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Why Is DXC (DXC) Up 4.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for DXC Technology (DXC). Shares have added about 4.7% 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 Reports Mixed Q4 Results

DXC Technology reported fourth-quarter fiscal 2019 results wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.

The company delivered non-GAAP earnings of $2.19 per share, which surpassed the consensus estimate of $2.07. However, the figure declined from $2.28 reported a year ago.

At $5.28 billion, revenues lagged the prior-year quarterly number by 5.4% and also slipped 1% on constant currency basis. Moreover, the metric fell short of the Zacks Consensus Estimate of $5.31 billion.

The quarterly 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 7.2% on a year-over-year basis to $2.19 billion, reflecting downsides in the traditional applications business including the completion of several contracts.

Accelerated cloud adoption also shifted revenues away from the traditional business. This is because the cloud offers more flexibility with workloads and eliminates the need to use services associated with upgrading applications.

Notably, during the quarter, the company won $2.86 billion worth of new business awards for the GBS segment.

Global Infrastructure Services revenues during the fiscal fourth quarter came in at $3.09 billion, declining 4.2% yearoveryear.

During the quarter, the company won $2.97 billion worth of new business awards for the GBS segment.

Digital revenues jumped 22% year over year at 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.

Notably, about 2,000 people were hired in the fiscal fourth quarter to enhance DXC Technology’s digital capabilities. The company inked a deal with DreamWorks Animation to develop a cloud-based pipeline for digital content creation.

Digital pipeline soared 50% year over year, backed by strong demand for digital solutions.

Cloud infrastructure business increased 25% at constant currency. Moreover, security business inched up 1.3% year over year on constant currency basis due to weakness in demand from Northern Europe and the United Kingdom. Asia and Southern Europe displayed a strong traction, partly offsetting this downtrend.

Year-over-year growth of 20% in enterprise cloud applications and consulting was another tailwind. The company won a SAP deal from a South American utility provider.

Even though analytics revenues fell 4.9% year over year in constant currency, the momentum in bookings was strong, particularly in the automotive sector.

DXC Technology continued to expand its digital transformation centers and capabilities and build on its collaborations with partners, namely AWS and Microsoft Azure.

At constant currency, industry IP and BPS revenues dipped 1.4% year over year due to softness in the company’s generic BPS business, especially in the United Kingdom and Europe where minimal clients in-sourced the work.

However, DXC Technology continues to ramp up revenues on the back of some of its large insurance BPS contracts. Bookings in the fourth quarter surged 59% year over year including a major deal with The California Department of Health Care Service.

Margins

Adjusted EBIT margin was 15.7%, flat year over year. Additional investments in the digital business include digital transformation centers, talent acquisitions and enhancements to Platform DXC and its automation program Bionix.

Non-GAAP income from continuing operations was $778 million during the quarter compared with $812 million a year ago.

Balance Sheet and Other Financial Metrics

The company exited the reported quarter with $2.9 billion in cash and cash equivalents compared with $2.5 billion sequentially. Long-term debt balance (net of current maturities) was $5.5 billion.

Adjusted free cash flow was $917 million compared with $503 million in the prior quarter.

During the fiscal fourth quarter, the company returned $142 million to shareholders through share buybacks and dividend payments.

Full-Fiscal Highlights

The company reported fiscal 2019 non-GAAP earnings of $8.34 per share compared with $6.75 reported for fiscal 2018.

Revenues generated came in at $20.75 billion, down from $21.73 billion a year ago.  

Fiscal 2020 Outlook

For fiscal 2020, DXC Technology estimates revenues of $20.7-$21.2 billion. The company expects to witness currency headwinds.

DXC Technology expects its full-fiscal non-GAAP earnings in the range $7.75-$8.50.

In the first quarter of fiscal 2020, the company expects adjusted EBIT margin to decrease sequentially to around 14%.

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.
 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -21.61% due to these changes.

VGM Scores

At this time, DXC has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. 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.

Outlook

DXC has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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