Company Overview: DXC Technology Company (NASDAQ: DXC) was formed on April 1, 2017 by the amalgamation of Computer Sciences Corporation (“CSC”) and Enterprise Services Division of Hewlett Packard Enterprise (“HPE”). After completing the merger, both the entities have become the 2^nd largest end-to-end IT services providing company across the globe. The company offers a wide range of professional services to clients in the commercial, global, and government markets and specializes in information technology (IT) systems consulting of designing, developing, implementing, and integrating information systems.

DXC Details

Low Customer Concentration Risk & Cost Cutting Initiatives Aid DXC: DXC Technology Company (NASDAQ: DXC) is a cloud-based service provider of innovative Information Technology, enhancing data and offering security and scalability to its users. Most of the industry participants in IT systems are in the process of modernizing their traditional legacy business processes to stay in-line with the changing IT services, in order to integrate benefits of emerging technologies consisting of cloud, IoT (Internet of Things), AI (Artificial Intelligence) and analytics. Further, increasing Internet penetration in the emerging markets across Asia-Pacific, remains a key positive. DXC is focusing on cyber business, cloud computing market and Big Data business to strengthen prospects. 

The company witnessed a CAGR of 28.8% in revenue over the period of FY16-FY20. In addition, for 2020, 2019 and 2018, no client accounted for more than 10% of total revenues. This indicates that the company is well equipped to diversify the sources of revenues as well as decrease the concentration of sales across multiple customers, industries, and products. Going forward, investment in product development and sales and marketing will remain high to benefit from the ever-changing environment in a post-COVID world. This, in turn, positions the company to sustain its long-term growth prospects.

Past Performance (Source: Company Reports)

1QFY21 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings of 21 cents per share as compared to earnings of $1.74 per share, in the year-ago quarter.  Revenues during the quarter came in at $4.5 billion, down 7.9% year over year, owing to termination of certain customer accounts, price concessions and unfavorable foreign currency headwinds. During the quarter, adjusted EBIT margin came in at 4.2%, which contracted 910 basis points on pcp. Non-GAAP income from continuing operations went down from $652 million to $190 million in 1QFY21. Book to bill ration for the quarter stood at 1.2x.

1QFY21 Results (Source: Company Reports)

Segment-wise Highlights: Revenue from Global Business Services (“GBS”) segment came in at $2.17 billion, which inched up 0.7% on pcp, signifying benefits from the buyout of Luxoft acquisition. In 1QFY21, the company received worth $3.5 billion new business awards for the GBS segment. Revenues from Global Infrastructure Services (“GIS”) segment stood at $2.33 billion, down 12.4% from the prior corresponding period, on the back of termination of certain customer accounts and revenue run-off. During the quarter, the company was awarded $1.8 billion worth of new business for the GIS segment. Within DXC’s enterprise technology stack business, IPO layer revenues went down 18.7% on pcp. Revenues from cloud and security went down 6% year over year.

GBS & GIS Revenues Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Details: At the end of June 30, 2020, the company had cash and cash equivalents of $5.51 billion, up from $3.68 billion at the end of previous quarter. Long-term debt balance (net of current maturities) at the end of the period came in at $10.33 billion. Cash flow from operating activities stood at $119 million, with adjusted free cash flow of -$28 million in 1QFY21. 

1QFY21 Key Numbers (Source: Company Reports) 

DXC Wraps Up Sale of U.S. State and Local Health and Human Services Business: On October 1, 2020, the company announced that it has wrapped up the divestment of its U.S. State and Local Health and Human Services business to Veritas Capital, in order to form Gainwell Technologies. The sale consideration amounted to $5 billion in cash and DXC plans to utilize the funds raised from the sale agreement to bolster its balance sheet and lessen debt by ~$3.5 billion. Post the debt repayments, DXC will have ~$6.0 billion of total debt on its balance sheet and net-debt of ~$3.0 billion. The company remains positive on its plan to complete the sales of its US State and Local Health and Human Services business, bringing the ‘new DXC’ to the market.  The company’s enhanced focus on its people, and customers will assist the company to improve its financial flexibility and achieve its long-term success. The new company, Gainwell, is poised to evolve in a healthcare technology market to support clients in achieving essential outcomes in their communities nationwide.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 39.99% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. holds the maximum interests in the company at 11.2% and 5.26%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported Jun’21 EBITDA margin at 11.9%, and gross margin for the same time span stood at 19.4%. Current ratio for the period came in at 1.29x, higher than the year-ago figure of 0.88x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s financial performance is likely to get affected by the pandemic-led business disruptions. Weakness in IT spending, due to the global economic slowdown amid the coronavirus crisis, might hurt DXC’s performance. Also, during the first quarter, the company top line was primary affected by price concessions and terminated businesses. Moreover, higher interest expenses are expected to weigh on the company’s performance, going forward. DXC’s leveraged balance sheet also poses risks with long-term debt of $10.33 billion as of June 30, 2020. Company's cash and cash equivalent position amounting to ~$5.51 billion, indicates that the company needs to be more focused towards the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Additionally, competition from peers adds to the woes.

Outlook: For 2QFY21, the company expects revenues to be in the range of $4.4 billion and $4.45 billion. Operating margin is expected to be in the ambit of 5% to 5.5%. Adjusted EPS is expected to be within 30-35 cents. Moreover, the company remains on track to achieve ~$550 million of cost reduction and expects to continue expanding margins on a sequential basis in the second quarter. The company will report its 2QFY21 results on November 5, 2020.

2QFY21 outlook (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of DXC closed at $17.64 with a market capitalization of ~$4.48 billion. The stock made a 52-week low and high of $7.9 and $38.37, respectively, and is currently trading below the average of its 52-week trading range. The stock went up ~3.3% in the last one-month period. The company will report its 2QFY21 results on November 5, 2020. On a technical analysis front, the stock has a support level of ~$17.06 and an immediate resistance level of ~$22.89. Considering the above factors, we have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like we have taken the peer group - International Business Machines Corp (NYSE: IBM), Xerox Holdings Corp (NYSE: XRX), and Unisys Corp (NYSE: UIS), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $17.64, down by 1.18% on 28 October 2020.

DXC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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