Investors pummeled DXC Technology stock, wiping out nearly one-third of the company’s value or about $1.68 billion in market capitalization in the wake of a big first fiscal quarter 2024 earnings miss and guidance cut.
The stock price of Ashburn, Va.-based global technology services provider DXC, formed in 2017 by the merger of HPE Enterprise Services business and CSC, fell by over 29 percent Thursday to $19.10 close to the end of the trading day.
DXC late Wednesday after the close of the trading day reported its first fiscal quarter 2024 finances, a report in which good news was hard to find.
DXC Chairman, President and CEO Mike Salvino, speaking to financial analysts late Wednesday during the company’s quarterly financial analyst conference call, laid the blame for the quarter’s financials squarely on his company’s GIS, or global infrastructure services business, where a drop in sales far exceeded growth in DXC’s GBS, or global business services.
DXC, ranked No. 10 on the CRN 2023 Solution Provider 500, is taking steps to realign its business to focus on its GBS business segment, which represents a higher value growth part of the company compared to GIS, Salvino said.
“We are taking the right steps to shape DXC into a company that consistently delivers revenue growth and expanded margins, EPS, and free cash flow,” he said. “We are doing this by focusing on our high value growth business of GBS and fixing the historical challenges of our GIS business along with changing the revenue mix so that GBS represents the majority of our revenue.”
In the first fiscal quarter of 2024, GBS accounted for about $1.70 billion of DXC’s total revenue of $3.45 billion, and had a profit margin of 11.3 percent. Growth in the segment was down 3.1 percent year-over-year.
GIS, on the other hand, saw its revenue drop year-over-year by 10.6 percent to $1.74 billion, and features a lower 5.2-percent profit margin.
Salvino said that DXC early in fiscal 2024 expected resiliency in its business based on the four quarters of revenue stability in a slowing IT market it experienced in fiscal 2023. The company also thought the essential nature of DXC’s work for customers would lead to stable customer demand, he said.
“Currently we are seeing customer demand for hardware PCs and network devices along with some project work either stopped or delayed to the second half of the year at a higher rate than we anticipated,” he said. “You will see that the resiliency in our GBS business held up. GBS performed as we had planned and delivered solid growth.”
GIS, on the other hand, did not show the expected resiliency, Salvino said.
“Although this is not great news, I would like to point out that a major piece of the revenue shortfall was resale revenue, which is low margin, and we have conscientiously reduced over the last few years to limit our dependency on this type of revenue,” he said.
In response, DXC has reorganized its business to better address the competitive environment by moving away from its regional sales model to an offering-led operating model, Salvino said.
“The offering-led operating model moves us from a regional model, where leaders were generalists concerning offerings, to a global offering model, where the leaders are experts and focused 100 percent on growing revenue and margin for their offerings,” he said. “This model increases our customer coverage and assures we bring the right skills to our customers to deliver and win new work.”
DXC’s our analytics and engineering and insurance offerings were early adopters of the new model, Salvino said.
“And they are consistently our highest revenue growth offerings,” he said. “Our intent is to get this model to work for the other four offerings.”
DXC’s GBS business is essentially a “flywheel” for DXC that provides sustainable growth at double-digit margins, and has now grown nine consecutive quarters, Salvino said. It is focused on analytics, engineering, and custom application capabilities, and offers unique capabilities with such technology partners as ServiceNow, he said.
“We run one of the largest instances of the ServiceNow product,” he said. “And we have used our custom application team to embed ServiceNow into Platform X, which is our AI tool that monitors and fixes the IP estate of many of our GIS customers.”
DXC’s GIS business, on the other hand, has three primary offerings, including security, cloud ITO (IT outsourcing), and modern workplace.
During the first fiscal quarter 2024, cloud ITO experienced the largest decline, Salvino said. This was despite moves by the company to fix its dependency on underutilized data centers it owns, develop a solid pipeline and path to move work to the cloud, and use its unique position to take market share from competitors and improve economics.
DXC did have a big success with cloud ITO during the quarter when it unveiled a deal with AT&T under which DXC will be providing securely managed server, storage, enterprise backup, and maintenance services to the telecom giant, Salvino said.
DXC expects cloud ITO and modern workplace will perform better in fiscal 2024 based on three actions the company has taken to fix them, Salvino said.
“First, we managed the disruption from terminated contracts that happened two to three years ago,” he said. “This work takes multiple years to fall off, and for the most part, it will be out of our numbers after this year. Second, we bolstered our customer delivery and offshore delivery capability to secure the revenue we maintain and deliver it at better margins. Third, to win more work, we improved our market reputation. For example, Gartner now ranks us as a leader in modern workplace. We invested in tools to be more competitive like Platform X and UPtime. We’re bringing in new work at better economics. And we have positioned ourselves to become the partner of choice to cloud providers as they move workloads that are essential to customer operations to the cloud.”
One area DXC expects to help both its GBS and GIS businesses is AI, and area which DXC has made a focus, including training over 10,000 employees in working with the technology, Salvino said.
In GBS, DXC has embedded its AI capabilities into both insurance and analytics in the engineering offerings, he said. This includes the ability to offer AI to help vehicle manufacturers offer self-driving cars.
In GIS, DXC has developed AI capability in both its cloud ITO and modern workplace offerings, Salvino said.
“In cloud ITO, our Platform X tool uses AI to proactively monitor IT estates to detect and resolve IT issues with one of our 10,000 bots to avoid costly business disruptions,” he said. “In modern workplace, AI is built into our UPtime platform, which we leverage across 7 million devices. We use AI every time an employee reaches out for assistance, and can resolve up to 80 percent of those interactions without human intervention, along with using AI to predict issues with PCs and reduce the carbon footprint for our customers. The bottom line is all of these solutions are at scale, are providing enhanced customer delivery capability, and are driving new revenue for us.”
For its first fiscal quarter 2024, which ended June 30, DXC reported total revenue of $3.45 billion, down 7.0 percent from the $3.71 billion the company reported for its first fiscal quarter 2023.
This includes GBS revenue of $1.70 billion, down from $1.76 billion, and GIS revenue of $1.74 billion, down from $1.95 billion.
Total revenue missed analyst expectations by $100 million, according to Seeking Alpha.
DXC also reported GAAP net income of $42 million or 17 cents per share, down from last year’s $103 million or 43 cents per share. On a non-GAAP basis, DXC reported net income of $136 million or 63 cents per share, down from last year’s $180 million or 75 cents per share.
Non-GAAP earnings missed analyst expectations by 19 cents per share, according to Seeking Alpha.
Looking ahead, DXC expects second fiscal quarter organic revenue to fall between 4.5 percent and 5.5 percent to between $3.43 billion and $3.46 billion. This compares to the $3.57 billion the company reported last year. The company also expects non-GAAP earnings of 65 cents per share to 70 cents per share, down from last year’s 75 cents per share.
For all of fiscal 2024, DXC is now expecting revenue of $13.88 billion to $14.03 billion, down 3.0 percent to $4.0 percent compared to fiscal 2023’s total revenue of $14.43 billion. The company had previously guided fiscal 2024 revenue of $14.40 billion to $14.55 billion.
DXC also expects non-GAAP earnings of $3.15 cents per share to $3.40 cents per share, down from last year’s $3.47 cents per share. The company had previously guided fiscal 2024 non-GAAP earnings of $3.80 cents per share to $4.05 cents per share.