during the script. What we're seeing with analytics and engineering is, we're able to deliver both increased helping a client increase their revenues or growth, and then decrease their cost. So when I gave you the example, during the script of the retailer, and specifically the loyalty program, what's going on there is, we're literally dealing with both the technology and the data. And as you can imagine, with loyalty, there's a lot of data. And instead of trying to deal with all the data, dealing with specific data, so that their loyalty points can be used at the right moment, has really created a really nice situation for this retailer, in the sense that they've seen more demand, and then the costs have gone down. So it's interesting that you have categorized it as discretionary, because a lot of times, all these customers have dealt with both their infrastructure cloud. And now what they're trying to deal with, is this data and get more out of the technology they've put in place. And that's what our analytics and engineering business does. So we're proud about 15.7, we expect that it's going to continue to perform in double digits, because, that's what it's been doing for several quarters now. So thanks for that question.

All right. Thanks for that Mike. And then, Ken, in terms of the free cash flows, good free cash flow quarter, but was wondering any call outs for next quarter for the cadence for the year? You did mention the seasonality into Q1? I heard you say that, but anything else we should be aware of in terms of cash flow.

Yes, no, I don't think there was anything, Jamie. I mean, I think the second quarter should be a good cash flow quarter and I think the rest of the year as well. So I think we're heading into kind of more cash generation going forward.

Got it. I'll drop back in the queue. Thank you.

Thanks, Jamie. Kellyanne next question?

That will be from Brad with BMO.

Hi. Thank you for taking my question. I wanted to start off asking about the application business within GBS and sort of the expected trajectory there. It could perhaps flatten out to where it sort of flat on growth versus being sort of a detriment to growth. You mentioned the demand within broader GPS and obviously, within analytics and engineering, but could you hone in on what your sort of view is for that business and how it fits in strategically?

Well, again, well strategically it's a key part of what we're doing in GBS and to break that business apart, right, there is really four pieces, there's a custom application, that's what we just build stuff from the ground up for clients which we're really good at. There was an SAP enterprise piece, there's an Oracle piece, and then there's a service now and what we do is, we do all four of those for clients. The demand that we're seeing is particularly in custom apps, SAP and ServiceNow. So that negative 2 -- was negative 2 last quarter, as well. And we do see that flattening out all right, throughout the year but that's a good business for us. And again, what we're leaning into is really the custom build and the reason why the custom build is, we're so good at that is because once you're running that infrastructure, they put the infrastructure with the applications typically, our engineers can develop good stuff. So that's a good business for us. Don't lose sight of the fact that the performance of that is going to be just fine. Brad, do you have another question?

Yes, just a quick follow-up for Ken on the free cash flow. I believe you said its reflective of the margin put a cadence in the region for the $100 million difference. Can you guess perhaps talk about the FX impact and how we should be thinking about that portfolio to free cash flow? You mentioned more extreme on margins and revenue and just want to make sure I have that understanding. Thank you.

Yes. I appreciate the question, Brad. We have about kind of a ballpark $800 million more in cost than U.S. dollars, when you look at it kind of on a pro rata basis. And so therefore, when the dollar strengthens, like it has, it's caused not only the revenue dollars and profit dollars to come down, it's caused margin compression as well and that's what's really impacting the margin in addition just to the dollars coming down.

Kellyanne, let's take the next question.

Thank you. That will come from Lisa Ellis with MoffettNathanson.

Hey, good afternoon, guys. Mike, I just wanted to ask this is a follow-up on the bookings dynamic, and what you're talking about pricing those deals in a different way. Are there investments that you're making, or you're realizing you need to make in your sales team and the go-to-market model to be able to sell this way to sort of shift to selling more value, or sort of a different value proposition perhaps than they've done before? Or is this, do you view it just like literally very temporary with this quarter and once you get the job closed you are kind of off to the races? Or is it something that requires a bit more investment?

Well, I mean, look, it is something that's systemic that we're putting in place in terms of DXC. So, and it's not about right the sales folks, I mean it's about our reviews of those deals and we got to be clear that we can hit those margins, instead of hoping in the future that some things are going to happen, okay? And Lisa as you know, those deals come to us, all right, with a certain price expectation, because that's the price they've been paying for several deals now, or several years now. As you know, those deals are a lot of times five, ten, fifteen years old, that these folks have been running those things. So the clients are coming to us with a specific price for a scope and what we're doing is sitting down and taking them back through the scope, taking them back through, here is why that was probably under bid and then here is how we're going to deliver it for you and then obviously, we stack that up with the references that we have in the market so that they can hear from those references that we do deliver, because that's where those folks are at now. They've had enough fun with the people that they've been dealing with, there's too much uncertainty as it relates to what's going to happen with their company and so forth and that's why I keep coming back. I know it sounds cliché but the quality of company that we've built, that's leading us to take on these new inquiries. So it's not so much what the sales team is doing. It's literally the operating committee that I have established, reviewing those deals and making sure we're not going to do them at a lower price. And if I need to get on these calls and say, hey, the book-to-bill was 0.87 do I really like to do that? No, but I also don't like when the margin is going backwards, all right, especially on the new work. So as you can see, Lisa, not only are we fixing the delivery model, but we're also making sure we're shutting off the funnel coming in that the deals should help us get to that 10% to 11% margin in FY '24.

Okay. And then, my follow-up is on GIS and apologies, I'm doing this out of my memory, so I might have it wrong, but my recollection is that in your -- when you initially set the 2024 outlook, your expectation for GIS was to get it to flattish or maybe modestly down and it's still running three quarters out at minus seven or so. So can you just help us a bit on GBS is humming along as you've highlighted very nicely, but can you help us a bit with sort of how we should think about bridging GIS over the over the next year or so to get to that 2024 number?

Okay. Lisa, thanks for the comments on GBS because obviously I'm very happy with that business too. Look just taking the or narrowing the decline of GIS by 80 basis points, you're starting to see it's heading in the right direction because we literally have stacked up the last three quarters of minus 8, minus 8.3, minus 8. So literally breaking through that number and starting to push it down is solely focused on one thing and one thing only, and that's the performance of modern workplace, okay? And it's not that hard of an equation, has modern workplace has gone from I think it was minus 19 last quarter to minus 16 this quarter, we've been very clear that we expect that that business is turned around. We have new work coming on. We're seeing the work come on as modern workplace gets fixed, so does GIS. It's literally that simple.

Okay. Great. Thank you.

Thanks Lisa. Kellyanne, any other questions?

At this time, Mike, I'd like to turn things back to you for closing remarks.

All right, Kellyanne, thanks so much. Look, in closing, what I would tell you is that we've made some very good short-term decisions around investing in DXC. We think those are going to position us well in the future. I'm very proud of the quality of the company and the quality of customer relationships that we've built. And the closing comment is we are laser focused on making sure we take out this $500 million, and we've got a team of operators that is very good and we've got high confidence like we did in FY '21 that we will take the cost out again. So with that, we'll close the call and I look forward to updating everybody in the fall on Q2. Kellyanne, you can close the call.

Thank you. This does conclude today's conference. Thank you again, all for your participation and you may now disconnect.