DXC Technology's Q2 2026 Earnings Call: Contradictions Emerge on AI Strategy, Insurance Subscriptions, Revenue Growth, and Fast Track Initiatives

Date of Call: October 30, 2025

Financials Results

• Revenue: $3.2B, down 4.2% YOY (organic)
• EPS: $0.84 non-GAAP diluted EPS, down from $0.93 YOY
• Operating Margin: 8% adjusted EBIT margin, down 60 bps YOY; came in above the high end of guidance

Guidance:

• Full-year revenue $12.67B–$12.81B; organic decline narrowed to 3.5%–4.5% year-over-year
• Adjusted EBIT margin expected 7%–8%; non-GAAP diluted EPS $2.85–$3.35
• Full-year free cash flow increased to ~ $650M (from ~ $600M)
• Q3 organic revenue decline expected 4%–5%; Q3 EPS $0.75–$0.85; Q3 adjusted EBIT margin 7%–8%
• Segment outlook: CES low-single-digit decline, GIS mid-single-digit decline, Insurance mid-single-digit growth

Business Commentary:

* Mixed Financial Performance: - DXC Technology reported adjusted EBIT margin of 8%, above the high end of their guidance, but revenue was $3.2 billion, declining 4.2% year-to-year organically. - The decline in revenue was due to disappointing performance in bookings, while the margin upside was achieved through disciplined cost management.

• Bookings and Backlog:
• The trailing 12-month book-to-bill ratio improved to 1.08, marking the third consecutive quarter above 1.

• While bookings moderated from strong prior performance, the improved ratio positions DXC for better revenue performance in the latter part of the year.

• AI Investment and Strategic Initiatives:

• DXC is focusing on AI native or highly AI-infused solutions, aiming for 10% of their business within 36 months.

• This strategic shift involves leveraging existing technology and new talent to develop replicable, high-margin solutions to drive growth.

• Free Cash Flow and Financial Flexibility:

• DXC generated $240 million in free cash flow, up from $48 million last year, driven by improved working capital and lower cash taxes.
• The strong cash flow allows DXC to maintain financial flexibility, enabling investments in AI and potential share repurchases.

Sentiment Analysis:

Overall Tone: Neutral

• Management called results "mixed": margins and free cash flow beat while revenue and bookings disappointed; CEO emphasized focus on execution and AI-driven products to drive future growth, and CFO raised full-year FCF to ~$650M while narrowing organic revenue decline expectations.

Q&A:

• Question from Bryan Bergin (TD Cowen): How is CES performing under the new lead and any go-to-market changes to restart bookings momentum?
  Response: Management: CES has targeted go-to-market plans (e.g., better monetization of SAP), a solid pipeline and a trailing-12-month CES book-to-bill of 1.15, providing a base for improvement though additional sales execution is still required.

• Question from Bryan Bergin (TD Cowen): Are the sources of the higher free cash flow sustainable or transitory?
  Response: CFO: Improvements in receivables (working capital) and lower cash taxes are sustainable; capex pacing is expected to remain similar but could increase for attractive opportunities.

• Question from James Faucette (Morgan Stanley): Can you walk through trends in GIS and how Hogan fits in the business?
  Response: Management: GIS operational metrics (scores, churn, uptime) have improved, pipeline and large-deal activity are building with longer closing cycles; Hogan sits under CES (new product work under Ramnath) and is being extended into new offerings.

• Question from James Faucette (Morgan Stanley): What is the runway for AI investments and how far along are you?
  Response: Management: The cost to develop AI solutions is low relative to benefit; DXC can sustain investment given available tools and a strong balance sheet to fund opportunities.

• Question from Yu Lee (Guggenheim Securities): What macro assumptions underlie the revenue and margin outlook and quarter-to-quarter variability?
  Response: CFO: Guidance is based on internal backlog, pipeline and conversion metrics with no assumption of a macro upturn or downturn; midpoints imply consistent margins across the back half.

• Question from Yu Lee (Guggenheim Securities): What gives you confidence you can close large pipeline deals and will concessions be needed given competitive pricing?
  Response: CEO/CFO: Strong executive-level client interest and emerging proof points underpin confidence; pricing has been stable and management does not expect material concessions.

• Question from Tien-Tsin Huang (JPMorgan Chase & Co): Will CoreIgnite target the existing Hogan back book and how will revenue change if converted to a subscription model?
  Response: CEO: CoreIgnite is additive and accretive—not cannibalistic—leveraging unique access/knowledge of Hogan to rapidly deliver new, monetizable services without disrupting existing contracts.

• Question from Tien-Tsin Huang (JPMorgan Chase & Co): Does this AI-driven product push represent a turning point for moving to subscription/value-based pricing?
  Response: CEO: Yes — AI-enabled, replicable solutions will enable more value-based pricing and subscription-like revenue over time, though the shift will be gradual.

• Question from Tien-Tsin Huang (JPMorgan Chase & Co): Any segment profit callouts to model for the rest of the year?
  Response: CFO: No material segment profit trajectory changes to call out beyond the second-quarter dynamics.

• Question from James Friedman (Susquehanna): How will you operate, manage and disclose the fast-track (AI) initiatives — lab/incubation versus scale?
  Response: CEO: Fast-track pilots will be formalized into a clearer roadmap early next fiscal year; only a few successful, replicable products are required to materially change revenue trajectory and they are being built for scale with higher margins.

• Question from James Friedman (Susquehanna): Any sizing or customer metrics you can share about Hogan today?
  Response: CEO: No specific sizing provided now; management reiterated Hogan is a core banking platform being extended (not rebuilt) with customer pilots forthcoming and more disclosure expected next fiscal year.

• Question from Bradley Clark (BMO Capital Markets): How sustainable are cost-management measures for long-term EBIT margin expansion?
  Response: CFO/CEO: Cost discipline is sustainable and, combined with AI-driven productivity (e.g., internal agentic SOC), should support margin improvement as revenue stabilizes; not all benefits are yet reflected in next-year guidance.

• Question from Paul Obrecht (Wolfe Research): How are you thinking about headcount strategy as AI is embedded across the business?
  Response: CEO/CFO: Workforce will be upskilled as the labor pyramid reshapes (AI agents at the base); DXC will balance resources to demand while driving productivity and managing the transition.

• Question from Paul Obrecht (Wolfe Research): Any update on win rates vs. last quarter?
  Response: CFO: Win rates were stable quarter-to-quarter with no material change in trajectory.

• Question from Rod Bourgeois (DeepDive Equity Research): What milestone enabled the pivot to fast-track opportunities now versus earlier?
  Response: CEO: The decisive milestone was hiring new talent with the right skills and product frameworks; that talent enabled product development and go-to-market for fast-track initiatives.

• Question from Rod Bourgeois (DeepDive Equity Research): Is the ~$650M free cash flow level a baseline going forward?
  Response: CFO: This is the third consecutive year in the same FCF range and, absent major disruptions, management expects similar free cash flow performance to continue.

Contradiction Point 1

AI Strategic Focus and Investment

It involves the strategic emphasis on AI investments and the company's approach to leveraging AI for competitive advantage, which significantly impacts the company's strategic direction and potential returns.

How long is the runway for AI investments, and what is your current progress? - James Faucette(Morgan Stanley)

2026Q2: The cost of AI tools is now achievable due to technological advancements and cross-subsidies. Our focus is on maintaining a competitive edge and investing sustainably. - Raul Fernandez(CEO)

How does AI affect your competitive position? - James Eric Friedman(Susquehanna)

2026Q1: AI is not yet a fully integrated component of customer operations but holds great potential. - Raul J. Fernandez(CEO)

Contradiction Point 2

Subscription Model Transition in Insurance Segment

It highlights the company's strategic direction in transitioning to subscription models, which has implications for revenue streams and financial forecasting.

What impact is Hogan's evolution having on GIS business trends and potential revenue changes? - James Faucette(Morgan Stanley)

2026Q2: Insurance bookings have different dynamics, with larger renewals. We expect mid-single-digit revenue growth as we transition to subscription models strategically. - Robert Del Bene(CFO)

Has the company started transitioning from term contracts to subscription models in the insurance segment? - James Eric Friedman(Susquehanna)

2026Q1: Has the company begun transitioning from term contracts to subscription models in the insurance segment? - James Eric Friedman(Susquehanna)

Contradiction Point 3

Revenue Growth and Margin Expectations

It involves the company's outlook on revenue growth and margin expectations, which are critical for investor confidence and financial planning.

How is the CES business performing under the new leadership? What areas are showing improvement, and are there early disruptions? Is the expected Q4 revenue contribution from CES already secured or still being finalized? - Bryan Bergin (TD Cowen, Research Division)

2026Q2: We're seeing strong bookings momentum, and we expect revenue improvement in the fourth quarter. - Robert Del Bene(CFO)

Could you explain the progressive margin benefits changes this quarter and their impact on Q4? - Tom Roderick (Stifel)

2025Q3: We expect adjusted EBIT margin to be about 7% in the fourth quarter due to revenue decline and increased investments. - Robert Del Bene(CFO)

Contradiction Point 4

Fast Track Initiatives and Innovation Strategy

It involves the company's strategic focus on innovation and fast track initiatives, which are crucial for maintaining competitive advantage and driving growth.

How will you manage and disclose fast-track opportunities, and what is the incubation strategy? - Jamie Friedman (Susquehanna Financial Group, LLLP, Research Division)

2026Q2: We will provide more clarity on fast track products and pipelines in the new fiscal year. The focus is on replicable, high-margin solutions, and we expect a few to significantly impact revenue. - Raul Fernandez(CEO)

Can you share details on your go-to-market strategy and where you see improvement? - James Friedman (Sussex Research)

2025Q3: Our revamped go-to-market approach is focusing on better solutioning, pricing models, and driving better economics on renewals. The strategy is leading to improved book-to-bill ratios and increased bookings. - Raul Fernandez(CEO)

Contradiction Point 5

Macroeconomic Impact on Demand

It involves the impact of macroeconomic conditions on demand, which is crucial for understanding revenue projections and business strategy.

How is the CES business performing under its new leadership? - Bryan Bergin (TD Cowen, Research Division)

2026Q2: The macroeconomic environment is not impacting our ability to deliver against our margins. - Robert Del Bene(CFO)

How has demand evolved during the quarter, and what is the impact of geopolitics on demand, particularly by industry? - Bryan Bergin (TD Cowen)

2025Q4: Project-based services in consumer industries and retail have experienced pipeline drops. Banking, capital markets, manufacturing, and the public sector remain robust. - Rob Del Bene(CFO)