DXC Technology Company (DXC) — Q4 2025 Earnings Call Transcript

Hello and welcome to the DXC Technology Fourth Quarter and Fiscal Year End 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the conference over to Roger Sachs, Vice President of Investor Relations. You may begin. Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology’s fourth quarter and fiscal year-end 2025 earnings call. We hope you had a chance to review our earnings release posted to the IR section of DXC's website. Speaking on today's call are Raul Fernandez, our President and CEO; and Rob Del Bene, our Chief Financial Officer. Let me walk you through today's agenda. First, Raul will share an overview of our results and provide an update on our strategic initiatives. And Rob will take you through our financial performance, full year fiscal 2026 guidance, and offer some thoughts on our outlook for the first quarter. After that, both Raul and Rob will take your questions. Certain comments made during today's call are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from those expressed on the call. You can find details of these risks and uncertainties in our annual report on Form 10-K and other SEC filings. We do not commit to updating any forward-looking statements during today's call. Additionally, during this call, we will be discussing non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations to the most comparable GAAP measures are included in the tables that are in today's earnings release. And with that, let me turn the call over to Raul.

Thank you, Roger. Our fourth quarter results represent another important step towards our goal of achieving sustainable, profitable revenue growth. We are gaining momentum with bookings up more than 20%, resulting in a book-to-bill ratio of 1.2. This marks our second consecutive quarter above 1.0, bringing us to a second half bookings growth rate of 24%, a clear indication of traction in the market and building the foundation to drive long-term top line growth. Reversing eight consecutive years of revenue decline remains the highest priority for me, our leadership team, and the entire DXC organization. The rebuilding of our operational capabilities is deeper and more extensive than I originally appreciated. But the work the team is doing is addressing structural, operational, and cultural issues that will better position us going forward. Great companies are built by teams of experienced people who share an intense passion to win. I am proud that we have recruited 22 great new members of our extended leadership team in the last 15 months. Each brings exceptional skills with the intensity to win. And in that time, we also rotated out 14 executives. DXC has had significant turnover in top executive leadership since its inception, and leadership stability is absolutely critical to ensuring we give our turnaround the time, attention, and persistence it deserves. In that spirit, I'm happy to announce that Rob and I have received equity grants designed to secure our continued leadership through fiscal year 2028. These grants align our compensation with sustainable long-term shareholder value creation. Another area of critical importance to us is to deepen our customer relationships and identify new opportunities to expand our pipeline. I recognized this gap in our organization and started rebuilding these capabilities from the ground up with an eye toward operational discipline and improved execution. My team and I have reviewed quota attainment data and segmented the existing population. Based on achievement, we developed strict quantitative performance criteria for 2025 year-end reviews with a documented process. We held CEO calls with HR business partners and sales leaders to communicate changing expectations and initiated better reporting for tracking sales performance. In preparation for our new fiscal year, we completed a quota deployment audit to ensure proper coverage for fiscal year 2026, further aligned pay incentives for our sales organization, and onboarded our first Chief Revenue Officer, T.R. Newcomb, someone I've worked with in the past and who brings an incredible amount of focus, energy, and operational excellence to the role. Our work has led to continuous improvement in our systems, processes, and pay structures, all of which will lay an even stronger foundation. DXC has been a significant global technology player for over 40 years in four major technology cycles: personal computing in the 80s, Internet computing in the 90s, mobile and cloud computing in the 2000s, and now AI in 2020 and beyond. This is a company with tremendous assets, loyal customers, deep and broad capabilities, and a global footprint with local excellence. The impact of AI is just beginning to accelerate within our client base, and AI spending is increasing year to year. This comes at a time when our customers are favoring further consolidation of their IT spending, putting DXC in a unique position to compete with the combined power of our full stack, infrastructure, and app management capabilities. We have built an early but strong track record of delivering real bottom-line results for our customers in key areas, including modernization, technical support, development time, testing, process improvement, deployment, and maintenance by harnessing the power of AI. While it's very early in the GenAI adoption cycle, it is clear to me that we are very well positioned to lead our clients into what I believe is the largest transformational technology opportunity of our lifetime. One of my top commitments as President and CEO is to spend as much time with our current and prospective customers as possible. During my tenure, I've met with over 100 customers, which has equipped me to better understand how we can more effectively meet their changing needs and identify new opportunities for mutual growth. New logos of significant size have been scarce in DXC's recent history. And this is something we have been laser-focused on improving. We are thrilled to share that Carnival Cruise Line just tapped DXC to manage its critical infrastructure, powering operations across the entire fleet. This was a highly competitive bid with ISG advising throughout the selection process, and we won. We won because we are uniquely qualified. We brought the full weight of our infrastructure capabilities, enterprise applications, and technical muscle to the table, and DXC was chosen to be their critical partner. Carnival is one of the largest cruise lines in the world that hosts over 6 million guests a year. Their bar is very high. Everything must run safely and flawlessly, from shore to ship, with great customer experiences. That's where we come in. We deliver complete operational confidence, so Carnival can focus on their customers, knowing every system is firing on all cylinders and running smoothly no matter where they are. This win isn't just about one client. It's a clear signal that we are a trusted partner and operator for some of the world's largest brands. Creating a winning culture, which sets the foundation for us to win consistently in the marketplace, is not an overnight mission. It requires experienced leaders who can translate vision into action with sustainable results. Since becoming CEO, I have focused on increasing the clarity, consistency, and transparency of internal communication, embedding a startup ethos that emphasizes flat, fast, and learning-focused collaboration, and ensuring that we all think in terms of generating sound financial results while driving profitable growth, not just growth for growth’s sake. Over the past year, we've made targeted investments and brought in new leaders to jumpstart innovation across all our offerings, redesign and expand our AI capabilities and software platforms, and streamline how we develop applications using GenAI. We expect fiscal 2026 to be a year of continued disciplined execution to sharpen operations and drive efficiencies. Despite near-term uncertainty over tariffs, we are clear on our strategy, confident in our team, and committed to executing with the discipline required for DXC to generate sustainable and profitable growth. Reflecting our confidence in the company's future, we will restart our share repurchase program. This underscores our commitment to delivering long-term value to shareholders.

Thank you, Raul, and good afternoon, everyone. Today, I'll go over our fourth quarter results, touch upon our full year performance, and then provide guidance for the full fiscal year 2026 and the first quarter. Now, starting with the fourth quarter, total revenue of $3.2 billion was slightly above our expectations, declining 4.2% year-to-year on an organic basis. We delivered another strong quarter of bookings, up more than 20% year-to-year, resulting in a book-to-bill ratio of 1.2. Growth was broad-based across all of our offerings and markets. Adjusted EBIT margin was 7.3%, down 110 basis points year-to-year, and like revenue, slightly above our expectations. Performance was driven by investments in our employee base, improving the capability of our sales force, and investments in marketing and communications and IT. Similar to the dynamics we saw during the first three quarters, the decline in revenue was offset by labor and non-labor efficiencies. Non-GAAP gross margin for the fourth quarter came in at 24.2%, down 40 basis points year-to-year, and non-GAAP SG&A as a percentage of revenue expanded 160 basis points year-to-year to 11.3%. Our gross margin and SG&A performance were driven by the same factors just mentioned for adjusted EBIT. As a reminder, the year-to-year changes in our non-GAAP gross margin and non-GAAP SG&A are normalized for the reclassification of certain business development costs to SG&A. Non-GAAP EPS was $0.84, down from $0.97 in the fourth quarter of last year, driven by lower adjusted EBIT, partially offset by a decline to non-controlling interest and lower net interest expense. Now, turning to our segments. GBS, which represents 51% of total revenue, was down 2.4% year-to-year organically, with a profit margin decrease of 240 basis points to 10.9%. The margin decline was driven by investments in our employees and to further build our industry-leading insurance capabilities. Within GBS, consulting and engineering services had a second straight quarter of strong bookings, up 9% year-to-year with a book-to-bill ratio of 1.22. The trailing 12-month book-to-bill for CES has now increased to 1.08. Last quarter, we noted an increase in larger projects in our CES pipeline, and in the fourth quarter, we converted those opportunities to bookings. While these bookings have less revenue yield in the short term, they contribute to building our backlog and future revenues. The growth profile of bookings in the quarter was more heavily weighted to enterprise applications and data and AI, consistent with our growth strategy of CES. Organic revenue for CES declined 3.9% year-to-year, reflecting ongoing market pressures on custom application projects. Insurance and BPS organic revenue grew 2.7% year-to-year. Our insurance services and software business, which accounts for about 80% of the total, grew 1% year-to-year organically. Through the first three quarters of the year, the insurance business grew at mid-single-digit rates. Underlying performance in the fourth quarter was similar, with the growth rate largely impacted by one-time items. We have confidence that the growth rate for the insurance business will continue to perform at mid-single-digit growth rates for fiscal 2026. GIS, which represents 49% of total revenue, declined 6% year-to-year organically, the second consecutive quarter of narrowing the year-to-year revenue decline. The improvement was driven by cloud offerings and workplace support services. Fourth quarter bookings for GIS grew 33% year-to-year with a book-to-bill of 1.28. It was the second consecutive quarter of strong bookings, exiting the year with a 12-month book-to-bill of 1.03. Profit margin declined 50 basis points year-to-year to 7.0%, primarily reflecting our increased investments in our workforce. We continue to drive cost savings through optimization of software and data center costs. Now, let me briefly touch upon our full year fiscal 2025 results. Fueled by our strong performance in the second half of the year, full year bookings increased 7% year-to-year, significantly better than the fiscal 2024 performance. With bookings up 24% in the second half of the year, the book-to-bill ratio was 1.28 in the second half and 1.03 for the full year. Total revenue was $12.9 billion, down 4.6% year-to-year on an organic basis with GBS declining 1% and GIS down 8.2%. Adjusted EBIT margin expanded 50 basis points year-to-year to 7.9%, driven by the execution of our cost reduction initiatives, which we accomplished with significantly less restructuring than originally estimated. Non-GAAP diluted EPS was $3.43, up 11% year-to-year, primarily driven by a lower share count and a higher adjusted EBIT. Now turning to our cash flow and balance sheet. For our full year fiscal 2025, we generated $687 million of free cash flow, above our most recent expectation of $625 million, largely driven by lower restructuring spend and better working capital management. In the year, we executed on our strategy of minimizing new financial lease originations and funding equipment purchases primarily through capital expenditures, which is a negative impact on free cash flow but reduces our debt levels. As a result, capital expenditures increased year-to-year. Without this change in approach, free cash flow would have increased year-to-year and CapEx would have declined. Total debt at fiscal year-end 2025 was equal to $3.9 billion, down $213 million year-to-year, including $298 million of capital lease and asset financing paydowns. Total cash in our balance sheet increased by approximately $570 million year-to-year to $1.8 billion. This was driven by our free cash flow generation and asset sale proceeds of approximately $190 million. As a result, we lowered net debt by $785 million to approximately $2.1 billion. As a reminder, we do not include asset sales in our reported free cash flow. At the beginning of fiscal 2025, our financial priorities centered around strengthening our balance sheet, creating financial flexibility, and reducing excess capacity with the help of restructuring spending. We accomplished these objectives while spending less than originally planned on restructuring. With our improved financial position in fiscal 2026, we will focus on the following financial priorities. We will continue to invest in our business to accomplish our top priority, driving sustained profitable revenue growth. We will continue to reduce outstanding debt by minimizing financial lease originations and paying down a portion of our senior notes maturing in January of 2026. And finally, we plan to return $150 million to shareholders in fiscal 2026 in the form of share repurchases. Now, let me provide you with our full year fiscal 2026 guidance. We expect total organic revenue to decline 3% to 5%. GBS is projected to be down low single-digits with consistent performance during the year, reflecting the larger, longer duration deals booked in the second half of fiscal '25 and increased economic uncertainty, particularly with shorter term project-based services. In GIS, we're projecting organic revenue to decline mid-single-digits, which reflects an improvement over last year's rate of decline. We expect adjusted EBIT margin to be between 7% to 8%, which reflects our intent to continue to build our revenue growth capabilities and invest in the business. With this revenue and adjusted EBIT margin guidance, we expect non-GAAP diluted EPS to be between $2.75 and $3.25. We expect free cash flow for fiscal year 2026 of about $600 million, reflecting our EBIT guidance and about $30 million of increased restructuring spending as we complete the execution actions planned in fiscal '25. Consistent with prior years, free cash flow generation will be strongest in the second half of the fiscal year. And now, for the first quarter of fiscal 2026, we expect total organic revenue to decline between 4.0% and 5.5%. We anticipate adjusted EBIT margin to be in the range of 6% to 7%, a function of lower revenue and first quarter seasonality with margins improving throughout the second half of the year. And finally, we expect non-GAAP diluted EPS of $0.55 to $0.65. Before wrapping up, I want to highlight that beginning in the first quarter, we will report our financial results under a new segment structure that better aligns with how we now run the business. We will report three segments: insurance services and software, consulting and engineering services, and GIS, which will include cloud and ITO, modern workplace, security, and horizontal BPO. We plan to provide restated historical results under our new reporting segments prior to the release of our fiscal first quarter results.

Thank you, Rob. We now like to open the call for your questions. Operator, can you please provide the instructions?

Hey, guys. Good afternoon. Thanks. I wanted to just kick off on demand and the broader question about kind of what you saw as you moved through the quarter and then post-quarter April into May. And if you can comment on kind of what you've been seeing by industry as it relates to the ones that are more product-based that would have direct implications for tariff dynamics versus those that are not. So, any commentaries as you've seen demand evolve, particularly if you've seen anything in the most recent week change just given, I guess, better directionality in geopolitics?

Sure, it's Raul here. Let me start. Look, we've had really good progress and good wins at the mega level, $100 million plus, and at the strategic level, the $5 million to $100 million. The $5 million and under is the category that's highly discretionary and easier for corporations to turn on and turn off. There are some segments where there has been some softness since early April. And those are, I'm going to hand it over to Rob now.

Yes, as we look at the pipeline in consumer industries and retail, there has been a notable decline, particularly in project-based services. The decreases are mainly observed in those areas and slightly in the media and entertainment sector, which is somewhat unexpected. Overall, other industries such as banking, capital markets, manufacturing, public sector, and insurance are performing very well. Additionally, project-based services pipelines are solid for projects below $5 million; however, we see a strong performance in what we refer to as the strategic segments between $5 million and $100 million. These segments are more complex and take longer, but the pipelines in this range are very solid.

I appreciate that. For my follow-up on free cash flow, could you explain how you plan to reach the $600 million target, starting from the fiscal '25 levels? Also, could you discuss your free cash flow expectations after finance leases as the year progresses?

The transition from fiscal year 2025 to 2026 is primarily based on the 2025 results, adjusted for the after-tax EBIT guidance we provided and the additional $30 million in restructuring costs. This suggests that the other factors affecting free cash flow remain largely unchanged in our projections. The chart we presented during the earnings briefing was intended to highlight the strength and consistency of our underlying free cash flow. Although the overall free cash flow figure decreased from 2024 to 2025, considering the lease originations associated with capital lease financing we have previously undertaken shows that if we had treated those capital purchases as expenses instead, our free cash flow would indicate consistent improvement over the last two years. Overall, there is a solid foundation for our free cash flow performance.

Okay. I know the capital finance lease piece was like just under around $300 million for this past fiscal year. Do you expect that to be comparable or do you still see that being lower for ‘25?

We anticipate a decrease year-over-year due to significantly lower originations in fiscal '25.

Great. Thanks for taking my questions. First, can you help decompose what's contemplated in your outlook at both the high end and the low end of the range from a macroeconomic perspective?

Yes, hi, Jonathan. Let's discuss the first quarter revenue outlook of a decrease of 4% to 5.5%. We've allowed for some uncertainty at the low end by expanding our typical 1-point range to 1.5 points. While we don't anticipate any exposure at this time, we've made room for it. For the full year 2026, we've maintained a traditional 2-point range, also considering potential lower end exposure in case conditions worsen, similar to the first quarter. We believe we've adequately factored uncertainty into both the first quarter and the full year forecasts.

Appreciate that color. And just as a follow-up, how would you characterize the pricing environment and sort of what you've seen through the quarter and how that may compare to what you saw last year?

The pricing environment has been very stable for us. Particularly for mega deals, we have seen improvements as renewals are coming due, which has been favorable. In project-based services, both strategic projects in the $5 million to $100 million range and those below $5 million have also remained stable, which has been beneficial for us.

I just want to ask structurally, your GenAI spend or GenAI spend generally has been increasing. How's that being reflected in your P&L now and where are you seeing that show up? And I guess maybe more importantly, how fast are these projects growing and what's their relative size compared to your typical engagements?

Yeah, look, the spend from major corporations in the last two years have been on the smaller side, so the $5 million and under, and there have been pilots to prove out proof points, meaning faster, better development time, faster, better documentation, et cetera. And we see across every industry a considerable amount of pilot work. And that's an area that I'm super excited about because we've got a great set of building blocks that we're putting in place with regards to replicability, with regards to scale of our solutions. And that's key for us in terms of taking the opportunity, the AI opportunity for our clients in different industries and being able to bring them real results, real case studies that have ROI behind them and having them quickly adopt. So, I'm super excited about the demand on that front. We are still very, very early in the cycle, but we are very well positioned for several reasons. And let me just add two more. One of the clear considerations for companies as they're looking to engage any part of their business functions into any sort of GenAI work is to look at their data readiness, their infrastructure readiness, and their people and process readiness. And we are uniquely positioned to have incredible insight there. So, I feel very, very strong about our early returns on that front with our customers and the foundation we're building because that foundation will be part of our growth in the future.

Got it. Appreciate that. And it seems like you're seeing increasing bookings. Obviously, the time to convert that to revenue takes a little while, and that makes sense. But I wonder if you can talk about how the duration of the new contracts you're signing compares to what you've done in the past and how that may be improving if at all your revenue visibility.

I think number one, and I'll turn it over to Rob in a second, is we're building a bigger, more qualified pipeline through the fundamental restructuring and rebuilding of our sales operation. I went into a lot of detail in the remarks to begin with around that because it gives you some insight as to the level of foundational work that was needed in that particular area. And now with a great new leader that I've worked with in the past here, Newcomb, taking that and operationalizing it and scaling it is key for us. And we've got the building blocks in place now. And frankly, if you think about the type of work that we've done in sales, we're doing similar work across every business function. And now with our leadership team in place, we've got not just the foundation set in the right direction, but leaders that can continue to grow.

Yeah, James, it's Rob. Let me just throw in one more comment. So, in our CES business, where the pipeline has been very good, and the bookings were very strong in the strategic project category, that means between $5 million and $100 million, those projects are typically more complex, they're longer in duration. So we are experiencing within the CES business that longer duration entering into our backlog and revenue projections going forward. That's reflected in our guide. So that became more pronounced in the third quarter and into the fourth quarters where it was really evident to us. So if we continue to see, and hopefully we will, the bookings in that category increase because these are strategic enterprise apps related as opposed to custom apps, it will be really good for the business, but the yield, turning the conversion into revenue is extended a bit versus traditional custom apps, smaller projects.

Yeah, thank you very much. My question follows that is more broadly, what are the conditions in order to generate revenue growth? And so I think investors are a little bit disappointed with the fiscal year ‘26 guidance, call it negative 4% at the midpoint. You talked about maybe duration is impacting that conversion of what appears to be solid bookings into revenues, but what longer term message do you want to leave with investors about what would cause the business to turn to a positive number? And don't know if you want to venture this far, but when would that be?

The foundation elements are both quantitative and qualitative. On the quantitative side, we've made progress in bookings, the trailing book-to-bill, and the size and quality of our pipeline, which are crucial. The effectiveness of our ability to win deals is a part of our execution. Improved sales and marketing capabilities, including both personnel and materials, are essential for this. It comes down to two areas: is the foundation in place with the right stories, solution development, bidding proposals, and leadership? We certainly have the opportunities. Can we execute? Yes. Can we execute at scale? That's critical in terms of timing. We need to gauge how quickly we can reach scale. The rebuild was significant, and we have key leaders in place. As we progress through the year, I believe we'll gain better insight into when we might see a turnaround.

Okay, maybe my follow-on then is, do you think the underlying markets you serve are growing in your seating share or do you think the markets that you serve, not the broader IT services, are contracting and you're doing better so to speak? And I'd like to hear within that context, maybe you could flush out a little bit on the Carnival Cruise Line deal about why do you think that you won that deal and how important was price in the ultimate conclusion?

Yeah, great question. We have more than enough opportunities in every vertical that we serve and every geography that we're in. AI adoption isn't segmented by geographies or verticals. It's happening across every industry and every company. So the opportunity is there. That's a full stop. Our ability to win is executing on the big and small things. And one of the things that I'm reflecting on, which has been great with regards to the Carnival, is that I was in one of the very early pitches with the team. New teammates that had just joined us were part of the bid and proposal and solutioning team, and we competed against 12 others, and it was a very, very good competition. At the end, we won across the board on all the key metrics, but it wasn't down on price. It was on capability. It was on being a proven partner. It was on having the foundation, technical foundation, leadership, partnership to take them to another level. And we were able to clearly convey that in terms of what we bring to the table, and that was a great proof, a great win. The key here is to scale that over and over again. Demand is there. We have presence, we have customers. We just have to scale the winning emotions that led to a great, great new partnership with Carnival.

Hi, thanks. This is Paul Obrecht on for Darrin. So now that we're a few quarters into the revamped go-to-market approach, can you just touch on what the company's cross-sell motion looks like today and as you're improving engagement with clients and helping build their understanding of all of DXC's offerings, are you seeing incremental demand from GIS clients for the GBS offerings?

Yes. We have recently started hosting client engagement insight forums where we gather multiple clients from various industries to discuss current challenges, opportunities with AI, and showcase proof points through real case studies and return on investment. Participation has been excellent, and I’ve attended a few sessions. It is evident that when customers recognize the full range of our capabilities—from infrastructure to applications, AI, and customer development—we stand out as one of the few providers that offer comprehensive end-to-end solutions globally with local excellence. Consequently, we are well positioned to continue expanding in this area. We need to establish processes to enhance solution scaling, improve pre-marketing efforts, and better target opportunities within our existing customer base to accelerate revenue generation.

Yes, the drop from the previous year to the midpoint is approximately 40 basis points. This is due to revenue declines mitigated by our careful cost management, which we have shown we can maintain in fiscal '25. We plan to continue this approach to counter any revenue declines. Additionally, we have cost reductions that will exceed what is necessary to support our investments, but we have also budgeted for an increase in investments year-over-year. Ultimately, this accounts for the decline in margin at the midpoint, as we are allowing for investments that will support our growth journey. This is the primary factor affecting the margins at the midpoint. As we did in '25, we will keep track of these metrics throughout the year and adjust our investments to ensure we are achieving the desired returns.

Thank you. And I just want to hone in on one topic, and that is the investment plans going forward. So I just want to ask about your priorities or investing in new solution capabilities in order to drive that more positive growth. If you could give us any sense also of the magnitude of investments that you're planning over the next year relative to your current investment pace. You said a little bit about that in the margin bridge, but it might be helpful to say more. But the main question really is what are the specific solution areas that you're investing most in to drive the profitable and positive growth?

Yeah, it's replicability of large capabilities that are repeatable capabilities that our clients are asking for. And we're in the process of putting together great frameworks that we're going to be rolling out again as part of the new team that's come in place to take the point work that we've got going around the globe, package that up, create a comprehensive story and be able to both not just cross-pollinate internally, but use that as an ability to generate what I believe is going to be great sales opportunities for us because we have proven ROI proof points. And we've got the other factor, which is industry knowledge. And probably most importantly, we've got a great client base. So for us, it's internal optimization, internal collaboration, internal knowledge sharing, and then external packaging. I mean those are the key ingredients.

I would like to add to what Raul mentioned that we are also investing in sales and marketing. This is another area where we are enhancing our capabilities, and it is part of our plans for next year and for 2026 as well. Rod, if you look at the guide and the bridge I provided, I believe it gives a good indication of the scale of the year-to-year investment profile.

Thank you, operator, and thank you, everybody, for joining us today, and we look forward to speaking with you again next quarter.