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Morningstar | DXC Updated Forecasts and Estimates from 13 May 2019

DXC, which was created via the merger of Computer Sciences Corporation, or CSC, and Hewlett Packard Enterprise’s, or HPE’s, Enterprise Services business, started trading in April 2017 and ushers in a new era for the combined IT services company. Historically poor management and strategic execution issues have plagued both companies; however, new management and full-scale turnaround efforts have notably improved the performance of both businesses. As a combined entity, DXC now has enviable scale within the IT services industry, which puts our prior scale concerns to bed. Top-line growth volatility is our primary concern, given declining legacy revenue exposure and the firm’s aspiring shift to provision of digital services. We are more confident in DXC’s ability to achieve considerable non-GAAP EBIT margin expansion (700- to 800-basis-point expansion from 2017 to 2020) and think management’s track record of achieving such lofty targets and current execution stand it in good stead.We do not assign an economic moat to DXC, owing to historically patchy returns on invested capital from CSC and HPE, along with the unknown future performance of the newly created company. However, DXC’s customer intimacy and scale is not to be discounted. With around 6,000 client relationships, the company has privileged access to a wealth of potentially sticky customers where the firm is looking to integrate valuable high-growth digital services. If the firm can significantly improve its digital position within clients over the short to medium term, we may revisit our moat rating.With DXC’s traditional revenue line expected to decline 4%-7% annually, given productivity gains and pricing pressure, the company’s future focus will be on rotating toward digital services, which DXC expects to grow 20%-30% annually over the medium term. To support its digital initiatives, the company has established digital industry partnerships with the likes of Microsoft, IBM, Oracle, SAP, and Amazon, while developing its industry expertise and reconfiguring its talent mix. Ultimately, we expect the growth-balancing act to lead to modest low-single-digit revenue growth over our explicit forecast period.