DXC Technology is planning "strategic alternatives," including the possible divesture, of three of its businesses in an effort to restart growth.
DXC Technology, the global solution provider formed in the 2017 merger of HPE Enterprise Services and CSC, on Monday unveiled the plan during its second fiscal quarter 2020 financial analyst conference call during which it also outlined several issues it needs to tackle before it can expect to see consistent growth going forward.
The Monday financial analyst conference call was the first for CEO Mike Salvino, who in early September stepped into that role after 22 years as an executive at Accenture.
DXC evaluated each of its businesses against four criteria, Salvino said. These include their importance to the enterprise technology stack, their ability to create industry solutions, how they provide what customers want, and their potential to unlock value.
Based on that analysis, DXC decided to pursue strategic alternatives for three of those businesses: its US, state, and local health and human services business; its horizontal BPS (business process services) business; and its workplace and mobility business, he said. Combined, these businesses represent about 25 percent of DXC's total revenue, he said.
"These businesses are strong," he said. "Our workplace and our US, state, and local health and human services businesses are market leaders. And we have meaningful IP (intellectual property) in our horizontal BPS business."
By "strategic alternatives," DXC means a range of possible actions to unlock value including potential divestitures to strategic or private equity buyers, a spin-off, or some other transaction, Salvino said.
"Throughout this process, we will remain closely engaged with our customers and our people to ensure we are meeting our commitments to both," he said.
Paul Saleh, executive vice president and chief financial officer at DXC Technology, said his company's executing on those strategic alternatives would create a more focused portfolio while strengthening DXC's ability to grow and unlock value.
Excluding those three businesses, DXC expects by fiscal year 2022 to have in excess of US$15 billion in revenue with at least half the revenue coming from digital offerings, Saleh said. The company also expects margins to be at least 12 percent, even after accounting for investments. "This margin level is consistent with global industry peers," he said.
DXC also assumes it will be able to generate net capital proceeds of about US$5 billion for these three businesses, Saleh said. Of that, DXC expects to deploy US$4.25 billion or more to repurchase shares and pay dividends over the next 10 quarters," he said.
"This represents about 50 percent of our current market cap," he said.
DXC also hopes to reduce its debt by over US$2.5 billion as it continues to pursue a balanced capital allocation approach and protect its investment-grade credit profile, Saleh said.
By fiscal 2022, DXC expects at least $7 per share of adjusted earnings per share, and at least $5.25 in earnings per share after restructuring, transaction, and integration costs, he said.
"This outlook reflects our plan to moderate these costs over the next couple of years," he said.
This would not be DXC Technology's first spin-off. The company in mid-2018 separated its US public sector business with previous Vencore and KeyPoint acquisitions into a new company, Perspecta, that is now an independent public company.
The plan to pursue strategic alternatives comes during a time when DXC is having difficulties with business growth.
Salvino said there are several areas where DXC needs improvements to address growth.
The first issue is that DXC's delivery teams were not able to execute the most complicated phase of operational cost improvements, including areas like pyramid optimisation, the deployment of DXC's Bionix automation program, and the leveraging of Six Sigma principles, he said.
"Pyramid optimisation" is the ability to match available resources with the needs of the organization.
"We need to focus more on our people and strengthening our employee value proposition," he said. "Our people need to be clear about their career path at DXC, the opportunities to work with new clients, and also the opportunities for reskilling and retraining. Being clear about these items will help create an environment where people are acknowledge, recognized, and rewarded, which will improve employee satisfaction and increase retention."
DXC also needs to focus more on selling integrated solutions, Salvino said.
"We have an opportunity to shift from providing individual services for many of our customers to integrated industry solutions leveraging multiple DXC offerings and capabilities."
DXC also needs to overcome execution challenges that have negatively impacted some of its large customers which resulted in lower margins and delayed revenue and bookings, Salvino said.
"We have recovery plans underway for these accounts, but we need to do a better job running operations," he said. "By doing this, we will earn the right to expand our footprint with customers. The current operating model is complex, resulting in unclear accountabilities as well as slow decision making. We will be simplifying this structure with greater emphasis on our regions and industries."
Another issue at DXC has been an under-emphasis on the company's ITO (IT outsourcing) business. "We had the opportunity to invest and strengthen this business. Doing this well will provide a foundation of future growth with our existing customers."
Each of these issues are fixable, and DXC has already started fixing them, Salvino said. This includes the recent hiring of several new senior executives to focus on the issues, he said.
"We believe there's an exciting path forward to run this business more effectively while also unlocking value," he said.
For its second fiscal quarter 2020, which ended 30 September, DXC reported revenue of US$4.85 billion, down from the US$5.01 billion the company reported for its second fiscal quarter 2019.
That included US$2.29 billion revenue from global business services, up from last year's US$2.11 billion, and US$2.57 billion revenue from global infrastructure services, down from US$2.90 billion.
The quarterly revenue was US$70 million below analyst expectations, according to Seeking Alpha.
On a GAAP basis, DXC reported a new loss of US$2.12 billion, or $8.19 per share, significantly down from last year's net income of US$259 million, or 93 cents per share. On a non-GAAP basis, the company reported net income of US$362 million, or $1.38 per share, down from last year's US$573 million, or $2.05 per share.
Analysts had been expecting GAAP earnings of 65 cents per share, and non-GAAP earnings of $1.43 per share, according to Seeking Alpha.
Looking forward, DXC is targeting full year 2020 revenue of US$19.5 billion to US$19.8 billion, slightly up from the US$19.24 billion the company reported for fiscal 2019.
Saleh said it is lower than its previous guidance by about US$275 million because of delays in several large deals the company expected to close in the second quarter, the loss of a few deals previously included in its revenue plans.
DXC is also expecting a shortfall of US$250 million because of execution issues at some of its customers, he said. Another US$175 million in revenue shortfalls could come from disruptions in the company's planned strategic alternatives for three of its businesses, he said.
Another US$100 million in lower revenue is expected from its traditional infrastructure and application businesses, he said.
The total fiscal year guidance implies a slight increase in second half fiscal 2020 revenue compared to its first half, he said.
DXC is also targeting full year adjusted earnings of $5.25 to $5.75 per share.
DXC is clearly not pleased with its poor guidance and its execution against its cost plans, Salvino said.
"We are taking steps to improve our performance with a focus on customers, people, and operational execution," he said. "We also believe that we will be able to unlock value due to a focused strategy. Going forward, DXC will run as one company focused on the enterprise technology stack vs. the traditional business and the digital business. Customers will see one DXC, not two."