Executive Summary / Key Takeaways

• Turnaround Momentum Building: DXC Technology is executing a comprehensive, multi-year turnaround, demonstrating tangible progress in Q1 Fiscal Year 2026 with results at the high end of guidance for organic revenue and adjusted EBIT margin, alongside strong free cash flow and a third consecutive quarter of double-digit bookings growth.
• AI as a Core Differentiator: The company is strategically embedding AI across its operations and client solutions, leveraging its deep industry expertise and a newly trained workforce of over 50,000 GenAI-enabled engineers to deliver quantifiable efficiencies and drive new business opportunities.
• Strengthened Foundation & Leadership: Under a stable, re-energized leadership team, DXC has rebuilt its sales organization, streamlined operations, and significantly strengthened its balance sheet, providing the financial flexibility to invest in profitable growth initiatives.
• Competitive Re-positioning: While still trailing market leaders in overall growth and innovation speed, DXC is carving out a competitive niche by focusing on cost-efficient, end-to-end IT services for complex, regulated industries and leveraging its global-local delivery model.
• Outlook for Profitable Growth: Management anticipates a continued organic revenue decline of 3-5% for FY26, with improving performance in the second half driven by ramping strategic deals, and expects adjusted EBIT margins between 7-8%, signaling a disciplined approach to balancing investment with profitability.

The Phoenix Rises: DXC's Strategic Reawakening in a Transformative Era

DXC Technology Company, a global IT services powerhouse with roots tracing back to 1959, stands at a pivotal juncture. For decades, DXC has adapted through successive technology cycles, from personal computing to the internet and cloud. Its formation in 2017 through the merger of Computer Sciences Corporation (CSC) and Hewlett Packard Enterprise (HPE)'s services business marked a significant consolidation, aiming to create a leading force in the IT landscape. However, the years following saw a period of revenue decline, prompting a comprehensive turnaround initiative under CEO Raul Fernandez and CFO Rob Del Bene, who took the helm around February 2024. This leadership team is now steering DXC towards a future defined by operational rigor, strategic investments, and a sharp focus on the burgeoning opportunities presented by Artificial Intelligence.

The IT services industry is currently undergoing a profound transformation, driven by the accelerating adoption of AI. This new technology cycle is redefining business processes and customer interactions, creating both immense opportunities for established players and fertile ground for disruptors. Customers are increasingly seeking to consolidate their IT spending, favoring partners who can offer end-to-end capabilities across infrastructure, applications, and emerging technologies. DXC, with its extensive global footprint and deep industry expertise, is strategically positioning itself to capitalize on this trend, aiming to become the trusted partner for enterprises navigating complex, regulated environments with cutting-edge solutions.

Technological Edge: AI as the Catalyst for Transformation

At the heart of DXC's strategic resurgence is its aggressive embrace of AI. The company's approach is not merely additive; it aims to integrate AI seamlessly into the fabric of its clients' operations, making it a core component of their business strategy. This is supported by a substantial investment in talent, with over 50,000 GenAI-enabled engineers trained and 92% of technical teams achieving AI readiness. This commitment has already garnered external recognition, with Gartner naming DXC an Emerging Leader in the inaugural Consulting and Implementation Services Market Quadrant for Generative AI. This validates DXC's current capabilities and its clear vision for deploying GenAI at scale, emphasizing speed, security, and tangible business value.

DXC is not just advising clients on AI; it is actively pressure-testing and documenting its own journey as "Client Zero." Internally, AI is being embedded across all corporate functions. In security operations, agentic AI is delivering real-time threat intelligence, resulting in an almost 70% reduction in investigation time with 95% investigation accuracy. Marketing teams have seen content creation and video production time cut by 30%. HR is leveraging predictive analytics to identify attrition risks and improve workforce utilization, while legal teams are automating contract reviews. This hands-on experience allows DXC to move faster, learn in real-time, and bring smarter, more scalable solutions to its clients.

Client engagements further illustrate the power of DXC's AI-driven solutions. For Unicaja, a top Spanish bank, DXC is modernizing core operations using AI and GenAI for document automation and virtual assistance, promising faster service and significant cost savings. With Equitable Holdings (EQH), a GenAI-powered virtual service agent quickly analyzes thousands of documents, enabling customer representatives to respond 80% faster and leading to a 10x growth in the relationship. For a large global bank, DXC's GenAI solution automates legacy code conversion to Java 50% faster with fewer errors, accelerating time-to-market for new credit card products. These examples underscore the tangible, quantifiable benefits DXC's technological differentiation brings to its clients, enhancing its competitive moat.

Operational Rigor and Strategic Initiatives

The turnaround at DXC is "deeper and more extensive" than initially appreciated, addressing fundamental structural, operational, and cultural issues. A key aspect of this transformation is the focus on leadership stability, underscored by CEO Raul Fernandez and CFO Rob Del Bene receiving equity grants designed to secure their leadership through fiscal year 2028. This aligns executive compensation with long-term shareholder value creation, providing critical continuity.

The company has undertaken a significant overhaul of its sales organization, rebuilding capabilities from the ground up. This includes implementing strict quantitative performance criteria, aligning pay incentives, and onboarding a new Chief Revenue Officer, T.R. Newcomb, to drive operational excellence. DXC is also shifting towards "proactive solutioning," bringing net new, AI-driven ideas to clients that leverage its industry knowledge and implementation heritage. This is expected to expand the pipeline and improve win rates, which already increased in Q1 FY26 in both CES and GIS. Furthermore, the global shared services model is now fully implemented, standardizing processes across sales, business, and account operations to increase agility and optimize costs, while the ERP consolidation plan is on track with initial migrations successfully initiated.

Financial Performance and Segment Dynamics

DXC's Q1 Fiscal Year 2026 results reflect the early fruits of these strategic initiatives. Total revenue for the quarter was $3.16 billion, a 2.4% year-over-year decline, or 4.3% on an organic basis. Adjusted EBIT margin stood at 6.8%, a modest 10 basis point decrease year-over-year, reflecting strategic investments aimed at future top-line growth. Non-GAAP diluted EPS was $0.68, exceeding the high end of guidance.

The company generated $97 million in free cash flow, a significant improvement from $45 million in the prior-year period. Bookings increased 14% year-over-year, marking the third consecutive quarter of double-digit growth, and resulting in a trailing 12-month book-to-bill ratio of 1.06.

The company's new segment structure, effective April 1, 2025, provides clearer insights into performance:

• Consulting & Engineering Services (CES): Representing 39.4% of total revenues, CES saw revenues of $1.25 billion, declining 4.4% organically. This reflects ongoing pressure in short-cycle custom application projects, as clients shift investments towards larger, longer-duration strategic deals. Despite this, CES bookings grew 32% year-over-year, achieving a strong book-to-bill of 1.19x, with its trailing 12-month book-to-bill at approximately 1.2.
• Global Infrastructure Services (GIS): Accounting for 50.6% of revenues, GIS reported $1.60 billion, with an organic decline of 5.7%. This performance was consistent with the prior quarter and aligns with full-year expectations. Bookings for GIS grew modestly, with a book-to-bill of 0.74x, impacted by the deferral of a couple of large deals expected to close in coming quarters. The trailing 12-month book-to-bill improved to approximately 1.1.
• Insurance Services (Insurance): The smallest segment at 9.9% of revenues, Insurance delivered $313 million, growing 3.6% organically. This growth was primarily driven by software and volume-based increases in existing accounts. The segment's book-to-bill was 0.54x, but management notes that Insurance bookings are lumpier due to large renewals and the segment has the most revenue coverage from its backlog, providing confidence in continued mid-single-digit revenue progression.
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DXC's balance sheet has also seen significant strengthening. Since the start of fiscal year 2025, the company has reduced nearly $350 million of capital leases and increased its cash balance by almost $570 million to $1.8 billion. This has resulted in a net debt reduction of approximately $630 million, bringing total liquidity to $5 billion as of June 30, 2025, including $3.2 billion available under its revolving credit facility. This improved financial flexibility supports strategic investments and capital returns, with plans to repurchase $150 million in shares in FY26.

Competitive Landscape and Strategic Positioning

DXC operates in a highly competitive IT services market, facing established giants like Accenture (ACN), IBM (IBM), and Cognizant (CTSH), as well as agile startups and hyperscale cloud providers. While AI creates opportunities for all, it also intensifies competition.

Comparing DXC's TTM financial ratios to its peers reveals a mixed picture. DXC's Gross Profit Margin (24.71%), Operating Profit Margin (5.38%), Net Profit Margin (2.96%), and EBITDA Margin (16.92%) generally trail those of Accenture (Gross: 33%, Operating: 15%, Net: 11%, EBITDA: 19.73% for FY24) and Cognizant (Gross: 34%, Operating: 15%, Net: 11%, EBITDA: 10.63% for FY24). IBM's margins (Gross: 57%, Operating: 16%, Net: 10%, EBITDA: 20.57% for FY24) are notably higher, reflecting its different business mix. DXC's Debt/Equity Ratio (1.51) is higher than Accenture (0.15) and Cognizant (0.10), but lower than IBM (2.14).

Despite these quantitative differences, DXC is strategically re-positioning itself. It leverages its deep understanding of complex, regulated industries and its ability to manage mission-critical legacy systems while modernizing them. The recent win with Carnival Cruise Line (CCL), a "highly competitive bid" against 12 other competitors, was secured not on price, but on DXC's "capability," its status as a "proven partner," and its "technical foundation, leadership, [and] partnership." This highlights DXC's strength in delivering complete operational confidence for large, demanding clients.

DXC is "one of only a handful of players that both have the end-to-end capabilities and also can deliver it globally with local excellence." This global-local model allows for tailored solutions that respond to regional dynamics while leveraging global resources. The company's pricing environment has been "very stable," and it has successfully achieved "more favorable terms" in renewals by focusing on mutual value. Furthermore, DXC is intentionally reducing its low-margin resale business in GIS by adhering to disciplined margin thresholds, even if it means losing some deals, prioritizing profitability over volume. This disciplined approach, coupled with improving win rates in both CES and GIS, indicates a more focused and effective competitive strategy.

Outlook and Risks

For Fiscal Year 2026, DXC expects total organic revenue to decline between 3% and 5%. However, due to favorable currency tailwinds, total reported revenue is now projected in the range of $12.6 billion to $12.9 billion, an increase of approximately $430 million at the midpoint from prior guidance. Segment-wise, CES is expected to decline low single digits organically, with performance improving in the second half as larger, longer-duration deals ramp up. GIS is anticipated to decline at a mid-single-digit rate organically, an improvement from last year's rate. Insurance Services is projected to maintain mid-single-digit organic growth.

Adjusted EBIT margin for FY26 is expected to be between 7% and 8%, reflecting continued investments in revenue growth capabilities. Non-GAAP diluted EPS is now guided between $2.85 and $3.35, an increase from prior outlooks, driven by the higher reported revenue projection. Free cash flow for the full year is targeted at approximately $600 million, reflecting EBIT guidance and an expected $30 million of incremental restructuring spend, with generation strongest in the second half. For Q2 FY26, organic revenue is expected to decline 3.5% to 4.5%, with adjusted EBIT margin in the range of 6.5% to 7.5% and non-GAAP diluted EPS of $0.65 to $0.75.

Despite this positive trajectory, risks remain. The "rebuilding of operational capabilities is deeper and more extensive than initially appreciated," and the turnaround is a multi-year, non-linear journey. Global uncertainties, including trade policy, geopolitical conflicts, inflation, and labor costs, continue to pressure corporate spending on discretionary projects. The conversion of bookings to revenue is not uniform; larger strategic deals have longer ramp-up times (15-25 months) compared to shorter-cycle projects (6-9 months), which can impact near-term revenue visibility. Furthermore, DXC faces significant tax litigation, with a potential liability of approximately $552 million (including interest and penalties) and cash tax payments of $632 million if it does not prevail in U.S. Tax Court. The recently enacted One Big Beautiful Bill Act (OBBBA) also introduces tax reform provisions whose full impact is still being assessed.

Conclusion

DXC Technology is in the midst of a profound transformation, moving beyond a period of decline to establish a foundation for sustainable, profitable growth. Under a stable and re-energized leadership team, the company is systematically addressing operational inefficiencies, rebuilding its sales engine, and strategically investing in its core capabilities, particularly in AI. The strong bookings momentum, coupled with a disciplined approach to cost management and a strengthened balance sheet, signals that DXC is gaining traction in the market.

While the journey is acknowledged to be extensive and non-linear, DXC's focus on integrating AI into client operations, leveraging its unique end-to-end service delivery, and sharpening its competitive edge in complex, regulated industries positions it to capitalize on the massive AI-driven technology cycle. Investors should monitor the consistent conversion of bookings into revenue, the continued expansion of its AI-driven solutions, and the disciplined execution of its turnaround strategy, as these factors will be critical in determining DXC's ability to achieve its profitable growth objectives and solidify its competitive standing in the evolving IT services landscape.