DXC Technology Company (DXC) — Q4 2026 Earnings Call Transcript

Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology's fourth quarter and fiscal year-end 2026 earnings conference call. We hope you've had a chance to review our earnings release, which is available on 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 first quarter and fiscal full year 2027 guidance. Raul and Rob will then take your questions. Please note certain comments on today's call are forward-looking and subject to the risks and uncertainties that could cause actual results to differ materially from those expressed on this 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. In addition, when we refer to year-over-year or quarter-over-quarter revenue growth rates, we will be discussing organic revenue changes on a non-GAAP basis, which excludes the impact of foreign exchange and any inorganic activity. We will also be discussing certain other 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 included in today's earnings release. And with that, let me turn the call over to Raul.

Thank you, Roger. In Q4, we delivered a strong quarter on profitability with adjusted EBIT margin and free cash flow ahead of guidance. That balance of expanding margin and free cash flow, while transforming DXC into an AI-led company is central to how we're operating the business. On revenue, we delivered just over $3.1 billion, missing our organic guide by approximately $75 million, or about 2 percentage points. When you break that down, closing the gap required less than $1 million per day. That's not just a pipeline and demand issue; it's execution, and we continue to work on both. The focus going forward is also tightening on quarter conversion, smaller, faster-start opportunities that can land and deliver within the period. As we close FY '26, one of the clear positives is our ability to reach the final stages of large competitive pursuits. As an example, across the globe, we pursued 13 large opportunities in this quarter that we expected to close before fiscal year-end. This represented more than $2 billion of potential total contract value that could have been booked in Q4. On a dollar-weighted basis, DXC won 32% of that $2 billion, we lost 40%, and roughly 28% remains outstanding. With that level of advancement in the competitive process, I personally expected a higher win rate. We didn't get it. But the learnings we take from those losses and wins are being applied to our sales process, and we will continue to make progress here. Like anything else in this business, once you understand precisely where you're falling short, you can fix it. That's exactly what we're doing now. Getting to those finals wasn't accidental. It reflects the work we've been doing over the past year: better qualification, clearer positioning and more discipline in where we choose to compete. You saw part of that transformation in Q3 with our brand and storytelling refresh. AI is advancing every workflow in every business. We view our AI transformation as a way to be more competitive. Inside DXC, we're moving with intent on AI enablement and we're applying the customer-zero principle, using ourselves as the first proven ground for what we deliver to customers. Every DXC employee now has full access to enterprise-grade AI tools supported by a company-wide knowledge hub, AI playgrounds for safe experimentation and internal agents that help employees apply AI responsibly. We are measuring this work with the same discipline we'd expect for our customers: tracking adoption and productivity and embedding governance from the start. What we learn inside is sharpening what we deliver outside. One example of how this is taking shape: we recently ran a four-week internal AI challenge inside one of our corporate organizations designed not as a one-off event, but as a blueprint we could test, learn from and scale. More than 100 teams formed on their own, built nearly 1,300 working AI agents and started solving problems that had been sitting on backlogs for months. But the real signal was what happened after: other parts of the company asked to launch similar initiatives. That organic and viral pull tells you adoption is real, not mandated. We continue to launch additional AI challenges across DXC, applying what we learned and extending the model enterprise-wide. This is what customer zero looks like in practice. We test inside, we measure what works and we scale what earns the right to scale. The impact is showing up across the business. In sales, we're automating the end-to-end cycle, increasing capacity, accuracy and consistency. In legal, we're compressing contract cycles while improving quality. In HR and marketing, we're driving both efficiency and better outcomes. The result is not just cost takeout; it's reimagined capacity, and that reimagined capacity driven by AI is what allows us to move faster and engage more deeply with clients. Fast Track is about building AI-native products and services at a much faster pace. We built our initial Fast Track offerings around moats that are unique to DXC: deep knowledge of complex workflows, data that must remain secure, and critical business functions that have to operate at 99.9% uptime in highly regulated industries where systems cannot fail. These carry a margin profile that looks nothing like traditional services. They're AI services delivered as software: recurring, scalable and platform-agnostic. Let me preview two of them; you'll hear much more about these and other AI offerings at Investor Day on June 11. Core Ignite allows banks to modernize and innovate without touching the core, connecting capabilities like buy-now-pay-later, stablecoin and modern remittance into legacy environments like Hogan, so banks can move at fintech speed without core banking risk. OASIS is our agentic orchestration platform that is rewriting how we deliver managed services. It moves beyond monitoring and incident correlation to autonomous remediation and service optimization, orchestrating across a client's full ecosystem. At its base, OASIS replaces a legacy product set with a modern platform layer that sits on top of every managed services contract, creating a recurring, scalable revenue stream with structurally higher margins. We launched OASIS with 10 customers on April 28, and the early traction is real. It's already contributing to new business, including a large new logo win with a major European insurer where it was a deciding factor in how we won the deal. In parallel, our core track is about execution, pricing discipline, utilization, delivery quality and running a better services company consistently and at scale. That foundation matters even more as we layer AI into the business. What's becoming clear is that the differentiator in AI is not just technology; it's how quickly organizations adopt and deploy it. That's a focus area for us as we scale these capabilities across DXC. You're also seeing a shift in how these services are priced: away from time and materials and toward outcome-based and consumption models. At DXC, about 80% of our revenue already sits in outcome-based categories, with only 20% in time and materials. That's a real advantage for us. It allows us to apply AI-driven productivity in a way that expands margin while also evolving how we deliver value to clients. We'll go much deeper on all of this at Investor Day on June 11 in New York City. We'll walk through the strategy, the products, the metrics and the roadmap over the next 12 to 24 months with live demos and direct engagement with the teams building these offerings. We're looking forward to that conversation. For the third quarter in a row, this script was written by me, Raul Fernandez, and delivered using my custom AI voice model built with ElevenLabs and shared simultaneously in six languages. This is customer zero in practice. We build it, we use it and then we bring it to clients. And now let me turn it over to Rob to review FY '26 results.

Thank you, Raul, and good afternoon, everyone. Today, I'll go over our fourth quarter results, touch upon our full year performance and provide guidance for the full fiscal year 2027 as well as for the first quarter. Now starting with our fourth quarter results. Total revenue was $3.1 billion, declining 6.6% year-over-year. This is below our expectations as we experienced increased weakening of discretionary spending on short-term services projects, particularly within GIS, where revenue was impacted in both the U.S. and Europe. Both CES and insurance were in line with our expectations and consistent with recent performance. Our book-to-bill ratio for the quarter was 1.07 with bookings down approximately 14% year-over-year, driven by two factors: the first being a tough comparison to last year's fourth quarter, which included large renewals; and secondly, the impact of a decline in short-term project-based services, which was the case for both GIS and CES. Adjusted EBIT margin was 7.6%, slightly above our guidance range and up 30 basis points year-over-year. This performance was driven by spending management and a point of discrete nonrecurring items in the quarter, largely offset by the impact of declining revenues. Non-GAAP EPS was $0.77 at the high end of our guidance range, consistent with our adjusted EBIT performance. Now turning to our segment results. The CES book-to-bill ratio for the quarter was 1.07, bringing our trailing 12-month book-to-bill to 1.10. Bookings were down 11% year-over-year with the largest driver being the decline in project-based services. CES, which represents 40% of total revenue, declined 3.9% year-over-year with performance consistent with the prior quarters of fiscal 2026. Enterprise applications grew in Q4 with sequential revenue performance improvements throughout the year, while custom applications continued to weaken in the fourth quarter. This is where we've experienced the most significant impact in short-term discretionary project delays. The quarterly GIS book-to-bill ratio was 1.11 with a year-over-year bookings reduction of 19%. This year-over-year decline is the result of large renewals in the fourth quarter of last year that made for a difficult compare. GIS, which represents approximately 50% of total revenue, declined 10.6% year-over-year and came in below our expectations. The shorter-term project-based services pressure we've seen all year continued and worsened in the quarter and, for the first time this year, the weakness extended to resale-based discretionary projects. Insurance, which represents approximately 10% of total revenue, grew 4% year-over-year driven by continued strong performance in our software business, which delivered high-teens growth in the quarter. We expect that momentum to continue, supported by strategic customer migrations to our cloud-based Assured platform and growing adoption of our recently introduced AI-enabled smart apps. Now let me briefly touch upon our full fiscal year 2026 results. Total revenue was $12.6 billion, down 4.8% year-over-year. This reflected a 3.8% decline in CES and a 7.2% decline in GIS, partially offset by continued growth in insurance, which increased 3.6% for the year. Overall performance was consistent with the themes we've discussed throughout the year, including macro uncertainty leading to pressure on discretionary spend and specifically project-based services. Full year bookings declined approximately 6% year-over-year, reflecting a more challenging comparison in the second half of the year due to several large prior-year renewals in GIS. The full year book-to-bill ratio was slightly below 1. The GIS full year book-to-bill ratio was 0.94. And in CES, where we had robust bookings of larger, longer-duration strategic deals, the book-to-bill ratio was 1.1. Adjusted EBIT margin declined 20 basis points year-over-year to 7.7%, largely driven by our investments to support future revenue growth in the form of offering development, sales and marketing. Our teams executed on spending reductions to largely offset the margin impact of revenue declines. Non-GAAP diluted EPS was $3.23, down 6% year-over-year, driven by the year-over-year decline in adjusted EBIT and an increased tax rate, partially offset by a lower share count from share repurchases. Now turning to cash flow and the balance sheet. We generated $110 million of free cash flow during the quarter bringing our full year total to $713 million, which was ahead of our expectation and up from $687 million last year. The year-over-year free cash flow performance was largely driven by lower cash taxes and lower capital expenditures, offsetting the decline to adjusted EBIT. As planned, we repurchased $60 million worth of shares in the fourth quarter. For the full year, we bought back $250 million worth of shares, which was nearly 18 million shares, representing almost 10% of our outstanding shares. In the fourth quarter, we continued to reduce capital leases, paying down a total of $34 million. We remain focused on maintaining a strong balance sheet with appropriate levels of debt. Since the beginning of fiscal year 2025, we have reduced debt through cash payments of $808 million, a combination of prepaying $300 million of bonds maturing in September of 2026 and our ongoing capital lease reductions. The combination of these cash payments, which were partially offset by the impact of tax, reduced our debt balance by $537 million. These actions, along with an increase in our cash balance, resulted in a net debt reduction of $1.1 billion over that same two-year period. Before turning to guidance, let me briefly outline our capital allocation priorities for fiscal 2027. First, we will continue to prioritize investments in the business as we build the foundation for future revenue growth. Second, we remain committed to strengthening the balance sheet, including deploying approximately $400 million to retire the remaining U.S. dollar bonds maturing in September and further reducing our capital lease obligations. And third, we plan to repurchase $250 million of shares in fiscal 2027, which we now expect to execute more evenly throughout the year to maintain flexibility in how we deploy capital. Now let me provide you with our full year fiscal 2027 guidance. We expect total organic revenue to decline 3% to 5% year-over-year with a 3- to 4-point improvement in the rate of decline in the second half of the year. The drivers of our top-line trajectory for the year are reflected in our segment outlook as follows: in GIS, we expect a mid-single-digit revenue decline for the year, with performance improving in the second half. The first half is expected to be broadly consistent with the full year fiscal 2026 performance. As the year progresses, there will be reduced headwinds related to contract losses that occurred in previous years. In CES, we expect revenue to decline in the mid-single-digit range consistently throughout the year, reflecting similar year-over-year performance in project-based services. And for insurance, we expect revenue growth to be in line with fiscal 2026 with performance improving progressively throughout the year, driven by expected new customer contracts and a ramp of our AI-based software solutions. Our guidance for all three segments does not assume any change in the current macro environment. We anticipate adjusted EBIT margin in the range of 6% to 7%, reflecting revenue performance, continued investments in offering development and go-to-market capabilities and normalizing for the one-time benefits incurred during fiscal 2026. We expect non-GAAP diluted EPS to be between $2.40 and $2.90. The anticipated year-over-year decline is largely driven by lower adjusted EBIT and a higher tax rate, partially offset by lower outstanding shares. We expect free cash flow for fiscal 2027 to be about $600 million, largely reflecting our adjusted EBIT guidance. For the first quarter of fiscal 2027, we expect total organic revenue to decline between 6.5% to 7.5% year-over-year, reflecting Q4 bookings performance and continued pressure on project-based services. At the segment level, we expect CES to decline mid-single digits, GIS is anticipated to decline at a similar rate to the fourth quarter, and insurance is expected to grow at a low single-digit pace. We expect adjusted EBIT margin to be approximately 5%, a function of the lower first quarter revenue and normal seasonality. We expect non-GAAP diluted EPS to be approximately $0.40. And 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, would you please provide the instructions?

I wanted to just quickly touch on the 2027 guide. So I was curious a little bit about what your assumptions are at the top and bottom end of the range. I know you mentioned that macro was assumed to be the same throughout the guide. But I was curious, generally, how would changes in macro impact your ability to fall within that guide? What happens if the macro worsens? What happens if the macro improves? And just generally, curious on what gives you confidence on that second-half inflection that you guys have mentioned in growth.

Yes. This is Rob. I'll take that one. So the comment in my remarks about consistency with the current macroeconomic environment is related to the midpoint of the guide. There's some room for improvement to steer toward the high end of the guide if macroeconomics improve, and if they further deteriorate it will steer toward the lower end of the guide. Let me go through the dynamics of the guide business unit by business unit. Generally, across all three of our segments, we're assuming similar project-based services macroeconomics year-over-year. In GIS, I mentioned that we had terminations from prior years; some of them date back three years or more, and it takes a long time for customers to roll off those contracts. We've really begun to see the decreases in the latter half of '26, and they impact us in the first half of '27, but then we wrap. So we'll get the benefit of that wrap in the second half of the year. There's no underlying assumption of a pickup in project-based services going forward in GIS; the dynamic is entirely from the backlog. In our insurance business, we have several contracts in the pipeline which we are confident in signing, booking and generating revenue in the back half of the year. We're also making great progress with our smart apps, our AI-based smart apps, and the pipeline is robust. We've feathered in some increases for that also in the second half of the year. So the insurance dynamic is improvements in the back half of the year through organic business growth. In CES, where there's a bigger proportion of revenue in project-based services, we have applied the same macroeconomics year-over-year. We don't assume any pickup in activity throughout the year. I view it as a relatively conservative guide for CES. If the macros improve, that's where we'll experience our biggest pickup.

Yes. And this is Raul. Let me add to that. The Fast Track initiatives that we've been building for over a year are literally just getting to market. So we took a very conservative approach with regards to the revenue pickup of those products. We will update, of course, as we enter quarter after quarter, but we took a very, very conservative approach as to their contribution in this fiscal year.

Okay. That's useful color. And just sticking to the guidance, the free cash flow guide of $600 million, can you walk through some of your expectations there as well as expectations around new lease originations? I know you guys have been trending that down and you expect to continue that next year. Just curious about how that flows into free cash flow and how that impacts those assumptions.

Yes. Think of the year-over-year free cash flow drop as directly related to the revenue decline and EBIT margin declines. We have some working capital benefits baked in year-over-year. We will continue to deploy capital to pay off our capital leases and focus on debt reduction, as I mentioned in my remarks. The main dynamic from a free cash flow perspective is the revenue and EBIT year-over-year dynamic.

Are there any areas where you're seeing or expecting rate card compression? Pricing has been described as stable for several quarters. Is that still the case across all three segments? And how do you combat competitive pricing pressure in the market?

I think pricing for today and tomorrow is definitely stable. In these longer-term projects, you are seeing assumptions built into multiyear projects where teams may not know exactly how they're going to deliver at a lower cost and keep their margin, but there is additional aggressiveness in those multiyear pricing scenarios. We're all using AI tools every day; we all see the impact and the productivity benefits. As we gain more experience and confidence in throughput and efficiency, and as we reengineer solutions and bring AI-centric offerings to market, we'll be better positioned. We're already well positioned to gain efficiency out of more AI in our solutioning. And from a macro standpoint, Rob's comments apply here as well.

Got it. And Raul, in your prepared remarks, you talked about win rates and missed opportunities. Where exactly are you falling short versus your peer group? Can you help us understand if you're perhaps losing on price, on capabilities, client confidence in DXC, sales execution or a combination? And how do you intend to address these?

Yes. Think about it in two buckets. The really large multiyear pursuits where you've got international teams and multiple offerings coming together involve a high level of executive impact and involvement. We got to the finals in many of those, typically against one other competitor. I was involved in each of them and felt we had better than a 50/50 shot at winning. We won our share, and we lost one or two more than I expected. It was definitely not pricing. I've debriefed on all of these losses. They were very close, and pricing was not the issue. The shortfalls were more about not being able to demonstrate the right type of capability—sometimes down to not just the technology, but the technology applied to the specific industry or company. There are clear areas where we've now received feedback and know we can plug those holes. What I felt good about is that we reached the final rounds. I'm obviously disappointed we didn't win one or two more, but we have outstanding opportunities and we're applying lessons learned from both wins and losses to our solutioning and positioning. With the new homegrown solutions in Fast Track, we should see a different market perception of our innovation capabilities, and I expect that to improve our win rate going forward.

I want to focus on the other side of that coin: where is DXC seeing success in the market? What offerings or services do you think have the potential—not in FY '27, but in FY '28 and beyond—to get you closer to flat growth or at least continue to improve the rate of decline?

Great question. Many of our Fast Track offerings are both defensive and offensive: they make our own operations and services more efficient, improve margin and scale, and they can be sold separately. Stabilizing the core requires the right combination of large, medium and small deals. Large deals recognize revenue over time; medium deals provide visibility and turn into revenue over 6 to 18 months; and small projects—often under $5 million or even under $1 million—get booked and recognized within the quarter or within two quarters. All three matter. The area where we can add incremental revenue through new Fast Track offerings is in the small and medium segments; we have a pipeline now. Our development capabilities need to continue to improve in speed, accuracy and throughput using AI development tools. Our ability to scale delivery efforts using capabilities available now will increase throughput and margin. There's no magic bullet: it's working across those three deal sizes and leveraging Fast Track to win across every weight class. We've laid the foundation to support and augment those areas and to both win larger long-term deals and shorter and medium-term deals as well.

Brad, I think narrowing the revenue declines will relieve a lot of the pressure on margins and allow us to expand margins. The current softness in project-based services is dragging margins down in our fiscal '27 guide. As we make progress with that part of the business, continue to roll out AI capabilities internally to drive cost reductions and as Fast Track revenues over time begin to take hold, we'll be in a position to expand margins. But we need the revenue decline to narrow.

Thinking about margin: the starting point for Q1 and moving from there, any callouts on cadence? You mentioned earlier some factors, but thinking about volume deleveraging, investments, one-timers that you're normalizing—what are the big puts and takes we should consider?

First quarter is the low point, a combination of revenue declines and one-time items that helped us in the first quarter of last year. From there, our expectation is continued margin improvement. You will see improvements in the second and third quarters. There's seasonality that normally helps in the second quarter, so we expect that plus natural margin improvement that we're driving. That will continue into the third quarter; the fourth quarter normally moderates a bit from the third quarter. So you'll see the same type of quarter-to-quarter dynamics that you've seen in previous years.

Okay. And maybe a higher-level thematic question: the concept of maybe getting bigger about getting smaller—would that be on the project side or the Fast Track side? What about on the resource side? Is that something to consider beyond the norm?

As we think about operating better, we've historically had a lot of acquisitions and buildup of duplicative systems and people. The ability to continue to look at those pools, costs and inefficiencies—and to do so in a reimagined way using AI—will drive efficiency and cost takeout beyond previous years, because we're reimagining work streams now in ways that weren't possible before. There's ongoing capability for all companies, including ours, to gain efficiency across operations, back office and delivery-facing functions. We're very focused on that and we'll provide more detail at Investor Day.

I have to ask about AI. Could you give your perspective on the net impact that AI is having on your revenue growth trajectory? Could you share anything about what mix of your business is being driven by AI-related services? To the extent there's AI positives and AI negatives, how is that equation starting to change as AI adoption scales?

Great question. We'll discuss a framework at Investor Day on how we evaluate our offerings regarding AI as an opportunity, growth enhancer, accelerant and, frankly, as a threat. One theme I'll highlight is outcome-based pricing, which falls into fixed price and volumetric pricing. An example of volumetric pricing is getting paid to process an insurance claim from point A to point B. When you step back and note that about 80% of our business is outcome-based, you have an opportunity to control the process and make it much more efficient. We view AI as a huge opportunity on a very large existing contract base—put aside any net-new work—to gain efficiency, speed, throughput and margin. This is a multiyear effort that is starting now and will show up more clearly as we execute through this year and into next year. From a demand side, pilots have happened and many have not gone into production; that's similar to any major technology wave. This is the beginning of the beginning for AI. People did pilots; some worked, some didn't. That's normal. You experiment, find the highest-impact areas and focus on those. We're taking advantage of AI internally from an operating model standpoint. As you'll hear at Investor Day, we have many new, disruptive AI-centric solutions in the marketplace now. The one we mentioned on the call was launched April 28. It's been less than a couple of weeks, but we feel good about its positioning, pricing and early demand signals.

Great. Quick follow-up related to apps: you mentioned the shortfall in apps revenue. Do you attribute that purely to macro factors or is AI playing a role there as well? What's your take?

Macro definitely played a role, particularly in discretionary spending. We entered the year expecting a more stable environment than what actually materialized in the first half. Events like increases in input costs, including higher energy costs tied to geopolitical factors, have increased operating costs and caused some customers to pause or rethink plans. Executive boards and senior management are asking hard questions about major technology decisions today: should we upgrade an ERP system, or can we do more agentically? Those are smart and accurate questions, and they can delay final decision-making. Everyone is experiencing that. It's part of the normal cycle when a disruptive technology wave is introduced. That said, AI will be a disruptive force and will drive change in how decisions are made and in the competitive landscape.

Well, thank you, everybody, for joining us today. We look forward to seeing you in June at our Investor Day and speaking with you next quarter. Thank you very much.