All right, we're gonna kick off. This is the DXC session. My name's Bryan Bergin. I cover IT services, fintech, and payments here at TD Cowen. Thank you all for joining us. Very pleased to have with us from DXC, CEO Raul Fernandez, and CFO Rob Del Bene. Guys, thanks for joining us. Thank you.
Thank you.
Appreciate your hospitality.
So let's kick off with really an intro and a background question. So Raul, I think it's important for us to understand, you know, given you formally became CEO earlier this year, maybe spend a little bit on your background, and then, you know, you did step into an interim CEO role.
Mm-hmm.
What was kind of the pitch to... The realization of, "Okay, I'm gonna take this to be full-time CEO- Sure. -and what was the kind of the pitch to the board initially?
Yep. Yeah, yeah, yeah. Let me back up a bit. So I started... I got a chance to start my professional career, like, literally with three engineers and myself doing pre-Web 1.0 work, client-server development, custom app development. You know, right place, right time, internet, grew the company dramatically.
I started it with my own money, got some private equity money in. We grew it, took it public, sold it. So the whole life cycle of pre-sales, solutioning, delivery, people, you know, I've lived it, right? From zero to, I forget, like 3,000 people, when we sold the company. And M&A, and all that sort of stuff. So I've, you know, as a practitioner, I did this. It was a couple of decades ago. Since then, invested in different tech companies, media, sports, entertainment. I've been on a bunch of boards, including Broadcom, GameStop, Kate Spade, so diverse background on verticals. And, you know, I was on this board, and you really do... You know, now I've been on both sides a couple of times. Whether it's public or private, it's two different points of view.
When you're inside and operating, you get a completely different point of view, no matter how active you are as a board member. And so when I stepped in in late December, you know, the first thing I did is met with our customers, started meeting with our employees, started looking at our systems and our processes, and quickly realized that there are a lot of things that I've seen done better in other organizations. There are a lot of things that were being done better by competitors, right?
If I take every business unit, and I say, "Okay, what are your comps?" You can isolate metrics, and then you can measure each business unit metrics against, like, best-in-class and see what the gap analysis is, and then figure out, you know, what you need to do to at least get, you know, first to average and then above average. And it just. It was a realization that there was a lot of work to be done, but none of it was rocket science. It was very basic execution. It wasn't one big lever to pull. It was a lot of little, you know, dials to turn and levers to push and to pull.
And it really spanned the whole organization, so everything from the people side, utilization, where they are in the world, what skill sets, to pre-sales, to solutioning, to delivery, to upselling, to renewals, so, like, really looking at the whole life cycle, and there's a lot of things that we're working on now to get better in class. And then, you know, I met with three dozen customers since then, not in that first month. And just walked away every time with appreciation of the work we do, that's really mission-critical. I think that term gets used a lot, and but in this case, it's really critical to the companies that we provide services for and software for. Trusted partner, long history, in many cases.
You know, this, this is a combination of DXC and CSC, but if you then take the CSC line and take it back in time, it's EDS. It's a whole bunch of companies, right, that have been around for a long time that make up the DNA of this company. I have a 23andMe chart of the company, which has all the logos that make up who we are today. It's pretty cool to see. And, you know, as you know, we came together as a, as an entity 7-ish years ago, and, but as operating companies, like, whether it's on the CSC side or the HP side, you know, we've got client relationships that go back 20, 30, 40 years. And we have employees, I think, one, we were talking about at dinner last night-
Yep
... celebrating fiftieth?
Yes.
Fiftieth anniversary. Fiftieth.
Wow!
Amazing. So again, solid foundation, great customers. But even in interacting with customers, you know, I'd meet with a customer, I know what work we're doing there, and I'd say: Do you know what other work we're doing in engineering and consulting, if it's an ITO customer? And so far, 34 for 34, they're like: "No, I didn't know you did that," so definitely introduce Howard to me, and we would like to follow up. So again, a small example of cross-selling opportunities-
Yeah
... in your accounts. So it hit me that what had to be done was something that I was fit to do because I'd done it before, that I had the energy, I had the passion, I had the confidence in the team that was there, plus new teammates that we brought in.
Okay.
That it was achievable, that it was doable. It was, is something that requires work, and it will take some time, and we will prove it over time. But it is an area where I know bringing, applying ourselves in a better, smarter way and bringing in new talent and keeping us operating at a higher level, we can be in a better place.
Okay, so let's dig in on this turnaround strategy. You mentioned a good example here on really the cross-selling opportunity.
Yeah.
What are some of the other top areas where you have the most urgency up front?
You know, I think in terms of urgency, it is a combination of performing better, so any chance we get to compete, we just, you know, make sure we have the best solution out there, competing on deals that we want to compete with. So some of the things in the past that were heavy on resale, low on margin, chasing revenue as opposed to chasing quality revenue with the right margin structure, we've cut all that off. We've changed the incentive system so that it aligns with more accountability. And everything has a tighter line of sight. So our new operating model has much more visibility all the way through.
And then thinking about the rationalization of, you know, our headcount, our systems, our back office processes, our legal entities. So it's a journey that combines transforming on the restructuring side, and then performing on the competitive side, winning, keeping, re-winning, and getting net new logos.
Okay. Is that incentive structure and that deal, kind of the guardrails around the deal pursuits, has that already changed?
Yeah
It's in flight?
In our, we ran really quick in the first few months, and
Yeah
... and we just, 45 days ago, we started-
Yep
our new fiscal year.
With the new fiscal year.
And you know, we were running, sprinting to get all that documented and out there and understood by everybody. Yeah, now they're all operating under that new model. Then as I went around, you know, I found you know, pockets of excellence and leaders that had done a great job. I'll give you a good example. Our leader in Spain has done an incredible job in Spain. The penetration we have within multiple sectors, banking being one of them, it we punch way above our weight class in terms of headcount.
Mm
... there. And so, you know, he was doing a great job there. He had a great backup, and now he's running all of Europe, right? And we have a lot of upside in other countries 'cause we... If we do one half of what we're doing on a pro rata basis in Spain and other countries, it's a great opportunity to grow. And his passion, his commitment, and his leadership are great to be applied now in a broader context.
Okay, okay. So certain things already changed, other things in flight as far as optimizing resources, optimizing systems, that'll probably carry through this fiscal.
Yep.
From our seat, and we think about tracking and measuring performance, are there things that you would, you know, will change as far as KPIs, ways that you could demonstrate progress to this plan-
Yeah
... early on as we go through this first fiscal year?
Yeah. I'm gonna let him comment on the second piece, but let me, let me just start on the first piece. One of the things we've been doing is, what metrics have we been publishing, and have we been reporting on? What metrics are internal, and then what are the right metrics by business unit? And I'll give you one that we all use is, is Book to Bill. Book to Bill is interesting, but Book to Bill within a context within a horizon, like within 12 months, is the real relevant, right? 'Cause if it's, four-year contract, it's, it My Book to Bill, and, like, what is in front of me for the next 12 months? Do I have enough? What else do I have to go get-
Yeah
... in order to hit the numbers that we're hitting? So we're gonna tweak, you know, obviously, internally run a couple of cycles, and then in the fall, winter, we'll come out and say, "Okay, here's a new set of metrics that we'd like people to look at. Here's how we define it," and start sharing some of the internal results. But that's forthcoming. Go ahead.
Yeah, and I think with the new operating model and with the offer-delivery being completely, totally aligned to the offerings and solution design, and standing up a new sales management team globally, we're gonna have much. We have today, and we'll continue to improve the metrics and measurements of each one of the business lines. Just it's kind of a get back to basics, utilization, resource management, delivery quality, you know, sales performance, soup to nuts. So those metrics are now being plumbed by business unit. Along with the new fiscal year, we're monitoring them on a weekly, monthly, quarterly basis, and then at the right time, we'll give more information externally on those metrics and the progress we're making.
Okay, okay. Then maybe we'll talk about the guidance framework as well.
Sure.
The fiscal year, Rob, you were there for the prior fiscal year-
Yeah
...in its entirety. You step into a new one. Maybe talk about what... Are you doing things differently in fiscal 2025 relative to the prior process? Any way that you've changed the framework as you've developed that outlook?
Yeah, well, one thing that was clear when I joined was that there was great dissatisfaction in the predictability of our business, and we had missed guidance consistently for three years, and that was not acceptable to investors, to the industry, or to us, right? So we are managing the business and setting our expectations to a much greater degree based on the metrics of the business, and we're diving deep into the operational metrics, backlog, pipelines, et cetera, sales, sales progression, closure rates, et cetera. Just all of the basics that you would expect us to manage by, that's what we're basing our external guidance on now. And not leaning into the wind, and not declaring victory in advance, but being, you know, very measured.
For the last three quarters, we've made our guidance, and then we plan on continuing that track record.
Okay. Let's dig in on the outlook now for this year.
Sure.
So maybe the underlying assumptions, we'll start at the top line.
Sure
... as you built the outlook for revenue, what were you under, what maybe under-
Yeah
... each segment? GBS-
Yep
... GIS-
Yep
... what are some of the underlying assumptions there?
For GIS, we assumed that the performance in fiscal 2025 is consistent with the performance in 2024, and that was based on the opening backlogs and our bookings from the last couple of years. So it's very. And that part of our business, which is Modern Workplace and ITO, backlog plays a huge role on the following year's revenue. So that is kind of the basis of the guidance, plus pipeline, et cetera, and runoff of contracts that terminated in the past. We've, you know, gone deep into all of those analytics. Along with that, we assume that our low-margin resale revenue continues to decline. It declined in 2024. We're assuming it'll continue to decline in 2025. So that, that's at the basis of GIS, and so we're not counting on any economic recovery.
It's, it's kind of consistent performance based on the metrics. In GBS, we have the insurance business, which if you strip out the horizontal BPO business, which we currently report in our insurance line, and it really has nothing to do with insurance, it's misplaced, and we're gonna, we're gonna fix that going forward. But that, that's 25% of the business has been declining. That has masked the true growth of the insurance business, and there we grew at mid-single digits in '24. We expect to continue that into '25, and if not, do a little bit better, and that is very much backlog and contract base. We, that there's little disruption year to year in that contract portfolio.
Mm-hmm.
So that's very predictable. In the what used to be A&E and apps, which we're now reporting as consulting and engineering business, we have that comes in multiple flavors, and it's our biggest business unit now. There's a run component, longer-term contracts and applications, and that's also shorter-term project-based works, project-based work, rather, in our engineering business. And so it's a combination of project-based and longer-term contracts. There, we had very good bookings in the second half of 2024. We see pipelines improving in the beginning of fiscal 2025, and we have slightly easier compares on a year-to-year basis in the back half of the year. So with those factors, we have modest increases in performance from the first half of the year into the second half of the year.
First half, we're low single digit negative, which is consistent with performance in 2024, and then in the second half of the year, we have low single digit positive revenue growth, which again, are the three factors that I just mentioned. We think we're grounded in facts here and feel good about the guide.
Okay. Now, as we walk down income statement into cash flow, so margin-
Yep.
The outlook there, it seems like there is some incremental margin pressure in 2025.
Yes, yes.
- despite, you know, you're saying you're gonna walk away from some more low-
Yes
... value, low-
Yeah
Margin resale. So what, what are the puts and takes there on the front?
Yeah, and that's mainly the predominant decrease year to year is a function of the revenue guide.
Okay.
So it's revenue dropping down to the bottom line. So that's, that's the majority of the decline there. Then you move to free cash flow, and we have been at $700 million-plus the last three years. Last year was $750, and we're projecting $400 for fiscal 2025. Now, the strength of cash flow generation has not diminished at all. So same baseline of performance in fiscal 2025, but we've chosen to increase restructuring in fiscal 2025 by $250 billion, and, excuse me, and that's for severance, and that's targeted at taking out overhead and indirect resources out of the company. So we're not gonna impact service delivery. We're not gonna impact sales. It's strictly at overhead. So that's a temporary increase in fiscal 2025 in spent.
The second item that is the bridge between $750 and $400 is we made a decision with revenue performance the last few years. We want to moderate the debt levels, bring them down appropriately, you know, prudently, and so the way we're doing that is by stopping capital lease originations. So we're gonna run all of our equipment purchases through CapEx, so that's a hit to the printed free cash flow number. So those two factors combined are what lead to the decline, and then when we spin forward to 2026, we fully expect to be back at levels of 2024 or better.
Okay. Okay. As far as, are there areas of network and capital efficiency you could also lean into, or have you optimized a lot of what you could?
Yeah, no, we still have room to run in working capital. Our receivables have not really... If you look back over the last three years, our DSOs are pretty stable, so we have room for improvement there. We have room for improvement in cash taxes, and we expect some benefits, you know, over the next, some in 2025 and also in 2026, improvements in cash tax performance. So there are other levers which we're going to exercise, and that's why we're confident about 2026.
Got you. So it's a number of pieces that-
Yes
get you back there. And then as far as the-
Yes
... the finance leases going through CapEx, is that a one-year phenomenon?
No
or are you gonna continue?
No, so the impact, last year, we had $180 million worth of new originations. So that, think of that as the baseline that we are now flowing through CapEx. From our lease payments in 2025 are $275 million. That decreases because we have been bringing down the new originations over time. Now we're just taking it to the extreme and zeroing it out, but over time it has come down. So that $275 million in fiscal 2026 goes a little north of $100 million. So that headwind is going to decrease for us over time here.
So I guess when you get through these initiatives, and you think about working through getting the top line to turn around, how do we think about the capital intensity? When you optimize under your strategy, what's the capital intensity of this business when we think about percentage of revenue type of dynamics?
Yeah, the capital from last year, on a revenue base of $13.5 billion, you know, thereabouts, the capital was, if you include the lease originations, so you have like for like year to year, capital was, you know, in the $800 million range.
Okay.
And so we're going to bring that total down on a year-to-year basis, and so we will be closer to $700 million in fiscal 2025. And then from there, it really depends on the pipeline of opportunities and deals. We will, we will be very disciplined, and we'll not sign up for capital-intensive deals that don't provide a return. But if there are opportunities out there, we'll invest the capital.
Okay.
But you could think of that water level in 2025 as a kind of a baseline, the right baseline.
Okay. And then as we think about, again, on some margin opportunities, so naturally resource optimization, facilities, but offshoring in the past has been something that's been discussed within the company. Where do you stand with that today, and how much room might you still have to change that shift, you know, that mix as you go through the next couple of years?
Yeah. So one of the things that I got a better appreciation for in terms of our global headcount, there's... In some parts of the world, we do work for government agencies, outside not in the U.S., you know, not in the United States. But they require clearances, and they require on-site. So there's a piece of, you know, like a big piece of European-based revenue that is, you could never, you could never do that, right? On others, we look, we've got the right delivery centers in the right places. We have the right talent, I think, spread out. I think the question is, the near-term question is alignment. You know, are we carrying a little bit higher bench than we should in certain circumstances?
The hiring environment is obviously more employer-friendly today than it was years ago.
Sure.
So the ability to ramp up as needed is easier. So, that's a factor in terms of, you know, how we look at human capital and readiness. And then frankly, it just goes back to better planning, right? Better planning, better management of engagements, ramp-ups. We have done a suboptimal job in the past on that, and in fact, you know, did all the hard work to get invited to the competition, be in the competition, win the competition, and so it's very frustrating when I go back, and I see we messed up the ramp-up of people because we just didn't plan it correctly ourselves, so completely self-inflicted.
Okay.
There's a lot of opportunities to operate better. It's just, you know, one word, it's all about execution across the full spectrum.
How much does it come down to IT modernization within your own organization to do that, to better manage the resources?
You know, I think you... You know, going from four enterprise systems to two or one will make the swivel chair less, like... you know, and we can take out more costs than that. But... Somewhat helpful, but it's not a magic bullet. Like, it's just operate smarter, operate a little bit faster, and I think that's one of the things, you know, I've been involved in big companies, been involved in small companies. It's- we're a big company, but we should try to work at a little bit different pace, cadence, and be a little bit more nimble.
Okay.
Yeah, and the opportunity there is also in just getting common processes-
Yes
... in place. So with the integrating the original companies that formed DXC, the heavy lifting on process, running common processes was not done.
Not done.
We invested in the tools, so we have Salesforce, you know, we have-
Pay the license fees.
We have all of... You know, we have the tools that we need. Now we need process discipline, and that's gonna help drive the restructuring because as you get process discipline, you eliminate redundancy, and that's what we're driving now.
Okay. And have you brought in a leader specifically on these initiatives to-
Yeah, so one of the things that, you know, as I was going through this, it was like, okay, there's a lot of work here in everybody's department to de-dupe, to streamline, to rightsize. But as a whole, like, you know, I literally had a meeting, you know, with our management team and said: "You know, I've got... I don't have enough cycles for that to be another full-time job here." So we needed. We realized we needed somebody who had that experience, could come in and help shepherd us every day, every month, every week. And we found a transformation executive who's in and doing exactly just that. So.
Okay
... you know, bringing in the right talent to make sure that we stay on pace on the transformation, and also that we don't, you know, you plug one hole, and something else opens up, like, that it doesn't open up again.
Right. Right. Okay. Okay. Well, let's talk about capital allocation. So over the last couple of years, repo has been number one priority, bought back a lot of stock. Understanding this year...
Yeah
... free cash flow is lower because of restructuring, but maybe just talk a bit about the capital allocation message for this year and maybe beyond this year.
Yeah, our priorities have been and will continue to be investing in the business, re-
... debt, investment grade, credit rating, you know, having the appropriate levels of debt and return to shareholders. So, so all three still hold. But as you said, the last three years, actually, 100% of our cash flow has gone into the buyback. So we diverted, we changed approach this year to get the EBIT margin and dollars on a better course going forward with the restructuring and to get the debt levels down through the change in origination policy. So, so that was... For this year, that's going to be our priority, and going forward, return to shareholders is still really important to us, and, you know, as we go along, we'll, we'll figure out how much is allocated to that.
Is there a minimum cash level or a leverage ratio that we should be thinking about as a target-
Yeah
... before you potentially restart a repo? Or, like, how are you thinking about that?
The way we're thinking about it, that I'm thinking about it for this year is, you know, execute on our guide and then our internal objectives, make sure we have good execution there. We're landing where we need to be in terms of cash, and then as we progress through the year and head into fiscal 2026, we'll figure out the right balance going forward.
Okay.
Okay.
Makes sense. A common question from investors is strategic alternatives, right? And we've heard over the years, different businesses that have been on again, off again to be sold.
Yep.
As you assess the portfolio, what do you... And I know there's data center rationalization-
Mm-hmm
... that's ongoing, but
Yeah
... are there businesses here that could be sold, spun, partially taken in, you know, you know, a partner?
Yeah.
Right. Talk about that.
Yeah, yeah. So, look, I think the one that is the most that stands out the most because of its different revenue mix, higher, higher software mix, could be even higher as you rotate revenue, insurance is, is definitely... It's an insurance tech company. It's a software company, right?
Performing well.
Performing well. Could be, and if we focus more energy, time, could probably take it to another level of growth, and then also rotation of revenue from professional services to more SaaS or recurring services. So that's ongoing right now. But the main goal, because, as we look around, I don't think we said, "Oh, that one's doing good to great, so we don't have to do anything there." It's across the board, it's across the organization. There is a good amount of work in this fiscal year that we can get done to elevate all of the business units, and thus elevate the value of our whole company. And our focus is on that, we have these pieces where they work well together. They can work even better together.
We're gonna optimize, rationalize, and group... and move them all forward, and then we're gonna, at some point, the end of this period of performance, this fiscal year, look back and go, "Okay, how are we doing? Where are we at? What's left in the journey?" But the near term is get them all in a better place, and that roadmap is short and detailed and very, very doable.
Okay, that's clear. So execute upon the plan, avoid distraction potentially otherwise.
Yeah, exactly. 'Cause, you know, it's very distracting and-
Right
... internally distracting, marketplace distracting, you know, can create pauses on deals, you know?
Right. Okay. Okay. I'm gonna pause and just see if the audience has any questions. All right, Generative AI. Let's talk about what you guys are doing-
Yep
... around Gen AI, how it might impact the various business lines-
Yeah
... that you have.
Yeah, I think the headlines are around the large language models and some of the multimodal stuff you can do. I think for business impact, the small language models and very, fine-tuned use cases, so with Copilot and, agents, that today a lot of that ticketing work, like helpdesk work, is done by humans-
Yeah
... or partially done by humans. I think that's a great area where I know our product team is looking at how to infuse, you know, ready to go, ready to plug and play, Microsoft Copilot, with, you know, verticalized. I was at the CEO's conference a week and a half ago and spent a lot of time with their different product managers, and there are ready to play, ready to use, tighter use cases that I know we can start using in our own business, and therefore, be a pilot for, you know, our customers.
So definitely on the map, I think the small language model use cases and the workflow around that are gonna get a higher traction and hit rate than some of the sexier stuff that, you know, gets the headlines.
Okay, any key partnerships that you're focusing in?
Well, Microsoft's a key partner.
With Copilot?
Yeah.
Okay.
Exactly.
Okay.
Yeah.
All right, very good.
Okay.
Guys?