DXC Technology Company (DXC) — Q2 2026 Earnings Call Transcript

Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology's Second Quarter Fiscal 2026 Earnings Conference Call. We hope you've 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. Here's today's agenda. First, Raul will update you on our strategic initiatives. Rob will then cover our quarterly financial performance as well as provide thoughts on our third quarter and fiscal full year guidance. Raul and Rob will then take your questions. Please note, certain comments on 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. Details of these risks and uncertainties are 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 the call, we will be discussing non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations of the most comparable GAAP measures are included in the tables included in today's earnings release. And with that, let me turn the call over to Raul.

Thank you, Roger. Our financial performance in the quarter was mixed. We were above our guidance in adjusted EBIT margin and non-GAAP diluted EPS and generated very strong second quarter free cash flow. However, I am disappointed in our performance in revenue and bookings, and we are laser-focused on building a predictable and growing company with better execution and pipeline conversion in the quarters ahead. I believe the strategic and tactical game plan we have in place will position us to create value in the rapidly evolving AI global economy. We have a strong balance sheet and consistent free cash flow and have the flexibility to continue to make the necessary investments to execute on our AI strategy. In the quarter, we formalized a 2-track approach to running our business, core track and fast track. Our core track represents our existing business where we are working to bring our portfolio of offerings to their full potential in the market. For an example on how we plan to energize our core business, let's take SAP. We have a 15,000-person strong SAP practice and ranked #3 among all system integrators for certified SAP business AI consultants. Our business needs to convert this strong capability into strong revenue growth. We now have a structured plan to scale our SAP business over the coming quarters. We expect this will double our SAP revenue over the next 3 years. Fast track represents our new AI native or highly AI-infused solutions that we have been building and piloting with a combination of our existing team and the new group of experienced leaders we have brought into the company in the last 20 months. Fast track solutions have a goal to be 10% of our business within 36 months. These AI-based SaaS solutions are highly replicable and built on proprietary methodologies, models and frameworks that create defensible competitive moats. And the best part is that clients can expect to see measurable results in weeks and months rather than quarters and years. Each product has a growth target and a net margin goal higher than our existing core portfolio baseline. We are targeting our first set of products for large and growing markets. Let me give you a few examples of our fast-track products. Within financial services, we are leveraging our strong legacy. Decades ago, one of DXC's predecessor companies developed Hogan, the preeminent core banking platform used by some of the largest financial institutions in the world, supporting $5 trillion of deposits and facilitating $2.5-plus trillion in daily transactions. To enhance and modernize this essential banking platform, we are developing a new offering, DXC CoreIgnite. We are redefining how banks unlock value from their core infrastructure by turning existing deposits and payment systems into cloud-native API-driven services that power new revenue streams. DXC CoreIgnite converts cost centers into growth engines, empowering banks to launch innovative, monetizable services at speed and scale without ever disrupting the core. Recognizing the untapped potential of Hogan, we identified the opportunity to transform it from a legacy core into a growth platform solving for challenges of interoperability. We recruited a new entrepreneurial team and are standing up a dedicated group to bring this vision to life. Our recently announced partnership with Splitit builds on that same fast track strategy. With this partnership, we would enable banks to unlock their most valuable asset, their existing customer relationships into a powerful competitive advantage. By offering Buy Now, Pay Later directly from customers' existing accounts, banks can meet the growing demand for flexible payments without introducing new friction. This approach strengthens trust, deepens engagement and keeps consumers within the bank's ecosystem. At the same time, it unlocks entirely new streams of transaction and interchange revenue, turning a defensive necessity into a strategic growth opportunity. Now turning to another product in development called OASIS, which is part of our GIS managed services transformation. OASIS is a unified AI-powered orchestration platform that enhances our clients' current technology ecosystems. It embodies our human plus AI approach, combining advanced automation with expert oversight to deliver complete IT estate visibility and better outcomes for customers. This positions GIS competitively as enterprises increasingly seek proven AI capabilities in their managed services partnerships while creating new revenue opportunities for us. Lastly, since we paused our strategic option process for our insurance business about a year ago, we continue to create a more valuable business by growing our SaaS portfolio from 30 to 45 products. We have execution plans in place to double our SaaS revenue in each of the next 2 years. These are 3 of our many fast-track pilots that are in the works. Fast track is a prime example of bringing exponential outcomes to our clients and we are bringing this to life in our newly launched Xponential branding and framework. Xponential is a new AI framework that helps DXC clients move from pilots to real business impacts with confidence. It blends governance, automation and human expertise to deliver measurable results fast. Early client successes show how Xponential is helping organizations, not just operate faster, but unlock new capacity, reduce manual effort and improve decision-making. As we integrate this framework across DXC, we're strengthening our position as a trusted AI transformation partner, helping customers turn AI potential into tangible productivity and growth. We are also showing up differently in the market, and it's getting noticed. Our engagement with the analyst and adviser community continues to deepen, and we are seeing a shift in how our capabilities and impact are being recognized. As a result, we were recently named as a leader in ISG's Provider Lens ServiceNow Ecosystem Partner study; IDC's MarketScape in Industrial IoT End-to-End Engineering; and in Everest Group's Custom Application Development Services PEAK Matrix. These recognitions matter as they validate the discipline and focus behind our strategy and help fuel confidence with our clients. With our rebuilt foundation and full stack expertise, we are reorienting ourselves around innovation and proactive solutioning. This signals to the market that we're more than steady operators of tech estates. We are better positioning ourselves as an enterprise technology and innovation partner that helps clients run more efficiently, modernizes their systems and harnesses the power of AI to drive outcomes through services, software and solutions. We're encouraged by our expanding pipeline, which includes several large deals with clear line of sight to close in the coming months. As a result, we're confident our book-to-bill will move back above 1 in the second half of the fiscal year. With that momentum, we have an incredible opportunity to work across our offerings, markets and teams to solve customer problems and show up as one DXC. And finally, as client zero, we are using existing and emerging AI across all corporate functions. In our legal department, we are using tools such as GC AI, Harvey and Legora for legal research, drafting and document comparison. This enables our attorneys to automate first pass reviews, rapidly assess risks against our playbooks and generate high-quality drafts. Our sales and marketing teams deploy AI across the full content life cycle. Agentforce automates CRM workflows and enriches email marketing with real-time firmographic data. Loopio accelerates proposal generation. Midjourney generates presentation-ready graphics. Video generation platforms, Veo 3, Runway and XLT help us create compelling video content. And voice and video synthesis tools, ElevenLabs and NotebookLM produce training materials and distill complex messaging. This integrated AI toolkit accelerates content production by 10x while elevating quality and enabling sales professionals to focus on high-value customer relationships. Our finance teams are using agentic AI, such as AI Foundry, UiPath Robot and Copilot to transform our back-office activities by automating manual and repetitive processes. And as an example of how AI will impact every job, including the CEO, this script was written by Raul Fernandez, but delivered by my custom AI-generated voice model. Now let me turn the call over to Rob.

Thank you, Raul, and good afternoon, everyone. Today, I'll go over our second quarter results and provide guidance for the third quarter and our updated full fiscal year 2026 outlook. Now starting with the second quarter results. Total revenue was $3.2 billion, declining 4.2% year-to-year on an organic basis within our guidance range and consistent with the past several quarters. Bookings grew approximately 2% year-to-year for a book-to-bill ratio of 0.85, which brings our trailing 12-month book-to-bill ratio to 1.08, a modest improvement from last quarter. This marks the third consecutive quarter with our trailing 12-month book-to-bill ratio above 1, positioning us for improved revenue performance entering fiscal '27. While we didn't get to the booking levels we anticipated for the second quarter, we continue to have a strong pipeline and anticipate a third quarter book-to-bill ratio greater than 1. Our confidence is grounded by the most robust list of new large opportunities in recent history. This is a reflection of the building of our go-to-market capabilities and newly developed AI-based solutions across all of our segments. Adjusted EBIT margin was 8%, coming in above the high end of our guidance range, reflecting disciplined cost management across the company particularly within our GIS segment and corporate functions. On a year-to-year basis, adjusted EBIT margin declined 60 basis points, primarily reflecting continued productivity savings to offset top line pressure, higher investment levels to support future revenue growth and lastly, a one-time legal settlement that benefited the prior year second quarter results. The impact of the increased investment levels is visible in our insurance and CES segment margins. In our insurance business, we have been investing in our cloud-based software platform, building AI-based smart applications to deliver enhanced value and productivity to our clients. In CES, we are strengthening our advisory capabilities in developing asset-based AI solutions, which are included in the fast-track initiatives that Raul described earlier. Non-GAAP EPS was $0.84, above the guidance range, consistent with our adjusted EBIT results, down from $0.93 in the second quarter of last year, largely driven by lower adjusted EBIT and higher taxes, partially offset by lower net interest expense and our share count. Now turning to our segment results. CES, which represents 40% of total revenue, declined 3.4% year-over-year on an organic basis. This reflects ongoing pressure in discretionary custom application projects, which continues to impact the industry. Bookings for CES declined modestly year-to-year with a book-to-bill of 0.92. While bookings moderated from the prior 3 quarters of strong performance, the trailing 12-month book-to-bill is 1.15, which we expect to lead to improved revenue performance in the latter part of this year and into fiscal 2027. GIS, which represents 50% of total revenue, declined 6.3% year-to-year organically, which is in line with our full year expectation. Bookings for GIS grew modestly year-to-year with a book-to-bill of 0.82, reflecting longer closing cycles on several large deals we expect to close in the coming quarters. The trailing 12-month book-to-bill remained at approximately 1.1. To help drive our long-term performance, we are building our AI-powered orchestration platform and plan to begin pilot deployments with select customers over the next few months. We expect to introduce the OASIS platform to the broader marketplace in the first half of calendar 2026. We are also enhancing our GIS offering portfolio with AI-enabled solutions targeting growth segments of the IT services market, and we're beginning to see the project pipeline build around these new solutions that we expect to convert and expand over time. Insurance, which represents 10% of total revenue, grew 3.6% year-to-year organically, largely due to growth in software and volume-based increases in existing accounts. We continue to expect this business to grow at mid-single-digit rates for the year. Now turning to our cash flow and balance sheet. During the quarter, we generated $240 million of free cash flow, up from $48 million last year. This increase in the quarter was largely driven by improved working capital and lower cash taxes. This brings our first half free cash flow to $337 million, an increase of $244 million year-to-year. The second quarter results include an increase in software payments, which we had anticipated. As a result of those payments, capital expenditures as a percentage of revenue returned to more recent levels at 5.3%. We also continue to minimize new capital lease originations, recording $6 million this quarter. Over the last 6 quarters, we paid down more than $400 million of capital leases while limiting new capital lease originations to just $31 million. These efforts, partially offset by currency movements on our euro-denominated bonds have brought our total debt down $107 million to approximately $4 billion. Over the same time period, our ability to consistently generate strong free cash flow enabled us to increase our cash balance by more than $660 million since the start of fiscal 2025, bringing it to $1.9 billion. As a result, we have reduced our net debt by approximately $770 million and in doing so, created additional financial flexibility. With this solid foundation, we will continue to execute with focus and discipline against our capital allocation priorities for the year that include continuing to invest in our business to accomplish our top priority, driving sustained profitable revenue growth, further strengthening our balance sheet by minimizing new financial lease originations and maintaining our investment-grade debt levels by retiring a portion of our senior notes maturing in the next 12 months and returning capital to shareholders. With our strong free cash flow through the end of the second quarter, we've repurchased $125 million of shares, $50 million in Q1 and $75 million in Q2. In the third quarter, we intend to maintain the same quarterly pace of buyback as the first half of the year. As a reference point, at the end of the second quarter, $467 million remained under our Board-authorized share repurchase program. Now let me provide you with our full year 2026 guidance. We now expect total revenue of $12.67 billion to $12.81 billion, with the organic revenue year-to-year decline narrowed to 3.5% to 4.5% from the prior decline of 3.0% to 5.0%. At the segment level, we expect CES to decline in the low single digits organically with third-quarter performance roughly in line with last quarter and an anticipated improvement in the fourth quarter as larger longer duration deals ramp. GIS is anticipated to decline at a mid-single-digit rate organically and insurance is expected to grow organically at a mid-single-digit rate, in line with recent performance. We continue to expect adjusted EBIT margin to be between 7% and 8%, and we continue to expect non-GAAP diluted EPS to be between $2.85 and $3.35. We are increasing our full year free cash flow from approximately $600 million to approximately $650 million, driven by our updated view of working capital and help from the new tax law legislation. With strong first half working capital performance, we anticipate a more balanced cash flow cadence over the course of the year relative to prior years that was more heavily weighted toward the second half. Now for the third quarter of fiscal 2026, we expect total organic revenue to decline 4% to 5%. We anticipate adjusted EBIT margin in the range of 7% to 8%. And finally, non-GAAP diluted EPS of $0.75 to $0.85. With that, let me turn the call back over to Roger.

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

I wanted to start on CES. So you've got, I guess, a quarter or so under the belt of your new lead there. Can you talk about just how that business is kind of faring under the covers, talk about any early areas to improve, particularly on the go-to-market to restart momentum in bookings? Any natural disruption that's occurring here just in the early stages? And then, Rob, you just mentioned CES picking up, I think, in 4Q. Is that in hand? Or is that go get type of revenue still?

All right. Let me just start. So we look at everything in terms of each of these offerings as core track and fast track. So let me start on the core track. There are many elements of that business and that operation that Ramnath has really dug into and has a very targeted goal and go-to-market plan to improve. Our SAP share in the marketplace is high from an engineering standpoint, but it's not commensurate with the revenues that we get from that practice. So that's a really good example of a core part of the business that we just have to operate at a much better functional level. So there are 2 or 3 other major areas that have revenue implications, that have pipeline implications, both longer-term projects, bigger projects as well as smaller, shorter cycle projects. On the fast track, as I mentioned in the call, that's an area that we're super excited. We are using our legacy as leverage, and we are building on top of some incredible technical connections and footprints that we've got with Hogan software to very quickly on a fast-track basis develop and deploy agentic solutions that will unlock many new services for our existing banking customers and new ones. And you saw a little bit of that in the release with Splitit as well. So coming in very quickly and having a huge impact since the end of July, joining the team. And so I'm very happy with the progress there. Let me turn it over to Rob.

Yes, Bryan, on your question on fourth quarter, is it in hand or go get. The dynamics of the business require bookings and revenue generation in quarter and especially 2 quarters out. However, we do see, based on the bookings we've had over the last several quarters... Can you guys hear me? Based on the strong bookings we've experienced over the past few quarters, which are reflected in the trailing twelve months being 1.15 for CES, we have a solid foundation as we enter the fourth quarter and look ahead to fiscal '27. I would say we have that base in place, and while we can see room for improvement, there is always more to pursue. We aim to enhance our current position with the third quarter for CES. Our pipeline is strong, and we expect to perform well in the quarter and maintain our momentum.

Okay. Okay. On the free cash flow, it was good to see that move higher within the guide. You mentioned a couple of primary sources, I think. As you consider those, are those lasting as you think about kind of free cash flow conversion or somewhat transitory?

The dynamics in the first half of the year were different compared to the previous couple of years. In those years, working capital was a burden in the first half but recovered in the second half, which accounted for most of our cash flow during that period. This year, we managed receivables effectively in the second quarter, allowing us to benefit earlier than usual. We expect this trend to continue for the remainder of the year. While we anticipate good performance in working capital, we won't see the same increase we've had in previous years, but I would characterize it as sustainable and a benefit we'll maintain. For cash taxes, we anticipate better performance for the full year, and that will also be sustained. The third factor is capital expense, where we plan to keep a similar rate and pace to the first half of the year. However, if valuable opportunities arise that require more capital, we will take action without hesitation.

It's Antonio on for James. I wanted to ask about the GIS business. If maybe like you could walk through any trends in that business. And then specifically within Hogan, like how that fits into GIS and any trends you're seeing there would be helpful.

So Hogan is part of the CES offering and the new product development and the team is all under Ramnath. On GIS, we've got a great upward tick on all kind of customer-related elements. So our scores are higher, our churn is lower. From an operating statistical standpoint, we're finishing like probably the best 2 quarters of uninterrupted service across the board around the world. So super solid from a foundation standpoint, from an operating standpoint. Again, new products are the key, not just for generating more revenue opportunities for us and more pipeline, but for us to change the narrative, frankly, from a safe pair of hands of legacy to a safe pair of hands for legacy and innovators for today's AI economy. So I feel good across all the offerings, all 3 offerings that we've laid the right foundation. Rob?

Yes. I would like to add to what Raul mentioned. Year-to-date, the project-based services marketplace has faced challenges overall, affecting both CES and GIS. This has been evident during the first half of the year. However, I can say that there is momentum building in GIS regarding our pipeline. As I noted in the prepared remarks, our large deal pipeline has been growing, and we have a strong list of opportunities. These deals tend to have longer closing cycles, but we are witnessing significant demand from both new content and resale perspectives, as well as from new customers. Additionally, the pipeline for the new offerings from the GIS team is also starting to gain traction. Therefore, I believe the future looks more promising. Our next step is to convert the pipeline into results.

Yes. That's helpful. And then as a follow-up, I wanted to ask about your investments within AI. Like what is the runway for that? And how far are you guys there?

I think one of the most interesting things about this kind of technological wave that we're living through is that the total cost of ownership of creating ideas has dropped almost down to 0. And that's due to a bunch of factors. One, all of these tools. But two, we're living in an era today of incredible cross-subsidies. So the compute power I use to generate my AI script, what I paid for versus what it cost is way off. If you use Sora, if you use any of these platforms, you're getting an unbelievable level of compute and rendering and creation at a fraction of what the real cost is. So we are very happy to be corporate consumers of many of these tools and to infuse them into our solutions. And so it's a very achievable and maintainable level of investment to keep us at the forefront. Rob?

Yes. And I'd just add that we have the capacity with the balance sheet that we've built over the last 18 months to make the necessary investments and take advantage of opportunities when we see them.

First from me, can you help calibrate what's contemplated across your revenue and margin outlook range from a macro perspective and a project ramp perspective, particularly as it seems there's some variability contemplated quarter-to-quarter in the back half from a margin perspective?

Yes, Jonathan, in the second half of the year, if you look at the midpoint of the range, it remains quite stable from a margin perspective. I would say that in our guidance, we do not expect any major shifts in the macro environment. Therefore, we are not relying on any economic upturns or downturns that could significantly impact demand. Our assumptions are quite stable. We are basing our forecast solely on our backlog, pipelines, conversion rates, and all the relevant metrics you would expect us to use.

That's good color. And just a follow-up. What in your customer conversations gives you confidence in your ability to close these large deals that are in your pipeline, especially given the competitive pricing environment that some of your peers are highlighting? And are there any concessions that you may have to provide to close these deals?

I've been personally active selling a lot of our new offerings on previewing them to CEOs, CTOs, COOs, et cetera. And I am just really energized by the interest, the sincere interest, the fact that we are showing up with brand new ways of doing things with tools at an enterprise and global level. And so I think the narrative of the conversation changes as we have more of these proof points out as we deploy more customers with these new tool sets, and it will build upon itself. But I think the great work we've done for the last 20 months to get this stuff together as a really solid foundation for new growth with new products is terrific as well as solidifying all of the legacy work that we continue to do and frankly, we'll continue to do because these systems will evolve, they will change. But as all of us have been in technology, it always appears like it's going to change faster than it actually does.

And just add one final point on that in terms of concession. Our pricing has been stable. Looking at the last several quarters, there's been stability in pricing.

Regarding the CoreIgnite product, are you planning to target the existing Hogan accounts, or is this primarily a new opportunity? I'm curious if you are transitioning existing Hogan accounts and what the revenue impact would be if you switch to a SaaS or subscription model with CoreIgnite. What is the difference in revenue between that and the current Hogan accounts?

Yes. Everything that we are building with CoreIgnite is accretive and additive. It is not cutting into any existing terms. What's really cool is because we've got the legacy relationship, we've built the thing, and we know the code in a way that nobody else does and frankly, have some data rights that are pretty interesting. We are uniquely positioned to do this in a way that no one else can do as quickly as well and with a high level of technical confidence in being able to deploy an enterprise-grade solution.

And you've been at this for a while. So thinking about this ability to break the linearity and go after more of the subscription type with this kind of new model. Do you feel like with AI in this product push you're discussing, this is really a turning point for that?

Absolutely. Look, when I started, AI was still in experimenting. A lot of what was machine learning was being used as AI. And now we really have revolutionary products that are literally leapfrogging existing players on a week-over-week basis. It's also going to create a new discussion with customers about how we charge and how we get paid. And it will be much more value-based over time. It will not happen overnight, but we are very well positioned to be aggressive players in that value-based discussion, which is around, as you know, replicable solutions, whether it's full SaaS, ARR or some replicable combination of software and services.

From a segment perspective, no real callouts in terms of different trajectories for what we have in 2Q.

This is Paul Obrecht on for Darrin. Can you provide a bit more detail on how you're thinking about headcount strategy going forward, especially as we think about AI being increasingly embedded across really every facet of the business, it sounds like?

Yes. Sure. I'll give you a little bit of color commentary and then Rob will kick in. Look, I think the traditional labor pyramid and the traditional way of thinking about labor in terms of onshore, nearshore, offshore will be obsolete. Will it be obsolete in 3 years, 6 years, 5 years? I don't know. But the pyramid will start looking more like a diamond and at the bottom of it are going to be AI agents. And part of what we're doing is making sure that our workforce is skilled to continue to move up the value chain as we deploy these forms of agents to do work that was done by Level 1 and Level 2 engineers. So it is an ongoing human capital discussion that we've got. It's a human capital investment that we're doing, but it's also one that's going to impact every company in this space.

Yes. So Paul, as that new model evolves, along the way, we'll continue to balance resources with our demand profile and delivery requirements while we continue to drive productivity throughout the overhead functions in the company. So we will maintain our normal management approach while the new model is evolving. Yes. I'd say quarter-to-quarter, they were stable. So no real change in the trajectory.

I have a general question about your fast track solution plans. I like the sound of these new plans. It seems like you're progressing beyond some of the initial turnaround efforts and are now focusing on enhancing positions in key areas. On that note, I would like to ask if there's a specific milestone you've reached that allows you to better pursue these fast track opportunities, whereas previously those new market approaches seemed to be on hold. Is the milestone related to having more resources to invest, increased readiness with execution, or perhaps an opportunity presented by AI? Can you elaborate on what the pivot point is here?

The absolute number #1 pivot point is new talent that has come in with the skill sets to do this. And that talent has gotten here, and we've been able to bring others that we've all worked with in the past in different companies, and that is the absolute key to this transformation. That new talent came up with the opportunity. That new talent came up with the product framework. That new talent is building and deploying that as we speak. So that's the absolute key. And finding the right people, getting them onboarded. As you said earlier, it's a playing offense and playing defense. The defense is stabilizing our kind of our core business and operating in a more efficient and effective way as a professional services firm. And then the offense is going to market with these fast-track products.

Okay. And then just a follow-up to focus on the free cash flow from a different angle. If you produce $650 million in free cash flow this year, can you give us a sense of whether that creates a baseline for next year to grow on top of? Or given that you have some free cash flow benefit that you're reaping this year, is the $650 million more of a stable level to consider on a go-forward basis? I know you can't give guidance that far out, but a general idea on the trajectory and how this year's benefits will apply to next year.

Yes. Sure, Rod. The way I'd describe it is this will be our third year in a row of producing free cash flow in that range. And I fully expect that to continue at this point, right? Without any major disruptions, I fully expect it to continue.

And that concludes our question-and-answer session. I am now going to turn it back over to Raul for closing comments.

Thank you so much. Before we sign off, we'd like to share a short video showcasing the AI capabilities I discussed earlier. It was created using AI tools at a fraction of the typical production cost. The video is available in the IR section of DXC's website, along with our other earnings material. Thanks, everyone, for joining us on the call today, and we look forward to speaking with you again next quarter.