DXC Q1 Ahead Of Consensus ; Noting Kyndryl Comments Last Week Relevant To Bid Reports

Rating: Baa2[N]/BBB-/BBB EUR 27s +3bp

Q1 results look ahead of consensus with a guidance raise though the results were light on detail and we note that the top-line is still seeing negative YoY growth on the back of Infrastructure Services weakness. Comments made last night by the Kyndryl CFO on his M&A strategy are likely of interest to DXC bondholders given the rally in DXC bonds back in June on Reuters reports of a joint bid for DXC by Apollo/Kyndryl back in June.

• Revenue -4.4% organically (reported +3.1% vs. BBG consensus) with beats across both the main segments (Global Business Services +2.4% vs. consensus, Global Infra Services +3.7% vs. consensus.
• Adj-EBIT margin of 6.9% (vs. consensus of 5.7%) up from 6.5% in Q223.
• FCF of USD 45mn (vs. consensus of flat) from USD -75mn in Q124 driven by OCF of USD 238mn from USD 127mn in Q124.
• Total debt of USD 4.1bn in line with Q1 and from USD 4.6bn at Q124.
• FY guidance raised; increased the low end of the adj-EBIT margin outlook range by 50bps to 6.5-7%, Increased the low-end of the EPS outlook range by $0.25 to USD 2.75-3 and increased FCF outlook by USD 50mn to USD ~450mn.
  
  
• Also, regarding the reported bid being considered by Apollo/Kyndryl which saw the EUR 27s/31s rally over2pts/4pts back in June, on Kyndryl’s earnings call yesterday the CFO noted “Our target has been to keep net leverage below one times adjusted EBITDA and we ended the quarter at 0.86 times. In terms of M&A, we do not need acquisitions to execute our growth strategy, So we will continue to be very selective, focusing on small tuck-in acquisitions like Skytap that complement our existing expertise and opportunities.”