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DXC Technology Co
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Good day and welcome to the DXC Technology’s First Quarter Year 2021 Earnings Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Shailesh Murali. Please go ahead, sir.
Thank you and good afternoon everyone. I'm pleased that you are joining us for DXC Technology’s first quarter fiscal year 2021 earnings call. Our speakers on today's call will be Mike Salvino, our President and Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. This call is being webcast at dxc.com/investorrelations and the webcast includes slides that will accompany the discussion today. After the call, we will post these slides on our Investor Relations section of DXC’s website.
Slide 2 informs our participants that DXC Technology's 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 SEC rules, we have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in tables included in today's earnings release.
On Slide 3, you'll see that certain comments we make on the call will be forward-looking. 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 these risks and uncertainties is included in our Annual Report on Form 10-K and other SEC filings. I would like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call, except as required by law.
And now, I'd like to introduce DXC Technology's President and CEO, Mike Salvino. Mike?
Thank you, Shailesh, and I appreciate everyone joining the call today. I hope you and your families are doing well as we all continue to navigate through the COVID-19 pandemic. I’m going to start today’s call by giving you an update on our Q1 performance and how we are progressing on our transformation journey to position DXC for growth. I will then share our financials for Q1, our guidance for Q2, and update you all on our strategic alternatives including the recent sale of our healthcare provider software business, and then I will make some closing remarks before opening the call up for questions.
I was very pleased with our performance during the quarter, which has allowed us to have a strong start to FY 2021. Our revenues came in higher than we thought in May, highlighting the resiliency of our business during COVID-19. Margins also came in higher, underscoring the effectiveness of our program to optimize costs.
And our book-to-bill for the quarter was 1.2x, underscoring that we are successfully bringing the new DXC, which focuses on our customers and our people to the market. This new approach is allowing us to cross sell our capabilities to our existing customers, win new logos, and renew existing work. Our results in Q1 show that DXC is very relevant to our customers, especially during tough times.
Now, I'd like to discuss our transformation journey and give you some specifics concerning how we are doing in the three key areas, which are: focus on our customers, optimize cost, and seize the market opportunity. Our focus on customers is really starting to pay off. Simply put, this focus allowed us to deliver higher revenue in Q1 and will enable us to stabilize revenue in Q2.
Let me give you an example. This week, we renewed and expanded our relationship with Sabre, an account where our standing was not in good shape. We brought the new DXC to the account, and now we are looking forward to working with Sean, his leadership team at Sabre along with Google to transform and modernize Sabre’s IT estate to the Google Cloud.
I'm happy to report that with the Sabre signing and us working through the final details with two other accounts, we have successfully fixed 38 of the identified 40 challenged accounts. We have rebuilt these relationships and we are winning more work.
Let me give you some stats. 31 out of the 40 accounts have given us new work in excess of 10 million since the start of the program in Q3 of FY 2020. We're now done with this program, and this customer-centric mindset is fundamental to the new DXC. Our people are the cornerstone to delivering for our customers. The investment we made to enable 99% of our workforce to work virtually has resulted in DXC delivering on our customers’ expectations during the COVID-19 pandemic.
The Australian Tax Office is a great example of where our people delivered for a key customer during COVID-19. DXC helped the Australian Tax Office deliver wholesale changes to systems and operations in two weeks to support troubled businesses and workers. The CIO commented the way our teams collaborated and worked as one was truly inspiring.
I'm also extremely proud of how our people handled the Ransomware attack, which impacted the Xchanging business. Our team immediately implemented a series of containment and remediation measures, got our customers up and running, and kept our customers updated every step of the way. Under the leadership of our new CIO, Chris Drumgoole and Mark Hughes, who runs our security business, our people did a great job of resolving the situation quickly and protecting the interest of our customers and DXC.
Among the many thank you notes we receive from our customers, Lloyd's Market Association summed it up the best saying “The transparent and collaborative way in which DXC has addressed the challenge has been first class.” I would like to thank all of our people as they are clearly engaged and delivering for our customers.
Now, let me turn to our cost optimization program where we continue to make good progress. Here, we were able to move faster than anticipated, simplifying our management layers and taking the appropriate steps to right size our cost structure to our revenue. We have achieved better than expected margins in Q1 due to these efforts. We're on track to achieve our goal of taking out 550 million this year and ensuring our people are focused on making business impact for our customers. We expect to expand our margins from Q1 to Q2.
Finally, let me comment on the third key area of our transformation journey, which is seize the market opportunity. We're focused on cross-selling to existing accounts and winning work with new customers. Our book-to-bill ratio of 1.2x this quarter is good evidence that we are indeed seizing new market opportunities. The Q1 bookings were comprised of one-third new work and two-third renewals. New work was generated through a combination of cross selling to our existing customers and winning work from new customers.
Let me give you an example of each. Zurich Insurance Group is an example of cross-selling new work to an existing customer at Zurich. We expanded our relationship, we're helping them transform and modernize their applications and security globally. A great example of new work from a new customer is ivari, where we were selected to help modernize ivari’s legacy systems, provide policy administration and customer support services.
Also, I don't want to ignore our renewals as they are solid evidence that we are delivering for our existing customers who are willing to make additional multiyear commitments to DXC. All of this is evidence that our strategy is working, and we expect to hit a book-to-bill of 1x in Q2. Now, before I turn the call over to Paul, I want to reiterate I was pleased with our performance in Q1 and we are well positioned for Q2.
Now, let me turn the call over to Paul.
Well, thank you, Mike and greetings, everyone. Before I cover our financial results for the first quarter, I'd like to echo Mike's comment about our performance. We delivered results which were ahead of the revenue and profit targets we shared with you on our last earnings call. This is clear indication that we are making solid progress on our transformation journey. Our business has proven to be more resilient in this COVID environment and our offerings are clearly relevant to our customers.
Now, however, our first quarter results may not reflect the progress we're making due to the lag effect from prior terminations, price downs, and runoffs. We expect these headwinds to subside starting in Q2.
Now turning to business under strategic reviews, we remain on track to close the sale of our state and local health and human services business in the current quarter, which will allow us to reduce debt and further strengthen our balance sheet. The recent agreement to set our healthcare software business will further enhance our financial flexibility.
Although we're quite encouraged by the progress we're making on multiple fronts, we’re still operating in an uncertain COVID environment. As a result, it's not yet the time to provide you with full-year guidance, but we will continue to update you on our progress on a quarterly basis. For the second quarter, we expect revenue to stabilize, margins to improve, and our bookings to continue to reflect the relevance of our new DXC in the market.
So now let me turn to our first quarter financial results. I'll start by covering the items that are excluded from our non-GAAP results. In the first quarter, we had restructuring costs of $72 million on a pre-tax basis, or $0.24 per diluted share. These costs relate to the cost optimization program we discussed previously.
Hopefully in the quarter, we had $110 million on a pre-tax basis or $0.32 per diluted share of transaction, separation, and integration related costs. And those were primarily driven by the external spend associated with the assets under strategic review. Now, in the first quarter, amortization of acquired intangibles was $148 million on a pre-tax basis, or $0.45 per diluted share. Excluding the impact of these special items, our non-GAAP income before taxes from continuing operations was $107 million for the quarter, and our non-GAAP EPS was $0.21, which is higher than we had indicated during our last earnings call.
Our non-GAAP EPS in the quarter was impacted by a higher than expected tax rate of 45%, reflecting our mix of income and accrual related to a return to provision adjustment associated with prior tax filings, as well as the valuation allowance in certain foreign jurisdictions.
Turning now to our first quarter results in more detail. As always, all revenue comparisons I'll discuss will be in constant currency. GAAP revenue in the first quarter was $4.5 billion, representing a sequential decline of 5.7%, but an improvement over the guidance we provided during our last earnings call. Our revenue for the quarter reflect the resiliency of our business, with a lower than anticipated impact from COVID during the quarter.
Currency in the quarter was an incremental headwind of about $40 million sequentially, and $101 million, compared with the prior year. Adjusted EBIT in the quarter was $190 million. Adjusted EBIT margin was 4.2% reflecting the acceleration of some of our cost optimization initiatives. For the quarter, we delivered $60 million of cost optimization savings, which is about $45 million better than originally planned. This helped offset a $36 million in accruals, related to the resolution of certain prior customer disputes. And at this time, I'm able to report that we have dealt with the vast majority of outstanding disputes.
Non-GAAP EPS was $0.21 in the quarter. And as I previously mentioned, our EPS was impacted by the higher than usual tax rate of 45%. Normalizing for a tax rate of 28%, EPS would have been $0.28. In the quarter, bookings were $5.3 billion for a book-to-bill of 1.2x.
Turning now to our segment results, I'll start with a GBS segment, which includes the two top layers of our enterprise technology stacks, analytics and engineering, as well as the applications business. The GBS segment for now also includes three businesses under strategic review: The U.S. state and local health and human services business, the healthcare software business which we recently agreed to sell to Dedalus and the horizontal DPS business.
GBS revenue was $2.17 billion in the quarter, down 5.2 sequentially. Year-over-year, GBS revenue was up 2.5%, reflecting the acquisition of Luxoft. In the first quarter, GBS profit was $215 million and our profit margin was 9.9%. Excluding the impact of dispute related accruals of $26 million, the profit margin for GBS would have been 11.1%. GBS bookings for the quarter were $3.5 billion for a book-to-bill of 1.6x.
Turning to our GIS segment, our GIS segment consists of the IPO and the cloud and security layers of our enterprise technology stack. It also includes our workplace and mobility business. GIS segment revenue was $2.33 billion in the first quarter, down 6.1% sequentially, and 12.4% year-over-year. The decline was primarily driven by the impact of prior terminations price down and run offs that we previously discussed.
GIS segment profit in the quarter was $23 million and profit margin was 1%, reflecting the timing of our cost actions. We expect margins to improve for the remainder of the year as we execute on our cost improvement plan and align our cost structure to revenue. GIS booking for the quarter was $1.8 billion for a book-to-bill of 0.8x.
Let me comment on the performance of the layers of the enterprise technology stock. Let me highlight again that in the first quarter, the revenues in each layer of the stock and the ensuing sequential and year-over-year comparisons are not truly indicative of the trajectory of the business, and this is due to the lag effect from prior terminations, price down, and run offs.
IPO revenue was down 5.2% sequentially, and down 18.7% year-over-year, driven by the terminations, price down, and run offs we discussed previously. Book-to-bill was 0.6x in the quarter, reflecting the timing of large contract awards, which typically take at least 6 to 9 months to negotiate and close.
Now we are encouraged by the progress we're making in the ITO layer, which is evidenced by the strength of our qualified pipeline. And we are targeting a book-to-bill of 1x for the second quarter. Cloud and security revenue was down 11.1% sequentially and down 6% year-over-year. The revenue decline in this layer of the stack was driven primarily by run offs, as well as deferral of project related spending. Book-to-bill was 1x in the quarter.
Moving up the stack, the application layer was down 8.7% sequentially, and down 7.5% year-over-year. The decline was primarily driven by some terminations, and project completions, as well as delayed work in industries most impacted by COVID, such as travel, hospitality and consumer goods. Book-to-bill for this layer of the stack was 1.5x in the quarter, reflecting a number of long-term applications management contract renewals.
In the analytics and engineering layer of the stack, revenue was down 2% sequentially, primarily due to delays in project work. Year-over-year revenue was up 52.1% driven by the acquisition of Luxoft. Book-to-bill in the quarter was 1.3x.
Turning now to the business under strategic review, we remain on track to sell the U.S. state and local health and human services business to Veritas in the current quarter. We completed and delivered audited carve-out financials for the business, which was an important closing milestone. And as we discussed previously, we plan to use the after-tax proceeds from this transaction to pay down debt.
Additionally, on July 20, we reached an agreement to sell our healthcare software business to Dedalus Group for $525 million in cash. This was an opportunistic transaction. As Dedalus was looking to broaden its software portfolio, we were able to realize an attractive value for the asset. Now this transaction is expected to close by our fiscal year end, and we plan to use the after-tax proceeds of [$425 million to $450 million] to pay down debt.
Turning now to the horizontal DPS business and the workplace assets, we continue to be in discussions with interested parties. The strategic evaluation process has taken longer than anticipated due to the current COVID environment, but we're focusing also on finding the right strategic fit for our customers and employees. And so, as part of this process, we're also evaluating the benefit of retaining these assets, but we expect to make a final decision on the best path forward for these assets by our next earnings call.
Turning to other financial highlights, adjusted free cash flow in the quarter was a negative $28 million, reflecting the timing of annual payments of software licenses and maintenance, and also a slight increase in working capital in the current COVID environment. We expect adjusted free cash flow to be positive in the second quarter.
Our capital expenditures, including the payment on capital leases was $382 million in the quarter or 8.5% of revenue. Cash at the end of the quarter was $5.5 billion. Our total debt, including capitalized leases, was $12 billion for a net debt to total capitalization ratio of 38.4%.
As we stated previously, we plan to use the proceeds from the sale of the U.S. state and local health and human services business to pay down debt. On a pro forma basis, total debt including capital leases would have been less than $5.5 billion at the end of the first quarter and this assumes we had a minimum cash balance of $2 billion, which is a more normalized level, absent this COVID environment.
During the quarter, S&P and Fitch revised their ratings of DXC to BBB- and BBB respectively, but upgraded our credit outlook from negative to stable. Now, we remain committed to maintaining a strong financial position consistent with an investment grade credit profile. The after-tax proceeds from the sale of the healthcare software business will only serve to enhance our financial flexibility.
So, in closing, we expect revenue to stabilize in the second quarter in the range of $4.4 billion to $4.45 billion. Margin in the second quarter should improve sequentially to 5% to 5.5%, reflecting additional contributions from our cost optimization initiatives. We are targeting our non-GAAP EPS in the second quarter to be $0.30 to $0.35 based on an effective tax rate of about 35%.
And with that, I'll now turn the call to Mike for his closing remarks.
Thanks Paul. In summary, we had a positive start to the year. Now, let me share with you three key takeaways. First, on customers: I'm pleased to say that we have fixed the challenged accounts, and those issues are behind us, which was one of my top priorities when I started with DSC. We have rebuilt our customer relationships and reinstalled confidence in our delivery capabilities, enabling us to stabilize revenue. Our people in the new leadership team are key to this turnaround. They're fully engaged and their efforts are being recognized by our customers.
Second on profitability, we're making clear progress on our cost reduction target of 550 million for this year. We are ahead of plans, but clearly this is not the end state. We know the industry profitability benchmarks and have a number of levers that we will execute over time to close our gap.
Beyond this year, the opportunities that we have already started include the consolidation of real estate in data centers, the use of technology, like Bionix, across more of delivery footprint, and finally further optimization of our organization through pyramiding, off-shoring, and contractor conversion.
Third, on the market, we're making good progress capturing an opportunity that is unique to us. In challenging times, we've seen customers turn to us for their IT needs because they know us, they trust us, and we've delivered for them for years.
So, in closing, we believe the positive momentum that we created in Q1 will carry over to Q2 and will be another positive step forward on our transformation journey.
And with that, operator, please open the call up for questions.
Thank you. [Operator Instructions] And we will take our first question. This will come from Lisa Ellis with MoffettNathanson.
Good stuff here on the results this quarter. Look, I know this revenue stabilization quarter-to-quarter is a key factor everyone is watching very closely. Mike, I know you highlighted some things like the 40 challenged accounts, but can you maybe give a little bit more commentary? I know you've mentioned in the past the top 200 accounts. Just what are the factors giving you confidence that we're going to see this revenue stability when we get into 2Q? Thank you.
Lisa, thanks for the question, always good to hear from you. Look, ever since I started securing the customers, and it's not just the 40, right? It's all of our customers around making sure that they had confidence in not only our delivery, but also how we were dealing with them. So, when I talk about the new DXC, I talk about it being focused on our people and our customers because we've always said, right, if you lose the people, you lose the business.
So, we're very focused on that. Our people are engaged, our customers are seeing it, and based on that we feel very good about the stability of the revenue. And that's what we're saying around Q2. I think that's going to be the step in the right direction. And then specifically what we mean by stabilized revenues is that you ought to expect that we will be either flat or slightly up quarter-on-quarter.
Okay. And then good – thank you. Maybe for my follow-up, just a question on talent. I know you just highlighted that. And I know DXC doesn't disclose talent metrics like headcount, attrition, or utilization, but can you give us a sense for how those metrics are trending, maybe like voluntary attrition in particular, just over these last few quarters? How are you feeling about the morale in the labor base? Thank you.
So, let me give you one – let me give you even a different stat. When I started, we took an employee engagement survey. We recently finished that. We've got our board meeting next week, and employee engagement is significantly up --significantly. And they're actually seeing the fact that the town halls that I'm doing, the town halls that the leadership team is doing, the engagement on how we've dealt with them during COVID-19, and also social injustice, it matters. And they're definitely paying attention. I can't thank them enough, because without them, right, we don't stabilize this revenue. Without them, we don't deliver for the customers. So, very pleased with how our employees are engaged.
Excellent, thank you, and nice results in a tough environment. Thanks a lot.
Thanks, Lisa.
And we will take our next question. This will come from Rod Bourgeois with DeepDive Equity Research.
Hey, guys. So, I want to ask more about where you're going with margins. I recognize there's definitely a bunch of COVID impacts and moving parts with your divestitures, but at the same time, you're citing revenue stabilization and progress on your cost actions. So, it'd be great to get your thoughts on your margin prospects for the rest of fiscal 2021. If you can say a little bit even beyond Q2, that would be really helpful?
Rod thanks. And again, always good to hear your voice. First, let me give you some context, right, when you look at what we're doing, first of all, we're managing a transformation journey. Second, now, we have added another strategic alternative that we're managing, and then obviously we're managing COVID-19. And I think we're doing that incredibly well, meaning we're making very good progress.
So again, I don't think it's the right time to give guidance, but here's what I can tell you. I've got the entire organization focused on expanding margins, and that's what you're going to see in Q2 and should continue to see quarter-on-quarter for the rest of the year. Now why do I say that? I say that because we're making very good progress against the 550 million in cost savings.
Now, beyond that, we still have the multiple levers that I talked about in my prepared comments. And that stuff that we're already working on, like consolidation of real estate and data centers, right. I mean, what we want to do with our employee base is to find a new employee experience. So, the folks that are working virtual are incredibly excited about that, and that will allow us to deal with the consolidation of real estate.
Second is the use of technology, all right, you know, that's part of my playbook. You know, I've used that in my past. Bionix is very good, but there's more technology that we can put on this delivery footprint with Vinod. And then last, we are very focused around starting to optimize the organization. The organization was not ready to optimize when we started here at DXC. Okay, now we've got things stabilized with customers. All right, we like where the revenue is.
So us, now looking at pyramiding and also offshoring the rate, make sure we've got that right mix is important. And then, look, I talk a lot about the employees, okay. And we are very focused on contractor conversion because it's very hard to build a culture if a significant portion of that workforce is contractors and we're definitely all over that. All right, and you know, the contractor base sees it and feels it.
S,o, what I would say Rod, summarizing that whole thing is that look, all of these points will help us close the gap on the industry benchmarks. So, I'm pretty pleased with where we're going. Not only immediately, but also long term.
Great. And just a quick follow up. You mentioned the Sabre deal. I'm very interested in that contract since Sabre had earlier announced they were moving to Google Cloud. It seems significant now that Sabre is now signing a deal with DXC too. Can you talk more about that situation, particularly if it's indicative of what's going on at other accounts? Is the Sabre situation a case of a customer facing challenges to switch away from a legacy service provider or is that just a case of DXC fixing a customer relationship? Can you just elaborate there?
Okay, so, look Rod on Sabre, we’re thrilled, right? We're thrilled to be working with Sean. We're thrilled to be working with Google. And it wasn't just fixing a relationship, right? When I talk about the new DXC, it was literally bringing our analytics, our apps, our cloud and security and our ITO capability to showcase in front of Sabre. So, when you look at that deal, the thing I like best about that deal, which is indicative of other deals, large deals that we've got in the pipeline is its full enterprise stack.
Now, what do I mean by that? It's got every single layer in the stack that we show. Roughly 70% of it is ITO. Roughly 40% of it is cloud and security and apps. And then the final 15 is analytics and engineering. So, we're thrilled, right, by that deal. The other thing I will tell you is this; the end industry continues to talk about the cloud, the cloud, the cloud. All right. And we believe in the cloud, we always have believed in a cloud.
We think that the industry, though, is going to take a very balanced approach. What we talked about during the last earnings call is that we've used virtual clarity across 135 of our top 200 accounts. And over the next two years, those clients aspired to move 20% of that critical work, which is where the industry is now moving critical work to the cloud, which won't happen overnight, but when you went through the process of technical feasibility risk business case, and the ability to execute that cloud percentage dropped to 5%.
And what was telling about all that analysis is the existing ITO work, our clients wanted 60% of their remaining work to be modernized. Now, why do I tell you all that? I tell you all that, because it's a balanced approach. It's in hand, right? You got to do ITO and you got to be able to do cloud. And what I had a client tell me this quarter was what DXC is, is the engineers for engineers. Like we know how to do the engineering work, whether it's on-prem or in the cloud.
So, like I said, I like the Sabre deal, not just because it got us back in to a client that was moving away, but more importantly, it's a full enterprise stack deal. So that's probably more than you wanted to hear, but those are my thoughts on the Sabre deal.
All helpful. Thanks, guys.
And we will take our next question. This will come from James Faucette with Morgan Stanley.
Hey guys, this is Jonathan on for James. Congrats on the quarter. Can you talk through some of the mixed work you're seeing from the challenged accounts and potentially some of the pricing considerations in those accounts?
So, Jonathan, thanks. So first of all, on the pricing, you know, I just talked about our margin. All right. So, we are very focused on obviously, growing revenue and stabilizing that revenue, but also making sure those margins are good. Alright, so we like the margins we're getting with the new work and we're incredibly disciplined around that. Now, the work on the challenged accounts is, again, full enterprise stack.
I mentioned during the last earnings call that we were pursuing our top 200 accounts to cross sell. That's one of the reasons why you spend all this time to make sure these customer relationships are rebuilt. I've said it over and over again, that clients give trusted people that have delivered for them more work. And what we're seeing is, we're seeing the work across the stack. We're seeing in the analytics and engineering offering, primarily fueled by not only DXC, but Luxoft.
We're also seeing it with cloud and security and apps. And then the final piece is, again, as people move to the whole virtual mindset is people started to take real notice to the ITO layer. So, in some cases, we've helped them shore up that layer. In some cases, we've quite frankly shut down some of the ITO layer because we can see great ways to get cost savings. So, that's what we see and that's just not for the 40 accounts. All right, but it's also across our top accounts, Jonathan.
Appreciate the color there. Can you also walk through the puts and takes around horizontal BPS, and the considerations you're taking there in terms of evaluate and potentially keeping that asset. I believe that disclosure was sort of net new.
Yeah, I mean, look, the way I always look at these alternatives, and first and foremost, is that the right thing for our customers? And is it the right thing for our people? Okay, and, you know, you know, my background pretty well, I'm pretty deep in BPO. All right, and if I can't feel comfortable with that, and if I can't feel comfortable with the value that we're getting out of that, then you know, we think we can create shareholder value by keeping it. That's clearly one of my strengths in my past and I can see clear to, to fix in that business if we need to.
Now, having said that, you shouldn't take away that we're still not trying to work deals, okay. And we've got a few work in immediately. Like Paul said, we plan on landing both the BPS and the workplace strategic alternatives basically before the next earnings call, Jonathan.
Super helpful. Thank you.
And we will take our next question. This will come from Ashwin Shirvaikar with Citi.
Thank you. Hi Mike, hi Paul.
Hi, Ashwin.
First of all, good to see the quarter-to-quarter progress, both the strategic and tactical. I wanted to start by asking you about your thoughts on what is your target leverage? Because I'm thinking, post HHS and the healthcare software sales, and the associated pay down, shouldn't you be getting to an inappropriate level of leverage where other uses have cash become more likely?
So, Ashwin the – thanks for that question, all right. And much like the guidance, I'm not going to talk about the alternative uses of cash, whether it be dividends, whether it be buybacks, whether it the potential acquisitions, because again, where we are is, we're laser focused right. This quarter-to-quarter progress that you all have seen now, is a lot of work. Okay, and couldn't be more thrilled with the progress that we're making. But with the transformation journey we got going on, with now the four strategic alternatives and COVID-19, you know, look, we just don't think it's the right timing to comment on that.
Got it. Okay.
Ashwin, what I would add is that, we’re just really as we mentioned all along, we're committed to an investment grade credit profile. And our balance Sheet, as you heard today is in stronger, we have quite a bit of liquidity and all these transactions are going to – the two, particularly the two that are been teed-up already will enhance our financial flexibility. Longer-term again, we're going to work to maintain that solid financial position and the debt-to-EBITDA of 2x or less would be probably our targets.
Understood. The second question is about the 515 cost saving, I ask this because one of the prior versions of cost cutting and optimization, the cuts went too fast, cut too deep, it hurt customers, it hurt employees. So, when you say you're doing faster, how are these cost optimization initiatives different? How this is smarter? What specific action are you now taking? Any incremental color there?
Okay. So, the key thing is this, right. With the 550 and cost reductions, we're focused on the delayering. And what I said in the last call is that look, what I've seen in this, okay, and it's key, right? Because you can't fix customers and take the cost out, right. You know, you would hear some rumblings, but what I noticed in my detailed reviews that I did in the first six months is we've got layers within DXC that are causing complexity and confusion. And I validated that with our customers. Almost to using individual names to say, have you seen these folks show up on the account. Okay, and look, what I want to do is, I want to make sure and this what we're doing is that our detailed folks that are doing the work, have a direct line to our customers and our account teams. And that's what we're doing, we're cleaning that up. And you know, so I'm very proud about the work we've done. I'm also very proud about how we've, how we've simplified the organization, because that's, you know, that's incredibly important.
The second thing I would say is this, we're being very transparent with our people. Okay, I do monthly town halls, with our people, we talk about it. I've talked about what we're doing, where we're going, and the specific words are, we want our people to be making customer impact. So, I would say three things: One, the delayering is key; two is, customer impact, right, if you're not making customer impact, then I want to understand, you know what we're doing; and then the last thing is the fact of we're simplifying the organization, Ashwin, and you know, I think that's basically the right way of looking at the 550 and why we're being successful this time around versus last.
Understood. Thank you for that.
And we will take our next question. This will come from Jason Kupferberg with Bank of America.
Good afternoon. I know you're targeting the book-to-bill of 1.0 in the second quarter, I was curious if your expectation is that that would be weighted towards GBS again, similarly to Q1 or do you think it'll be more balanced based on what you're seeing around near-term pipeline conversion?
No. So, it definitely will not be focused on GBS, it will be much more balanced between GBS and GIS. Actually, when I look at them, they're both at 1x. So, it should be very balanced, but I like remember what Paul said about the ITO pipeline. Those deals take a little bit longer to do, but when you get on like Sabre, they're meaningful and that pipeline with our focus has grown significantly. We expect to harvest that.
Great, okay, well, that's good to hear. Maybe just, sort of a follow-up along those lines, I know that pre-COVID you guys had talked about investing 100 million into the legacy IP outsourcing business. Can we just get an update on those investment plans? Is that all still on track over what period of time, sounds like maybe you're starting to see some fruits from that?
I mean Jason that’s done, right. I mean, so when I said that, basically, our focus on our customers is really starting to pay-off. That investment is what's making that work. All right. So, us getting closer to those customers, making sure that the folks on the account team have the tools, the training, and then making sure that we also not only use that 100 million on people, but also some of the automation, you know, helps us basically move that forward.
The last thing, as I said on the last call, is that we're rewarding our folks. All right, in fact, it's this month. We're rewarding our folks that are doing the detailed work. All right, what I call layers, one through four with pay increases. And again, I think that's incredibly important that the leadership of DXC recognize and rewards our folks for the work they're doing. And that's what's happening.
Congrats on the quarter. Thanks.
Thanks, Jason. And our next question will come from Darrin Peller with Wolfe Research. All right, thanks, guys. Just to hone in a little more on the bookings, again, it's obviously great to see the 1.2 and then the 1.0 for next quarter, but when we think about the types of contracts, you're having, obviously, one third is new. Can you give us a little bit more of a sense of the actual – from a horizontal standpoint or workflow standpoint? What exactly is resonating with your clients the most that you're offering that you're winning over others? And just maybe consider also thinking about both for this quarter? What's going on for next quarter and then the pipeline in a similar question?
Okay, so Darrin, back to the pipeline. The pipeline, like Paul said, we're seeing an increase in pipeline, obviously, across the board, most significant in ITO. Okay. The second thing is, what I would say is, the analytics and engineering capability that we have is significant. And I was actually a little bit surprised with how resilient it was. So, when we looked at our pre, you know, our COVID numbers, all right, pre-actually selling into this quarter, we thought that piece of the business was going to be impacted more, and it wasn't. In fact, they did very well. Okay.
The second thing is exactly what I said about the ITO and the cloud. What we're seeing is, we are the engineers of engineers. What that means is, as people move to the cloud, they need our help, and it's a balanced approach. My view of the cloud business right now is the easy stuff move to the public. That was the first 25%. Now what we're dealing with is we're dealing with the critical applications. Those don't move to the cloud quick. That doesn't mean that the cloud does not play a pivotal role in it. It absolutely does, but it's definitely right, a balanced approach. And that's what we're seeing.
We're seeing some of that work, move to the cloud. Other of the work, they want it modernized. Our clients want the ITO, the IT estate modernized. So, Darrin, hopefully that gives you a flavor. It's a balanced pipeline. We expect to deliver a balanced book-to-bill across GBS and GIS next quarter, but we do feel confident about that 1x.
Okay. I'm trying to get a sense of what your, you know, your clients think that you have that really your competitors don't have and that's why they're choosing you and those new logos. That one-third of the bookings that's new. Sounds like it is a lot of what you're saying around the analytics, though and obviously, your capabilities on the cloud conversions as well.
Well, it's also, look – it's the ability to migrate, right, the ITO work. Okay. I mean, you know, this ITO business is a favor for us, because every single client we walk into not everything's in the cloud. All right. So, the net-net is us being able to deal with mainframes. Us being able to deal with [AS400], us being able to deal with that kind of stuff that not all of our competition has Darrin, that's unique.
Okay, and then when we can show up, speaking the cloud for Google, for Microsoft, for VMware, for Amazon, that's huge. Okay, so that's why I keep saying it's an and story.
Got it. That actually makes a lot of sense. Just a quick follow up is on when you talked about how you're done was really trying to fix the challenged accounts. What are the implications of that? I mean, it seemed like you were uncovering different issues. For the first couple of quarters, you came as CEO, Mike, but now that you're done, do you feel like you can really put that to rest? There's no other issues, you cannot – you're expecting to uncover and just look forward now?
No, I mean, look, Darrin for as many times as I, you just think about, basically a week of my time, probably every day that goes by, I'm on a customer call, in some fashion. Could be a status call, could be me just checking in. And then look, I'm constantly sending these customers emails about what's going on, all right. And they would tell me if stuff was not working. Because they've got every opportunity to, all right, and they certainly are engaged.
And in fact, they're more inquisitive than I thought about what other capability does DXC have, and us being able to get out there and tell that story is huge. Okay. So again, like the position we're in, like the fact that the customers are engaged. What I would finish with is this. This new DXC thing is not like a logo. It is what we believe in, okay. And part of that is around being customer focused.
So, when I mentioned about that customer centricity mindset is built-in, that's where we're going. So, I do not expect us to go backwards. Alright, so, again, that's the culture that we're dealing with.
Got it. Appreciate that guys nice. Thanks.
And we will take our next question. This will come from Bryan Bergin with Cowen.
This is actually Jared Levine on for Bryan. Can you give us a quick update on how the workplace and mobility business performed in the quarter?
The details of the workplace mobility business, again, we saw the demand, we converted two very nice deals that were up over 200 million in TCV in the quarter. One for a large electronics company, another one for a pharmaceutical company where Jerry, we showed up in their time of need. And that allowed us right to compete even better for that work, because we delivered.
So, Paul, would you add anything about the performance of the workplace business?
Yes. On the revenue side in constant currency, I think it was down about a few points close to 4%, more again, you know, timing of some of the things in the first quarter in the COVID environment of what customers were looking to do so, but overall, I think that our pipeline also is pretty strong right now.
Okay great. And are there any other opportunistic sales within the portfolio being evaluated at the moment?
Jerry, listen, again, our focus is on those four. The fact that we added another one, you know, we've got a lot of work and we're doing great at it. We certainly will always look to unlock value in our portfolio, especially as we continue to focus on the enterprise technology stack. So that's, that's how I’d answer that question.
So listen…
Yeah.
Yeah, thanks, Jerry. What I'd like to do is, I want to thank each and every one of you for joining the call and I'd like to highlight that look, our strategy to position DXC for growth has always been based on taking care of our customers and our people. This focus has allowed us to make good progress on our transformation journey in Q1 and we are confident that this momentum will continue in Q2. So, with that, I want to wish you and your families all the best. And operator, please close the call.
This concludes today's call. Thank you for your participation. You may now disconnect.