DXC Technology Shuts 58 Facilities, Makes Broad Management Cuts In A $1B Cost Savings Push

DXC Technology is cutting costs. The newly-formed company said Tuesday it had axed four layers of management in its delivery and support organizations and shrunk its real estate footprint by 7 percent during its first quarter of operations.

The Tysons, Va.-based company, No. 11 on the 2017 CRN Solution Provider 500, said it has cut $140 million of costs since opening for business April 3, and is on track to achieve an annual cost savings of $1 billion by the end of its first year of operations, in March 2018. DXC Technology is the company that came to be when systems integration and IT outsourcing behemoths CSC and HPE Enterprise Services merged.

"It's not a small deal to remove four layers of management in 90 days," Mike Lawrie, DXC's chairman, president, and CEO, told Wall Street analysts. "We did find a fair amount of overlap."

[Related: DXC Technology Buys 740-Person Microsoft Dynamics 365 Powerhouse Tribridge]

DXC has eliminated 40 percent of the vice presidents and directors in the 170,000-person company as it moved from 11 to seven layers of management in its delivery organization, and from 10 to six layers of management in its support organization, according to Lawrie and DXC's CFO Paul Saleh.

The spans of control across the entire company have increased by 20 percent, according to Lawrie, referring to the number of people reporting to each manager. At the same time, Lawrie said CSC hired 6,000 employees in the most recent quarter in a push to refresh its workforce.

All told, Saleh said DXC achieved $60 million of net savings in the quarter through its workforce optimization. "We've had the first phase of management layer elimination, but we still need to attract younger talent in the right location and continue to develop the talent that we have," Saleh said.

DXC has also been closing locations with low utilization rates and combining offices in big cities, Saleh said. The solution provider ended up shutting 58 facilities and consolidating an additional 31 sites.

The facility closures yielded a $25 million net savings in the quarter, Saleh said, and reduced DXC's overall real estate footprint by 7 percent, or 1.2 million square feet.

DXC saved $50 million by way of improved supply chain processes, Saleh said. The company consolidated its vendor line card, renegotiated agreements with its top strategic suppliers, and achieve additional rate reductions for third-party labor as well as non-labor expenses, according to Lawrie and Saleh.

Finally, Lawrie said DXC reduced its services and products from 500 separate offerings to less than 300, grouped into nine offering families.

"It's critical that we have the right mix of people with the right skills to serve our clients, to drive innovation, and to compete in a very dynamic workplace," Lawrie said.

In DXC Technology's first quarter of operations, which ended June 30, the company reported that sales sunk to $5.91 billion, down 7.9 percent from $6.42 billion for the combined performance of CSC and HPE Services at this time last year. That fell short of Seeking Alpha's estimate of $5.93 billion.

Net income climbed to $159 million, or $0.55 per diluted share, up from a net loss of $283 million, or $1.00 per diluted share, for the combined companies a year ago.

On a non-GAAP basis – which excludes restructuring, transaction, integration and pension-related costs – net income soared to $461 million, or $1.59 per share, up 164.9 percent from $174 million, or $0.61 per share, for the combined companies last year. That crushed Seeking Alpha's estimate of $1.27 per share.

DXC Technology shares climbed $2.51 (3.24%) to $80 per share in after-hours trading on Tuesday. Earnings were announced after the market closed.

DXC saw Global Business Services (GBS) sales decline to $2.27 billion, down 6.4 percent from $2.42 billion for the combined companies the year prior, due to the completion of large government application services contracts in the United Kingdom. That was partially offset by growth in DXC's enterprise cloud apps, consulting and analytics offerings, according to the company.

Global Infrastructure Services (GIS) revenue fell to $2.97 billion, down 9.8 percent from $3.29 billion the year prior due to continued woes in the company's data center business. However, the rate of decline after factoring out changes in foreign currency exchange rates slowed to 5 percent, from an average year-over-year fall of 12 percent, during the company's 2014 to 2017 fiscal years, Lawrie said.

United States Public Sector (USPS) revenue tumbled to $677 million, down 4.2 percent from $707 million due to the lumpiness of contract award timing and several large deals getting pulled forward into the pre-merger period. The division consists purely of capabilities previously housed at HPE Enterprise Services since CSC spun off its U.S. Public Sector division in November 2015 to form CSRA.

For the company's 2018 fiscal year, which ends March 31, 2018, DXC expects earnings of between $6.50 and $7.00 per share on sales of $24 billion to $24.5 billion.