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DXC Technology (Baa2/BBB-/BBB) Falls 22% On Weak FCF Guidance Despite Strong Q4

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  • Q4 revenue was in line with BBG consensus at -5.7% YoY (o/w -4.9% was organic against guidance of -5.5 to -6.5%, better than each of the four BBG estimates of organic growth), driven by declines in Modern Workplace and Cloud and ITO. Adj-EBIT was ~17% ahead of consensus at -11.6% YoY with a margin of 8.4% against guidance of 7-7.5%; decline driven by lower non-cash pension income, and lower gains on asset sales.
  • adj-EBITDA leverage of 1.39x slightly higher from 1.34x at Q324 and 1.12x at FY23. EBIT interest coverage of 12.1x compared to 17.8x at FY23. FY24 FCF of USD 756mn came in below the FY guidance of USD 800mn.
  • Guidance is disappointing; organic growth seen at -4% to -6% from -4.1% this year, adj-EBIT margin of 6-7% from 7.5% this year and particularly FCF of USD 400mn from USD 756mn this year.
  • On the call, the CEO stated that the lower FCF guidance is due to reducing finance lease originations (USD 185mn in FY24 to 0 in FY25) and increased restructuring of USD ~250mn while saying cash flow will be weakest in Q1 and strongest in H2 as per usual seasonality.
  • EUR spreads muted.
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  • Q4 revenue was in line with BBG consensus at -5.7% YoY (o/w -4.9% was organic against guidance of -5.5 to -6.5%, better than each of the four BBG estimates of organic growth), driven by declines in Modern Workplace and Cloud and ITO. Adj-EBIT was ~17% ahead of consensus at -11.6% YoY with a margin of 8.4% against guidance of 7-7.5%; decline driven by lower non-cash pension income, and lower gains on asset sales.
  • adj-EBITDA leverage of 1.39x slightly higher from 1.34x at Q324 and 1.12x at FY23. EBIT interest coverage of 12.1x compared to 17.8x at FY23. FY24 FCF of USD 756mn came in below the FY guidance of USD 800mn.
  • Guidance is disappointing; organic growth seen at -4% to -6% from -4.1% this year, adj-EBIT margin of 6-7% from 7.5% this year and particularly FCF of USD 400mn from USD 756mn this year.
  • On the call, the CEO stated that the lower FCF guidance is due to reducing finance lease originations (USD 185mn in FY24 to 0 in FY25) and increased restructuring of USD ~250mn while saying cash flow will be weakest in Q1 and strongest in H2 as per usual seasonality.
  • EUR spreads muted.