Q3 2023 DXC Technology Co Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at.
At this time I would like to welcome everyone to the deep expertise technology third quarter fiscal year 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise.
Chris speakers remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question again Press Star Watson. Thank you. It is now my pleasure to turn today's call over to Mr. John Sweeney head of marketing and Investor Relations.
Sir Please go ahead.
Thank you and good afternoon, everybody I'm pleased that youre, joining us for DXP Technology's third quarter fiscal year 2023 earnings call. Our speakers on the call today will be Mike Salvino, Our chairman President CEO and Ken Sharp, our EVP and CFO . This call is being webcast at <unk> Dot com.
Investor Relations 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 the SEC rules. We provide a reconciliation of these measures to their respective and most directly comparable GAAP measures. The reconciliations can be found in the tables in today.
The earnings release and in the webcast slides.
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 quarterly reports on our Form 10-K, and other SEC filings I would now like to remind our listeners that DXP technology assumes no.
<unk> to update the 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 strong Q3 results, where our execution drove record bookings along with margin EPS and free cash flow that all exceeded expectations next I will discuss our transformation journey and how it has helped US drive these strong results Kevin will then.
Then discuss our financial results in more detail and provide our updated guidance and finally I will make some closing remarks before opening the call up for questions.
In Q3 revenues were $3 $5 7 billion and our organic revenue growth was negative three 8%. This was a direct result of the weak bookings in the first half of the year. However.
Our organic revenue grew for the second consecutive quarter sequentially and it is notable that we have driven the same level of revenues in constant currency, excluding dispositions for all three quarters in FY2023.
Our adjusted EBIT increased from seven 5% in Q2 to eight 7% in Q3, highlighting the strong execution of our cost optimization efforts, while not negatively impacting our customers.
Our non-GAAP EPS increased to <unk> 95.
Our book to Bill of 134 is the strongest book to Bill results since I've been CEO . This quarter, we almost hit on all cylinders by having five out of our six offerings deliver a book to bill of over one point out.
Overall Q3 showed strong execution and has created good momentum for us. So now let me give you some additional color around our transformation journey, which is at the core of how we are creating these results.
The first step is to inspire and take care of our colleagues. We are seeing improved attrition due to the way we are taking care of our colleagues and our efforts to change the culture at DXP.
I am proud of how we're taking care of our roughly 4000 colleagues in the Ukraine and we continue to be impressed by their resiliency to take care of their families and our customers concerning COVID-19, we were just awarded the President's certificate of Commendation in Singapore.
This prestigious honor as awarded organizations that made exceptional efforts, which had a significant impact and Singapore's fight against COVID-19.
Want to thank the women and men of <unk>, along with my leadership team for their continued execution and as we look to 'twenty. Four we will continue to take care of our people and continue to adjust and add to my leadership team to deliver on our commitments.
The next step in our transformation journey is to focus on our customers. The key metric here is our net promoter score and our most recent NPS score was 27 near the top end of the industry benchmark.
This solid customer delivery has driven sequential organic revenue growth in constant currency for two quarters in a row. The key thing I would like to highlight is that we have now delivered roughly the same level of revenue in constant currency, excluding dispositions for all three quarters in FY 'twenty, three and Youll hear.
Our fruit can that we are guiding to a fourth quarter at a similar organic level. Now. This is a great accomplishment as we have been a company with declining revenues for the past. Several years also you will see our strategy for GBS and Gis working.
In GBS, we continue to grow the business and expand margins. This is the seventh quarter of consecutive organic revenue growth. As a result, GBS continues to become a larger part of <unk> now accounting for approximately 49% up from 48% in Q2, demonstrating that the business.
Mix is trending towards the new tech of GBS.
Gis, we continue to stabilize revenue and expand margins, we are seeing our increased financial discipline and <unk> pay off as the demand we saw in the market translated into strong bookings this quarter, which we expect to drive future revenues. So you can see we are executing on both parts of our growth.
<unk> to accelerate growth in GBS and moderate the declines in Gis. This execution of our growth strategy is why we expect to drive flat to 1% organic revenue in FY 'twenty four.
The third step is to optimize cost clearly we are executing on our cost takeout numbers as we expanded our margins from seven 5% in Q2 to eight 7% in Q3.
We continue to take a thoughtful approach to cost takeout by focusing on our entire organization, while delivering for our customers. This approach gives us confidence that we can continue our efforts for the remainder of FY2023 and into FY 'twenty for the other piece of our cost optimization efforts as.
So shaping you will hear from Ken that we were able to generate approximately $375 million of cash from the sale of data centers in the quarter along with the German banks in early January .
In the area of sees the market I am extremely pleased with our bookings this quarter a record book to Bill of 134 brought us back to over one on a year to date basis for FY2023 and this shows strong momentum as we are completing FY2023 and heading into FY 'twenty four.
In GBS all three offerings delivered a book to bill of over one point and we continue to see momentum in our engineering and software capabilities that we discussed last quarter, but this quarter, we saw even greater success and applications.
And Gis are more disciplined approach to dealmaking has paid off in Q3, we signed over $800 million of Ato deals that were delayed from the first half of the year and signed two new logos by closing deals with S&P and <unk> Fisher and modern workplace again this shows good execution.
Houston and momentum as these deals will create future revenue.
It is clear that there is demand in the market for our offerings and we need to be patient because we are taking work from our competition at better economics.
Our final step is our financial foundation, where we generated $463 million of free cash flow. This quarter. The execution in this area was outstanding and it gives us great momentum to hit our yearly guide for free cash flow.
This free cash flow result, along with the cash we generated from portfolio shaping including the sale of the German banks in January totaled $840 million.
We anticipate that we will use approximately 400 million to pay down our debt further enhancing our investment grade profile and we plan to repurchase approximately $400 million of DXP shares to complete our previously announced $1 billion share repurchase program.
Now before I turn the call over to Ken I want to reiterate what we said in our October 4th Press release management has been approached by a financial sponsor regarding a potential acquisition of the company.
System with our fiduciary responsibility to maximize shareholder value. The company is engaged in preliminary discussions and are sharing information we.
We do not have any further update on this situation a day and we will not be commenting on it further now let me turn the call over to Ken.
Thank you Mike Let me provide you a quick rundown of our Q3 performance Q3 organic revenue declined three 8%.
Adjusted EBIT margin and non-GAAP diluted earnings per share were above the top end of our guidance range at eight 7% and 95, respectively free cash flow was $463 million in the quarter.
Team is making great progress with what we expect will be two consecutive years of positive cash flow of at least $630 million. This is quite a turnaround from two years ago with over $650 million of negative free cash flow.
Moving to our key financial metrics third quarter gross margin declined 60 basis points on lower volumes.
SG&A as a percent of sales increased 10 basis points depressed.
Depreciation was lower by 10 basis points. Other income increased 60 basis points, primarily due to asset sale gains of $24 million and FX hedging gain of $11 million, partially offset by lower pension income as a result adjust.
Good EBIT margin was flat compared to prior year and up 120 basis points sequentially.
EPS was up <unk> <unk> compared to the prior year due to <unk>.
But in the lower share count <unk> from a lower tax rate <unk> from lower interest expense. These benefits were partially offset by <unk> <unk>.
Lower revenue and FX.
Let's turn to our segment results our business mix continues to improve as our GBS revenue mix increased 110 basis points to 48, 7% of <unk> revenue.
<unk> grew 0.2% organically the GBS profit margin declined 220 basis points year over year and was up 130 basis points sequentially.
Organic revenue declined seven 4%.
<unk> profit margin increased 190 basis points year over year and was up 50 basis points sequentially benefiting 80 basis points from settling a commercial matter in the current quarter.
Turning to our offerings analytics and engineering continued with solid organic growth.
11, 7% applications declined six 8% on lower project revenue, coupled with a difficult prior year compare as Q3 was the strongest growth quarter in FY 'twenty, two insurance software and bps is up three.
<unk> and our insurance software business is about $550 million of annual revenue and grew approximately 7% in the quarter security was up four 2% cloud infrastructure and IP outsourcing declined five 4% modern workplace.
<unk> was down 15, 3% we are encouraged by the recent new logo wins.
Let me tie the year over year organic revenue declines above with mikes earlier point on sequential quarterly revenue.
I am pleased to note that we've delivered three quarters of revenues that are flat on a constant currency excluding divestitures basis.
Further we are guiding to a fourth quarter that is also going in a positive direction all while on the backdrop of very strong Q3 bookings demonstrating our momentum.
Turning to our financial Foundation that is $4 7 billion, we continue to tightly manage restructuring at Tsi expenses. These expenses totaled $55 million in the quarter and year to date restructuring in Tsi is a $147 million down to 100.
Third $24 million from prior year capital expenditures and capital lease originations as a percent of revenue were six 4% in the quarter up 120 basis points as compared to prior year. We continue to believe our capital intensity presents a long term.
<unk> to improve cash flow free.
Free cash flow for the quarter was $463 million on January <unk>, we closed the sale of our German banks customer deposits were $70 million lower as compared to the start of the year, thus, creating a free cash flow outflow.
With the sale of our German banks for 300 million euros, we have substantially completed our $500 million portfolio shaping and asset proceeds goal last quarter, we announced a new $250 million asset sale proceeds goal, while selling these real estate.
Date assets will bring in real cash we expect to incur a noncash loss that is not incorporated in our guidance in Q3, we closed on four facility sales, yielding $56 million of cash proceeds and recognized a $16 million gain.
The combination of our Q3 free cash flow sale of our German banks, and our Q3 asset sales delivered $840 million in cash to <unk>.
Put a finer point on the $840 million of cash it is over 12% of our market capitalization.
We expect to deploy 400 million to repay a portion of our debt and we will adjust our target debt level to $4 5 billion.
With the bank sales customer bank deposits are no longer part of our cash balance accordingly, we are reducing our target cash balance to $1 8 billion at these new target levels, we have an additional $400 million available to repurchase our stock.
Turning to our capital allocation on slide 19, we repurchased approximately $600 million of our stock to date.
With cash on hand, we feel good about our ability to deliver on our $1 billion share repurchase.
Our Q4 guidance organic revenue decline of minus two 6% to minus three 1%.
Adjusted EBIT margin of eight 7% to nine 2% non-GAAP diluted earnings per share of $1 to $1 <unk>.
Turning to our FY2023 guidance organic revenue decline of minus two six to minus two 7%.
Adjusted EBIT margin of 8% to eight 1% non-GAAP diluted earnings per share of $3 45 to.
The $3 50.
As I mentioned earlier, our free cash flow was negatively impacted by $70 million due to lower customer bank deposits held in our German banks Accordingly free cash flow was adjusted to $630 million as Mike and I reflected on our FY 2000 and for guidance we gave almost.
Two years ago, we envisioned a business that could grow with solid margins and good quality cash flow.
We still envision that same business today, let me provide you some context on our original FY 'twenty four guidance at the time organic revenue was declining double digits, and we guided to organic revenue growth of 1% to 3% adjusted EBIT margin.
<unk> were approximately 6%, including a 190 basis points of noncash pension income and we guided to a 10% to 11% margin.
Free cash flow was negative $650 million and we guided to $1 5 billion of free cash flow.
Lastly, let us not forget the $900 million of annual reoccurring restructuring in tsi cost that we guided to $100 million all while expanding margins.
From our vantage point, we have come a long way over the last two years as the business is on a much stronger foundation.
Let me take a minute to update you on our preliminary FY 'twenty for expectations for organic revenue. We are working plans to drive the business to flat to 1% growth.
Adjusted EBIT margin to expand above FY2023 levels, but do not expect margins to exceed 9%.
When we provided the FY 'twenty for EBIT guidance pension income was 65 basis points higher than where we are in FY2023.
We are assuming pension income continues at a similar level and has a 65 basis point headwind from our original FY 'twenty for guidance.
Free cash flow to increase above FY2023 levels, but do not expect to exceed $900 million. When we set our FY 'twenty 415 billion free cash flow guidance, we had $900 million of capital lease payments.
Capital lease payments are not part of free cash flow, but we're a significant consumer of free cash flow, leaving $600 million of cash generation.
As we sit here today, we expect to originate about $200 million to $250 million of capital leases in FY2023.
Our lower originations over the last couple of years has driven down the capital lease payments to about $400 million next year.
We will refine our FY 'twenty for guidance on our next earnings call. Once we complete our annual planning process with that let me turn the call back to Mike for his final thoughts.
Thanks, Ken and let me leave you with the key takeaway, we will achieve our inflection point at the end of FY2023 and deliver the business. We have always envisioned in FY 'twenty tour, albeit with slightly lower guidance as.
As we exit FY2023 you can see that we've cleaned up many of the challenges from our past that Ken just outlined.
Our clear execution of our transformation journey is build a quality company that you can depend on to deliver revenue that is not declining change the mix of the revenue to the higher value tech offerings of GBS.
Expand both margins and EPS.
Win new work in the market as our offerings are relevant and in demand generate strong free cash flow manage our debt and return cash to shareholders. Now. This is great execution, but we didn't come here to <unk> to fix the challenges with the momentum that we've created in the business we have.
Confidence that we are poised to deliver the business we had envisioned in FY 'twenty four.
As we can see the ability to drive revenue flat to 1% growth expand both margins and EPS rotate the revenue to the new tech of GBS and generate increased free cash flow.
Getting this inflection point was no small task and my management team and I are proud of the quality company, we have created along with being clear and excited about the future of DXP and with that operator. Please open the call up for questions.
At this time, if you would like to ask a question press star followed by the number one on your telephone keypad.
If he would like to withdraw your question again press Star one.
First question comes from the line of Bryan Bergin with Cowen Your line is open.
Hey, Brian .
Hey, guys. How are you doing good afternoon. Thank you.
Wanted to start on free cash flow, so just hoping to dig in on the moving pieces here to make sure. We understand this for 23% 24. So can you first talk about some of the factors that drove the strong <unk> performance should we expect the continued lumpiness in free cash flow generation going forward or does that start to.
Kind of smoothed out and then just to clarify the last point you made thereafter capital leases it sounds like the real net free cash flow difference in your fiscal 'twenty four post capital lease payments is about $100 million given you've taken the number down so it. So a couple of combo questions around free cash flow to start please.
Great Brian in book value.
To clarify feel free to jump back in.
It's great work from the team right. We've been at this for a couple of years right. If you wind the clock back the business had negative free cash flow.
We've done a lot of work probably the biggest.
If you look at it now two years in a row of positive cash flow over 600 million. So it's really not lost on US right. It's a lot a lot a lot of good work from a lot of people across the entire business. The biggest driver right. If you had just kind of look holistically at the business has been to focus on driving down the restructure.
In Tsi.
So I think thats been somewhere around $600 million swing so year to year. So I think thats, a pretty big piece and then just this quarter. We had built up some it's a little bit hard to tell on the balance sheet.
Because of FX movements, and so forth, but we had built up some in the last couple of quarters and brought that back down this quarter to kind of.
More normalized level, so really the team has done a nice job just driving across the business and then when you looked at slide 24 I think.
That is a good way of looking at it.
The leasing.
Out of probably a little bit it was it didn't have the right economics from our perspective, so when we looked at it and it also creates some I would say business oversight challenges when you're leasing a lot of assets is not always as economic as you want it to be so we went through a process of making sure that.
When you lease assets that it goes through kind of the right economic.
<unk> has the right hurdles to it.
So when we did that of course, we brought down the level of leasing pretty dramatically I think everybody knows this right, but it gets a little confusing on the cash flow statements. If you leased assets they dropped below free cash flow because they are financing a purchase basically if you buy them straight out they go right through capex, so as we squeeze down.
One on the on the leasing certainly that some of that capital and the Capex, which directly impacts free cash flow. So in that way is certainly a good way to look at it I mean, certainly I think when you look longer term, we've got opportunities to improve at our capex as a percent of revenue.
This is higher than a lot of our peers. So I think that's a place we need to continue to work on and then your question around the Lumpiness of the cash flow Q1 is always going to be a little bit and I think most companies have this right. There's a lot of our cash outflows that go through Q1, So I think in the future Youll.
See that continue to be a bit more of a negative quarter. We'll work at it Q2, I think we've got some work to do to make sure that we level that out and hopefully Q2's more positives.
This year I think it was slightly positive, but like to keep working that Q3, and Q4 always have been pretty strong cash quarter. So we'll keep at it.
Alright I appreciate your question Bill.
Yes, please just on bookings and demand Mike So good to see the broad based performance across the offerings can you talk about near term pipeline now that you've gotten some of those larger deals over the line that you were holding back and just any change in client sentiment and sales cycles and things like that just given the macro.
Well I looked at the client sentiment is is pretty simple.
<unk>.
The whole industry is focused on efficiency, it's focused on cost savings.
And what we're seeing is that the deals will will be larger just like the $800 million.
<unk> number that we gave in they are taken a little bit longer.
The other thing that we're seeing out in the industry is the fact that look customers are still focused on revenue, but it needs to be immediate impact. So when I boil that all up and look at our offerings and look at.
The IPO offering there's not going to be too many audit committees.
Had these companies' boards that will take that spend down and the reason for that is because they don't want any cyber security attacks. So we're still seeing demand for the that offering. The second is when you look at modern workplace. We've still got a lot of companies that are supporting a major major.
Part of their population their employee base and a virtual mindset. So you can't really curtail that spend too much and then when I look at the ability to drive revenue and Thats, what our engineering business does and I've said over and over again, we've got unique skills I continue to look at that business and see double digit growth.
Along with a very solid book to Bill so from a demand standpoint, it's hard not to be cautious but look.
I mentioned on the last call them, but im adjusting the sales model and I think focusing on what I call relationship selling and GBS, which means we go build the deep relationships and then sell in sell our offerings based on strategic points of view that will either drive revenue or decreased cost and then.
Look the Gis business is always going to be there and what we need to do is continue to win in the marketplace are loved the new logos and I love the better economics, So Brian Thats, how I'd answer your question.
Alright, great. Thank you guys.
Thanks, Brian .
Brent next question <unk>.
Question comes from the line of Ashwin <unk> with Citi. Your line is open.
Thanks Ashwin.
Mike.
Dan.
Good evening and good to hear from you all.
I wanted to go back to free cash flow, but talk about deployment I see the deployment notes with regards to.
The immediate buyback pay down could you.
Talk a little bit more granularity about the timing.
Off of those and was interesting to see that tuck in M&A was not specifically noted.
You know basically what he brought on the turnkey as it relates to ongoing deployment of free cash flow.
Okay. So why don't you take the immediate to long term look at sounds good Mike.
You know ashwin on the timing.
We put out $1 billion commitment on the share repurchase and I think our perspective that kind of looks like the end of this fiscal year. When we file the K. So ideally that would be the kind of ballpark timing, we would hit we always like to deliver on our commitments. So we will work at that always depends on.
What is the share price does volumes in all of those things because as you know repurchasing shares it's highly regulated and there is processes you need to follow so we'll do that in good stead. So we should be in good shape the debt retirements.
I think you're also asking about.
We like to run.
Somewhat fiscally conservative we'd like to keep our leverage ratios in line.
So we know we have some European commercial paper, it's relatively short duration theres no cost to take it out.
So we'll reduce that we've got also some preferred stock that's a little bit higher yield that it's a mandatory redeemable. It also comes up at the end of the quarter. So we'll clean that up and be in good shape, we do tend to keep a little bit of a cash buffer as well so to the extent you know Mike wants to do some tuck in.
M&A as we've always kept some reserves and on hand, so I'll, let I'll turn that to Mike for the remainder of your product.
Can I ask one on in terms of capital allocation moving forward, what I would say is focus on that inflection point.
May be inflection point about us getting to the end of FY2023 what you see as the revenues now aren't declining we're definitely change in the mix of our business to GBS.
We're expanding our margins and EPS and we're generating good quality pre cash flow. So as I look into 'twenty four one of the things that we'll be discussing here is it feels like it's time to start looking at the tactical tuck ins.
My two favorite slides in this deck are 15% and 23 and if you look at 15, you see the stability of the revenue. We basically are now in the same amount quarter after quarter after quarter. So now it's a matter of let's look at the new bookings, let's look at the things that are potentially complementary to <unk>.
Business and then when you look at page 23, you can see the challenges that we've come through when we talk about the quality company you can see how we measure that and then you can also see how we will treat the thing forward. So there will be some balance to the capital allocation I'm not ready to say one way or the other we're going to get through our 2000.
For planning, but.
We've gotten to that point, where I do think it's time to start considering that.
Yes.
Ashwin.
Yes, I do think you so investors obviously.
Very interested in revenue visibility and <unk>.
You're guiding to not just obviously the next quarter, but but you gave initial outlook new initial outlook for fiscal 2004, So speaking 15 months out.
And just wanted to.
Ask it dependent comment on your visibility sort of in terms of.
The bookings you had but also the pipeline replenished the segment level granularity that youre seeing model going forward, if you could comment on that.
Okay.
Okay. So look.
In terms of the visibility there is nothing better than seeing that net revenue being stable.
So we're not fighting a lot of the challenges around customers around terminations around that sort of stuff. That's why I give you all the.
The NPS number each quarter, which again is at 27% and we're doing that on the back of also continuing to expand our margins. So when I look at that stability that means Steph one should be completed I mean, we're not going backwards anymore. So now it's time to go forward, So we feel pretty comfortable.
The revenues will be stable loved the fact that that book to Bill came in at 134, we didn't deplete the pipeline I expect to to continue.
Momentum into Q4, and you start stacking up a few more quarters and Ashwin I think we're going to be right, where we wanted to be.
So that's how I'd answer that question.
Great. Thank you.
Brent next question.
Next question is from the line of Bryan Keane with Deutsche Bank. Your line is open.
Hey, Brian .
Hey, guys, how you doing.
I kind of had a follow up on that one ashwin question there because.
Because I guess in its history, Mike DXP has had trouble getting to that that inflection point and we've heard it from multiple management teams over the years that we're going to see the inflection point and it just has never come.
Maybe you can just you've never talk about you've never you've never heard that from me. So the fact that our mouthing that is a pretty big deal.
Yes, that's what I'm trying to get out here because it feels a little more real this time.
Because in its history, it hasn't been able to do it but it sounds like maybe.
With with fixing the troubled contracts and fixing the mix of business that we're finally at a point that the visibility is strong enough that you feel confident this can be a positive organic growth not only next year, but just from years to come.
Yes, Brian look here's what I see and I again.
We win.
Yes.
We focused on putting 15 in for a reason, okay and you guys can see all the adjustments that Ken and I talk about in terms of FX and disposition and so forth, but when you look at 'twenty three the biggest thing we will have achieved as customers they count on us.
Stable revenue that is not declining and the change of mix, we're almost at 50%, which is all stuff that when Ken talked about how we envision the business two years ago. This is where we wanted to be so the reason why we kept saying that hey, we're also guiding towards a fourth quarter.
<unk> at about the same revenue that's a clear indication that as we flipped to next year. If we continue to keep the book to Bill and when I look at book to Bill again, I know, we had a great quarter 1234, but the trailing 12 month book to Bill is what I'm looking at that 1.06 that increased.
It's good stuff the other thing Thats good stuff is literally looking at.
The individual offerings. Okay. So if I go to the businesses first GBS and Gis.
GBS alright grew for the seventh consecutive quarter.
Two.
There was a tough compare there we did do a perpetual software sale of about $36 million last quarter I totally expect that business to be back up around three.
In Q4, then when you look at our strategy for Gis.
It's awesome.
Fact that we are literally taking our time with these deals the deals are out there I can now stop talking about them. We could show you guys. The results 800 million is a big basket of deals at better economics. So.
When I talk about the clarity and the excitement of DXP.
Youre leaning into what you should feel now because I meant what I said, you've never heard me say alright flat too.
Two one within a very short timeframe.
I mean, we're pretty happy about the fact that two years ago, we called one to three.
We're still looking at that.
One pretty closely.
So Brian you are.
The second question, Yes. My second one is just on the I know you cant comment about what's going on with the strategic review, but.
Usually these things take one or two months this one seems to be taking longer.
Just curious why the length of period and I'm, a little concerned does it have any impact on the business fundamentals the length of the review.
I mean look I reiterated we won't comment on any further I mean look the.
The press release still stands.
That confirms that we are still having discussions and Brian that's about all I'm going to say.
Anything on that how does it hurt anything in the fundamentals of the business. The review or do you think thats not been that's not been no not at all I mean, there's no way you can go.
And expand margins increased GBS and GTS our EPS.
Drive the free cash flow and book 134, if it was really having a big a big problem.
Got it thanks, so much.
Alright, Thanks, Brian Brent next question.
Next question is from the line of Darrin Peller with Wolfe Research. Your line is open.
Hi, Darren Thanks, Hey.
Hey, Mike it's good to see the momentum on this.
The trajectory you guys have been showing.
I guess I just wanted to sort of circle back to a couple of the answers you gave on whether it's the question Bryan was just asking the question around M&A, but broadly I mean is the portfolio that you have now Mike the right portfolio of assets for the next few years for <unk> I mean, I know you mentioned, some tuck ins, but anything else to divest and then.
And then really where are your focus from a tuck in standpoint, if youre going to make some moves or are we going to just digest, what we have now and let the company operate and see if we can execute towards those fiscal 'twenty four targets.
Well I mean look I think it's a combination of all those and what I would tell you is with the where the market is right now there should be some pretty good buys.
If we did do anything we would do it in GBS, because what we've been saying the whole time.
As we need to change our mix change our mix now having said that I've also said over and over again that the Gis business can be a good business for us.
And we do think that can produce good cash for us.
So when I look at it.
Sure.
There is there is now.
Part of me that you know my past history that I did a tactical tuck ins in seven years.
So now in terms of stuff that we are continuing to look at you've now heard Ken say for two quarters that we have $250 million of data centers and facilities that we're going hard after and we sold a few this quarter. So we will keep doing.
That the next thing is I look at countries in terms of this is still part of what I would call the.
The cleanup, meaning I think we're in too many countries that we quite frankly shouldnt be in there's not a real strategic reason that we need to operate but that was nothing more than taking HPE and CSC and putting it together and we can finally go after that and then there is still a few other businesses.
Later dynamics business that we still would like to move on so look youll see I think a whole combination of those things Darrin I mean, we're certainly not done and I think what you've seen in US is we're not going to wait around we're going to continue to be.
Aggressive with the business because we do think it's gotten a lot of merit. We do think we've got more clarity in terms of what we see now and I think we can get more focused on some of the.
The last few things that we need to clean up.
Yes, Darren you've got a second question.
I do and it goes back to the demand discussion that somebody asked earlier I guess the bookings obviously with some of it was like you talked about last quarter pulling into this quarter flowing into this quarter, which helped but could we just revisit that for a minute in terms of what youre seeing in terms of what kind of projects are looking like they're winning bookings now because the book.
Bill ratios are strong in both Gis and GBS this quarter, even like you said, even modern workplace I think you talked about having it was great to see the new logos. So can you give us a sense of what you're actually seeing and if theres been a change in sentiment on demand from the enterprise and Youre working with.
Okay. So I'll take each offering individually so what we're selling in A&D as engineering and a lot of our engineering projects are in automotive and we still see quite a bit of demand in banking and a lot of that stuff is analytics around also can we help a customer.
Generate new revenue so that's what we're selling there so think projects.
There are smaller, but they are quicker to generate revenue.
And applications, while we're dealing with there is we're dealing with custom apps. So think something I'm building from the ground up and then we're also seeing service now and we're seeing S&P.
And then in insurance, Ken mentioned, the insurance software business.
Look we're right at the heart of a lot of.
The insurers because that software enables a insurer too.
New books of business. So the fact that that's growing 7%, we're not only selling the software we're implementing implementing it.
And we're also running and then a few dropdown into Gis theres always going to be security projects. So that four 2% growth you saw this quarter is kind of nice and then <unk>.
<unk> is making sure that these infrastructures that haven't moved to the cloud and then the ones that have moved to the cloud are basically let's call. It bulletproof. So thats what were seeing is the maintenance the upgrades are that those environments. So that they don't tip over and then modern workplace.
Thank Yo Yo Youll.
You'll see that our uptime product is doing very well in the market for SCP to have gone with us.
Is a big deal they kind of know one or two things about software. So that's what that's what we're seeing Darren.
Yes look.
I wish that I could be more clear that the sentiment that's out there that I read after every single one of my competitors earnings calls.
Is that the thing is going to go backwards, but.
Showing up with a 134 and saying that look it may be like maybe a little bit lumpy, but we still see very good demand for our services in the market. So to go back to the last point of your your first question.
Do I think DXP has everything it needs to have to.
To take this thing into the future we definitely have a good foundation.
I would tell you that we have.
Got more than enough to make this a very good technology company and like I said I like page 23. It can literally show you. The course that we've been on in terms of fixing the business getting to a quality business and know where we're going to go.
Alright, Thats really helpful. Mike Thanks.
Thanks, Darren Brent next question.
Our next question is from the line of Keith Bachman with BMO. Your line is open.
Yes, Thanks, Matt good segue and good afternoon or good evening excuse me.
I did want to drill down on modern workplace, a little bit it's a small part of your revenue, but it is still.
One point of drag on growth.
And how does that shape out over the next one to two years can you get that to flat or what happens because its still is.
Frankly, a drag.
Okay. So Keith let me, let me give you the exact numbers because if you go back to page 15, modern workplace mimics a lot of the overall business. So if you look at the revenue for Q1. It was $4 47, if you look at the revenue for Q2, it's $4 36.
If you look at the revenue for Q3, it's $4 33, so that thing is basically stabilized out meaning remember when I put the business up for sale. We lost a number of contracts because why are you going to go with somebody who is potentially going to sell the business. So I think we're through that puzzle.
<unk>.
The fact that like I said, we've got good new logos coming our way I think in Q4, youre going to see a pretty significant.
Change in that negative $16 15 that we've been showing for the entire year and then I do think we can get that business to flat to grow.
So hopefully those numbers.
Yes, yes.
And it makes sense and then I wanted to try to ask.
Visibility a little bit differently, but.
In terms of the pipe.
As we're progressing over the next couple of quarters, how should we be thinking about the book to Bill this quarter.
It was obviously pretty strong you focus on the latest 12 months, but anything you want to call out as we think about the next couple of quarters on book to Bill that will give us confidence that the zero to 1%.
Growth is not only attainable, but sustainable.
Well Keith think of it this way.
Literally guiding to minus two five to minus three in Q4, so that should suggest that the demand that I just knocked down is going to show up some.
Sometime in 'twenty four.
So, especially with the new logos and modern workplace those are not project type things Thats outsourcing type work.
The second thing I would tell the second thing I would tell you is having the business hit on all five out of six offerings.
Jos that look we still have not only relevancy in the market, but there is demand. So look can I tell you what's going to happen to the economy I mean.
You look at everything you read the scripts people say this is the year of efficiency.
Okay.
We do efficiency well, Keith so if people one cost savings and if people want somebody to run something efficiently that's us.
So like I said, I mean, I can't call out exactly what's going to happen.
In 24 or two or three months.
Two or three quarters down the path, but what I can call is that we feel good about Q4, and we feel good about the momentum we've created so far.
Okay perfect. Thanks, I'll cede the floor.
Keith Thanks, Brent next question. Your next question is from the line of Jason Kupferberg with Bank of America. Your line is open.
Hey, Jason its Scott.
Hi, there how are you. Thanks for taking the question I just wanted to ask the first one on organic revenue growth I mean, I know in the quarter was a little below plan I guess fourth quarter is coming in a little below what was previously expected. So just as you unpack that I mean, where would you say.
This shortfall has been relative to what you had previously anticipated which of the service lines.
It was modern workplace and applications. So we expected that.
We would turn modern workplace quicker than than we did because I kept telling everybody that that's that's following the exact same transformation journey is Ato youll see that we turned ato within probably about a year. So we thought we return that a little bit quicker and then applications, we expect it to.
Get more project.
Revenue out of that when you looked at our plan for FY2023 it was backend loaded and we expected to get a little bit more out of out of apps, but.
Kaps will youll see a turnaround in apps, just like Youll see a turnaround amount of workplace in Q4 based on the bookings we just knocked down.
Okay.
And then my second question was just more of a clarification I guess, Ken I think you've said in the script that there was some kind of.
Commercial matter that was settled but I don't know if I got this correct. So correct me if I'm wrong help.
<unk> margins by 80 bps in the quarter is that.
It was and is that just kind of a one off.
Yes.
A nonrecurring so that's why we called it out but you got the numbers right.
Okay. So what is that about 40 ish basis points overall and it was 83 SaaS.
Okay. Thank you guys.
Yeah. Thanks, Jason Brent next question. Your next question comes from Ken Wong.
Wong with Jpmorgan Your line is open.
Hey, hi, Thanks for taking the question here I just wanted to hone in on the bookings side.
Mike you talked about not depleting the pipeline.
And demand is still good but visibility obviously is driven somewhat by macro is there wiggle room, if large deal slip or project work gets pushed out.
For you to still see that inflection that you're calling out here today and also similarly, just just want to better understand you mentioned better economics include.
Including on competitive takeaways I'm, a little surprised by that given the cost focus of clients. So just curious on what's changed there.
Mind elaborating on those two things on bookings.
Tien tsin, Thanks for comment on my call, it's good to hear.
Glad to be on absolutely, okay. So back to.
Your questions.
In terms of which one do you want me to go to <unk>.
Either one is easier I kind of rambled, a little bit just thinking about the wiggle room, maybe starting with that.
Even if things get pushed out a little bit maybe larger deals or project work for example, it sounds like you had a good backlog.
Feel good about the fourth quarter, it's not just <unk>.
100%, let me, let me start with that one first so.
When you think about wiggle room I mean.
Look at what we've done on the revenue on the back of <unk>, three and <unk> 87, so when I when I look at that 12 month trailing book to Bill I can all I can go all the way out five quarters <unk> nine to one one point to 1.2 0.878, III why am I doing this for you.
There is wiggle room, okay in terms of.
For us, making sure that we can sustain that revenue.
And like I said, the 134 is nice because that means that we're going to be executing against all that all that bookings come Q4, and then into FY 'twenty four so the backlog doesn't have to be perfect for us to get to that flat to 1% guide does that makes sense Tien tsin.
It does it does.
It's important to go back to those yet.
And then your second question was better than Onex, alright, the better economics.
I think I mentioned, including on competitive takeaways.
Note. This is clear so when I say that its IPO.
Okay, and if you think about what's happening in this space our competition.
Is struggling a bit and what's interesting about the market right now as I remember those days. So when I took over <unk>, we were the ones that were struggling in terms of.
Customer satisfaction in terms of our balance sheet in terms of our free cash flow all of that stuff and if you go back to 'twenty three.
That's not where we're now we're adding more alright, and I've talked on numerous calls that we're now the the safe pair of hands, alright, and youre talking to the CEO .
Literally likes the Gis space, Alright, and has always said that is key to what we're trying to get done.
Because we do think it can generate cash okay now here's the second piece.
When those deals that we're looking at Tien Tsin were done 510 years ago that Ato space was a commodity space. It was a race.
So the bottom in terms of pricing.
And we're not.
When those clients call us now whether were joint with one of those competitors in our large client or its a brand new logo, we're very clear about the economics that we're going to do one of the things that I talked about is going to infrastructure light that means we can definitely get cola that means we pass on things like electric.
City, we pass on things like <unk>.
Hardware upgrades, we pass on things like software increases and Tianjin you knew that was the playbook that Iran is the old place. So when I say better economics, that's exactly what we're doing it's taken me a little bit longer than I wanted to to get there because we had stabilized a lot of delay.
Every but I like where we're at.
No that makes perfect sense I appreciate your thoughts.
Alright, Tien tsin, Thanks, Brent let's take.
Let's take one more question.
Your final question comes from the line of Rod bourgeois with deep dive equity research. Your line is open.
Hey, Rod Hey, guys, Hey, I have a question about bookings traction and a question about capital intensity I'll start on the bookings side.
Youre booking strength in the December quarter was pretty disconnected from less good trends in the broader.
Infrastructure services market. So I wanted to ask how much of your recent booking strength was due to push outs from earlier in the year versus a real inflection point in your market traction.
If you are if you are seeing a real inflection point can you share more about what's enabling that inflection point.
Okay. So first I'll talk about the bookings. So if you take out the $800 million that we said was basically caught up in the first half of the year, we're still at a book to Bill of 112.
So that's just the math thats, a very strong quarter also the way I'd look at it Rod is.
We're back over one O year to date.
So youre going to look at it that way you can look at it the trailing 12 months.
Increasing from 1.0 401.006, either way you look at it the demand was fluid okay.
Rich this is where I keep going back to <unk>.
We do.
See not only the <unk>.
But we also there is a need for our services out there.
That's what I, just keep coming back to know what we're not going to do is raised to go do some book to Bill just to do with the book to Bill because on the Gis piece, we've talked about our discipline over and over again that we will get that at the right economics, and then look I.
Really like what we're doing in GBS. When you look at all of those offerings 132 book to Bill in apps.
115 in any 1.06 and raise insurance business.
That's all goodness, so Rob what was the second part of your question again.
Well it relates it relates to the.
To the disciplined topic in the in the Gis business. So maybe it's a good topic to end on capital intensity and the business is something that has been wrestled with here for years.
So can you talk about the levers you have to get capital intensity down while Youre also achieving better revenue stability in Gis.
Okay.
Ken do you want to tell you that yes, sure yes, no Rob we've been backed out of whole governance process, we've put.
A thoughtful approach around free cash flow cash generation on deals and as Mike said It just takes time to work its way through the system. That's probably the first part and then your comment about historically I think there wasn't this.
Cash culture, and putting that in place and part of the business came out of our hardware business. So I think their desire to refresh and not really kind of manage capex.
You know like we need to we just need to keep working that right. So we've even put some tools in place which are gone live this quarter to better forecasts manage create accountability tie back to the.
Commercial team that Mike's been building now, which I think will be a big part long term I mean, our focus is absolutely to support our customers, but we also need to make sure we're getting a proper return.
On the business and when you look at the capital intensity in the margins in the Gis space you could easily argue we're not getting the right returns. So we will keep sharpening the pencil there and drive our way down through it but there is certainly an opportunity to make headway there and if you look at our peers right you kind of.
Quickly get back.
The Gis space ought to be somewhere around 5% of revenue, maybe 6% on a bad day and the GBS space ought to be kind of a one to two so.
And that thesis right there ought to be an opportunity to get the capex down the 3% to 4% with a little bit of work and that's that's what we just need to do and we need to keep at it.
So rod let me leave you with these with these comments.
When I look at that space in the three plus three and a half years I've been here.
We first talked about is there even a need for that business.
At work that infrastructure work and I gave you all data that said, hey that stuff's not going to go away not everything is going to go to the cloud because all of our competition is always talking about the cloud the cloud the cloud Alright second is nobody liked that business because it was commodity.
Alright, so a lot of people could do it and that meant a race to the bottom on price. Okay. So now where are we today.
Alright, there is definitely a need because not all of the mission critical stuff has gone to the cloud some of it has some of it has and second is the industry isn't as commoditized as it once was because we've got competition, that's fallen off alright, So therefore us being there.
<unk> right to take the business to make sure that we can deliver on what we said we're going to do is huge to get better economics now the last thing I will say as Ken was.
Was being very detailed I would add to his detailed by saying using our balance sheet to do deals is not something that we want to continue to do over and over and over again and I'll just leave it at that.
So rod did you have question or should I should I wrap the call up.
I think its time to wrap thanks guys.
Alright. Thanks, so much look I appreciate everyone. Joining the call also I want to thank everyone for joining the call. Some of you made the time for DXP.
This quarter and I do really appreciate it.
I would end with is this we definitely have both execution and we've created great momentum in our business to get to what I think the inflection point will be at the end of FY2023 and we expect to deliver like we had always envisioned the business in FY 'twenty four.
We are very proud about the quality of company that we've created and we're also very clear and excited about our future. So I look forward to updating you all in May and operator, please close the call.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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