Q4 2023 DXC Technology Company Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the D. C Technologies' fourth quarter fiscal year 2023 earnings conference call all.
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.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press to Starwood. Thank you Joe.
John Sweeney VP of Investor Relations.
You may begin your conference.
Thank you and good afternoon, everybody I'm pleased that youre, joining us for the Dx C Technologies' fourth quarter fiscal year 2023 earnings call.
Speakers on the call today will be Mike Salvino, our chairman, President and CEO , Ken shop, our EVP and CFO .
This call is being webcast at <unk> Investor Relations website in the webcast includes the slides that will accompany the 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. We provide a reconciliation of these measures to their respective and most directly comparable GAAP measures.
These reconciliations can be found in the tables included in today's earnings release and in the webcast slides certain comments, we make on the call will be forward. Looking these statements are subject to known risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. Our discussion of the risks and uncertainties is included in our annual report on form 10.
K and other SEC filings.
Now I'd like to remind our listeners that DXP technology assumes no obligations to update the information presented on the call except as required by law and with that I'd like to introduce <unk> Technology's, 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 solid Q4 results, where we delivered another strong quarter across all financial metrics.
Next I will discuss our transformation journey and provide insights concerning how the work we did in FY2023 positions us for success in FY 'twenty for Ken will then discuss our financial results in more detail and provide an update on our guidance and finally I will make some closing remarks before opening.
The call up for questions.
We are pleased with our performance in Q4 and in FY 'twenty. Three is it shows that we can execute and positions us for more progress in FY 'twenty four.
Revenues were $3 $5 9 billion and our organic revenue was minus two 9%.
We have driven roughly the same level of revenue in constant currency, excluding dispositions for all four quarters in FY2023.
Which positions us to continue improving our revenue performance in FY 'twenty four.
Our EBIT margin increased from 7% in Q1 to eight 9% in Q4. This shows that we can continue to invest in our business early in our fiscal year and still deliver on our EBIT margin goals for the year, we see a similar EBIT margin progression and FY 'twenty four we.
We delivered over $700 million in free cash flow and like EBIT margin increased it throughout the year. This positions us to expand free cash flow in FY 'twenty four.
Our non-GAAP EPS increased to $1 <unk>.
Growing 21, 4% year on year this.
This is the first time, we've exceeded a dollar in a quarter over the past three years, which shows that our capital allocation strategy is working and finally, we delivered another strong quarter of book to Bill at 1.04 in the quarter four out of our six offerings delivered a book to bill over one.
Now I will turn to our transformation journey and give you more details concerning how we drove the execution of our numbers in the quarter and position <unk> for success in FY 'twenty four.
The first step is to inspire and take care of our colleagues we've done a good job changing the culture of DXP and we've also built a strong team that is executing and I'm happy with how we've been able to add talent to our team.
To enhance our execution, we have changed our operating model to be led by our offering leaders our new operating model gives our organization clarity and places seven of our most experienced leaders into the market focused on growth differentiation coaching our people and actively managing the details of our business.
GBS is a great example, our A&D along with our insurance offerings have been the main reason, we have driven consistent growth in GBS for eight straight quarters in GBS continues to become a larger part of our overall revenue.
Michael Corcoran and Ray August two lead <unk> insurance, respectively were early adopters of our new operating model and they have achieved both market growth and differentiation.
Michael and Ray are just two of the seven experienced leaders now driving our business through our offering led operating model then went live on April one.
The next step on our transformation journey is focused on our customers in FY2023 our efforts to focus on our customers translated into revenue stability as Ken will show, we have had four consecutive quarters of similar revenue once currency and divestitures are removed.
We feel strongly that our revenue is now stable as higher quality and is trending more towards the GBS due to our customer delivery and our enhanced relationships. We have developed our net promoter score for the quarter was 29, which is near the top end of the industry benchmark range.
We wanted to get more insight into what our customers thought of us as we have seen the external perception of DXP chain. So we hired an outside firm to do a deeper survey of our customers.
What we got back gives us confidence that we are positioned for future success concerning revenues because our customers view. The work we do for them is essential.
They want us to help them evolve to their technology future and they trust us.
This has been our platform since I arrived at DXP focused on delivering for our customers and Gis is this will build trust and DXP and ultimately change our external perception.
This will allow us to grow GBS and that's exactly what we've done the fact that GBS has grown now consistently over the last two years and continues to become a larger part of our overall revenue is an outstanding proof point that this strategy is working.
In FY 'twenty four we expect to be even more aggressive with this strategy due to our new operating model that takes our most experienced leaders and focuses them on spending even more time with our customers doing relationship selling which was the change we made in our sales approach two quarters ago. The third step is to optimize cost we have been.
A team that knows how to drive cost optimization and expand margin as you saw that in FY2023 driving EBIT margin to a high of eight 9% in Q4 the.
The expansion of margin throughout the year was a function of our cost optimization initiatives that focused on staff optimization contractors real estate and data centers and third party expenses.
In FY 'twenty four we will stay focused on these items with an increased emphasis on contractors and data centers specifically in the IPO space. We are moving towards what we call infrastructure light, which means we will not use our balance sheet to do deals we will shed a significant number of our data centers and we will shed existing car.
On tractors in favor of full time employees. These are the key items around our more disciplined approach to dealmaking and managing our <unk> work.
These items along with us managing the decline of our pension income that does not generate cash will produce higher quality margin for us in FY 'twenty four.
In the area of sees the market our new sales approach is working as we have delivered another quarter of a book to bill over one the relationship selling that we're doing in GBS delivered a book to bill of 1.0 for that.
The book to Bill of Gis was 1.03, which shows that we are taking work from our competition and our more disciplined approach to deal making is working.
We are seeing that our external reputation has changed and that our customers see the work we do for them is essential which speaks to our Gis business and they want to work with us to help them evolve to their technology future, which speaks to our GBS business.
Another proof point that we're making the right moves in the market and changing our external reputation of being a trusted partner is the 2023 Gardner outsource services Magic quadrant, where we moved into the leaders quadrant, increasing and ability to deliver and completeness of vision in.
In FY 'twenty four we will continue to focus on our sales approach, which should be even easier with our new streamlined operating model. We believe that the market needs our services and that we are uniquely positioned to continue to deliver a book to bill of one.
The final step is our financial foundation, our execution in this area has placed us in a position of financial strength heading into FY 'twenty four and FY2023 we were able to maintain our solid investment grade credit profile deliver over $700 million of free cash flow for the second.
Great year, and deliver on our $1 billion commitment to repurchase our shares in FY 'twenty four we plan to do more of the same maintain our investment grade credit profile expand our free cash flow deliver higher quality revenue margin and EPS and repurchase another $1 billion of our shares.
And with that let me turn the call over to Ken.
Thank you Mike Let me provide you a quick rundown of our Q4 performance.
Q4 organic revenue declined two 9%.
Adjusted EBIT margin, eight, 9% and non-GAAP EPS of $1 two.
Both are at the highest level in the last three years.
Free cash flow of $269 million in the quarter as you can see the team continues to make great progress on cash generation.
Moving to our key financial metrics.
Fourth quarter gross margin was up 250 basis points due to lower payroll and contractor expense, resulting from our cost optimization efforts positive impact from divestitures.
And lower retail SG&A as a percent of sales increased to 160 basis points depreciation was lower by 10 basis points. Other income decreased 60 basis points, primarily due to lower pension income.
As a result, adjusted EBIT margin was up 40 basis points non-GAAP earnings per share was up 18.
Compared to the prior year due to <unk> 11.
From a lower tax rate <unk>.
From a lower share count <unk> <unk> from expanded margin <unk> from lower interest expense. These benefits were partially offset by eight.
From lower revenue volume and other factors.
Now turning to our segment results our business mix continues to improve as a percent of total revenue GBS is now at 48, 8% up 10 basis points sequentially.
<unk> grew three 3% organically, our eighth consecutive quarter of growth. The GBS profit margin declined 80 basis points year over year.
Turning to Gis organic revenue declined eight 5% Gis profit margin increased 190 basis points year over year and was up 110 basis points sequentially benefiting from the cost optimization initiatives and lower levels of retail rather.
<unk>.
Retail revenue was at a lower margin so lower resale revenue improves the quality of revenue.
Turning to our offerings and.
Analytics and engineering continued with solid growth up eight 5%.
Applications declined 5% a significant improvement from the last quarter's decline of six 8%.
Insurance software and bps is up five 9%, we continue to see good momentum in our insurance software business.
Churn software business benefited in the quarter by approximately 300 basis points due to restructuring and existing customer contract into a perpetual IP license with upfront revenue recognition.
Security was down 4%.
Cloud infrastructure and IP outsourcing declined 10, 5% largely driven by a decrease in retail revenue of $84 million or approximately 600 basis points modern workplace was down five 3% as you will note. This is a significant improvement.
From our prior performance that we expect will continue to narrow in the upcoming year.
Revenues on a sequential constant currency basis, excluding divestitures continued with only a modest decline from Q3.
This momentum that Mike and team created will be key to our success to deliver our organic revenue improvement.
Turning to our financial Foundation, we achieved our target debt level of $4 5 billion. We continue to tightly manage restructuring in tsi expense, our restructuring and tsi expense was $232 million for the year $68 million lower than our guide.
Had been focused on improving the quality of earnings and limiting this kind of non-GAAP adjustment going forward, we will utilize the restructuring only to accomplish our facilities right sizing efforts as they are nonoperational.
This labor restructuring started when <unk> was formed.
And has gone on far too long.
Operating lease payments and the related expenses were down approximately $80 million for the full year, resulting from our successful efforts to reduce our facility footprint.
Capital expenditures and capital lease originations as a percentage of revenue or six 3% for the full year down 70 basis points from FY 'twenty two.
We continue to believe our capital intensity presents a long term opportunity to improve free cash flow as we pursue and infrastructure light model.
DXP has a strong and stable debt position with manageable debt maturities in a low interest rate almost all of our debt is fixed rate.
With an effective interest rate of one 5% our debt is denominated approximately 60% euros and other currencies and 40% U S dollar to better match our operations as a result, we have a high degree of financial flexibility and maintain access to significant.
<unk> liquidity, our net debt to adjusted EBITDA ratio of one one demonstrates our strong commitment to an investment grade credit profile.
Turning to COVID-19, let me touch on how our noncash pension income has impacted our adjusted EBIT margin.
As you can see our adjusted EBIT margin, excluding noncash pension income has expanded from six 6% to six 8% in FY2023.
And we are now expecting a further 95 basis point margin improvement in FY 'twenty four.
Pension income as non operational as it is noncash earnings as pension income comes down the quality of our margin improves.
In the fourth quarter of FY2023 as part of our efforts to improve our financial Foundation, we executed on a pension plan buyout for one of our larger plans the buyout removes the funding risk from <unk> balance sheet and should allow approximately $180 million.
Of the surplus to fund other plans in the same country.
These plans are expected to have future funding requirements.
The buyout resulted in a loss of $361 million and in addition, the annual pension Mark to market loss of $1 1 billion was primarily due to the returns on planned assets for investments and our UK plans.
Both of these noncash items are excluded from the company's non-GAAP results in aggregate, our pension plans remain overfunded by $699 million.
The team continues to make great progress on cash generation and as a result, we have delivered two consecutive years of positive free cash flow over 700 million a $1 4 billion improvement from FY 'twenty one as.
As you recall, our FY2023 free cash flow was negatively impacted by $70 million due to lower bank customer deposit at the German banks, we divested.
So excluding the impact of the lower bank customer deposits, our free cash flow would have been over $800 million.
As you think about our asset sales they have generated significant deployable cash and reshaped our portfolio to be more focused on our core business and yield a positive margin impact over the past fiscal year proceeds from the sale of noncore assets contributed more than 500.
Million of capital for deployment as we previously discussed we are targeting an incremental $250 million asset sales <unk>.
Principally data centers.
Our robust capital deployment has reduced DXP shares significantly we've repurchased $46 7 million shares or approximately 18% of the outstanding stock since the beginning of FY 'twenty two.
By improving our free cash flow and reducing our outstanding shares we have significantly increased our free cash flow per share and expect to continue that trajectory in FY 'twenty four.
Turning to our capital allocation, we completed our prior commitment to repurchase $1 billion of our common stock our board increased our outstanding share repurchase authorization by $1 billion to $1 4 billion, we are targeting a new incremental $1 billion share repurchase ultimate.
We expect our share repurchase to be funded by excess cash from free cash flow and asset sales due to the quarterly progression of cash flows and the episodic nature of asset sales, we expect temporary fluctuations in that above our target debt level, we continue to believe.
DXP presents an attractive valuation assuming the current share price, our incremental $1 billion share repurchase would equate to about 19% of the current outstanding shares.
Our Q1 guidance is as follows we expect Q1 organic revenue to decline minus 2% to minus 1%, we expect higher project revenues, specifically in GBS and narrowing declines in IPO and modern workplace ultimately improving organic revenue.
Performance throughout FY 'twenty four.
Adjusted EBIT margin of seven 5% to 8%, we expect to expand adjusted EBIT margin during the year as our margin optimization efforts take hold and offset the lower pension income that is negatively impacting our margin by 70 basis points.
non-GAAP diluted earnings per share of <unk> 80 to 85.
Earnings per share of $3 80 to $4 five.
Our non-GAAP earnings per share guidance reflects a tax rate of 29% and our expectations for the timing of our new $1 billion share repurchase.
Free cash flow of $900 million, our historical pattern is that we generate strong free cash flow post Q1 throughout the remainder of the year like we achieved in FY 'twenty, two and FY2023 due to the timing of receipts and disbursements, we expect Q1, FY 'twenty for free cash flow to be negative.
Got it.
Let me touch on the announcement today as I reflect on my two and a half years of DXP I appreciated the opportunity to work closely with Mike and his leadership team and the finance team together.
Together, we built a solid financial foundation and fix many of the challenges at DXP.
This has clearly been a team effort across DXP, while I will not be on the next phase of the journey for personal reasons I look forward to the great things yet to come and with Mike and the whole DXP team all the best in the future.
I will be transitioning my responsibilities to Rob who you will meet in the summer and of course I will be available to help make sure. It is a seamless transition with that let me turn the call back to Mike.
Thanks, Ken and let me leave you with the key takeaway due to all the work we did in FY2023 we are well positioned for success in FY 'twenty four.
A clear execution of our transformation journey by our talented team in FY2023 has delivered a better culture stronger customer relationships are better sales model revenue stability expanded margins and free cash flow and we've maintained our investment grade credit profile, while returning $1 billion.
Back to shareholders.
It is great execution, and I'm happy that our folks in FY 'twenty four will not be on fixing challenges, but delivering higher quality revenue margin and EPS expanded free cash flow and returning another $1 billion to shareholders, while maintaining our investment grade credit profile.
I can tell you that my team is excited and proud because we've worked hard to get <unk> to this point and with the execution momentum we've created along with our new operating model. We are excited and confident about delivering in FY 'twenty for now.
Now before I open the call up for questions. Let me. Thank Ken for all of his hard work and time that is spent with me and the team over the last two and a half years together, we have built a solid financial foundation and fix many of the challenges of DXP.
I want to welcome Rob to the team I look forward to working with him to drive <unk> forward from our solid financial foundation and execute against our numbers.
Also looking forward to a smooth transition from 10 to Rob and introducing Rob to all of you over the summer.
With that operator, please open the call up for questions.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
We ask that you limit yourself to one question and one follow up.
And rejoin the queue for further clarification.
For just a moment to compile the Q&A roster.
Your first question comes from the line of Bryan Keane with Deutsche Bank.
Your line is open.
Hi, good afternoon, Brian .
Hey, Mike how are you doing I wanted to ask about the services demand.
In the market right now.
On one hand, we're hearing some weakness.
Other it vendors in the macro is weighing on some demand but.
On the other hand, it looks like <unk> is guiding to improving organic growth. So can you just help us understand what youre seeing in the demand environment and how that might impact your guidance.
Brian Thanks for that and one of the things I said in my prepared remarks was we pushed on this hard obviously, we're seeing what our competitors are doing we see some of the uncertainty and Thats why we went out and did that survey.
And what that survey gave us back in.
Is that look the the business that we have is an incredibly stable our customers see us as a central which basically means.
They can run their business without us and then the other key thing to that survey and those results were once we're in that position then they want us to evolve to their technology solution. What's in the market right now is customers want cost savings first and foremost second.
They want projects that will give them quick value. So gone are the the projects on innovation gone are a lot of the experiments. So we're in a unique position because ever since I've been here our strategy has been to deliver on that Gis business. So that we could sell the.
GBS business and what essential means to us is that speaks to our Gis business and they've got to spend money on that right. Now what we are seeing is some softness which Ken and I, both talked about and hardware sales, which in all honesty, we have been very focused on with our new sales approach.
To be Sticklers about resale revenue. So the resale revenue will come down came down in Q4, it will come down a bit.
In FY 'twenty, four which in all honesty, we will help our margin over the long term, but <unk>.
Three things I would say first of all yes, we see the uncertainty the uncertainty we see is mostly in hardware sales and also some projects stuff, but mostly innovative project projects. The positioning that we have is because we've got that IPO work and we're delivering we're seen as essential they're spending money on us.
We can see that and quite frankly, all three book to bills overall book to Bill GBS book to Bill and then <unk>.
Book to Bill and the final point I'll make is because of that.
Because of that grounding and the clients they want us to evolve so that's where we see the project work in GBS. So.
Fully that Brian gives you a flavor of what we're seeing in the market do you have a second question Brian Yes.
Yes, just a follow up for Ken Ken We're sorry to see you go obviously the free cash flow.
The improvement is kind of evident with the guide.
We were at $737 million. This fiscal year, maybe you could help us just bridge to that $900 million of about $900 million in free cash flow for this fiscal year, you're guiding to.
You may take our first cure might go ahead, okay. So Bryan the bridges take 737, and then last quarter remember, we took out funds depot that $70 million right. So 737, plus 70 gets you to 800, where we see the other $100 million coming from is us managing capex.
Better Alright, us also driving our margin.
So we feel pretty confident in that number now the other key thing that you should have taken from Ken's prepared remarks is there's a pattern what I call. It there's a rhythm there's a rhythm of <unk> now in our margin and also within our free cash flow, where we make investments in Q1, and we pay quite.
Frankly, a lot of our software vendors, we pay our bonuses in Q1, and then we generate increased margin and also increased cash flow throughout the year and now we've done that for two years, we've done that with the same team.
And that's why we feel confident in the $900 million I Miss them, Yeah, just maybe real quick Mike just to add to it. We think Q1 is probably coming in proximately down $200 million.
We fully expect to pull that back through the rest of the year like we've done the other two years that Mike mentioned.
Got it thank you.
Alright, Thanks, Brian Operator next call.
Our next question comes from the line of Keith Bachman with BMO. Your line is open.
Hi, Thank you very much first of all Ken I do want to say I'm disappointed to see leaving.
So I wish you the best begrudgingly into next as part of our journey.
Two things for me is.
When you think about your work.
This is coming up on all of our coverage universe, including with IBM last week, but just may be comment on what you think gen AI.
That drives a lot of your revenue.
Thank you for that and the second question is just wanted to help understand.
You think about it.
The movement towards sort of flat revenues for the year.
What is your booking trends need to be.
As we migrate through the year. So it just over 1% this quarter just give us a sense about how you expect that that book to bill trends over the year. That's it for me. Thank you.
So Keith the first one on chat.
<unk> first of all that's an awesome piece technology, because it's finally, bringing AI to the mainstream and if.
If you've looked back on my background, that's one of the things I brought to <unk>.
Roughly almost four years ago. So we're on the forefront of using AI with our <unk> business and the product that we build is called platform acts.
And when you think rate times ours, what platform X does to US I'll give you two use cases platform X monitors the state and the first use cases, we use AI to predict when hardware is going to fail a lot of our hardware providers will tell us that the hardware should be up.
And running for three years four years, sometimes seven years and what we have is predictive analytics.
And we've built those algorithms to accurately predict when something is going to tip over so we can get in front of the client alright, and make sure that that doesn't happen. So when you think rate times ours. We are doing project work proactive new project work because of AI now let me give you the <unk>.
Cost savings example, the cost savings example is we don't need as many people know because the other AI algorithm that we've written in platform X literally takes a failure point.
And we basically map that to the bots that we have we have a library of bots that we can deploy when something goes wrong. So when something goes wrong AI looks at it understands the issue it predicts and takes the rate, but we implement the rate, but and the thing gets fixed.
With no human intervention, which again, that's the piece, where we're driving our costs down because of it.
So.
I would tell you three things on AI the first one.
We're going to continue to evolve I love. The fact that it's mainstream because a lot of lot more people understand the fact that you have to build the algorithms <unk>. The second thing is we've got 20000 people that do analytics and engineering and part of that analytics is data and with that number of people we have been able to.
Great datasets that will train these algorithms and then the final thing is look not only are we doing it for ourselves we're doing it for our clients. So.
Love AI I think it will be something that.
We can use to our advantage, but to vote to both drive revenue and also reduce costs.
Now in terms of the revenue I think Thats. Your second question right Keith how do we stabilize revenue the book to Bill got it.
Yes.
Okay. So look I mean, we always shoot every quarter to have a book to bill over one what you saw last year, which is why the slides in our deck on revenue are so important, particularly slide 15 is that you remember our book to Bill last year was <unk> 80, 783, then I believe it was.
13136 last quarter, and then 1.0 for and what Youre able to see by US is that we can keep that revenue.
<unk> stable alright, so what I would tell you is our goal absolutely is to get over one point.
You've seen that the bookings can be lumpy so as long as we're in and around 1.0 for the entire year, our revenues should be in good shape hopefully that gives you a good flavor about that question.
Okay. Thank you Mike.
Next question.
Your next question comes from the line of Bryan Bergin with TD Cowen Your line is open.
Hey, Brian Hey, guys. Thank you very much how are you doing.
Wanted to start can you just talk about the organic growth in fiscal 'twenty four if we were to.
Remove that path to revenue headwinds so the resale headwinds you talked about if you didn't have that year over year grow over kind of what would that imply on the organic trajectory of the business.
Well look out what I will tell you about the organic trajectory of the business is when you look at our flat revenues.
We basically let's call it over the last.
Let's just call it over the last two quarters so.
We delivered minus three eight last quarter, we delivered minus.
Two 9% in this quarter, we are now guiding to minus one to minus two.
There's two things that are going to go on with our revenue. The first thing is we are going to turn positive.
What I would say towards the back end of this year. The second thing is you will see GBS become a larger and more dominant part of our revenue also in 2000 in fiscal year 2024.
And look the key thing is that as you can continue to see us driving the execution of this business into what we exactly.
<unk> said that we are going to do and we have always said that we've got two businesses. We said that that Gis business is incredibly important to us because if we deliver for our customers that will change our perception in the industry, which is what we've done and that will allow us to finally get to revenue growth.
<unk>.
Or in FY 'twenty four.
Maybe Mike just add to that.
The decline in retail this quarter was about 170 basis points.
Organic revenue growth. So the business performed on a service level mud services level much better.
So when.
When we think about the resale alright, one of the things we've done with our operating committee is really hone in on resale revenue because we make very little margin on it I understand our clients needed I understand that our clients want a one stop shop.
Two implementing.
<unk> and cloud.
But look this is part of our more disciplined approach to deal, making and I just wanted to come back to what we said around infrastructure light because that will be important because when we think about not using our balance sheet. When we think about not taking data centers. When we think about removing contractors for employees.
All of that stuff is goodness as it relates to our margin and then better revenue that we'll generate margin. So.
Look we tackle something pretty much each year. This will be the thing that we tackle this year and I think it when we talk about having a better quality revenue for you all that's what we are saying.
Brian did you have another question.
Yes, just one follow up on the outlook on 24 growth guidance can you give us any other color on the underlying stack performance assumptions there that are embedded within that overall headline growth range.
Yes, what I will tell you is GBS will be will grow more than it did in FY2023 so that means a combination of analytics insurance and apps.
And Gis will shrink more than it did in FY 'twenty, three alright, and what you've seen when you go look at page 14 of our deck the security is.
That's a business that is pretty stable for us I mean, we do security based on the Ato stuff, what you will see with our folks on IPO is we will drive that well below.
The FY2023 totals and then I have been saying now for probably four quarters that were finally going to fixed modern workplace and you saw that turn this quarter from minus 15.
Three to now minus five three and I expect that to get.
Flat.
Next quarter so.
More GBS less Gis and that basically will be our mix for FY 'twenty four so Brian hopefully that helps out with the Gis will shrink at a lower rate Mike is that correct, yes. Okay.
Okay. Thank you guys.
Your next question comes from the line of Ashwin <unk>.
<unk> with Citi. Your line is open.
Hey, Ashwin.
Hi, good to speak with you all.
Tom Sorry to see you go.
Hello, Paul.
All of them.
I guess, so let me start with.
Macro concerns.
Abound.
And.
Fix.
A fixed number of things that enterprise spenders due when those concerns come up.
Yes.
Yes.
When you apply sort of the normal approach that you've taken.
How would you kind of.
I'll get one level below and within GBS GBS for example to talk about the.
The impact that you might expect to see on analytics versus this applications versus insurance and the same thing for Gis.
How are you kind of.
Mitigating the outlook that you're providing.
Well look I mean, ashwin the way I'll start with I'll start with Gis right. I mean, the first thing is you look at how stable the revenue is and it's not like.
The macroeconomic stuff just started today alright. So you look how stable that revenue has been.
Just in the last two quarters and we're looking at more stability as we enter FY 'twenty four alright that along with people are going to continue to spend money.
On the <unk> in the cloud space, mostly because they want to protect themselves from any sort of security issues that could cripple the environment. The second thing is you know the other major offering we have in Gis is modern workplace and as much as we would all hope that everybody might come into the office that's still.
Not true alright, so being able to have a workforce that you can support virtually is key so we have two key offerings there that what I keep talking about as they are essential to our customers' needs and we are continuing to see demand now and that demand they want cost savings alright.
And in that demand there are there are competitive deals from our competitors because they are not delivering for their customers coming to the market for us to look at so we need to be very choosy, because what we're not going to do is take the progress that we've made in Gis backwards now on GBS is.
Very simple the apps and the AE business, we sell based on value.
You sell based on value based on relationship sales. So part of this operating model change is taking seven of our our most senior leaders and sticking them to the forefront of doing relationship selling and coaching our people and managing the details.
Right and when we do that.
We have seen a built in pipeline for our work in GBS, Alright, and then insurance stands on its own I think Ray has got a great business. There, it's a business where the industry needs. Our software we do a good job running the software and we definitely provide value to them to that industry and cost savings so look.
Yeah.
And that's why we're pretty we're pretty bullish about.
Calling what we've called in FY 'twenty, four and we're not coming off that and like I said, if I see anything any shortcomings in the revenue ashwin it'll be resale and it'll be maybe the project work. Okay. Now the last thing I will leave you on the project work is remember what we did a year ago.
But we did a year ago as we took on the Russian issue straight away.
Okay, and we got ourselves out of Russia, So that A&D capability is unique in the industry, because we don't deliver any of that work with Russian resources. So therefore that makes that revenue more stable and that also gives us a unique sales position in the marketplace in terms of our delivery.
Capability.
So anyhow, that's how I would give you some more details ashwin on on our business.
Right now.
We appreciate the steady performance.
Ken I can't let you go without one one more free cash flow question.
Yes.
The bridge.
<unk> 24 from.
From.
What you have here.
What are the main elements.
Off that offset maybe if you could kind of drill down into that.
Yes, maybe ashwin and thanks, and just touch on what Mike said earlier right. We produced $737 million. This year add back the lower bank customer deposits like as we Fortunately no longer own bank. So we won't have that headwind next year, which I would still characterize as.
Non operational so that puts us at 800 million. This year our margin. We're guiding to is eight to eight five and it includes 70 basis less pension income and I think we all know by now pension income is noncash so right there off the bat.
The margin improvement that we're targeting with the lower pension income will certainly drive more cash flow and then just we talk about working capital its been a user of cash I think when I first got here, we had about 13 negative 13% working capital we're now down.
Negative 3% of revenue on working capital. So we don't feel like we need to keep.
<unk>.
Paying down the working capital to make the business kind of more normal from a payables standpoint, and that's kind of closer to the peer group. So we don't think working capital will be a consumer going forward and then the capex as Mike talked about earlier I think we feel pretty good that we've been working through each and every deal.
And we will come out on the other side with better Capex profile.
<unk> point is this year's 70 basis point decline in Capex and capital leases as a percent of revenue.
Got it understood understood.
And thank you for pointing out the $2 billion buyback is 19% of your area.
Okay.
Operator next question.
Your next question comes from the line of Rod Virtualize with deep dive. Your line is open.
Okay great.
Hey, there.
And Ken Youll definitely be missed and thanks for all the progress you've contributed on cleaner financials and moving to a more capital light model.
Just as a couple of examples there and welcome Rob to the CFO role.
Guys I wanted to ask about.
The competitive intensity topic are you seeing an ability to win competitive deals without using your balance sheet are sacrificing on profitability terms I guess in particular are you experiencing a change in the IPO market, that's enabling the infrastructure light.
Model that come to fruition.
Yeah.
100%.
I don't know how to answer that any other way, meaning we see demand in that market because of the fact that we've delivered for our customers I keep talking about us being a safe pair of hands.
It is definitely we have customers coming to us with our competitors work. Okay. So that's first and foremost.
I've told you guys that we have been very choosy about that work and what we're not going to do is be a bank. So take extended payment terms because that's the way. This market has been we also are not going to fund or.
A lot of the transitions or increases in.
Energy and so forth. So we will sit on the terms Rob to get us to the deals that we want.
And actually the terms that we want so that we don't go backwards, Okay, and Thats really important to me because all the progress we've made in this revenue it's still got to be revenue that we can generate good margins. The last thing I will tell you is we've also seen progress.
On us not only getting better terms, but also getting better prices because.
Again at the end of the day that Ato market is about keeping those states up and running making sure. They don't get penetrated and the final thing is just not a headache that Ceos want to have.
So us being that trusted partner was happy to see how we moved in the in the Gartner quadrant right. I mean, that's totally third party viewpoint of the world and I like the position that we have in the market right now and what we're going to continue to do is be choosy about the work, but we're also going to sell on.
Top of those trusted relationships the GBS work.
Got it.
You have.
Yes.
Follow up is just about the new operating model can you give us a little more background on what prompted you to move to the new model and what's the main difference in the new model versus the prior one and is that new model, mostly in GBS or does it also flow into <unk>.
Ended ended Gis as well so just some more color on the background the background there.
Thanks Rod.
So first of all the operating model goes across the entire company and when I came in here.
The business ran by region right. So we talked about what Ken and I have done on the financials to make them more.
<unk> parent to also get them to a better spot and so forth, but when you're running financials alright in the business by region. There is no differentiation. There is no good analysis on whats happening right with each offering and.
Theres really not a person that's driving that from revenue through margin through collections and.
And basically operating these businesses like their own so with the new operating model does is it's something I'm used to from my past.
If you go look at the major service providers that are out there typically they are driven by an offering why because you can get the differentiation what I like about it is we've literally chosen our top leaders and we put them into the market to focus on growth differentiation.
But the other thing is I keep talking about the culture.
And in this business you have to manage the details which means you got to get to the account level and you've got to drive the account and it starts with our relationship with a customer then it gets into the actual value that we provide because a lot of our book to Bill right now Rod is based on the value that those customers.
And what we're providing it's not just delivering anymore, but they are literally seeing the cost savings and they are seeing the new ideas brought to the table, where we can help them meet their financial performance. So that's what the new offering model does.
Im really excited about it I will tell you that we've been planning for this for an entire year.
And Ken has done a lot of good work.
Rob we'll definitely take it to the next step with as IBM background, alright, because when you look at people like IBM and Accenture. They are used to running that model and driving the business.
For increased revenue and then margin expansion EPS expansion and free cash flow.
So that's why we're doing it like I said I am excited about it and.
I think everybody will see the fruits of it very shortly.
Got it thank you.
Operator next question.
Your next question comes from the line of Lisa Ellis with Moffett, Nathan Nathan said.
Your line is open.
Good afternoon Lisa.
Hi, Thanks for taking my question, Ken will be missed.
Hey, Mike I know you opted not to give any sort of new longer term guidance.
I think at this point is like can you give us a sense for.
As youre, reflecting starting into the new fiscal year.
We would articulate medium term goals for DXP at this point.
So what I would do is the first thing I would say is.
Go back to that inflection point.
So the great news is that we've got a leadership team here that can execute.
We have shown everybody that we can recruit really good talent and now this game is going to be about all about execution.
And what I would tell you plain and simple is I see a company that will grow revenue and like I said expand margin EPS and free cash flow those are our goals alright, those aligned to what we're trying to do and what we will implement in FY 'twenty four and I think having those goals will propel.
As to be a company that will be a very stable company that can compete well in the it services market for years to come.
Lisa do you have a second question.
Yes, sure just maybe related to that I know you called out in your prepared remarks about $250 million in additional asset sales you've done a lot of portfolio reshaping very effectively over the years.
Is that sort of done at this point are there additional things we should be.
Anticipating essentially either additional divestitures.
You bet.
Thank you.
Thanks, Lee as our focus right now will be on that second piece I talked about was about infrastructure lies which is shedding our datacenters. Okay. So that's a fixed cost that when you're going through the transformation that we're going through.
You got to be able to shed those and I'm used to running what I call infrastructure light.
At the old place and basically you don't own data centers and what we're looking to do is that 250 is focused on data centers and some facilities. So we plan on delivering that in FY 'twenty and FY 'twenty four and I think we've got a very good handle and beat on.
On delivering that $2 50.
Operator next question.
Yes.
Your next question comes from Jason Kupferberg with Bank of America. Your line is open.
Hey, Thank you.
Sure.
I actually wanted to pick up on the infrastructure light topic.
Maybe if you can just talk a little bit about what what is needed with different key if I mean I feel like we've talked about this for a while.
Use the balance sheet less than outsourcing deals I mean, I get youre going to sell some datacenters, but just in terms of go to market deal terms and deal structure like what I guess whats really changing because I feel like infrastructure light has been a topic really since you got there Mike.
Okay. So Jason the first thing that changed the competitive landscape. So when I got here, we were not in the position we are today.
And Jason you cover the industry know, what our competition's doing you know the people that you put us up against and I would tell you. We're on top of that he's right now alright. So that's first thing Thats changed now based on us being in that position that front position. We can now alright ask for different terms.
And we can also start shaping our business because of that.
Alright. So this isn't just something we've been talking to we've been preparing for this for quite some time. Many people said that we ought to get rid of that business and strategically I thought that was the wrong thing to do and now it is proving out to being the right thing to do because we're able to shape that business and grow off the back of those.
Customer relationships. So the main things I would tell you that.
Folks on is our balance sheet is a lot cleaner than it's ever been that's 0.1, so we're implementing that appropriately youll see throughout the year, how we implement.
The focus on data centers and then the last thing.
Is the contractors so lot of our competition and in fact, the EXE when I got here was very very heavy on contractors and flipping those contractors to employees allows us to generate more margin remember each contractor, we're probably paying a 7% to 10% premium on and.
Having that focus will definitely clean up our margins.
So look with that Jason I. Appreciate the question look in closing I want to thank Ken for all of his efforts I want to welcome Rob He will be a great addition to the team I think we've been executing incredibly well, we've definitely got the right team and I am definitely looking forward to delivering an FY 'twenty four.
Basically higher quality revenue margin EPS and the key thing will be expanding our free cash flow and while we're doing that we expect to maintain our investment grade profile and deliver another $1 billion back to our shareholders and with that operator, please close the call.
This concludes today's conference. Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
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