(Not Investment Advice)
Hi Guys, So you've probably never heard of DXC but essentially they where born upon the merger of Computer Science Corporation (CSC), HPE Services and Electronic Data Systems (A former Ross Perot company lol). To me this looks like a great free cash flow story. Last year they generated $700 Million in FCF A $1.5 Billion reversal over the previous year. This year DXC is guiding to $800 million in FCF and by the end of 2023 DXC claims they'll be able to run this all the way up to $1.5 Billion annually. Considering the market cap is only $6.6 Billion it seems to me like that would be an enormous return. Furthermore a new management team has been installed at all senior levels of the company. It has a mix of DXC veterans who previously departed the company as well as talent from industry leader Accenture ($100+ billion MKT Cap). In my view the management is competent (although this is a big point of contention among lower level employees). The icing on the cake is they are selling non core assets, like banks, Prison management software etc. and using the freed up cash to buy back shares!
Let me go into the bear thesis as I understand it. Essentially the market believes that DXC's revenue will continue to decline as customers shift more workloads to the cloud. Additionally I would be remised if I didn't mention that most employees are angry with management. They would point out that DXC corporate culture can be toxic, lacks direction, and is chaotic.
I believe that these criticism have an element of truth to them however I don't believe they warrant the current depressed valuation.
On growth it is true that DXC's revenue has done nothing but plummet since inception. There are also other industry players in this space experiencing the same difficulties notably Kyndryl (Formerly IBM) as well as ATOS. That being said DXC software business recently begun posting organic revenue growth. Software is 50% of DXC's revenue so it is encouraging to see it beginning to grow. Additionally DXC's on-prem IT business is starting to see a leveling off of its revenue declines. While I do think cloud will be a medium term headwind I don't think on premise IT will permanently die. Hospitals, insurance, banking, high frequency trading, electric grids, smart city and hospitality are all examples of applications on “the edge” which should still provide DXC opportunity to grow. Eventually this market will bottom and when it does so will DXC's revenue.
On the poor management side my only response is that I believe that turnarounds take time. DXCs CEO Mike Salvino has been at this since 2019 and while that is a number of years my gut tells me that's still not enough time to drive a significant culture change for a company with over 100k personnel. This is not to say that they've not accomplished anything, DXC has reduced debt, returned to profitability, sold excess real estate, rebuilt the C-Suite, begun the arduous process of integrating the shit ton of companies the old management purchased. (all of this during covid mind you) . Oh and by the way Mike Salvino ran the exact same turnaround strategy for Accenture (ACN) BPO group which is basically ACN's version of DXC and was successful in his turnaround efforts there. DXC's managment apparently even meets regularly with ACN's former CEO William Green for advice. This is all to say that I find it hard to believe management is incompetent.
I will be honest one blind spot of my thesis is however Europe, I'm not quite sure how the war in Ukraine is going to effect European IT spending. 50% of DXCs revenue comes from Europe however much of this is for mission critical applications. In other words so long as Europe is able to keep the lights on DXC will earn revenue as customers the need DXC to run their businesses efficiently. Additionally there will probably be currency headwinds with the decline in the euro. Reasonably I think that revenue shouldn't all disappear and probably will come back at some point but it could be a significant headwind. As I write through this I'm thinking perhaps this is the silver bullet in my thesis and maybe it is. Id like to hear your thoughts please try and stress test my thesis id love to learn more. Also let me know if you need me to elaborate on anything. Thanks Guys
Q4 earnings deck Link
https://s27.q4cdn.com/120381974/files/doc_financials/2022/q4/Q4-FY22-Earnings-Deck-FINAL-(1)-(1).pdf-(1).pdf)
Most Recent 10-k
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001688568/878a4c00-cadc-415e-81e8-d17a205c1dd5.pdf
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