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DXC Reports Progress In Resolving Customer Issues Under New CEO, But Sales Continue Decline In Q3

DXC Technology, which Thursday named a new chairman, said the company is making progress on selling three strategic assets and on identifying and solving issues it has had with its largest customers, said President and CEO Mike Salvino.

Global systems integrator and solution provider DXC Technology, which Thursday reported sales and earnings declines in its fiscal third quarter, said it is making progress in addressing issues with its customers and with plans to shed three of its businesses.

The third-quarter results are the first full quarter for DXC under new management.

Mike Salvino (pictured), who was appointed DXC president and CEO in September, told analysts on the company's earnings conference call that he is pleased with the progress DXC has made with running its business and unlocking its value.

[Related: 5 Keys To Understanding DXC's Planned Divestiture Of Three Businesses]

"We reported financial results in line with our plan," Salvino said. "Simply put, we did what we said we were going to do. And we are executing nicely against our new focused strategy."

Salvino took over as DXC CEO and president in September after Mike Lawrie retired from those posts in September. Lawrie remained chairman through December when he retired from that post as well.

On Thursday DXC named Ian Read, former chairman and CEO of pharmaceutical giant Pfizer, to be the company’s new chairman. He succeeds David Herzog, a DXC board member who had been serving as interim chairman following Lawrie’s retirement.

Read's appointment follows by less than a week the appointment of Chris Drumgoole, the former chief information officer of General Electric, to be DXC’s new chief information officer.

Salvino said he is thrilled that Read is joining DXC as chairman of the board. "Ian brings a wealth of experience, particularly in the area of leading large public companies through transformation, Salvino said.

Addressing DXC’s financial results on the analyst call, Salvino said that issues related to a DXC's long-running transformation will not be a quick fix. "But I am confident that our new focused strategy will position DXC to compete in the IT services space," he said.

A quarter ago, Salvino said, he called for DXC to leverage its ITO (IT outsourcing) capabilities and make investments to improve delivery and regain trust. "I have a fundamental belief that, by running our customers' critical systems smoothly, we will earn the right to win additional business," he said.

Leveraging its ITO business has been a key part of growing DXC and overcome a number of issues, Salvino said.

DXC, after assessing customer accounts, found it had a list of 20 to 30 accounts it classified as "challenged," Salvino said.

"[That meant] we were not meeting service levels or customers were not pleased with our performance," he said. "We started doing in-depth reviews, and saw some partial [account] terminations, and two accounts that terminated completely. During this quarter, we established a very focused program that includes 40 accounts to address these issues. These accounts represent about a quarter of our revenue.”

“Overall, this program is off to a good start, with seven accounts graduating out of this program. We expect the majority of accounts to be turned around by the end of Q4, and the program to be completed in the first half of fiscal '21,” the CEO said.

As part of his push to resolve the customer issues, Salvino said he personally made 92 check-in calls in the quarter.

"This program has clearly created positive momentum with our customers. In fact, we've already been awarded over $500 million of business from several of these accounts in the form of renewals and new work. Some of this new work was previously put on hold, and some of the new work was in analytics, which is at the top of the enterprise technology stack. This is solid evidence that leveraging the ITO business and focusing on our customers, people, and operational execution is the right strategy to grow DXC."

To improve DXC's operational execution, the company has a team focused on examining its delivery footprint, utilization and talent to improve its quality, speed, and cost of delivery, Salvino said.

"Ultimately, our goal is to consolidate and further scale our delivery operations," he said.

The company is also moving to a regionally focused operating model with a tighter management system designed to speed up decision making and increase accountability, he said.

In order to better leverage ITO business to spur DXC growth, the company is beginning to use Virtual Clarity, the digital transformation company it acquired late last year, to assess the IT estates of its top 200 accounts and let DXC have fact-based dialogues about migration of those estates to the cloud, Salvino said.

"In these discussions, we talk about technical feasibility, risk, the value proposition, and the ability of our customers to execute such a migration, along with their need for assistance," he said.

Those assessments are expected to be complete for 30 top accounts in the fourth fiscal quarter.

"This work will allow us to have productive and proactive discussions with our customers, and give us hard numbers concerning how fast our ITO business, which has a large amount of mission-critical applications and infrastructure in it, will move to the clouds," he said.

When it comes to unlocking value, DXC is introducing customers to the breadth of its enterprise stack, and customers are reacting positively by showing growing interest in trying its services, he said.

DXC is also executing well in pursuing strategic alternatives for three of its businesses, and is on-track to meet its timelines, Salvino said. DXC has engaged advisers to help with the move, and plans to be in the market this month, he said.

The first of these is its state and local service operations and health and human services, where business has continued as usual, he said. The other two are horizontal BPS (business process services), and workplace and mobility, where results were mixed but in-line with expectations.

"On the positive side, some customers have awarded us new work or have renewed existing contracts," he said. "However, there's been a few cases where customers are pushing out renewals, insourcing the work, or have indicated their intent not to renew with us."

For its 2020 third fiscal quarter, ended December 31, DXC reported revenue of $5.02 billion, down about 3.0 percent over the $5.19 billion the company reported for its fiscal 2019 third quarter. However, the quarter's revenue beat analyst expectations by $120 million, according to Seeking Alpha.

That includes global business services revenue of $2.36 billion, up 8.8 percent over last year, and global infrastructure services revenue of $2.66 billion, down 11.5 percent.

Net income on a GAAP basis was $90 million, or 32 cents per share, for the quarter, down from last year's $466 million, or $1.66 per share.

On a non-GAAP basis, the company reported net income of $328 million, or $1.25 per share, down from last year's $626 million, or $2.26 per share. Analysts had been expecting non-GAAP earnings per share of $1.08.

DXC reported its financials after the close of the trading day, during which share prices rose 13 cents to $34.63 per share. However, in after-hours trading, share prices rose nearly 7 percent to $37 per share.

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