Good day and welcome to the DXC conference call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Shailesh Murali. Sir, please begin.
Thank you, and good evening, everyone. I'm pleased that you are joining us for DXC Technology's call regarding today's announcement. Our speakers on today's call will be Mike Salvino, President and CEO, and Paul Saleh, our CFO. We will make certain comments on the call that will be forward-looking. These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. The discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings. I would like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call, except, of course, as required by law. And now, I'd like to turn the call to DXC Technology's President and CEO, Mike Salvino. Mike.
Sure, Ash, thanks so much. And good evening, everyone. Thanks so much for joining the call. I'm pleased that we continue to execute the plan that we outlined in November, especially in this volatile environment. Today, we announced that we've reached agreement to sell our U.S. State and Local Health and Human Services business to Veritas Capital for $5 billion in cash. The transaction is an important first step in our business and focusing on the enterprise technology stack. The transaction progressed much faster than we originally anticipated, but we are absolutely delighted to partner with Veritas Capital, the leading investor in the healthcare and government sector. Now, let me turn it over to Paul to talk a little bit about the transaction, and then he'll turn it back to me for some closing comments.
All right, thank you, Mike, and good evening, everyone. So, as Mike mentioned, we agreed to sell our State and Local Health and Human Services business to Veritas Capital for $5 billion in cash, and this represents a valuation of three and a half times trailing 12 months' revenue of $1.4 billion. Yes, it's a great outcome in such a volatile environment. We expect the transaction to close no later than the third quarter of fiscal 2021. The transaction is subject to customary closing conditions and the receipt of certain third-party consents and regulatory approvals. Now, the transaction is not subject to any financing conditions. All financing commitments are already in. The purchase agreement will be filed publicly in the coming days.
Now, given the volatile market environment, it is important for us to strengthen the balance sheet and maintain a financial position consistent with an investment-grade credit profile. And so, as a result, we will now use the after-tax proceeds of approximately $3.5 billion to pay down debt. Now, we're continuing to pursue strategic alternatives for the other two assets, and our plan is to use any proceeds from those transactions to primarily reduce debt. Now, this is a change to the capital allocation model we used as part of our fiscal 2022 framework back in November. Now, consequently, we are withdrawing our fiscal 2022 forecast estimates that we shared with you previously. Now, I can say also that right now, we remain on track to deliver on the financial targets for fiscal 2020, and we are continuing to work on our fiscal 2021 plan.
We'll provide the financial targets for fiscal 2021 in May as part of our year-end earnings call. I'll turn the call back to Mike.
Thanks, Paul. As we talked about in February, we talked about us going and conducting detailed regional business reviews focused at the account level to develop our plan for 2021. Although the work's not 100% complete, I wanted to highlight two things that have changed. First, the environment obviously is more volatile than it was five weeks ago. Second, early indications from the reviews suggest a higher-than-anticipated impact from previously terminated accounts and price concessions. This, coupled with a lack of sales earlier this year, is making fiscal 2021 more challenging for us. We'll continue to do the work in 2021, and we'll give you a full update in May concerning these numbers. In closing, I continue to be very encouraged about the progress we're making against our plan to focus on our customers, our people, and our operational execution.
On customers, we continue to turn challenged accounts around, and we are creating the Virtual Clarity IT estate plan so that we can aggressively get into the market with our customers. Second, on the people front, we continue to attract high-quality talent. We announced Ken last Friday, and Ken's focus will be on simplifying and standardizing our offerings and strategic partnerships so our sales team can be more focused in terms of what we are selling to our customers. Finally, on operational execution, we are finalizing our plans to ensure the right utilization around our people that perform offering, sales, accounts, and delivery around our key customers. This will help us optimize our costs. Now, what I'd like to do is turn it back to the operator for any questions.
Thank you, sir. At this time, if you would like to ask a question, you may press star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. Okay. And our first question comes from James Faucette with Morgan Stanley.
Great. Thank you very much. I just wanted to ask two quick follow-up questions. The first is, if you can give a little more color in terms of the nuance that you're seeing in the market right now and how much of the kind of slow selling start do you think is related to the macro environment versus just DXC's own operational, its own operations, excuse me? And then my second question is, can you give us a little bit of an outline of how we should think about depreciation and amortization on a run rate basis once the deal and disposition is closed? Thank you.
Do you want to take the second one first?
The depreciation and amortization at this time, I think I can only talk to you about the business that we just really right now agreed to sell to Veritas Capital. I think it is not going to be a meaningful decrease in our depreciation and amortization, maybe about, I think, 100 and more 300, excuse me. Sorry. So one second. 30 million. Forgive me. $30 million out of our depreciation and amortization. Not much. We'll update you on the other two assets at the appropriate time.
And now on sales, James, look, the net-net is when we would obviously like to prefer to do orals, right, face-to-face. When you don't do orals face-to-face, you don't build the appropriate relationship and so forth. That's an industry-type thing. But we're working virtually. A lot of cases, we're still seeing clients face-to-face. Do I think that's going to elongate the sales process? It may. And that's right now what we're dealing with. And I think everybody can appreciate the environment that we're in is a little bit different, and we're feeling our way through it.
Great. I am sure they can. Thanks a lot for that, Mike.
Thank you. Our next question will come from Lisa Ellis with MoffettNathanson.
Hi, good afternoon. Thanks. First one for me is for Paul. Can you just give us a sense of the margin revenue growth and free cash flow contribution of the HHS business that's coming out? And then second one, yeah, just around, and Mike, this might be for you. Can you kind of remind this group, because DXC obviously has not existed as an entity for that long, how we should think about if we do go into an IT budget slowdown, given the nature of DXC's service lines, how we should, I would imagine, less exposure to discretionary IT spending, etc.? So how does it typically perform during an IT budget slowdown? Thank you.
I think we'll give you more update on the MMIS financials in due course. It was a business that was growing slightly, and I can tell you that the margins were higher than, obviously, the average of the company.
And then, in terms of an IT spend slowdown, right, when you look at our business and you look at the stack, right, when we do ITO on-prem, then we do cloud. We also deal with rationalizing and modernizing the applications, and then we do the analytics and the advisory services. The discretionary services that are there, we don't have a lot of what I would consider consulting dollars. And when companies tighten their belts from a cost standpoint, they usually will look to reduce costs and outsource more. From our standpoint, right, we are absolutely trying to take advantage where we can to deal with the sales process. Moffett, I come back to. I keep talking about these IT estate plans, all right?
These IT estate plans enable us to be very curious with our customers in terms of what they need to do next to reduce costs and to shore up environments from an on-prem standpoint and also a cloud environment.
Thank you.
And thank you. Our next question will come from Jason Kupferberg with Bank of America.
Hey, thanks, guys. Mike, I just want to see if you could go a little deeper on some of those early indications you were previewing that could impact next fiscal year, I guess, some contract wind down, some price downs. I just want to make sure we have kind of the pieces. I know nothing's finalized, but just want to make sure we understand the dynamics there because it kind of sounded like those dynamics may be kind of separate from the virus and the latest change in the macro, but just want to make sure we're interpreting that accurately.
So Jason, like I said, I mean, what we've seen so far is a higher runoff from terminated and price concessions than we had originally planned. That, coupled with us not performing well from a sales standpoint earlier this year, have created headwinds. And look, the reason why we came prepared to highlight a number of things today was because of the fantastic outcome we had with this business. And like both Paul and I said, we're going to work on the numbers now, and we'll give you more information in May.
Okay. And then just as a follow-up, are you still comfortable the three deals collectively will generate the $5 billion in after-tax proceeds, and that all could close by the end of this calendar year? And then if you can just say a quick word on why this transaction is going to take maybe upwards of nine months to close. Doesn't seem like you need that many approvals, so just wanted to understand the nuances there.
Yeah. I think a couple of things. Number one, we are still confident in our ability to generate those kind of after-tax proceeds. Obviously, the market is quite volatile, but as you can see from the prior transaction we announced today, that we were able to get a favorable outcome out of that because those are very good assets, premier assets that are up for strategic consideration. In terms of the close, I think we said no later than the third quarter of fiscal 2021. Our objective, obviously, is to close as fast as possible. It's less about those other approval levels as much as us being able to separate the business fast enough and get carve-out financials in time just to be able to execute that. We're all out working vigilantly and at pace to be able to achieve that outcome.
And so hopefully, we'll be able to be surprised in an aggressive timeline that we had set for ourselves previously.
Okay. Thank you. The thing I would add so far is, look, in the short term, all right, this marks the second thing, right? When we put out our plan in November, right, we obviously talked about the new plan for the rest of the year. We did a nice job delivering against Q3. Now, right, we've knocked down one of our first deals. And what we need to do is continue to execute, right, both in the short term along with the rest of this year as we separate these businesses. So I like the plan that we've put in place, and it's one that we can deliver on.
All right. Thank you. Our next question comes from Ashwin Shirvaikar with Citi.
Thanks. Hey, guys. I just wanted to get maybe an update from you. You mentioned last time you complete the assessment of top 30 accounts and so on. Given what's been going on in the market, is that process still expected to be completed on time? Any updates on that? And yeah, let me stop there, and there's another question after that.
Okay. So thanks for that. So the 40 challenged accounts, we're absolutely working that on the plan that we set. We said the majority of them would be completed by the end of March, and then they would all be completed in the first half of 2021. And so far, so good as it relates to dealing with those 40 accounts.
Got it. And then you reiterated your 2020. I just want to confirm that that was all of the targets, the revenue, Non-GAAP EPS, as well as the Adjusted Free Cash Flow. You're still confident on the 80% plus of Adjusted Net Income?
Right now, yes.
Got it. Okay. Thank you.
All right. Thank you. Our next question comes from James Friedman with Susquehanna.
Hey, let me congratulate you. This is a great outcome. Just a couple of questions. So Paul, should we anticipate any stranded costs from the transaction? I remember this was your first rodeo. We had a couple of these divestitures before, asset sales. How should we be thinking about stranded? Was this really run as a separate entity?
No, this one was. I mean, obviously, it's a U.S.-based business, so it was a little bit different than the other two businesses that are much more global in nature. So there's still, though, some intermingling because of the common financial system that we run and some of the other support IT system that we run. But that being said, we're actively working just, again, to, first of all, separate the business and to be able to convey that asset to Veritas Capital as quickly as feasible. As far as stranded costs and everything, we're going to, once we know all the we separate the business, we will be able to look at all those costs, and as usual, we'll address them appropriately. We've had that track record previously, and that's what we intend to do.
Then in terms of your prepared remarks, Paul, with the debt versus the equity, could you say what you said again? So are you saying now that you anticipate, and I don't want to misquote you, that the other two asset sales will likely be directed towards debt, or did I hear that wrong? Because the stock's down a little bit.
Yeah. I think what I was trying, what I said is, first of all, the first transaction, that $5 billion, the after-tax proceeds from the sale of that asset will be directed to reducing debt. And what I said also is that in this environment, right, the responsible thing to do is to be really quite defensive and to strengthen our balance sheet and maintain a strong financial position consistent with an investment-grade profile. And as a result of that, additional proceeds from the sale of assets will be directed primarily to reduce debt at this point.
Got it. And then so was Veritas the buyer of your U.S. public sector business, or am I confusing the companies? And if so, I guess if not, it's moot. But if so, will that help the boarding process? Would that accelerate because they know these businesses already?
I think we merged our -- we actually merged those private U.S. -- PS business with two companies that were owned by Veritas, Vencore and KeyPoint, and to form Perspecta. I think Veritas has an incredible track record in building and companies and supporting companies and investing in companies in the public sector business. So they're very well connected. We couldn't be happier with the quality of the home for our U.S. state and local health and human services business. So they have great relationship both at the state and the federal government level, and it would be very helpful for the transaction to proceed.
All right. Thank you. At this time, I would like to turn the call back over to Mr. Shailesh Murali for any closing remarks.
Thank you very much, and thank you, everyone, for joining us. Talk to you all soon.
Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.