Thank you, everybody, very much for joining us today. Very pleased to be kicking off the Morgan Stanley TMT Conference for 2024. Thank you for joining us here for the first Monday morning session, kicking off here in the Presidio Room with DXC and senior management. Before I get started, just a quick introduction. I'm James Faucette, senior research analyst here at Morgan Stanley, covering the IT services space. As I said, we're very pleased to have DXC senior management. Before I introduce them, I do have an important research disclosure to read. For those disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So, kicking off with DXC, as I said, is we've got the President and CEO, Raul Fernandez. Thanks for joining us.
CFO Robert Del Bene and John Sweeney, VP of IR. And John's up here to make sure we stay honest and not break any rules. Or if we do, he's going to fix them for us. So look, I think at a high level, Raul, you're new to the title and the role, but you're not new to DXC. You've been associated with the company for quite a while. Can you walk us through what you have seen as the evolution of DXC over the past couple of years and talk about the key takeaways that we should carry as investors as you transition from board member to now CEO?
Sure, sure. So look, I'm going to just take it back because I, I think it'll help set some context. The company basically was formed, and a lot of things that I would do and others have done in private equity or in M&A, large small M&A, frankly wasn't done day one, which was take a timeout, eliminate duplication of systems, eliminate duplication procedures, legal entities. When you think about accounting systems, time management systems, planning systems, and so, you know, put together, add in some, some more acquisitions. And that created an interesting layering of, on the one hand, on the positive side, really deep industry expertise, especially in a couple of industries, great horizontal set of services, good distribution of talent globally of the 125,000, only 10,000 in the United States.
So it is truly a global company and an incredible set of customers with a long history and an incredible set of employees that have been not just since the company was formed, but have a heritage back to CSC or HP. I just sent an email to somebody who celebrated, I think, their 41st anniversary. So pretty amazing because the company's only been around, you know, less than two decades or a decade and a half, I guess, in as an entity. But its heritage goes back many, many generations. So, the evolution, I think, with Mike and Mike was about getting it together, putting it together for a time period, fixing the balance sheet, bringing in talent, looking at quality issues.
As I took over 75 days ago, I think today's the 76th day, as I did a deep dive with employees, with customers, with investors, with partners, what I quickly appreciated is this is six different businesses, and we grouped them in these two artificial buckets, GIS and GBS. But to really understand this company, you've got to go to each line of business, which is what I've been doing, and in each line of business, interact with those business unit leaders, figure out for that line of business what's the right private and public comp, figure out what the right metrics are. And as we've been doing that by business unit, you see where you are. We're here. Average is here. There's a gap analysis. We've got great professionals that work here. We've worked in other companies.
We should be able to close that gap from where we currently are metrically to where average is. So the business unit by business unit plan really does focus on individual metrics. What are the right companies that, that we aspire metrically to be? And then how do you take the metrics where we fall short and close that gap quarter over quarter over quarter? And then as you roll that up across six businesses, you can develop a more macro theme for the enterprise. But it is really, for me, it's been an appreciation of six different businesses with different characteristics, comps, quality. And I think one common theme across the board has been the lack of marketing and communications and storytelling. There's incredible things that this company does for major customers, mission-critical things in aviation, banking, capital markets, insurance, automotive.
Really, if you have a journey today and you're traveling and you know, you go to any major airline, there's probably an 80% chance that you interact with a system that we've built, that we maintain, or a next-generation system that we're building. So what's been great for me in discerning what we have and, you know, how we build on and how we get better is the depth and quality of the client base, the types of solutions that we have, the history that we have, longevity with many of these great blue-chip global customers, and also an opportunity to package up the story and just be better storytellers for investors, for our customers, for even for our employees, right? Because obviously talent is key in our business.
So being a destination and being someplace that you're proud to work at and you've got a great experience with our brand, that's all part of, you know, what I've seen and now what I'm working on.
So as you've seen that and it sounds like, you know, putting together the storytelling, as you say, and just better communicating DXC's capabilities, both in terms of what it can do and what it is already doing. But that makes a lot of sense. But where does that fit within kind of your top maybe three priorities as CEO? And how are you thinking about where it makes sense to allocate your time?
Yep. So I look at return on effort. I look at the six business units, and each one has a different, call it, value delta. If it was on its own, if we were going to IPO it, if we were building it up as a, you know, as a private company to be a public company, they're just different businesses that have, you know, different profiles, right? Software, SaaS, higher valuation, long, you know, longer visibility, services depending on how they're sold, shorter, but on the high end of the services also extremely valuable. And then you kind of can move down the value range. So the one that I've spent the most time on recently has been in insurance. We've got a, you know, billion-dollar-plus, insurance tech company that has a software component, both traditional software and maintenance, as well as SaaS.
It also has recurring services, so not straight-up one-time professional services, but recurring services that has a lot of visibility, a lot of history. And so that unit, if you look at its comps, public and private, super interesting, super valuable, and different because it is a higher, well, it is a higher mix of software than the other business units. So, spending a lot of time there, great, great talent there, great industry talent, so people that have been in the insurance business for decades with other companies, with other software companies, other services companies, and other BPO, BPS companies. So I've been spending a lot of time on that. If you look at apps, engineering, and design, and now I'm lumping, you know, two business units together, great backdrop, digital demand backdrop, digitalization backdrop, AI backdrop, high-end application development.
Sure, there's going to be highs and lows because of the global economy and spending, but this is a fundamental business that will continue to get fundamental demand. And again, another area that I'm very proud of is real deep expertise by industry. That obviously insurance is super deep in its business unit, but that business unit has great automotive case studies. I was on the phone with CEO Ferrari, and we make one of the in-car infotainment systems. We do a lot of the back office things at their corporate headquarters. So deep relationships with multiple teams doing multiple kinds of work there. So those two, I would say, are on the value side of it, you know, have a lot of return on effort potential for us.
As then we move to things that have kind of a secular zero to negative growth backdrop, you get into Modern Workplace, you get into ITO. And I think there, our point of view is, look, we are going to optimize those business units for cash. We are not going to defy gravity. We will be super realistic and, and, and, conservative about how we look at, you know, those numbers. These will be the first set of numbers that are our numbers, the ones that we're going to be putting out for fiscal year 2025. We completely appreciate and understand the disappointments of the past seven out of 10 or eight out of 12 quarters. Some metrics have been missed, so consistently inconsistent. And we're here to hopefully reverse that, reverse that trend.
But, but there's, you know, I think one of the things that excited me and I went from interim to permanent was I saw many ways to win. This isn't a situation and we've all had situations in different businesses where it's really a trick shot to try to get out of it, get out of it, and the, the odds aren't great. Here, if we do smart, basic, fundamental, we get creative in some areas. We don't have to we don't have to win across all the initiatives. We have to win across half the initiatives, and we should derive some value out of that. So that's one of the things that's super exciting, about, you know, kind of the opportunity and the things we're working on.
So I wanted you mentioned it once again in kind of your initial comments, but I thought it was interesting on the last call, particularly, your comment about, appropriately benchmarking each of those six core offerings that DXC has. Can you provide a little bit of an update on this exercise and, and how are you thinking about the ultimate outcome of, like, what you would like to get from the benchmarking besides just seeing, okay, this is these are key KPIs and, and performance metrics, etc.
Sure, sure, sure. So it's work in progress. I'm going to have Rob jump in here as well. Obviously we've got the benchmarks and the numbers and the key metrics that we've been looking at in the past, but it's been an ongoing process to look at business unit EBIT, what's in, what's not in. The other key piece that I didn't mention before is organizationally, go-to-market, execution, and then sales. We've spent a lot of time in this quarter, optimizing that, changing that. It was probably, well, it was in a place that wasn't either, you know, at point A or point C. It was stuck in the middle, in B. So we've put together a new, new model, that is obviously market.
These professional service companies that are global, you know, you move how you go to market a little bit, but it's not rocket science. It's a spectrum. I think the key fundamentals for that are accountability, visibility, and making sure that we've got individuals that have the right oversight, the right controls on both the revenue side as well as the cost side, and that we can again, going back to the metrics, that if I'm signing up for a certain EBIT and I'm signing up for a certain book-to-bill and I'm signing up for a certain mix as a business unit leader, that first of all, organizationally, I'm empowered to handle it. I think that's one of the issues we had in the past.
There wasn't clear organizational, design discipline, which then led to a lack of accountability, which led to well, I didn't handle that input in my in the numbers, so that's why the numbers kind of, you know, went this way or the other. So I think it all goes hand in hand, the organizational as well as the metrics. I don't know if you want to jump in on the metrics.
I'd say the company was traditionally run as separate geographic regions as opposed to business units. So now we've reoriented the company on a business unit basis. We have strong general managers in charge of each of the six businesses. So it's important that we implement a set of KPIs and metrics that are specific to their business units on a global basis. Along with that, Raul mentioned the lack of integration of the companies that were the basis of the formation of DXC. So as we integrate over time, we expect to improve our KPIs on the infrastructure as well. So not only implementing, you know, very strong dashboards and metrics for the individual business units, but the support organizations as well. And we think both of those are going to drive value for us.
Can I just ask, is, like, typically when there is at least in the companies I've looked at over time, if there is some putting together of businesses that weren't fully integrated, etc., a lot of times it's been that's been the result of, like, very aggressive and ambitious pursuit of synergies, and the investments aren't made to actually integrate them. How should we be thinking about, you know, what that implies for? Is there incremental investment that needs to be made at least for a short period of time to drive these integrations, or can you do that within the existing cost and?
Yeah. Look, I've had the pleasure and the benefit of being on the Broadcom board for the last four years. So I mean, if you wanted to take a PhD in how to do that, that's the class you would have taken. So I've been able to see what is great, and I can tell you we're not great. And so there's work to be done. It's work that we can time, investment that we can make, and progress that we can get on an incremental basis. It unfortunately is not going to be like how we would like to do it, which is day one, month one, or the first 100 days with everything fully aligned. But, you know, we're dealt the cards we have.
So I as I look at the system roadmap and the incremental progress, visibility insight information that the implementation, you know, yields for us, it's not one where it's a cliff yield. It's not one where you're like, "Oh, shoot, we got to wait 36 months before I get some value." No, quarter-over-quarter, as a business unit leader, as a geography, you'll have more granular and fast insight. And the like, I was in Spain, with our regional country manager there. And, you know, he was rattling off his billability, his bench, his margin, gross net margin, account information, everything that you'd expect to have. Now, he has really great control and multiple people hitting multiple systems to get him that information. So it can be done.
It's just very complicated because you've got to go hit seven different things rather than one dashboard to find gross metric on this account or if I'm overbilled on this account, underbilled on this account. So it's there. And so what I mean is the we're going to get incremental, incrementally better and therefore helping the business units and the business leaders and, and everybody on the team, be better. It, it is something that will take a little bit of time and, and more investment, and we'll phase that. We'll phase it in.
More? Any other comments?
Yeah. No, I, we will absolutely make the investments we need to make and, and make the necessary trade-offs to, to fund the systems work. And that systems work will lead to process improvement and efficiency from a people perspective. I mean, we have a lot of human glue stitching together what Raul just described in Spain. It's replicated around the world. So this is really necessary and an important part of our evolution, which we're undertaking.
So let's, let's turn and talk about kind of top line and, and pipeline. And how would you right now characterize your, your pipeline, and how is conversion trending relative to where it had been historically? And, and I guess I'm trying to drive at, you know, how we should be thinking about pace of bookings to revenue conversion and, and opportunity for growth.
I'll let you start.
Yeah.
No, good call.
So we have multiple we can talk about GIS and GBS separately for a moment. In the GIS segment, our bookings have been influenced by selectivity and discipline on engagements. So taking a more disciplined approach there. And also those are larger renewals and new opportunities that are kind of lumpy in nature. They come the renewals come along in cycles. So that's kind of influenced the bookings so far this year and will continue to influence us through the end of this year. In the GBS segment, we have seen the industry has affected us. In the first half of the year, particularly, the bookings were lower than historically. We in the third quarter fiscal third quarter, we saw improvements. We expect to see those improvements continue into the fourth quarter.
So it's a sign of improving demand in an industry that has been impacted economically. Now, I would say that the projects themselves, the implementation of those projects are not at the same level as they have been historically. Customers are being cautious on start dates and rate and pace of implementation. So the good news is the demand is improving. And I would expect that the yield will get back to historical levels as the economy continues to improve in the industry.
I think the key there is a rolling 12-month look at it.
Okay.
Because some of the projects are shorter term, one, two, three quarters. Some of them overlap over multiple years. So I think historically we've kind of used this number, but I think I'm coming up to speed again, trying to get more granular on what the rolling 12-month forward looks like backward. And it is going to have, especially going forward because some of these are larger, longer, efforts with that are multi-staged, right?
Right.
That's the other point: it's not just in the start date, but the complexity and, you know, no matter how good you are at planning and executing, but there's two parties here that, you know, you're working with a counterparty, the IT department or a business unit on the other side. Other priorities come in, maybe delays you a little bit. So, again, it's a forward look, and it's then a backward look too to see historically, you know, has this burned off in the right period of time, or should we be focused on a subset of the bookings that we know will have the impact, the flow through?
Got it. Got it.
So I should have added in GBS, which is the A&E and applications business along with insurance. The insurance business also has very long-term renewals that cause lumpiness in the bookings.
Yes.
Last quarter, we have had a couple of significant renewals. The book-to-bill was really high. Then it'll settle back down depending, again, on longer-term renewal cycles. In that business, contracts could be extremely long-term in nature.
I think the average relationship there is like 18 years.
Wow.
It is really long-term.
Right, right, right. And when you talk about, like, you know, the bookings improving but still having some variance or, you know, people trying to be very methodical about how they're implementing their new engagements, etc., how does that affect your visibility from a quarter to quarter and a year to year? I mean, it seems like, Raul, if you're looking at it on a rolling 12-month basis, it's probably pretty good, but getting the timing right in any given quarter may be a little bit challenging. Is that fair?
Yeah. I look, I think it's, you know, you're constantly optimizing demand, signed work, billable work, work that can be completed with talent, talent availability, and the right mix of that, right? So ideally, you're fully aligned. In some cases, you know, when things are great, you've got much more demand than you have people to do the work, so you're able to, like, you know, rotate them around. When you've got more people that in the right place than the actual work, then, you know, that's where you've got to really fine-tune this and make sure that, you know, you've got enough to complete as booked, but you also don't overstep on the hiring side, and create cost issues that are out of line with revenue realization.
Right, right, right. So what about, you know, the other part of that Denyeau of that key top line dynamic is obviously pricing. And can you walk us through what you're seeing right now across DXC's core offerings and pricing? And what areas do you see relative strength and weakness as it relates to pricing power? And is that pricing power variance DXC specific, or is it just kind of the reality of the industry? Just any color you can give us, sir.
Sure. I think where you have a cross-section of work that you do that has a combination of the technical skills to implement plus a really deep industry expertise, that is where I'd argue in any business you can have more pricing power because you've got a two-dimensional set of value that you're bringing. And where maybe it's more generic in terms of the kind of work, not necessarily industry specific, that's where I think there's more competition. There's not just more competition, but there's less pricing power on the side of the providers on our side.
Yeah. No, I, I think that's exactly right. And, also with, with the portfolio of longer-term outsourcing contracts in the GIS segment, you have less flexibility in pricing, right? That was just the nature of the business and the nature of the contract backlog. And that's common in the industry. So your opportunity to improve is upon renewal, right?
Got it. And on that, Rob, just, like, how should we think about margin trajectory and what moves the needle there and over what time frame?
Yeah. Our margins for the last several 2-3 years, if you strip out the impact of pension income, which has been declining as we've taken action on our pension plan, the underlying margins of the business have been stable for the last three years. Now, that is with the challenge of the declining revenues in modern workplace and outsourcing. So the team has done a good job of managing the cost structure of GIS along the way. And in fact, our GIS margins have improved some over the last year or so. In GBS, the margins have been better than GIS as you would expect relative to the industry talent that we have there and the value we provide.
It's that those margins have also been stable, but we have room to run based on our internal position and profile of those businesses. You know, from a comp that's the comments we made at the beginning of this discussion on KPIs and managing the business at a detail level, each business unit at a detail level will yield margin improvements in the GBS business over time. So there's room to run there.
And when you say over time, how quickly do you think you can start to manifest that, or what are the conditions that you need to see to at least be able to demonstrate it?
Well, I think it relates directly to the discussion we've been having on pricing power, where we have skills and having a disciplined approach to pricing, resource management, de-layering overlap between the business units because we run geographically instead of by business unit basis. So all of those actions we have underway, and we're, you know, we're starting now. So I'm expecting to see a nice progression over time.
There are things I've seen in other tech services companies that I think there's room for improvement here.
Okay.
So, you know, as you complete an engagement, you know, you come together. Obviously, the team comes together. And if you do it on a rep the same kind of engagement by industry or by horizontal, you tend to be able to develop some replicable procedures. So, "Hey, we're going to run this engagement this way, and it's going to be more efficient, faster, therefore hopefully more profitable, for us." As you do that, you also tend to, again, if you're focused on trying to harness experience and value, sometimes you're able to get replicable code and replicable designs. Sometimes that may turn into IP that you can actually license later, over time.
But that whole getting faster, getting stronger, getting by the repetitive and learning from it and then saying, "Hey, here's what we're going to do," as again, in Spain, good example, there's something that we fielded as a one-off as that he's calling testing as a service, but he's now wrapped it up internally as something that we can sell in a more structured way, an engagement, a, a, a set of procedures. So from point A to point B, here's how we're going to run it. And now we're starting to look at, well, what code can we keep bringing to the next engagement and therefore make the engagement more profitable for ourselves?
So, Raul, I want to talk about, you know, there's a lot of strategic activity that's going on right now, obviously, or at least, you know, you're thinking about changing some different things. But how are you feeling about the leadership team and anything that you need to other incremental changes you want to make there in the different business units? And what areas of the businesses should we expect that you're going to be trying to highlight to clients and investors?
Sure. I think if you look, talent is key in all of our businesses, right? So obviously, keeping the talent you have, looking for where you can bring in other team members to help augment the team is an ongoing thing. So looking for talent in our businesses, you never stop. But I'm super happy with the leadership that's there at all levels. I'm going to strive for more diversity in our ranks. We're a global company, and I think we should reflect that global footprint in a different way. So that's one of my personal hot buttons. But we've got an opportunity, I think. Whenever there is something new that's hot, by definition, there's no expert because it's new. And so AI is one of those areas.
As I look through the 60 active AI projects we have globally, we are blessed because if you step back and think about it, those that will be early users, early adopters, early experimenters are entities, enterprises that have really large data lakes, really large amounts of proprietary information that they can segment, that they can use without IP and infringement issues. And that's most of our customer base. So as a backdrop, our customers are the kinds of customers that will be experimenting, that will be using, and that we wish we should be leading with AI. And again, because, like, I did this starting back to 1.0, so I came from a client-server world to a web 1.0 world. There was nobody in the lead because it was brand new.
And so that's the point we're at right now with AI. And it gives anybody, whether it's a huge company or a startup, an opportunity to gain some credibility based on real, you know, deployments, that.
So last couple of questions so we can kind of know where we're starting from here. You know, can you remind us what percentage of revenue would you characterize right now as on-prem versus cloud? And where do you think the ideal mix of that should be, in order to remain competitive in the market?
Yeah. I haven't dug deep on that.
Yeah. So our profile and that question is more pertinent for the outsourcing, for the ITO business. And so the majority is clearly on-prem for us.
Right.
Right? And the cloud services, cloud-managed services-based revenues are growing. We're skilling up. We're forming relationships. I don't know if you've seen the AWS relationship that we recently formed.
Yep.
We're improving our hands substantially there. We're expecting that to grow into the future, but it's still, you know, it's still a minority of that revenue stream.
Got it. Got it. And then, you know, you mentioned, Rob, in particular, you mentioned, renewals and, and that kind of thing. You know, right now, what is that rough mix of net new work versus renewals? And, and in particular, what are some of the conversations clients are having around renewals? Where do you see, clients leaning in versus pushing back? Just trying to get a sense of, like, what those conversations look like.
Yep. And again, this varies by business line, but in outsourcing and modern workplace, the bookings we've had since I've been there have been predominantly renewals. Some new logos, but again, a minority of the bookings have been new logos. In those discussions, I'm happy that the terms and conditions and pricing we've been very disciplined in our approach. But because of the service delivery quality, the renewals have been, you know, very, very high renewal rate. Same in insurance, where again, the longer-term contracts, the renewal rates are extremely high. Terms are not deteriorating. Pricing is not deteriorating. So that, you know, is very promising for us and again, a sign of our discipline.
In the applications and A&E businesses, there's a fair amount. There's a really healthy mix of renewals and new customers. But again, the renewal rates there are, have been good, have been strong, particularly in A&E where we have the engineering talent. Those renewal rates are very high.
Last question, Raul. You know, been here. You said 76 days. I'm going to round up because this is if this is a 76-day. But, you know, as we get past this quarter and into your next fiscal year, what are the key benchmarks or to-dos that, you know, you think that investors should be looking to you and, and holding you accountable for?
Yeah. No, I think we are going to be deeper, better at describing the metrics, and the differences of each individual business unit. So as we get into the next period, obviously, historically, we still talk about the buckets that we've talked about. But as we go deeper into those business units and the types of metrics that I'm having weekly reviews on, we're going to share some of those insights so that we can all see, like, how do you define success? Well, this is how I define the first level of success. So that more, more, more detail coming, because now we're getting into, you know, things that haven't been out there, so we're not going to jump into that.
But much more detail coming and the appreciation of the value of the six different business units, where they're coming from, where they can grow, where they can go, and what they look like both on a public comp-company basis, comp basis, and a private company comp basis. That's part of the storytelling that I'm digging deep into. And that's where I see a tremendous amount of opportunity. That's where I see a tremendous amount of value. And hopefully, as we both execute on that opportunity, we'll, we'll get the value and, and hopefully get some credit for it as well.
Love it. Raul, Rob, John, thank you very much for joining us and helping us kick off the TMT Conference.
Thank you so much.
Appreciate it.
Appreciate it. Thanks.
Thanks.