Q2 2025 DXC Technology Co Earnings Call
Good afternoon, and good evening My name is Aaron and I will be your conference operator for today at this time I would like to welcome everyone to the DXP technology Q2, FY 'twenty five earnings call.
All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session at that time, if you would like to ask a question simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question at any time simply press star followed by the number one again thank you.
Yeah.
And with that I would like to begin our call and I would like to turn it over to Roger Sachs VP of Investor Relations.
Roger Sachs: Thank you operator good afternoon.
Roger Sachs: I mean, everybody and welcome to the <unk> technologies second quarter earnings Conference call I Hope you've had a chance to review our earnings release posted to the IR section of Dx. He's website speaker on today's call are Robert Fernandez, Allott, President and CEO and Rob they'll Danny our Chief Financial Officer, our agenda will be as follows.
Roger Sachs: We will provide an overview of our results and an update on our strategic initiatives. Rob will then walk you through our financial performance for the quarter as well as.
Speaker Change: Update you on our full year outlook and provide some thoughts there.
Roger Sachs: Very clear.
Speaker Change: Rob will then take your questions.
Certain comments, we make on today's call will be forward looking.
Speaker Change: Statements are subject to risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. You can find a discussion of these risks and uncertainties in our annual report on Form 10-K, and other SEC filings, we do not commit to update any forward looking statements made during today's call.
Speaker Change: Additionally, during this call we will be discussing non-GAAP financial measures that we believe provide useful information to our investors reconciliations to the most comparable GAAP measures are included in the tables included in today's earnings release with that let me turn the call over to Ralph.
Ralph: Thank you Roger good afternoon, everyone and thank you for joining us today for our second quarter fiscal 2025 earnings call.
Ralph: Im pleased to report a solid quarter with adjusted EBIT margin and non-GAAP EPS exceeding our guidance and revenue coming in towards the high end of our range.
Ralph: Given this performance we are raising our full year guidance for adjusted EBIT margin and non-GAAP EPS.
Ralph: Proud of how our new leadership team has come together and the early momentum we've seen from our initiatives this year.
Ralph: There's more work ahead, particularly in our go to market initiatives, we're focused on execution and building a solid foundation to support even stronger performance going forward.
Ralph: Specifically during the quarter total revenue declined five 6% year over year.
Ralph: On an organic basis.
Ralph: Adjusted EBIT margin equaled eight 6% expanding 130 basis points year over year.
Ralph: non-GAAP diluted EPS was <unk> 93.
Ralph: 33% year over year.
Ralph: And we generated free cash flow of $48 million for a year to date total of $93 million.
Ralph: $10 million to $16 million during the same period last year.
Ralph: While corporate spending on discretionary projects remains under pressure, we continue to believe our biggest near term opportunities lie in our self help initiatives that will drive a more significant impact on results.
Ralph: Our bookings remain an area of intense focus and I feel we will make the progress needed in the upcoming quarters.
Ralph: We expect our book to Bill ratio to improve in the third.
Ralph: Our global delivery and sales footprint complemented by deep local presence as a competitive advantage to serving clients.
Ralph: Global and local allows us to understand and respond to regional dynamics by delivering tailored solutions that meet specific market needs.
Ralph: While leveraging global expertise and resources.
Ralph: To drive improved sales discipline and execution, we implemented several new initiatives during the second quarter to augment our revamped go to market approach.
Ralph: These include a new client relationship training program with nearly 150 team members now certified.
Ralph: A regular cadence of sales team performance reviews, including detailed assessments of the value of the solutions we provide.
Ralph: And our new executive client sponsorship program to drive deeper client relationships.
Ralph: Additionally, during the second quarter, we initiated several tactical actions in our offerings to build on our progress.
Ralph: In our global business services segment, where we help clients accelerate digital transformations, we continued to refine our delivery models and drive more scalable and standardized solutions spin.
Ralph: Specifically in consulting and engineering services.
Ralph: We hired a new global delivery leader to sharpen operations keep projects on track and ensure contract requirements are met.
Ralph: We are building more enterprise application capabilities, leveraging DXP fast rise with SAP service, so clients can accelerate.
Ralph: SAP four.
Ralph: For Hana cloud implementations and we're expanding our gen AI offerings using a center of excellence model to scale beyond proof of concepts to production.
Ralph: Let me highlight two examples of recent Gen III.
Ralph: Engagements.
Ralph: For equitable holdings, a leading financial services client, we built and deployed a gen AI powered virtual service agent.
Ralph: This solution quickly analyzes thousands of documents, enabling customer representatives to respond 80% faster and freeing them to focus on more value added activities such as complex financial planning.
Ralph: The success of this solution led to the creation of a Gen. AI center of excellence for our clients, which has developed several more gen. AI based applications growing the relationship by more than 10 X.
Ralph: We are also helping a large global bank accelerate time to market for new credit card products are.
Ralph: Power Gen AI powered solution automates the conversion of hundreds of thousands of lines of legacy code into job.
Ralph: 50% faster with less errors.
Ralph: Expediting the time to market better positions the bank to capture market share in a highly competitive industry.
Ralph: By embedding AI across many of our solutions, we're sharpening our competitive edge.
Ralph: Identifying numerous opportunities to help clients manage.
Ralph: Full lifecycle of journey II from initial deployments to building complete solutions that grow with their businesses in a secure way.
Ralph: Includes matching the latest language models to meet client needs and ensuring Gen. AI solutions access data that is clean current and reliable.
Ralph: This approach is providing momentum in our data and AI practice within Cts.
Ralph: We continue to invest in our insurance business to grow our software and reoccurring services mix as well as to expand geographically.
Ralph: We are being very thoughtful and deliberate and evaluating the range of opportunities we have to accelerate performance to deliver greater value for our clients and all stakeholders.
Ralph: To help drive long term sales and improve profitability.
Ralph: Our global infrastructure services segment.
Ralph: Which represents our portfolio of technology solutions, we took several actions during the quarter.
Ralph: We rolled out a new workforce management system to better manage resources.
Ralph: We brought in leaders to drive innovation in our software platforms.
Grow our public sector presence and enhance our security and modern voice capabilities.
Ralph: And we streamlined cloud and.
Ralph: Security and modern workplace delivery under a single leader to improve consistency and accountability.
We are realizing a notable improvement in our delivery metrics and overall quality of service leading to a record net promoter score.
Ralph: As a result, we have seen meaningful reduction and contract terminations.
Ralph: Our global shared services model is now fully implemented consolidated standardizing and eliminating redundant processes across sales business and account operations.
Ralph: This increases our agility to better serve clients and optimize our costs.
Ralph: Our ERP consolidation plan remains on track and we have successfully initiated our first migration wave from our legacy systems.
Ralph: We expect all of these initiatives to lay the groundwork for margin expansion and revenue growth over time.
Ralph: With our partner ecosystem and top tier engineering capabilities.
Ralph: We're well positioned to capture opportunities including.
Ralph: Migrating clients to cost effective platforms to reduce software expenses and maximizing returns on cloud migrations through cloud native applications.
Over the past 11 months I've witnessed our global team's capability.
Ralph: And a shared commitment to clients.
Ralph: We are not only capable but also worthy of winning.
Ralph: Now our focus is on doing so consistently and at scale.
Ralph: Our journey to realizing this vision will involve tactical execution.
Ralph: A firm commitment to accountability and rewards tied to measurable success.
Ralph: To support this we have recruited a talented group of proven Hungary, and innovative leaders with deep industry expertise complementing.
Ralph: Complementing, our reenergized workforce and essential services portfolio.
Ralph: I am confident this combination is the right formula for success.
As we execute our enhanced operating model I firmly believe we are on the path to delivering stronger results as we move forward.
Ralph: Embracing each opportunity with the passion of our first time entrepreneur and executing with the precision of an experienced global leader. We are building a solid foundation for enduring success.
Speaker Change: Now, let me turn the call over to Rob for a detailed review of our second quarter results.
Rob Danny: Thanks, Raul and good afternoon, everyone. Today I'll review, our second quarter results and provide you with our latest updates to our full year fiscal 2025 outlook, along with our view for the third quarter before.
Rob Danny: Before discussing our performance I want to point out a change in our reporting of adjusted EBIT.
Rob Danny: Starting in the second quarter gains and losses on the sale of real estate and facilities.
Rob Danny: Longer being included in the calculation of adjusted EBIT as these transactions are considered to be non operational.
Rob Danny: During the quarter, we executed sales of approximately $60 million with a loss of $27 million.
Rob Danny: To be clear the cash proceeds from these transactions are not included in free cash flow.
Rob Danny: Losses, which were not included in any previous guidance for adjusted EBIT are excluded from our reported second quarter adjusted EBIT results.
Rob Danny: We have provided a historical view of our results, reflecting the reporting change in our <unk> data sheet that you can download from the IR section of <unk> website.
Rob Danny: And now onto our results.
Rob Danny: It'll revenue of $3 2 billion declined five 6% year to year organically, which was towards the high end of our guidance range.
Rob Danny: Book to Bill ratio for the quarter was <unk> 81, a modest improvement from <unk> 77 and <unk>.
Rob Danny: The trailing 12 month book to Bill ratio was <unk> eight eight the same as last quarter.
Rob Danny: Adjusted EBIT margin expanded 130 basis points year to year to eight 6% above our guidance for the quarter.
Rob Danny: This performance was primarily driven by a higher yield from cost management initiatives and a nonrecurring benefit related to the settlement of a legal matter, which added 30 basis points to the margin.
Rob Danny: non-GAAP gross margin for the second quarter was 25, 1% expanding 170 basis points year to year.
Rob Danny: One full point of impact was due to a reclassification of business development costs to SG&A, which is a better representation of the nature of the spending.
Rob Danny: Absent this change gross margin would have expanded 70 basis points year to year, primarily due to ongoing cost management within our Gis segment.
Rob Danny: non-GAAP SG&A as a percentage of revenue was 10, 4% compared to nine 4% last year. The one point increase was related to the re class of business development spending.
Rob Danny: Excluding the impact non-GAAP SG&A as a percent of revenue would have been flat year on year.
Rob Danny: non-GAAP EPS was <unk> 93 up from <unk> 70 in the second quarter of last year.
Rob Danny: <unk> three <unk> increase was primarily driven by higher adjusted EBIT and the impact of a lower share count each contributing 9% improvement.
Rob Danny: Now turning to our segment results.
Speaker Change: Yes, which represents 52% of total revenue was down one 6% year to year organically.
Speaker Change: The GBS profit margin increased by 30 basis points year to year to 12, 8% largely due to more efficient resource management.
Speaker Change: Within the GBS segment consulting and engineering services declined three 4% year to year organically largely due to market pressures impacting customer application projects, which contributes about two thirds of CES as total revenue.
Speaker Change: The book to Bill ratio of <unk> 93 improved from the first quarter, while the trailing 12 month book to Bill ratio remained stable at just over one point out.
Speaker Change: Insurance and horizontal bps grew four 4% year to year organically.
Speaker Change: Embedded in this performance as our core insurance services and software business.
Speaker Change: Presenting close to 80% of the total which was up 5% organically year to year.
Speaker Change: The book to Bill ratio was <unk> 78.
Speaker Change: Trailing 12 month basis was <unk> 95.
Speaker Change: Reminder, bookings in this business tend to be lumpy with significant variation quarter to quarter, given the higher concentration of large and longer duration deals.
Speaker Change: Gis, which represents 48% of total revenue declined nine 6% year to year organically as services revenue was down 8% inline with prior quarter and resale declined 19%.
Speaker Change: Margin expanded almost two five points year to year to eight 2% largely due to disciplined resource management ongoing actions to optimize our data centers and networks and the lower mix of resale revenue.
Speaker Change: With Ncis cloud <unk> and security.
Speaker Change: Security revenues declined 10, 1% year to year organically with services revenue down, 9% and resale revenue down about 25% as we continued to reduce the number of low margin deals.
Speaker Change: Book to Bill ratio was <unk> 69, primarily attributed to the timing of certain large scale renewables and our disciplined approach to new deals.
Speaker Change: Trailing 12 month book to Bill ratio equaled <unk> 71.
Speaker Change: Modern workplace declined 8% year to year organically with services revenue down, 7% and resale revenue down 12.
Speaker Change: Book to Bill ratio equaled eight and a trailing 12 month book to Bill ratio was <unk> 91, both in line with last quarter.
Speaker Change: Now turning to our cash flows and balance sheet.
Speaker Change: During the quarter, our free cash flow defined as operating cash flow less capex equaled $48 million compared to $91 million in the same period last year.
Speaker Change: The decline was largely driven by DSO performance, which deteriorated in the quarter.
Speaker Change: Capital expenditures equaled $147 million down $10 million year to year, and new lease originations were $10 million down 14 from last year.
Speaker Change: Together capital expenditures and leasing originations declined $24 million for the prior period and as a percent of revenue improved by 50 basis points to four 8%.
Speaker Change: Our free cash flow for the first half of fiscal 'twenty, five equaled $93 million compared to $16 million for the same period last year and as a percent of revenue Capex and lease originations improved 70 basis points to five 5%.
Speaker Change: Now a moment on our restructuring efforts, where we're taking a very measured approach at the beginning of the year. We told you we would increase spending by approximately $250 million year to year.
Speaker Change: We're now revising that to a maximum of $150 million. This adjustment is reflected in our updated free cash flow guidance.
Speaker Change: Disciplined hiring practices, we have reduced our net head count by approximately 4500 since the beginning of the fiscal year, putting us on track to achieve our cost saving plans for the year.
Speaker Change: We currently anticipate utilizing the full $250 million into fiscal 2026.
Speaker Change: During the quarter, we reduced our debt through cash payments of approximately $227 million driven by retiring our outstanding commercial paper balance and paying down capital leases.
Speaker Change: This action was partially offset by the impact of the strengthening euro on our outstanding Euro denominated bonds.
Speaker Change: Now let me provide you with our latest thinking on our full year outlook.
Speaker Change: As we have half the year behind us or tightening the range for revenue and now are expecting total revenue to decline between five 5% and four 5% year to year organically with the midpoint of the range unchanged given market conditions and somewhat longer conversion times, we are.
Speaker Change: Saying in our CES business, we now anticipate full year GBS revenue to decline slightly year to year offset.
Speaker Change: Performance slightly better than our prior expectation.
Speaker Change: As a result of our strong performance in the first half of the year, we're raising our full year adjusted EBIT margin outlook to a range of seven point.
Speaker Change: Seven five up from our prior guidance of six 5% to seven pointed out.
Speaker Change: We expect our adjusted EBIT margin during the second half of the year to be lower than the first half. This is primarily due to merit increases and ramping investments in sales marketing and all.
All partially offset by labor efficiencies.
Speaker Change: We continue to expect a full year non-GAAP effective tax rate of approximately 32%.
Speaker Change: Full year non-GAAP diluted EPS is now anticipated to be between $3 and $3 25.
Speaker Change: Compared to the prior outlook of $2 75 to $3.
Speaker Change: Update is primarily driven by the increase of our adjusted EBIT margin outlook.
Speaker Change: Free cash flow for the full year is now expected to be approximately $550 million an increase from our prior view of about $450 million.
Speaker Change: This improvement is largely due to the increase of our EBIT outlook and lower anticipated restructuring spending to a maximum of $150 million.
Speaker Change: These cash flow benefits are being partially offset by the expansion of working capital.
Speaker Change: And now for the third quarter.
Speaker Change: We expect total organic revenue declined five 5% to four 5% with a sequential improvement in our book to Bill ratio.
Speaker Change: We anticipate adjusted EBIT margin in the range of seven to seven 5%, reflecting the higher investment activity I, just mentioned and finally non-GAAP diluted EPS of <unk> 75 to 80.
Roger Sachs: With that let me turn the call back to Roger.
Roger Sachs: Thank you Rob we now like to open the call for your questions. Operator can you. Please provide the instructions.
Roger Sachs: Thank you and ladies and gentlemen, with that we'll go into our Q&A session. At this point to remember to ask a question you need to hit Star followed by the number one on your telephone keypad.
Roger Sachs: Our first question from today comes from the line of Jack <unk> with Cowen Your line is live.
Speaker Change: Hi, Thanks. This is Zach as a man on for Brian Just first question on the free cash flow I wanted to dig in a little bit further nice to see the uptick for fiscal 'twenty five.
It sounds like this is driven by both profitability.
Speaker Change: And the extension of restructuring just wanted to get a better sense on the sustainability and growth in the coming quarters and years I know fiscal 'twenty six.
Speaker Change: The goal is to get back to levels seen in 'twenty four.
Speaker Change: As you extend the restructuring program does that weigh on on those goals or are there still margin upside and other levers.
Speaker Change: To help you kind of.
Speaker Change: Get back some of that free cash flow and continuing to build.
Speaker Change: Beyond fiscal 'twenty five.
Rob Danny: Yeah. Thanks, Thanks for the question Zack this is Rob.
Rob Danny: So let me just as a reminder, at the beginning of the year.
Speaker Change: We set our free cash flow guidance, we said without the restructuring and the change in lease originations approach of lease originations our free cash flow for fiscal 'twenty five.
Roger Sachs: Should be very consistent with the prior two years. So we have that strong fundamental base of free cash flow generation.
When you now look at the forecast or assessment here for the full year.
That is maintained.
If you back out the restructuring and account for a lease origination changes. We are also at a very similar level from the last two years. So that foundation in the seven hundreds of free cash flow has maintained this year and that foundation will be maintained into fiscal 'twenty six.
Roger Sachs: As we get closer to the end of this year.
Roger Sachs: Give more precise guidance, obviously, and we'll figure out whether how much of the restructuring will carryover or not but you should think of the fundamental cash generation as being consistent with what I said at the beginning of the year and consistent with previous years.
Speaker Change: That's helpful and then move it nice to see the revenue stabilization. So just wanted to dig in.
Speaker Change: So to booking specifically.
Speaker Change: It sounds like an expected improvement in the coming quarters can you just kind of dig into them moving pieces by segment.
Speaker Change: Any way to parse the company specific factors like the stricter go to market versus <unk>.
Speaker Change: Order structural market dynamics.
Speaker Change: You can say on on GBS, the potential to return to.
Speaker Change: One data on the book to Bill Thanks.
Bill: Yes, so we have we have confidence going forward.
Bill: Bookings will improve from first half into second half and we have that confidence in both CES on the project based work and in our Gis segment as well insurance is a little lumpier. So it's not as meaningful from a book to Bill perspective now from a.
Bill: From a CES perspective, we have pipeline has been growing so our go to market New organization, New management system New leaders.
Bill: Starting to take hold in the first evidence of that is in our pipeline.
Bill: And our closure rates have been have been consistent slightly picking up slightly.
Bill: With better closure rates and better pipelines. It gives us confidence that the book to Bill will improve going into the second half of the year.
And as a reminder, was 0.91 0.93 and in the second quarter or so so we expect improvements from there.
Bill: In our CES business that is both modern workplace and IPO those are lumpy as well dependent on large renewals.
Bill: We do anticipate again based on the opportunities in front of us.
Bill: Which by the way we're off to a good start in October based on that we're confident in our third quarter bookings will be in the one plus range of one point or plus range.
Bill: And based on our pipe. We also expect to have better performance in the fourth quarter than we had in the first half of the year. So all of our internal indicators here are pointing to improved performance in both Gis in CES exact let me just amplify on one other point for both Gis and GBS, we've been recruiting and I've helped.
Bill: Recruit or assist in bringing in 13, new senior leaders into the team.
Bill: They have an average experience of 29 years and many of them I've worked with them and other companies. So I know they can deliver.
Bill: They've only been here on average for about four five months. So while we worked on the mechanics very early on while we worked on making sure that how we tracked what we tracked was more accurate. We've also been adding new talent that is going to have an impact because as you can see from the data I just gave you.
Bill: Derived side.
Bill: So I feel very confident as I said in my prepared remarks that those are areas, where we will see.
Bill: Just better results.
Thanks for the color.
Bill: Thank you for your question.
Speaker Change: Our next question is from the line of Jason Kupferberg with Bofa. Your line is live.
Speaker Change: Hi, good good afternoon Rowen, Rob This is Tyler on for Jason. Thanks for taking my questions I wanted to start by asking about growth expectations, particularly within GBS. It was encouraging to see positive sequential growth in the quarter, but it looks like it decelerated at around 200 bps on a year on year basis, mostly due to CEO.
Speaker Change: Yes.
Speaker Change: And based on the prepared remarks, it sounded like and correct me if I'm wrong. It sounded like growth is expected to be negative for the full year.
Speaker Change: What.
Speaker Change: Have you seen over the past couple of months that made you change. This outlook is it more macro specific or are there certain individual clients that are potentially delaying implementation or just sort of it would be great to get it.
Speaker Change: Atlanta land, what Youre seeing within GBS. Thank you.
Speaker Change: No no no.
Speaker Change: Question. So what we're saying is it is tied to the economy. So it's macro its not company specific or customer specific.
Speaker Change: A little bit of color there.
Speaker Change: Can give you is that in.
Speaker Change: And the Ccs business.
Hit us harder and custom application development.
Speaker Change: As opposed to enterprise applications.
Speaker Change: And as I mentioned earlier, our pipelines have improved.
So we're encouraged by that.
Speaker Change: Closing of deals our close rates are good and healthy and improving.
Speaker Change: It's really just a slowdown in the rollout of projects and custom apps. So that in and that's why we took took the outlook down a little bit in the second half of the year than we were originally anticipating a little bit of an uptick in the second half and we're just we just don't see it yet.
Speaker Change: We took it down a bit yeah, let me just amplify on that as well.
Speaker Change: Believe that the self help initiatives as I've mentioned in the call. We will have a far greater impact in the near term than the macro functions. We have plenty of opportunities, we can get more opportunities, especially with the new teammates that we have onboard and we just have to convert them at a higher level. So I'm confident that again the fund.
Speaker Change: Mental changes that we've made plus the new team mates that have come on board, we'll give us the boost that we need in that area.
Speaker Change: Okay. That's very helpful. I appreciate the color there and then second I wanted to ask about the go to market it seems like.
Speaker Change: It's been it's been evolving over the past couple of quarters and I was wondering if you can maybe just take a minute and discuss how this has changed since putting more of an emphasis on sales execution and focusing on geography and sort of what are the stakes in the ground for lack of a better phrase that we need to see to make sure that we're moving sort of in the right direction that were hoping for.
Speaker Change: Yes, I think.
Speaker Change: In the beginning and again Robin I've been together here for 11 months.
It was a focus on on fundamentals and mechanics that clearly werent at average below average so working on getting those two average working on making sure that we've got a reward system in place for all of our sales executives across the world that is.
Speaker Change: Both fair and positive but is also backed up by real success measured success in terms of revenue and profitability.
Speaker Change: And that we have the right balance I think one of the things that ive gotten a much better appreciation is our global footprint is terrific. Our global customer base is terrific I've engaged with a lot of customers many of which never had seen the CEO from <unk> before and I really get a much better sense, a deeper sense of the value.
Speaker Change: That we provide and that's a combination of the global offering the skill sets and the local delivery the ability to know the market no. The individuals' no. The leaders know the buyers no. The talent that we have on the ground to make it happen. So as we execute on those mechanics and get those mechanics at a <unk>.
Speaker Change: Level of throughput.
Speaker Change: Confident that we have laid the foundation for additional growth there.
Speaker Change: Great.
Speaker Change: Well I appreciate all the color there.
Speaker Change: Thank you for your question. Our next question comes from the line of Jamie Friedman with Susquehanna.
Speaker Change: Your line is live.
Speaker Change: Hi.
Speaker Change: Thank you for taking my question. So I want to ask you that some of the comments you made your prepared remarks with regards to the insurance business.
Speaker Change: Growing the software and especially the recurring services mix.
Speaker Change: And the numbers look good in insurance congratulations on that so.
Speaker Change: Yes.
Speaker Change: So maybe the tactics related to those inputs like specifically related to the software and the recurring components of insurers.
Speaker Change: Yeah, Great question, it's better execution, if you think about all the fundamentals that we've put in place they affect the entire company and while that segment or that business unit was on a relative basis doing a bit better it's still benefits from a base smarter more efficient go to market and all of the positive.
Speaker Change: Attributes that we're putting in place in terms of systems rewards et cetera. We've also spent quite a bit of time looking at the portfolio looking at our Skus in terms of our offerings.
Speaker Change: Looking at our pricing looking at past price increases looking at where price increases are necessary now and in the future and so I have confidence that not just the VIP and the services that we deliver through that segment, but also the innovation behind that we've been able to recruit some.
Speaker Change: Great talent to really boost the product portfolio and to really think about how we can take that to another level and shift more into higher margin recurring revenue.
Speaker Change: I think it's a good business that can be better and we're working on all the elements to make it better.
Speaker Change: Okay, and then if I could just follow up on the Gis margin good progress there as well.
Speaker Change: <unk>.
Rob Danny: So Rob you did call out that a component of that is the lower reseller I wasn't sure in the sequence of the inputs to the margin increase those were in the order.
Rob Danny: That impacted or otherwise, but anyway, if you could unpack like how well you're.
Speaker Change: You're doing better on the margins there. Thank you.
Speaker Change: The resale element is a relatively small component of the improvement at the vast majority is because of the disciplined resource management.
Speaker Change: And non people related cost management by the team they've done an outstanding job.
Speaker Change: Of lowering costs.
Speaker Change: With the revenue declines.
Speaker Change: So it's just Jamie.
Speaker Change: That's just very very disciplined cost management.
Speaker Change: Got it. Thank you. Thank you both.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, once again, if you would like to ask a question today remember it is star followed by the number one on your telephone keypad.
Speaker Change: We have our next call. Our next question from the line of Rod.
Speaker Change: Bushwa with deep dive equity research.
Speaker Change: Your line is live.
Speaker Change: Hey, Thank you guys, Hey, I have a couple of questions that are structural related to the I T O business.
Speaker Change: First one relates to the resale mix clearly retail mix is.
Speaker Change: It is dropping which is great for margins, but a bit of a headwind on the revenue side. My question is how much that that had started.
Speaker Change: Yes over the last couple of years. So that's that's not a new trend that's a trend that that had already been underway before the new management team came came into place. So my question. There is how much room is there to go on reducing the resale mix.
Speaker Change: And having a business that's more based on services and less based on the product.
Speaker Change: Product pass through stuff.
Speaker Change: Yeah. Thanks for the question Ron I anticipate we're going to continue to see a year on year decline into the second half of this year and then I expect that decline to to narrow through the first half of next year and then.
Speaker Change: More.
Speaker Change: Stable in the second half of next year. So we're through most of it last year and a half we've gone through most of it I think theres. Another six to nine months and then it's going to it's going to start it's going to start to level off.
Speaker Change: Okay.
Speaker Change: By the way is a good portion of that tapering intentional where you're actively moving away from that business or is this sort of.
Speaker Change: Yes, Okay, yes.
Speaker Change: Right right.
Speaker Change: It's definitely intentional in the way it does.
Speaker Change: Ascribe it is worse, we're still bidding on on.
Speaker Change: Work, but holding to our margins hold up holding to our very disciplined on the large and thresholds we're willing to accept.
Speaker Change: We're losing a lot of those deals because we're sticking to our margin thresholds.
Speaker Change: That's driving that's driving the reduction in revenue.
Speaker Change: But we're as I said that.
Speaker Change: I could see kind of the end of the tunnel on on those declines coming.
Speaker Change: Understood and then the other structural question is as you move further into the AI era is that prompting additional migration of legacy data centers to cloud and just would be helpful to get an update on what's happening on that front. Thanks.
Speaker Change: Yeah. That's a great question look the compute backdrop that you need for any G&A activity today is very different than our legacy business and even in even our business at Gis and it's evolving it's new it's evolving but one of the things that excites me and the projects that I've had a chance to look at participate in talk Dara.
Speaker Change: Our experts as well as the customers is.
Speaker Change: Is the fact that kind of it it gives us an opportunity to bring together our holistic set of services that includes cleansing data, making sure that proprietary data is the correct data that we should be using.
Just picking obviously the right language models to approach it and then building fast prototypes deploying them learning from that deployment and then helping scale in the first example that I gave it was a terrific.
Speaker Change: Initial fast deployment.
Speaker Change: Had bottomline ROI.
Speaker Change: <unk> that then led to the incremental deployments and as I mentioned in my prepared remarks, a tenant 10 X increase in fees from the first pilot through where we're at today. So a lot that's definitely an area where demand will continue and I think we're very well positioned again.
Speaker Change: Team for all of US here is consistency and scale. We just have to have a consistent approach and we need to scale it more effectively.
Speaker Change: Yes.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Tien Tsin Huang with Jpmorgan.
Speaker Change: Your line is life.
Speaker Change: Great. Thanks, I just wanted to draw on your experience here, just thinking about visibility and I know we have the election uncertainty now in place rates, presumably following further.
Speaker Change: Should we expect some improvement in visibility generally speaking relative to the second question that Rod just asked I.
Speaker Change: I guess I'm, probably more focused on GBS.
Speaker Change: Here.
Speaker Change: And that being more sensitive to demand changes.
Speaker Change: Bigger picture comments there thanks.
Speaker Change: Yeah look I think the commentary that I've heard from other Ceos in the space and the commentary that I hear from our end customers.
Speaker Change: Consistent so I have no outlier information there.
Speaker Change: That that Robin I see the whole team sees is just an opportunity execute on the fundamentals better as I mentioned before the self help initiatives some of which I listed in my prepared remarks, and many more that are ongoing globally.
Speaker Change: Going to have a bigger impact in the next 12 months to 24 months than the macro environment. The macro environment is good it can get a little better it can get a little worse, but the biggest key to success in the near term for US is executing on every single opportunity that we get a chance with I know that we've got the right talent.
Speaker Change: And I know that we've got the right references and I know that we have the right opportunities and it's about putting all those together consistently and scaling it.
Speaker Change: Very clear thank you.
Speaker Change: Thank you for your question, ladies and gentlemen last call. If you would like to ask a question today remember at Star followed by the number one on your telephone keypad will give you a couple more seconds. If anybody has a question you would like to ask.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Jonathan <unk> with Guggenheim.
Speaker Change: Your line is live.
Speaker Change: Great. Thanks for taking my question can you dig into some of the dynamics youre seeing around the softness in GBS versus the improvement in Gis and how we should be tying that to call. It the low end versus the high end of your outlook here.
Speaker Change: Trying to better understand what's needed to hit the higher end of your outlook.
Speaker Change: Yes.
Thanks for the question Jonathan.
Speaker Change: To get to the higher end.
Speaker Change: We would need.
Speaker Change: A little a little better performance.
Speaker Change: Just from the economics on the CES business.
Speaker Change: Having.
Speaker Change: The customers on the custom apps, just loosen up and accelerate some of the projects.
Speaker Change: That would be the primary path for us to get to the higher end.
Speaker Change: So instead of low single digit negatives that draws closer to flat.
Speaker Change: Flat.
In GBS that that would be the path.
Speaker Change: Understood and just as a follow up can you can you talk through what youre seeing around.
Speaker Change: Some of the pricing dynamics, specifically in CES.
Speaker Change: From a from a price.
Speaker Change: Perspective.
Stability in our deals so.
Speaker Change: I'm encouraged by that.
Speaker Change: As we.
Speaker Change: Migrate our offerings over to enterprise solutions.
Speaker Change: Yes.
Speaker Change: Price stability is encouraging.
Those deals for us in the longer term will be higher margin than custom.
Speaker Change: So from my perspective in the short term prices are stable and over the long term the move to enterprise from custom will be beneficial to us.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: I appreciate the color there.
Speaker Change: Thank you for your question.
Speaker Change: And ladies and gentlemen that will conclude our Q&A session for today's call and to close this out I'd like to hand, the call back over to Roger.
Roger Sachs: Thank you everybody for joining us on our call today, and we look forward to speaking with you again next quarter.
Speaker Change: Please wait the conference will begin shortly.
Roger Sachs: Yes.
Roger Sachs: [music].
Roger Sachs: Yeah.
Roger Sachs: Okay.
Roger Sachs: Yes.
Roger Sachs: Yes.
Roger Sachs: [music].
Roger Sachs: Yeah.
Roger Sachs: [music].