Trump's tax reforms lift DXC's profit

Tax reforms in the US helped shore up the bottom line of cost hurling Frankenfirm DXC Technologies, but the top line slid at the company for third straight quarter since it came into being.

At $6.186bn, revenue for DXC’s Q3 ended 31 December was ahead of consensus estimates from analysts but represented a 5.9 per cent year-on-year drop on a pro-forma basis.

The Global Business Services (GBS) and Global Infrastructure Services (GIS) divisions reported sales slippage of 6.6 per cent and 6.8 per cent respectively to $2.315bn and $3.145bn.

The US public sector division, the unit that will break away from the group in May and form part of an independent entity, grew 0.9 per cent $726m.

CEO Mike Lawrie didn’t go into fine detail on why the business continues to shrink in terms of sales, save for saying GBS’s margin improvement was due to “cost takeout actions, including the reduction of management layers”.

DXC confirmed last month that a bunch of senior execs, including former HPE Enterprise Services boss Mike Nefkens, were leaving the business.

On GIS, Lawrie said the revenue fall “reflects the continued management of headwinds in the legacy infrastructure business and client transformation leveraging digital offering in cloud and security”.

Basically, this unit isn’t in a place they want it to be yet.

DXC said it made sales gains in digital transformation, enterprise cloud and apps, consulting, cloud and analytics but admitted security was down. No meaningful financial figures were given. The firm opened five digital transformation centres globally in the quarter, it said.

Lawrie used big chunks of the conference call with financial types to update them on how the relentless efforts to hack costs out of the balance sheet are going. And they are going well from his perspective.

“We are on track to deliver $1.1bn or more of year one cost savings, which implies roughly $1.6bn of run rate cost savings exiting fiscal 2018,” he said.

And again.

“Collectively third quarter cost actions generated approximately $130m of in-quarter savings, which means we are on track to deliver the $1.1bn or more of in-year synergy realisation versus our target of $1bn.”

Not wanting to be outdone by his boss, CFO Paul Salah also got in on the act during the con-call:

“In this quarter we continue to rebalance our workforce. We reduced our labor base by an additional three per cent… through a combination of automation, best shoring and pyramid correction. We also continue to rebalance our skill mix, including the addition of 5,300 new employees and the ongoing retraining of the existing workforce.

“In real estate we eliminated 1.3 million square feet of space during the quarter and for the year-to-date we’ve reduced our total square footage by roughly 17 per cent. In total we delivered $130m of incremental cost take out in the quarter and are on-track to achieve $1.1bn or more in in-year savings, which translates to around $1.6bn of run rate savings exiting fiscal ’18.”

Profitability for Q3 was aided by an overhead squeeze and a boost from the provisional impact of US federal tax reform. This included the reprising of different tax liabilities that was offset by tax accrual that is required under the new tax rules.

DXC reported a pre-tax profit of $475m and with a $333m income tax benefit, net profit came in at $776m versus $31m a year ago.

“We’re still awaiting further guidance from regulatory agencies on the interpretation of the US tax reform provisions, including those related to global intangibles non-tax income and the base erosion anti-avoidance tax. It’s still early to tell, but overall we expect tax reform to provide a moderate tailwind,” said Salah.

A geographic split was not mentioned, unlike last quarter when DXC revealed a couple of big contracts were not being renewed in the UK. The Reg discovered these were with the Department for Work & Pensions. ®