DXC Technology (DXC) Q1 Earnings & Revenues Top Estimates

DXC Technology (NYSE:DXC) reported first-quarter fiscal 2020 results wherein both the bottom line and top line beat the Zacks Consensus Estimate. However, both the figures decreased on a year-over-year basis.

The company reported non-GAAP earnings of $1.74 per share, which surpassed the consensus estimate of $1.71. However, the figure declined from $1.93 reported a year ago.

At $4.89 billion, revenues lagged the prior-year quarter’s number by 7.4% and also slipped 4.2% on constant currency basis. However, the metric topped the Zacks Consensus Estimate of $4.87 billion.

Results were mainly driven by demand strength in the company’s digital solutions. However, continued headwinds in traditional application services business affected revenues.

Quarter in Detail

Segment wise, revenues from Global Business Services (“GBS”) fell 2.4% on a year-over-year basis to $2.16 billion, reflecting downside in the traditional applications business and 2.9% impact of foreign exchange headwinds. However, revenues from this segment increased 0.5% in constant currency on the back of continued growth in Enterprise and Cloud applications business and contributions from acquisitions.

Notably, during the quarter, the company won $2.4 billion worth of new business awards for the GBS segment.

Global Infrastructure Services (“GIS”) revenues during the fiscal first quarter came in at $2.73 billion, declining 11% year over year on a reported basis and 7.6% in constant currency. This reflects acceleration of client savings on several large contracts, and decline in IT outsourcing services business as clients shift to cloud environments. A foreign exchange headwind of 3.4% was also a dampener.

During the quarter, the company won $1.8 billion worth of new business awards for the GIS segment.

Digital revenues jumped 35% year over year in constant currency, driven by growth in enterprise and cloud applications, cloud infrastructure and digital workplace offerings. The company continued to make strategic investments in digital assets and capabilities, including increased hiring.

In June this year, the company completed the acquisition of Luxoft, boosting its position as an end-to-end mainstream IT and digital services market player.

DXC also announced a joint digital transformation practice with Microsoft’s (NASDAQ:MSFT) cloud arm, Azure.

The company is further expected to announce a strategic partnership with Alphabet’s (NASDAQ:GOOGL) Google Cloud, which will enable enterprise clients to modernize IT and integrate digital solutions capitalizing on the Google Cloud Platform.

Digital pipeline soared 80% year over year, backed by strong demand for digital solutions.

Cloud infrastructure business grew 36%.

Moreover, security business moved up 5.7% year over year driven by strength in demand from Asia and Europe. Notably, during the quarter, the company secured a multiyear deal to provide managed security services to a major European car manufacturer, using standard DXC offerings and partnered offerings with Micro Focus, Fortify and Carbon Black.

Year-over-year growth of 17.1% in enterprise cloud applications and consulting was another tailwind. Strong growth was displayed in the Americas region, particularly in practices with Microsoft, ServiceNow (NYSE:NOW) and SAP. Moreover, DXC and Salesforce jointly won a major multiyear deal with four global luxury retail brands.

Industry IP and BPS revenues witnessed 3.5% year-over-year growth driven by 7% rise in the company’s IP offerings. The acquisition of Molina drove strong demand in the U.S. state Medicaid business. Notably, during the quarter, DXC signed add-on deals with Tennessee, California and Ohio worth more than $100 million each.

Margins

Adjusted EBIT margin was 13.3%, contracting 190 basis points (bps) year over year. Additional investments in the digital business include digital transformation centers, talent acquisitions and its automation programBionix.

Non-GAAP income from continuing operations was $591 million compared with $750 million a year ago.

Balance Sheet and Other Financial Metrics

The company exited the quarter with $1.9 billion in cash and cash equivalents compared with $2.9 billion sequentially. Long-term debt balance (net of current maturities) was $7.9 billion.

Adjusted free cash flow was $72 million compared with $917 million in the prior quarter.

During the fiscal first quarter, the company returned $451 million to shareholders through share buybacks and dividend payments.

Outlook

DXC expects currency headwinds, delays in the completion of several deals and pressure from its traditional business to negatively impact fiscal 2020 results, forcing the company to cut its view.

For fiscal 2020, DXC now estimates revenues of $20.2-$20.7 billion instead of $20.7-$21.2 billion.

It expects full-fiscal non-GAAP earnings in the range $7-$7.5 per share, down from previously expected $7.75-$8.50, due to lower revenues and delays in cost savings.

The company expects lower revenues and delays in cost takeout to affect margins by about 1 point sequentially in the fiscal second quarter. However, margins are expected to improve in the second half of the fiscal through labor actions, supply chain improvements and real estate consolidation.

Moreover, with the acquisition of Luxoft, which is likely to be completed by this June end, the company expects to boost its digital business further, particularly penetrating the key markets of Eastern Europe with workforce expansion in the zone.

As the company continues to transfer client workloads out of the legacy environments, several stranded costs are cropping up. These costs are expected to be removed by the end of the fiscal third quarter.

DXC currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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