DXC Technology Co

NYSE:DXC

Earnings Call Analysis

Strong Adjusted Earnings and Strategic Initiatives

DXC Technology's Q1 Fiscal 2025 results exceeded expectations with a 6.9% adjusted EBIT margin, up 40 basis points year-over-year, and a 17% increase in adjusted diluted EPS to $0.74. Revenue declined 4% year-over-year organically. The company generated $45 million in free cash flow, reversing a negative $75 million from the prior year. DXC is revamping its go-to-market strategy, resulting in expanded pipelines and larger deals in later sales stages. For FY 2025, DXC expects revenue to decline 4-6%, EBIT margins of 6.5-7%, EPS between $2.75 and $3, and free cash flow of $450 million.

Introduction to DXC Technology's Fiscal Q1 Performance

In the first quarter of fiscal year 2025, DXC Technology reported results that exceeded expectations, offering a glimpse of potential stability in a challenging market. The highlights included a 4% decline in total revenue year-over-year on an organic basis, counterbalanced by improvements in adjusted EBIT margin and non-GAAP diluted EPS, which rose 17% to $0.74. With a focus on transforming operations, the company is strategically positioned for future growth.

Segment Analysis: Global Business Services and Global Infrastructure Services

The company's revenue breakdown revealed that Global Business Services (GBS) contributed 52% of total revenue, with a slight organic growth of 1%, primarily from a robust performance in the Insurance Software & Business Process Services segment. However, Global Infrastructure Services (GIS) saw a more significant challenge, with a 9% decline in revenue, attributed to restrained customer spending and a selective approach to new deals. This divergence highlights GBS's steadiness in contrast to GIS's struggles.

Cost Management and Margin Improvement

Despite the revenue setbacks, DXC managed to improve its adjusted EBIT margin to 6.9%, up by 40 basis points year-over-year. This improvement was largely due to better cost management practices, particularly within GIS, where gross margins expanded by 80 basis points. The company is actively investing in optimizing operations and driving automation, enabling it to enhance service delivery while managing costs effectively.

Guidance and Future Outlook

Looking ahead, DXC maintains a cautious outlook but remains optimistic based on initial results. The full-year organic revenue is expected to decline between 6% to 4%. For GBS, growth is anticipated to improve to low single digits by the second half of the year, while GIS is projected to experience a low double-digit revenue decline. Enhanced margins are anticipated, with adjusted EBIT margin guidance now between 6.5% and 7%.

Challenges in Customer Spending and Booking Ratios

The company is encountering persistent cautious behavior among its client base, leading to restrained discretionary spending on projects. The first quarter's book-to-bill ratio of 0.77 reflects a lower levels of bookings, indicating the need for a strategic pivot in deal acquisition and customer engagement. DXC has restructured its sales approach, embedding client-specific expertise to bolster deal success.

Investment in Innovation and Future Growth Areas

DXC is leaning into investments in industry expertise, particularly in emerging technologies like AI. The management emphasizes the importance of transforming internal capabilities to offer innovative solutions aligned with industry demands. This approach aims to leverage established client relationships while adding value through advanced technical offerings.

Conclusion and Market Positioning

In conclusion, DXC Technology is navigating a complex landscape with a blend of strategic initiatives designed to improve client relationships and operational efficiency. While facing near-term revenue challenges, the company is focusing on long-term capabilities and market adaptation, aiming to unlock significant shareholder value through disciplined execution and targeted investments.

Earnings Call Transcript 2025-Q1

[Operator]

Hello, and welcome to the DXC Technology Q1 Fiscal Year 2025 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Roger Sachs, VP of Investor Relations. You may begin.

[Roger Sachs, executive]

Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology's first quarter earnings conference call. We hope you had a chance to review our earnings release posted to the IR section of DXC's website.

Speakers on today's call are Raul Fernandez, our President and CEO; and Rob Del Bene, our Chief Financial Officer.

Our agenda will be as follows. Raul will provide an overview of our results and an update on our strategic initiatives. Rob will then walk you through our financial performance for the quarter as well as update you on our full year outlook and provide some thoughts on our fiscal second quarter. Raul and Rob will then take your questions.

Certain comments we make on today's call will be forward-looking. These statements are subject to 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. We do not undertake any obligation to update or release any revisions to any forward-looking statements.

Also during this call, we will discuss non-GAAP financial measures, which we believe provide useful information to our investors. In accordance with SEC rules, we provide a reconciliation of these measures to their respective and most direct comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release.

And with that, let me turn the call over to Raul.

[Raul Fernandez, executive]

Thank you, Roger. Good afternoon, everyone, and thank you for joining us today for our first quarter fiscal 2025 earnings call.

I'm pleased with our first quarter results that came in ahead of our expectations on top line, adjusted EBIT margin and adjusted diluted EPS. Our performance is an early testament to the improved execution by our teams along many fronts. Our teams are focused on designing and implementing solutions that embed engineering skills, AI and industry expertise to capture opportunities in an expanding addressable technology market.

As our enhanced operating model gains traction, we believe it positions us well to deliver greater value for our customers, improve financial performance, and drive long-term shareholder value.

Specifically during the quarter, total revenue declined 4% year-over-year on an organic basis, adjusted EBIT margin of 6.9% expanding 40 basis points year-over-year, non-GAAP diluted EPS of $0.74 was up 17% year-over-year, and we generated free cash flow of $45 million versus negative $75 million during the first quarter of last year.

In light of ongoing market uncertainty, we continue to see cautious behavior for many of our customers. This has resulted in an ongoing restrained discretionary spending environment on short-term project work, down modestly from the prior year, across both our Global Business Services and Global Infrastructure Services segments. Therefore, along with our selective new approach to deals, overall bookings during the first quarter remained under pressure. We had factored this lower level of bookings going into the full year outlook that we provided this past May.

We are revamping our go-to-market approach within our sales organizations. A few examples include: dedicated client partners having significant domain expertise tied to specific clients and industries; updated compensation structure that includes bookings, revenue and profitability, as well as elevated incentives to expand client relationships; and a clear delineation between existing and new logo account teams.

We are beginning to see some early success from our efforts. Our pipeline has expanded nicely largely driven by new deal inflows in Consulting & Engineering Services, which is our largest segment. Additionally, within our pipe, we are seeing a greater mix of larger deals progressing to the later stages of the sales cycle. Although these engagements are expected to have a lesser contribution to near-term revenue, we believe they provide a solid foundation for long-term stability.

Let me take a minute to quickly highlight details of 2 new deal wins led by our technology and engineering expertise, together with deep vertical domain knowledge.

For ContiTech, one of the world's leading industrial suppliers, our Consulting & Engineering Services business is leading the effort to consolidate multiple SAP legacy ERP systems to a new SAP S/4HANA platform. This migration allows greater process optimization across the company and provides timely, actionable insights for strategic decision-making to drive business performance.

Within our Cloud & Infrastructure business, we recently entered into a long-term IBM mainframe managed service agreement with First Horizon Bank for ongoing management and support. During the first quarter, we initiated several tactical actions under our enhanced operating model.

Within GBS, where we help clients accelerate digital transformation, we are doing the following. Last quarter, we consolidated our Analytics, Engineering & Applications business and now call it Consulting & Engineering Services under industry veteran Howard Boville. This streamlines our offering structure and enhances our ability to design and go to market with more standardized, scalable enterprise applications.

Additionally, under Howard's leadership, we've aligned the business to 5 verticals, financial services, automotive and manufacturing, health care and life sciences, airlines and public sector, where we have significant domain expertise, allowing us to develop very targeted solutions to address industry-specific challenges.

To enhance our operating and delivery model, during the quarter, we began to execute on the following initiatives: optimizing our global delivery network to quickly identify and leverage the best available talent in geographic regions; increasing adoption of gen AI capabilities for application development, testing and maintenance; implementing a new workforce planning management system to better manage resources in all market conditions through predictive modeling; and restructuring our account pyramids to drive further offshore delivery.

Within Insurance Software & BPS, we continue to explore a range of opportunities to accelerate the already strong performance of our market-leading Insurance Software & Services unit that generates more than $1 billion of annual revenue. We anticipate providing you a further update in the near future.

Moving to GIS, which represents our portfolio of technology solutions. We are bringing together our infrastructure, security, and modern workplace teams under the trusted leadership of Chris Drumgoole, a tenured DXC executive. This better enables us to develop and deliver unique and mission-critical secure technology solutions to meet the evolving needs of our customers.

Our integrated GIS workforce of almost 50,000 practitioners across 70 countries will be one of the largest, most experienced and best equipped in the marketplace. These professionals have over 49,000 certifications across AWS, Google Cloud, and Microsoft Azure as well as specialized security technologies. While each of our offerings will continue to innovate and maintain distinct market identities, this combination helps that our solutions are designed, built, sold, and operated to work together seamlessly.

Specifically within cloud, ITO and security, we are executing on the following: developing a targeted set of offerings, investing in and growing top-performing accounts and winding down select nonperforming accounts, and driving deeper penetration of our AI data-driven intelligent automation platform that helps customers quickly detect and resolve IT issues and prevents future problems before they occur.

Within Modern Workplace, we're continuing to implement AI and gen AI tools to enhance the capability of our chatbots to handle increasing inbound service requests.

Additionally, during the quarter, we took steps to improve our operational efficiency. We began to consolidate, standardize, and eliminate redundant processes across our sales, business, and account operations through the implementation of a global shared services model. As part of our consolidation plan, we are in the final stages of upgrading our targeted ERP system to S/4HANA and expect to start an initial phase of migrations later in this year.

Revamping our go-to-market approach as well as the actions we are taking across GBS, GIS, and our internal infrastructure enables us to reduce overhead and redirect investments towards more value-added, front-end initiatives. The impact is already being felt as we are realizing a notable improvement in delivery metrics and overall quality of our services that has resulted in higher client satisfaction Net Promoter Scores.

I want to now take a moment to briefly comment on an area that I'm deeply passionate about: protecting intellectual property. This mission has been a cornerstone in my career as a leader, investor, and entrepreneur. At DXC, we are defining how to embrace innovation ethically and responsibly, helping our customers navigate digital transformation with confidence. We believe our commitment to IP protection represents a cornerstone to company advancement and stakeholder value.

We also take extensive measures to safeguard our own technology while ensuring excellence. As such, I'm very pleased with the recent favorable judgment by the United States District Court, which endorses our commitment to responsible innovation and protecting our intellectual property from certain actions by one of our competitors, TCS.

Before concluding, I want to express my gratitude to our global team who diligently worked with customers that were recently impacted by the CrowdStrike software update that led to widespread disruption. Our response demonstrated that our dedication to our customers goes well beyond transforming their operations. We assembled a dedicated team that quickly implemented a recovery plan, leveraging our extensive experience with similar incidents.

Our technicians worked directly with end customers, guiding them through complex restoration processes to keep customers' operations up and running. For example, our efforts enabled a regional airline carrier, a global petroleum company, a worldwide logistics company, and a global manufacturing company to have their operations restored shortly after the event, minimizing disruption.

To conclude, we believe our greatest near-term opportunities will come from being much more effective across the life cycle of capturing new business, solutioning it correctly, incorporating proper pricing and creating better economic models for renewals.

Our success will be defined by our ability to execute against these opportunities. And I am determined to drive the transformation of our company as quickly as possible.

Now let me turn the call over to Rob to review our first quarter results.

[Robert Del Bene, executive]

Thank you, Raul, and good afternoon, everyone.

Today, I'll review details of our first quarter results and then provide you with our latest thinking regarding our full year fiscal 2025 outlook, along with our view for the second quarter.

Please note that the additional financial information we have historically provided as an appendix to our slide presentation is now being made available as an Excel file for your convenience. You can download it from the IR section of DXC's website immediately following our call.

Additionally, given our leadership changes Raul discussed, we have reassessed how we will report results. Moving forward, we will continue to disclose revenue, book-to-bill ratios, and profitability by our 2 segments: Global Business Services and Global Infrastructure Services.

Within GBS, we will now report revenue and book-to-bill ratios for Consulting & Engineering Services as well as for our Insurance Software & BPS offerings. Under GIS, we will now disclose revenue and book-to-bill ratios for Cloud, ITO & Security and our Modern Workplace offerings.

And now on to our results. Total revenue of $3.2 billion declined 4% year-over-year on an organic basis, which was better than our expectation. GBS revenue, which now represents 52% of total revenue, increased 1% year-over-year on an organic basis. GIS revenue, which represents 48% of total revenue, declined 9% year-over-year.

With continued pressure to customer discretionary spending and our more selective approach to new deals, our book-to-bill ratio for the quarter was 0.77 with a trailing 12-month book-to-bill ratio of 0.88, declining modestly from last quarter.

Adjusted EBIT margin expanded 40 basis points year-over-year to 6.9%. This better-than-anticipated performance was largely due to top line results ahead of our expectations.

Gross margin for the first quarter was 21.9%, expanding 80 basis points year-over-year, largely driven by disciplined cost management within GIS.

SG&A as a percentage of revenue was 9.1%, flat year-over-year, largely due to prudent spending management.

Non-GAAP net income attributable to DXC shareholders was $2 million year-over-year.

Non-GAAP EPS was $0.74, up 17% from $0.63 in the first quarter of last year. The $0.11 increase was primarily related to the benefit from lower outstanding shares.

Free cash flow for the quarter was $45 million.

Now turning to our segment results. For GBS, organic revenue increased 1% year-over-year largely driven by mid-single-digit growth of our Insurance Software & BPS business. Profit margin declined 50 basis points year-over-year to 10.8%. The changes we are making to the operating model of our CES business, including the restructuring actions we are targeting, are expected to provide future margin growth.

Consulting & Engineering Services declined 1% year-over-year on an organic basis, consistent with the trends we saw last quarter. The book-to-bill ratio of 0.88 was impacted by the ongoing short-term project pressures reflected in both our revenue and bookings for the quarter. The trailing 12-month book-to-bill ratio was stable quarter-over-quarter at 0.96.

Insurance & Horizontal BPS grew 5% year-over-year on an organic basis. Embedded in this performance is our core Insurance & Software business, representing approximately 75% of the total, which was up 6% organically year-over-year, continuing the strong momentum we saw during 2024. The book-to-bill ratio was 0.65. As a reminder, bookings in this business tend to be lumpy with significant variation quarter to quarter.

Moving to GIS. Revenue declined 9% year-over-year on an organic basis, in line with recent trends and ahead of our expectations. While resale revenues performed as expected, down 28% year-over-year, services revenue declined 8% helped by higher-than-anticipated in-quarter volumes.

Profit margin expanded over 2 points to 7.3%. This performance was largely driven by better resource management as we embedded automation in our delivery processes and take disciplined cost actions to optimize our data centers and networks. The lower mix of resale revenue also contributed to the year-to-year margin improvement.

Within GIS, Cloud, ITO & Security declined 8% year-over-year on an organic basis with resale revenue down 24%, impacting the total growth rate by about 1 point. The book-to-bill ratio was 0.67 primarily attributed to the ongoing challenging ITO market, coupled with our disciplined approach to new deals. The trailing 12-month book-to-bill ratio equaled 0.76.

Modern Workplace was down 14% year-over-year on an organic basis with a book-to-bill ratio of 0.80 and trailing 12-month ratio of 0.92, consistent with last quarter.

Turning to our cash flows and balance sheet. During the quarter, our free cash flow, defined as operating cash flow less CapEx, equaled $45 million compared to a use of $75 million in the same period last year. This improvement was primarily driven by a stronger working capital position as we saw a sequential improvement in our DSO and as well as lower CapEx spending.

Capital expenditures equaled $193 million, down $9 million year-over-year; and new lease originations were $7 million, down $37 million from last year. Taken together, cap expenditures and lease originations declined $46 million year-over-year and as a percent of revenue improved to 6.2% compared to 7.1% for the fiscal first quarter of 2024.

We began to execute upon the incremental $250 million of restructuring initiatives we announced last quarter. While we saw a minimal impact to our cash flow in the first quarter, we expect the program will ramp throughout the year with the majority of spending being back-half loaded.

Our balance sheet remains strong with cash and cash equivalents totaling $1.3 billion. As planned, we incurred a modest increase to our debt levels to $4.1 billion due to first quarter seasonal needs. With our cash flow generation and existing cash balances, we have ample flexibility to execute on our capital allocation plan and invest in our business. As a reminder, our capital allocation plans for the year prioritize $250 million of incremental restructuring as well as reducing our debt levels, which includes minimizing new financial lease originations that equaled $185 million during fiscal year 2024.

Now let me provide you with our latest thinking on our full year outlook. We continue to expect total revenue to decline between 6% to 4% year-over-year on an organic basis. With a better-than-expected start to the year, we remain confident in our ability to achieve our full year revenue outlook.

For GBS, we are maintaining our full year outlook calling for slightly positive top line growth. We now expect first half revenues to be roughly flat year-over-year, improving to low single-digit growth in the second half given our pipeline and stable conversion rates.

We continue to anticipate GIS full year top line to decline at low double-digit rates given expected lower resale revenues and deal selectivity.

Based on first quarter performance and with our updated view of projected cost savings initiatives, we now expect full year adjusted EBIT margin to be in the range of 6.5% to 7% compared to our prior outlook of 6.0% to 7.0%.

We now expect a full year non-GAAP effective tax rate of approximately 32% compared to our prior expectation of approximately 30%. This increase is largely due to an updated mix of jurisdictional income.

Full year non-GAAP diluted EPS is now anticipated to be between $2.75 and $3 compared to our prior outlook of $2.50 to $3. This update is driven primarily by the increase of our adjusted EBIT margin outlook.

Free cash flow for the year is now expected to be approximately $450 million, an increase from our prior view of around $400 million. This improved outlook is largely due to the increase of our adjusted EBIT outlook as well as better working capital performance for the year. We still expect the increased level of restructuring year-over-year to be about $250 million skewed to the second half of the year.

As a reminder, our year-over-year free cash flow expectation is largely driven by the incremental $250 million restructuring program as well as our efforts to minimize new financial lease originations that expect to lead to higher levels of capital expenditures compared to fiscal 2024. Absent these elements, our free cash flow for fiscal 2025 would be more in line with last year's performance.

And now for the second quarter, we expect total organic revenue to decline 6.5% to 5.5% year-over-year. This decline from the Q1 growth rate is based on our backlog and the projected view of current contract volume activity. We anticipate adjusted EBIT margins in the range of 6.5% to 7%; and finally, non-GAAP diluted EPS of $0.70 to $0.75.

And with that, let me turn the call back over to Raul for some closing remarks.

[Raul Fernandez, executive]

Thank you, Rob. Before I turn it over for questions, I would like to briefly comment on the recent speculative reporting in the press. It is our policy not to comment on market rumors, and we do not intend to break from that policy today.

As we have been discussing, we are 100% focused on building a great company by executing against our enhanced operating model that highlights our differentiated global industry-focused offering and aligns our sales and account organization by geographic markets. Our commitment will help drive more business outcomes and deliver significant value for our customers. I remain confident we will see continued progress of our efforts in our results during the coming quarters.

And we'll now turn it over for your questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan.

[Tien-Tsin Huang, analyst]

Good quarter here. I'll ask on the revenue with that coming in ahead of expectations. Can you give a little more detail on where the sources of upside came from? And was there any pull forward? Because this look like revenue does assume some deterioration here in the fiscal second quarter, so anything you can share would be terrific.

[Robert Del Bene, executive]

Yes. Tien-Tsin, it's Rob. Thanks for the question. The strength came primarily in our ITO -- versus expectation came primarily in our ITO business, and it really came from in-quarter volume activity in our client base. And that increase in volume activity was fairly widespread, so it didn't come from a concentrated short list of customers. So that's what really drove the outperformance relative to our original guidance.

Now we haven't factored an increased activity in the second quarter in our outlook. So when you come to 1Q to 2Q comparisons, that increase, we're not counting on a repeat of that increase in the second quarter.

[Tien-Tsin Huang, analyst]

Got it. No, I think that's prudent. My follow-up then, if you don't mind, just the disciplined approach to new deals. I know that you talked about that for a little bit. I'm just curious, the discipline here, I'm sure it's more than just price. Is there a need to then lower your delivery cost in order to be able to be more available to attack some of these deals? I know there's a talk, I think, Raul, you mentioned optimizing the global delivery network. I'm just curious if those are all related.

[Raul Fernandez, executive]

Yes. Look, I think at a macro level, the headline is a relentless focus on all aspects of execution. And that starts with existing customers because I think one of the things that I've continued to appreciate more and more as I spend more and more time with customers that have been with us 5, 10, 15, 20 years plus is that we have an incredible beachhead. Our work is valued, our professionals are very valued, and that is a great base to build off of.

So when you think about what we've been doing over the last quarter, it's been focusing on all aspects of execution from existing customers and getting those renewals and having line of sight on those renewals and making sure the economics of those renewals are good for both sides, and that's both pricing as well as cost. It's also a focus on net new deals, new logos. The number of new logos in the pipeline is at a level that I hadn't seen before. The pipeline is growing very nicely.

So the focus on execution from pre-solutioning to sales, to delivery, to the client management, you can weave in updated compensation metrics, as I mentioned in my first few calls, it's a lot of little things that are basic that weren't being done at the right level, and we're beginning to take them up to the right level. We are not done. There's a lot more work ahead, but the good news is that we're seeing early results and early returns on it.

[Operator]

Our next question comes from the line of Bryan Bergin from Cowen.

[Zachary Ajzenman, analyst]

This is Zach Ajzenman on for Bryan. Maybe just picking up on that last point, Raul, the early self-help focus areas that you've put into play here, can you maybe just update us on some of the near-term initiatives that the company has prioritized? And where have you seen the most progression to date? And where do you continue to see more room for improvement?

[Raul Fernandez, executive]

Well, room for improvement, everywhere. We're nowhere near getting through the punch list of kind of operational, I won't even call it, excellence. I'd call it getting to a level of operational discipline and execution that's commensurate with a good company. And so it's a lot of small initiatives but with the follow-up and the accountability that just wasn't there in the past and it's here now, both with our existing team that was here plus the new teammates that we've brought in. But it really is balanced. It's existing delivery, existing global delivery networks and locations where we are servicing existing clients, where we're investing to bring in new talent.

The mix of talent, we talked a little bit about having, are obviously technology talent, which is very appreciated, but also having a better fit or a better combination with industry knowledge. We have really deep industry expertise in various areas, and our Consulting & Engineering group is continuing to build up those capabilities.

And then frankly, just to step back a second, I talked a lot about storytelling on the first few calls in marketing. We've got a world-class head of marketing that we recruited who has been here a couple of months but having a huge impact. So it really is across the board, taking it up a level in terms of just operational execution. And again, early results are good but there's still a long way to go across all those areas.

[Zachary Ajzenman, analyst]

Got it. And on that Consulting & Engineering piece within GBS, what can you say about what you're seeing more recently in terms of stabilization? Or is there's still some further deterioration at play here? And then within that, any noteworthy vertical or geo call-out in either direction? Just kind of curious what will give clients the confidence to begin releasing spend that has been delayed and deferred in that area within services.

[Raul Fernandez, executive]

Yes. Look, I think it differs vertical by vertical, industry group by industry group. For us, from a business execution, our ability to, as you said, self-help and get better with everything that we've got in front of us is going to have a bigger impact than the overall environment. The overall environment obviously affects us all, but we have so much upside based on the relentless focus on getting better at execution, in all aspects of execution, that is a much bigger factor by multiples than the spend environment.

I think the spend environment, again, from my checking in with customers and hearing other companies and their comments, and talking to other CEOs, I think it's as you heard, right, it's tepid. But we do have some early signs that some of our areas where we have, again, invested in are beginning to show uptick above and beyond where the market is.

Let me turn it over to Rob.

[Robert Del Bene, executive]

Yes, Zach, so there's a couple of green shoots. We're undergoing a pretty significant operating model enhancement in our CES business. And as Raul described in his opening remarks, we're focused on establishing practices and industry verticals. So we've invested in resources in CES to help drive this change in the marketplace. And that's the primary reason the margins declined a little bit year-to-year in the first quarter for GBS.

But as we progress and organize around these verticals, we're shifting from custom applications, which is 2/3 of that business, to enterprise applications in those specific industry verticals. And so in those new practice areas, we're beginning to see green shoots in terms of pipeline growth; and in terms of revenue growth, in the first quarter, in certain areas like data and AI and SAP and other custom applications, other enterprise applications rather, than Howard's team is focusing on. It's early days but we are seeing benefits starting to accrue.

[Operator]

Our next question comes from the line of Jamie Friedman from Susquehanna.

[James Friedman, analyst]

I was hoping to get some perspective specifically on the GIS margin. It's up 210 basis points year-over-year. And I'm wondering, Raul, how you're prioritizing margin expansion full stop relative to revenue growth or relative to anything. Is that the North Star of this? And do you have any perspective on, and some of your competitors disclosed this, the margin on renewal or on new signings. How much of the margin expansion this year is due to leaving contracts that are losing money? Any inputs that you can unpack on the GIS margin would be helpful.

[Raul Fernandez, executive]

Sure. Look, it is holistic. There isn't one magic lever that you can pull on this front. It is, first of all, doing an analysis for your existing installed base and your renewals, where you're at, at the gross and net level, are the utilization numbers correct, is the labor mix correct, and then looking at other third-party costs like software pass-throughs, et cetera. But then it's being smart about how you're pricing both the renewal and how you're pricing net new work to factor your offering, your value-add, et cetera. So it's not one lever that I can point to.

I think by each business unit, and Rob will give a little bit more color commentary, they have taken a bottoms-up approach to looking at their business, looking at their customers, looking at their profitability, looking at their mix of talent. And by deal, by customer, by net new opportunity, they're making smart business decisions and pricing things and then competing effectively to be able to show the differentiated value that we bring to the table.

So it is holistic from not just numeric and spreadsheet but also are we telling the story correctly so that we can get the value that we're actually delivering. And again, early returns are that it's beginning to get better across the board in the complete life cycle.

[Robert Del Bene, executive]

Yes. And so Jamie, it's Rob. I'll just add that the team has done a very nice job of driving automation into the accounts so they're becoming more labor efficient, if you will. And that is a sustainable change I think we'll continue to see driven down real estate costs, networking costs, so very good job on cost management.

On your point on are the margins getting any better in new deals, I have seen an improvement in signed margins. But I will say the bulk of that, the important thing is delivering to those margins. So a maniacal focus on executing the automation plays that we have, we've already started enabling. Focus on driving down the fixed cost structure is paramount and delivering with quality and not incurring SLA penalties. I have to say the team is at an all-time low in terms of delivery SLA penalties, which means they're meeting customer commitments at amazingly high rates. So they're delivering with quality, improving costs, driving automation. All of the above led to the 2 points in the first quarter. So the trend is positive.

[James Friedman, analyst]

And for my follow-up, Rob, sorry if I missed it, but are you guiding margins at a segment level for the year? At least if you could share a trajectory, that would be helpful.

[Robert Del Bene, executive]

No, we haven't guided margins at a segment level, but I think we'll see stability in margins in both GBS and GIS.

[Operator]

Our next question comes from Jason Kupferberg from Bank of America.

[Jason Kupferberg, analyst]

Just wanted to come back on the book-to-bill. I know you talked about the soft discretionary spending environment, and I think it's good to see you're being more selective on some of the large deals that are out there. But can you give us a sense on how you're thinking about you're book-to-bill evolving as you go through the fiscal year? We know it can be lumpy in any given quarter, but...

[Raul Fernandez, executive]

Yes. You cut out a little bit, but I think the question is color commentary on book-to-bill.

[Robert Del Bene, executive]

Yes. So Jason, let me...

[Jason Kupferberg, analyst]

Yes, sorry. Just forward-looking on book-to-bill, how you're thinking about it.

[Robert Del Bene, executive]

Yes. So let me just take that in two parts, cover GBS and then GIS. In GBS, our book-to-bill in the first quarter was down low single digits, low to mid-single digits, and that's really a reflection of the CES market, right? And the book-to-bill of the trailing 12 months is consistent. We had all of that factored into our revenue forecast, so that was in line with expectation and our outlooks.

And as Raul mentioned earlier, our pipelines are improving and our conversion rates are stable. So I would expect to see, really in that business, in CES, it will really depend on the marketplace. So we're not counting on extraordinarily higher conversion rates. We're not counting on an outsized improvement in bookings. We have stability, we're counting on stability, and the pipeline supports that in GBS.

In GIS, GIS has larger deals in both Modern Workplace and ITO. And there, we had a more significant year-to-year decline. It was around 30% in larger deals that occur typically in those business units. There, again, the pipelines are improving so that is very encouraging. The deals are lumpy in nature so it's hard to predict with certainty within a quarter what the bookings will be. I will say though, based on the pipeline, based on the named list of opportunities we have, we do expect bookings improvements through the rest of the year.

[Raul Fernandez, executive]

Yes. And just to reiterate, it really does start with the quality of the pipeline for net new business and the quality of the renewal pursuit. And in both cases, I've been involved in multiple very, very large pursuits, where the teams are really operating again at a new level. And so I'm encouraged that all those factors will lead to, over a 12-month period, a very, very solid book-to-bill number.

As you know, in my mind, there's book-to-bill that burns in the next 12 months and book-to-bill that burns beyond that. And I think that's a distinction that I've gotten better insight in. But I'm confident that the pipeline and our existing customers will lead to a good full year on that.

[Jason Kupferberg, analyst]

Okay. No, that's good color. And then I wanted to just come back on the new go-to-market strategy and the operating model. I mean, what's your general sense, Raul, of how long you think it will take to fully implement that across the organization?

[Raul Fernandez, executive]

Look, I think I mentioned earlier that it's a full year journey because you're putting in new processes, you're making sure those processes are followed. You're taking any sort of action if they're not being followed. But in many cases, you've got to have a couple of quarters' worth of execution to get it kind of fully right at least at an initial stage. So I expect to see continued improvement across all these metrics for all the businesses quarter over quarter. Again, it's not one lever that is going to give you a stair step. It's steady progress across all aspects that'll continue to deliver the results that we are beginning to see today.

[Operator]

Our next question comes from the line of Jonathan Lee from Guggenheim.

[Yu Lee, analyst]

It's tremendous to hear the push toward a more effective sales team. Are there any signs of or early signs of success from clients there given some of the changes you've made in the business so far?

[Raul Fernandez, executive]

Yes. I think the number of new logos that have won, with these, you've got to get permission to talk about them, so hopefully, we get more permission to talk about them more detail in the next call. I think the early signs are, at least for me, in looking at the business in detail, a lot more new logo wins than what we had traditionally, a lot better positioning on the resale, a lot better planning on the -- not resell, on the renewal, a lot better planning many, many quarters out on renewal, making sure that we're going into the renewal period in the strongest possible fashion, and then a lot of learnings. We're looking at deals that we lose and deals that we win and why.

And I think for me, it's been really encouraging because on the ones that I've gotten deep on that we've lost, it's been a lot of errors that we committed that we can fix. So it wasn't that we didn't have the talent. It wasn't that we didn't have the credentials. It was some other part of the sales process and capture. And it's been great to go back and look at the wins and losses to really fine-tune how we can continue to get better on it. So I'm very encouraged.

[Yu Lee, analyst]

Appreciate your insight there. As a follow-up, it's good to see the project discipline you're showing. How would you characterize the current pricing environment across both GIS and GBS? And how has that evolved relative to earlier this year?

[Robert Del Bene, executive]

It's Rob, Jonathan. I mean, from my perspective and the data we have, the pricing has been stable. So I haven't seen any notable changes up or down in the pricing environment. So I would just characterize it as stable.

[Operator]

[Operator Instructions] Our next question comes from the line of Rod Bourgeois from DeepDive Equity.

[Rod Bourgeois, analyst]

I want to first ask about investment plans. DXC has leaned into share buybacks over the past couple of years and reduced the share count. You're also working to improve free cash flow. So I want to ask, are you feeling that you currently have sufficient capacity to invest to be competitive in your key markets while also doing the buybacks and the free cash flow improvement? So essentially, do you have room to invest? And how much and where are you making investments in your future growth?

[Raul Fernandez, executive]

So one of the themes that I talked about early on was that, as I came in off the Board and got deep, there was a lot more to do on integration, de-duplication of back-office functions, de-duplication of legal entities, et cetera. So we are going on a very thorough and consistent plan to just operate better in a more streamlined way, taking a look at things that weren't looked at before. That's providing us the ability to reinvest some of that back into the business, back into talent, back into training, back into differentiation at an industry level, and then back into innovation, the innovation around generative AI, innovation around helping our customers get their data ready to begin to use generative AI. I think there's obviously been a lot of talk and a lot of hype around that, which is correct.

But I think one of the things that hasn't really been discussed is all of the process that currently is in place to do what companies do. The data and the cleanup of the data before you can actually begin to apply some of these generative AI tools, all that is going to fuel business for companies like ours and others in the industry. So we're very well positioned to capture that. And as you know, we've got a mix of business with our customers. Many customers, we help run their operations so we're very well positioned to look at their internal data and be a great partner and a great leader for them in the gen AI space.

But I think that across the board, with regards to your question on go-to-market, do you want to make some comments there on some investments?

[Robert Del Bene, executive]

Yes, Rod, so with the geographic market organization that we're establishing, we are investing in the markets. And as Raul mentioned, now with gen AI, we're investing in the CES practices that Howard is standing up. So those are two areas in particular that we're investing in. And our cash generation is very stable, our balance sheet is strong, so we have ample flexibility to invest as we see fit in the business.

[Rod Bourgeois, analyst]

Okay. Great. And it's encouraging on the bookings outlook, it sounds like, the operating model. Makes sense that it takes a while to get the traction but it's encouraging in the outlook for the second half.

My question on the operating model is really a clarification one. Last year, the prior leadership was pivoting to an operating model that it called offering-led operating model. And this year, you've been emphasizing this geography-oriented sales model. So I just wanted to clarify, maybe give us a little more color on the geography-oriented sales model and how it's different and, I assume, how you feel like it's better than the operating model that was being pursued last year. Can you just juxtapose the current operating model with the prior one that was being pursued?

[Raul Fernandez, executive]

Yes. I think at a macro level, at a theme level, it's tighter and better coordination and collaboration, right? You've got the resources that are located in a geography and you've got offerings and you've got other technical skills that may span across the company and can be leveraged across the company and across the globe. So it, what I would say, is a better coordination of the two. I don't think it's one or the other. It is the fact that we've got talent in different parts of the world. We have better tools now to manage that talent, to find that talent, to find the availability of that talent as they come off projects and they're available to roll on to new projects. So I would call it closer collaboration between the offerings and the geographies as kind of like what's different and why it's having a better impact now than before.

[Robert Del Bene, executive]

Yes. And Rod, just to supplement that, sales is local, right? The relationships are local, and so that's best managed in the market. So that is one fundamental shift here is having the market presence that was missing before. And then on the flip side of that, it's invest in developing offerings once, develop global pools of skills. So development, solutioning, delivery is a business unit core competency, and sales is local. So that, in a nutshell, is what we're trying to accomplish with the new model.

[Operator]

Our next question comes from Darrin Peller from Wolfe Research.

[Darrin Peller, analyst]

Just in terms of developing expertise in industry verticals for the Consulting & Engineering businesses, just help us understand where there's still room to improve and just what areas do you think you need to invest in further around that.

[Raul Fernandez, executive]

Tightening up solutions within an industry where there's some level of replicability, and that could be replicable frameworks in terms of how we walk the customer through getting the right solution defined and then replicable code bases in terms of how we build once but use often and take that IP with us and continue to invest in it on an industry-wide basis. So I think from what's left ahead of us in terms of improvement, I'd say that we've got that mix today, but that mix can be stronger and have a much bigger impact.

The other area that I've touched on in previous calls is internal collaboration and internal communication. We have a lot of upside in being better internally, collaborating, sharing case studies, sharing technical solutions, taking things that are truly innovative that are being done, and they're all around the world, and exposing them, putting a spotlight on them, and making sure that everyone is aware of them.

Every time that I go into a customer, I obviously know what we're doing for that customer. And I always take the opportunity to say, "And did you know that we also do this?" And so far, 100% of the time, they've come back and they've said, "No, I didn't know that you also do that. Can you send somebody in to help me figure out if you're a partner for us there?"

So that internal collaboration and that internal cross-selling, there's a lot of upside there that we are just beginning to scratch the surface on. And again, when you think about all the stuff, it just goes back to basic execution at a different level. So I'm excited about the runway that we've got there. And I'm excited about, again, the installed base and the ability to be able to tag in different parts of our business into great accounts.

[Darrin Peller, analyst]

Can I just ask one quick follow-up, it's just to make sure we're understanding the booking dynamics. And I understand you talked about macro volatility in GBS and timing -- I'm sorry, and timing on GIS. But I guess the shift from what was almost 100% bookings to book-to-bill last quarter in GBS down to like, I think it was 0.8 or so, 0.83, it just seems like a quick move. And so I'm curious if there's anything substantially you're seeing in one particular category or some confidence you can really work on that getting a little bit better beyond just macro, anything you can do that's in your control.

[Raul Fernandez, executive]

Yes. It goes back to the quality of the pipeline as the new team has come in, scorecard of existing bids and wins and losses being better. So I think it's both the funnel, right, how big and how qualified and how good those opportunities are, our ability to address them in a more competitive way, both clarity of the technical solution as well as pricing. And as I said, I've been working on multiple deals that are very, very, very big and the team has competed really well. And you can't talk about them until they're signed, but I'm very encouraged that starting with the funnel and then starting with better execution of opportunities that are in the funnel, that, that number will, on a full year basis, be in a good place.

And don't forget, like some of these deals in parts of our business can be 5-year deals, right? So the book-to-bill, because it can be multiyear like that and because it can be so big, the clarity on the next 12 months really is you need more than 1 quarter to really look at it. So that's why I'm confident that we're in a good place there.

[Roger Sachs, executive]

Yes. And Darrin, it's Roger. And you might recall in Raul's prepared remarks, he did mention a good part of the pipeline expansion was due to inflows in the CES business. So it's in the right direction from an opportunity standpoint.

[Operator]

All right. And at this time, we have no more questions in the queue so I'll turn it back over to Roger Sachs and the team.

[Roger Sachs, executive]

Great. Thank you, everybody, for joining us today, and we look forward to speaking with you again next quarter.

[Operator]

That concludes today's call. Have a pleasant day.