DXC Technology Sees Growth In Cloud Business, Accelerates Digital Transformation Efforts

While DXC Technology saw some headwinds in its move to consolidate itself as one of the IT industry's largest solution providers, it is seeing growth in its new digital business and has accelerated its cost-saving moves beyond its original goals.

DXC, formed nearly a year ago by the integration of Hewlett Packard Enterprise's Enterprise Services business with stand-alone solution provider CSC, also said the merger of its public sector business with that of two other government-focused solution providers is proceeding as planned despite a delay in the timing.

The update to DXC's business was reported Thursday during the company's third fiscal quarter 2018 financial analyst conference call.

[Related: A Channel Force Arrives: DXC Technology Born From Close Of CSC-HPE Enterprise Services Merger]

The highlight for the quarter, which ended Dec. 31, was 13 percent growth in DXC's cloud business, which cuts across all the different parts of the company's total business, said Mike Lawrie, chairman, president and CEO of the Tysons, Va.-based solution provider, No. 11 on the 2017 CRN Solution Provider 500.

Lawrie, speaking with analysts on the conference call, said that growth included 25 percent year-over-year growth in enterprise cloud apps and consulting revenue, 13 percent growth in cloud revenue, and 2.4 percent growth in analytics revenue, tempered by a 3.5 percent drop in security revenue.

"We are continuing to invest in and grow [the security] business through the expansion of our security consulting capabilities," he said. "We also launched new capabilities including identity access management-as-a-service and a ransomware consulting diagnostic to address the increase in cybersecurity threats."

DXC also saw progress in the development of its new digital business team to jointly develop digital transformation with its customers, Lawrie said. "We're scaling this model to more than 50 accounts over the next few months," he said. "In our pilot accounts, we increased the digital pipeline by 30 percent, and created several new opportunities valued at more than $200 million each."

Those initial engagements were also leveraged to build a digital business framework to align DXC assets and capabilities with partner offerings to create a reusable digital transformation blueprint, Lawrie said.

"This allows us to quickly shape modular transformation road maps tied to clear business outcomes for our clients while unlocking a greater share of wallet and overall revenue growth for DXC.," he said.

DXC has launched five digital transformation centers globally, including one during the third fiscal quarter, and launched new partner offerings including digital insurance as a service with Amazon Web Services that allows insurers to launch new offerings quickly, Lawrie said.

DXC reported third fiscal quarter 2018 revenue of $6.19 billion, down from the $6.59 billion reported for the same period of fiscal 2017. Last year's revenue figure was a pro forma combination of the revenue of HPE's Enterprise Services business and CSC, adjusted to take into account the two organizations' different reporting calendars.

Third fiscal quarter 2018 revenue include $2.3 billion from the company's global business services, which was down 4.6 percent over last year; $3.1 billion from its global infrastructure services, down 4.7 percent over last year; and $726 million from its U.S. public sector business, up 0.9 percent, Lawrie said.

"Historically, [HPE Enterprise Services] experienced significant headwinds each November," Lawrie said. "Through our focused sales and add-on project work, we were able to offset those headwinds and grow revenue sequentially overall."

The company reported third fiscal quarter 2018 net income of $779 million, or $2.68 per share, on a GAAP basis, which included a $473 million tax adjustment related to U.S. tax reform. This compares with $37 million, or 21 cents per share, a year ago.

On a non-GAAP basis, income before income taxes was reported at $877 million, or $2.15 per share, compared with last year's $589 million.

As the integration of the two parent companies continue, DXC is enjoying improved workforce efficiencies, Lawrie said. This includes moves to drive productivity through increased automation related to both internal personnel as well as third-party contractors, as well as moves to enhance management to better utilize labor in existing projects and move some of that labor to staff new projects, he said. The company is also tightening its supply chain to eliminate or convert thousands of contractor roles, he said.

DXC also has several initiatives aimed at optimizing non-labor spending, including renegotiations, vendor consolidation, demand management and maintenance expense reduction, Lawrie said.

"Collectively, third-quarter cost actions generated approximately $130 million of in-quarter savings, which means we're on track to deliver the $1.1 billion or more of in-year synergy realization versus our target of $1 billion."

Lawrie also told analysts that DXC's planned spin-off of its U.S. public sector business in a merger between it and two other government solution providers, Vencore and KeyPoint, was originally slated to close at the end of March. However, because of issues with the accounting firm needed to approve the merger, combined with additional time to finish the spin-off, means it is expected to close in late May.