While DXC Technology revenue slipped compared with the previous year, the company’s lower loss and increased non-GAAP earnings are indications that the company is on the right path, said Mike Salvino, president and CEO of the US-based systems integrator.
Salvino, in his prepared remarks Wednesday to financial analysts during DXC’s second fiscal quarter 2022 earnings call, said improvements in the company’s Global Infrastructure Services (GIS) business are helping the company reach higher into the enterprise where it can bring its more profitable Global Business Services (GBS) business to bear.
“Let me remind you that the way to grow is to deliver the GIS services that are critical for our customers and build trusted relationships,” he said. “Once these trusted relationships are built, we can move our customers up the enterprise technology stack towards the services of our GBS business. This is exactly what we’re doing, and the organic revenue trajectory of GIS and GBS and the overall business is great evidence that this strategy is working.”
During the quarter, DXC’s GBS revenue fell 16.5 percent year over year to US$1.87 billion, while GBS profit fell only 6 percent to US$298 million, giving it a segment profit margin of 15.9 percent.
The company’s GIS business saw a slight 6.8 percent drop in revenue to US$2.15 billion, but saw a huge 256 percent jump in profit to US$118 million, giving it a segment profit margin of 5.5 percent.
During the second fiscal quarter, 59 percent of DXC’s bookings were new deals, while 41 percent were renewals, Salvino said. New deals increased because of DXC’s focus on its Platinum customer channel, which includes the company’s top 175 accounts, where the company is finding new success with the analytics and engineering services business it got with its 2019 acquisition of Luxoft, he said.
“We’re now starting to see evidence that we are being successful in taking Luxoft, which drives our new analytics and engineering services, through our Platinum customer channel,” he said. “The analytics and engineering group grew 17.3 percent in Q2, which is clearly helping us create growth in our GBS business segments.”
To illustrate the connection between DXC’s GIS and GBS segments in building business with Platinum customers, Salvino used the example of a major specialty retail customer of 14 years.
“Now, before I arrived and implemented the [Platinum] strategy, our revenues were roughly $80 million per year split one-third GBS and two-thirds GIS,” he said. ”By continuing to deliver our GIS services for this customer, we were offered the opportunity to sell our GBS services. The result is we have increased the total revenue on this account by 13 percent, and the mix between GBS and GIS is now split 50-50 as we are now providing them analytics and engineering services.
"We’re in the early innings of this strategy, but we feel confident that we can implement this approach to our other Platinum customers, successfully delivering GIS services and growing GBS services that are the same or more revenue at better margins.”
Two significant deals expected to close in the second quarter instead closed in the third quarter, Salvino said.
“The great news about these deals that they were both hybrid cloud [and] ITO [IT outsourcing] deals with long-standing customers,” he said. “Specifically, we are helping their customers modernize their existing IT estates and building new private cloud capabilities to run their mission-critical applications.”
Salvino said DXC is in the midst of a multistep transformation of the company, starting with a focus on inspiring the company’s employees.
“We hired and on-boarded more colleagues than any other quarter since I became CEO [in 2019],” he said. “A key advantage to our hiring efforts is that we have implemented and are running a virtual-first model. Hiring has been a focus for us, and it will continue. While hiring has improved, we left some open demand and project work unconverted, and we are focused on capturing this moving forward.”
The second focus of that transition is working with customers to improve DXC’s organic revenue growth, Salvino said. The company’s success is shown through its improving Net Promoter Score, he said.
“The last time we gave you our NPS was during the investor day in June, and it was 18, almost within the industry best practice range of 20 to 30,” he said. “Currently our 12-month rolling NPS is at the midpoint of the best practice range. This is the most positive our customers have been since I arrived. This improvement is due to our strong service delivery and gives us the ability to sell up the enterprise technology stack from our GIS business to our GBS business.”
DXC is also working to improve the efficiency of its service delivery, implementing better IP tools and actively managing its real estate footprint, Salvino said.
“Let me provide you with some additional color concerning the operational work we’re doing with real estate,” he said. “[This includes] moving to a much smaller footprint in the D.C. area. For our colleagues that need to come into a facility, we’ll share space. ... [This helps us] move to a virtual-first model, reduce our carbon footprint, and represents our desire to maintain a much smaller real estate footprint.”
For its second fiscal quarter 2022, which ended Sept. 30, DXC reported revenue of $4.03 billion, down 11.6 percent over the $4.55 billion the company reported for its second fiscal quarter 2021. Of that, organic revenue fell 2.4 percent over last year.
This includes analytics and engineering revenue of $520 million, up from US$437 million; application revenue of US$1.22 billion, up from US$1.18 billion; business process services revenue of US$118 million, down from US$136 million; cloud and security revenue of US$521 million, up from US$517 million; IT outsourcing revenue of US$1.05 billion, up from US$1.14 billion; and modern workplace revenue of US$581 million, down from US$637 million.
However, the overall slight dip in enterprise technology stack revenue was offset by a large drop in M&A and divestiture revenue to US$19 million from last year‘s US$504 million.
For the quarter, DXC reported a GAAP loss of US$187 million, or 74 cents per share, which was significantly better than the loss of US$246 billion, or 96 cents per share, it reported last year. This compares with non-GAAP income for the quarter of US$233 million, or 92 cents per share, after adjustments including US$111 million in restructuring costs and US$215 million in debt extinguishment costs.