DXC (DXC)

IT services provider DXC Technology (NYSE:DXC) reported Q1 CY2025 results exceeding the market’s revenue expectations, but sales fell by 6.4% year on year to $3.17 billion. On the other hand, next quarter’s revenue guidance of $3.07 billion was less impressive, coming in 1.4% below analysts’ estimates. Its non-GAAP profit of $0.84 per share was 8.6% above analysts’ consensus estimates.

Company Overview

Born from the 2017 merger of Computer Sciences Corporation and HP Enterprise's services business, DXC Technology (NYSE:DXC) is a global IT services company that helps businesses transform their technology infrastructure, applications, and operations.

IT Services & Consulting companies stand to benefit from increasing enterprise demand for digital transformation, AI-driven automation, and cybersecurity resilience. Many enterprises can't attack these topics alone and need IT services and consulting on everything from technical advice to implementation. Challenges in meeting these needs will include finding talent in specialized and evolving IT fields. While AI and automation can enhance productivity, they also threaten to commoditize certain consulting functions. Another ongoing challenge will be pricing pressures from offshore IT service providers, which have lower labor costs and increasingly equal access to advanced technology like AI.

DXC Technology competes with global IT services providers such as Accenture (NYSE:ACN), IBM (NYSE:IBM), Cognizant (NASDAQ:CTSH), and Infosys (NYSE:INFY), as well as with cloud service providers like Microsoft (NASDAQ:MSFT) and Amazon Web Services (NASDAQ:AMZN).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $12.87 billion in revenue over the past 12 months, DXC is larger than most business services companies and benefits from economies of scale, enabling it to gain more leverage on its fixed costs than smaller competitors. This also gives it the flexibility to offer lower prices. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For DXC to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, DXC’s demand was weak over the last five years. Its sales fell by 8% annually, a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. DXC’s annualized revenue declines of 5.6% over the last two years suggest its demand continued shrinking.

DXC also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, DXC’s organic revenue averaged 4.4% year-on-year declines. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, DXC’s revenue fell by 6.4% year on year to $3.17 billion but beat Wall Street’s estimates by 0.9%. Company management is currently guiding for a 5.3% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 3.4% over the next 12 months. Although this projection is better than its two-year trend, it's tough to feel optimistic about a company facing demand difficulties.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

DXC was profitable over the last five years but held back by its large cost base. Its average operating margin of 2.4% was weak for a business services business.

On the plus side, DXC’s operating margin rose by 6.6 percentage points over the last five years.

In Q1, DXC generated an operating profit margin of 11%, up 18 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for DXC, its EPS declined by 9.3% annually over the last five years, more than its revenue. We can see the difference stemmed from higher interest expenses or taxes as the company actually grew its operating margin and repurchased its shares during this time.

In Q1, DXC reported EPS at $0.84, down from $0.97 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 8.6%. Over the next 12 months, Wall Street expects DXC’s full-year EPS of $3.43 to stay about the same.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

DXC has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3%, subpar for a business services business.

Taking a step back, an encouraging sign is that DXC’s margin expanded by 9 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

DXC’s free cash flow clocked in at $111 million in Q1, equivalent to a 3.5% margin. The company’s cash profitability regressed as it was 1.1 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

DXC historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.3%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, DXC’s ROIC averaged 4.2 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

DXC reported $1.8 billion of cash and $4.55 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.24 billion of EBITDA over the last 12 months, we view DXC’s 1.2× net-debt-to-EBITDA ratio as safe. We also see its $42 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing DXC beat analysts’ revenue, EPS, and EBITDA expectations this quarter. On the other hand, its full-year revenue and EPS guidance fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 12.5% to $14.50 immediately following the results.

Updated: May 23, 2025 at 12:00 AM EDT

Before investing in or passing on DXC, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We cheer for all companies serving everyday consumers, but in the case of DXC, we’ll be cheering from the sidelines. To kick things off, its revenue has declined over the last five years. And while its rising cash profitability gives it more optionality, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its projected EPS for the next year is lacking.

DXC’s P/E ratio based on the next 12 months is 4.4x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $17.11 on the company (compared to the current share price of $15.29).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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