Has DXC Technology reached a fork in the road?

DXC Technology reported its Q1 earnings last night, revealing that it was revising its outlook downwards for the year ahead, having missed its targets by a significant margin. DXC’s global revenue for the three months ended 30 June 2023 was down 7% at $3.45bn. Meanwhile, on an organic basis (taking account of DXC’s divestments) revenue was down by 3.6% reflecting a deterioration on the same time last fiscal when the decline was 2.6%. Net income was just $42m compared to $103m in Q1 FY23.

Revenue from Global Business Services (GBS) fell by 3.1% to $1.7bn in Q1 but grew by 3.3% on an organic basis. Meanwhile, Global Infrastructure Services (GIS) revenue fell sharply and was down by 10.6% at $1.74bn. On an organic basis GIS was down by 9.9% with the decline accelerating in Q1 FY24 compared to the same period last year when revenue was down by 7.2%. These latest results emphasise what has been apparent for some time, that many of DXC’s major revenue challenges relate to its GIS business. Meanwhile, GBS is performing fairly well, despite the tough climate, and this segment continues to show encouraging signs.

After six years of declines, DXC’s leadership had been heralding FY24 as the point at which the company’s long-awaited “pivot” would start to become apparent. As recently as May this year, CEO Mike Salvino was predicting better times ahead whilst the outgoing CFO forecasted that organic revenue would fall by between 1% and 2% in Q1, with the company expected to move into organic revenue growth by the end of the fiscal. DXC’s revised guidance now indicates that declines are expected to continue throughout FY24 with revenue predicted to be down by up to 4% at the year-end.

Alongside new CFO, Rob Del Bene, Salvino endured some uncharacteristically probing questions during last night’s earnings call, with the investment community apparently surprised and disappointed by DXC’s start to its new fiscal. Amongst other things, the analysts in attendance sought answers to why DXC’s position had deteriorated so rapidly from the guidance issued just last quarter, and whether or not the departure of the company’s former CFO, Ken Sharp, had contributed in any way to the unexpected miss.

Salvino was, as ever, robust in defence of his strategy, and also dismissed any suggestion that the CFO handover had led to DXC taking its eyes off the fiscal road ahead. To be fair to Salvino and DXC, there are other leading technology vendors that have recently been forced to revise their future guidance down sharply. Both Accenture and Infosys have found themselves in a similar position to DXC, in the face of the wider economic malaise and challenging market conditions that have led to contract delays and a sharp downturn in demand.

Cloud and ITO, and Modern Workplace are the offering areas that present particular challenges for DXC. The first of these perhaps because DXC’s leadership has steadfastly pinned a great deal of (as yet unrealised) value on the potential in this legacy operation. The thinking being that physical IT estates still need maintaining and will eventually need transforming. Secondly, the Modern Workplace offering saw its revenue peak during the pandemic and lockdown(s) but has subsequently been in decline, in part because many employees have returned to the office (albeit on a reduced part-time basis).

Despite the longstanding drag on performance coming from GIS, Salvino also batted away suggestions from the floor last night that DXC might consider divesting its underperforming units. Publicly at least, DXC’s CEO does not appear to want to go down the path taken by vendors such as IBM (Kyndryl) and more recently Atos (Eviden/Tech Foundations) in order to free its balance sheet of its “problem children”. Salvino appears to firmly believe that the temporary headwinds in the macro economy, coupled with one or two internal issues still to be ironed out, mean that DXC can still turn the corner and prosper in its current form.

Whatever the future holds for DXC in structural terms, the success of GBS reflects the company’s likely path to sustainable growth. Within DXC’s overall business mix, the services that are most in demand in the market are predominantly provided by this segment. By way of an example, Salvino last night emphasised his belief that DXC has the potential to be a leader in automation and AI (currently two of the hottest tickets in enterprise IT). Meanwhile, on the evidence of last night, it looks like investors may have to maintain their faith in the programme and will need to wait a little longer before DXC pivots to profitable growth.

Posted by Jon C Davies at '12:21' - Tagged: DXC