This clock is ticking, so we'll get started. This is the DXC Technology session. Thanks for everyone for joining. My name is Tien-tsin Huang. I follow the IT services sector here at JPM, and really excited to have the DXC team. It's been a while since we've had DXC at the conference. It's a name I've covered for over 20 years. And so a special place in my heart to always follow DXC, and with the new management team here, means a lot to me. Raul Fernandez, President, CEO. Rob DelBene, CFO. Thank you both for being here.
Thank you.
Thank you.
Thank you so much.
So I'll get into the questions. We'll open up to the audience, but I thought, Raul, I'd start with you, right? You come to DXC with a really interesting background. I think I asked you this a couple earnings calls ago, but I think it's worth saying again, right? You're a founder, entrepreneur, CEO of Dimension Data, a name I'm familiar with from the old days. You're an investor, you're on the board of Broadcom, GameStop, and of course, co-owner of Monumental Sports. I'm a Virginia kid, so that's close to home for me. So that's a pretty unique blend of things here to help you lead DXC. What does that help you, or how does that inform your thinking around DXC, and why did you take this job?
I'm sure it was something that you, you strongly considered, and you took it head-on. Maybe start with that.
Great. Well, thank you. Yeah. So I took an interim role, coming in and stepping in, and really my goal in the very beginning was just to bridge it, and as I got deeper in the first 45 days of being there, meeting with customers, meeting with employees, meeting with partners, looking at how we were operating, go-to-market, back office, I quickly realized that there were many ways to win. That the next chapter was about doing things that should have been done 7 years ago, you know, at the combination of CSC and HPE into DXC, and in some cases, as you said, even before then, right?
There's some legacy, legacy, legacy systems that come stacked from the CSC days, et cetera. I put together what I call a 23 and me chart of the company, which is all the companies that make up the company that we are today. And it's a great, deep, rich heritage of technology companies that have disrupted in the past. But unfortunately, the management teams in the recent history have not stepped back and done a proper and complete reset of business systems, reset of legal entities, reset of all of the back functions that support all of those things. And that became glaring to me as something that I didn't fully appreciate as a board member, not until you really dive in. And so I saw a lot of opportunities. So it's not about doing one or two things better.
It's about doing about 50 things better. And all 50 things, you'd think, Oh, wow, that's a big list. Is that manageable? It's almost like a punch list, you know, as you finish a house. I need to get this thing done over here. Then I need to get a totally different thing done over here. They all may not matter in isolation. They all may not make that house better in isolation, but when you put all 50 together, it takes an okay house and makes it a great house, and that's what I'm doing operationally: transforming, fixing a lot of the things on the back end while performing, executing on better client-centric delivery.
And again, I'm 5 months into this, so at month 2, after I realized it, I also looked around our management team, and I said, "Hey, we all have full-time day jobs running the functions we're running, but it seems like there's a full-time job here to really keep us on track to transform. So if any of you can do this as your night job, raise your hand." Nobody raised their hand 'cause everybody's really, really busy on what they have to do. And I said, "Okay, we really need to bring somebody in that's gonna keep us honest, on pace, on track." And that's when we came to the conclusion we needed a transformation officer. Patrick Thompson, who you can read the bio, we were able to find a couple of great candidates really quickly and move very quickly.
I think one of the things that I've learned, going back to your question about working with super big companies that are best in class at acquisitions, integrations, growth, like Broadcom, some that have been melting, you know, icebergs or ice cubes, and I got off the GameStop board right at the-
... frenzy, is that I've seen the best and I've seen the worst. And I've also seen speed, and I've seen, you know, less than optimal movement to, to try to address that stuff. And so from, you know, working with very small startups that have all the great things of a small startup, figuring it out, doing it, just finding an answer, to very large companies where there's more of a command and control structure, I think I've been able to leverage from that experience base and try to bring the best of in the right place at the right time. You can't infuse that in all places. You can't just go: Okay, everybody act like an entrepreneur. That doesn't happen. You can't snap your finger and change culture, but you can do it slowly. So opportunity to win in many different ways.
Talent, I looked around and I said, "We have got some really good people," and especially with customers who, in some cases, we may have had a rocky road in the past, very, very satisfied, very happy, where I saw a good foundation of what we were doing to grow more in that account and, more importantly, to grow other parts of our offerings in that account. Every time I meet with a CEO, I obviously know what we're doing for them now, whether it's an ITO, ITO work, orM modern Workplace or Security, but I always come up with something that, "Hey, do you know that we do this kind of work as well?" And I'll bring it up, and I'm shocked, and I'm like, at the 99%: "Oh, no, I didn't know you had that capability as well.
“Can you send somebody?” So cross-selling, storytelling, packaging up the great legacy, the history, and the current great work that we do across our client base, and using it internally is, again, one of those levers that's pretty small, but if you pull it, it along with the other things you're gonna pull, will make a big impact.
Okay, good. I figured—I threw this question in there because I thought... I do wanna expand on everything you just talked about, but when we talk to investors, the skeptics will very easily say, "It's a legacy services provider that's in perpetual turnaround mode." What's your response to that, and why this is gonna be different this time around to shake the stigma?
Yeah. So for sure, there are some things at least that I saw, and I see, and I'm working on right now that should have been done.
Yeah.
So the turnarounds or the restructurings that were done in, let's just say, the short 7-year history, right? As a standalone entity named DXC, there were 5 enterprise business systems when the first CEO took over, there were 5 when the second CEO took over, and there were 5 when the third CEO took over. They're not gonna be 5, you know, at the end of my tenure. So again, one thing that was basic should have been dealt with the first 100 days or the first 9 months was not done, and that's a big thing, right? With an enterprise ERP system. And then there are a bunch of little things like that.
So I do think this is a real reset on fundamental work that was never done before, along with a real reset to rebalance our global footprint and costs with the current economic environment. Having said that, once that's executed, you know, I feel like we've handled the things in the past and therefore, we have a stronger foundation to grow off of.
So the fact that it hasn't been addressed, the five enterprise systems, is it the risk of actually executing this and getting to one system very difficult in your mind? Is there execution risk in getting there? I know that's what you guys do for a living.
Yeah.
But at the same time, this, it's a lot, you know, given some of the historical M&A of the company.
No. It's from a technology standpoint, it's not-
Okay.
... it's not harder than anything else we do every day. I think it's a combination of not having both the leadership and the follow-up and the consequences for not doing certain things. And, you know, when you stack things on top of each other and you don't go back and go deep, they tend to get entrenched, they tend to get a whole culture and life to themselves, and that needs to be broken and needs to be dealt with. And that's what we're doing.
What's the timetable on getting some of the systems into one?
Well, we don't have an... We're not publicly announcing the-
Okay
... the end date of that. But, I can tell you that the work's happening immediately, and again, going back to having somebody that is literally-
... every day, every week, every quarter-
Accountable
... accountable is huge for us.
Agreed. No, that's great. So one of the things when you first got on the call, I underlined it, and I put it down in my question list: enhanced execution was something that you referred to quite a bit. What does that mean, and how might it change DXC for the better?
Yeah. The mix of the people that come together to engage with the client, both for current delivery as well as net new opportunities, and the operations, whether it's sales operations, business operations that support them, is not streamlined, is not optimized for, you know, it to the right size. And so streamlining kind of that supply chain of what we do and engaging with a customer to deliver what we've won or to deliver something that we just won, is a lot of enhancements along the way in every business group that is responsible for that. And so, again, it's a different way of saying a lot of different changes across the board, both on the perform side as well as the transform side, to deliver a better result at the client.
Obviously, keeping the client-centric, being profitable, and then ultimately being in a better position to grow.
Okay, good. I like it. So let's dig into the business a little bit, and then we'll come back to some of the numbers and, and get Rob into the conversation. So let's, let's start with GBS, if you don't mind, and you should know this well, of course, given Dimension Data, but what is DXC's right to win in, in this business? I know it's very competitive, both in terms of winning customers, but as well as attracting talent.
Yeah, you know, one of the things that, that again, I, I was in going around the world and going around with customers, meeting very happy customers, meeting customers that are happier now than they were before, meeting customers that had some issues, that, that we've got talent and access to talent. Are they optimized? Are they in the right geographies? Are we... You know, no. I think every service organization goes through that on an ongoing basis. It's not something you do once a year. It's something you do continuously. We need to do a catch-up. We also need to do a consolidation of all the geographies. Again, there's another item of not going back and saying: What's critical mass? How do we define success for critical mass? Do we have it here? Okay, we do. Keep it.
If we don't, then what do we do with, with the geos that are not part of that critical mass or not critical for us to be successful? So the skills are there, the reference ability is there, the history of the relationships are there, the existing contracts are there. One of the things that has been failing is, again, this cross-selling. So from a, do we have the fundamentals to compete? Yes. Do we have the fundamentals to compete at a higher level? Absolutely, we do, and that's on us to apply some better and best practices that we have from other businesses. And that we have the demand? We absolutely do. The demand is there.
I would argue that for us, the issue is less anything macro, and the issue in the near term is just getting better organized and operating better. At some point, after we've cleared that hurdle, then yes, macro issues will start to put into— But the first hurdle is self-made, that we need to, that we need to knock down.
I see. Right, 'cause I got that question quite a bit. The second-half outlook with GBS getting better-
Yeah.
Is that a macro-dependent comment?
No.
It sounds like no.
It's not a macro-dependent comment. We're just looking at our performance historically, cyclically. I'll let Rob comment a little bit on the cyclical nature, and then just the momentum we had coming in and how we see that momentum burning out or burning down in terms of wins-
- second half versus first half.
Yeah, that's right. Our bookings in the second half of fiscal 2024 were better than 1.0 in-
Yeah
... in GBS, and they were strong, and we think that'll, that will help in the second half of fiscal 2025. And also, our, our pipelines have improved since the beginning of the fiscal year. So those two factors are why we guided slightly higher in the second half for GBS.
Okay, good. So digging in further, the GBS, the analytics, engineering, and the applications business, that's now being reported as Consulting and Engineering Services. I know that includes the Luxoft business. We've had some of your-
Yes
... competitors there at this conference. Why the change in this structure, and then how would you describe or what's the identity of Consulting and Engineering, if you were to describe it succinctly?
Yeah. I think it's next-generation technology skills and people dealing with digital challenges that aren't necessarily legacy issue related, but more growth. How do our customers attack markets more effectively? How do our customers deal with the whole supply chain of what they do from-
... B2B to B2C?
It is, today, a combination of some applications that are one-off. Tomorrow, they'll be more enterprise. They'll be tied to more enterprise rollouts with partners such as SAP and ServiceNow and Microsoft. But they are best in class for any digital challenge that your company or entity may have, globally, and that's the other thing they appreciated, that it is big, and there's negatives with being big, but there are certain positives where you can have presence in, you know, many geographies. In, you know, still in our hybrid world, presence matters, and being in front of the customer matters, and being able to make a difference and show up and show and do, you know, and show what you're building matters. So that's another positive that we've got.
Got it. On the call, you mentioned that the consulting and the engineering business had below-average margins.
Yep.
Why, why is that?
Yeah. So one of the things that I did in the very beginning was I looked at every business unit, and I said, "Let's just pick the comp group that you're gonna be measured to." So ITO, Modern Workplace, let's look at Kyndryl, let's maybe look at Unisys, and let's look at what's best in class there.
... and what are key metrics, and then measure yourself against it. Then do a gap analysis, and then say, "Okay, how are we gonna close this gap?" So first thing we wanna do is close the gap to get to average, and then after that, use that foundation to go above and beyond that. So by every business unit, we've picked in the consulting and engineering, engineering and consulting services, just as a reference, you know, the EBIT could be at a higher level than it is, and should be, and so we're targeting that. We're targeting, you know, gross net margins, billability, utilization. Like, you think about the full dashboard of metrics. We can be operating that at a much better...
I'd say that across the board, the only one I'd say is operating at a really good level, therefore, the investments on hypergrowth and mixing the margin or mixing the flavor of revenue is the Insurance business.
Right. Well, before we get into Insurance, just to be clear on the consulting side, the restructuring that you talked about, was there any revenue-producing headcount that was impacted within that?
Revenue-producing?
Yeah.
No, I mean, I think in the past, there's been a tendency to not look enough at non-revenue players in reduction and kind of ignore-
... back office functions that are duplicative, et cetera. Now, we're taking a very fresh look at the operation support and what's the right mix, and balance and ratio there.
Yeah, and it ties—this ties back to the comments about systems and processes and having disparate processes more so than systems. We've had several different people management systems, resource management systems, so the consolidation of the proper common processes, consolidation of systems, will allow us to get better utilization in that business 'cause our utilization is below par. So we have room there to reduce the structure without impacting revenue-
Okay
... and also have a very sharp focus on app, on enterprise applications as opposed to custom applications, which is a majority, two-thirds of our portfolio today. So we have room for portfolio improvement there as well, and, and both of those will contribute to margin improvement.
Good. So it's not, to close it out, it's not your subscale issue. It's really-
No.
That's right
... fixing some of these issues around... Okay.
That's right.
So let's do insurance. You mentioned it, Rahul. We've always said, and I think others have said, you have said it, that it's an underappreciated asset. Software, three-quarters of the business is growing mid-single digit. You are the industry standard on the insurance side. It sounded like you have a plan to enhance growth, and then if I heard it correctly, embrace SaaS across a broader enterprise. So tell us about how you get there.
Yeah. So if you break down the insurance business, and I'll let Rob comment on the macro number and then the number I'm talking about, which is about $1.2 billion. That got a couple of really interesting attributes. One, a 95%+ client retention rate, an average customer tenure of over 18 years-
... a good footprint in three out of the four major types of insurance products, and then a full life cycle support. For an insurance company, we handle the full life cycle, from capturing the customer, to delivering the quote, to delivering the policy, to handling the claim, to doing the payout. The full life cycle, both from a software standpoint, from a business process standpoint, and in some cases, from actually a people standpoint, answering the phone. So if you think about that, we've got a great footprint as a holistic end-to-end partner with many global insurance companies. We're missing, you know, we're not present in some parts of the world that we should be, and that's an area for growth for us in the insurance business. And then the other thing that's interesting is that the mixture...
First of all, if you define software, traditional, license and maintenance, SaaS and recurring services, so services that are recurring, and so they're not project, it's not project work, so it's a step above project work. 80%+ of the business today is in those three categories.
Okay.
So highly recurring or reoccurring. So then, if you look at the mix, and I've done this in other companies, in smaller, you know, companies where we come in, and it may be two-thirds professional services, one-third SaaS. By the time we sell the company, it's two-thirds SaaS, one-third professional services. So you're getting value creation on growth, and you're getting value creation on the rotation of the kind of revenue, which inherently, with SaaS, is higher margin, both gross and net. So that's the playbook, is we have a great base, we have a good mix. That mix can be better, and the other thing that made me feel very encouraged is in order to make these changes at customer renewals in contracts, you have to have great relationships, and I've never seen a business unit that has such great relationships with the end customer.
We hosted a massive conference in Charleston, and I was just shocked at... It was a user conference. I was just shocked at how great, collaborative, and open our teams and our customer teams were. So we're uniquely positioned to accelerate growth there.
Okay, and the last one on this, the growth algorithm with this transition, can we expect it to be smooth, or could there be some volatility as you make the transition? Because the payoff makes a lot of sense.
Yeah, I'll just comment on the growth rates, just to provide clarity.
Please.
Today, our insurance segment that we report externally is about $1.6 billion in fiscal 2024. That includes about $400 million of non-insurance related BPO services, HR, finance. So we're extracting that out to give better clarity on the $1.2 billion that Raul was just describing. That $1.2 billion business grew in fiscal 2024 at about 7%, and our expectation going forward is that we will be, for 2025, is that we'll be at that mark or slightly better in fiscal 2025. So consistent growth out of the business.
Good. All right, let's do GIS before we do Gen AI, and then we'll open it up to questions, of course. So GIS, I think on the call, you talked about a goal of getting to market growth in the negative single digits, low single digits. My question here is, can you get there with the assets that you have in place, or might there be some changes in the portfolio to get to market levels?
Yeah, look, I think my focus is on everything that we have. We're gonna make and get to a better place.
Okay.
That's the mandate. That's what we're focused on, and there's... You know, some have a longer journey than others in that game plan. With both ITO and Modern Workplace, shrinking at a faster rate than some comps, so the first goal or the first marker is to shrink in line with the comps. When we get there, then the next goal is to say, "Okay, how much better can we do?
Right.
But the first goal is we're clearly below average. We know why we are not gonna be chasing revenue for revenue's sake. We're gonna make sure that while we're going after competing and winning, we're also doing it with the right financial metrics that bring us margin, bring us free cash flow. But we do know that we can do better on the growth or, again, on, in this case, it's decelerating at a slower speed than what we're at right now. Modern Workplace is interesting because it's smaller.
Yeah.
There are some, one of the things I've been surprised at is some rather large, you know, opportunity A, opportunity B, that are active and real, that if one could, could take you close to break even in a, you know, in a pretty short hop.
I wasn't thinking that that'd be an opportunity. I'm not saying we're gonna do that, but at least, I can see a path to getting, you know, like, literally, you know, we can win this or this or any combination. You're getting closer to it.
Right.
So in terms of additions, I think we're across the board, we have what we need, and we need to make what we have better. In terms of any of the business units being in a position to be M&A ready, and by what I mean by that is to be to buy something, to make it accretive, to make it add value, to keep the key people, to keep the key relationships, the key contracts, to build value off of it, to have, you know, a great by any measure, ROIC, whatever measure, outcome. We're not structurally ready for that because we're not, you know, we're, there's still inefficiencies in our operations.
When we get to being structurally ready by business unit and by back office function, then absolutely would look to fill in where we need to fill in. That may be geographic, that may be specific products, with insurance as an example, that may be with technology to accelerate some, you know, internal stuff that we're doing, but right now we're not ready.
Okay. Last one on GIS. Just across the bigger subunits of security, you mentioned Modern Workplace, Cloud Infrastructure, ITO. Where is there the most room for improvement? Anything to call out across the big names?
I think one of the things on security that I don't think I mentioned before-
Yeah
... is that the go-to-market sales motion of that division was to be sold along with contracts that were being originated by ITO, Modern Workplace, and then in some cases on the consulting and engineering side. But it didn't have... I was shocked, it didn't have its own sales force.
Yeah.
Given the professionals that we have, given the type of work that we're called in to do for major brands, it shocked me that we didn't go to market just with the offering and sell it by itself because we have capacity, we could scale capacity, we have reference ability. So we brought in some proven industry leaders that I knew through reputation in other companies, and they were in the process of, even before I came on board, looking at the opportunity and going: "Wow, this thing is something we could grow faster." And so they're on board now.
I think the security offering, obviously, given the backdrop of demand and given the reference ability we have, is one where I've got hopes that new people, and again, unleashing their ability to sell direct, separate, along with still selling combined, will give us some positive impact there.
Yeah. No, I would think so. I mean, I think security and sort of the history of the company have always been there, so selling and staying alone, I think, would make some sense. Okay, good. Any questions from the group? Happy to take them. I think we have a mic runner, right? Yeah.
Hi, thanks. So I heard two points here that I'm trying to connect and make sure I'm not misinterpreting. I heard that two-thirds of the portfolio are built on customer applications, but then I also heard our customers love us. And so when I hear that, I almost wondered, have we set expectations with the customers that they speak, we listen and run back into the organization and build things regardless of our scalability around those? So are there changes in behavior that you have to have in your customer-facing units? And then the second part is: Are you going to start changing expectations with your customers, where they may have some reaction to that?
Can you just repeat the first part? I didn't hear the first part.
Yeah. So you said that you have two-thirds of your applications are custom apps.
Oh, in the part of consulting and engineering.
Exactly.
Got it.
So often that can be, "Hey, we," you know, they speak, we run back after we... our tips of our pen have been speaking-
Yeah
... in a client-facing session. We run back in, we tell everybody, we need all this stuff.
Yeah.
We don't have any filter mechanisms internally to stop.
Yeah. So it's a great question. I think what you described is definitely a pattern that was there in the past. And one of the things that I learned in this business is if you've built something once, and, you know, obviously, it's not a product, it's a solution, it's a service you dropped. By the time you build it the second and third and fourth time, and by the way, if you built it once, just for somebody big, it probably can be sold a few more times, is that you begin to package it up and productize it. And productization has, you know, it's a wide spectrum, right? It's a replicable way of discovery upfront. It's now replicable codes. It's now replicable methodologies. Now, it's maybe some code base that you can actually license separately.
So to answer your question, definitely chasing anything anybody wants on an app, that's not what we're doing. We're doubling down in some industries where we've done some things in a repetitive way, automotive, in-car, where we've got frameworks that we've built, that we can say, "Hey, we've done this now a few times. The next time we go deliver this for somebody or the next time we deliver the next version, we're building off of scale, scale of experience, scale of code, scale of process, and scale of people doing all of the above." So, I think it's a good call-out, but we're not doing it that way.
We're trying to build on a replicable framework, and there is a lot of room there for us to be even more disciplined there and sell more of what we've deployed in one place and is clearly making a difference, whether it's bank, on the capital market side, or somewhere else, there is a big opportunity. So I'm sorry if I gave a misperception that it was a one-off app development, you know, part.
Anyone else? I want to make sure I rapid-fire some questions that people asked me to ask, if that's okay. So let's do free cash quickly. So you've been running over $370 million free cash for a period this year, $400 with the restructuring, and then back to $700 again.
Yes.
The questions we got there were: Why are you pausing buybacks after-
Yeah
... a heavy period of repurchasing for the last 2 years? And then why is it important to maintain Investment Grade?
... Sure. So first point on the last two years, we did return to shareholders in excess of 100% of our free cash flow. So we were heavy into share repurchase mode. Our three capital deployment priorities for the company are investing in the business, maintaining investment-grade credit rating, and return to shareholders. So we're overweight on return to shareholders. For 2025, we've hit the pause button there for the time being, and we're gonna focus our efforts and our restructuring funding. We're using $250 million of our free cash flow generation in the year to shore up our EBIT margins on a sustainable basis, and we're gonna do that by all of what Raul described early in this meeting. So we're gonna go deploy that capital to reducing our structure.
The second component of the change in 2025 is to pay down our debt by pausing on capital leases as well, not having capital leases, new originations in the year. So that's a form of debt reduction that's important to us to make sure that our credit status stays strong. And in this industry, many of our contracts have credit clauses. So in outsourcing and application management, where you're servicing core, really important processes, the hearts and lungs of our customers, they wanna know that you're a company with staying power and you have investment, you know, capacity to maintain the service levels over time. So it's really important from that perspective to maintain Investment Grade credit rating, and we're committed to do that, and the actions we're taking in 2025 demonstrate that.
Once we get past the restructuring, which will increase in 2025 and come back down to low levels in 2026, our free cash flow generation will return to fiscal 2024 levels, and we're confident in that.
You know, it's interesting. I think it's also a rule of being big. When you're big, you're held to a different standard-
'Cause I've... Obviously, I'm involved in small companies, big companies. So for the big companies, we're big, big companies hold us to a different standard. At the same time, they'll turn around and they'll buy some really critical stuff from a Series B cyber company that's super hot, that absolutely has no investment grade, and they're trusting that. So I do think it's part of we're in this weight class that we get, you know, measured differently, but that same buyer is then going off to a company that may not be there in one round of funding, and trusting their systems to it. So it's a great question, though.
Raul, I know we're out of time, but I have to ask you. A lot of people asked me to ask you, just quickly, Gen AI, how do you see it impacting the industry? You've been in it for a bit. How will DXC leverage it?
Yeah. So if you think about, especially in Modern Workplace, and I'll use that as an example, we're handling 7 million devices. Those devices are attached to people. Those people have issues, those people have questions, those people have tickets, those people need resolution. Today, some of it's automated, some of it's machine learning, but tomorrow, highly focused, whether it's Copilot or whether it's some mix of other technology that is taking a small language model of questions and answers and developing a great agent that can answer the question, resolve the ticket without a human in the middle of it, that's a good example of how we will use it.
How customers are using it, and again, this is very early days, is really across the whole enterprise, and I think one of the things that we have, not just the technical skills, but we also have the understanding of how business processes need to change around the technical skills. So it's not just you can do this multimodal thing now in AI, but how is the whole process of doing it gonna be different than the way you do it today? And that's where our higher-end services, our business process services, plus our technology services, puts us in a great position to be a partner there.
Cool. Good. I think we're out of time. We'll stop there. Thank you for spending a few minutes with us.
Awesome. Thank you so much.
Enjoyed it. Yep.
Appreciate it.
Thank you.