DXC Technology's Q2 2026 Earnings Call: Contradictions Emerge in AI Investment Strategy, Pricing, and Win Rates

Date of Call: None provided

Financials Results

• Revenue: $3.2B, down 4.2% year-over-year (organic)
• EPS: $0.84 non-GAAP diluted EPS, down from $0.93 in prior-year quarter; above guidance
• Operating Margin: Adjusted EBIT margin 8%, down 60 basis points year-over-year

Guidance:

• FY26 revenue $12.67B–$12.81B; organic decline narrowed to -3.5% to -4.5%.
• Segment outlook: CES low-single-digit organic decline; GIS mid-single-digit decline; Insurance mid-single-digit organic growth.
• Adjusted EBIT margin expected 7%–8% for FY26.
• Non-GAAP diluted EPS expected $2.85–$3.35 for FY26.
• FY26 free cash flow raised to approx. $650M (from ~$600M).
• Q3: organic revenue decline -4% to -5%; adjusted EBIT margin 7%–8%; non-GAAP EPS $0.75–$0.85.
• Expect book-to-bill to move back above 1 in second half.

Business Commentary:

• Mixed Financial Performance:
• DXC Technology reported revenue of $3.2 billion, declining 4.2% year to year on an organic basis.

• The decline was due to lower bookings and revenue generation, despite a strong performance in adjusted EBIT margin and non-GAAP diluted EPS.

• AI Strategy and Product Development:

• DXC Technology introduced its new AI framework, Exponential, and Fast Track products to drive growth in AI-based solutions.
• The company aims to have AI-based solutions account for 10% of its business within 36 months.

• This strategy is focused on leveraging legacy assets like Hogan, the core banking platform, and developing new AI-driven offerings like DXC Core Ignite.

• Improved Free Cash Flow:

• The company generated $240 million in free cash flow in Q2, up from $48 million last year.

• The improvement was due to better working capital management and lower cash taxes.

• Cost Management and Margin Improvement:

• Adjusted EBIT margin was 8%, coming in above the high end of guidance, reflecting disciplined cost management.
• The company continued to manage costs to offset top-line pressure and support future revenue growth.

Sentiment Analysis:

Overall Tone: Neutral

• "Our financial performance in the quarter was mixed... above our guidance in adjusted EBIT margin and non-GAAP diluted EPS and generated very strong second quarter free cash flow," but management was "disappointed in our performance in revenue and bookings." CFO raised FY free cash flow to ~ $650M and expects book-to-bill to move above one in H2, reflecting cautious optimism amid execution risk.

Q&A:

• Question from Bryan Bergin (TD Cowen): Wanted to start on CES. 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? Rob, you just mentioned CES picking up, I think, in fourth queue. Is that in hand, or is that go-get type of revenue still?
  Response: Management: CES has a solid bookings base (trailing 12‑month book-to-bill ~1.15) and targeted GTM plans (e.g., better monetization of SAP), but requires improved execution to convert pipeline into revenue; Q4 has a base but still needs "go-get" activity.

• Question from James Faucette (Morgan Stanley): I wanted to ask about the GIS business, if maybe you could walk through any trends in that business. Specifically within Hogan, how that fits into GIS and any trends you’re seeing there would be helpful.
  Response: Management: GIS shows operational improvement (higher customer scores, lower churn) and a growing pipeline of longer-cycle large deals; Hogan sits under CES and is being extended via new product efforts (DXC Core Ignite) rather than revived as-is.

• Question from Jonathan Lee (Guggenheim Partners): 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? And what in your customer conversations gives you confidence in your ability to close these large deals, especially given the competitive pricing environment?
  Response: Management: Guidance assumes a stable macro and is driven by internal backlog, pipelines and conversion metrics; confidence in closing large deals stems from active executive-level engagement, strong customer interest in new offerings and stable pricing.

• Question from Tien‑Tsin Huang (JPMorgan Chase & Co.): Is DXC Core Ignite going after the backbook of Hogan, or is this really a new opportunity? If you convert an existing Hogan account to a SaaS/subscription model, what’s the delta vs legacy Hogan?
  Response: Management: DXC Core Ignite is additive—not cannibalistic—leveraging unique code/data rights to add cloud-native API services; it enables value-based/replicable subscription models over time rather than immediate wholesale migration.

• Question from Jamie Friedman (Susquehanna Financial Group): How are you going to operate, manage, and disclose Fast Track—champion/challenger, lab/incubation—and can you size Hogan today?
  Response: Management: Fast Track will be incubated via pilots that scale into replicable products (more detail at FY start); only a few wins need to succeed to shift trajectory; no new Hogan sizing disclosed—it's being extended with AI/API capabilities.

• Question from Brad Clark (BMO Capital Markets): You mentioned cost discipline driving margin upside versus guide. As you think longer term, do you see taking cost out for a while and how sustainable are these cost-management measures given growth aspirations?
  Response: Management: Confident in sustaining cost discipline and productivity improvements (including AI-driven automation), which will support margin expansion as revenue stabilizes; internal AI initiatives (e.g., Agentic SOC) will further reduce operating costs.

• Question from Darren Peller (Wolfe Research): Can you provide more detail on headcount strategy going forward, especially as AI is embedded across the business, and any update on win rates?
  Response: Management: Anticipate workforce model shifting (pyramid to diamond) with AI agents automating lower-level work and investment in upskilling staff to higher-value roles; win rates were stable quarter-to-quarter.

• Question from Rod Bourgeois (DeepDive Equity Research): What milestone enabled you to better pursue Fast Track opportunities now, and if you produce $650M in free cash flow this year, is that a baseline for next year?
  Response: Management: The pivot was hiring experienced talent that created product frameworks and execution capacity; management expects the ~$650M FCF range to be sustainable absent major disruptions and to serve as a solid baseline.

Contradiction Point 1

AI Investment Strategy

It involves the company's AI investment strategy, which is crucial for its future growth and competitive positioning.

What is the runway for AI investments, and how far have you progressed in this area? - Jonathan Lee (Guggenheim Partners)

2026Q2: The total cost of ownership for creating AI ideas has dropped due to technological advances and cross-subsidies. We are leveraging these tools to build innovative solutions and believe we have the capacity to continue investing in this area. - Raul J. Fernandez(CEO)

What is your investment strategy for GenAI, and how is it integrated into new engagements? - Unidentified Analyst (Morgan Stanley)

2026Q1: DXC is focusing on learning by doing and applying AI across internal functions. The investment strategy is both organic and inorganic, with a focus on scalable, replicable AI solutions. AI investments aim to enhance efficiency and drive revenue growth. - Raul J. Fernandez(CEO)

Contradiction Point 2

Pricing and Win Rates

It involves the company's pricing strategy and win rates, which are crucial indicators for revenue growth and competitive positioning.

What gives you confidence in closing large deals, and are concessions being made? - James Faucette (Morgan Stanley)

2026Q2: Our pricing has been stable, and we're maintaining strong competitive positioning. - Rob Del Bene(CFO)

Have you observed any changes in yield or win rates due to macro factors? - Yu Wai Lee (Guggenheim Partners)

2026Q1: Pricing has been consistent, and win rates have increased by low to mid-single digits, showing improvement in both CES and GIS. - Rob Del Bene(CFO)

Contradiction Point 3

AI Investment and Pricing Strategy

It involves changes in the company's approach to AI investment and pricing strategy, which could impact cost management and revenue growth.

What is the runway for AI investments, and how far have you progressed in this area? - Jonathan Lee (Guggenheim Partners)

2026Q2: The total cost of ownership for creating AI ideas has dropped due to technological advances and cross-subsidies. - Raul Fernandez(CEO)

How do you factor in macroeconomic uncertainty into your outlook, and what is your view on the pricing environment? - Jonathan Lee (Guggenheim Partners)

2025Q4: We've accounted for uncertainty in our guide, especially at the low end of our range. The pricing environment has been stable with favorable conditions for mega deals, and project-based services have remained consistent. - Rob Del Bene(CFO)

Contradiction Point 4

AI Investment Runway and Strategy

It involves the company's approach to investing in AI, which is crucial for its future growth and competitive positioning.

What is the runway for AI investments, and how far along are you in AI? - Jonathan Lee (Guggenheim Partners)

2026Q2: The total cost of ownership for creating AI ideas has dropped due to technological advances and cross-subsidies. We are leveraging these tools to build innovative solutions and believe we have the capacity to continue investing in this area. - Raul Fernandez(CEO)

How do you assess the runway for AI investments and their alignment with the business? - Dr. Holger Wenig (VP, Business Development & Investor Relations)

2025Q3: The investments in AI and automation will continue to be an area of focus for us and as you know, they are long-term investments. But we want to be very, very disciplined in making sure that we are -- they contribute to the top-line revenue growth that those investments make. - Robert Del Bene(CFO)

Contradiction Point 5

Sales and Pricing Strategy

It involves the company's approach to sales restructuring and pricing strategy, which are critical for revenue growth and market positioning.

What gives you confidence in closing large deals, and are concessions being made? - James Faucette (Morgan Stanley)

2026Q2: The pricing has been stable, and we're maintaining strong competitive positioning. - Rob Del Bene(CFO)

Are new contracts improving revenue visibility, and how do they compare to previous durations? - James Faucette (Morgan Stanley)

2025Q4: Our sales restructuring has led to a better pipeline and increased contract durations. - Raul Fernandez(CEO)