Weakening customer relationships and “suboptimal” customer delivery were some of the factors behind a substantial revenue run-off that contributed to a loss of roughly US$1 billion in revenue for DXC Technology in FY20.
This is according to the global systems integrator’s (GSI) CEO and president Mike Salvino, who told shareholders on 28 May that the company expected roughly 4,500 employees, or around 3.5 per cent of its global workforce, to be affected in a major cost-cutting initiative the company is undertaking in a bid to stem its losses.
“DXC's main fundamental challenge has been revenue run-off from existing contracts,” Salvino said during an earnings call on 28 May. “With everything we've been doing for our existing customers, we should be able to stem future revenue run-noff.
“I say this because over the last [seven] months, we've done a lot of work to secure our customers, improve delivery and study our customers' IT states,” he said.
Salvino was candid during the call, putting the blame for a substantial drop in revenue not on external influences or market forces, but rather upon the company itself. And he didn’t pull any punches when it came to the company’s outlook for FY21, which painted a grim picture.
“Here's the key finding from all this work,” he said. “Our revenue run-off was not caused by cloud trends, prompting customers to move away from DXC. Instead, this run-off was due to suboptimal customer delivery and weakening customer relationships.
“As a result, we lost roughly [US]$1 billion of revenue in FY20 and expect to lose a similar amount in FY21 from price-downs and terminations decisions made by customers in the last 12 to18 months.
“For FY21, the impact will be more pronounced in the first half of the year. The good news is that this fundamental problem is absolutely within our control and fixable. In fact, we're making good progress on bringing the new DXC to our customers, which should help stem future revenue run-off.”
Salvino’s comments came as the company reported on its fourth quarter and annual financials for FY20, which highlighted marked drops in revenues and profits for both the quarter and the year.
Revenue in the fourth quarter was US$4.82 billion, compared with US$5.28 billion in the year prior, while the company made a net loss of US$3.50 billion for the fourth quarter, including US$3.81 billion of goodwill impairment. This compares with US$271 million the year prior.
For the year, the company made a net loss of US$5.36 billion, including US$208 million in restructuring costs and US$6.70 billion of goodwill impairment. This compares with a net profit of US$1.26 billion in the prior year period.
Revenue in fiscal year 2020 was US$19.58 billion, down from US$20.75 billion in the year prior. Adjusted earnings before interest and tax (EBIT) was US$2.06 billion in fiscal year 2020, compared with US$3.27 billion in the prior year.
However, Salvino laid out details of the company’s efforts to stem its costs and tighten up its bottom line going forward, with a decent part of the plan involving a “cost optimisation” initiative that is expected to impact at least 3.5 per cent of the company’s 137,000-strong global workforce.
“Now let me turn to our transformation journey, which consists of [three] initiatives focused on our customers, cost optimisation and the market,” Salvino told shareholders, reiterating the company’s efforts to improve delivery and relationships with existing customers.
“Being well on our way to securing our customer base and taking care of our people, it's now time to focus on the second initiative, which is to optimise the cost,” Salvino said. “Our cost optimisation will be initially focused on simplifying our management layers and taking the appropriate steps to rightsize our cost structure to our revenue.
“What I have learned by doing countless customer calls and account reviews is that we have too many people between our customers and the people doing the detailed work. This causes complexity and confusion. It also erodes profitability and shareholder value.
“By eliminating unnecessary layers, our people will be able to deliver for our customers faster, drive meaningful revenue growth and help deepen customer relationships. This is why we are accelerating our cost optimisation initiative. We expect to eliminate about US$700 million of cost on an annualised basis, with about US$550 million coming this year,” he added.
Salvino went on to say that the company expected roughly 4,500 people, or 3.5 per cent, of its workforce to be impacted as a result of these cost saving measures, although he stopped short of indicating which regions would bear the greatest brunt of the cuts.
“I also want to highlight a reminder...that along with these actions, we will continue to run our business,” Salvino said. “This means we will continue to hire and exit people at all levels as we see the needs and the performance of the business changing.
“This cost optimisation initiative will allow us to better serve our customers and help us seize the market, which is our third initiative,” he said.
Earlier this year, it emerged that, after a year hit by costs associated with its landmark merger of CSC and HPE’s Enterprise Services business, DXC Technology’s Australian branch had finally turned a profit.
DXC Technology Australia Holdings’ annual financials for the year ending March 2019, lodged with Australia’s corporate regulator on 31 January, revealed that the company registered a pre-tax profit from continuing operations of A$8.92 million.
This was a far cry from the pre-tax loss from continuing operations of A$20.53 million it booked the year prior, largely due to expenses involved with the integration of CSC and HPE’s Enterprise Services business, which together became DXC Technology following their landmark merger in 2017.