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DXC Technology (DXC) Q3 Earnings Top, Revenues Miss Estimates

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DXC Technology Company (DXC - Free Report) reported mixed third-quarter fiscal 2018 results, wherein non-GAAP earnings came ahead of the Zacks Consensus Estimate but revenues fell short of the same. However, on a year-over-year basis, both marked a robust improvement mainly driven by the merger of the Computer Sciences Corporation and Enterprise Services Division of Hewlett Packard Enterprise (HPE - Free Report) .

Notably, in 2016 Hewlett Packard Enterprise entered into a spin-off-merger agreement with Computer Sciences Corporation, wherein it agreed to spin-off its Enterprise Services division and merge the same with the latter’s businesses. The transaction closed on Apr 1, 2017, and the new entity was named DXC Technology.

Coming back to the fiscal third-quarter results, the company reported non-GAAP earnings of $2.15 per share, which surpassed the Zacks Consensus Estimate of $1.99 and also increased on a year-over-year basis.

DXC Technology Company. Price, Consensus and EPS Surprise

Quarter Details

Revenues in the quarter soared a whopping 222.7% from the year-ago period to $6.186 billion. However, excluding the impact of purchase price accounting and last year’s one-time contract reset United States Public Sector (USPS), revenues were down 4%. On a constant-currency basis, revenues fell 5.9% year over year. DXC Technology’s revenues also fell short of the Zacks Consensus Estimate of $6.228 billion.

Segment wise, revenues from Global Business Services (GBS) surged a massive 121.3% on a year-over-year basis to $2.315 billion. Excluding the impact of purchase price accounting, on constant currency basis, revenues decreased 6.6% year over year. The decline was primarily due to weak performance of traditional application services which was partially offset by growth at Enterprise Applications and Business Process Services businesses. Revenues from the new business for GBS came in at $3.3 billion during the reported quarter.

Global Infrastructure Services (GIS) revenues during the fiscal third quarter came in at $3.145 billion as compared with $871 million reported in the year-ago quarter. On constant currency basis, revenues dropped 6.8% 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 $2.2 billion during the quarter.

USPS revenues came in at $726 million during the quarter, however were down 11.9% year over year (excluding the impact of purchase price accounting). Revenues from new business for USPS awards came in at $527 million in the quarter.

The company’s adjusted operating income from continuing operations (excluding one-time items) amounted to $927 million as compared with $626 million reported in the year-ago quarter. Adjusted operating margin came in at 15% as compared with 9.5% reported in the prior-year quarter.

Adjusted net income from continuing operations came in at $622 million during the quarter as compared with $416 million reported in the year-earlier period.

The company exited the quarter with $2.926 billion in cash and cash equivalents compared with $2.671 billion in the previous quarter. Long-term debt balance (net of current maturities) was $6.367 billion. Net cash provided by operating activities during the nine-month period ended Dec 31, 2017, came in at $2.542 billion. Adjusted free cash flow for the first three quarters of fiscal 2018 came in at $1.870 billion. During this period, the company returned $189 million to shareholders through share buyback and dividend payments.

Updated Fiscal 2018 Outlook

The company reaffirmed fiscal 2018 revenues guidance but increased its outlook for non-GAAP earnings per share. For fiscal 2018, DXC Technology projects its revenues in the range of $24-$24.5 billion in constant currency. The Zacks Consensus Estimate for the same is pegged at $24.32 billion.

However, the non-GAAP earnings per share guidance range has been raised to $7.50-$8.00 from $7.25-$7.75 anticipated earlier. The Zacks Consensus Estimate for earnings is pegged at $7.52 per share.

Bottom Line

The company’s upbeat guidance for earnings makes us optimistic about its near-term performance.

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. This alliance has combined Computer Sciences’ strength in insurance, healthcare, and financial services with HPE’s expertise in industries like transportation, pharma, technology, media and telecom.

Following the footsteps of Computer Sciences, DXC Technology might be seen making strategic acquisitions to enhance its portfolio, which is likely to drive growth over the long run. Further, the company is projected to generate cost synergies worth $1.1 billion during the first year and record a run rate of $1.6 billion at the end of the same.

Currently, DXC Technology has a Zacks Rank #3 (Hold).

A better-ranked stock in the same industry space is GTT Communications, Inc. (GTT - Free Report) which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GTT Communications has a long-term expected EPS growth rate of 35%.

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