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Text: I'm pleased that you are joining us for DXC Technology's third-quarter fiscal 2021 earnings call.
After the call, we will post these slides to the investor relations section of our website.
In accordance with SEC rules, we have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
I will walk through today's agenda in a moment.
As we announced last month, we received an unsolicited and nonbinding proposal from Atos to purchase DXC.
Our Board reviewed the proposal carefully with our financial and legal advisors and found it to be inadequate and lacking certainty, given the value our Board believes we can create on a stand-alone basis by executing on our transformation journey.
After sharing some high-level information with Atos to help them understand why their proposal undervalue DXC, Atos and DXC agreed to discontinue further discussions.
We are confident in our transformation journey, and our Q3 results show strong evidence that our team is executing.
We are flattered that Atos saw the value we are creating and clearly has taken notice of our new leadership team and how we are delivering for our customers and winning in the market.
I was pleased with how we managed the proposal.
As it did not linger, we stayed focused on our business and it helped highlight some areas where we can accelerate our transformation journey and create additional value.
With the new leadership team in place, I'm looking forward to sharing the details of our FY '22 full year plan and longer-term expectations on our Q4 earnings call.
We're also planning an Investor Day to discuss in more detail our plans and introduce you to our leadership team.
Now let me turn to today's agenda.
I will start by giving you a quick update on our strong Q3 performance.
Next, I will highlight the progress we're making on our transformation journey.
Our strong Q3 results were driven by executing against the three key areas of our transformation journey, which are focused on customers, optimize cost and seize the market.
I will then hand the call over to our new CFO, Ken Sharp, to share our detailed Q3 financial results and guidance for Q4.
Regarding our Q3 performance, our revenues were $4.29 billion, approximately $90 million above the top end of our guidance.
This is the second straight quarter of revenue stabilization, and we expect this trend to continue in Q4.
Our sequential revenue stabilization is positive evidence that we will achieve year-on-year revenue stability.
Concerning adjusted EBIT margin, we delivered 7%, also higher than the top end of our guidance.
Like revenue, we expect margins to continue to expand in Q4.
Book-to-bill for the quarter was 1.13, underscoring the success of bringing the new DXC, which focuses on our customers and people to the market.
This is the third straight quarter that we've delivered a 1.0 or better book-to-bill, and we also expect this trend to continue in Q4.
I'm pleased about the level of stability and momentum we are achieving.
We have done well attracting talent, improving the environment for our people, strengthening our customer relationships, taking out cost without disruption and continuing to win in the market.
Now before I go through the progress of our transformation journey, I would like to comment on two recent hires that have allowed me to finalize our new leadership team.
We completed our CFO search and hired Ken Sharp.
Ken returns to DXC after being the CFO of Northrop Grumman's Defense Systems business.
Prior to that, Ken was SVP of finance at Orbital ATK and has over a decade of experience in our industry.
Ken has a strong operational focus and has led large-scale finance transformations.
These skills are important to us as we continue executing on our transformation journey.
We also added Michael Corocoran to our team.
Michael has joined us as chief strategy officer and has a track record of transforming and growing businesses.
Michael joins us from WPP, where he led strategy and operations.
Prior to WPP, Michael was at Accenture, where he spent a number of years with me and created the strategy for Accenture operations.
The amount of transformation and industry experience of this team is substantial, and they are the main reason for our strong execution and results.
You will hear in a moment why Ken joined DXC and his comments concerning the opportunity to create value do a really nice job capturing why talent joins DXC.
Now I will cover the good progress we are making on our transformation journey, starting with our customers.
Our focus on customers continues to be the primary driver of revenue stabilization.
As I've said time and time again, when we deliver for our customers and are seen as a trusted partner, customers are more likely to renew existing work and consider us for new work.
Let me give you two good examples that have happened in Q3.
Molson Coors renewed two pieces of work with us this quarter.
The first is in application management, and the second is across multiple layers of the enterprise technology stack, including ITO, Modern Workplace, cloud and security.
Next, our strong relationship and flexible delivery model led to an expanded agreement with Pacific Life insurance, which includes application development and support for its retirement and life divisions, enabling them to reduce cost and improve efficiency.
These are two perfect examples of the great job we're doing, strengthening our customer relationships and gives us confidence that we can continue to stabilize revenue.
Now let me turn to our cost optimization program.
We will achieve our goal of $550 million of cost savings this year.
Our cost optimization program was responsible for our strong adjusted EBIT margin of 7% in Q3.
We were able to expand margins despite a 200 basis point headwind from the sale of the U.S. state and local health and human services business.
We have done well optimizing our costs and continuing to deliver for our customers without disruption.
Seize the market is the final area of our transformation journey.
In this area, we are focused on cross-selling to our existing accounts and winning work with new customers.
The 1.13 book-to-bill number that we delivered this quarter is consistent evidence that our plan is working.
In Q3, 55% of our bookings were new work and 45% were renewals.
Let me give you a good example of new work with a new customer.
We signed a three-year deal with Ferrari, where we will modernize their IT platforms with services, including security and modern workplace.
Our ability to deliver a consistent book-to-bill number of over 1.0 in the first three quarters of FY '21 is clear evidence that our transformation journey is not only working but we can absolutely win in the IT services market.
Turning now to our healthcare provider software business.
We are on track to complete the sale of this business and use the roughly $450 million of net proceeds to pay down debt, further strengthening our balance sheet.
Let me begin by saying how excited I am to join DXC and be part of the team that Mike has assembled.
Let me provide you some insight into my thought process on why I joined, which came down to three main factors: the team Mike assembled; the transformation journey; and third, the investment thesis of how DXC would create value.
After spending time with Mike and the team, I'm convinced that DXC can execute on the investment thesis I was contemplating.
This includes stabilizing revenue, expanding margins and delivering free cash flow.
When we achieve this thesis, I believe DXC will be successful in unlocking significant value.
Now let me talk about the team Mike assembled.
Companies with the best people win.
The strength of the team delivering on the transformation journey is clearly visible in our Q3 results.
At DXC, there are three main areas that our finance team will focus on.
First, we will work hard to demonstrate the true earnings power of DXC.
We will focus on cash flow, paying particular attention to reducing outflows.
We intend to continue investing in our people and delivering for our customers.
At the same time, we will be disciplined in reducing spend in areas such as restructuring, transaction and integration, capital expenditures, excess facilities and our outsized overhead.
We believe we will create the most value by growing the underlying business.
That means organic growth and at the same time improving cash flow.
Second, we are committed to putting in place a disciplined capital deployment program that will maximize the value creation of our cash flow engine.
Based on rigorous analysis, we will carefully evaluate the returns associated with capital deployment options.
Now that we've strengthened our balance sheet, we are turning to solidify our cash flow.
With a strong balance sheet and a cash flow outlook, we will be in a position to execute a disciplined capital allocation program.
Third, we will improve our financial visibility.
We are committed to providing annual guidance and our longer-term expectations on our next earnings call.
We are also planning an Investor Day to discuss in more detail our longer-term plans and introduce you to our leadership.
Moving on to our Q3 results.
In the quarter, DXC exceeded the top end of our revenue, adjusted EBIT and non-GAAP earnings per share guidance.
GAAP revenue was $4.29 billion and $88 million better than the top of our guidance range.
Currency was a tailwind of $58 million sequentially and $118 million year over year.
On an organic basis, revenue increased 1.7% sequentially.
Organic revenue declined 10.5% year over year due to previously disclosed runoffs and terminations.
We expect this to be the high watermark for organic year-over-year revenue declines.
As you will see from our Q4 guidance, we expect to continue delivering stable sequential revenue.
And during fiscal year '22, we expect this to translate into year-over-year revenue stability.
Adjusted EBIT was $300 million.
Our adjusted EBIT margin was 7%, a sequential improvement of 80 basis points despite an approximate 200 basis point headwind from the HHS sale.
Non-GAAP income before taxes was $246 million.
Non-GAAP diluted earnings per share was $0.84 due to a lower-than-expected tax rate of 10.2%.
Using our guidance tax rate of 30%, non-GAAP earnings per share was $0.65.
This was $0.10 higher than the top end of our guidance range.
Our Q3 tax rate primarily benefited from the reversal of certain tax reserves related to tax audits, the expectation of higher utilization of foreign net operating losses and the ability to utilize state tax credits related to the HHS sale.
In Q3, bookings were $4.9 billion for a book-to-bill of 1.13.
Like Mike mentioned earlier, we are encouraged to see three consecutive quarters with a book-to-bill greater than 1.0.
Turning now to our segment results.
The GBS segment, the top of our technology stack, includes analytics and engineering, applications and the horizontal BPS business.
The GBS segment previously included the HHS business, which we sold on October 1 and includes the healthcare provider software business, which we are in the process of selling.
GBS revenue was $1.92 billion or 45% of our total Q3 revenue.
Organic revenues increased 2.2% sequentially, primarily reflecting the strength of our analytics and engineering business.
Year over year, GBS revenue was down 7% on an organic basis.
GBS segment profit was $273 million and profit margin was 14.2%.
Margins improved 10 basis points sequentially despite a headwind of about 300 basis points from the HHS sale.
GBS bookings for the quarter were $2.7 billion for a book-to-bill of 1.35.
Now turning to our GIS segment, which consists of IT outsourcing, cloud and security and the modern workplace layers of our enterprise technology stack.
Revenue was $2.37 billion, up 1.3% sequentially and down 13.2% year over year on an organic basis.
GIS segment profit was $88 million with a profit margin of 3.7%, a 210 basis points margin expansion over Q2.
GIS bookings were $2.2 billion for a book-to-bill of 0.95.
Now before I discuss the details of the enterprise technology stack on Slide 13, I wanted to point out that there is no better slide that drives home the positive impact of our transformation journey.
The proof points on the slide include continued revenue stabilization and strengthening of our book-to-bill for each layer of our stack that has been part of the transformation journey since Q1.
As you can see in Q1, all four layers of our stack had negative sequential growth, whereas we are now reporting sequential growth improvement for all layers in Q3.
Also, it is positive to see the revenue mix beginning to change in shifting up the stack.
Now let me drill down one level to comment on the performance of the layers of our enterprise technology stack.
IT outsourcing revenue was down 1.8% sequentially, an improvement as compared to Q2 where it was down 4.7%.
ITO revenues declined 17.7% year over year due to the previously disclosed runoffs and terminations.
Book-to-bill was 0.96 in the quarter.
We believe building strong relationships with our ITO customers and delivering effective solutions will improve revenue performance.
Cloud and security revenue was up 4.7% sequentially and down 1% year over year.
Book-to-bill was 1.0 in the quarter.
Moving up the stack, the applications layer posted 2.6% sequential revenue growth and was down 9.3% year over year.
Analytics and engineering was up 4.6% on a sequential basis and flat compared to the prior year.
Analytics and engineering book-to-bill was 1.2 in the quarter.
The modern workplace and BPS businesses increased 2.6% sequentially and was down 12.6% compared to the prior year.
I should note that Q3 positively benefited from increased volume of resales.
As you may recall, these two businesses were part of the strategic alternatives initiative and are just beginning their transformation journey.
As a result, you should expect some unevenness in performance.
Moving on to cash flows on Slide 14.
Our cash flow from operations totaled an outflow of $187 million, and adjusted free cash flow for the quarter came in at negative $318 million.
As discussed on our prior earnings call, we had cash disbursements of $332 million that impacted free cash flow related to the HHS sale.
In addition, during the quarter, we normalized payments to our suppliers and partners.
Our effort to normalize our supplier and partner payments is not expected to reoccur and had an approximate $400 million negative cash flow impact in the quarter and $500 million negative cash flow impact through the first three quarters of our fiscal year.
We believe treating our partners appropriately will allow us to further leverage the partner ecosystem.
If these two items had not occurred, our free cash flow would have been more than $700 million higher in the quarter.
The company has traditionally reported adjusted free cash flow that adjusts for capital expenditures, restructuring, transaction, separation and integration costs.
On Slide 15, we detail the efforts we have undertaken to strengthen our balance sheet.
As we previously disclosed, we utilized $3.5 billion of net proceeds from our HHS sale to reduce debt.
Additionally, we continue to make progress on our plan to sell our healthcare provider software business, and we will use the proceeds to pay down debt and further strengthen our balance sheet.
Cash at the end of the quarter was $3.9 billion.
Total debt, including capitalized leases, was $6.2 billion for a net debt of $2.3 billion.
We expect to make tax payments of approximately $900 million in Q4 related to our divestitures.
I would like to emphasize our commitment to an investment-grade credit rating.
As you can see, our net debt to EBITDA improved more than one full turn from 2.4 times at the end of September 2020 to 1.2 times at the end of December.
We fully expect our leverage ratio to continue to improve.
Moving on to guidance on Slide 16.
We are targeting Q4 revenues of $4.25 billion to $4.3 billion, adjusted EBIT margins of 7% to 7.4%, non-GAAP diluted earnings per share of $0.65 to $0.70, net interest expense of $60 million and an effective non-GAAP tax rate of about 28%.
And let me share three key takeaways on our progress we are making at DXC.
First, we're bringing the new DXC to the market and have demonstrated solid momentum in executing on our transformation journey.
This is translating into consistent quarter-on-quarter revenue stability, sequential margin expansion and a book-to-bill number of one or greater.
Second is we are on track to complete the sale of the healthcare provider software business and use the proceeds to pay down debt, further strengthening our balance sheet.
Third, with the additions of Ken and Michael, we have built and finalized the new leadership team that is executing on our transformation journey and producing strong results.
In closing, I am pleased with the level of stability and momentum we are achieving.
We have done well attracting talent, improving the environment for our people, strengthening our customer relationships, taking out costs without disruption and continuing to win in the market.
We expect all of this positive momentum to continue in Q4.

user
compname reports q3 non-gaap earnings per share of $0.84.
q3 non-gaap earnings per share $0.84.
q3 earnings per share $4.29.
q3 revenue $4.3 billion versus refinitiv ibes estimate of $4.2 billion.

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