5 Keys To Understanding DXC's Planned Divestiture Of Three Businesses

The three businesses combined offer a multitude of services and solutions aimed at solving some of the most important challenges facing business and public sector customers, but DXC hopes their divestiture will help solve some of its own challenges.

Looking For Growth In Uncertain Times

Mike Salvino, the new CEO of DXC Technology, said this week that the company plans to divest itself of three of its business. The move will let DXC better focus on its core business, Salvino said during his first quarterly financial analyst presentation since he took the reins in September.

2019 has been a tough year financially for DXC, the Tysons, Va.-based global solution provider formed from the April 2017 merger of HPE Enterprise Services and CSC. The company's share prices started 2019 at $52.28 per share, down from its peak the year before of $96.26 per share. During the year, they peaked at $68.89 per share in February, but then gradually fell to the mid- to upper-$20 range by November.

DXC this year has faced several issues, including three major legal battles including one based on alleged management fraud, a fight with its former parent company Hewlett Packard Enterprise over an expected payment, and the replacement of its CEO.

For its most recent fiscal quarter, DXC, ranked No. 3 on the 2019 CRN Solution Provider 500 list, reported revenue of $4.85 billion, down from the $5.01 billion it reported a year ago. The company also reported a GAAP loss of $2.12 billion, or $8.19 per share, compared with last year's net income of $259 million, or 93 cents per share. On a non-GAAP basis, the company reported net income of $362 million, or $1.38 per share, down from last year's $573 million, or $2.05 per share.

Salvino said there are several areas where DXC needs to improve, including getting its delivery teams to execute the most complicated phase of operational cost improvements, focusing more on strengthening its employees, zeroing in on selling integrated solutions, and taking better advantage of its IT outsourcing business.

Here is an in-depth look at how DXC plans to change its organization and the potential impacts of those changes.

‘Strategic Alternatives’ For Three Of DXC's Businesses

DXC is now pursuing “strategic alternatives” for three of its businesses, Salvino said. These include its U.S., state, and local health and human services business, part of its Global Infrastructure Services; its horizontal business process services business; and its workplace and mobility business. Combined, these businesses represent about 25 percent of DXC's total revenue, he said.

DXC evaluated each of its businesses against four criteria, including their importance to the enterprise technology stack, their ability to create industry solutions, how they provide what customers want, and their potential to unlock value, Salvino said.

Each of the three businesses fall under one of two of DXC's reportable business segments.

The first, Global Business Services, is focused on helping customers address business challenges and accelerate their digital transformation plans, and includes enterprise, cloud applications and consulting; application services; analytics; business process services; and industry software and solutions.

The second, Global Infrastructure Services, is DXC's portfolio for delivering predictable outcomes and measurable results, and includes cloud platform and services; workplace and mobility; and security.

The U.S., State, And Local Health And Human Services Business

DXC does not report individual revenue and income for its U.S., state, and local health and human services business, which can be said for all the company's individual businesses.

Unlike the other businesses, however, it is not called out separately in the list of Global Business Services capabilities.

DXC has over 50 years of experience in health care, and the company is currently focused on such services as digital care transformation, population health management and health-care data analytics.

DXC's core offering in this space is DXC Open Health Connect, a digital health and analytics platform aimed at helping businesses gain value from health-care data including medical-focused Internet of Things and electronic health records. The company also offers DXC Health360, a consumer-centered population health offering built on Microsoft Azure that is targeted at personalized care experience. The company also uses its DXC Bionix digital services delivery model for intelligent automation at scale to help accelerate transformation.

A good part of DXC Technology's health-care business is also tied to the company's other initiatives including analytics, and it is unclear how much of this business is slated for divestiture. A company spokesperson was unable to provide details.

Business Process Services

DXC said its business process services and solutions has 15,000-plus professionals working in over 20 delivery centers serving approximately 150 customers in 100 countries. The company said it offers a service-level agreement compliance rate of over 98 percent.

DXC’s business process services business, part of its Global Business Services segment, uses cloud and robotic process automation and artificial intelligence to help reduce customers’ business risks and improve performance. Services include agile process automation and intelligent automation as a service, card and payment services, customer experience transformation, and transformation of finance and human resources.

Workplace And Mobility

With DXC's workplace and mobility services and solutions, the company said it currently manages 7.5 million desktops and 1.5 million mobile devices for over 1,100 clients in 150 countries. Its teams respond to over 42.7 million service desk contracts worldwide.

DXC's workplace and mobility business is a part of its Global Infrastructure Services segment. It is currently broken down into seven categories of services.

The categories include mobility and workplace IoT, including artificial reality, virtual reality and wearable offerings; support services, including services for digital support, service desk, site support and smart work spaces; mobility and workplace management including services related to mobile enterprise, virtual desktop and application, and workplace devices, as well as Device as a Service; intelligent collaboration, including services focused on Office 365, unified communications, file sync and share, and messaging and collaboration.

They also include campus and connectivity networks working closely with AT&T to support digital transformation; software licensing and management solutions to address cloud and hybrid software licensing complexity; and advisory services, including consulting engagements to help clients better understand digital workplace issues and plan their transformation strategies.

Impact Of The Divestitures

Paul Saleh, DXC's executive vice president and chief financial officer, said during the quarterly conference call that executing on DXC's planned strategic alternatives for the three businesses would create a more focused portfolio while strengthening its ability to grow and unlock value.

Excluding those three businesses, DXC expects by fiscal year 2022 to have in excess of $15 billion in revenue with at least half the revenue coming from digital offerings, Saleh said. The company also expects margins to be at least 12 percent, even after accounting for investments. "This margin level is consistent with global industry peers," he said.

DXC also expects to generate net capital proceeds of about $5 billion for the three businesses, Saleh said. Of that, DXC expects to deploy $4.25 billion or more to repurchase shares and pay dividends over the next 10 quarters, he said.

By fiscal 2022, DXC expects at least $7 per share of adjusted earnings per share, and at least $5.25 in earnings per share after restructuring, transaction and integration costs, he said.

"This outlook reflects our plan to moderate these costs over the next couple of years," he said.

The planned divestment of the three businesses will likely initially be a negative to DXC's credit rating given that those businesses have a higher margin profile than DXC as a whole does, according to a Tuesday report from Moody’s Investors Service.

However, Moody's said, the shift in strategy will mean DXC will be better able to turn around its declining top line and react to IT industry changes.

"DXC has been slower than other competitors, such as Accenture (Aa3 stable) or Cognizant, to react to an evolving IT services landscape but we believe the scale and depth of its customer relationships provide an opportunity to reposition the company and return to long-term growth," Moody's wrote.