DXC Technology (DXC) Q3 Earnings Surpass Estimates, Down Y/Y

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

The company reported non-GAAP earnings of $1.25 per share, which beat the consensus mark by 15.74%. The figure, however, declined from $2.23 reported a year ago.

At $5.02 billion, revenues fell short of the prior-year quarter’s number by 3% but topped the Zacks Consensus Estimate by 2.4%.

Continued decline in traditional infrastructure business and currency headwinds affected revenues.

Quarter in Detail

Segment-wise, revenues from Global Business Services (“GBS”) grew 8.8% on a year-over-year basis to $2.17 billion, reflecting strength in the Luxoft business. Contribution from Luxoft more than offset foreign exchange headwinds, which affected revenues by 1.1%.

During the quarter, the company won $2.5 billion worth of new business awards for the GBS segment.

Global Infrastructure Services (“GIS”) revenues during the fiscal third quarter came in at $2.66 billion, down 11.5% year over year, reflecting a decline in DXC Technology’s traditional infrastructure business. A foreign exchange impact of 0.9% was also a dampener.

During the quarter, the company won $2.8 billion worth of new business awards for the GIS segment.

In horizontal BPS, and Workplace and Mobility, results were driven by new contracts with new customers and renewed contracts with existing customers. However, several customers insourced the work carried out by DXC Technology, leading to a drop in customers.

Application and Industry IP witnessed 0.4% year-over-year growth.

Margins

Adjusted EBIT margin was 10.5%, contracting 570 basis points year over year.

Non-GAAP income from continuing operations was $468 million compared with $786 million a year ago.

Balance Sheet and Other Financial Metrics

The company exited the quarter with $2.56 billion in cash and cash equivalents compared with $2.88 billion in the previous quarter. Long-term debt balance (net of current maturities) was $7.32 billion.

Cash flow from operating activities came in at $477 billion. Adjusted free cash flow was $397 million compared with $739 million in the prior quarter.

During the fiscal third quarter, the company returned $140 million to shareholders through share buybacks and dividend payouts.

Outlook

For fiscal 2020, DXC Technology continues to expect revenues of $19.5-$19.8 billion.

It expects fiscal non-GAAP earnings of $5.25-$5.75 per share.

Free cash flow in the fourth quarter of 2020 will reflect two significant cash outflows — one to cover the company’s annual 401-K match and the other for a contract settlement payment that is expected to be recovered in fiscal 2021 from insurance coverage. Free cash flow guidance also indicates more conservative working capital and functions for the fourth quarter.

Zacks Rank & Key Picks

The company currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader technology sector are CEVA, Inc. (NASDAQ:CEVA) , SYNNEX (NYSE:SNX) and Silicon Motion Technology Corporation (NASDAQ:SIMO) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for CEVA, SYNNEX and Silicon Motion is currently pegged at 20%, 10.37% and 7%, respectively.

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