A month has gone by since the last earnings report for DXC Technology (DXC). Shares have added about 1.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is DXC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
DXC Technology reported first-quarter fiscal 2019 wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.
At $5.28 billion, revenues marked 1% year-over-year improvement on a reported basis but lagged the prior-year quarter figure in constant currency by 1.8%. It also missed the Zacks Consensus Estimate of $5.32 billion.
The company reported non-GAAP earnings of $1.93 per share, which surpassed the Zacks Consensus Estimate of $1.75 and increased from $1.23 reported a year ago.
The quarterly results were mainly driven by impressive growth in the cloud business. Additionally, discontinuation of the U.S Public Sector business, 3.7% reduction in headcount and elimination of extra 700,000 square feet of office space contributed significantly to the bottom line.
Segment wise, pro forma revenues from Global Business Services (GBS) fell 2.4% on a year-over-year basis to $2.2 billion owing to the completion of HPE and HPI integration projects and other application contracts.
However, 14% growth in enterprise and cloud applications, along with 18% rise in analytics was a tailwind.
Global Infrastructure Services (GIS) revenues during the fiscal first quarter came in at $3.1 billion, marking 3.4% year-over-year growth on a pro forma combined company basis. The improvement was mainly driven by growth in the company’s cloud infrastructure, security and mobility and workplace.
The ITO business continued to decline but was mitigated by the company’s constant growth driving efforts.
Management noted that demand for multi-cloud solutions resulted in a 42% growth in the company’s cloud business. Improvement in enterprise spending on cloud is driving its Digital revenues which grew 21% in the quarter.
Adjusted EBIT margin was 15.2% compared with 10.9% reported in the prior-year quarter. The robust improvement was mainly driven by the ongoing cost synergies from CSC and HPE’s Enterprise Services division merger.
Non-GAAP income from continuing operations was $564 million during the quarter compared with $369 million reported in the year-earlier period, up 366 basis points.
Balance Sheet and Other Financial Metrics
The company exited the reported quarter with $2.58 billion in cash and cash equivalents compared with $2.59 billion recorded in the previous quarter. Long-term debt balance (net of current maturities) was $4.75 billion.
Net cash provided by operating activities during the fiscal first quarter came in at $473 million compared with $519 million in the prior-year quarter. Adjusted free cash flow for the quarter came in at $321 million.
During the first quarter, the company returned $375 million to shareholders through share buyback and dividend payments.
Fiscal 2019 Outlook
The company issued fiscal 2019 outlook. For the fiscal, it projects revenues of $21.5-$22 billion. The company anticipates non-GAAP earnings per share between $7.75 and $8.15.
DXC Technology is also quite optimistic about the acquisition of Molina Medicaid Solutions, a Medicaid management information systems business, which was announced in the reported quarter. Moreover, the recent collaboration with Amazon Web Services on a new strategic DXC AWS integrated practice looks promising.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, DXC has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, DXC has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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