Q2 2024 DXC Technology Co Earnings Call

Good afternoon, everybody I'm pleased that you're joining us.

Technologies.

Quarter of fiscal year 2024 earnings call.

Our speaker, Nicole today will be Mike Salvino, Chairman President C E O.

<unk> R E B P S.

The call is being webcast.

Investor Relations website the webcast include slides.

This discussion do that.

Today's presentation includes certain non-GAAP financial measures, which we believe provide useful information to investors.

Accordance with the F. C C rules, we provide reconciliation.

Respective both directly comparable non-GAAP.

Pleasures.

These reconciliations can be found the tables, including the today's earnings release under the webcast slides certain comments you make up your call will be forward looking.

That's a subject no risks and uncertainties, which could cause actual results to differ materially from those expressed on the call a discussion about these risks and uncertainties is included in our quarterly report on Form 10-Q, another S. A C filings.

Now like to remind our listeners.

Technology assumes no obligation to update the information.

This call except as required by law.

With that I'd like to introduce <unk> technologies, Chairman, President CEO lifestyle being a bike.

Thanks, John 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 update on our overall business performance.

Next I will update you on our performance a R. G B S and Gis businesses.

Rob will then discuss our financial results in detail and our guidance and finally I will make some closing remarks before opening the call up for questions.

We are pleased with our financial performance and Q2 is our leadership team continues to strengthen and execute on are offering based operating loss.

Organic revenue for Q2 was minus 3.6 per cent above aren't guidance inconsistent with our queue one performance.

R. G B S business performed better than we expected at 2.4% organic revenue growth and Gis showed progress going from organic revenue minus 9.9% in Q1, two minus 9.1% in queue to.

Our EBIT margin was 7.3%, which is better than our guidance and quarter on quarter.

80 basis point improvement theater, both G b as in Gis margins improving.

G. P. S was 70 cents at the high end of our guidance and book. The Bill was 0.81 and are trailing 12 months book. The Bill is now 1.02.

Free cash flow is 91 million, which was an increase over the minus 75 million we delivered in Q1.

This execution shows that we are beginning to see the benefits of our new offering based operating model, where we are now running global offerings with the goal of driving revenue growth and expanding margins EPS and free cash flow.

The queue to resolve clearly show we achieved all four goals when compared to Q1 performance.

As you have heard consistently from us over the last several quarters. Our management team is laser focused on transitioning from stability to higher performance.

That work started with reinforcing our financial foundation and customer relationships and moved onto ensuring we had the right talent in the right places to execute on our growth and expansion goals.

With the movies that we have made over the last several months I now believe we absolutely have that team in place.

Q2, we added two more senior executives to our leadership team to strengthen our ability to run are offering based operating model and consistently deliver on our financial commitments.

Howard Robb Mark three senior executives with significant senior management experience and expertise in critical parts of our business.

[noise] have joined us to play key roles for DSC alongside the other talented members of our senior leadership team.

Will be running our applications offering and be accountable for our AI strategy, Andrew will be running our modern workplace offering and obviously, Rob is our new C. F who has been making a huge impact and driving our financial performance.

Howard has joined us from I B M.

The nineties services expert with proven experience in creating growth strategies and executing against them.

He did an IBM with their cloud business.

Prior to IBM Howard was the CTO Bank of America, which gives him a unique perspective of what customers want and a 90 service provider Howard is the perfect choice to lead our applications offering.

Andrew joins us after working for some of the largest and well respected brands in the technology industry. Most recently he was the Chief Digital Officer, Microsoft where he was our customer for the modern workplace services, we provide to that.

Crider, Microsoft I worked with Andrew at Accenture, where he was the C. I L and delivered innovative digital services to a very demanding workforce Isabel.

The ability to run global P&l's and deliver the services Mason the perfect choice to run our global modern workplace offerings.

Andrew combined with Chris who runs Ietf's gives us three former <unk> fortune 500 companies, leading almost 70% of our revenue.

These three bring deep customer and industry relationships to D C and the ability to attract top talent to help us deliver on our financial targets.

Now turning to R. G. B S business GBS grew organically for the 10th consecutive quarter and Q2 and now accounts for 49, 7% of our total revenue.

As we have stated repeatedly consistently growing this high value business and having it become the majority revenue source of D C.

According to our overall growth strategy.

Can see from the results of this quarter, we are delivering on that goal.

The 2.4% organic revenue growth was moderately ahead of our growth expectations for the quarter due to the stronger performance across all three offerings also I was pleased to see us expand margins from 11.3% in Q1, 212.5% in Q2.

Our insurance offering has benefited the most from our new operating model because it's been in the model the longest our insurance offering delivers SaaS model to our customers.

And we are the world's largest provider of insurance software and bps solutions to the industry.

Under our new model right to now focus on selling these capabilities to existing customers and delivering services more efficiently. His team has done an outstanding job of beginning the modernization process of our insurance software products positioning our insurance offerings for further growth. This is.

Just one example of how our right model and right leader approach is clearly, making a positive impact and starting to generate solid financial performance I believe that kind of production across the <unk> is only beginning.

Another key attribute of our growth strategy is selling our GBS offerings to our Gis customers on a yearly basis, we generate roughly $370 million in revenue by selling analytics and engineering to our Gis customers and this is growing 11% in FY 24.

So far the new operating model is allowing Michael and his team to continue having success in a very tough market.

Another example of US having the right model and the right leader is our applications offering which generates roughly 1.2 billion of revenue by selling to Gis customers, but it is not growing in F Y 24, so far.

<unk>. This is one of Howard's highest initial priorities as we have charged him with responding to the AI demand and getting our customer base ready to accept this technology.

Moving out of our Gis business, where this quarter, we moderately moved it in the right direction shrinking the decline in revenue from minus 9.9% in Q1 to minus 9.1% in queue too low margin increase from 5.2% in Q1 to 5.8% in Q2.

Like G. B S. All three offerings perform better than our expectations. Let me highlight the progress we have made in the quarter to continue fixing our I T O business.

We have discussed moving to an infrastructure late model.

As part of this effort and as we communicated on prior calls we plan on selling facilities, Chris and Rob are making progress on this initiative with plans to sell facilities in the back end of the year executing on this will allow us to sell under utilized the assets, making us more efficient overall and helping us fixed.

Margin of the GBS business moving forward.

We recently signed a deal to become the partner of choice for AWS. This partnership incentivize as us and our customers to move their systems that are essential to their operations to the clouds. We plan to use this deal to move some of our customers that are using a data center that is on <unk>.

Sub optimized to the clouds to improve the cost economics for our customers and ourselves.

Now, let me turn the call over to Rob to discuss the details of our financials.

Thank you Mike before I get into the numbers I would like to say that team has made good progress with the implementation of the offering based operating model with improved execution.

Spec us to build on this performance going forward.

Well now provide you with a quick rundown of our two Q performance organic revenue is down 3.6%, which came in above our organic revenue guidance range and in line with first quarter's performance.

3.6% near Tears decline 160 basis points came from a reduced level of low margin resale revenues, which was in line with our expectations.

Augusta EBIT margin came in at 7.3% also above our guidance range the <unk>.

<unk> increased 80 basis points sequentially and was down 20 basis points on a year to year basis.

This number there is a significant reduction of 60 basis points from the <unk>.

Pension income contribution on a year to year basis, so that the pension income or non-GAAP EBIT margin moves from 6.3% in two to 23 to $6 7%.

<unk> P S with 70 cents at the high end of our guidance range.

<unk> and up seven sequentially.

SG&A was well managed in the quarter with spending in line with our expectations.

Free cash flow for the quarter was 91 million benefiting from our continued focus on working capital management and a lower level of Capex.

In the corner or book to Bill was 0.81 and the trailing 12 months is now one point out to the.

The level of bookings through the first half of the year is similar to the first half of fiscal twenty-three any 0.81 is factored into our annual guidance.

I can forward based on our pipelines, we expect book to Bill to improve in the second half of the fiscal year.

Moving to our key financial metrics.

Our second quarter gross margin of 23.4% was up 120 basis points here over a year and 230 basis points sequentially benefiting from our cost reduction initiatives.

<unk> It was 9.4% of revenues up 60 basis points year over year <unk>.

Preciation, an amortization was down $7 million compared to the prior year.

Other income decreased 28 million your tier driven primarily by 25 million dollar decline and non-cash pension income.

Taking this altogether adjusted EBIT margin was down 20 basis points year over year <unk>.

Excluding pension income at both periods EBIT margin would've been up about 40 basis points here Dear.

Net interest expense increased 9 million year over year to $25 million, primarily due to a higher level of variable interest expense on short term debt.

non-GAAP EPS was down five cents compared to the prior year driven by a three cent decline from higher interest expense.

<unk> production from a higher tax rate and it's six cent reduction due to lower pension income. These increases were partially offset by a nine cent improvement due to lower share countered by our ongoing share repurchase activity.

Turning to our segment results are business mix continues to transfer a higher margin G. B a segment as a percentage of total revenue G. B S is that very close to 50% of revenues.

Anticipate that this trend will continue and that shortly the G. B S segment will be the majority of our revenue.

G. B S go with 2.4% organically and posted the 10th consecutive quarter of organic growth, which reflects the deep industry based customer value delivered by the G. B S teams.

The G. P. S profit margin declined 20 basis points here over a year with a decrease driven by the impact of lower pension income.

Turning to G. I S organic revenue declined 9.1% with a modest reduction of the decline sequentially.

T. I S profit margin decreased 40 basis points here over a year again, driven by the reductions and pension income.

Now, let's take a closer look at our offerings.

Analytics and engineering revenue performance was up 5.3% below the first quarter growth right <unk>.

We are seeing a moderating level of demand as customers are more cautious due to the current backlog of economic environment.

Applications revenue declined 80 basis points similar to first quarter performance.

All of our applications performance has been stable, we are expecting to see improving book to Bill performance in the second half of the year based on the opportunities we see in our enterprise applications business and public sector and in banking.

Insurance software M. B P. S continued to grow with revenue up 5.2% insurance SAS component of a portfolio accelerated to high single digit growth the insurance platform and deep industry P. P. S skills of our team is resonating in the market.

Security declined 1.8% year to year.

Plan on the infrastructure in I T outsourcing revenues declined 9.8% year to year organically the year or to your performance continues to be impacted by two primary factors that I outlined in the first quarter earnings call the impact of which were anticipated in our to guide the.

The first is declines from contracts that were terminated some time ago and continue to wind down.

The second factor is a decline in resale revenues, which drove 41% of our second quarter decrease in cloud in I T L.

The modern workplace business declined 9% year to year and as with I T. L. The business performed as expected and our two Q guide our expectation is that a sequential performance in revenue will stabilize through the second half of this year.

Turning to financial Foundation metrics.

Levels decreased modestly in the first quarter to 4.5 billion.

Restructuring and Tsi expense increased to 38 billion with the increase entirely due to the restructuring up facility leases part of our effort to right size. Our facility footprint. We are currently managing restructuring and will continue to evaluate opportunities to streamline our operations.

Up writing lease payments and related expenses were $91 million down $17 million a year to year, reflecting continued management of our real estate commitments.

And a quarter capital expenditures or $157 million down $38 million a year to year.

Lisa originations were $24 million flat ear to ear as a percentage of revenue capital expenditures and Lisa originations declined to 5.3 per cent of revenues as we'd tightly manage our capital leasing commitments.

As I mentioned earlier free cash flow for the quarter was 91 million, bringing our first half total to 16 million slightly better than last year's performance.

We have several large drivers of cash expenditures in the first half of the year, such as bonus payments payments to suppliers for annual renewals of software and related maintenance and cash taxes.

Cash outflows will be significantly lower in the second half of the fiscal year and combined with a higher adjusted ebay and continued progress out working capital efficiency, we are maintaining our free cash flow GUL of $800 million.

Turning to capital deployment.

<unk> continued progress on our billion dollars share repurchase program for fiscal year 2024 year to.

Today, <unk> has repurchased about 10% of our shares outstanding.

This is in addition to the 7.4% of shares that we repurchased in fiscal year, 22, and 10.6% in fiscal year twenty-three.

It is important to note that an aggregate of $1 billion share repurchase program will be funded through free cash flow and our asset sale program.

And just to note, there's approximately $500 million remaining for the second half of the fiscal year.

Starting now to third quarter, we expect Q3 organic revenue to decline from minus four to minus five reflecting the weaker demand environment.

Adjusted EBIT margin of 7% to 7.5% and.

And non-GAAP diluted EPS of 75 cents to 80 cents.

Starting to our full year guidance, we are reaffirming our organic revenue growth from negative 3% to negative 4% are adjusted EBIT margin of 7% to 7.5% and EPS from $3.15 to $3.40.

Also maintaining our free cash flow guidance of $800 million.

We have increased the tax rate or non-GAAP E. P. S guidance reflects a tax rate of 30% up from our previous expectation of 29%.

We are making progress on our 250 million asset sell program, which is a plant source of cash and fiscal year 24.

<unk>, we realized 61 million, bringing our year to date asset sale total to $65 million, we have a portfolio of assets that will enable us to achieve that 250 million dollar objective expect to execute by the end of the fiscal year.

These cash generating transactions could result in a non-cash loss that is not factored into our guidance and as we have more clarity on the specific assets and timing will provide an update and four two guidance.

With that let me turn the call back to Mike for his final thoughts.

Thanks, Rob and let me leave you with a few key takeaways, we're starting to see the benefits of our new operating model and our financial performance and we are focused intently on making sure that continues.

We believe we now have the right model and the right leaders to run the global offerings for the three businesses, where we need to make the most improvement having three X C X OS now running applications.

In modern workplace, a big win for us because they are deep relationships with the existing C. I OS that will prove impactful for us.

Our goal for D. C is to grow revenue and expand margins EPS in free cash flow quarter on quarter, we made positive progress on each concerning revenue growth.

<unk> G B S for the 10th straight quarters <unk>.

Moderately slow the decline in G. I S. We.

We also continued to sell our GBS offerings to Gis customers and with the addition of Howard driving or applications are offering we expect to do even more and we continue to make our high value G. B S business, a larger part overall overall revenue now at 49.7%.

While making that progress on revenue, we expanded March 80 basis points E. T S. Seven cents and free cash flow turned positive as we delivered $91 million in the quarter.

I'm pleased with our financial execution for the quarter expect that this execution will continue and I look forward to updating you on R Q3 progress in February operator, please open the call up for questions.

Thank you at this time I would like to remind everyone in order to ask a question <unk> then the number one on your telephone keypad we.

We will pass for just a moment to compile that roster and again that is star one on your telephone keypad to ask a question.

Our first question comes from the line of Brian Megan Bryan.

Go ahead.

Hey, Brian This is Zack isn't it.

Hey, this is Zack anything off her Brian first question on a demand at outlook. So.

The trailing 12 months about gangs remains above one, but the quarterly book to Bill which was below one for the second consecutive quarters. So in this context, we're just looking to dig into what gives you confidence for the revenue affirmation for fiscal 24, which implies a four Q.

Revenue acceleration and perhaps you could get some contacts around individual stack layer assumptions that underpin this four Q revenue and prevent.

Okay. So is that the the first of all the bookings in the first half of the year was factored in our guidance. When we we gave you guidance last quarter I would tell you the key take away from this earnings reporters our ability to convert the pipeline to revenues, it's significantly improved we talk.

About project work that we saw on the back end of of the year that clearly has accelerated by us beating our revenue number.

So.

And basically what we're seeing is the shows that are operating model is really starting to work we talked about that last quarter.

That are are detailed leaders need to get side by side and shoulder to shoulder with our customers and start driving the project stuff and that's what we've done and we think we can continue so what we see in our bookings are bookings have always been lumpy. If you look at last year. If you look at the year before they are lumpy and were folk.

Is now on replenishing the project work and as I look forward based on our pipeline. We expect book the bill to improve particularly in the area of G. B S. So that hopefully gives you the color you're looking for.

Next question do you have any other questions.

Yeah, I'd free cash flow <unk>, just wanted a dig into the the factors that are giving you confidence here and being able to achieve that that 800 million outlook that was that was a farm.

Yeah sure Zach this is Rob <unk>.

Alright, as I mentioned in my in my remarks.

There are several several factors that hit free cash flow in the first half of the year.

That won't be repeated in the second half. So the first is a bonus payments.

There are always skewed to the to the first half of the year and I can give you a rundown of of the numbers in more detail or impact and <unk> was 130.

Due to the bonus payments.

We have vendor payments that are normally scared until the first half of the year, primarily for software and maintenance annual renewals.

And our projections are that the second half of the year will be significantly lower due to the skew until the first half of those annual payments in the range of $450 million.

So those two factors alone are 580.

The cash taxes are projected to be lower in the second half of the year as well in the 80 million dollar range.

And the remainder we're confident will come from second half ebay being better than first half and.

And continued working capital improvements and we have.

We've identified where specifically where we think we will make those improvements.

So that's pretty detailed bridge to get to get to the 800.

Okay I appreciate that color.

Alright, zac. Thanks, so much Jessica next question.

Great. Thank you. The next question comes from the line <unk> swiped not with the city.

Okay. Please go ahead.

Hey, this is gay schwartzman, calling in for Ashwin you went through the free Castle. A bridge. You also noted that you re purchase a quarter to share. Since early 2022 is that the main use of cash going forward are there any M&A opportunities or other uses like further restructuring that might take president's.

But we basically when you look at our capital allocation, we have one a one b one C. So when a is will be the buyback.

One be will be our debt, which I think we've continually made sure that we stayed at investment grade profile are better than one C will be our investments. If you go look at our SG&A for this quarter, we've made investments around our brand. We've also made some investments and some outside help to a valley.

<unk> some of our SG&A cost and then the third thing we'll do is I highlighted for you the uptick in our insurance business in terms of us modernizing our software this positioning that offering for growth.

So that's how I would answer that question.

Thank you and perhaps do you have another question.

Yep, Yeah, I have one follow up I would like to ask you if it's possible to walk through the offerings get an idea of nondiscretionary revenue in the base versus what kind can pushing it push out asking this because we see the <unk> track record lately. Some of the items, we thought were safer like cloud and Ikea stepped down while some that we thought were more prone to cost cutting like analytics an application.

Better than expected. Thank you.

So look what I would tell you is will break to do your question into the two pieces G. B S and G. I S. So on G. B S. We see R. G. B S business continuing to grow but at a lower rate due to a knee. We believes in a tough market. We think Michael has done a nice job selling out.

Thank you.

John Sweeney: Good afternoon, everybody. I'm pleased that you're joining us for DXC Technologies 2nd quarter fiscal year 2024 earnings call. Our speakers in the call today will be Mike Salvino, chairman, president, CEO, and Rob DelBene, our EVP and CFO. The call has been webcasted at DXC's investor relations website and the webcast includes slides that will accompany this discussion today. Today's presentation includes certain non-gap financial measures which we believe provide useful information to our investors.

<unk> R analytics and engineering onto our G. I S customers, but we are seeing that slow a little bit I don't think that's any new news to anybody applications has continued to be flat and with the addition to Howard we think he can definitely improve on that but right now we're keeping a flat and then the final thing is we've been.

Pretty bullish around insurance just in terms of what raised doing it in the market and so forth. So we continue to see growth. There have you then turn the page to G. I S. We think that basically the G. I S business will maintain what it's doing today, both Chris with I T O.

John Sweeney: In accordance with the SEC rules we provide reconciliation to measures of the respective and most directly comparable non-gap measures. These reconciliation can be found on the tables including 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. A discussion of these risks and uncertainties is included in our quarterly report on form 10Q and other SEC filings.

Andrew are very focused on positioning both of those businesses for future success and I gave you. Some details around what Chris is doing with a T. O. So you know I would highlight those two things again being he's working with Rob to take our underutilized assets the facilities and put.

John Sweeney: I'd now like to remind our listeners that DXC Technology assumes no obligation to update the information presented on this call except as required by law.

Them make sure that we can sell them because the longer we hang on to them you know the less value that that they have alright. So we're pushing hard to make sure that happens this year.

Michael Salvino: And with that I'd like to introduce DXC Technologies, chairman, president, and CEO Mike Salvino, Mike. Thanks John 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 update on our overall business performance. Next I will update you on our performance of our GBS and GIS businesses. We'll then discuss our financial results in detail and our guidance and finally I will make some closing remarks before opening the call up for questions.

Second thing is a W. S and we're pretty happy about that to say the least I say that because for years now we have not gotten our fair share of the cloud business and with a a W. S with us being that partner choice that clearly puts us into the <unk>.

How'd migration in the cloud operation operation business that like I said traditionally we have not participated as well as we wanted to when you look at the cloud industry right now what we see is they're focused on the essentials systems that run customer operations and that's R. I T O business and when <unk>.

Michael Salvino: We are pleased with our financial performance in Q2 as our leadership team continues to strengthen and execute on our offering based operating model. Organic revenue for Q2 was minus 3.6% above our guidance and consistent with our Q1 performance. Our GBS business performed better than we expected at 2.4% organic revenue and GIS showed progress going from organic revenue of minus 9.9% in Q1 to minus 9.1% in Q2. Our even margin was 7.3% which is better than our guidance and quarter on quarter was an 80 basis point improvement due to both GBS and GIS margins improving.

Somebody like AWS gives you that partner of choice credential, that's a big deal and what they see as they see a a firm like us that has great customer relationships that are trusted cause. This essentials stuff is not easy to run and they also know that we can we can <unk>.

<unk> the migration work successfully and the Tidbit I'll give you is we're expecting a W. S. When I say don't incentivize us and work with us they're gonna train roughly 15000 of our women and men on a W. S to make that happen. So that's quite a bit of scale. So that's what we see hopefully.

Michael Salvino: EPS was 70 cents at the high end of our guidance and booked a bill was .81 and our trailing 12 month booked a bill is now 1.02. Precache low was 91 million which was an increase over the minus 75 million we delivered in Q1. This execution shows that we are beginning to see the benefits of our new offering based operating model where we are now running global offerings with the goal of driving revenue growth and expanding margins EPS and free cash flow.

That gives you what you need.

Yep. Thank you.

Jessica next question.

Yes. Your next question comes from the line at James Maiden name like Susquehanna James Scott.

Alright. Thank you for taking my question. So you know you've had.

I had some impressive.

Uhm accomplishments in especially the free cash flow in the free cashflow per share.

Michael Salvino: The Q2 results clearly showed we achieved all four goals when compared to Q1 performance. As you have heard consistently from us over the last several quarters our management team is laser focused on transitioning DXE from stability to higher performance. Government. That work started with reinforcing our financial foundation and customer relationships and moved on to ensuring we had the right talent in the right places to execute on our growth and expansion goals.

And I was wondering if you could kinda unpack, how you're achieving that Rob because it really stands out both the numerator and denominator.

Yeah, one of the.

There are several.

You would imagine there are several factors that contribute to the free cash flow performance.

It starts it starts with.

The value delivered by by the teams and and the offerings that we have.

Michael Salvino: With the moves that we have made over the last several months, I now believe we absolutely have that team in place. In Q2, we added two more senior executives to our leadership team to strengthen our ability to run our offering based operating model and consistently deliver on our financial commitments. Howard Andrew and Rob, Mark III senior executives with significant senior management experience and expertise and critical parts of our business that have joined us to play key roles for DXC alongside the other talented members of our senior leadership team.

The profitability of those offerings.

Another big contributor is a significant cost reduction activities that the teams have embarked on.

And last year, they're very successful in achieving the cost reduction goals. This year on track with our cost reduction golf and that will and that will continue.

The third area of emphasis emphasis has been on management of capital outlays.

Management of longer term commitments like leases.

Michael Salvino: Howard will be running our applications offering and be accountable for our AI strategy. Andrew will be running our modern workplace offering and obviously Rob is our new CFO who has been making a huge impact in driving our financial performance. Howard has joined us from IBM. He is an IT services expert with proven experience in creating growth strategies and executing against them as he did at IBM with their cloud business. Prior to IBM Howard was the CTO Bank of America which gives him a unique perspective of what customers want in a 90 service provider.

And we are very focused on and that on both.

And we've been successful and steadily driving Ah commitments down over time.

No that's not to say, if we had great opportunities wouldn't deploy capital, but we you know the management system has been very tight.

And then then there's just continued emphasis on on the working capital matrix and driving those numbers down. So those those are the four main elements of of what what do you think is delivered the progress on free cash flow.

Perfect nice job of dropped back in the queue. Thank you.

Michael Salvino: Howard is the perfect choice to lead our applications offering. Andrew joins us after working for some of the largest and most effective brands in the technology industry. Most recently he was the Chief Digital Officer at Microsoft where he was our customer for the modern workplace services we provide to them. Prior to Microsoft, I worked with Andrew at Accenture where he was the CIO and delivered innovative digital services to a very demanding workforce.

Thanks James.

Go to the next question, Yes. Our next question comes from the line of fraud.

<unk> <unk> <unk> <unk> <unk>.

Alright, your line or something.

Okay, great right.

Hey, there hey, I want to talk about the cyclical demand trends and how they've affected your business here. When you reported three months ago and updated guidance. Your project based revenues were weak and that was the case for the industry at large I think at that time, you would assume that project based revenues were position for.

Michael Salvino: His ability to run global PNLs and deliver these services makes him the perfect choice to run our global modern workplace offering. Howard and Andrew combined with Chris who runs ITO gives us three former CXOs of Fortune 500 companies leading almost 70% of our revenue. These three bring deep customer and industry relationships to DXC and the ability to attract top talent to help us deliver on our financial targets. Now turning to our GVS business, GVS grew organically for the 10th consecutive quartering Q2 and now accounts for 49.7% of our total revenue.

Some improvement in the second half of the fiscal year and I think some of that was due to your new operating model showing some benefits. So I just wanted to see if you could share how those project based revenues are tracking for the second half.

Do you see improvement there and also maybe do you have other sources of revenue upside to offset you know projects. It if the projects were to remain week due to the cyclical challenges. Thanks.

So right I'll I'll tackle the second one first certainly we do I mean, we're running outsourcing business. So basically that's still our bread and butter and converting that stuff from backlog is quite frankly, something utah quite a bit about right in the industry.

Michael Salvino: As we have stated repeatedly consistently growing this high value business and having it become the majority revenue source of DXC is important to our overall growth strategy. As you can see from the results of this quarter, we are delivering on that goal. The 2.4% organic revenue growth was moderately ahead of our growth expectations for the quarter due to the stronger performance across all three offerings. Also, I was pleased to see us expand margins from 11.3% in Q1 to 12.5% in Q2.

Three meaning taking your pipelining converting it to revenue so the.

The reason why we went to this operating model alright, and I call. It basically you know <unk>.

Right model with right leaders is the fact of can you take the pipeline and converted the revenue now the quickest is the project stuff and what we're seeing in terms of the industry is we're seeing analytics and enter and engineering and a tougher market alright, but that's being picked up by insurance.

Michael Salvino: Our insurance offering has benefited the most from our new operating model, because it's been in the model the longest. Our insurance offering delivers a SaaS model to our customers, and we are the world's largest provider of insurance software and BPS solutions to the industry. Under our new model, right to now focus on selling these capabilities to existing customers and delivering services more efficiently. His team has done an outstanding job of beginning the modernization process of our insurance software products, positioning our insurance offering for further growth.

That software business I'm doing better than we expected and then I would say that applications has a chance alright with the with Howard's leadership, what we see in the industry. One of the comments I made he's charged with getting clients ready.

<unk> for a I that doesn't mean that he's implementing a that means that clients need to get ready for a I alright, you Gotta get ready with your data you Gotta get ready for your applications you Gotta understand the bias in your data and so forth.

Michael Salvino: This is just one example of how our right model and right leader approach is clearly making a positive impact and starting to generate solid financial performance. I believe that kind of production across DXC is only beginning. Another key attribute of our growth strategy is selling our GBS offerings to our GIS customers. On a yearly basis, we generate roughly 370 million in revenue by selling analytics and engineering to our GIS customers, and this is growing 11% in FY24 so far.

And that's good work for us.

So I look at applications and the back half, we think it's flat, but Howard could potentially do a little bit better. When you look at G. I S. We see the cloud infrastructure stuff I'm I'm very encouraged with how Chris is position that business now with the relationship with a.

W. S and also what he's doing on the margin and then look I I have full confidence in Andrew because the best part about Andrew is he used to be our client and he knows what we do well he knows where we need to improve he knows how to sell this stuff and that's basically what he did.

Michael Salvino: The new operating model is allowing Michael and his team to continue having success in a very tough market. Another example of us having the right model and the right leader is our applications offering which generates roughly 1.2 billion of revenue by selling to GIS customers, but it is not growing in FY24 so far. Fishing this is one of our highest initial priorities as we have charged him with responding to the AI demand and getting our customer base ready to accept this technology.

<unk> at at Accenture, So when I look at the demand the demand should be getting better and G. B S. Alright, I don't see that the man is gonna change much in Gis it'll be lumpy, but that's that's what we see rod.

You have another question yeah.

Yeah, I do so thanks to Rob for outlining the free cash so drivers to get you to the 800 <unk> target. That's clearly key metric here I want to ask another question about free cash flow kind of from a different angle you know clearly the industry is experiencing the cyclical challenges and that's impacting your project.

Michael Salvino: Moving out our GIS business, where this quarter we moderately moved it in the right direction, shrinking the decline in revenue from minus 9.9% in Q1 to minus 9.1% in Q2, while margin increase from 5.2% in Q1 to 5.8% in Q2. Like GBS, all three offerings performed better than our expectations. Let me highlight the progress we have made in the quarter to continue fixing our ITO business. We have discussed moving to an infrastructure light model as part of this effort and as we've communicated on prior calls, we plan on selling facilities.

Face revenues this year, if you weren't seeing cyclical challenges in your project based revenues. This year would you then be in a position for free cash flow north of $800 million in other words I'm trying to I'm trying to get a get a take on to what extent the cyclical demand challenges R. M P.

Sparing your free cash flow power this year.

Yeah, there's I mean, the way I'd answer that is.

Michael Salvino: Chris and Rob are making progress on this initiative with plans to sell facilities in the back end of the year. Executing on this will allow us to sell underutilized assets, making us more efficient overall and helping us fix the margin of the GBS business moving forward. We recently have signed a deal to become the partner of choice for AWS. This partnership incentivizes us and our customers to move their systems that are essential to their operations to the cloud. We plan to use this deal to move some of our customers that are using a data center that is on-prem and sub optimized to the cloud to improve the cost economics for our customers and ourselves.

We were adjusting our capacity based on demand.

So there's always there's always some leverage with with more.

More demand in more revenue you're right, there's always operating leverage as a result.

So the higher the demand you know over time, the higher the free cash flow.

But the way I'd answer it is for this year in particular.

<unk> or managing our structure going forward and operating within the envelope of demand that we see on the table right in in our pipelines.

The other thing I would add to to.

<unk> <unk> <unk>.

Is.

Rob DelBene: Now let me turn the call over to Rob to discuss the details of our thing. Thank you, Mike. Before I get into the numbers, I would like to say that the team has made good progress with the implementation of the offering-based operating model with improved execution, and expect us to build on this performance going forward. I'll now provide you with a quick rundown of our 2Q performance. Organic revenue is down 3.6%, which came in above our organic revenue guidance range and in line with first quarter's performance.

We keep overlooking the operating model.

So it takes most companies a year or two to get these operating models right.

We now are starting to see the benefits of it because after last quarter right. Every every transformation hit some bumps, but I couldn't be more proud of the execution of our team this quarter and what that means is we're getting to a lower level of detail than <unk> has ever seen with our <unk>.

Customers and that detail not only produces new project work. It also makes us have the ability to manage our margins a lot better to generate more free cash flow. So when I talk about the rape motto right leader approach to me that's the catalyst that we're giving to the market at this point.

Rob DelBene: Of the 3.6% year-to-year decline, 160 basis points came from a reduced level of low margin resale revenues, which was in line with our expectation. Adjusted even margin came in at 7.3%, also above our guidance range. The margin increased 80 basis points sequentially and was down 20 basis points on a year-to-year basis. Within this number, there is a significant reduction of 60 basis points from the pension income contribution on a year-to-year basis.

And time and you're starting to see a team really starting to deliver now verses you know being able to you know and having a consistency around hitting our financial performance. So we don't have much more on the free cashflow, we're happy with where it is and where it's going to be.

Rob DelBene: So without the pension income, our non-GAP EBIT margin moves from 6.3% in 2Q23 to 6.7%. Non-GAP EBIT was 70 cents at the high end of our guidance range, down 5 cents a year-to-year, and up 7 cents sequentially. SGNA was well managed in the quarter with spending in line with our expectations. Free cash flow for the quarter was 91 million, benefiting from our continued focus on working capital management and a lower level of cat-backs.

And and we'll go forward from there.

So Jessica next question.

Yeah, and just a quick reminder to folks if you'd like to ask a question. Please press star one on your telephone keypad and your next question comes from <unk> with Bank of Montreal that go ahead.

Hi, Thank you <unk> first.

And then can cost reduction <unk>, you know some time getting Netflix you know economic cycle and <unk> <unk> <unk> <unk> <unk> <unk> activities <unk>, you know again looking forward and you know if it's an economy tied to improve how much quicker.

Rob DelBene: In the quarter, our book to bill was 0.81, and the trailing 12 months is now 1.02. The level of bookings through the first half of the year is similar to the first half of fiscal 23, and the 0.81 is factored into our annual guidance. Looking forward, based on our pipelines, we expect book to bill to improve in the second half of the fiscal year. Moving to our key financial metrics, our second quarter gross margin of 23.4% was up 120 basis points a year over year, and 230 basis points sequentially benefiting from our cost reduction initiatives.

Okay and then your second part it on modern one place you know it sounds like the hit mostly in execution based and approved rather than under mandate improvement.

The new leadership.

You know an <unk> experience with the <unk>.

What is going to be coming to focus is to improve execution and you know sort of how long does that take can play out. Thank you.

Okay. So Brad first of all I'll take your cost exited cost cause point look there's always four levers that we're focused on I think we've drained the details on us focusing on facilities alright that will change our for fixed cost over time, alright, and that will play out through the rest of this.

Rob DelBene: SGNA was 9.4% of revenues up 60 basis points a year. The appreciation and amortization was down 7 million compared to the prior year. Other income decreased 28 million a year, driven primarily by a $25 million decline in non-cash pension income. Taking this all together, adjusted EBIT margin was down 20 basis points a year over year, excluding pension income in both periods, the EBIT margin would have been up about 40 basis points a year.

Sheer second is the increase in margin this quarter was solely due to the reduction of contractors and us continuing to optimize.

Our staff to the revenue, we have and and that's not going to change Alright, I was very pleased on the execution and again I'll give that benefit to our new operating model with our six leader is now running these global offerings and then the final one is onshore offshore. So that's when we got to continue to <unk>.

Rob DelBene: Net interest expense increased 9 million year over year to 25 million primarily due to a higher level of variable interest expense on short term debt. Non-GAP EPS was down 5 cents compared to the prior year driven by a 3 cent decline from higher interest expense, a 6 cent reduction from a higher tax rate, and a 6 cent reduction due to lower pension income. These increases were partially offset by a 9 cent improvement due to lower share count driven by our ongoing share of purchase activities.

<unk> the onshore ticked up a little bit so we need to go back and look at that but there's there's more room, there and we certainly haven't said we're done yet.

So I liked the opportunity we have there whether the environment is good or bad alright on modern workplace modern workplace. There is demand alright, let's make no bones about that the demand environment, there everybody hasn't gone back to being in office.

Rob DelBene: Now turning to our segment results, our business mix continues to trend to our higher margin GBS segment. As a percentage of total revenue, GBS is now very close to 50% of revenues. We anticipate that this trend will continue and that shortly the GBS segment will be the majority of our revenue. GBS grew 2.4% organically and posted the 10th consecutive quarter of organic growth, which reflects the deep industry-based customer value delivered by the GBS teams.

S. As full time, so being virtual is still a big piece of what's going on in the market and we think we've got a great solution. So from an execution standpoint. My expectation is one you will see Andrew knockdown, a few more deals that we.

Rob DelBene: The GBS profit margin declined 20 basis points year over year with the decrease driven by the impact of lower pension income. Turning to GIS, organic revenue declined 9.1% with a modest reduction of the decline sequentially. GIS profit margin decreased 40 basis points year over year again driven by the reductions in pension income.

<unk> weren't able to get in past quarters. The second thing you'll see him do alright is look at the value proposition because the value proposition isn't just maintaining.

P CS and so forth. It's also helping with the employee experience and that's what I know Andrew is good at what he did in past stops at Accenture in Microsoft and we expect that he's gonna show the market how to do that and then finally is the cost peace meaning.

Rob DelBene: Now let's take a closer look at our offerings. Analytics and engineering revenue performance was up 5.3% below the first quarter growth rate. We are seeing a moderating level of demand as customers are more cautious due to the current macroeconomic environment. Applications revenue declined 80 basis points similar to first quarter performance. All our applications performance has been stable. We are expecting to see improving book to build performance in the second half of the year based on the opportunities we see in our enterprise applications business in public sector and in banking.

You know I think we've done well on the cost, but I think there's more that that we can do so those would be the three things he's focused on and I do think he's gonna make some good improvement I think that business is close so that's why we're leaning into it.

Jessica next question.

Alright. Thank you so much that's currently all the questions that we have in the queue. So at this point I will try and the call back over to you may try closing remarks.

Rob DelBene: Insurance software and BPS continued to grow with revenue up 5.2%. The insurance SaaS component of the portfolio accelerated to high single-digit growth. The insurance platform and deep industry BPS skills of our team is resonating in the market. Security declined 1.8% year to year. Cloud infrastructure and IT outsourcing revenues declined 9.8% year to year organically. The year to year performance continues to be impacted by two primary factors that are outlined in the first quarter earnings call, the impact of which were anticipated in our 2Q guide.

Jessica Thanks, so much and I appreciate everybody joining the call today, we obviously are pretty excited about our execution. Our execution was a line with our expectations and in some cases even better.

Think my teams, making great progress on our new operating model and you are starting to see that show up in the financial benefits as we've stabilized or business now and the numbers are now moving again in the right direction.

I think the catalyst from our standpoint that we're focused on is the right model and the right leaders to drive our financial performance and I expect this performance to continue with time, the operating model and our team does nothing but get better which means consistent financial performance from D. C. So with that I look forward to update you on our queue three perform.

Rob DelBene: The first is declines from contracts that were terminated some time ago and continue to wind down. The second factor is a decline in resale revenues which drove 41% of our second quarter decrease in cloud and ITO. The modern workplace business declined 9% year to year and as with ITO the business performed as expected in our 2Q guide. Our expectation is that the sequential performance in revenue will stabilize through the second half of this year.

It's in February and have a nice evening.

Ladies and gentlemen that concludes today's call. Thank you for joining you may now disconnect.

Okay.

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Rob DelBene: Turning to financial foundation metrics, debt levels decreased modestly in the first quarter to 4.5 billion. Restructuring and TSI expense increased to 38 billion with the increase entirely due to the restructuring of facility leases part of our effort to right size or facility footprint. We are tightly managing restructuring and will continue to evaluate opportunities to streamline our operations. Operating lease payments and related expenses were 91 million down 17 million year to year reflecting continued management of our real In the quarter, capital expenditures were 157 million, down 38 million year-to-year.

Rob DelBene: Finance lease originations were 24 million, flat year-to-year. As a percentage of revenue, capital expenditures and lease originations declined to 5.3% of revenues as we tightly manage our capital leasing commitments. As I mentioned earlier, pre-cash flow for the quarter was 91 million, bringing our first half total to 16 million slightly better than last year's performance. We have several large drivers of cash expenditures in the first half of the year, such as bonus payments, payments to suppliers for annual renewals of software and related maintenance, and cash taxes.

Rob DelBene: These cash outflows will be significantly lower in the second half of the fiscal year, and combined with a higher adjusted EBIT and continued progress on working capital efficiency, we are maintaining our free cash flow goal of 800 million. Burning to capital deployment, it may continue progress on our billion-dollar share repurchase program for fiscal year 2024. Year-to-date TXC has repurchased about 10% of our shares outstanding. This is in addition to the 7.4% of shares that we repurchased in fiscal year 22 and 10.6% in fiscal year 23.

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Rob DelBene: It is important to note that an aggregate, our $1 billion share repurchase program, will be funded through free cash flow and our asset sale program. And just to note, there's approximately 500 million remaining for the second half of the fiscal year.

Rob DelBene: Starting now to third quarter, we expect Q3 organic revenue to decline from minus 4 to minus 5, reflecting the weaker demand environment. Adjusted EBIT margin of 7 to 7.5%, and non-gap diluted EPS of 75 cents to 80 cents. Starting to our full year guidance, we are reaffirming our organic revenue growth from negative 3% to negative 4%, our adjusted EBIT margin of 7% to 7.5%, and EPS from $3.15 to $3.40. We are also maintaining our free cash flow guidance of 800 million.

Rob DelBene: We have increased the tax rate. Our non-gap EPS guidance reflects the tax rate of 30% up from our previous expectation of 29%. We are making progress on our 250 million asset sale program, which is a planned source of cash in fiscal year 24. In 2Q, we realize 61 million, bringing our year-to-date asset sale total to 65 million. We have a portfolio of assets that will enable us to achieve the $250 million objective and expect to execute by the end of the fiscal year. These cash generating transactions could result in a non-cash loss that is not factored into our guidance. And as we have more clarity on the specific assets and timing, we will provide an update in 4Q.

Unknown Executive: God. Phillips.

Michael Salvino: With that, let me turn the call back to Mike for his final thoughts. Thanks, Rob, and let me lead you with a few key takeaways. We are starting to see the benefits of our new operating model, in our financial performance, and we are focused intently on making sure this continues. We believe we now have the right model and the right leaders to run the global offerings for the three businesses where we need to make the most improvement.

And.

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Michael Salvino: Having three XCXOs now running applications, ITO and Modern Workplace of Big Wind for us, because they have deep relationships with existing CIOs that will prove impactful for us. Our goal for DXC is to grow revenue and expand margins, EPS and free cash flow. Quarter on quarter, we make positive progress on each. Concerning revenue growth, we grew GBS for the 10 straight quarter. We moderately slow the decline in GIS. We also continue to sell our GBS offerings to GIS customers, and with the addition of how we are driving our applications offering, we expect to do even more.

And.

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Michael Salvino: And we continue to make our high value GBS business, called larger part of our overall revenue, now at 49.7%. While making that progress on revenue, we expanded margin-having basis points, EPS 7 cents, and free cash flow term positive, as we delivered 91 million in the quarter. I am pleased with our financial execution for the quarter. Expect that this execution will continue, and I look forward to updating you on our Q3 progress in February.

Mmm.

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Unknown Executive: Operator, please open the call up for questions. Thank you. At this time, I would like to remind everyone in order to ask a question. Press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And again, that is star one on your telephone keypad to ask a question.

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Zachary Ajzenman: Our first question comes from the line of Brian Bergen with Cowen. Brian? Go ahead.

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Zachary Ajzenman: Brian is a Zach agent. Hey, this is Zach agent off her Brian. First question on the demand out. Look, so it's the trailing 12 month bookings remains above one. But the quarterly book to bill was below one for the second consecutive quarter. So in this context, we are just looking to dig into what gives you confidence for the revenue affirmation for fiscal 24, which implies a 4Q revenue acceleration. And perhaps you can give some context around individual stack layer assumptions that underpins this 4Q revenue program.

Zachary Ajzenman: Okay, so Zach, the first of all, the bookings in the first half of the year was factored in our guidance when we gave you guidance last quarter. I would tell you the key takeaway from the learnings reporters are ability to convert the pipeline to revenue. It's significantly improved. We talked about project work that we saw on the back end of the year that clearly has accelerated by us beating our revenue number.

Zachary Ajzenman: So, you know, and basically what we're seeing is this shows that our operating model is really starting to work. We talked about that last quarter that our detailed leaders need to get side by side shoulder shoulder with our customers and start driving the project stuff and that's what we've done. And we think we can continue. So what we see in our bookings are bookings have always been lumpy. If you look at last year, if you look at the year before they are lumpy.

And.

Zachary Ajzenman: And we're focused now on replenishing the project work and as I look forward, based on our pipeline, we expect book to build a roof particularly in the area of GBS. So that hopefully gives you the color you're looking for.

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Unknown Executive: Thank you. Next question. Do you have any other questions?

Rob DelBene: Yeah, I'm pre-cashable. Just wanted to dig into the factors that are giving you confidence here and being able to achieve that 800 million outlook that was affirmed. Yes, sure, Zach, this is Rob Delbeni. As I mentioned in my remarks, there are several several factors that hit free cash flow in the first half of the year that won't be repeated in the second half. So the first is bonus payments. They're always skewed to the to the first half of the year.

Rob DelBene: And I could give you a rundown of of the numbers and more detail. Our impact in 1Q was 130 due to bonus payments. We have vendor payments that are normally skewed to the first half of the year primarily for software and maintenance annual renewals. And our projections are that the second half of the year will be significantly lower due to the skew into the first half of those annual payments in the range of $450 million.

Oh.

And.

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And.

Uh-huh.

Rob DelBene: So those two factors alone are 580. The cash taxes are projected to be lower in the second half of the year as well in the 80 million dollar range. And the remainder or confident will come from second half EBIT being better than first half and continued working capital improvements. And we have, you know, we've identified where specifically where we think we will make those improvements. So that's, you know, the pretty detailed bridge to get to get to the 800 appreciate that color.

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Zachary Ajzenman: All right, Zach. Thanks so much.

Unknown Executive: Jessica, next question. Great. Thank you.

Gates Schwartzman: Your next question comes from the line of Gates Schwartzman with city. Gates, please go ahead. Hey, this is Gates Schwartzman calling in for Ashwin. You went through the pre-cathlet of bridge. You also had noted that you repurchased a quarter to shares since early 2022. Is that the main use of cash going forward? Are there any M&A opportunities or other uses like further restructuring that might take precedence? We basically, when you look at our capital allocation, we have 1a, 1b, 1c.

And.

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Gates Schwartzman: So 1a will be the buyback. 1b will be our debt, which I think we've continually made sure that we stayed at investment grade profile or better than 1c will be our investment. If you go look at our SG&A for this quarter, we've made investments around our brand. We've also made some investments and some outside help to evaluate some of our SG&A costs. And then the third thing we'll do is I highlighted for you the uptick in our insurance business in terms of us modernizing our software that's positioning that offering for growth.

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Gates Schwartzman: So that's how I'd answer that question. Thank you. Do you have another question? Yeah, I have one on the web. I would like to ask if it's possible to walk through the offerings, get an idea of nondiscretionary revenue in the base versus what clients can push out. Asking this because as we see the potential track record lately, some of the items we thought were safer like cloud NITA stepped down while some that we thought were more prone to cost cutting like analytics and applications have done better than expected.

Gates Schwartzman: Thank you. So look what I would tell you is we'll break the two your question into the two pieces, GBS and GIS so on GBS we see our GBS business continuing to grow but at a lower rate due to A&E we believe in a tough market we think Michael's done a nice job selling applications or analytics and engineering on to our GIS customers but we are seeing that flow a little bit I don't think that's any new news anybody application this continued to be flat and with the addition to Howard we think he can definitely improve on that but right now we're keeping it flat and then the final thing is we've been pretty bullish around insurance just in terms of what raised doing in the market and so forth so we continue to see growth there.

Yeah.

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Gates Schwartzman: If you then turn the page to GIS we think that basically the GIS business will maintain what it's doing today. Both Chris with ITO and Andrew are very focused on positioning both of those businesses for future success and I gave you some details around what Chris is doing with ITO. So you know I would highlight those two things again being he's working with Rob to take our underutilized assets, the facilities and put them make sure that we can sell them because the longer we hang on to them.

And.

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Gates Schwartzman: You know the less value that they have all right so we're pushing hard to make sure that happens this year. The second thing is AWS and we're pretty happy about that to say the least I say that because for years now we have not gotten our fair share of the cloud business. And with a AWS with us being that partner choice that clearly puts us into the cloud migration and the cloud operations operations business that like I said traditionally we have not participated as well as we wanted to.

Oh man.

And.

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Gates Schwartzman: When you look at the cloud industry right now what we see is they're focused on the essential systems that run customer operations and that's our ITO business. And when somebody like AWS gives you that partner of choice credential that's a big deal and what they see is they see a affirm like us that has great customer relationships that are trusted because this essential stuff is not easy to run and they also know that we can we can make the migration work successfully.

Uh-huh.

Okay.

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Gates Schwartzman: And the tidbit I'll give you is we're expecting AWS when I say don't incentivize us and work with us they're going to train roughly 15,000 of our women and men on AWS to make that happen so that's quite a bit of scale.

Yeah.

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Unknown Executive: So that's what we see hopefully that gives you what you need. Yep, thank you.

Unknown Executive: Jessica next question.

James Friedman: Yes, your next question comes from the line of James Friedman with Seth Guajana. James, go ahead. Hi, thank you for taking my question. So you know you've had some impressive accomplishments and especially the free cash flow in the free cash flow per share, and I was wondering if you could kind of unpack how you're achieving that Rob, because it really stands out both the numerator and denominator. You know, one of the, there are several, as you would imagine, there are several factors that contribute to the free cash flow performance.

And.

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James Friedman: It starts with, you know, the value delivered by the teams and the offerings that we have in the profitability, those offerings. Another big contributor is a significant cost reduction activity that the teams have embarked on. And last year they're very successful when achieving the cost reduction goals this year on track with our cost reduction goals, and that will continue. The third area of emphasis has been on management of capital outlays and management of longer term commitments like leases, and we are, you know, very focused on, and that on both.

Yeah.

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James Friedman: And we've been successful in steadily driving the commitments down over time. Now, that's not to say if we had, you know, great opportunities wouldn't deploy capital, but we, you know, the management system has been very tight.

Yeah.

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James Friedman: And then there's just continued emphasis on the working capital metrics and driving those numbers down, so those are the four main elements of what we think has delivered the progress on free cash flow. Perfect, nice job of drop back in the queue. Thank you. Thanks James, just because the next question.

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Rod Bourgeois: Yes, your next question comes from the line of Rod Puzwa with the dive. Rod, you are, your line is open. Okay, great. Hey there. Hey, I want to talk about the cyclical demand trend and how they've affected your business here. When you reported three months ago and updated guidance, your project base revenues were weak. And that was the case for the industry at large. I think at that time, you had assumed that project base revenues were positioned for some improvement in the second half of the fiscal year.

Rod Bourgeois: And I think some of that was due to your new operating model showing some benefits. So I just wanted to see if you could share how those project base revenues are tracking for the second half. Do you see improvement there and also maybe, do you have other sources of revenue upside to offset. You know, projects, if the projects were to remain weak, do the cyclical challenges. Thanks.

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Michael Salvino: So, Rod, I'll tackle the second one first. Certainly we do. I mean, we're running out sourcing business. So, basically, that's still our bread and butter and converting that stuff from backlog is quite frankly something you talk quite a bit about right in the industry. Meaning taking your pipeline and converting it to revenue. So the reason why we went to this operating model. All right, and I call it basically, you know, right model with right leaders is the fact of can you take the pipeline and convert it to revenue.

Yeah.

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Michael Salvino: Now, the the quickest is the project stuff and what we're seeing in terms of the industry is we're seeing analytics and engineering and a tougher market. All right, but that's being picked up by insurance that software business doing better than we expected. And then I would say that applications has a chance. All right, with the, with Howard's leadership, what we see in the industry. One of the comments I made, he's charged with getting clients ready for AI.

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Michael Salvino: That doesn't mean that he's implementing AI. That means that clients need to get ready for AI. All right, you got to get ready with your data. You got to get ready for your applications. You got to understand the bias in your data and so forth. And that's good work for us. So I look at at applications in the back half we think it's flat, but Howard could potentially do a little bit better when you look at GIS.

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Michael Salvino: We see the cloud infrastructure stuff. I'm I'm very encouraged with how Chris is position that business now with the relationship with AWS and also what he's doing on the margin. And then look, I have full confidence in Andrew because the best part about Andrew is he used to be our client. And he knows what we do well. He knows where we need to improve. He knows how to sell the stuff. And that's basically what he did at, at Accenture.

Okay.

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Michael Salvino: So when I look at the demand, the demand should be getting better in GBS. All right, I don't see that the demand's going to change much in GIS. It'll be lumpy. But that's, that's what we see, Rod.

Rod Bourgeois: Yeah, have another question? Yeah, I do, so thanks to Rob for outlining the free castle drivers to get you to the 800 mean target. That's clearly the key metric here. I want to ask another question about free castle kind of from a different angle. You know, clearly the industry is experiencing the cyclical challenges and that's impacting your project base revenues this year. If you weren't seeing cyclical challenges in your project base revenues this year, would you then be in a position for free castle north of 800 mean dollars.

Yeah.

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Rod Bourgeois: In other words, I'm trying to get to get a take on to what extent the cyclical demand challenges are impairing your free castle power this year. Yeah, there's, I mean, the way I'd answer that is we, we're adjusting our capacity based on demand. So there's always, you know, there's always some leverage with with more demand and more revenue right there's always operating leverage as a result. So the higher the demand, you know, over time, the higher the free cash flow.

Rod Bourgeois: But the way I'd answer it is for this year in particular, we're, we're managing our structure going forward and operating within the envelope of demand that we see on the table right in in our pipelines. So Rod, the other thing I would add to, to Rob's comments is we keep over looking the operating model. So it takes most companies a year or two to get these operating models right we now are starting to see the benefits of it because after last quarter right every, every transformation hits some bumps.

Okay.

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Rod Bourgeois: But I couldn't be more proud of the execution of our team this quarter and what that means is we're getting to a lower level of detail than DXE has ever seen with our customers. And that detail not only produces new project work, it also makes us have the ability to manage our margins a lot better to generate more free cash flow. So when I talk about the right model right leader approach, to me, that's the catalyst that we're giving to the market at this point in time.

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Rod Bourgeois: And you're starting to see a team really starting to deliver now versus, you know, being able to, you know, in having a consistency around hitting our financial performance. So we don't have much more on the free cash flow, we're happy with where it is and where it's going to be and we'll go forward from there.

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Unknown Executive: So just a good next question. Yes, and just a quick reminder to folks if you'd like to ask a question, please press star one on your telephone to pad.

Bradley Clark: And your next question comes from Brad Clark with Bank of Montreal. Brad, go ahead. Hey, thank you. The second question first is, you mentioned cost reduction as a global pre cash flow and it's going to focus for, you know, sometimes during the, you know, economic table and can be a team general. How much room do you see last game cost reduction? Asked activities for the X, you know, a deal with in forward and, you know, if it's an economy start to improve how much the debt may not focus.

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Bradley Clark: And then the second part is on modern workplace, you know, it sounds like this is mostly an execution based and improvement rather than a demand based improvement, you know, with the new leadership. You know, in position and what it's being with the big niche, you know, what is going to be some of the focuses to improve execution and, you know, sort of how long does that take to play out. Thank you.

Michael Salvino: Okay, so Brad, first I'll take your costs point. Look, there's always four levers that we're focused on. I think we've drained the details on us focusing on facilities. All right, that will change our fixed cost over time. All right, and that will play out through the rest of this year. Second is the increase in margin this quarter was solely due to the reduction of contractors and us continuing to opt to optimize our staff to the revenue we have.

Michael Salvino: And that's not going to change. All right, I was very pleased on the execution. And again, I'll give that benefit to our new operating model with our six leaders now running these global offerings. And then the final one is onshore offshore. So that's one we got to continue to focus on the onshore ticked up a little bit. So we need to go back and look at that, but there's there's more room there. And we certainly haven't said we're done yet. So I like the opportunity we have there, whether the environment is good or bad.

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Michael Salvino: All right, on modern workplace, modern workplace, there is demand. All right, let's make no bones about that. The demand environment is there. Everybody hasn't gone back to being in offices full time. So being virtual is still a big piece of what's going on in the market. And we think we've got a great solution. So from an execution standpoint, my expectation is one you will see Andrew knocked down a few more deals that we weren't able to get in past quarters.

Michael Salvino: The second thing you'll see him do, all right, is look at the value proposition, because the value proposition isn't just maintaining PCs and so forth. It's also helping with the employee experience. And that's what I know Andrew is good at. That's what he did in past stops at Accenture and Microsoft. And we expect that he's going to show the market how to do that. And then finally is the cost piece, meaning, you know, I think we've done well on the cost, but I think there's more that we can do. So those would be the three things he's focused on. And I do think he's going to make some good improvement. I think that business is close. So that's why we're leaning into it.

Okay.

Alright.

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Unknown Executive: Jessica, next question. Great. Thank you so much. That's currently all the questions that we have in the queue.

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Michael Salvino: So at this point, I will turn the call back over to Mike for closing remarks. Jessica, thanks so much. And I appreciate everybody joining the call today. We obviously are pretty excited about our execution. Our execution was aligned with our expectations. And in some cases, even better. I think my team's making great progress on our new operating model. And you were starting to see that show up in the financial benefits. As we've stabilized our business now, and the numbers are now moving again in the right direction.

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Michael Salvino: I think the catalyst from our standpoint that we're focused on is the right model and the right leaders to drive our financial performance. And I expect this performance to continue with time the operating model on our team does nothing but get better, which means consistent financial performance from DXC. So with that, I look forward to updating you on our Q3 performance in February and have a nice evening.

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Unknown Executive: Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect. Please wait.

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Unknown Executive: The conference will begin shortly. Please wait, the conference will begin shortly[inaudible] Please wait, the conference will begin shortly Please wait, the conference will begin shortly The conference will begin shortly as the conference will begin shortly after the conference The conference will begin shortly as the conference will begin shortly as the conference will begin shortly Please wait, the conference will begin shortly Please wait, the conference will begin shortly[inaudible] Please wait, the conference will begin shortly Please wait, the conference will begin shortly The conference will begin shortly as the conference will begin shortly after the conference Please wait, the conference will begin shortly The conference will begin shortly as the conference will begin shortly Hello everyone, the DXC Technology Q2 earnings call has concluded, so we will go ahead and close the bridge now. The recording will be made available. Thank you. Please wait, the conference will begin shortly.

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Hello, everyone.

Right now I just need your earnings call has concluded. So we will go ahead and close the branch now they're recording will be made available. Thank you.

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