Q1 2020 Earnings Call
At this time I would like to turn the conference over to Mr. Johnson for head of Investor Relations. Please go ahead Sir.
Thank you and good afternoon, everyone I'm pleased you're joining us for Dfc technologies first quarter fiscal 2020 earnings call.
Our speakers on todays call, we Mike Lawrie, our chairman, President and Chief Executive Officer, and possibly our Chief Financial Officer call is being webcast DNC Dotcom Slash Investor Relations and we posted slides to our website, which will accompany the discussion today.
Slide two informs our participants Dfc technologies presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors.
In accordance with FCC rules, we have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release as well as in our supplemental slides. Both documents are available on the Investor Relations section of our web site.
On slide three you'll see that certain comments, we make on the call before with Lucky. These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call.
A discussion of risks and uncertainties is included in our annual report on Form 10-K , and other assay C. Five.
I'd like to remind our listeners that Dfc technology assumes no obligation to update the information presented on the call except as required by law now I'd like to introduce Dfc technology is chairman President and CEO Michael Okay. Thank you. Good afternoon, everyone I'm going to follow my standard format. Then turn this over to Paul and then will be available for any.
Questions.
First our non-GAAP EPS in the first quarter was $1.74 or the adjusted EBIT was 652 million in the adjusted EBIT margin was 13.3%.
And we generated 72 million of adjusted free cash flow in the first quarter.
Revenue in the first quarter was $4.89 billion on a GAAP basis and constant currency revenue was down.
4.2% year over year pretty much in line with what we expected and the book to Bill was 0.9 ex for the quarter, reflecting a couple of delays in us some deals that we had expected to close in Q1.
And the first quarter the digital revenue grew 35% year over year, primarily driven by enterprise and cloud apps cloud infrastructure and our digital workplace our industry IP Mbps revenue grew 3.5% year over year and the digital book to Bill was 1.3 acts in the industry I P. MBS and bps book to Bill was a 1.2 x.
[noise] on my fourth point in June we completed the acquisition of locks, which strengthens Dx sees value proposition as an end to end mainstream I T and digital services market leader, We also announced a joint Dx C and Microsoft Zohr digital transformation practice building on our long standing relationship with Microsoft in the next few days, we also plan to announced a strategic partnership with Google Cloud, which will enable enterprise clients to modernize IP and integrate digital solutions capitalizing on the Google cloud platform and I'll talk a little bit more about that in a moment.
And finally, we now expect additional currency headwinds for the full year.
Combined with some of the delays in these deals as well as additional pressure on our traditional business. We're revising our revenue guidance for the full year to a range of $20.2 billion to $20.7 billion.
And given this lower revenue and some delays and cost savings, which I'll talk about in a moment our non-GAAP EPS target is now $7 to $7.75 and we continue to target adjusted free cash flow of 90% or more of adjusted net income now let me just go into a little more detail.
As I said, the first quarter non-GAAP EPS was $1.74 the effective tax rate was 28.1%.
The first quarter adjusted EBIT was 652 million and the adjusted EBIT margin was 13.3%, including the impact of the investments I discussed last quarter and accelerated mix shift to digital and some delays executing resources in high cost complex countries I'll provide a little more color on these points.
As we discussed we continued to make significant investments in digital town, including both hiring new employees and Upskilling our existing workforce. We also are expanding our digital transformation centers and investing in joint practices with partners such as a WCS, Microsoft and Google. These investments are necessary to continue building on the strong momentum we have in the digital business and we continue to plan on roughly a 100 million of incremental investments this year.
The first quarter also has the most impact from the accelerated client savings we discussed last quarter. We're seeing these trade offs translate into greater opportunities and a qualified digital pipeline, which was up roughly 80% year over year in Q1.
During the quarter, we saw an acceleration in the shift from traditional infrastructure to digital solutions. For example, our cloud infrastructure business was up 36% year over year, which was faster growth than what we had expected.
And as we migrate client workloads out of the legacy environments. There are stranded costs that we have to address including assets as well as people have given the accelerated pace and expanded scope of cloud migrations, we weren't able to get these costs out during the first quarter, but we're taking action and expect to remove the stranded costs by the end of the third quarter.
Our delivery team was also behind on its fiscal 20 cost improvement plan, particularly.
Workforce actions in high cost countries as we continued to expand deployment of our Biotics automation program into additional geographies and client environments. It is taking longer to eliminate the head count as we automate activities and in some cases, we're required to implement the full automation solution prior to removing any of the resources now we're implementing actions to improve execution and second half profit, including accelerated labor pyramid improvements reductions in non billable and underutilized resources and further optimization of non labor spend such as hardware maintenance and software rates.
And as I said adjusted free cash flow for the quarter was 72 million or 15% of adjusted net income, reflecting lumpiness of cash flow, including the timing of our sales Commission payments, our fiscal 2019 bonus payments and prepaid software enterprise license agreements. However, we continue to expect adjusted free cash flow to be 90% or more of adjusted net income for the year.
Now, let me turn to revenue as I said in the first quarter revenue was $4.89 billion on a GAAP basis.
All revenue comparisons I'll discuss will be in constant currency in the first quarter revenue was down 4.2% year over year in line with what we expected and the book to Bill in the quarter was 0.9, reflecting some delays on some large deals.
In the first quarter GBS revenue was 2.2 billion, which was up 8.5% year over year the year over year improvement reflects continued momentum in our enterprise and cloud applications business as well as the addition of Molina and two weeks of the luck Soffe business.
As I discussed last quarter accelerated cloud adoption is eliminating some of the services associated with rationalizing and re factoring traditional applications and this dynamic is an ongoing headwind for legacy application services GBS book to Bill in the quarter was 1.1 and bookings were up 22% year over year, reflecting strong bookings in enterprise cloud apps analytics analytics and industry IP and bps.
Gee I asked revenue was 2.7 billion in the first quarter down 7.6% year over year. This reflects the accelerated client savings, we discussed last quarter as well as increased momentum in digital migrations cloud and digital workplace, both grew more than 35% year over year and similar to the dynamic I discussed in traditional applications. These accelerated shifts pressure the traditional G.H. bass business as clients lift and shift existing workloads to recognize immediate savings overtime, we typically grow revenue by migrating additional workloads into our multi cloud environment, but the initial shift often results in less near term revenue and we're also seeing some slowdown in additional add on project work in the legacy environment as more investment is made in the digital solutions.
Not offset these traditional headwinds we're taking a much more aggressive approach on the G. I ask pipeline development, we've expanded our sales efforts targeting large infrastructure outsourcing opportunities for new clients with a focus on deals that involve modernization of the traditional environment. While at the same time investing in digital projects. We're still early in this process. However, we're seeing good traction total infrastructure pipeline in the first quarter was up 32% year over year, and 22% sequentially and we expect to drive additional revenue during the second half of the year. The G. I asked book to Bill in the quarter was point sevenx, reflecting the lumpiness in large deal signings and some of the delays that I had mentioned previously.
Now, let me move on to our digital industry IP Mbps results digital revenue was up 35% year over year, including two weeks of revenue from Luxoft. Excluding lock saw digital revenue grew 31% and the book to Bill in the quarter was 1.3 acts as I've discussed we're seeing good enterprise spend environment and digital particularly with respect to enterprise cloud migrations.
As we partner with our clients on these transformations, we continue to see strong momentum in our cloud infrastructure solutions. This business grew 36% year over year, reflecting accelerate migrations and continued demand for multi cloud solutions and we're seeing good traction in this business across geographies and across industries. For example, during the first quarter, we want to deal with a major European Aerospace and defense company to provide cloud migration security and analytics services.
We are leveraging our knowledge of the legacy of state to modernize the clients IP architecture and help them thrive in a highly competitive market. We built an agile platform that enables development and deployment of solutions such as next generation smart factories.
Asset use optimization and application of artificial intelligence to everyday business challenges.
Enterprise cloud apps and consulting continues to perform well with a 17.1% year over year growth, including strong growth in our Americas region, particularly in our Microsoft Service now and safety practices. We're also partnered with Salesforce to win a major multi year deal with for global luxury retail brands, we are providing development and support services on Salesforce Commerce cloud supporting roughly 35 b to C websites globally.
Security revenue performance improved in the quarter and grew 5.7% year over year with particular strength in Asia, and Europe and during the quarter, we want a multiyear deal to provide managed security services for a major European car manufacturer leveraging standard dfc offerings as well as partnered offerings with micro focus fortify and carbon black. The solution includes threat intelligence security event monitoring vulnerability management, forensic investigations and regulatory and policy.
Compliance controls.
We also saw improved performance in industry IP Mbps revenue was up 3.5% year over year in constant currency driven by a 7% growth in our industry IP offerings and with the addition of Molina, we're seeing strong demand in our US state Medicaid business. During the first quarter, we signed add on deals with Tennessee, California, and Ohio worth over $100 million, each and industry IP and bps book to Bill in the quarter was 1.2 X.
Now my fourth point during the first quarter, we completed the acquisition of Luxoft.
Which strengthens dxps unique value proposition as a leading end to end IP services provider.
As we've previously announced Luxoft will continue to be led by Dimitri well, Shannon, who will report directly to me.
Lux offerings, a 13000 person workforce that provides digital strategy consulting and engineering services for companies across North America, Europe , and Asia, Luxoft will retain its brand and operate as a Dfc technology company, but we've already launched joint go to market efforts to cross sell solutions to both companies' current clients and to target new clients across industry verticals processes incentives have been put in place to promote and reward cross selling and we're encouraged by the early progress we're seeing in the joint pipeline of opportunities.
The acquisition also expands DXP has access to digital talent by leveraging walks off presence in key markets, especially eastern Europe and by broadly deploying luxoft unique talent acquisition and management platform.
We're undertaking several changes to quickly apply luxoft strengths and capabilities to dxps business within locks off we're creating industry, leading verticals in automotive and financial services. These two verticals will serve more than 20 major automotive Oems and more than half of the top financial institutions in the Americas, and Europe and two key digital offerings, the internet of things and block chain will also be combined within luxoft.
Now we continue to expect Luxoft to provide roughly $700 million in revenue during the last three quarters of the fiscal year. In addition to the two weeks of revenue we were able to recognize by closing the deal in the middle of June .
Turning to our partnerships, we recently announced enjoyed practice with Microsoft Zohr.
The DMC and Microsoft Zohr digital transformation practice enhances our deep and long standing relationship with Microsoft. This joint practice, we will provide clients with a highly integrated approach to modernizing their IP systems on the door and the result will be a reduced time to digital and a more rapid movement of client workloads from legacy IP to a modern cloud architecture on the Zohr.
In addition, we recently signed a strategic partnership with Google Cloud.
This partnership will allow us to modernize mission critical IP for enterprise clients and integrate digital solutions capitalizing on the Google Cloud platform under our partnership agreement Dx see we'll also be launching centers of excellence for Google Cloud platform and Google Cloud artificial intelligence to provide clients with secure agile and payable cloud based digital platforms that leverage our advanced analytics capability, and we will be providing more information on this as the partnership.
Evolves.
The Microsoft the Zohr and Google Cloud practice complement our ongoing cloud work with AAMC pork on Vmware to give our clients access to the largest cloud providers in the world.
And my fifth point before I turn this over to Paul as we now expect an additional $150 million to $200 million of currency headwind for the full year.
And as I discussed, we're also seeing more impact on our traditional business as accelerated client migrations pressure near term revenue.
And combined with some of the delays I talked about we're revising our revenue guidance for the full year to a range of $20.2 billion to $20.7 billion.
In addition to this lower revenue outlook delays in some of our cost savings actions.
Will lower our margins and our non-GAAP EPS target is now $7 to $7.75.
And as I said, we continue to expect adjusted free cash flow to being 90% or more of adjusted net income and with that I will turn it over to Paul.
Thank you Mike as usual I'll start by covering some items that are excluded from our non-GAAP results in the first quarter, we had restructuring costs of $142 million pretax or 42 cents.
Per diluted share and this is primarily related to workforce optimization.
Also in the quarter, we had $105 million pretax or 31 cents per diluted share of integration separation and transaction related costs, including costs associated with the Luxoft transaction.
In the first quarter amortization of acquired intangibles was $138 million pretax or 40 cents per diluted share.
Excluding the impact of these special items non-GAAP income before taxes from continuing operations was $591 million and non-GAAP EPS was one dollar and 74 cents.
Turning now to our first quarter results in more detail.
GAAP revenue in Q1 was $4.89 billion down 4.2% year over year in constant currency.
Adjusted EBITDA in the quarter was $652 million adjusted EBIT margin was 13.3%, reflecting the investment we're making to help clients accelerate their digital transformations with us.
As well as incremental investments, we're making to support the continued momentum.
In our digital business.
Our EBIT margin in the quarter was lower than we had anticipated.
We experienced delays and executing on our cost takeout plans.
And while we reduced our headcount by 3900 people in the quarter, we fell short of our expectations as we experienced delays in exiting the resources in high cost complex countries.
Also in Bionics program with expanded beyond the Xcede is delivery centers into clients environments.
Now this involves the reengineering of client processes before savings can be realized and it is taking more time to execute on these joint efforts.
For now we still intend to execute on our original workforce optimization plans.
The benefit will now be pushed out to the second half of the year.
In the quarter, our non-GAAP tax rate was 20.1%.
Reflecting our global mix of income and the benefit of a return to provision true up in certain foreign jurisdictions.
Turning now to our segment results.
GBS revenue was $2.16 billion in the first quarter.
Up 0.5% year over year in constant currency.
In the first quarter GBS segment profit was $366 million.
And profit margin was 17%.
Compared with 18.2% in the prior year.
GBS margins reflect the investments, we're making in hiring and training digital talent as well as the expansion of our digital transformation centers.
Gee is revenue was $2.73 billion in the first quarter.
Segment profit in the first quarter was $340 million and profit margin was 12.4%.
Yes margin reflects the investment, we're making to help accelerate our clients' digital transformations.
And the timing and some of some of our cost takeout actions.
Turning to other financial results.
Adjusted free cash flow in the quarter was $72 million or 15% of adjusted net income.
And this reflects the timing of annual payments.
For software licenses and maintenance.
Investment made to consolidate real estate facilities.
And the timing of refresh programs on a few large accounts.
As a result, our capex was $357 million in the quarter or 7.3% of revenue.
But we expect our capex to moderate over the course of the year.
During the quarter, we paid $51 million in dividends.
We also repurchased $400 million of shares through a combination of open market purchases and an accelerated share repurchase program.
In total we returned $451 million in capital to shareholders.
And we continue to be opportunistic and returning more capital to our shareholders.
Cash at the end of the quarter was $1.9 billion.
During the quarter, we funded the Luxoft acquisition with $2 billion of additional debt.
We also paid down $430 million of current maturities of long term debt.
At the end of the quarter, our total debt was $9.4 billion, including capitalized leases.
For a net debt to total capitalization ratio of 36.
4.5%.
Now, let me close by covering our revised fiscal 20 targets.
We are targeting revenue of $20.2 billion to $20.7 billion, including Luxoft.
This revised outlook includes the impact of $150 million to $200 million of additional currency headwinds from a strengthening dollar since the beginning of May.
Our revised outlook also reflects the near term impact from delayed deal closing.
As well as slippage on a few large transformation milestones.
However, we expect the second half improvement in revenue as those deals close and we convert on our strong pipeline, including cross sell opportunities with Luxoft.
Right now targeting non-GAAP EPS of seven to 7.75.
Dollars for the full year.
Reflecting the impact of lower revenue.
As well as the first half delays in executing on our delivery cost takeout programs.
We now expect to achieve $250 million to $300 million of cost savings this year.
Versus our original target of $400 million.
We expect a lower revenue and delays and cost takeout to impact second quarter margins by about a point sequentially.
But we expect margins to improve in the second half of the year through labor actions supply chain improvements and real estate consolidation.
Our workforce optimization actions include labor pyramid and location mix improvements.
Now, what we've driven significant productivity improvements in our delivery organization.
The last several quarters.
We have additional opportunities to extract greater efficiencies from our middle management layers.
Including the number of managers as well as their location mix.
In supply chain.
We're in the process of renegotiating several large software contracts as well as driving additional vendor consolidation to achieve incremental savings.
In real estate, we plan to eliminate an additional 600000 square feet of office space and close three additional data centers throughout the year.
Our EPS target assumes a tax rate of 26% to 28% for the full year, reflecting our tax attributes and foreign just jurisdictions as well as the increased beat liability due to the Luxoft acquisition.
Given our lower tax rate in Q1, we expect a higher tax rate over the next three quarters of about 30%.
We continue to expect adjusted free cash flow to be 90% or more of adjusted net income.
I'll now hand, the call back to the operator for the Q and a session.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question we will pause for just a moment to allow parties an opportunity to signal for questions.
Our first question comes from Lisa Ellis from Moffettnathanson.
Hi, Good afternoon, guys. Thanks for taking my question.
Yes, given the reduction in your outlook for the year just three months in.
You appear to be seeing the business deteriorate, a little bit faster I guess to state the obvious the newly than you expected three months ago. So beyond the luxoft integration in the organic investments you're making in digital are there. Other strategic options. You are considering meeting at this point is there a plan b on the table and sort of what are the options for plan B., particularly I guess with the focus on industry in bps, which you called out is doing fairly well at this point and I think it's pretty independent of the rest of DXP.
Yes, I think.
Absolutely so as Mike is as always.
All options are always on the table.
The way I look at this is.
Our digital performance is quite good and if I look out over the full year, we see probably upside to that performance you're right our industry IP in particular and bps business as has strengthened since we exited.
Last fiscal year I think the news new the new news for me here as I look through the quarter, where a couple of things one.
We saw a greater acceleration, particularly on the move to cloud and that does impact our business and impacts we've seen this impact certainly on the application business, but it also is impacting what I referred to sort of the volume metrics at many of our contracts we get paid on the amount of volume. So we are seeing some greater acceleration. There now we're seeing the other side of it too because our our cloud infrastructure business is growing faster than what we had had expected.
Now that requiring us to take more actions from a cost standpoint, and how we do that we didnt execute that as quickly as we wanted to in the first quarter and we think we can catch up on that as we go through the.
The second third and fourth quarter of this year, but that's primarily the new news is an acceleration of this cloud migration and that does impact our infrastructure business in particular.
Okay, and then I guess my follow up is at this point do you feel like you have enough.
What's your confidence level in feeling like this reset is is it.
I mean, meaning.
Do you now feel like you have a good sense of sort of the dynamics of the shift level the rates and so at this point you feel like you are pretty confident in the outlook for the remainder of the year.
Yes, we've got some very strong plans in place to recover.
I felt it was important to reflect what we saw in the first quarter that was different than what we saw exiting in the year and that's what I am signaling.
That doesn't mean, we don't have plans in place to try to recapture the bulk of that we do but when you see a slightly different trend than what you saw its important to the investors to to call that out. So yes are we confident about that yes, we are.
Okay, great great. Thank you thanks a lot.
Thank you.
Our next question comes from Rayna Kumar with Evercore ISI.
Hi, Thanks for taking my question.
No.
EPS guide by 75 cents at the midpoint.
Break out how much of that is from incremental FX headwind.
Closing delays.
The declines in your legacy IP services business and then this lower cost takeout.
Versus what you initially planned.
Paul you want to take that yes, I would say.
The if you look at it from an EPS perspective, right the revenue probably as much somewhere around 25.
Plus sense of the impact of that and the rest of it is a combination again of the.
Mix change that we're seeing with the the traditional being a little softer than we had anticipated, but digital is picking up but the differential.
It has an impact on that also the cost of.
That got pushed out and as things that we did not execute as fast as we had anticipated, particularly in the complex.
Markets and that will just really be with us.
Through the second quarter, but we expect to catch up in third and fourth quarter so that.
The the combination is as that was happening fast too fast and assets in certain market, we couldn't take the costs fast enough.
So net net I think it's about 75 cents today. It is broken down as I mentioned 25 plus.
From revenue the rest from the cost.
Great. That's really helpful. And then can you just talk about maybe like on a quarterly basis your expectations for.
Revenue growth on a constant currency basis.
We will right now I think we are reflected the currency from where it is now I think we said it was about a $150 million to $200 million impact for the full year right. There was some impact.
On the revenue side right.
And right now we would expect relatively slight flat, let's say for Q2.
And for the full year, we gave you the.
The expectations of.
A pick up in the second half of the year, we expect to have about a couple of hundred million dollars of pickup in Q3, and a similar amount in.
In Q4, right and then we would as I mentioned the margins would be impacted in Q2 by about a point, but then we'll expect to see quite a rapid acceleration of our margin improvement in the second half of the year as our cost takeout actions.
Starts to.
Materialize.
In the third quarter and carry through into the fourth quarter.
That's very helpful and just one housekeeping question from me.
The acquisition the revenue contribution from block.
In the quarter.
$45 million.
Thank you.
Thank you.
Our next question comes from Jim Schneider with Goldman Sachs.
Good afternoon. Thanks for taking my question I was wondering if you could maybe help us Mike I understand the dynamics clearly the faster transition to cloud is one thing can you maybe give us an update on.
What youre hearing from clients, who you gave.
So on the outsourcing business and the rate at which they are booking digital revenues and talk about your level of confidence that those revenues are actually going to materialize throughout the year as you expect thanks.
Yes that that is pretty much working just as we had discussed before again when I step back and I look at this.
The digital revenue is clearly accelerating above the level that I thought so just exclude locks off for a second was up 31% thats about the fastest growth rate. We've had in digital revenue and some of that is attributable to some of the deals. We did as I said some of those deals that we did we saw that impact in the first quarter. Okay.
So my confidence level on that part of the strategy is very high because we're seeing that absolutely flow through and if I look at the pipeline as I look out for the balance of the year and digital very strong and Thats before we even throw.
Lux off into the equation, so from a strategy standpoint, and a plan standpoint that is working where we had some.
Some some new news was the acceleration of the movement to the cloud and the impact that is having on our traditional IPO business and then our ability to respond to that in the first quarter from a cost standpoint, we were not able to respond quickly enough. The other factor I mentioned as BYOD. So I'm really pleased with the progress we're making in bionics, but that now is becoming much more client by client and many clients are one to see that improvement from bionics before we actually exit.
The people and that's fine that makes good sense, but that does delay some of the delayed some of the cost take out in the first quarter and that then has an impact on the on the full year. So thats fundamentally what's going on here. The digital strategy is working and in fact, it's accelerating but at the same time, we're seeing an acceleration of that impact, particularly on the infrastructure business.
I would add to what Mike has said that the pipeline as he mentioned on the digital is growing 80% on a year over year basis about 18% sequentially. So thats a strong one but also the pipeline on the.
Traditional business is also holding up right now and so we see actually opportunities as customers are coming to us so that had insource their environment and asking for modernization.
Opportunities and in discussions with us, which I'd say the composition of the pipeline is much more geared towards not just standard outsourcing, but much more modernization of the current IP estate and then the move to.
Potential.
That's helpful. And then maybe just a little bit more color on the deterioration in the traditional business can you maybe talk about over how broad client base or how many clients that deterioration is that you are seeing is that kind of relegated to a few clients is it broader than that and I guess to the earlier question. What's your level of confidence you won't see that from additional clients in the next couple of quarters. Thanks.
Yes, we look at.
Top two or 300 clients, which is what I look at it across said I'm not going to name any specific clients, but we are seeing an acceleration of this move to a cloud infrastructure is somewhat industry specific so some of the industries that we are more exposed to like.
Consumer package goods for example is migrating more rapidly to the cloud than let's say.
Financial share financial services or insurance. So it's it's not so much that theres new clients that we're seeing this in we're just seeing a slightly more rapid adoption of the cloud infrastructure in the top two or 300 clients that we have now that's being offset it's being offset by some of this digital revenue that we talked about and then what we.
Now that we have what I'll call shored up most of our large contracts and renewed most of those large contracts. We don't have a lot of those on the horizon. This year, we're being more aggressive in targeting now more new clients from an IP modernization standpoint, that's what we're now seeing in the pipe as matter of fact, we got price stronger pipeline on traditional IP monetization than we've had in years as we begin to make that shift too.
The driving much more of a sort of an aggressive offensive play around IP monetization.
Thank you.
Thank you. Our next question comes from Edward Caso with Wells Fargo.
Hi, Good evening I was wondering if you could talk a little bit about the competitive.
Dynamics in the market are you seeing any shifting in say the last six nine months and I guess, I'm, particularly thinking about I b M here or there emerging Morris a competitor. Thanks.
No I know, we were worse, particularly in the in the digital world.
We are competing more frequently with Accenture for an example, particularly in some of the areas like our enterprise cloud apps business think about that as I say S&P and the upgrade the S. Four Honda. So we are running into some of those players more often and were having.
Quite a bit of success with that.
On on traditional more traditional outsourcing things we see the same competitors. We've seen we haven't really seen any difference in that I would say, there's quite a bit of price competition, there certainly pricing pressure around some of those.
Traditional.
Traditional outsourcing and IP modernization programs, but many of our competitors are seeing the same exactly the same dynamics.
In their infrastructure business that we are seeing theres not significant differences there.
So I wouldn't say, there's been any significant change from a competitive posture over the last three or four months.
Historically, you've given us some multi year view, a three year view.
Can you update any of that now that you've got luxoft.
In the house.
No we're not going to update that today I think at some point in time it will be important to sit down do another analyst meeting and go through what those longer term models look like but.
Right now we're sort of focused on recovering some of the shortfalls that we had in the first quarter and building a plan to get where we need to get to hear on a on a full year basis. The long term theres no changes to that model.
Great. Thank you.
Thank you.
Our next question comes from Ashwin Shirvaikar with Citi.
Hi, Mike Hi, Paul.
Hey, My first question is it seems that based on the information you provided in these questions.
You you should be able to exit the year approaching breakeven overall site first wanted to confirm that possibility, but then as the breakout guys GBS.
I, we in a situation, which primarily you can get a little bit of growth from jvs.
But gee I asked is in a much longer multi year.
Situation because of the accelerated cloud migrations.
Pricing productivity things like that.
Could you break that down a bit whereas.
Yes, I would say your comment is well taken in a sense that as we exit the year, we would have recovered quite a bit about that revenue shortfall that it would have happened.
Particularly in Q2 from our original expectations were maybe off.
Maybe by about $100 million to $250 million from our original exit rate.
That being said also.
Absolutely right I think the GBS business will be a little bit closer to its original targets, because that's where we have a whole lot of our digital assets and but the dji us we'll have a little bit longer.
Road ahead, just because.
The.
The trends that Mike was indicated will take longer to.
Two.
Moderate and as we get to new deals in a sense that we have in the pipeline. This will also.
Hopefully, we'll do what we will do better than.
Overtime, but I just think the trend here is quite quite straightforward, we're seeing an accelerated shift to the cloud that is clearly impacting our.
Our IPO business, that's being offset by some of the things we're doing by participating with them in many of their digital projects integrating those digital projects into the.
Existing IP infrastructure, so theres nothing different here from a strategy standpoint other than it has accelerated a little bit and now we've got to make some adjustments both from a cost standpoint, and going out and attracting newer new clients beyond our current install base in this IP modernization space, that's the fundamental messenger.
Got it understood and I see that you havent.
Change the free cash flow conversion, but they will be correspondingly low what FCF Dan.
Based on the guide down.
The question is.
Does that affect the magnitude or timing of your capital return plans and how does that and we can you can you kind of go through cap dedication a bit.
So I think we are.
We are.
We will not make a significant.
Having a significant impact on our capital return, we look at it much more opportunistically against all the other.
The opportunity that we see for tucking acquisitions for example, our investment that we're making in the business.
But and you know.
We are so yes, it is 90% or more of.
Free cash flow for the remainder.
First for the four year, even though we started the year at a lower point than.
But we did just I guess, there were more timing issues that something more fundamental.
Got it thank you.
Thank you. Our next question comes from Jason Kupferberg with Bank of America Merrill Lynch.
Hey, good afternoon guys.
So obviously the pace of change in the business just seems to be accelerating on a couple of different fronts as you outlined.
Mike does that speak to the need to evolve some of the internal forecasting processes you guys use I mean, it just seems like there was some pretty significant change in just two two and a half months relative to when you reported.
Your your Q4 I'm just wondering if you guys are contemplating any changes in terms of how you formulate your.
Forward guidance.
As you as you think ahead.
I think the run off and things like that we've got a really pretty good handle on I think for me.
What I, what we need to do a little better job, but let me qualify this because it's really not that easy to do is some of the volume metrics. So again the way our contracts are set up you get paid based on volumes, it's a little difficult to forecast too far out what's going to happen with those volumes.
And they do fluctuate month to month, and they certainly fluctuate quarter to quarter now we're going to try to do a better job of understanding that in forecasting, but I got to tell you there are some.
You know some limits as to how you can forecast those those volumes.
This has not been a huge issue in the past because the volumes were quite stable.
But what we're seeing with this accelerated shift to the cloud some of those volumes are shifting around and that is now something we're going to have to get a better handle on and forecasts. We get enough data points, you will be able to calculate with a little more precision, but that's the fundamental new news for for me and what was different from what I saw coming out of.
Out of last year.
Okay. Okay. Paul just just one for you as we're tinkering with the model here. It looks like you adjusted EBIT margin outlook for the full year fiscal 2000 is coming down by maybe a point or so so I just wanted to see if you can.
Validate that I know you talk directionally about a better second half obviously, but just so that we have the the models calibrated properly on that line.
Yes, I think we had term where we gave you some directions before.
By a point to a point on the house.
Okay, and then just very quickly I talked about earlier.
Excuse me that you have done for the year.
For the full year Yep Yep understood and then you talked about some deals that slipped out of Q1 did those already closed in Q2.
Now a couple of them on the books.
I'll be very honest, because a couple of them I decided not to do.
Typically at the end of the quarter you get into an equation.
There was one for example, I think was up roughly $400 million roughly I won't name the name, but at the end of the quarter. So can you give us a bigger discount will sign up I decided not to do it.
I'm, just not going to take I'm, not going to give up that profit for the sake.
Our book to Bill number overall, a week or two we transitioned fair. So we'll get that close and we'll get to close in the second quarter, but that was an example, just something we were unwilling to do too.
To get that done before the June thirtyth deadline, so theres, probably at least four or $500 million to sell into that general category and there were just some deals that we just couldn't we just couldn't get across the lawn damage with pricing or giving away profit and just we couldn't couldn't get them done, yes, and we do expect to get them closed in this second are some may may go as far as the third quarter.
Okay understood. Thank you.
Thank you.
Our next question comes from Arvind Ramnani from Keybanc.
Hey, guys. Thanks, and thanks for taking my question.
Just a couple of questions here.
I don't think off all the strategic options you have.
Are you going to outline what what may fall.
Instead of it then within your control.
Sort of given your current financial means versus what what do you may need to do is really kind of get help externally.
Well, yes, I mean, there's all kinds of strategic options as as I've said before.
All options are on the table, we've got a strategy, we're executing that strategy. Yes. There was some new news here, particularly around the acceleration on the infrastructure business does that change the strategy no does it change some of the options.
Our available no could that change some of the timing to think about some of those yes. It could so I'd just idling Yang from the from the strategic option standpoint, I don't really fundamentally see any change all those options have always been on the table.
Great.
And then from an Investor perspective, you know I think.
Kind of pretty vocal sentiment has has been weak for some time now but then.
Can you maybe help outline the mode mood at DXP and it may be.
Different and different types of business has been what's the mood internally and secondly, what's the message is that to existing employees are recruits.
Well I think the I think the messaging is very similar to the messaging we have for you.
Doesn't change.
Okay, because it's because it's a fax is the truth.
Now if you go into different parts of the world. It is slightly different I've said. This before you go to Asia, you got to Australia, where we've largely gotten through this transformation of where the digital revenue streams are more than offsetting.
Some of the traditional while that's a much more upbeat move if you go to our digital transformation centers, where people were totally focused on these digital projects, it's a different world.
You go into an account where you've got a significant amount of runoff and you are taking costs out well, it's not nearly as positive. So it differs based on where you are and it differs on where you where the businesses in that transition, but were seeing good opportunities to attract people. We've hired I think last year. We are 25000 people were continuing to hire particularly in the digital business and most people see the opportunity that we're communicating here around helping our clients modernize their existing IP infrastructure, but being able to help them on these digital projects and then integrating that into the existing I'd infrastructure.
Okay. That's helpful.
Suddenly wishing you invest some of that for the remainder of the year.
Im sorry, what I said a super helpful. Thank you. Thanks for answering the question on vicious wishing to wish you luck for rest of the year. Thank you. Thank you. Thank you.
Thank you.
Our next question comes from Rod bourgeois with deep dive equity research.
Hey, guys.
You've sort of answered the same questions over and over so let me let me answer ask a question from a different angle here.
Answer for me, Rob Thats good.
Right.
No I mean, you're clearly seeing volumes at your clients shift more rapidly to the cloud. My question is is that spend as it shifts going completely away from Dx see or is this more of a case where over time.
Let's spend is still available to you you can recover that spin, but at a lag effect. I mean, you mentioned last quarter that you are pursuing these deals where you give clients upfront savings, but then you get a commitment to make up the spin gap overtime by shifting into digital scope. So I'd like your take on whether this accelerated cloud shift is an outright negative or is it more of a situation where you're taking a hit now but with the benefit later have a shift into more of a digital business mix, which is kind of the long term goal that that you are trying to accomplish so how much of this is a negative versus an opportunity can you give us the balance on that right now.
Yes, I think on on balance it's much more positive I do think there is a delay, but we're seeing that because.
The.
The the increase that we're seeing in our cloud infrastructure business is increasing it was up again, 36% in the first quarter. So it's much more of a lag effect. We're also doing other things where some of the.
Revenue associated with the actual cloud is beginning to be captured as part of the the contract that is of a lag effect as well so I view it much more as a lag effect than just a negative in a matter of fact I go through this all the time, our top two or three roughly our top 250 accounts. So weve got about $14 billion of revenue I go through every one of those accounts where are we what some run off what's the digital pipeline look like but there is a timing issue as you point out you are 100% correct.
Okay, Hey, a couple of quick quick ones related to that can you quantify on these deals are you're giving clients proactively you're giving them upfront savings. That's clearly affecting your revenues this year be because of that lag effect can you quantify how much revenue impact that is having this year.
There is a number you can give us on that.
I can't I can't give you an accurate number and that right now what I can.
What I like to be able to do that a little bit more retrospectively for example in X. account I know what we've given okay. I also know what that current forecast as I know what the digital pipeline. If I know, what's the revenue associated with that is but I want to see that materialize and then we will be able to look back and make some judgments as to whether thats something we ought to continue something we should continue but right now I don't see any major change in what we have communicated up to this point in time.
Okay and then one other quick one is as the in your particularly in your G.I.S. business as the volumes move to the cloud and you shift your scope to more digital services.
Is that a positive margin event or is it neutral or negative what's the margin mix that is happening.
Mix shift that's happening as you shift into more digital and your G.I.S. business.
Thanks.
Right near term, it's a little bit more negative just because you have to think so.
Transformation project early on I don't have the same margins as you could imagine from this environment, we were managing in the traditional.
Side.
So there is a differential in margin early on we also have to take cost action also to deal with some of the stranded asset and the old environment. So net net it puts more pressure on the cost side near term is there for that margin.
Yes.
Our more pressured near term, but over time, then you get the efficiency is those cost comes out the margins actually there's opportunity expand those margins. It's really tough when these volumes go away I mean really only as much. Many servers you don't need as much storage you don't need as much this that that stuff doesn't move out in 60 days and just it just doesn't work that way. It takes time to do that but yes as those costs come out then that gives us a great opportunity for margin expansion on the new digital business.
Got it thanks guys.
Yes, Thank you and operator, we'll close the call now thank you ladies and gentlemen. This concludes today's conference. We thank you for your participation you may now disconnect your phone lines and we hope you have a great day.