2023-04-20 16:33:37 ET
Summary
- DXC Technology provides an array of IT consulting and outsourcing services to organizations worldwide.
- The company has seen declining revenue in recent years as its legacy business has struggled.
- Management has guided to essentially flat top-line revenue results in the fiscal year ahead.
- Little or no growth combined with the prospects for macroeconomic slowdown leaves little to provide an organic upside catalyst for the stock.
A Quick Take On DXC Technology
DXC Technology ( DXC ) provides businesses with IT consulting services and related software development.
The company has a challenging mix of a declining GIS segment yoked to a growing GBS segment, resulting in an anemic 1% revenue growth target for fiscal 2024, at best.
Given a slowing global macroeconomic environment as banks pull back on lending and the firm’s essentially flat top-line growth, my near-term outlook on DXC is Neutral [Hold].
DXC Overview
Ashburn, Virginia-based DXC Technology was founded in 1959 and operates in two business segments:
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Global Business Services - software engineering, analytics
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Global Infrastructure Services - transforms legacy systems to the cloud
The firm is headed by president, Chairman and CEO Mike Salvino, who joined the firm in 2019 and was previously Managing Director at Carrick Capital Partners and Group Chief Executive at Accenture Operations.
DXC also provides business process outsourcing for selected industry verticals such as insurance.
DXC’s Market & Competition
According to a 2021 market research report by Grand View Research, the global market for software consulting (as a subset of the firm’s broader array of services) was estimated at $219 billion in 2020 and is forecast to reach $542 billion by 2028.
This represents a forecast CAGR of 12.0% from 2022 to 2028.
The main drivers for this expected growth are the continued transformation of business activity to the cloud, the growing use of digital touchpoints across all aspects of the enterprise and the need to outcompete on the basis of technology, wherever possible.
Also, the chart below shows the historical and projected future growth trajectory of the U.S. software consulting market from 2018 through 2028:
U.S. Software Consulting Market (Grand View Research)
Major competitive or other industry participants include:
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Accenture (ACN)
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Atos (AEXAF)
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Capgemini (CAPMF)
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CGI Group
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Clearfind
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Cognizant (CTSH)
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Deloitte Touche Tohmatsu Ltd.
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Ernst & Young
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IBM (IBM)
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Oracle Corp. (ORCL)
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PricewaterhouseCoopers
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Rapport IT
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SAP SE (SAP)
DXC’s Recent Financial Trends
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Total revenue by quarter has dropped in recent quarters:
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Gross profit margin by quarter has remained relatively flat:
Gross Profit Margin (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have remained within a narrow range, except for a few outlier quarters:
Selling, G&A % Of Revenue (Seeking Alpha)
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Operating income by quarter has fluctuated per the following chart:
Operating Income (Seeking Alpha)
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Earnings per share (Diluted) have remained positive in the last five quarters:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, DXC’s stock price has fallen 22.6% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) drop of 6.7%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet, the firm ended the quarter with $2.1 billion in cash and equivalents and $4.2 billion in total debt, of which $643 million was categorized as current or short-term, presumably due within 12 months.
Over the trailing twelve months, free cash flow was about $1.0 billion, of which capital expenditures accounted for $249 million. The company paid $105 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For DXC
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 0.7 |
Enterprise Value / EBITDA | 3.6 |
Price / Sales | 0.4 |
Revenue Growth Rate | -10.8% |
Net Income Margin | 4.8% |
GAAP EBITDA % | 18.2% |
Market Capitalization | $5,830,000,000 |
Enterprise Value | $9,800,000,000 |
Operating Cash Flow | $1,270,000,000 |
Earnings Per Share (Fully Diluted) | $2.94 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be Cognizant Technology Solutions; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | Cognizant Technology | DXC Technology | Variance |
Enterprise Value / Sales | 1.5 | 0.7 | -56.9% |
Enterprise Value / EBITDA | 8.4 | 3.6 | -56.6% |
Revenue Growth Rate | 5.0% | -10.8% | -316.7% |
Net Income Margin | 11.8% | 4.8% | -58.9% |
Operating Cash Flow | $2,570,000,000 | $1,270,000,000 | -50.6% |
(Source - Seeking Alpha)
Future Prospects For DXC
In its last earnings call (Source - Seeking Alpha), covering FQ3 2023’s results, management highlighted growth in adjusted EBIT despite top-line revenue contraction as due to the ‘strong execution of [its] cost optimization efforts while not negatively impacting [its] customers.’
The firm is seeing reduced employee attrition due to efforts to ‘change the culture’ and other initiatives. Employee retention is an important aspect for consulting firms, since so much of their brand value in the markets they operate in come from being able to attract and retain high-quality employees.
Management also noted the growth of its GBS segment, which contributes 49% of company revenue, ‘demonstrating that the business mix is trending towards the new tech of GBS.’
Looking ahead, management’s overall strategy is to grow its GBS segment while minimizing the decline rate of its GIS segment.
Leadership guided to 1% total revenue growth for fiscal 2024.
The company's financial position is moderately strong, although the firm has a significant portion of its debt coming due in the short term and which will likely be subject to higher interest rates.
Regarding valuation, the market is valuing DXC at significantly lower multiples than competitor Cognizant, not a surprise given the firm’s negative revenue growth rate and other lower performance metrics.
The company recently evaluated a potential private equity acquisition approach, but the talks apparently did not come to fruition and the stock has since dropped approximately 10% after talks were called off by DXC.
Given the firm’s challenging mix of declining GIS segment yoked to a growing GBS segment, resulting in an anemic 1% revenue growth target at best combined with a slowing global macroeconomic environment as banks pull back on lending, my near-term outlook on DXC is Neutral [Hold].
For further details see:
DXC Technology Faces Tepid Growth In Best Case Scenario