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Wednesday 07 November 2018

DXC fails to hit Q2 revenue target

dxcSecond quarter results out overnight from DXC Technology (FY19, three months to end September) revealed a disappointing top line. Revenue declined 6.2% (constant currency) to $5.01bn - which is about $200m below what CEO Mike Lawrie was expecting.

The decline in Q2 is deeper than Q1 (down 1.8%) - indeed, DXC is now revising its full year guidance to a range of $20.7bn-$21.2bn. There were two main reasons for this. Firstly the slow ramp-up of several “large” digital contracts. Lawrie also says it is taking DXC “longer than expected” to bring on the resources to support digital opportunities. And secondly, pressure in the apps maintenance and management business (which was also called out in Q1).

In Q1, Lawrie commented that the firm was seeing “literally an explosion in the number of deals that we’re doing under $5m”. Let that soak in for a minute. “UNDER $5m”. Even if these deals demonstrate that the firm’s digital offerings are resonating with the market, consider how many of these it would have to win to match a traditional IT services deal. Until the firm can stem the big declines in the apps business in particular, and ramp-up the flow of larger digital deals (partly by employing more of the right people), growth at the top line is going to be hugely challenging.

Getting back into growth mode is a key imperative for Lawrie following a long period of cost cutting. However, taking out staff cost can lead to both distraction and a dent on morale – which in turn can impact performance. And DXC’s sales engine really needs to be operating at full steam in today’s incredibly challenging market.

The profit story at DXC, however, continues to be strong. Adjusted EBIT margin was 15.9% (up 230 basis points yoy), with both GBS and GIS becoming more profitable. Lowrie points to his work around workforce optimisation, supply chain efficiencies and facilities rationalization for this uptick. Furthermore, he believes he can get another 250-350 basis points of expansion between now and FY22, which may well be achievable. The questions we have are much more around revenue growth.

Further reading:
DXC Technologies: A Tale of Two Strategies
Share Indices for October 18

Posted by Kate Hanaghan at '09:29' - Tagged: results  

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