Robert Del Bene
Executive Vice President & Chief Financial Officer at DXC Technology
Mike, thanks for the introduction, and thank you for the opportunity to be part of the DXC team. In my brief time here, I've been impressed by the intense focus on delivery excellence, culture and customers. I can clearly see the strategic and long-term value of the business. I'll now provide you with a quick rundown of our first quarter performance, covering the important highlights of where we executed well and where we fell short of our expectation. Organic revenue growth for the quarter was down 3.6% with consistent year-to-year growth of the GBS segment being offset by a greater-than-expected decline in the GIS segment.
In the quarter, we were impacted by a slowdown in customer expenditures, this is mainly the resale of IT equipment, such as PCs, networking gear and servers and project work. These are projects that are typically below $5 million in size and are sold into our existing account base. The GIS segment experienced the bulk of the slowdown. The declines in resale and projects are consistent with what is taking place in the industry with the economic environment impacting spending. This, we believe, accounted for the bulk of our revenue underperformance versus expectation with half of the miss in resale and half in project revenues. In the first quarter, the revenue shortfall impacted profitability particularly since the revenue weakness was not evident until late in the quarter. While the resale revenue provides little to no bottom line profit, it does provide modest gross profit and absorb overhead. So in the short term, the underrun and resale revenue impacts bottom line profit. As communicated by Mike and the team in prior calls, the strategy over the longer term is to reduce resale revenue and focus the team on driving services revenues.
The project-based services revenue shortfall has a greater impact on profitability as the resources to deliver the higher revenue levels are already on board, reducing this excess capacity will be a focus going forward. Expenses were well managed in the quarter with spending in line with our expectations. Free cash flow for the quarter was negative $75 million, ahead of our expectations due to continued focus on working capital management including strong collections performance.
As a reminder, the first quarter is seasonally our lightest free cash flow quarter as we made previously planned annual vendor payments for software, maintenance and paid annual bonuses. Now moving to our key financial metrics. Our first quarter gross margin of 21.1% was up 10 basis points year-over-year but below our expectation due to the revenue shortfall. SG&A spending was down 6.5% year-to-year, flat as a percentage of sales. Depreciation and amortization was down 10.5%, lower by 30 basis points. Other income decreased $40 million year-to-year, lower by 90 basis points, driven by 2 factors: a $30 million decline in pension income and a lower level of gains on sales of assets, which reduced adjusted EBIT by $17 million year-over-year.
Taking this all together, adjusted EBIT margin was down by 50 basis points year-over-year, excluding pension income and asset sales, the EBIT margin is up 60 basis points year-to-year. Non-GAAP EPS was down $0.12 compared to the prior year. The EPS reduction was driven mainly by the lower pension income and a lower level of asset sales in the current year. The higher tax rate compared to the prior year reduced non-GAAP EPS by $0.08 but this was fully offset by the lower share count resulting from our ongoing share repurchase program. Now turning to our segment results. Our business mix continues to trend to our higher-margin GBS segment. As a percent of total revenue, GBS is now 49.4%, up 60 basis points sequentially. We anticipate that this trend will continue and that in a matter of quarters, the GBS segment will be the majority of our revenue. GBS grew 3.3% organically and posted a ninth consecutive quarter of organic growth which reflects the deep industry-based customer value delivered by the GBS team. The GBS profit margin declined 60 basis points year-over-year, reflecting the capacity required to continue to drive future growth and the impact of lower pension income.
Turning now to GIS. Organic revenue declined 9.9%, driven by declines in cloud infrastructure and IT and moderating declines in modern workplace. GIS profit margin decreased 130 basis points year-over-year, driven by the reductions in pension income, reduced gains on asset sales and revenue impact of clients delaying project-based services. Now let's take a closer look at our offerings. Analytics and engineering revenue performance was up 8.8% and which is slightly ahead of the fourth quarter growth rate. This is very solid performance in the current demand environment. The book-to-bill was 1.03 and trailing 12-month number is a strong 1.14x. Applications revenue declined 70 basis points, similar to the fourth quarter decline. The trailing 12-month book-to-bill is 1.06x. The application offering team has made good progress in expanding our capabilities and success in enterprise applications such as SAP and ServiceNow Insurance software BPS continued to grow with revenue up 5.1%. The insurance SaaS component of the portfolio grew 8.5% and insurance software and deep insurance industry BPS skills of our team is resonating in the market. Security had strong performance up 6.8% year-to-year. Cloud infrastructure and IT outsourcing declined 12.7%. This business was significantly impacted by a slowdown in both resale revenue and project-based services revenue. The resale reduction accounted for almost 5 points of the revenue decline, while project-based services revenue accounted for 2.5 points. Also impacting revenue is the wind down of several contracts that terminated some time ago. The headwinds from these contracts will continue throughout the year and combined with the reduced resale revenue will result in ITO in the negative high single-digit range for the remainder of the year.
Now turning to modern workplace. Based on our performance last fiscal year, we anticipated moderating declines going forward. However, like cloud infrastructure and ITO, we experienced a slowdown in project-based services that impacted revenue. We have also experienced several clients moving from a virtual model and taking work back in-house, further impacting revenue. These 2 factors drove the 5% decline in 1Q and we are anticipating continued year-on-year declines for the remainder of the year. Turning to our financial foundation, which the team has consistently managed. As anticipated 3 months ago, debt levels increased modestly in the first quarter to $4.6 billion. We continue to tightly manage restructuring and TSI expense, which was $21 million in the first quarter. Operating lease payments and the related expenses were $90 million, down $16 million year-to-year. We continue to manage new lease commitments in an effort to reduce our real estate footprint. Capital expenditures ticked up to $202 million in the first quarter, impacted by planned annual software renewals. Going forward, we expect to continue the progress that has been made lowering our capital requirements and drive free cash flow. Financing lease originations were reduced by $14 million year-to-year in the first quarter, another indication that we are lowering future commitments.
As a percentage of revenue, capital expenditures and lease originations increased to 7.3% of revenues with the increase due to the annual software renewal. Turning to capital deployment. We made continued progress on our latest $1 billion share repurchase program during the quarter. It is important to note that in aggregate, our share repurchase program will be self-funded by our full year '24 free cash flow of $800 million in additional asset sales. As you'll remember from our last earnings call, we completed our previous $1 billion share repurchase program in April. We continue to believe DXC presents an attractive valuation.
Assuming the current share price, the approximately $800 million remaining from the $1 billion program would equate to removing approximately 15% of the current outstanding shares. And please remember, this is on top of the 21% of shares we've already removed from the share base. As a result of the areas of weakness that I discussed earlier, we are lowering our guidance. We expect second quarter organic revenue to decline minus 4.5% to minus 5.5%, reflecting the continued difficult economic environment impacting resale and projects most significantly in ITO and modern workplace, adjusted EBIT margin of 6.5% to 7%, with the revenue shortfalls continuing to impact profitability. We expect to improve adjusted EBIT margins in the second half of the year as our cost optimization efforts take hold. Non-GAAP diluted EPS of $0.65 to $0.70.
Turning to our full year guidance. We are reducing our organic revenue growth to negative 3% to negative 4%. Adjusted EBIT margin is now 7% to 7.5% and impacted by the lower revenue and partially offset by cost reductions in the second half of the year. We're continuing the successful initiatives from fiscal year '23, focusing on staff and contractor optimization, reducing our real estate footprint and third-party spending. Non-GAAP diluted earnings per share of $3.15 to $3.40. Our non-GAAP EPS guidance reflects a tax rate of 29% and our expectations for the timing of our share repurchase initiative. Our non-GAAP EPS guidance does not reflect potential losses on asset sales that we are evaluating. While potential sales drive cash, they may have an associated noncash book loss. And lastly, free cash flow of $800 million, down from our previous guidance of $900 million. Now before I turn the call back over to Mike, allow me to comment on my immediate priority, which is to produce the metrics and analytics, meaning the financial headlights to drive predictable and repeatable results. I will align the financial teams to support the offering-led model and drive enhancements to our processes and systems. The offering-led model fully supported will give us transparency of financial performance and financial returns of the offerings enabling focused operational management, targeted investments, portfolio management and help us confirm our strategy.
I expect us to make steady progress with this finance transformation. And with that, let me turn the call back over to Mike for his final thoughts.
