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DXC Technology to Post (DXC) Q3 Earnings: What's in Store?

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DXC Technology Company (DXC - Free Report) is set to report third-quarter fiscal 2018 results on Feb 8. Notably, DXC Technology is a result of the merger between Computer Sciences Corporation (CSC) and Enterprise Services Division of Hewlett Packard Enterprise (HPE - Free Report) , which was closed on Apr 1, 2017.

So, this will be the second quarterly result of the combined business. Let’s see how things are shaping up for this announcement.

What to Expect?

The Zacks Consensus Estimate for the quarter under review is pegged at $1.99, representing a year-over-year increase of a whopping 145.7%. We note that the Zacks Consensus Estimate has been revised upward over the past 30 days. Additionally, analysts polled by Zacks project revenues of roughly $6.23 billion, up a massive 224.9% from the year-ago quarter.

DXC Technology’s fiscal third-quarter result is likely to benefit from CSC and HPE’s Enterprise Services business merger, strategic partnerships and acquisitions. However, escalating interest expenses due to increased debt burden might dampen the company’s profitability, offsetting the benefit of higher revenues to some extent.

DXC Technology Company. Price and EPS Surprise

Let’s now discuss the aforementioned factors in detail.

Combined Entities Opened Up Avenues of Growth

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 the merger has opened up avenues of growth for the combined company. The 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.

It is anticipated that the combined entity will generate revenues of approximately $26 billion. Also, DXC Technology is projected to generate cost synergies worth $1 billion during the first year and record a run rate of $1.5 billion at the end of the same.

Notably, the company had registered a 229% surge in the fiscal second-quarter revenues chiefly benefiting from the merger. The analysts covering the stock anticipate that the merger benefit will drive DXC Technology’s fiscal third-quarter top-line performance as well.

Enhancing Customer Base with Partnerships

The company’s continued focus on making strategic partnerships to expand its share in the cloud-computing market is likely to aid fiscal third-quarter results. The company, in August 2017, collaborated with VMware (VMW - Free Report) and launched the latest 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 and HCL. It has also joined forces with Amazon to develop cloud-based solutions for enterprise and public-sector clients. In addition, it has entered into cloud-partnership agreement with IBM and SAP as well. These alliances have increased the company’s access to advanced technology, backed innovative product development and creation of new markets.

Furthermore, 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.

Buyouts to Generate Additional Revenues

Following the footsteps of CSC, DXC Technology is also focusing on acquisitions to expedite growth. Since its formation, the company has announced two acquisitions — Tribridge and Logicalis SMC. While it completed the Tribridge buyout in July last year, the Logicalis SMC acquisition is still in process.

Tribridge is one of the largest independent integrators of Microsoft’s Dynamics 365, which explains why this acquisition makes sense for DXC Technology. Therefore, this buyout is likely to benefit the company’s to-be-reported quarter results in the form of increased customer base and additional revenues.

Rising Interest Costs to Dent Profitability

Flaring up interest expenses due to increased debt burden might dampen the company’s profitability. As of Sep 30, 2017, DXC has a total long-term debt (excluding current portion) of $6.33 billion, while it paid $154 million as interest expenses during the first half of fiscal 2018, which was 185% higher than the first half of fiscal 2017 tally.

The company’s long-term outstanding debt has significantly increased this 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.

Currently, DXC Technology carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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