Q4 2022 DXC Technology Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the D. C Technologies' fourth quarter fiscal year 2022 earnings call.
Lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
I would like to withdraw your question again pet Starwood. Thank you John Sweeney Vice President of Investor Relations you May begin your conference.
Thank you and good afternoon, everybody I'm pleased that youre, joining us for DXP technologies fourth quarter and full year 2022 earnings call. Our speakers on the call today will be Mike Salvino, our president CEO and Ken Sharp, our EVP and CFO . This call is being webcast at <unk> Dot Com Investor relations in the wet.
Cost includes slides that will accompany this discussion today today's presentation includes certain non-GAAP financial measures, which we believe provide useful information to our investors in accordance with the SEC rules. We provide a reconciliation of these measures to the respective and most directly comparable GAAP measures. These reconciliations can be found in the tables.
In today's earnings release and in the webcast slides certain comments made on the call will be forward. Looking these statements are subject to known and uncertain risks and uncertainties, which could cause actual results to differ materially from those expressed in the call. Our discussion of these risks and uncertainties is included in our annual report on Form 10-K, and other SEC filings.
I'd now like to remind our listeners that <unk> technology assumes no obligations to update the information presented on the call except as required by law and with that I'd like to introduce <unk> Technology's, President and CEO , Mike Salvino, Mike. Thanks, John I appreciate everyone joining the call today and I Hope you and your families are.
Doing well.
Today's agenda will begin with an update on the progress we have made in driving our transformation journey. There is no doubt that <unk> is in a better place next I will update you on Ukraine and Russia.
Ken will then discuss our Q4 results in FY 'twenty three guidance and finally I will make some closing remarks before opening the call up for questions I.
I am pleased of what we've accomplished in FY 'twenty two the next two slides show quantitatively and qualitatively. The progress. We have made that has put <unk> in a dramatically better place beginning with the numbers. We narrowed the total organic revenue declined by 620 basis points our growth.
<unk> has two parts.
<unk> grow GBS and shrink the negative declines in Gis, we've achieved the first part of our growth strategy by consistently growing GBS for four consecutive quarters in FY 'twenty two.
While we did shrink the organic revenue declines in Gis, we expected better results, which we plan to achieve in FY 'twenty three.
Concerning adjusted EBIT margins, we delivered a 230 basis point increase in our non-GAAP diluted EPS was up 44.
The highlight of the year was our free cash flow performance, we drove $743 million and free cash flow. This of one $4 billion improvement compared to FY 'twenty, one and is a clear indication that we have built a team that can execute.
Now, let me turn to our qualitative resolved discussing each of the five steps of our transformation journey. The first step is to inspire and take care of our colleagues, which was highlighted by how well we've taken care of our people through Covid and now the conflict created by Russia's invasion of Ukraine.
Concerning our customers, we continue to increase our NPS score, which is now at 31 and above the industry best practice range of 20 to 30.
Optimized cost as the next step we made good progress in portfolio shaping by divesting businesses that did not fit our strategy and we drove out cost across the organization.
Our cost takeout activities will accelerate for the Gis business in FY 'twenty three.
The first step is sees the market, where our book to Bill numbers continue to show that we can win in the industry.
Our trailing 12 month book to Bill of one one is a great result, and filing in terms of our financial Foundation Ken's team has done a great job executing three initiatives improving our free cash flow refinancing our debt and remediated the material weakness all three of these items have.
Put DXP in a stronger financial position.
We continue to stand with the people of Ukraine, and our thoughts are focused on a rapid resolution of the conflict while Russia's invasion of Ukraine has been a tragedy. This has not and will not have a significant impact on our business. Let me take you through how we've delivered on the commitments we made.
On March four.
First we've done a great job caring for our people in the region I would like to thank our DXP colleagues across the organization for coming together to deliver excellence for our customers and colleagues our transformation journey starts with our people and we are honored by the commitment dedication and caring we have seen from our.
People in the region and throughout the company over the past few months.
In terms of our 4000 colleagues in the Ukraine, we have successfully moved many of them to western Ukraine, Poland, and Romania, and I would like to highlight their productivity has been above 85% since the conflict began.
By the end of June we will also have successfully relocated our non domestic and corporate Russian employees.
Out of Russia.
Our second commitment was to exit Russia in April we exited the Russian market and successfully took care of our customers and colleagues of that business. This action fulfill dxp's commitment to exit the region and we will reduce our revenues by approximately $140 million per year or.
Our solid execution of these commitments has enabled us to have strong customer retention has made our business better and positioned us to effectively deal with the conflict as it continues.
As we move into FY 'twenty three our leadership team knows what we need to do within GBS and Gis. This clarity gives me confidence that the momentum created in FY 'twenty two will continue in FY 'twenty three.
<unk> business that we've consistently grown and is comprised of a set of digital offerings that are high value for our customers and for DXP.
This business is highlighted by our engineering offering which enables <unk> to help our customers grow in fact, a number of our customers refer to us as their growth partner.
He has deep engineering skills to create products services and experience that make our customers more relevant and vital to their customers. An example is our relationship with one of the world's largest automotive manufacturers.
Car buyers want a digital experience that will help them minimize disruption to their vehicles and we all know cars are full of sensors that produce all sorts of data. Our engineering teams use this data to provide diagnostics and preemptive failure analysis overall this lowers maintenance improves the cars.
Performance and leads to a better driver experience.
The engineering offering is just one example, but you can see why we're excited about the future of GBS. It is a business that's differentiated as high value for our customers in <unk> and now represents roughly 47% of the total revenues of DXP.
Gis is comprised of a set of offerings, where the work is mission critical making this business high value for our customers.
Based on the financial performance of this business. It is currently lower value for us in FY 'twenty three our top priority is improving the financial performance of Gis. The focus of this attention will be on driving organic revenue growth and modern workplace and driving margin improvement for <unk>.
Good infrastructure Slash IPO.
For modern workplace, we expect to see the fruits of last year's Labor drive improved organic revenue in FY 'twenty three we anticipate that Q4 will be the low watermark in organic revenue declines in by the end of FY 'twenty three modern workplace is expected to turn positive for.
For cloud infrastructure Slash <unk>, we are committed to taking out costs to increase margin, which will be done by fixing contracts, reducing contractor and real estate costs and optimizing the assets of our data centers. Finally, we will continue to portfolio shape to run a company that.
As higher value to our customers and DXP now, let me turn the call over to Ken.
Thank you Mike turning to our progress on our transformation journey. There is no doubt we are in a much better place. Our Q4 organic revenue declined two 8% impacted by 75 basis points due to Russia invasion of Ukraine.
Adjusted EBIT margin of eight 5% year over year, our margin expanded 100 basis points margins were impacted by 40 basis points related to taking care of our Ukraine, and Russia and colleague and exiting our Russian business.
Our trailing 12 month book to Bill is 111.
non-GAAP diluted earnings per share of <unk> 84.
Up 10 compared to prior year.
Moving to our income statement on slide 11.
During the fourth quarter gross margin was lower by 210 basis points due to accelerated hiring and higher utility costs in Europe SG&A as a percentage of sales was down 180 basis points as our business optimization efforts yielded results.
Other income increased due to a gain on sale of assets in total adjusted EBIT margin expanded 100 basis points intra.
Interest benefited from our debt retirement, and refinancing Q4 was $4 million higher than anticipated due to unwinding a legacy financial structure.
Adjusted EPS is up 13, 5% boosted by increased EBIT margin lower interest and a lower share count.
Our EPS for Q4 came in below our guidance by <unk> 14.
Due to three items aggregating 17.
<unk> Russian invasion of Ukraine, <unk> increased European utility cost and seven <unk>.
Higher tax rate.
For FY 'twenty, three we expect additional costs related to taking care of our colleagues and exiting Russia of $50 million and our tax rate will be back to a normalized level of 25%.
Turning to our segment results a key part of my strategy is to continue to improve the business mix and ultimately move GBS to be a larger portion of the business.
For the quarter, our GBS mix improved 160 basis points to 47, 2%.
GBS continues with its fourth consecutive quarter of organic growth of three 4% GP.
GBS growth was impacted by about 150 basis points due to Russian invasion of Ukraine. Our GBS profit margin was 14, 5% down 130 basis points year over year GBS margins were impacted by about 100 basis points.
<unk> invasion of Ukraine.
Organic revenue declined 8%.
<unk> profit margin was five 9% an improvement of 180 basis points benefiting from operational improvements as well as the gain on the sale of assets. We continue to work plans to move the Gis margin forward.
As Mike articulated our growth strategy has two parts first consistently grow GBS, which we feel good about.
Second moderate the Gis organic revenue declines we see early success with our IP outsourcing business.
Our GBS and Gis businesses are each comprised of three offerings.
Turning to our GBS offerings analytics and engineering continued its strong organic growth up 19, 7%.
Applications decreased 6% due to timing, we expect applications to return to growth in Q1.
The EPS generated $112 million of revenue down 12, 8%.
Moving to our Gis offerings cloud and infrastructure and security was down six 9% with a book to Bill of 1.04, it's great to see that our IP outsourcing declines moderated in the low single digits for two consecutive quarters with a decline of two 1%.
And workplace was down 19, 6% due to a difficult compare as the prior year quarter included a higher than normal level of resale of approximately $60 million or 930 basis points of growth rate.
We believe the fourth quarter represented the low watermark for modern workplace based on our investments in the business.
Its ability to win in the market.
For FY 'twenty three we plan to make three updates to how we operate and report our offerings.
We will bring our insurance and banking software assets and related business process outsourcing together.
Combining our cloud infrastructure with our IPO infrastructure business and third security will be stand alone.
Slide 14 that was reduced to our target debt level and remain there the entire year.
Interest is down significantly and restructure and tsi expense were reduced $565 million.
We also reduced the operating lease payments by $132 million.
Lastly, capital expenditures and capital lease originations as a percentage of revenue was 7% in FY 'twenty two down from roughly 10% in FY 'twenty and presents a significant opportunity to improve cash generation as we look forward.
Slide 16 demonstrates how our progress translate into improved cash flow outperformance in the last three quarters of FY 'twenty. Two provides a solid platform to build off of in FY 'twenty, three and ultimately gives us confidence as we work towards delivering our.
Longer term guidance of $1 5 billion and free cash flow.
I should note. This cash improvement has come while we've been reducing capital leases and related financing payments that sit outside of free cash flow.
Cash flow from operations in the quarter totaled an inflow of $271 million.
Free cash flow for the quarter was $93 million for the full year, we delivered $743 million of free cash flow exceeding our initial guidance of $500 million.
As Mike mentioned earlier, our financial Foundation is in a much better place we achieved a lot in the year improving transparency into our performance strengthening our balance sheet significantly improving free cash flow, reducing restructuring in tsi expense in <unk>.
Executing on our capital allocation program.
Now that our financial foundation is much improved we will pivot to providing more details on our business optimization efforts, particularly focused on improving Gis margins led by our Chief operating officer, Chris Dromgoole.
Turning to chart 18, let me expand a bit on what Mike discussed earlier that improving Gis economics is a top priority.
Let's think about our business optimization in two parts first improving disciplined execution with a focus on driving higher quality revenues and second optimizing costs that will allow us to expand margins.
On disciplined execution this starts with putting disciplined processes metrics and incentives in place to ensure our team is committed to finding profitable new business with favorable economic terms, we are moving away from leveraging our balance sheet to sell work that does not yield.
Quality revenue with appropriate margins and cash flow.
We are actively solution, an underperforming relationships and reviewing our contracts to ensure we can provide a high level of service, but also make a proper return that will allow us to invest in our business.
Cost optimization, there is clearly a lot of opportunity in front of us whether it is addressing our underutilized data centers and office buildings software agreements contractors delivery standardization or offshore mix, we feel that we have enough levers to improve the Gis.
Margin to circa 10%.
We believe more than ever we can make these changes as the competitive landscape has improved.
Moving to capital allocation on slide 19, we returned $634 million to our shareholders repurchasing $18 8 million shares or over 7% of our outstanding shares we expect to repurchase an additional 770 million.
Dollars or about 10% of our outstanding shares over the next three quarters. We continue to believe our stock is undervalued.
As a reminder, when our debt is at our target debt level, we expect to deploy any cash over $2 5 billion.
Additionally, we expect to generate $500 million of cash from our disclosed portfolio shaping initiatives.
Related to portfolio shaping we are committed to ensuring we have the right portfolio to drive organic growth.
We will continually assess our portfolio with specific focus on Gis to ensure our portfolio is aligned to our strategy and value creation to reduce complexity and allow management more time to focus on the critical parts of the business.
Moving to governance, Mike and I are committed to improving our corporate governance to be clear our low governance score is not and will not be our brands in that vein. We are pleased the legacy material weakness is remediated as part of our efforts to pass say on pay.
We have proactively engaged many of our shareholders obtain their feedback and use their feedback to reshape our pay practices you can see the improvements we committed to make that will be fully detailed in our proxy.
Turning to our FY 'twenty three guidance revenue of $14 nine to 15.05 billion. Two key items, we are addressing in our revenue guidance foreign currency is expected to be a headwind of four 6% or almost $800 million based on the <unk>.
Lengthened in U S. Dollar divestitures that are announced and closed lower revenue by approximately 2% or about $300 million.
We have additional divestitures and process, including funds depot Bank and we will update you accordingly organic revenue growth of minus 1% to minus 2%, which is a combination of continued growth in GBS and moderating declines in Gis.
Adjusted EBIT margin of eight 5% to 9%.
Our margin guidance takes into consideration $100 million decline in our non cash pension income for FY 'twenty, three and a $50 million of costs associated with taking care of our colleagues in Ukraine, and Russia as we reposition our business to put it in a better place.
And exit Russia.
The non cash pension income is due to expected returns on our pension assets exceeding pension costs as several of our pension plans are overfunded. We are focused on locking down these plans and further derisking our balance sheet.
non-GAAP diluted earnings per share $3 85 to $4 15.
15% growth at the midpoint free cash flow $800 million.
Our guidance for the first quarter of FY 'twenty three.
Revenue of $3 7 billion to $3 75 billion foreign currency is estimated to be 6% or about $250 million headwind.
Divestitures are expected to reduce revenue by about 100 million organic revenue decline of one 5% to two 5%.
Adjusted EBIT margin in the range of seven 5% to 8% due to the lower noncash pension income of $25 million and a cost to reposition our Ukraine, and Russia business non-GAAP diluted earnings per share of 80 to 85.
Free cash flow of minus $100 million due to seasonally high level of cash payments in Q1.
We are reaffirming our guidance for FY 'twenty four this reflects our strong progress on our transformation journey and our belief in the company's capability to execute over the next two fiscal years.
As we think about our FY 'twenty four goals, it's important to realize how far we've come as we've improved the transparency of the financials and the invest ability of DXP, we improved year over year cash generation by $1 4 billion.
We've tackled the issue that negatively impacted our ability to generate and hang on to cash and we are in the process of reshaping our portfolio to drive higher value for our customers and DXP. So that we can grow organically and generate cash flow.
As we close on FY 'twenty, two let me point out two key points that demonstrate we are in a better place.
First GBS never grew before FY 'twenty, two and has now grown for consecutive quarters second Gis is no longer declining double digits.
We will bring this positive momentum into FY, 'twenty, three which sets us up well for FY 'twenty four with that I'll turn the call back to Mike for his final thoughts.
Thanks, Ken and I agree that <unk> is in a better place in FY 'twenty. Two we made excellent progress on our transformation journey driving our financial performance and building a strong financial foundation, while Russia's invasion of Ukraine as a tragedy. Our team has done a tremendous job taking care of our call.
Our analytics and engineering business will emerge in a far better place. It is more resilient as a more diversified global delivery platform and has lower geopolitical risk. While this situation is unfortunate we have been able to manage it well and it has not and will not have a significant.
<unk> on our business.
Over the last two and a half years. It is clear that we have put <unk> in a far better place and I am excited to embark on FY 'twenty three my leadership team has clarity on the actions that we need to accomplish on our portfolio and how to improve its trajectory, we fully expect our momentum to continue and deliver long.
<unk> term and with that operator, please open the call up for questions.
Yeah.
This time I would like to remind everyone. If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from the line of Ashwin <unk> Baker Your line is open.
Ashwin, it's Mike how are you doing.
Hey, I'm good thank you.
Sorry, I was on mute.
Figured I'd learned that after two years.
I guess my first question is with regards to.
The mention of contract.
That said need improvement.
Improved performance so.
Is that different than when you first got there.
<unk> contract.
Could you kind of have.
Just help us.
With that in.
If they are indeed problem contracts again.
<unk> com.
Would be the question on what gets you out.
Okay. So ashwin this is <unk>.
Got nothing to do with us fixing those original problem contracts.
I said was our team has tremendous clarity now this is the first time since I've been here that my management team.
Majority of them have been in the seat for over a year. So they are now running their teams their strategies their policies or procedures and the clarity that we have on what we literally need to do to the Gis business has never been better. So we're raising the bar on what good looks like.
Here at <unk>, so when I think about fixing some of the contracts.
Look, we're just not going to run contracts.
Where we don't make the appropriate margin.
And if if we're not getting cola.
We will go get Cola, so we're taking a click up on managing this business.
Yes.
There's not a ton of these contracts, but clearly we've got.
Basically a laser focus on making sure these things get fixed.
Yes, maybe ashwin just to jump in real quick too I think when we had problem contracts previously it was around the customer relationship side, and I think Mike and his team did a phenomenal job in proving that when we talk about underperforming contracts. It's just where we think we can actually generate better margins, we have happy customers.
And I think we believe that we ought to have the right margins be able to ensure that we're investing in our business and our work for us and that's our focus and we think this is just additive.
We move the business forward and create a sustainable business, but ask when you know in this market Theres two things you look at you make sure that youre getting paid for the scope that you do.
Then the second thing is the margin and when I look at page 12, the Gis business, we've been floating around call it five 5% 6%.
We're going to continue to go fix that and take the appropriate measures to make sure. We're on the right track, but there is we are not in the problem contract category at all.
We've got and that's why I gave you the NPS score there is no chance that our NPS score would be 31, if we had a bunch of clients not like in our delivery right.
Alright, great. It sounds based on what you said that there are.
Just given the environment.
With wage inflation and timing of pricing and things like that.
These are things that you are.
Fixing as you go along.
That's what it sounds like.
The other question that.
Some clarity with regards to you.
You've mentioned pensions and Theres a potential.
Upside EPS opportunity with pensions could could you kind of walk through perhaps what's on the table.
Perhaps size that I know I might have missed the sizing of it.
Yes, so ashwin.
Pension.
Pension income generally runs greater than our pension expense. So we have a gap and it's noncash, but GAAP profit it was running somewhere around $300 million last year and it will be down to $200 million. This year and there was a couple of reasons right. One is the interest rates of certain.
Crap up I think that impacts everybody that has a defined benefit plan and we've also been I think relatively thoughtful with our pension surpluses.
Starting to move into I would argue maybe a little bit more conservative investments and we're looking to see if we can lock down those pensions and maybe wind them down certainly in all within the rules.
While the participants do well with that certainly trying to figure out how to unlock some of that potential surplus that we have in these plans.
Understood. Thank you.
Thanks Ashwin.
Your next question comes from the line of Bryan Bergin with Cowen Your line is open.
Yeah.
Hey, good afternoon guys.
Just first a clarification on the outlook in the fiscal 'twenty three.
Give us any sense on the divestitures and the portfolio shaping was there any margin or free cash flow.
<unk> impact that you can quantify there.
Yes, I'd look at the margin impact to be roughly about what our business runs out so I wouldn't say, it's accretive on a margin side, but arguably a little bit maybe right around the eight 5% 9% range we're at.
Okay, and free cash flow nothing nothing to call out specifically on the divestiture piece just to clarify that.
No I think we're good on the free cash flow piece of business at this point.
Okay, and so then when we look at that 800 million number you know you obviously did a lot of proactive measures in fiscal 'twenty. Two do you have anything chunky in there that you are undertaking as well.
If we try to make sure we leave a bit of room on the free cash flow. So we can deal with some of the legacy stuff that pops up from time to time. So I would say we've tried to be thoughtful with that in general.
Okay. Thanks, and then just last one for you just on the macro if you just put Russia and Ukraine. Aside can you give us a sense on what youre hearing from clients just any notable change you've seen in client decision, making in recent weeks and how you thought about when you built the fiscal 'twenty three outlook, what kind of economic environment did you did you kind of build in there.
I mean, we looked at it like this the first thing that the big indicators, our book to Bill and the book to Bill that we just delivered was one point too. So we're not seeing the headwinds I've heard a lot about Europe and so forth.
We have not seen that yet.
And like I commented, Brian we really the way I look at it is we have two different businesses. We have GBS that we've consistently grown in that business as highlighted by analytics and engineering that we grew almost 20% and that is the business, where we had to deal with the Ukraine, Russia situation so that.
That 19, seven is a very good number and we've seen an.
<unk> ability to pass on price increases in this environment. So then you turn to Gis and.
I haven't been in the outsourcing business for 30 plus years. This business has an annuity stream. So in downturns. This thing holds up and it holds up because we've got long term contracts that are protected by Cola causes.
And then the thing I will tell you is in the Gis environment. We have now become the safe pair of hands that competitive landscape has changed in terms of the providers of mission critical systems.
And we've got some good demand, let's just put it.
Coming our way as it relates to the.
The Gis business now when I look at margin, if we keep going in terms of inflation and the economic headwinds look we put into this expanded margin salary increases.
Some more costs for Ukraine, and Russia that I think is conservative.
Utility costs inflation adjustments and then the appropriate investments in the business one of the things that you will see US do is invest in the insurance business that has been a really nice nugget for us that we're going to lean into pretty heavily and then the last thing I always look at is people Bryan So am I, losing people in.
Can we attract good people in our attrition numbers are definitely right in the middle of the industry averages, but the key signal for me was as we had to scale up a number of the centers in our global delivery network to deal with Russia, and Ukraine, we could attract good people otherwise we wouldn't have effectively dealt with the.
Crane Russian situations. So I would tell you our viewpoint was steady as we go.
I don't think were overly aggressive or overly.
Optimistic around what we're trying to get done.
So it gives you enough color on how we saw a 23.
Yes that was great and thanks for all the color I appreciate it.
Josh next question.
Your next question comes from the line of Bryan Keane with Deutsche Bank. Your line is open.
Hey, guys how are you doing.
Mike Let me ask the Gis question, a little bit differently.
I know it was weaker than expected and I guess in the history of <unk>, it's probably been typically weaker than expected.
So slide 18, you have a plan to improve it.
Why is this plan going to work with many plans haven't worked to improve Gis.
Brian I've been at this now for two and a half years and what I can tell you is I've got the team in place to finally do it. So let me just take you back to the strategy strategy number one was to make sure we were delivering for those customers and we clearly are with the NPS score. This.
Second thing then was to make sure that we.
Sure.
<unk> continued to build the relationships. So we could have opened minded conversations if we wanted to change the scope moved the scope and so forth.
Third thing is this we're really honing into things that.
We think we should adjust like for instance, I don't think on our balance sheet should be.
The purchase of computers or quite frankly, the purchase of software clients can go directly to those folks that doesn't need to flow through.
Flow through Us Thats shaping 101, and then when you also look at some of the contracts I continue to go back to the margin. There is plenty of stuff that we can do and what we need to do is be proactive with the clients and tell them. What we're doing there may be some dollars that we need to give.
To.
Decreased contractors to deal with data centers to literally move people around the world, but now we can start being proactive you can't do any of this Brian when we're literally not delivering okay. And then you can see.
And the fact that.
I've got the right I've got the right team in place. The second thing is I mentioned I think in my last answer the competitive environment has changed.
Okay DXP is being looked at now totally different because of the investment that we've made in Gis and thats not hard dollars Thats people thats relationships, that's us making sure that these.
Tia States don't tip over people are now coming to us to say, hey, let us run.
Youre think about having us.
Look at running their their contracts, so I kind of like the competitive environment. So that's on the revenue side on the cost side like I said, we've been preparing for this I think slide 18 maps out what we're going to do the thing we haven't touched yet is we've had teams built now for the last year looking at contractors and looking to real.
State, Ken and his team did a nice job with real estate they took out roughly.
$93 million in costs. The next thing that we're going to tackle is the data centers, which you all know we've been a little long on data center capacity for a while and we're going to tackle that in 'twenty three so thats sort of a long winded way of answering your question, but this is something that we've been preparing for for a while it's part of the strategy.
<unk> Love. The fact that we're GBS is GBS can't go backwards, we got to continue to grow that the second part of the growth strategy was meant to fixed Gis, which is what we're going to do.
Got it no that's helpful and just as a follow up Ken on <unk>.
On the guidance it looks like fiscal year 'twenty, three maybe a little lighter due to some of the callouts, especially the unfortunate Ukraine, Russia situation.
Fiscal year 'twenty four didn't change so youre going to grow margins at least 100 basis points in fiscal year 'twenty for over 23 and in a couple of hundred basis points in revenue. So can you just talk about the jump from fiscal year 'twenty three 'twenty four it looks like a sizable jump, but maybe there are some one timers in there and some.
That helped that Joe.
No Brian let me take that question. So if you look at what we've delivered on page five over the past 12 months you look at the 620 basis point improvement organic revenue. If you look at the 230 basis point improvement in adjusted EBIT. If you look at what we've done in free cash flow, we basically have to deliver.
The same results over the next 24 months.
We never said this thing was going to be a straight line, we definitely like the trajectory, we're on and I would keep coming back to what gives me confidence around 24 management team in place.
This is a team now that literally has got their hands around like I said the team the strategy of their policies and procedures never been clear. So that's a key point and literally the math that's pretty simple to do is you take page five you see where we landed with 22.
If you say that will continue this team will continue to execute which we've done to date, you'll see that not only will we deliver on the FY 'twenty four guidance will.
We will be usually be on the upper end.
Hopefully that gives you some color in the way we looked at it yes. Thanks guys. Thanks, so much for taking the questions.
Your next question comes from the line of Rod bourgeois with deep dive. Your line is open.
Okay, guys, Hey, I wanted to start with a question about portfolio shaping.
You mentioned portfolio shaping and your comments on Gis I was hoping you could talk about your criteria for portfolio shaping.
Give us your thoughts on how.
Portfolio refinements would enhance <unk> overall value.
Alright, So hi, Raj. Thanks for the question. The our criteria is let's just talk about for because when we look at fixed net ex Japan systems of German banks, the Israel business. They will go through the same process. So the first thing is now that we've got control.
All of this business and you've seen the progress we've made in 'twenty two now, it's our turn to really sort out.
Businesses that will literally get us to high value.
So what do I mean by that I mean, the GBS business that you can see on slide 13, that's all digital stuff.
And the engineering work, we do again with my background that is second to none so that's high value for DXP and high value for our customers.
So when something is.
When something isn't high value. That's the first trigger that we want to look at our age. So they will start looking at that business. The second one is complexity.
You know since I've sat in this seat over two and a half years I've been trying to drive down the complexity of the things we have to manage so if we can decrease the complexity and increase our management focus towards the businesses that matter.
That's what we will do.
Third as we look at FY 'twenty for a lot and if we can help accelerate getting to those targets.
By divesting a business, we will and then the last one is a good valuation.
I think you would you would think that we were being remiss. If we didn't look at the sum of the parts of DXP and if we can see the sum of the parts and we can unlock significant value on one of those parts with with divesting something for a good valuation.
Then then we'll do it so simply put if we can get it.
If it gets <unk> to higher value check if we can reduce complexity check if we can accelerate getting into the FY 'twenty four numbers check and if it's a good valuation we'll consider it.
And that's what we've done and that's what we did with fixed and ex Japan systems, the German banks and so forth. So.
Hopefully that gives you a little bit more detail on how we think about it.
Got it and the <unk>.
<unk> four workplace revenues.
Pretty encouraging.
You're guiding to the ability to get to positive growth by the end of the fiscal year. What are the levers that are giving you the confidence in getting workplace revenues heading heading in that direction.
Two levers the first one is I have been saying for the last year. We took the exact same approach.
We did to basically fix Ato.
Probably another calls didn't mean much.
But now when you look at IPO that thing has gone from minus 9% at the beginning of the year to a stable call it minus 2%.
When we see the investment we made in modern workplace and we see all the work we've done over the last year.
That gives us a lot of confidence that not only is the fourth quarter. The low watermark, but the thing is going to pop because just like Ato Rod modern workplace has very chunky contracts. The revenue comes on in large pieces. So as what we've been doing over there.
The last six months is starting to convert some of the new business.
Debt that we've sold.
I know for many of you the book to Bill Hasnt converted quick enough, but for US we know exactly when that revenue is coming on and we can see pretty clearly to modern workplace and FY 'twenty three going positive.
Got it thanks.
Thanks Rod Josh.
Josh next question.
Your next question comes from the line of Keith Bachman with BMO. Your line is open.
Hi, Keith.
Hi, This is Brian Clark on for Keith Thanks for taking the question.
Wanted to.
Visit the Python comment you made in your ability to.
Pass on some price increases can you just dive a little bit deeper into the pricing environment. What are the conversations look like with customers.
Where do you gain more.
Openness I guess to have that conversation with some customers.
Thank you.
Okay. Thanks for the question so look.
The price increase is usually in the analytics and engineering space.
And the conversation is pretty simple.
After we've created a certain amount of value.
In terms of doing a quick pilot and so forth.
And then the conversation goes to what's the value we're going to create moving forward.
And as we look at the value that we're going to create moving forward and staffing that team of people know.
How critical these engineers are to get.
That's why we think we've got a unique position in the engineering space because we can continue to create and recruit these engineers to get the work done.
So because they are in such demand because everybody talks about it quite a bit there has been an uptick in terms of us being able to.
Give a little price increase to an <unk>.
The customers just because.
They don't use all the resources those resources can be quickly move to other projects. So that's basically the conversation.
I've been thrilled about it because we've been leaning in our bench get.
Gets cleared pretty quick and when you've got that low of a bench and better get as much.
As much money as we can for those folks.
Josh next question.
Your next question comes from the line of Lisa Ellis with Moffett Nathan Your line is open.
Hey, good afternoon, guys and thanks for taking my question.
First one for me was on the trailing 12 month book to Bill you highlighted that's running at $1. One one that's.
A really strong number but then the FY 'twenty three revenue guide is down 1% to 2% on organic basis can you just help us bridge those two.
Factors a bit like what are the other other kind of levers or drivers underneath areas there.
Weakness in the backlog or is there an FX impact I'm, just trying to kind of reconcile those two numbers. Thank you no FX impact Lisa that is literally us bringing on large chunks of work I forget the call or the question that was above to say Oh looks like FY 'twenty three to 'twenty for us.
Jump well, it's not a jump if youre literally taking six months nine months to convert some large contracts okay. So.
Look a lot of our revenue is project base, that's the stuff that converts quickly, but the outsourcing deals don't don't convert overnight. So and you know those take anywhere between six to nine months to convert.
You you can tell by my comments, where they're being converted.
So.
The reason why that guides that guide is because the revenue should come on in the back portion of FY 'twenty three.
Got it okay Super helpful. So there is like that.
<unk> kind of impact in there on the IPO side.
Second question, just looking at slide nine on the actions, we're improving Gis.
Okay.
Good list of actions I always kind of.
Maybe expecting or hoping to see.
Some investments in actually helping clients with the cloud migration work that they're doing.
That's affecting this business right as many of your clients might be modernizing and migrating some of these foreclosed and to the cloud is that a piece of vision and.
Can you just give us a little bit of an update on how much work you're doing with clients now, but like you said you can prove the relationship tremendously with these clients over the last couple of years.
Yes, I mean, we said it's definitely in there.
When I look at the cloud infrastructure and IPO.
It's not only just on Prem stuff, but there is there is a ton of cloud that cloud work that we do and Thats one of the things that Ken highlighted as we get into Q1, we're going to detail out even more GBS and Gis to say, okay. The Gis stuff that we're talking about here is cloud infrastructure.
But thats definitely in there.
The code there on optimizing the assets of our data centers, that's what you're poking at.
And that's clearly what we're going to go after now, but when you think about the journey. We've been on the first thing was get the contracts under control will start delivering for the contracts start taking some cost out and now the point that we're in is we can really look at not only the real estate, but also these data centers that we're running and may assets that are in them.
Should they move to the cloud should they stay on Prem.
How do we balance that and then how do we balance that when we've got a data center that's not fully utilized so that's what that optimizing the assets of the datacenter means.
Got it clarity clarity, that's what you should take away.
Like I said this is the first time the team has been in place I mean, I know I've talked to you guys. A lot about a have hired this person or that person. That's great. So that means we've got good talent, but dow that good talent has stayed and are really starting to drive what we're trying to do here.
So hopefully that gives you enough color Lisa.
Yes very helpful. Thank you.
Josh next question.
Our next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.
Hey, guys. Thanks. My first question is just looking at some of these metrics on the GBS side. The growth rates were very strong in those key areas that we called out earlier, which.
Again, I mean, if that is sustainable probably should lift.
The rising tide should lift the whole ship here at some point I think it's just a question of what you were alluding to earlier.
Business in collecting and so with that in mind can you remind us a bit more about the types of contracts coming into the Gis side that.
Youre booking business in what exactly is it in terms of what kind of work are you booking and like what's resonating now and sort of follow up to Lisa's question, a little bit as well as I think Brian what's resonating now that youre going to see a big term big contracts coming later in the fiscal year.
That's good that's really going to drive that path.
So the bottom line is the first one is modern workplace.
When you look at those contracts Mcdaniel has done a great job.
We kept showing you all the the book to Bill and the <unk>.
Book to Bill of 112 for trailing 12 months. That's a good indicator that he has built up a backlog that we then have to go in and think about it.
A lot of these clients have 50000 or 100000 people that takes a while to bring that revenue on.
And then same right when we lost it and we started looking at these negative numbers, that's what was going out the door right.
That revenue. So the first one is modern workplace and like I said those are our large contracts. The second one that I keep talking about is the competitive environment within IPO. So that's literally modernizing IPO work. Okay. So that means I'm going in im updating servers a month.
Dating networks that can be both on Prem and also cloud.
I am not going to get into more detail on the competitive environment lets just say it is 90 stay here that DXP as a safe pair of hands financially safe good team.
Good client references you guys do your own channel checks you know what you are hearing.
So theres work to be had out there and you know what we're going to go get it and we're going to get it at the right price. So that's that's our attitude there.
Okay. Okay.
Eric.
Okay Darrin hanging on one thing because you did make a point on GBS. When you literally look at our business. The other thing that hopefully everybody sees now is GBS is almost half of our business.
Len mentioned 47, 2% or something like that that is that has not been the case. So we throughout this transformation journey, we have grown the business that is what seven $6 billion now of digital stuff that we can compete with anybody that has high Val.
<unk>.
So we got to keep that business growing I couldnt be more pleased about that we do a couple more things to Gis and <unk>.
I like the future of DXP.
Okay, great sorry, but just one quick sorry about that.
Bye.
I appreciate it very quickly on the financials just on the free cash obviously, you've made a huge amount of progress Ken and team and just when we think about the bridge now from them I think youre, saying $800 million or so into I think it says $1 5 billion for 24, which was reiterated.
It seems like you've done a lot already I guess I'm curious what the next step would be to really bridge that.
Detailed bridge into FY 'twenty four.
Exactly yes, sorry. This is one of the things we certainly have been in the details of the business.
And when you think about it right the progress the $1 billion for change, we certainly beat our guide for this year pretty significantly so which is a great result.
When I kind of think of 23% to 24, we've got some restructuring in tsi.
Spencer that basically impact cash flow that will go down so I think a couple of hundred million dollars there.
We're very focused on capex.
Uses of cash the business has been running 67%.
Capex I think there is certainly some knobs to turn there you heard Mike talk about passing through software and those kind of things, we definitely need to get more thoughtful with how we deploy capital. So I think there is a pretty big focus there as well margin improvement we can touch on.
Working capital.
As well and then our bank actually.
Consumed a little bit of cash this year, which we don't expect it to consume going forward because it won't be in the portfolio. So when the deposits go up and down.
It actually has a negative impact on cash flow, which sounds odd, but thats I guess out bank accounting works. So I think that will ultimately be out of the portfolio. So I think we're pretty comfortable on our bridge to $1. Five we think we've got a lot of levers and we will just keep working at them and that's what we did this last year Darrin the key is.
I'll, let Ken keep 14 and 15 in the deck.
Which is a lot of detail alright.
Round, what our opportunities are.
Literally things that we look at rate on a quarterly basis, starting with restructuring in tsi. It couldnt be more pleased around our commitment from taken that to over $1 billion to now roughly $300 million and continue to drive that down but it literally has all the pieces Ken talks about whether it's the.
Leases whether it's.
The interest expense, it's our way of making sure that we're very fiscally smart about keeping the cash with US and then doing something good with it like the capital allocation so very.
It's a team effort, but Ken has done a nice job with.
Our new finance team driving that home.
Yes, maybe even just touch on something Mike said, the capital leases, which if you think about when we started our journey they were burning around $900 million I think we guided this year to $500 million that all sits outside of free cash flow and to mikes point about hanging on the more cash the $1 billion five becomes even more meaningful.
With that number ticking down so we think thats just a great result, as well.
Great. Thanks, Darin Thanks, Josh.
We're at the top of the hour, but let's let's take one more question if we can.
Certainly if you would like to ask a question. Please press star followed by the number one on your telephone keypad will pause briefly to compile any remaining questions.
There are no further questions I will turn the call back to Mike <unk> for closing remarks.
Sorry, Josh sorry.
Sorry.
My apology, okay, perfect from Jason Kupferberg with Bank of America. His line is open.
Thanks, guys I'll be real quick.
Trying to wrap up but I was just wondering do you expect to exit this fiscal year at breakeven organic revenue growth.
And I'm just curious just given all the commentary around pricing is there is there an assumption of positive net pricing and the revenue growth outlook for this year. Thank you.
No so Jason on the pricing, we didn't we didn't put that into the revenue growth I mean.
Like I said, we've been at this now for two and a half years, we're looking at the rhythm of the business.
And showing that the.
The trajectory what I would do is come back to the comment that I said rate. This thing was never going to be a straight line.
I like the momentum that we have we literally have to deliver over the next two years, what we just got done doing just just got done delivering.
So I mean, I think we've got a good guide for 'twenty three I can definitely see.
24 in our sites.
Got a lot of confidence in terms of us getting there.
So Jason. Thanks, Sorry, you were you were held up a little bit. So look in closing first of all I appreciate everyone joining the call.
I just want to leave you with I couldnt be more pleased about our team and the momentum that we've achieved in 'twenty, two and definitely looking forward with our team of carrying that momentum into FY 'twenty, three and ultimately achieving our longer term goals. So with that hopefully everybody has a nice holiday weekend.
Josh Please close the call.
This concludes today's conference call. Thank you for joining you may now disconnect.
Please wait the conference will begin shortly.
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