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DXC Technology (DXC) Beats on Q1 Earnings, Revenues Miss

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DXC Technology Company (DXC - Free Report) released first-quarter fiscal 2018 results on Aug 8, 2017. Notably, DXC Technology is result of the merger between Computer Sciences and Enterprise Services Division of Hewlett Packard Enterprise (HPE), which was concluded on Apr 1, 2017.

Thecompanyreported non-GAAP earnings from continuing operations of $1.59 per share, which surpassed the Zacks Consensus Estimate of $1.26 per share and also  increased on a year-over-year basis.

DXC’ Technology’s stock price history reveals that it hasn’t disappointed in a long time. In fact, shares of DXC have risen 65.4% in the past one year, outperforming the industry’s increase of meager 24.7%.

Quarter Details

Though revenues were up approximately 206.4% from the year-ago quarter to $5.913 billion, it marginally missed the Zacks Consensus Estimate of $5.954 billion. On a constant currency basis, revenues were down 4.2% year over year.

Segment-wise, revenues from Global Business Services (GBS) increased 116.1% on a year-over-year basis to $2.267 billion. Excluding the impact of purchase price accounting, on constant currency basis revenue decreased 3.8% year over year. The decline was primarily due to completion of two large government contracts in the UK. Revenues from the new business for GBS came in at $2.4 billion during the quarter.

Global Infrastructure Services (GIS) revenues during the quarter came in at $2.969 billion. On constant currency basis revenue decreased 4.7% year over year (excluding the impact of purchase price accounting), primarily due to decline in traditional infrastructure services. Revenues from new business for GIS awards came in at $3.7 billion during the quarter.

United States Public Sector (USPS) revenue was $677 million during the quarter. USPS revenue was down 3.5% year over year. USPS bookings during the quarter came in at $184 million.

The company’s non-GAAP operating income from continuing operations (excluding restructuring costs, transaction and integration-related costs and amortization of intangible assets) amounted to $619 million as compared with $243 million reported in the year-ago quarter. Operating margin came in at 10.5% as compared with 12.6%, reported in the prior-year quarter. Non-GAAP selling, general and administrative expenses amounted to $286 million compared with $539 million reported in the year-ago quarter.

Non-GAAP net income from continuing operations came in at $159 million during the quarter.

The company exited the quarter with $2.517 billion in cash and cash equivalents compared with $1.263 billion in the previous quarter. Long-term debt balance (including current portion) was $7.452 billion. Net cash provided by operating activities during the quarter came in at $534 million. Free cash during the quarter came in at $595 million.

During the quarter, the company paid $20 million as dividends and $19 million as share repurchase.

Outlook

The company provided fiscal 2018 guidance. For fiscal 2017, DXC Technology expects revenues to be in the range of $24–$24.5 billion in constant currency. The Zacks Consensus Estimate for revenues is pegged at $24.21 billion. Non-GAAP EPS is anticipated to be in the range of $6.50–$7 per share. The Zacks Consensus Estimate for earnings is pegged at $6.73 per share. Tax rate is expected to lie between 25% and 30% for fiscal 2018.

Recent activity

DXC Technology recently made its first acquisition after the merger, buying the privately-held Tribridge company. Tribridge is one of the largest independent integrators of Microsoft’s (MSFT - Free Report) Dynamics 365, which explains why this acquisition makes sense for DXC Technology.

The company intends to integrate Tribridge business under DXC Eclipse business. Per the company, “DXC Eclipse is a leading global Microsoft Gold Partner delivering Microsoft Dynamics 365, ERP, CRM, business process, analytics, and collaboration solutions on premise and in the cloud.”

Our Take

The company reported mixed first-quarter fiscal 2018 results, where in the bottom line surpassed the Zacks Consensus Estimate while the top line missed the same. The company also provided a modest guidance for fiscal 2018.

Post-merger, DXC Technology has become the world’s second largest end-to-end IT services providing company after Accenture plc (ACN - Free Report) . We believe that the merger has opened up avenues of growth for the combined company. Following the footsteps of Computer Sciences, DXC Technology may be seen making strategic acquisitions to enhance portfolio, which is likely drive growth over the long run.

DXC Technology has also been making strategic acquisitions, such as UXC and Xchanging, to strengthen portfolio, which is likely to drive growth in the long haul.

Nonetheless, the market is very competitive with companies like CACI International Inc. (CACI - Free Report) and Accenture, which could hurt DXC Technology’s top and bottom lines. Additionally, a challenging macroeconomic situation and uncertain IT spending environment remain headwinds.

Currently, DXC carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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