DXC Technology held an earnings call for the first quarter of fiscal year 2024, which was webcasted on the DXC Investor Relations website. The speakers on the call were Mike Salvino, the Chairman, President and CEO, and Rob Del Bene, the EVP and CFO. The call included certain non-GAAP financial measures and forward-looking statements, and Mike Salvino gave an update on the overall business performance.

In Q1, DXC is seeing customer demand for hardware PCs and network devices, along with some project work, either stopped or delayed to the second half of the year at a higher rate than expected. GBS performed as planned and delivered solid growth, while GIS did not show the same resiliency. DXC has changed how they engage with the market by moving to an offering led operating model to become more competitive in this market environment.

In Q1, DXC's organic revenue growth was 3.6% lower than the midpoint of its guidance range, resulting in a lower-than-expected EBIT margin. Free cash flow was better than expected due to strong execution around working capital management. GBS grew 3.3% in Q1 and has grown nine consecutive quarters, providing sustainable growth at double-digit margins. DXC is seeing the ability to sell new GBS work to longstanding GIS customers, which could provide a source of upside revenue. Its GBS offerings are all uniquely positioned in their respective markets.

Our team specializes in engineering solutions for companies like BMW and Mercedes, and provides the world's largest provider of insurance software and BPS solutions. Additionally, we are modernizing the Lloyd's of London platform, as well as embedding ServiceNow into Platform X. Our GIS business experienced a decline, however our security offering grew and we recently announced an AT&T deal to provide managed server, storage, enterprise backup and maintenance services.

Modern Workplace and Cloud ITO have seen a decline in revenue in Q1 of FY '24, but DXC has taken action to improve them. This includes managing disruption from terminated contracts, bolstering customer delivery and offshore delivery, and improving its market reputation. Additionally, DXC has invested in AI and has over 10,000 people trained in it. This AI capability is embedded in four of their six offerings, including insurance and analytics.

In the first quarter, DXC's organic revenue growth was down 3.6%, with the GBS segment having consistent year-to-year growth and the GIS segment experiencing a greater than expected decline. AI is used in both the Cloud ITO and Modern Workplace offerings to monitor IT estates, interact with employees, predict PC issues, and reduce the carbon footprint. Despite the slowdown in customer expenditures, DXC is still focused on delivery excellence, culture, and customers. Rob Del Bene will provide a quick rundown of the performance highlights.

The GIS segment experienced a slowdown in their resale and project revenues which impacted their profitability in the first quarter. The strategy going forward is to reduce resale revenue and focus on driving services revenue. Expenses were managed well in the quarter and free cash flow was negative $75 million. Gross margin was up 10 basis points year-over-year, but below expectation, while SG&A spending was flat as a percentage of sales. Depreciation and amortization was down 10.5%, lower by 30 basis points.

Other income decreased year-to-year, lowering adjusted EBIT margin by 50 basis points. Non-GAAP EPS was down $0.12 due to the lower pension income and a lower level of asset sales. GBS grew organically and is now 49.4% of total revenue. GIS organic revenue declined 9.9% due to declines in cloud infrastructure, ITO, and Modern Workplace. Analytics and engineering revenue performance was up 8.8%.

In the first quarter, applications revenue declined 70 basis points, while insurance software and BPS grew 5.1%. Cloud infrastructure and IT outsourcing declined 12.7%, primarily due to a slowdown in resale revenue and project based services. Modern Workplace also experienced a 5% decline due to clients taking work back in-house and a slowdown in project based services. Debt levels increased modestly to $4.6 billion.

DXC has taken steps to reduce its real estate footprint and lower its capital requirements, resulting in a decrease in financing lease originations and an increase in capital expenditures due to annual software renewals. The company also made progress on its $1 billion share repurchase program during the quarter, and is expecting a decrease in organic revenue for the second quarter due to the difficult economic environment.

Rob has outlined their revised guidance for the year, with organic revenue growth expected to be negative 3%-4%, adjusted EBIT margin of 7%-7.5%, non-GAAP diluted EPS of $3.15-$3.40, and free cash flow of $800 million. Rob's immediate priority is to produce the metrics and analytics to drive predictable and repeatable results, in order to provide transparency of financial performance and financial returns of the offerings.

DXC has been impacted by a slowing IT market which has caused them to make changes in their leadership and operating model to remain competitive and create value. They are confident that they can stabilize the performance of their Cloud ITO and Modern Workplace offerings, and are managing areas such as free cash flow, restructuring, and financial analytics to deliver more predictable results. They are also maintaining their $1 billion buyback and investment grade credit profile while executing their transformation journey.

GBS grew as expected in Q1 and GIS's Cloud ITO and Modern Workplace have not changed much in terms of revenue. The revenue miss of $75 million in the quarter was due to the accelerated reduction of resale revenue, which is low margin revenue that GIS plans to replace with service revenue.

Rob Del Bene responds to a question from Zachary Ajzenman regarding the company's free cash flow and margins. He explains that the company has adjusted their operating model in order to recover some of the missed revenue in the back half of the year. He also explains that they are not cutting expenses too drastically in order to maintain free cash flow.

Mike Salvino and Zachary Ajzenman discuss the EBIT margin and cost reduction plans to reach the adjusted level of $800 million. Salvino mentions that they have been focused on expenses and that there is still more room for cost takeout initiatives. Rod Bourgeois then asks about the linearity of the cyclical part of their business, such as project based work and resale work, and whether their guidance assumes that the project based work will improve in the back half of the year.

Mike Salvino states that the CFO transition had no impact on the shortfall in expectations for the quarter and that the majority of the adjustment was due to the resale revenue being 25% down. He also states that the project work in the other offerings is performing well and they expect to increase that project work in the back half of the year.

Mike Salvino discussed changing the operating model in the quarter from a regional model to a global offering model, which has seen success with analytics and engineering along with insurance. He expects to see benefits in the back half of the year, but there is still softness in project work. Keith Bachman asked about the possibility of asset sales to turn around the struggling workforce management area, which could improve growth.

Mike Salvino explains that DXC is better off keeping its offerings together, rather than selling assets, as it can sell new GBS work to longstanding customers and has an entryway into customers through cloud providers. He also mentions that they are looking to sell data centers and be the partner of choice to cloud providers as they move work to the cloud.

Mike Salvino responds to Lisa Ellis's question about potential strategic or transformational changes DXC could make to improve its revenue trajectory. He explains that they are focused on operational improvements and discipline to achieve sustainable capital savings, and not trying to accelerate anything temporarily. He also mentions that they have done a lot of portfolio adjustments, and could be considering acquisitions, divestitures, and creative client deal structuring.

The four-step process for Cloud and ITO is taking longer than anticipated, but the progress made is showing that it will be beneficial. The steps are dealing with the disruption from terminated contracts, focusing on customer delivery, scaling the offshore model for delivery, and not bringing in new deals without good economics. This will make the business more desirable for cloud hyperscalers to partner with.

Mike Salvino explains that DXC is in a good state, with their resale revenue decreasing from 1.4 in FY 2022 to 1.2 in FY '23 and below $1 billion in FY '24. This means that the revenue they are discussing should be of higher quality and have better margins. Salvino goes on to explain that their AI initiatives are focused on driving revenue and showing customers that they are more than a GIS business, by applying their capabilities from the GBS business to any of their offerings.

DXC Assure is a market-dominating insurance business that helps customers answer complex questions. Robotic drive is a self-driving vehicle technology that uses AI facial recognition to assist drivers. Platform X is a monitoring tool used by clients that has AI capabilities to launch 10,000 bots with little human intervention. UPtime is a call center tool that uses AI agents to deflect written and verbal questions.

Mike Salvino closes the call by expressing his confidence in the company's business and their ability to continue the growth momentum in GBS. He also states that they will be taking actions to improve their performance over time, and when they do, the revenue they will see in GIS will be mostly services revenue and not resale revenue.

This summary was generated with AI and may contain some inaccuracies.