Q4 2020 Earnings Call
Good day and welcome to the de Xcede Conference call. Today's conference is being recorded at this time I would like to turn the conference over Shallish Murali. Please go ahead Sir.
[music].
Joining us, but do you have cheese.
[music] Twentytwenty earnings call Oh speakers on today's call will be Mike. So do you know president and Chief Executive Officer.
Our Chief Financial Officer.
This call is being webcast and do you see dot com slashed investor Relations webcasting slides.
Company the discussion today.
We will see slide.
Relations section.
[music] flight to.
Do you see technologies presentation includes certain non-GAAP financial measures and further adjustments. These measures, which we believe provides useful information and invest in accordance with assay seals. So why do you put a completion these measures.
Prospective and most directly comparable GAAP measures. These circuits are the issues can be found in the tables included in todays earnings release.
On slide three you will see that Susan Collins remain on all these forward looking.
These statements are subject to known and unknown.
Uncertainties.
Actual results to.
Many of you from those expressed on this call.
Discussion of these risks and uncertainties is included in our annual report on asking other FCC side.
I would like to remind our listeners that DXP technology assumes no obligation to update the information presented on the call except as required by law.
And now I'd like to introduce do you see technologies, President and CEO, Mike Sylvia.
Thank you slash and I appreciate everyone. Joining us today. This is the first time, we've connected since the koby crisis and I Hope you and your families are staying well.
I'm going to start today's call by sharing some big picture context about what we've accomplished since the last time we spoke.
Will then discuss feedback we have been receiving from our customers who are recognizing our outstanding operational performance during the Kobin 19 crisis.
Before I hand, the call over to Paul I will also provide an update on our transformation journey.
Paul will then share our financials, including an update on the actions we have taken to strengthen our liquidity and enhance our financial flexibility.
I'll make some closing remarks before opening the call up for questions.
I'm pleased with the core we've been making good progress with our customers. Since I started in September we have been focused on improving customer delivery and building stronger customer relationships and we have done both this quarter.
On customer delivery, we have now fixed 35 of the 40 challenged accounts.
The remaining five two and decided to leave us and we're still working the other three.
Investing this to fix these accounts with something I highlighted during my first earnings call and I'm Happy to report this is pretty much behind us.
The investment is also paying off as we now have sold 2.1 billion in TCV over the last two quarters do these accounts.
The work consists of renewals and new work. Some of this new work was previously put on hold and some other work is in new areas like analytics in engineering.
New work is the best evidence.
So describe a turnaround.
On building stronger customer relationships, we have significantly increased our focus on our top 200 accounts.
In this quarter I personally checked in with these customers numerous times, making sure I gave them an update on how do you actually was doing assuring them, we were focused on delivering and asking them to please let me know.
If they ever see any issues.
It was unfortunate as cold as a cobot 19 crisis is and I don't want to minimize that point. The crisis has caused customers to see heightened needs for our capabilities, specifically, having reliable and secure on prem IP infrastructure and workplace in mobility.
Services.
The customer feedback has been overwhelmingly positive for the way, we have delivered and I could not be more proud of how our team at DC has delivered.
Clearly the investment we've been making in our people in the business over the past seven months was the right thing to do.
That allowed us to fully support our customers when they needed us most and customers remember when you deliver in tough times.
We have pulled together a slide with a sampling of quotes that capture some of the stories concerning how we deliver for our customers. The I.T. challenges that our customers has faced during the crisis have highlighted the criticality of our distinctive workplace in mobility services are.
On Prem I T infrastructure in cloud capabilities, and finally, our ability to innovate and execute and a very demanding environment.
Let me bring a couple of these quotes to life.
For a major defense contractor, we delivered 1200 fully image computers for their employees in one week.
Also in one day, we feel today, 200% surge in service desk calls to to enable half of their employees to work from home.
In addition, we delivered a dashboard showing their devices across their hundred 19 locations, which delighted the customer.
For a leading health Tech company, we anticipated to surge in service desk calls from the employees working from home.
And we built a chat bought in 30 hours to reduce the call volume by 12% on the first day.
The customer was thrilled as you'll see in the quote.
They highlighted our proactiveness out of the box thinking speed and collaboration and I want to highlight for you. All this is the new d. exceed at work.
I want to thank our 137000 women and men, who deliver everyday for our customers. They have done a phenomenal job taking care of themselves their families and our customers during the cobot 19 crisis.
Over 99% of our people are unable to work virtually this 99% number is industry, leading which is expected because we've got the number one workplace and mobility business in the industry, but nonetheless, it was great to see us deliver for our customers.
The actions, we have taken to improve customer delivery and focus on our people have enabled us to meet and exceed our customers' expectations. During this challenging time.
And I also want to take a moment and thank our customers for reaching out and recognizing the outstanding performance of our people.
Our strategy to physician Dx see for growth has always been based on taking care of our customers and the people who do the detailed work the financial pay off from this strategy will materialize over time, but I'm very encouraged about our progress.
As we discussed in the last couple of earnings calls Dx sees main fundamental challenge has been revenue run off from existing contracts with everything we've been doing for existing customers, we should be able to stem future revenue run off.
I say this because over the last seven months, we've done a lot of work to secure our customers improved delivery and study our customers I T as states.
Here's the keep finding from all this work our revenue wrong runoff was not cause by cloud trends, prompting customers to move away from Deoxi. Instead. This run off was due to sub optimal customer delivery and weakening customer relationships.
As a result, we lost roughly 1 billion of revenue UNEV, why 20 and expect to lose a similar amount and that's why 21 from price downs in terminations decisions made by customers in the last 12 to 18 months.
Slide 21, the impacts will be more pronounced in the first half of the year. The good news is that this fundamental problem is absolutely within our control in fixable in fact, we're making good progress on bringing the new Dx see to our customers, which should help stem future revenue run off.
Off.
Now I'd like to turn to our people, we continue to higher talented people to serve our customers. Both at the account level and within deliveries. My focus has been to reward our people who are closest to our customers you might have heard we announced pay increases for our people that are done.
Liberating the detailed work the first phase of these increases were done in January and the final phase will be done in August.
The health and safety of our people has always been in remains a top priority for me as we navigate the cobot 19 crisis I'm personally keeping our people informed of the evolving situation through town halls, and emails on a regular basis.
My leadership team has done a fantastic job throughout this quarter, we're meeting daily to ensure that we're supporting our people on our customers by acting on the information from our co bid 19 Command Center. This center works around the clock to monitor the evolving situation.
Guides, our actions to help reduce the spread of the virus ensures our people can work safely in critical onsite roles and enables our people to work from home securely.
Now, let me turn into our transformation journey, which consists of three initiatives focused on our customers.
Cost optimization and the market all of these initiatives will help us build the foundation for growth.
Now I've already giving you a lot of context on our first initiative, which focused on customer delivery and building stronger customer relationships, but I want to spend time clarifying our cost optimization and sees the market initiatives.
Being well on our way to securing our customer base and taking care of our people. It's now time to focus on the second initiative, which is to optimize the cost our cost optimization will be initially focused on simplifying our management layers and taking the appropriate steps to rightsize, our cost structure to our rather.
Yeah.
What I have learned by doing countless customer calls and accounted reviews is that we have too many people between our customers and the people doing the detailed work this causes complexity and confusion. It also a roads profitability and shareholder value.
By eliminating unnecessary layers are people will be able to deliver for our customers faster drive meaningful revenue growth and help deepen customer relationships.
This is why we are accelerating our cost optimization initiatives, we expect to eliminate about 700 million of cost on an annualized basis with about 550 million coming this year.
We expect roughly 4500 people or 3.5% of our workforce to be impacted.
I also want to highlight a reminder, that I communicated to our people four weeks ago that along with these actions we will continue to run our business.
This means we will continue to hire an exit people at all levels as we see the needs and the performance of the business changing.
This cost optimization initiative will allow us to better serve our customers and help us sees the market, which is our third initiative.
The current environment has reaffirmed that what we do it Dx C is incredibly relevant.
We see this demand as a revival of the on Tremain T. a state market and this is an opportunity that is unique to us.
I've mentioned before that we were going to tap into the strategic advisory capabilities of virtual clarity Dx seed company that we acquired this past year to provide greater insights to us concerning how our customers are considering moving their existing on premise is state to the cloud.
We have worked with 95 of our top customers represent nearly half of our key accounts to assess their current state Nx and the expected evolution of visa stage to the cloud over the next two years.
Data shows our customers aspire to move 20% of their current on Tremain T. as state to the cloud over the next two years. However.
After careful analysis in considering the technical feasibility risk and business case, along with the ability to execute this number drops to 5%.
In addition, we found these customers wanting to modernize over 60% of there on Prem <unk> state and do not plan to touch the remaining on premise state and the next two years. This also highlights the criticality of B.I.T. as stage that we run for our customers and the thoughtful.
On this concerning how they will move.
The next pieces of visa states to the cloud.
These on Prem IP infrastructure capabilities have always been essential.
But now they're both essential and top of mind for our customers I want to underscore here that reliable and secure work from home capabilities have become a must have for our customers.
Work from the work from home trend is becoming a demand game changer for right for our IP infrastructure and workplace and mobility businesses and we are eager to capitalize on these opportunities.
You will hear from Paul that we're currently in the market with the workplace and mobility business, but given the importance of working from home to our customers. We are reevaluating retaining the business to capitalize on this strong demand.
It is now time for us to focus on cross selling our services to our customers that we have worked so hard to take care of which is exactly what we are doing.
We're in the market right now cross selling to our top 200 accounts.
We have spoken to 90% of them concerning our workplace in mobility offering.
Criteo in cloud capabilities, and our analytics and engineering offering.
All of these actions have enabled us to increase our qualified pipeline by 23% over the last couple of months.
I am looking forward to working with our teams and customers to seize this market opportunity that this third initiative has created and convert this cross selling pipeline into new revenue for Dx C.
Now let me please turn the call over to Paul.
Thank you, Mike and greetings, everyone as usual I'll start by covering some items that are excluded from our non-GAAP results in the current quarter. We have restructuring costs are $4 million on a pretax basis or one cents per diluted share.
Also in the quarter, we had $92 million on a pretax basis or 28 cents per diluted share or transaction separation and integration related costs, primarily from external spend associated with assets under strategic review.
In the fourth quarter amortization of acquired intangibles was $148 million on a pretax basis, our 45 cents per diluted share.
Also in the quarter, we recorded $3.9 billion non cash goodwill impairment charge or $15 per diluted share.
Also in the quarter, our annual Remeasurement pension assets and liabilities resulted in an accounting gain of $244 million as of year end, we had pension assets up $11.1 billion.
Pension liabilities of $10.2 billion Orient over funded position us $940 million.
Excluding the impact of these special items non-GAAP income before taxes from continuing operations was $292 million for the quarter and our non-GAAP EPS was $1.20 driven by a tax benefit from the release valuation allowance and the key foreign.
Thanks, Jason as well as the benefit from other tax planning initiatives.
Full year restructuring transaction separation and integration costs amounted to $570 million on a pretax basis or $1.78 cents per diluted share.
For the full year.
This nation of acquired intangibles was $583 million on a pretax basis or $1.73 cents per diluted share.
Our full year non-GAAP earnings also include the impact of goodwill impairment losses in Q2.
As well as the gain on H.B. Arbitration Award.
So for the full year non-GAAP income before taxes from continuing operations, which also includes the gain on the HD Arbitration Award was one dollar $1.84 billion and our non-GAAP EPS was $5.58.
I will not moved to our fourth quarter and full year results in more detail.
As always all revenue comparisons I will discuss will be in constant currency.
GAAP revenue in the fourth quarter was $4.8 billion, despite a stronger dollar during the quarter.
Currency was a headwind about $40 million for the quarter sequentially.
And $101 million headwind compared with the prior year.
Our full quarter revenue fourth quarter revenue represents a sequential decline of 3.3% in constant currency.
The revenue decline reflects the impact of prior terminations runoff and price concessions.
As well as a $49 million and one time headwinds from the resolution of certain customer disputes in the quarter.
Adjusted EBIT in the quarter was $352 million adjusted EBIT margin was 7.3% and our non-GAAP EPS was $1.20.
In the quarter two items are particularly noteworthy yes, they impacted our income from continuing operations and our heat.
First the resolution of certain customer dispute impacted non-GAAP income before taxes from continuing operations.
$73 million and on non-GAAP EPS.
21 cents.
On the other half EPS in the quarter benefited from low tax rate as a result of the release of evaluation allowance in a key foreign jurisdiction and the benefits from other tax planning initiatives.
Normalizing for a tax rate of 27% and excluding the charge associated with the resolution of those customer disputes.
During the quarter would have been a dollar and seven cents.
In the fourth quarter bookings were $4.4 billion for a book to Bill 0.9 times.
For the full year, GAAP revenue was $19.6 billion, including a year over year currency headwind.
$45 million.
Our fiscal 20, adjusted EBIT was $2.06 billion, our adjusted EBIT margin was 10.5%.
Non-GAAP EPS was $5.58 for the full year bookings were $17.7 billion for a book to Bill.
Nine times.
Turning now to our segment results I'll start with a GBS segment, which includes the following layers if I enterprise technology.
Application and industry IP as well as analytics and engineering, which now includes data analytics advisory and the engineering services flux off.
GBS segment for now also includes the U.S. state and local health and human services business and the horizontal DPF business, which both are under strategic review.
GBS revenue was $2.3 billion in the fourth quarter down 1.5% sequentially.
Adjusting for the impact of the resolution of certain customer disputes revenue was flat sequentially.
Year over year GBS revenue was up seven 3%, primarily due to the contribution from the Luxoft acquisition.
In the fourth quarter GBS segment profit was $223 million and profit margin was 9.7%.
Adjusting for the impact of customer dispute resolution profit margin without that 12%.
GBS bookings for the quarter were $2.2 billion for a book to Bill a 0.9 times.
Well I know you just slippage of a one large deal that we expect to sign in the current quarter.
For the full year GBS revenue was $9.1 billion segment profit was $1.3 billion margin was 14.3%.
Bookings were $9 billion for a book to Bill of one time.
Turning out to our.
Segment.
Segment consists of the IPO layer of the enterprise technology stack.
Claude and security business.
It also includes our workplace in mobility business, which is on the strategic review.
Gee I asked segment revenue was $2.5 billion into fourth quarter down, 4.9% sequentially and 16.9 per se on a year over year basis.
The decline year over year is due to the run off and termination of certain accounts as well as the decision from a few customers to in source services.
Segment profit in the fourth quarter was $192 million that profit margin was 7.7%.
Sequentially giant profit margin was down 100 basis points, primarily from the impact on revenue run off.
Giants bookings for the quarter was $2.2 billion for a book to Bill a 0.9 times.
And for the full year Giants revenue was $10.5 billion segment profit was 1 billion dollar margin was 9.6% and bookings were 8.7 billion for a book to Bill of 0.8 times.
Let me comment on the performance of the layers of the enterprise technology.
I feel revenue was down 7.1% sequentially and 20.6% year over year.
This layer of the stock has been impacted by terminations that price down due to actions that were taken in the last 12 to 18 months.
Oh, so bill as one time in the quarter, which has an early indication that the effort to secure and stabilize our customers, it's starting to pay off.
For the full year revenue was $5.5 billion.
Well in security revenue was up 3.1% sequentially and up 7% year over year.
Revenue increase than this layer of the stock was driven by continued demand for IP monetization solutions.
Book to Bill was 1.1 times in the quarter and for the full year cloud and secure any revenue was $2 billion.
Moving up the stock the obligation and industry IP layer was up 0.6% sequentially and flat year over year.
We're seeing solid demand for enterprise cloud application business.
Book to Bill for this layer of the stock was 0.8 times in the quarter as customers pulled back on project work and new application deployment due to covert 19 as well as the slippage of one of the large deal I just referenced.
For the full year revenue was $5.5 billion down 2.1% year over year.
Indiana analytics and engineering layer of the staff revenue was down 6% sequentially, primarily from softness in the automotive sector and some project delays in banking.
Book to Bill into quarter was 1.3 times.
Revenue for this layer of the stock was $1.8 billion pro forma for the full year contribution luxoft.
Now, let me turn into the three businesses under strategic reviews.
Overall, these three businesses generated $5 billion in revenue for the here.
As you all know we announced the sale of our us state and local health and human services business to Veritas capital for $5 billion in cash.
Business continues to perform very well our team are diligently working through a separation activities.
And we now expect this transaction to close earlier than expected and most likely by the end of our second.
Order.
Were in active discussions with interested parties for the horizontal vps and workplace mobility businesses.
Our horizontal bps is performing well despite challenges from Covance 19.
For our workplace and mobility business.
Seeing strong demand in the current environment as a number of customers are looking to enable their employees to work remotely.
Our pipeline has increased by a billion dollar since the beginning fiscal year.
As Mike mentioned more placement mobility.
It's become an area strategic importance for our customers in the current environment.
So were also reevaluating the value creation for pension up retaining this business while at the same time, we continue to pursue discussions with interested parties.
Turning to other financial highlights adjusted free cash flow in the fourth quarter was $131 million are 43% of adjusted net income.
We generated solid free cash flow, despite two large cash outflows, including payments for our annual as far west came out.
And the contract settlement that we expect to recover from insurance coverage in the current fiscal year.
For the full year adjusted free cash flow was $1.34 billion or 92%.
Adjusted net income.
Our capital expenditures, including the payment of capital leases, but $368 million into quarter or 7.6% revenue.
For the full year, Capex was $1.38 billion or 7%.
Oh, it's revenue.
During the quarter, we paid $53 million in dividends.
And for the during the whole fiscal year, we returned $960 million of capital to our shareholders in the form of $214 million in dividend and $736 million in share repurchases.
Gosh at the end of the quarter was $3.7 billion, a total debt was $9.9 billion, including capitalized leases.
For a net debt to total capitalization ratio of 41.6%.
Now I'd like to turn to our liquidity on the actions, we've taken to enhance our financial flexibility.
As we've stated one of our key strategic priorities is to maintain a strong financial position consistent with an investment grade credit profile.
In the last couple of months, we've taken a number of test and strengthen our liquidity and financial position.
We drew down 4 billion dollar revolving credit facilities to staff.
Well I don't have billion dollars in March and $2.5 billion in April.
We're able to build out our cash position during an uncertain economic environment, and we used our credit facilities to pay downs commercial paper.
We subsequently accessed the capital markets and raised $1 billion in Bonn via two senior notes with an aggregate principal balances a $500 million each due in 2023 and 2025.
Proceeds were used to pay down bank debt and extend our maturity profile.
As of April Thirtyth, we had over $5.5 billion of cash on our balance sheet.
We also had $10.2 billion in depth and $2 billion in capital leases.
Thanks point $2 billion five debt consisting of terminals undrawn revolver is subject to financial covenants.
We recently modified our covenants from it three times gross debt to EBITDA two three times net debt to EBITDA for the next 12 months, which further enhances our flexibility.
Our net debt to EBITDA at the end of fiscal 20 was 1.65 and less than one turn on a pro forma basis for the sale of the U.S. state and local health and human services business.
After 12 months this covenant and will step down to 2.25.
Net debt to EBITDA.
We also completed the extension of about $1 billion up Youre, a term loans by 12 month.
Further improving our debt maturity profile and so as a result, we now have less than $600 million of debt maturing in the next 24 months.
As previously communicated we intend to use the proceeds from the sale of our state and local health and human services business to pay down debt.
Lastly in this uncertain environment, we're also taking the prudent steps.
Suspending our dividends.
This decision aligns with our investment grade financial policy.
The pause in the dividend will give our board an opportunity to reevaluate the appropriate dividend payout following the completion of our strategic alternatives.
In summary, we're taking steps to ensure that the company is well positioned financially and is able to withstand potential further market dislocations.
Importantly.
These steps underscore our commitment to maintaining a strong financial position consistent with an investment grade credit profile, but it also gives us the flexibility to execute our transformation journey.
Nonstandard previously fiscal 21 isn't transact transition year 40 Act c.
We are executing on a number of initiatives as part of our transformation journey.
Were securing our cost centers optimizing cost and executing on strategic alternatives, while enhancing our liquidity and our financial position.
We're working on all of these inch initiatives concurrently.
But he added uncertainty from Cove at 19 makes it very challenging traffic clear line of sight on the timing and this will impact of these actions on our financial results.
Well, therefore, suspending our fiscal 2001 guidance until we have better visibility into the Covitz situation and we've progressed further along on these initiatives.
We expect the impact of our transformation journey and cobot 19 to be more pronounced in the first half of the fiscal year.
For the current quarter revenue loss due to price concessions and previously terminated business.
Combined with the impact of Covance 19 on our project work could result in revenue decline of 8% to 10% sequentially.
Well, we expect revenue to stabilize sequentially thereafter.
Our first quarter EPS will be a low point for the quarter.
Reflects the more pronounced in back of the revenue decline in Q1.
As well as the impact of additional investments in the business and a higher level of interest expense in the quarter.
Additionally, in Q1 EPS only includes minimal contribution from the cost optimization options are undertaking.
The benefit of those cost optimization initiatives, a $550 million for fiscal 21 or $1.60 per share will accelerate throughout the year beginning in the second quarter.
Now the interest expense and the first quarter is also not indicative of the annualized level up for the remainder of the year, particularly when you factor in the Paydown of debt from the proceeds of the sale of the U.S. state and local health and human services.
And with that I'll now turn the call to Mike for his closing remarks.
Thank you Paul and I, just wanted to take a moment to recognize all the great work that you and your team have done to position us for success during the Covidien 19 crisis.
I'm pleased with the progress, we're making on our strategic owners initiatives.
Which should allow us to have a stronger balance sheet, enabling us to execute our transformation.
As part of our ongoing strategy, we will continue to assess the competitive position of our business portfolio and developed plans to unlock future value either organically or inorganically.
In summary, we are making good progress on our transformation journey, we're fixing our delivery in customer relationships that will stem. The revenue run off that has impacted us an f. why 20, and that's why 21.
We are executing our cost optimization plans to better serve our customers by eliminating complexity in confusion and finally, we are seizing the market opportunity, where the criticality of B.I.T. as state is top of mind for customers, which is highlighting our expertise.
Yes.
This allows us to set to cross sell our capabilities across the enterprise technology stack.
All of these points will create the foundation that will position do you see for growth.
Now before opening the call up for questions I, just want to wish you and your families. All the best during this time and please stay healthy.
Todd Please open the call up for questions.
Yes, Sir if he would like to ask a question. Please signal by pressing star one on your telephone keypad.
We're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
Well take our first question from Darrin Peller with Wolfe research.
Alright, Thanks, guys glad to hear your out your older well and see if.
Mike can you can you give us a deeper understanding of the conversations you're having with clients you know the responses that you're getting back from these clients.
They really recognize I guess, the renewed focus the axes getting on the IPO business.
And then overall would you say you think these conversations are getting well. If you know Africa has helped you conservatively capture what you're seeing in that billion dollar impact and 21.
Darren Thanks, the looked at the bottom line is I think we're making great progress that's why.
We put together the.
The customer quote slide.
And what they're basically seeing is if you think about the environment right now basically almost overnight people had to star working from home.
And the Ceos and CIO is that I'm talking to our saying alright look.
What do I do with my existing state because now I've got my entire workforce hitting up against that has stayed pretty much every day.
So when I started talking about the IP estate again, and say hey, it's become relevant is I think we've all experienced some level of.
Whatever.
Slow times or what have you against what you're trying to do from a virtual standpoint. So that is top of mind for the senior level folks how do I make sure I can bring my entire a workforce together to communicate virtually so those are the conversations and then the key thing for us.
Yes is the fact that it was then outpouring of look you guys really showed up.
I really appreciate what you've done and it wasn't just showing up darrin with normal type things, but it was finishing transitions that was important it was thinking innovate innovatively and it was making sure that we went above and beyond the call of duty.
To get them, where they need to be so that's why I highlighted for you all.
That looked at the plan was always to go cross sell these customers. That's why I focused on the customers to begin with.
And what this has enabled us to do is look at those customers now and say all right what else can we can we be doing.
And then I wanted to highlight that look I've been having discussions with analysts for a while now about the cloud and I'm I'm very very supportive of the cloud.
But when I analyzed our ideas state and the criticality of that that isn't just going to move to the cloud quickly I've been saying that all along Darrin alright, and the fact the matter is.
Now I'm sitting there going we have the facts because we use virtual clarity we made the investment in virtual clarity and we got to the over 60% number and now we gotta go tackle that opportunity and some of it is in that 2.1 billion that I mentioned and some of that is in the 23%.
Qualified pipeline pipeline uptick over the last couple of months.
Okay, and just a follow up on me the comment you made around the impacts of what you're seeing on pricing and other factors I mean, it sounds like you've done a pretty good bottoms up analysis across your client base now so we could feel pretty good about your conservatism, there where you really how comprehensive that review was around that billing.
There's.
Yeah, I mean, it look we.
Uptake and I've taken my time.
Okay and the plan. We've got said I think is is at a very detailed level and hence the reason why I highlighted again, the virtual clarity stuff all right and that we are I know and the fact that Darren I also have highlighted for you all from a very track.
Parents standpoint, the 40 challenged accounts.
Okay, and the fact that in seven months, we stabilize the majority of those accounts and delivered in the cobot 19 environment that special.
Got a good team here, we're doing good stuff okay.
Okay.
That's great to hear does alright stay safe and thank you.
Thanks, Dan.
Thank you we'll take our next question from Ashwin Shirvaikar Citibank.
Thank you he thanks, guys and good to hear from you.
Mike I would want to take up but.
On your last comment grade 30 pilot or be a problem tides dissolved to extend my leaving I mean, he has a problem. This is high and you are wanting to understand a couple of tank one is quite good.
I think it out when I would see maybe the.
DTV financial impact on this because the amount that mentioned was I think 72 million in quarters team does and it really small.
Impact is there.
Ongoing impact on pricing concessions is that an ongoing impact on cash no short term.
Easier comps that you had to do.
We had what I see the impact of that ongoing.
[noise] Ashwin are you talking about the 2.1 billion of new work are you talking about the 1 billion of revenue run off what exactly how many help me understand a little bit more the comp the combination combination off that and then taking that down to I would be going to be.
Faced with sort of.
Hey, hey structure that he know where margin because even I can given.
You know significant price concessions to dissolve these problems.
It gets a little bit into the solution what was the seduced and how do you think these things. So quickly. So if we can understand what the ongoing impacted.
Okay, well, here's a three things that we did right I mean first of all moving forward, obviously, we've got pretty significant pricing discipline. So we're not doing that anymore. The second thing is like I had mentioned right out of the shoot I started investing in those customers to get the delay.
Every sound alright, because I didn't want to have any other discussions about revenue run off and now those discussions right or over Paul mentioned that the majority of that revenue run off we'll be in the first half of F. why 21.
And then the last thing is the the last thing that we did around there is one we secured our delivery operations.
Okay, and we put in place various mechanisms to make sure that not only where we delivering but ashwin I'm, calling these customers on a regular basis I'm sitting in weekly meetings I am having dialogues with these customers to make sure I hear not only what they're saying.
But I'm also pushing on them a little bit when I hear what our competitors potentially are saying about us alright, and I'm, giving them the facts around what we're doing a de ICSI. That's why when I think Paul about the the liquidity process and the financial flexibility alright that we've.
Got over the next 24 months, we've got the runway to go make this thing happen.
Understood understood and you said an important thing you kinda said it wasn't the the secular impact on cloud. It was Ginny you know suboptimally did anybody the ratings in being done.
Is there.
POS it looked to kind of do and and attribution analysis and starts to kind of figure. It out you know you have that determinations price downs, so often Monday liberty.
He is something of an impact maybe it's incorporated into price downs, there's a short term impact here from Colin.
As we think of growth going forward, how should we think of that in terms of all these factors.
Well look good in terms of growth moving forward right before I give any other guidance you know I want to get further down my transformation journey.
But the <unk> what I will tell you is this rate when when I think about what we're doing with these customers. It was really important for us to show up in deliver for them, Okay, and when you show up and deliver for a customer the immediate thing that that happens.
Is I had one of our largest customers tell me two weeks ago after delivering you're gonna get the first shot at the new work, Okay, and what I have seen in the analysis Ashwin is the fact that at a detailed level right. What we're doing is making sure that we.
Understand and listening to the voice of the customer and then were cert, we're starting to cross sell what's happening and the environment just helped us.
Because outsourcing always do does better and a down market and our clients one cost savings. So not only are weak coming to the table, but they're coming to the table.
Paul would you have anything else to add on Ashwin his comments about numbers or what have you.
Well, Mike I think we're seeing it across the board.
This cross sell that you're talking about it certainly I mentioned the billion dollars and new pipeline that just really got generated by the workplace business.
The ability.
And also to build actually on what you just said, Mike and I think it's an important national instrument to know I think I should have made it clear injuring or my presentation and I think it was on one of the slides that our business is actually quite resilient and and economic.
Uncertainties.
Think about at 30% of five business is only exposed to project work. So we see opportunities out there Mike as mentioned stabilizing the customer securing to come back and just really.
Needs their core need and therefore need right now has shifted to make sure that there are on plan.
Environment is resilient secure so that gives us really a great opportunity to showcase the rest of our product of our.
Offering across the enterprise.
Well just stuck.
So ashwin just to close on that the Bottomline is I've been saying since I showed up here.
All right that I have a hard time believe and everything is moving to the cloud because when I analyze these accounts in the critical nature.
I mean people have described this is being at the heartbeat of our clients people live describe it as being as part of the fabric of what they do that stuff is going to thoughtfully moved to the cloud and Oh by the way when it does move to the cloud they still need our capabilities all the knowledge every day.
Thing that we do on Prem is needed in the cloud except for walking into a data center. So look getting back out there in the market Ashwin and having those discussions with clients and them known we care is you know it it's turned the tone. So when I say, a new Dx. He is showing up that's what we're doing.
Thank you we'll take our next question from James Fossett with Morgan Stanley.
Great. Thank you very much wanted to ask about.
As you look at the cost run offs and the progress you're making with your customers then as you referenced that the new DXP.
How confident are you that a that the revenue run off will kind of and in fiscal year 21, and what do you need to see happened from this point for that to be the case. So that you can kind of get yourself back into a firm footing and headed in the positive direction or you want to be going from a financial perspective.
Yes.
Okay. So for things. The first one is we need to continue to deliver for these customers.
Right, because that's going to stem any future revenue run off [laughter] second is we got to continue to build trust and we got a huge opportunity to build trust in the covert 19 environment.
Right and I don't want to minimize cobot 19, but like I said right I take it very seriously, but we had a heck of an opportunity to deliver for our customers. So now the key thing is what additional new work is potentially out there.
And that is in the existing environment everyday upgrade updating a network upgrade updating a server putting in patches right we need to be doing that the third thing is the cross selling.
And the cross selling is meaningful because now we've got an open door based on those those relationships that they trust us.
And then the last thing is we want to continue obviously to optimize our cost I wasn't kidding about mean doing the analysis about the detailed people doing the work right and the number of layers between them and the customer.
And getting that more simplified and streamlined that's going to help us in that environment. So I see those four things James.
Thank you we'll take our next question from Bryan Bergin with Cowen.
Hey, good afternoon. Thank you guys.
I wanted to ask on the cost optimization plans. So how much of that 550 is a net cost savings versus reinvestment that you made plan to make and then Paul just as it relates to the 700 to if as we think about the following fiscal year.
The cost optimization of 515, it's all going to be.
And net incremental to the bottom line [noise].
As I mentioned not much of it wasn't in the first quarter. So we're going to see it accelerates throughout the quarter, you'll see it's starting to show up in the second quarter and I think from a timing perspective. Some of these initiatives that you can imagine in complex countries. As me, we've begun to execute them and were way on our way now to getting the work done well have.
Basically a.
Carry on effect in fiscal <unk> 22, that's the difference between the 700 plus million dollars that we're going after and.
So that will add further to the run rates actually as we exit fiscal 22, and we're not just done without.
Really part of.
Though the plan of continuing to optimize.
Caused their other opportunities that we're looking out for looking at the for example, our real estate.
Footprint for example in this new redefined work environment. We're also looking at contractor costs or are further opportunity within the parameters of how we serve our customers. All of these things are still things that aren't going to be.
Top of mind for us as we progressed over the years and we start to look to fiscal 2002.
Okay is there a as we think about cash flow then how should we think about conversion here and really just absolute cash flow generation levels understanding of giving yourself more flexibility and financials, but from a cash generation perspective anything changing them off going forward.
Oh, that's hard to give you again guidance at this point in time, one thing that I can tell you that a lot of people worried.
By the fact that may be customer as well as deferred payment in this environment Covance for example, and another interesting statistics as that.
Only about.
15 once 515%.
Revenue comes from industries that have been the maybe high risk exposed to kind of like the airline for example, or the hospitality sector or some of the consumer goods.
Players our retail and then the rest of it is 85% of our business is in an industry has come from industries, our customers in industries that are moderates to lower risk.
So thats a good side for US right now our cash flow has been very solid you can see some of the data that I gave you as of April.
Thirtyth that we continue to.
Generate solid cash flow and I mentioned than we are over $5.5 billion. That's cash at the at the end of April So where we're just watching.
The market carefully managing working capital being very important in our cost.
Oh and our spend.
I can't give us precise number in terms of netting how much of the cash flow as a percent of net income, but in due time as we get a little bit more clarity I'll be able to give you though.
Thank you we'll take our next question from Rod Borgias with deep dive equity research.
Hey, guys. So I have a question on revenues and then a follow up about the cost takeout plant. So first on the revenues. Your commentary has conveyed enthusiasm about the progress you're making with clients on the other hand, it's hard to see the benefits from that progress and look.
And that the near term financials and the outlook for the June quarter, which of course, we understand is affected by coded and the contract run off that seemingly were started into motion in earlier periods, but with that is the backdrop I want to ask particularly Mike what are the med.
Tricks, you're looking at concerning the IXYS turn around.
And can you also comment on how those metrics are making you think the worst shouldn't be over on the revenue run off as the first half of fiscal 21.
Okay. So three metrics rod that I would I would lay out is is first of all the customer delivery and the relationships.
Because that is going to stem the revenue run off.
And you know being conservative.
You know I can't predict everything that every single one of these customers is going to is going to do but I'll tell you I have gone out of my way to make sure that they've seen the what I called new D. axes, showing up all right. So the first one is the delivery and am I hearing any problems that are out.
There and I've made myself personally available along with the leadership team says first thing.
Second thing is we're obviously very serious about this the second initiative, which is optimize optimize a cost.
Right, because there's too many people between the folks doing the work in a customers right. So we need to make sure we get that cleaned up I think that will continue to to help us deliver you know I just I look at also some basic things in that bucket to.
Do right around just the operational performance I mean, our PD ones are down our service. So lay penalties are down that's all metrics that I'm looking at.
And then the final thing I gave you all a glimpse as to the campaigns were running.
All right and we're at the front end of it because I'm on my team every day about the cross selling the fact that we're at 90% I mean, you know I would've liked to have been a little bit better on that right, but the 23% uptick now what I'll be measuring is the conversion of that of that qualified pipe.
So it's those three things, it's the customer delivery and the relationship alright. The second one is the optimize cost in the third is the cross selling Ron.
Thank you. This concludes today's question and answer session. We appreciate your participation Hey, Todd hang on hang on Rod had another piece of that question.
Hey, you guys still there.
Roger backend life Oh, great. Thank you. Thanks for letting me sorry about that and no no no no problem so listen in the in the past we've seen firms pursue cost take out and then sometimes it revenue trade off so my question is.
How do you take out substantial costs without sort of stymieing. The progress on the customer service improvements that that you're seeing and also just laying a better groundwork for growth. It sounds like you see ways to take out cost. It may actually make thing smoother with clients, but it'd be great. If you could explain more about how to avoid.
Oil trade off on growth as you pursue the cost takeout.
Okay. Thanks, Fred the a and again sorry about cut you off the look the first one is you got over communicate with the customers. So my third message during this quarter I highlighted exactly what we were doing and de layering to our top 200 accounts So I've pro.
Actively.
Communicated that with them and then when I've had the virtual meetings or the conversations I've reiterated what we're doing so it's not a surprise okay. I've also giving them. Some examples right and the examples rod came from the second piece, which was the detailed analysis I kept saying right over the last seven.
So I'm going to go review these accounts I'm going to review these accounts, where we went and did the work and we identified right the layers and when you identify the layers you can actually give the customers. Some examples of have you seen so and so have you know they shown up in made an impact and when they recognize that all right well that's part of ours.
Our management structure, but the person really isn't showing up everyday they get the concept alright, and then the last thing it's got to continue to take care of the people that are doing the work. So that's why I wanted to make sure that I highlighted for you all.
What were we gave them raises.
Right the folks that are coming in today that are doing a detailed work we've locked those folks down we started in January and then we'll be done we started in January in India to get ahead of it the industry in terms of salary increases and then we will finish with the rest of the world in August.
So it's really doing those three things proactively talking are communicating the customer second is the detailed analysis than three is taking care of the people.
So talk with that.
Hey, thanks, Thanks Rod.
Todd sorry, I I interrupted you you can probably close the call now.
Thank you Sir again, we appreciate your participation ladies and gentlemen. This concludes todays call you may now disconnect.
[noise].