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DXC Technology (DXC) Q4 Earnings Top Estimates, Revenues Miss

Zacks Equity Research

DXC Technology DXC reported fourth-quarter fiscal 2020 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same. However, both figures decreased on a year-over-year basis.

The company reported non-GAAP earnings of $1.20 per share, which beat the consensus mark by 23.71%. The figure, however, declined from $2.19 reported a year ago.

At $4.82 billion, revenues fell short of the prior-year quarter’s number by 8.8% and also missed the Zacks Consensus Estimate of $4.92 billion.

Suboptimal customer delivery, weakening customer relationships and price concessions affected the top line.

Currency headwinds of about $40 million negatively impacted revenues. Additionally, $49 million were lost in order to resolve certain customer disputes.

The company also witnessed headwinds due to economic disruptions stemming from the coronavirus pandemic.

DXC Technology Company. Price, Consensus and EPS Surprise

DXC Technology Company. Price, Consensus and EPS Surprise

DXC Technology Company. price-consensus-eps-surprise-chart | DXC Technology Company. Quote

Quarter in Detail

Segment-wise, revenues from Global Business Services (“GBS”) grew 7.3% on a year-over-year basis to $2.31 billion, reflecting strength in the Luxoft business. However, the resolution of customer disputes took a toll on the segment’s revenues.

During the quarter, the company won $2.19 billion worth of new business awards for the GBS segment.

Notably, the U.S. state and local health and human services business and the horizontal BPS business, which are under review currently, will be henceforth included under the GBS segment.

Global Infrastructure Services (“GIS”) revenues during the fiscal third quarter came in at $2.51 billion, down 18.8% year over year, reflecting a revenue run-off and the termination of certain customer accounts.

During the quarter, the company won $2.18 billion worth of new business awards for the GIS segment.

Notably, the workplace and mobility business, which is also under review currently, will be henceforth included under the GIS segment.

Within the company’s enterprise technology stack business, IPO layer revenues declined 20.6% year over year due to account terminations and price concessions. Cloud and security revenues grew 7% year over year, driven by solid demand for enterprise cloud applications.

Application and Industry IP remained flat year over year.

Margins

Adjusted EBIT margin was 7.3%, contracting 840 basis points year over year. However, a lower tax rate due to the release of evaluation allowance and other tax planning initiatives were a breather.

Non-GAAP income from continuing operations was $292 million compared with $778 million a year ago.

Balance Sheet and Other Financial Metrics

The company exited the quarter with $3.68 billion in cash and cash equivalents compared with $2.56 billion in the previous quarter. Long-term debt balance (net of current maturities) was $8.67 billion.

Cash flow from operating activities came in at $288 billion. Adjusted free cash flow was $131 million compared with $397 million in the prior quarter.

During the fiscal fourth quarter, the company returned $53 million to shareholders through share buybacks and dividend payouts.

Fiscal 2020 Highlights

For the full fiscal year, revenues were $19.58 billion, down 3.5% year over year. Moreover, non-GAAP earnings were $5.58 per share.

Outlook

DXC suspended its fiscal 2021 guidance as it is still in the process of assessing the impacts of coronavirus-related uncertainties on its business.

However, the company expects its digital transformation journey to accelerate in the first half of fiscal 2021.

Also, in the first quarter of fiscal 2021, revenue loss due to price concessions and terminated businesses is expected to continue, resulting in an 8-10% sequential decline.

First-quarter earnings per share are also likely to decline to reflect the deeper impacts of the expected revenue decline. Additional investments in the business and a higher level of interest expense are expected to remain overhangs on the margins.

Zacks Rank & Key Picks

The company currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader technology sector are NVIDIA Corporation NVDA, Apple Inc. AAPL and Fortinet, Inc. FTNT, all carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term earnings growth rate for NVIDIA, Apple and Fortinet is currently pegged at 16.9%, 10.7% and 14%, respectively.

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