DXC Technology (DXC) To Post Q4 Earnings: A Beat In Store?

DXC Technology Company (NYSE:DXC) is set to report fourth-quarter fiscal 2018 results on May 24, after the market closes. The question lingering in investors’ minds is whether or not this IT services company will be able to post a positive earnings surprise in the quarter.

Notably, DXC Technology is a result of the merger between Computer Sciences Corporation (“CSC”) and Enterprise Services Division of Hewlett Packard Enterprise (NYSE:HPE) , which was closed on Apr 1, 2017. So, this will be the fourth quarterly result of the combined business. Let’s see how things are shaping up for this announcement.

What the Zacks Model Unveils?

Our proven model shows that DXC Technology is likely to beat on earnings this quarter as it possesses the two key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

DXC Technology carries a Zacks Rank of 2 and has an Earnings ESP of +1.06%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for the fiscal fourth-quarter earnings is pegged at $2.20, which indicates a massive 91.3% year-over-year jump. The Zacks Consensus Estimate has remained unchanged, over the past 30 days. Additionally, analysts polled by Zacks project revenues of roughly $6.12 billion, up approximately 224% from the year-ago quarter.

DXC Technology Company. Price and EPS Surprise

Synergies from the merger of CSC and HPE’s Enterprise Services business will likely have contributed to the company’s top and bottom-line results. Apart from this, strategic partnerships and acquisitions are anticipated to have brought in additional revenues in the to-be-reported quarter. However, escalating interest expenses resulting from increased debt burden might have dampened the company’s profitability, offsetting the benefit of higher revenues to some extent.

Let’s now discuss the aforementioned factors in detail.

Merger Synergies — The Key Growth Catalyst

The above-mentioned merger has combined Computer Sciences’ strength in insurance, healthcare, and financial services with HPE’s expertise in industries like transportation, pharma, technology, media and telecom. Post merger, DXC Technology has become the world’s second largest end-to-end IT services providing company after Accenture plc (NYSE:ACN) . We believe the merger has opened up avenues of growth for the combined company.

Per the Zacks Consensus Estimate, the combined entity will have generated revenues of more than $24 billion in fiscal 2018. Also, DXC Technology is projected to generate cost synergies worth $1 billion during the first fiscal and record a run rate of $1.5 billion at the end of the same.

Notably, the company registered more than 200% surge in revenues in all the preceding three quarters, mainly benefiting from the merger. The analysts covering the stock anticipate that the merger benefit will drive DXC Technology’s fiscal fourth-quarter top-line performance as well.

Additional Revenues From Acquisitions

Following the footsteps of CSC, DXC Technology is also focusing on acquisitions to expedite growth. Since its formation, the company has announced six acquisitions — Tribridge, Logicalis SMC, Racemi, M-Power, eBECS and Stable37.

Therefore, the buyout is likely to benefit the company’s soon-to-be-reported quarter results in the form of increased customer base and additional revenues.

Partnerships Enhancing Customer Base

Going ahead, the company’s continued focus on making strategic partnerships to expand its share in the cloud-computing market is likely to aid the fiscal fourth-quarter results. The company, in August 2017, collaborated with VMware (NYSE:VMW) and launched DXC Managed Cloud Services, supported by VMware's next-generation hybrid-cloud platform.

It should be noted that the company has strategic partnerships with the likes of AT&T (NYSE:T) and HCL. It has also joined forces with Amazon (NASDAQ:AMZN) to develop cloud-based solutions for enterprise and public-sector clients. In addition, it has entered into cloud-partnership agreement with IBM (NYSE:IBM) and SAP, as well. These alliances have increased its access to new technology, backed innovative product development and creation of new markets.

Also, it has enabled clients to leverage the benefits of mobility, social networking and big data facilities. This, in turn, is likely to expand DXC Technology’s customer base and help garner additional revenues.

Escalating Interest Costs to Impede Profitability

Rising interest expenses due to increased debt burden might dampen the company’s profitability. As of Dec 31, 2017, DXC Technology has a total long-term debt (excluding current portion) of $6.37 billion, while it had paid $231 million as interest expenses during the first three quarters of fiscal 2018, which was 166% higher than the previous fiscal-period tally.

The company’s long-term outstanding debt significantly increased last fiscal. CSC, prior to the completion of its merger with HPE’s Enterprise Services business, had taken additional debt. This increased DXC Technology’s total long-term liability, thereby escalating its interest-cost burden. Any elevation in interest cost will have a negative impact on the company’s bottom-line results.

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