Q1 2023 DXC Technology Co Earnings Call
Yeah.
Good day, everyone. My name is Kelly Anne and I'll be your conference operator for today at this time I would like to welcome everyone to the DXP Technology Q1, 2023 earnings Conference call. Today's call is being recorded all 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 would like to ask a question.
During this time simply press star one on your telephone keypad, if you would like to withdraw your question simply press Star one again.
At this time I'd like to turn the conference over to Mr. John Sweeney head of marketing and Investor Relations. Please go ahead Sir.
Yeah.
Thank you and good afternoon, everyone I'm pleased that you're joining us today for DXP Technology's first quarter fiscal year 2023 earnings call. Our speakers today on the call will be Mike Salvino, Our chairman, President and CEO and Ken Sharp, our EVP and CFO the call is being webcast at DXP investor relation.
The webcast 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 SEC rules provide a reconciliation of those measures to their respective and most directly comparable GAAP measures. These reconciliations can be found.
The tables included in today's earnings release and in the webcast slides.
Certain comments, we make on the call before looking these statements are subject to known risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our annual report on Form 10-Q, and other SEC filings I would now like to remind our listeners that DXP techs.
<unk> assumes no obligation to update information presented on the call except as required by law and with that I'd like to introduce <unk> Technology's, Chairman, President and CEO , Mike Salvino, Mike.
Thanks, Jon and I appreciate everyone joining the call today and I Hope you and your families are doing well today's agenda will begin with an overview of our Q1 results next I will update you on the progress, we're making with our transformation journey, Ken will then discuss our financial results in more detail and our updated.
Guidance and finally, I will make some closing remarks before opening the call up for questions.
Our transformation journey is creating value, but as you can see with the shortfalls in the quarter, we need to do better. The good news we have the right plan for FY 'twenty. Three we are laser focused on executing this plan with my team of operators and the work that needs to be accelerated is within our control.
We've done a nice job of investing in our business that has produced a stronger quality company and deeper customer relationships that have positively changed our reputation in the industry.
When I talk about the quality of company that we are I want to highlight we continue to improve our free cash flow generation debt and capital allocation is being well managed we have portfolio shaped and sold off businesses that were distractions to our strategy, we have consistently grown GBS.
And narrowed the declines of Gis, while moving our revenue mix towards the higher value business of GE.
And finally, we've improved our governance significantly.
Concerning customer relationships the NPS score that we communicated during these calls shows that we now have deep customer relationships, because we are delivering our customers Trust us with their mission critical systems, and now trust us with their higher value business needs, which is evidenced by the consistent.
<unk> of our GBS business.
New and existing customers are turning to us for their Ato and modern workplace needs because of the quality of company, we have built and our reputation that we deliver for our customers.
As you heard last quarter, our plan for FY 'twenty three was to begin the year with lower margins and to increase them throughout the year, we are accelerating our cost optimization to reduce $500 million in cost by the end of the year not only as my management team focused on this but so my I wanted to.
Remind everyone that roughly the same team of operators took out $700 million of annualized cost in FY 'twenty, one while delivering for both our customers and colleagues and clearly expanding our margin.
It's this experience that gives us confidence that we can do it again.
The Q1 results are as follows revenue was $3 $71 billion and minus two 6% organic.
Book to Bill was <unk> 87 in the quarter. The shortfall was within our control we purposely pushed out deals in the areas of IPO and modern workplace due to poor economics, all that being said we are currently at a trailing 12 month book to Bill of 1.06 and we.
Expect to be back over one in Q2 adjusted.
Adjusted EBIT margin was 7% and EPS was <unk> 75.
And finally free cash flow was negative $12 million, which is a significant improvement from the negative $304 million that we produced last year.
Now, let me give you some additional color around our transformation journey.
The first step is to inspire and take care of our colleagues. It is very clear that people wanted to join DXP, which used to be an issue in the market I'm very pleased by the way we have taken care of our people impacted by the Russia, Ukraine conflict and COVID-19.
Concerning our customers. Our most recent NPS score was 30, which is on the high end of the industry benchmark range I mentioned earlier that customers are now trusting us with their higher value business needs and our analytics and engineering offering is a great example of where we have consistently performed well.
In the market.
For one of the world's leading retailers, we are changing the way their loyalty program works to enable the company to increase revenues and decrease costs, we are transforming their loyalty technology and data to better ingest and manage the right data.
This data led transformation is delivering their customers more personalize offers so that they can use their loyalty points, where they are most impactful across all channels.
This has increased loyalty and spending which has helped the retailer grow.
In addition, the transformation has lowered costs by managing the right data versus all of the data.
Analytics and engineering as an offering that we have consistently grown in double digits, which has helped us with our strategy to grow GBS.
In Q1, the two 8% growth in GBS is the fifth quarter of consecutive growth and we narrow the declines of Gis producing negative seven 2% growth due to the improvement and modern workplace.
Optimized cost isn't the next step as I stated earlier, we have high confidence that our cost optimization will improve our margins and make DXP easier for our colleagues to work here easier for our customers to work with us and position us well for the future.
We expect to eliminate $500 million of cost. This is comprised of the following areas staff optimization, including increasing productivity and offshoring contractor conversions office and data center space.
Network, and telecommunications and third party spend in the areas of hardware and software I also want to highlight a reminder, that I discussed with my management team that along with these actions. We will continue to run the business. This means we will continue to hire for the businesses that are growing like GBS and the SKU.
The offshore presence of our global delivery network.
The first step is sees the market. Our Q1 book to Bill of <unk> 87 was a direct result of more disciplined dealmaking and our trailing 12 month book to Bill is still a healthy 1.06, new work for the quarter was 57% and renewals were 43%.
As I said before we pushed out a number of deals in the eto and monitor workplace areas. Because we believe we can get better economics.
The demand in the <unk> and modern workplace market is there and customers. One providers that are financially stable are investment grade and will deliver that is now DXP and due to these points. Our reputation has changed in the industry and that is why we are now the safe pair of hands.
<unk> that are coming our way and we're being very disciplined in our dealmaking.
Providers have given customers aggressive deals in the past with hopes that they can improve the economics over time and the old <unk> was part of that trend. We all know that these deals were hard to economically make work the new DXP is focused on doing good deals from the start and although this.
Upland Dealmaking may have a short term impact on our book to Bill we believe that it will help us longer term improve margins and deliver for our customers all of that being said, we expect Q2 to be back over one.
And finally, I am pleased with the financial Foundation, and how far we have improved the quality of <unk> over the last couple of years, we're doing a nice job of improving free cash flow and the business is producing results that has helped us manage our debt below 5 billion. We've also delivered 900 million.
To shareholders through our capital allocation program, while being below our target debt level and finally, we have significantly improved our corporate governance and with that now let me turn the call over to Ken.
Thank you Mike turning to our progress on the transformation journey, we continue to move forward on our key initiatives Q1 organic revenue declined two 6% 10 basis points or $4 million below the bottom end of our guidance.
Adjusted EBIT margin of 7% was 50 basis points below the bottom end of our guide year over year, we improved free cash flow performance by $292 million.
Free cash flow was $88 million better than the expectation we gave on the Q4 call.
As a reminder, Q1 cash is seasonally impacted including software vendor payments and incentive payments non-GAAP diluted earnings per share of <unk> 75.
<unk> <unk> below the bottom end of the EPS range.
Moving to the income statement on slide 12.
The first quarter gross margin declined 40 basis points compared to prior year.
Primarily due to increased direct cost as a percent of revenue and unfavorable FX movements.
We invested in our global delivery network in order to improve our delivery and ultimately allow us to optimize cost while we're making these investments and doing the knowledge transfer it is leading to higher costs.
In addition, we made investments to deal with demand and the GBS marketplace as well as to exit Russia. Finally, we need to optimize cost to drive higher margins in Gis.
SG&A as a percent of sales increased 10 basis points as we made investments in certain corporate functions.
Other income decreased 40 basis points due to lower noncash pension income.
Preference is to move towards a stronger balance sheet by reducing pension exposure as a result, adjusted EBIT margins declined 100 basis points.
Our cost optimization efforts have moved at a slower pace than anticipated as we were thoughtfully building. Our plan net interest expense is favorable benefiting from lower interest expense and higher interest income.
EPS was down <unk> <unk> compared to prior year and was impacted by <unk> <unk> from lower margins 10 from unfavorable FX rate movements <unk> from a higher tax rate. These impacts were partially offset by 15 due to lower interest expense.
And a lower share count.
For revenue the continued strengthening of the U S. Dollar is resulting in $1 billion of headwinds or an additional $374 million from our prior guidance FX is having a more meaningful impact on margins due to a higher concentration of cost in U S dollars year over year.
<unk> FX is negatively impacting adjusted EBIT margin by approximately 50 basis points or an additional 25 basis points of margin impact from our prior guidance.
Next let's turn to our segment results, we continue to see improvement in the business mix as GBS becomes a larger portion of the business for the quarter GBS increased 180 basis points to 47, 4% of total revenue GBS has.
Consecutively grown for five quarters, and as our higher value business with higher margins and lower capital intensity.
<unk> continues to grow organically up two 8% driven by strong analytics and engineering demand. The GBS profit margin was down 250 basis points to 11, 9% impacted by higher cost and FX.
Organic revenues declined seven 2%.
Gis profit margin was six 5% an improvement of 70 basis points benefiting from lower cost a gain on sale of assets, partially offset by FX with that cost optimization efforts, we expect to see improvements in our segment margins in the second half of.
The year that will continue through FY 'twenty four.
Turning to our six offerings that comprise GBS and Gis, starting with GBS analytics and engineering continued its strong organic growth up 15, 7% applications declined 2% insurance software and bps generated 300.
$68 million of revenue up 3% moving to our Gis offerings security was down 3% cloud infrastructure in it outsourcing is performing in line with our expectations with declines moderating at negative four 4%.
Modern workplace was down 16, 1% an improvement from the fourth quarter of.
Down 19, 6%, we expect to see continued improvement in modern workplace throughout FY 'twenty three.
Book to Bill has been impacted by our increased pricing discipline, Mike mentioned earlier.
We have taken a more disciplined approach to ensure we achieve reasonable economics that appropriately cover our cost of capital.
At the end of the day, we believe the market realizes for large scale infrastructure type work DXP is the safe pair of hands. We believe our competition has been forced to be more rational as a result, we expect to be able to assign work with better economics.
Slide 16 demonstrates how DXP continues to benefit from its financial foundation that continued to decline due primarily to FX impacts on euro denominated debt.
Currently about 60% of the outstanding debt is euro denominated.
At $4 8 billion in debt, we are below our target debt level of $5 billion, we continue to reduce our restructuring and tsi related cash outflows. These expenses totaled $35 million in the quarter down significantly from prior year.
Capital expenditures and capital lease originations as a percentage of revenue were six 4% in the quarter down from 11, 9% in Q1 FY 'twenty two.
We continue to thoughtfully examined our capital expenditures and capital leasing as their capital intensity presents a significant opportunity to improve cash flow.
As we think about cash generation and capital available for deployment, let me take a moment to discuss the interplay of capital or finance lease debt reduction and cash available for capital allocation.
In FY 'twenty, three we expect to repay $500 million of capital leases reducing debt.
Based on our efforts to better manage fixed asset purchases via capital leasing we expect to reduce borrowings in FY 'twenty three to approximately $200 million of capital lease originations. So between the capital lease repayments and the lower originations or borrowings our debt would be.
Reduced by an approximately $300 million the $300 million of capital lease debt reduction provides flexibility to either borrow for capital allocation by staying at our target debt level or further de lever.
Our expectation is to hold our $5 billion target debt level, yielding cash available for capital allocation of $500 million.
Moving to slide 19, given our current valuation we believe the best capital allocation decision is to repurchase our stock we have returned $900 million to our shareholders by repurchasing 27, 8 million shares or over 10% of our hour.
Outstanding shares since the start of FY 'twenty two.
As of the end of June we are halfway through our recent $1 billion share repurchase program and are on track to complete this prior to reporting our fiscal year results.
Further we are on track to achieve our $500 million of cash proceeds due to our previously discussed portfolio shaping initiatives.
Turning to our guidance for the second quarter revenue of $3 five 5% to 358 billion two key items addressed in our revenue guidance foreign currency is expected to be a headwind of seven 2% or almost $290 million year over year.
Divestitures are expected to produce revenue by about $93 million organic revenue growth of minus one 5% to minus two 5% <unk>.
Adjusted EBIT margin of 7% to seven 5% as we continue to face headwinds from higher cost as a percent of revenue and FX.
non-GAAP diluted earnings per share of 70 to 75.
Our updated FY 'twenty three guidance revenue of $14 6 billion to $14 75 billion. We now expect foreign currency to be a $1 billion year over year headwind. This is an increase of over $300 million as compared with prior guidance.
Divestitures are expected to reduce revenues by about $325 million organic revenue remains unchanged at a decline of 1% to 2% adjusted EBIT margin in the range of 8% to eight 5% this reflects higher than anticipated costs.
As a percent of revenue and a FX impact of about 25 basis points, we expect margins to improve through the second half of the year as we execute on our cost optimization efforts non-GAAP diluted earnings per share of $3 45 to.
At $3 75.
Down <unk> 40 from our prior guidance free cash flow of 700 million reduced by $100 million.
We are reaffirming our guidance for FY 'twenty four this reflects our confidence in our ability to execute while we have more progress to make with our margins, let's put it in perspective.
Over the last couple of years, we have improved our margins while offsetting headwinds.
Including divesting a large portion of our business revenue declines due to legacy terminations lower pension income and significantly reducing restructuring in tsi.
While our cost optimization initiatives ramped slower than anticipated. We believe we have the right plan with the right operators to accelerate our margins with that let me turn the call back to Mike for his final thoughts.
Thanks, Ken and let me leave you with a few key points our transformation journey is creating value and we are confident that we are taking the right steps for <unk> in the short term that will set us up for success longer term I.
I am pleased with the quality of company DXP has become with our stable that sound capital allocation strategy free cash flow generation focus investment grade profile improved governance, and our consistent growth in GBS.
Im also pleased with the work our team of operators has done to change our reputation in the industry and deliver for our customers to become the safe pair of hands.
We have a good plan and we are laser focused on accelerating our cost optimization to improve our margins and we will deliver and finally I like the way the Ato in modern workplace market is breaking our way.
And it is up to us to win the new work at economics that benefit <unk> longer term and with that operator. Please open the call up for questions.
Thank you.
Thank you and as a reminder to ask a question that will be star one we'll pause for just a moment.
Alright.
We'll hear first today from Bryan Bergin with Cowen.
Hi, guys. Good afternoon. Thank you I wanted to start first just on the demand question. So just can you talk about how client conversations are progressing just as it relates to the macro uncertainty is causing any change in deal cycles or conversion understanding you've talked about some push outs that are your own <unk>.
<unk> decisions, but are you seeing anything there and cycle timing conversion and just if you could break that down between maybe U S and ex U S clients, if youre seeing any difference in behavior there.
Okay. So Brian good to hear your voice and thanks for the question. Let me first start by saying, we're not seeing a real difference between Europe and the U S and APAC so let's.
Let's put that aside the second thing is now let's look at the demand by GBS and by Gis.
The GBS demand is definitely there and we're seeing it in our results because you can't grow the analytics and engineering business 15, 7% and also have the book to Bill of one 107%. The demand wasn't there you will also see I'll comment on the margin at some point in time again through this call but.
The investment that we made one of the investments we made in Q1 and this is on me is that we did build a bench for GBS that market is literally a market that if you can show up with the right skilled people.
At the client's doorstep first youre going to win the work, but they really really want to see the skills and I think everybody on the call knows that the demand environment for the skills is hot so we invested we built the bench. So we're seeing good demand there I don't I don't see any issues and I love the way that.
We've now broken the insurance business out and more and more laser focused on.
Doing work for those insurance companies now.
In contrast, we see Gis and Gis I would also tell you the demand is there.
If you go look at the marketplace Youll see that there are customers.
<unk> and modern workplace segments that are trying to figure out what do they do with their work moving forward and I made in my prepared comments. They are focused on do you deliver for your customers or your customers referenced well thats why I talked so much about our customers in my script than.
And then the second thing is our investment grade profile and third is financially or you're doing okay, and thats why I talked about the quality of company and I also talked about the safe pair of hands.
So we're definitely seeing the deals come our way now here's the deal traditionally those customers have been given deals where the providers have invested in them upfront.
<unk> turnaround and then hope to get the economics better moving forward.
And we have said when I talk about our disciplined dealmaking, we're not doing that anymore. So.
So we want the deal to be good for both <unk>, both the customer and us right off the bat.
So look in this quarter, we had it wasn't just a couple of deals it was three or four deals that were pushed out.
Because we got to the terms, we got to the economics and we didn't like the economics. So I think those deals are lost no. Because we believe now that that those those customers know that we are the ones that we will deliver so and like I said in the call I expect that that our our book to Bill will come.
Back over one in Q2.
Demand environment is decent for us I don't I don't see any issues with the demand.
Okay. Okay appreciate that.
But the color Youre looking was that the color you're looking to add or not.
Yes. It was Mike So I appreciate that and I was going to ask about the risk of loss of those deals, but you kind of answered that for me. So maybe I'll ask the free cash flow follow up here just Ken how are you projecting free cash flow cadence over the course of the rest of this year and a reduction of $100 million is that comparable to margin kind of half FX have operational.
Hey, Brian So let me let me let me just I'll do.
A pivot real fast because the deals that we pushed out.
Those are large deals to do I expect that their loss no.
And it's not like we're not actively working with them right now to show why the pricing that we gave them was the re pricing fair enough.
Yes understood.
Okay free cash flow. So just maybe two quick things so the guide down over $100 million.
Really around it a bit but it's really margin are 100% margin.
We thought it was sensible to take that off and then fully expect cash to build throughout the year.
Expect to have some good quarters in front of us.
Alright, thanks, guys.
Youre welcome.
Next question Kelly and take our next question from Bryan Keane with Deutsche Bank.
Hi, guys good afternoon.
I guess I'll ask about the margins.
You gave guidance for the first quarter almost two months into the quarter already for first quarter.
And I'm, just a little surprised to see the margin shortfall in GBS and I guess you guys were to I'm just surprised that it surprised you the way it did since since you were already two months. When you gave the guidance. So just maybe a little color on <unk>.
Why the surprise and how long is it going to take to fix.
Well, Darren so I'm not sure. It's a surprise okay. So when I look at what we did in terms of the investment and the investment you can make pretty quick.
The margin is based on the fact that look we're investing in our global delivery network, Alright, and what that means is we're fixing the onshore offshore mix of this company. We're also <unk>.
Investing in automation, but when you look at what we've done with our centers, which is basically we have a staffing bubble alright, which means we had two people doing the job of one because we're doing the knowledge transfer from onshore to offshore.
We also when you look at <unk>.
Russia, right, we've scaled Serbia, we scaled Poland, we failed Romania. So from that standpoint, we increase that stuff then whether we increase did one month two months or three months and I wouldn't call. It a <unk>.
Massive surprise the second part of the investment was the bench for GBS.
And when I look at the demand for GBS I think thats prudent. So we're making some short term calls that we think longer term are going to serve us incredibly well.
And I would also add Darrin I mean, theres a lot of moving pieces in Q1. So you think about the pension impact Russia that Mike was talking about dealing with it the unprecedented move in FX.
No.
I would say just maybe on the FX side. It did catch us off guard a little bit on the cost side and the concentration of U S dollars and we're certainly working it back and then our cost optimization, which we've talked about in our script and we've been building up to this trying to be really thoughtful with it and make sure that we build the knowledge trade.
For capability offshore to move to work.
As appropriate and we finally moved out a little slower on that than we would like I think when you put all of that and it's safe to say, we missed our guide I get your point about you're two months into the year, but theres just a lot of moving pieces in Q1.
And that's Brian Darren correct, Yes, sorry, sorry.
Sorry about Bryan Bryan sorry about going you Darrin, that's that's not good sorry about that.
I'm sure hopefully darrin cannot come up with some other questions, but my my one follow up is.
I think the key then is going to be the confidence in the long term outlook, which was reiterated.
If margins are drop and I think investors are going to lose confidence in the fiscal year 'twenty four outlook of adjusted EBIT margin of 10% to 11% why is that still the right margin target and how confident are you that you can hit that and that doesn't have to eventually come down.
Two things Brian .
The bottom line is we have.
We are structurally fixing this business. So when you look at the onshore offshore piece once we get there we.
We'll have better margins in the Gis business and then that's basically a machine. So when you look at that that's why I called out look two years ago, we took cost out.
Roughly $550 million I believe in the current year $700 million.
In terms of annualized.
And then we let embed in we make all of our decisions based on looking through the eyes of our customers and colleagues and then we knew we were going to take this out again.
So when I look at that Alright fair enough so the staffing bubble.
We didn't move as quick as we should have on but at the end of the day once we get done with 'twenty three we should be at a very good position to hit our FY 'twenty four numbers and Thats why we reiterated them.
Great. Thanks for the color guys.
See you, Brian sorry again.
Okay, Kelly and who do we have next.
I would like to remind everyone. If you do have a question that is star one at this time, we will hear next from Rod bourgeois with deep dive equity research.
Hey, guys. So I have a question about your overall turnaround journey.
You clearly showed some good turnaround progress through the March quarter.
And then you hit some bumps here in the June quarter.
Also during the June quarter, we saw reason for some concern that there could be some margin tradeoffs that you would encounter as you pursue better growth. So my question is is it appropriate to say that youre hitting a number of margin trade offs that are seemingly required.
To drive the revenue growth that you're targeting.
And if that if that's a if that's an accurate portrayal in your go forward turnaround journey, how do you overcome the recent bumps in the road.
To reach your long term margin targets I mean, how do you get past the near term trade off in order to get to the to the long term target. Thanks.
Okay. So rod, let's break this up into revenue and margin and let's let's start with the.
The margin.
In the short term.
Right. The decision we made was to invest in the GDN.
Hire the folks offshore so that.
We could transfer the work and when I look at that and we get through the knowledge transfer.
And put.
Put the Ukraine situation.
In the Serbia, Poland, and Romania look we're going to be in good shape youre going to see that we're doing that in basically Q1 and Q2, because thats. The guide on margin and then the margin literally increases through the back half of the year because you've got the machine working so that's the way I would say that both short term.
Long term in terms of revenue short term long term, we have two things going on first we built the bench we invested in the bench in GBS and Youll see we can see our GBS pipeline up we can see that the book to Bill is still very solid then the other thing is look I've been very.
Clear with you all we are sorting out the Gis market and those deals are there to be had.
In the market that we're in whether you think we're in a recession or not anytime. We're in this kind of market. There are not only more outsourcing deals, but they are bigger and when they are theyre more in their bigger customers, usually one increased cost reductions than we think.
We can command.
Pricing that is really consistent with.
How do we look at our margins long term.
The 10% to 11%.
So anyhow, that's the way I see it rod when you talk about.
Basically where we're at as a company, but we also said this thing was never going to be a straight line.
Great example of not being a straight line with free cash flow last year right. Nobody thought when we started a minus three or four that we were going to get to 743. So my view is look we're making good investment decisions, we're making in the short term we've got a good plan and high confidence we will continue to create value I hope.
People have taken to heart everything else, we've done right in terms of the quality of company, whether it's the debt to capital allocation, whether it's the improved governance score and then I continue to look at consistently growing GBS when a lot of other folks are struggling in that area as a as a a good.
Shining star.
Okay, Great and then so let me just ask a quick follow up on this you've got some competitors, particularly in the infrastructure business that are really struggling.
And Theres a lot of messy Paul it messy contracts in that infrastructure business. Historically are you seeing clients willing to pay a premium to sort of get out of a messy historical legacy contract and into something where where the service can be it can be better.
And.
With a client willing to invest in digital and a more modern approach to the to the infrastructure problem that they're trying to solve are you seeing clients willing to pay up to move out of that.
These legacy deals.
So the short answer to your question is yes, and that's what we're focused on.
So let me give you some color around that so when you get to these points Rod where you've got these large deals.
And they are paying up we have to literally go through line item by line item unturned in terms of why that's appropriate so whether it's inflationary costs, whether it's cost of hey, here's the way the deal should have been constructed to begin with or whether or not its just look here.
The model that we will be using.
Two to make sure we're delivering and lets now walk past that last point, meaning here's the model, we will be using meaning a lot of times with some of this stuff rod a 100% offshore is not the right answer so you've got to have a nice mix of onshore offshore so literally those are the conversations.
We are having with the demand in the market.
It takes a little while to get them to understand that actually they've got a good price and theyre not going to have to worry about the delivery moving forward. So hopefully that gives you the color rod that youre looking for.
No that's helpful. Thanks, guys.
Thanks Rod.
Kelly Ann Who's the next question.
We'll hear next from Jamie Friedman with Susquehanna.
Alright.
The analytics and engineering.
The business performed well it was up almost 16% year over year.
I was just curious.
Because I would think of that as somewhat discretionary but it still.
Was it juggernaut here so.
If you just give us some.
Text about why that may be performing well in this environment.
And how you see it.
Going forward.
Thanks, Jamie so.
Basically I'll just go back to the example, we gave you during the script.
What we're seeing with analytics and engineering is we're able to deliver both increase helping our clients increase their revenues or growth and then decrease their costs. So when I gave you. The example, during the script of the retailer and specifically the loyalty program, what's going on there is we are literally dealing.
With both the technology and the data.
And as you can imagine with loyalty there is a lot of data and instead of trying to deal with all the data dealing with specific data so that their loyalty points can be used at the right moment.
It really created a really nice situation for this retailers in the sense that they have seen more demand and then the costs have gone down. So it's interesting that you have categorized it as discretionary because a lot of times.
Are these customers have dealt with both their infrastructure cloud and now what they're trying to deal with is this data and get to get more out of the technology, they've put in place and Thats, what our analytics and engineering.
<unk> business does so we're proud about $15 seven we expect that.
It's going to continue to.
To perform and double digits, because that's what it's been doing.
For several quarters now so thanks for that question.
Alright, thanks for that Mike and I can.
In terms of the free cash flows good free cash flow quarter.
But was wondering any call outs for next quarter for the cadence for the year. You did mentioned the seasonality into Q1, I heard you say that but anything else, we should be aware of in terms of cash flow.
No I don't think Theres anything Jamie I mean, I think the second quarter should be a good cash flow quarter, and I think the rest of the year as well so.
I think we're heading into kind of more cash generation going forward.
Got it I'll jump back into queue. Thank you.
Thanks, Jamie.
Kelly Ann next question.
That will be from Brad with BMO.
Hi, Thank you for taking my question I wanted to start off asking about the applications business within GB ash and sort of the expected trajectory.
Could perhaps flatten out to where it kind of flat on growth.
In front of a detriment to growth.
The demand within broader GB action, obviously within analytics and engineering, but could you hone in on what your sort of view wage for that business and how it fits in strategically.
Well again, we will strategically it's a key part of what we're doing in GBS and to break that business. Apart right is theres really four pieces theres a custom application, that's where we just build stuff from the ground up for clients, which we're really good at that as an.
Enterprise.
Piece, there is an oracle piece.
And then there is a service now and what we do is.
We do all four of those for our clients the demand that we're seeing is particularly in custom.
Custom apps.
And service now so that negative two was negative two last quarter as well and we do see that flattening out alright throughout the.
The year, but that's a good business for us and again, what we're leaning into is really the custom build and the reason why the custom builders.
So good at that is because once you are running that infrastructure.
The infrastructure with the applications typically we are engineers can develop good stuff. So that's that's a good business for us Don.
Don't lose lose sight of the fact that the performance of that is going to be just fine.
Yeah.
Brad do you have another.
Yes.
Quick follow up on the free cash flow I believe you said it's reflective.
The margin.
Cadence that we can put $100 million gambling could you perhaps talk about.
The FX impact and how we should be thinking about that.
Free cash flow you mentioned more extreme on margin and revenue and just want to make sure I have got I understand thank you.
Yeah No I appreciate the question Brad we have about.
Kind of a ballpark $800 million more in cost in U S dollars. When you look at it kind of on a pro rata basis and so therefore, when the dollar strengthens like it has it's call. It it's not only the revenue dollars in profit dollars that come down it's caused margin compression as well.
And Thats whats really impacting.
The margin in addition, just to the dollars coming down.
Okay.
Kelly Ann let's take.
Let's take the next.
The next question.
Thank you that will come from Lisa Ellis with Moffett Nathanson.
Hey, good afternoon guys.
Mike I just wanted to ask this is a follow up on the on the bookings dynamic and what you're talking about about.
And pricing those deals in a different way are there investments that youre, making or youre. Realizing you need to make in your sales team and the go to market model.
To be able to sell this way to sort of shift to selling more more value.
Sort of a different value proposition, perhaps than they've done before.
Or is this do you view it just like literally very temporary with this quarter and once you get detailed closed you're kind of off the races or is it something that requires a bit more investment.
Well I mean look it is something.
It is something that is systemic that we're putting in place in terms of DXP so and.
It's not about right the sales folks I mean, it's about our reviews.
Some of those deals.
We ought to be clear that we can hit those margins instead of hoping in the future that some things are going to happen, Okay, and Lisa as you know those deals come to us.
Alright, with a certain price expectation.
Because that's the price they have been banned for several deals now are several years now.
You know those deals that are a lot of times 510, 15 years all that these folks have been running those things. So the clients are coming to us with a specific price for scope and what we're doing is sitting down and taken them back through the scope taken them back through here's why.
That was probably under bid.
And then here's how we're going to delivered for you and then obviously, we stack that up with the references that we have in the market. So that they can hear from those references that we do deliver because that's where the that's where those folks are at now they've had enough fun with the people that they've been dealing with there is too much uncertainty as it really.
So what's going to happen with their company and so forth.
That's why I keep coming back I know it sounds cliche, but the quality of company that we built that.
That's leading us to take on.
These new inquiries. So it's not so much what the sales team is doing it's literally the operating committee that I've established reviewing those deals and making sure we're not going to do them at a lower price than if I need to get on these calls and say hey, the book to Bill was <unk> 872, I really like to do that no but I also.
Don't like when the margins going backwards, alright, especially on the new work. So as you can see Lisa not only are we fixing.
<unk> delivery model, but we're also making sure we're shutting off the funnel coming in that the deals should help us get to that 10% to 11% margin in FY 'twenty four.
Mhm mhm, Okay. Okay, and then my follow up is on Gis and <unk>.
Apologies I'm doing this out of my memory, so I might have it wrong, but my recollection is that in your when you. Initially set the 2024 outlook Youre expectation for Gis was to get it to flattish or maybe modestly down and it's still running.
Three quarters out at minus seven or so so can you just help us a bit on GBS is humming along as you've highlighted very nicely, but can you help us a bit with sort of how we should think about bridging.
Gis every day over the next year or so to get to that 2024 number.
Okay, Lisa Thanks for the comments on GBS, because obviously I am very happy with that business too.
Look as taking the or narrowing the decline of Gis by 80 basis points Youre starting to see it is heading in the right direction, because we literally have stacked up the last three quarters of minus eight minus eight three minus eight so literally breaking through that number.
And starting to push it down is solely focused on one thing and one thing only and Thats performance of modern workplace, Okay, and it's not that hard of an equation as modern workplace has gone from I think it was minus 19 last quarter to minus <unk> 16. This quarter, we've been very clear that we expect that that business is.
<unk> turned around we have new work coming on we're seeing the work come on as modern workplace gets fixed so does Gis.
Literally that simple.
Okay. Okay, great. Thank you.
Thanks Lisa.
Kelly Ann any other questions.
At this time, Mike I'd like to turn things back to you for closing remarks.
Alright, Kelly and thanks, so much look in closing.
What I would tell you is that we've made some very good short term decisions around investing in <unk>. We think those are going to position us well in the future I'm very proud of the quality of company and the quality of customer relationships that we've built and the closing comment.
As we are laser focused on making sure we take out this $500 million and we've got a team of operators that is very good and we've got high confidence like we did in FY 'twenty, one that we will take the cost out again, so with that we'll close the call and I look forward to updating everybody in the fall.
On Q2, Kelly Ann you can close the call.
Thank you. This does conclude today's conference. Thank you again all for your participation and you may now disconnect.
Please wait the conference will begin shortly.
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