Credit: Shutterstock photoIt has been about a month since the last earnings report for DXC Technology (DXC). Shares have lost about 1.9% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is DXC due for a breakout? 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 Q2 Results
DXC Technology reported second-quarter fiscal 2019 wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.
At $5.01 billion, revenues lagged the prior-year quarter figure on reported basis by 8.1% and by 6.2% on a constant currency basis. It also missed the Zacks Consensus Estimate of $5.33 billion.
The company reported non-GAAP earnings of $2.02 per share, which surpassed the Zacks Consensus Estimate of $1.96 and increased from $1.67 reported a year ago.
The quarterly results were mainly driven by demand strength in the company's digital solutions. However, delay in ramp-up of a few large digital contracts impacted the revenues by about $100 million.
Moreover, the application maintenance and management segment suffered a decline, which impacted revenues by roughly $80 million. A reallocation of IT spending by large clients especially in the Americas led to lesser investment in application maintenance.
Quarter Details
Segment wise, pro forma revenues from Global Business Services fell 8.7% on a year-over-year basis to $2.11 billion owing to the decline in the application maintenance and management business.
However, 6.6% growth in enterprise cloud applications was a tailwind.
Global Infrastructure Services revenues during the fiscal second quarter came in at $2.9 billion, declining 7.6% year-over-year on a pro forma basis. The fall was mainly due to unfavorable timing of client transition from traditional to cloud environments.
However, 37% year-over-year growth in cloud bookings offset the decline to some extent.
Digital revenues jumped 6.4% in the quarter, driven by 1.9% year-over-year growth in cloud infrastructure and 25% growth in digital workplace.
Delays in certain healthcare and insurance contracts led to a 2.1% decline in industry IP and BPS revenues.
A soon-to-be-carried-out ramp-up of some BPS life insurance contracts including Brighthouse are expected to positively impact revenues in the remaining two quarters of fiscal 2019.
DXC Technologies enhanced its digital business by opening an analytics migration factory for Microsoft Azure in Bangalore, India. The company also hinted at two additional migration factories in Warsaw and Manila by the end of this year.
During the quarter, DXC Technologies completed the acquisition of Molina Medicaid Solutions, part of Molina Healthcare. With this acquisition, the company expects to expand its margins.
The company also announced the buyout of argodesign, which will enhance its inner-phase design capabilities, thereby expediting clients' digital transformation journey.
Another development, which took place in the quarter, was the announcement of two more acquisitions. The buyouts of ServiceNow's major partners - BusinessNow and TESM - will strengthen DXC Technology's cloud portfolio.
Margins
Adjusted EBIT margin was 15.9% compared with 13.6% reported in the prior-year quarter. The 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 $573 million during the quarter compared with $492 million reported a year ago.
Balance Sheet and Other Financial Metrics
The company exited the reported quarter with $2.78 billion in cash and cash equivalents compared with $2.58 billion recorded in the previous quarter. Long-term debt balance (net of current maturities) was $5.41 billion.
Net cash provided by operating activities during the fiscal second quarter came in at $885 million compared with $473 million in the prior quarter. Adjusted free cash flow was $604 million.
During the fiscal second quarter, the company returned $181 million to shareholders through share buyback and dividend payments.
Fiscal 2019 Outlook
Taking into account the fall in revenues due to digital contract delays into account, the company now expects currency headwinds of about $300 million, and accordingly, cut its fiscal 2019 guidance.
For the fiscal, it projects revenues of $20.7-$21.2 billion, down from previously expected range of $21.5-$22 billion.
However, encouraged by the successful ongoing cost saving initiatives, DXC Technology raised non-GAAP earnings guidance to $7.95 to $8.20 from the earlier projection of $7.75-$8.15.
The company expects to save $575 million in the fiscal year encouraged primarily by the significant savings that results from its automation program, Bionix.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, DXC has a nice Growth Score of B, though it is lagging a bit 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 20% 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
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, DXC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
