DXC Technology (DXC) Q3 Earnings & Revenues Top Estimates

DXC Technology (NYSE:DXC) reported third-quarter fiscal 2019 results wherein the top line and the bottom line beat the Zacks Consensus Estimate.

The company reported non-GAAP earnings of $2.23 per share, which surpassed the consensus estimate of $2.04 and increased from $2.15 reported a year ago.

At $5.18 billion, revenues lagged the prior-year quarter figure by 5.2% and by 2.6% on a constant currency basis. However, it beat the Zacks Consensus Estimate of $5.16 billion.

The quarterly results were mainly driven by demand strength in the company’s digital solutions. However, completion of a few large transformation contracts, coupled with headwinds in traditional application services business affected revenues.

Quarter Details

Segment wise, revenues from Global Business Services (GBS) fell 6.3% on a year-over-year basis to $2.17 billion.

During the quarter, the company won $2.3 billion worth new business awards for the GBS segment.

Global Infrastructure Services revenues during the fiscal third quarter came in at $3 billion, declining 1.5% year over year.

During the quarter, the company won $3.4 billion worth new business awards for the GBS segment.

Digital revenues jumped 16.9% year over year in constant currency, driven by growth in cloud infrastructure and digital workplace offerings.

Digital pipeline was up more than 90% year over year, backed by strong demand for digital solutions. A large deal was signed between DXC and a European automotive manufacturer for analytics, multi-platform cloud and security.

Cloud infrastructure business increased 32% in constant currency. Moreover, security business grew 4.5% year over year in constant currency, driven by strong momentum in Northern Europe and Asia.

DXC inked a partnership with CrowdStrike to provide managed endpoint threat detection and response services.

The company is also experiencing strong demand for its operational technology security solutions in the manufacturing and energy sectors.

Growth of 2.7% in enterprise cloud applications and consulting was another tailwind.

During the quarter, DXC secured a deal with a major U.S. food manufacturer, wherein the latter will transfer all its existing IT services management processes on to a ServiceNow (NYSE:NOW) platform. During the quarter, DXC completed the buyout of ServiceNow’s major partners — BusinessNow and TESM — to strengthen its cloud portfolio.

Furthermore, the company won a couple of SAP S/4HANA deals from a European satellite operator and a multinational technology company.

In constant currency, industry IP and BPS revenues grew 2.6% year over year driven by the acquisition of Molina Medicaid Health Solutions, part of Molina Healthcare (NYSE:MOH) . The acquisition, which was completed in the second quarter of fiscal 2019, aided the company’s mission of supporting state agencies in the administration of Medicaid programs, enhancing the overall healthcare IP portfolio.

Notably, DXC recently announced the buyout of Luxoft Holding to strengthen its digital portfolio with capabilities in high-growth areas, including analytics and business intelligence, user experience, IoT and blockchain. The company expects $300 million to $400 million of additional revenues for the combined company by fiscal year 2022.

It also accelerated hiring in third-quarter fiscal 2019.

Margins

Adjusted EBIT margin was 16.2% compared with 14.6% 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.

Global deployment of DXC’s automation program, Bionix, delivery center rationalization and the benefit of some contracts aided the margin expansion.

Non-GAAP income from continuing operations was $626 million during the quarter compared with $541 million a year ago.

Balance Sheet and Other Financial Metrics

The company exited the reported quarter with $2.48 billion in cash and cash equivalents compared with $2.78 billion recorded in the previous quarter. Long-term debt balance (net of current maturities) was $5.98 billion.

Adjusted free cash flow was $503 million compared with $604 million in the prior quarter.

During the fiscal third quarter, the company returned $851 million to shareholders through share buyback and dividend payments.

Fiscal 2019 Outlook

For fiscal 2019, DXC estimates revenues of $20.7-$21.2 billion. The company expects to witness currency headwinds.

However, encouraged by share repurchases and lower tax rate, DXC raised non-GAAP earnings guidance to $8.15-$8.30 from the earlier projection of $7.95-$8.20.

Zacks Rank & A Key Pick

DXC currently carries a Zacks Rank #2 (Buy).

A stock worth considering in the broader Computer and Technology sector is Twilio Inc. (NYSE:TWLO) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Twilio is 9%.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>