Executive Summary / Key Takeaways

• DXC Technology is undergoing a significant operational and strategic transformation, pivoting from legacy IT services to an AI-first approach with a "2-track" strategy focused on optimizing core businesses and accelerating new AI-native solutions.
• The company's financial performance in the first half of fiscal year 2026 reflects ongoing revenue declines (4.3% organic decline for H1 FY26) but demonstrates strong cost management, leading to an adjusted EBIT margin of 8.0% in Q2 FY26, exceeding guidance.
• DXC is building a robust foundation for future growth, evidenced by a trailing 12-month book-to-bill ratio of 1.08x in Q2 FY26 and significant investments in AI talent and innovative solutions like DXC CoreIgnite and OASIS.
• The company has substantially strengthened its balance sheet, increasing cash to $1.9 billion and reducing net debt by approximately $770 million in the first half of FY26, providing financial flexibility for strategic investments and share repurchases.
• While global uncertainties and the time lag for bookings to convert to revenue present near-term challenges, DXC's strategic focus on AI, new talent acquisition, and disciplined execution positions it for sustainable, profitable growth, with a full-year FY26 free cash flow guidance of approximately $650 million.

Setting the Stage: A Transformation in Motion

DXC Technology Company, a global IT services provider founded in 1959, stands at a pivotal juncture, leveraging its deep heritage across multiple technology cycles—from personal computing to the internet, mobile, and cloud—to embrace the transformative power of artificial intelligence. The company's current form, shaped significantly by the 2017 merger of Computer Sciences Corporation (CSC) and Hewlett Packard Enterprise Company (HPE)'s (HPES) Enterprise Services business, has positioned it as a trusted partner for organizations seeking to simplify, optimize, and modernize their critical systems. DXC's overarching strategy is clear: reverse years of revenue decline and achieve sustainable, profitable growth by reorienting its business around innovation and AI-powered solutions.

The IT services industry is currently experiencing an accelerating shift towards AI adoption, with customers increasingly consolidating their IT spending. This trend plays directly into DXC's strengths as a full-stack provider with capabilities spanning infrastructure and application management. However, the competitive landscape is intense, with major players like Accenture , IBM , Capgemini (CAP), and Cognizant (CTSH) vying for market share. DXC's competitive positioning, while strong in secure outsourcing and legacy modernization, faces challenges in matching the innovation speed and broader ecosystem integration of some rivals.

DXC's TTM gross profit margin of 22.27% and operating profit margin of 5.30% indicate a leaner operational profile compared to some peers, where companies like Accenture often exhibit higher profitability. DXC's debt-to-equity ratio of 1.53, while managed, suggests a more leveraged balance sheet than some competitors. The company's strategic response involves a "2-track approach": a "core track" focused on optimizing existing offerings and a "fast track" dedicated to developing new AI-native or highly AI-infused solutions. This dual strategy aims to capitalize on DXC's foundational strengths while aggressively pursuing new growth avenues.

Technological Edge and Innovation Roadmap

DXC's technological differentiation is central to its transformation. The company is making substantial investments in AI, having trained over 50,000 GenAI-enabled engineers and achieving 92% AI readiness across its technical teams. This focus is not merely theoretical; DXC is actively deploying AI internally as "client zero" to pressure-test and refine its offerings. For instance, internal AI adoption in security operations has led to an almost 70% reduction in investigation time with 95% accuracy, while AI in marketing has cut content creation and video production time by 30%. These quantifiable internal benefits underscore the practical application and potential ROI of DXC's AI capabilities for its clients.

A key "fast track" initiative is DXC CoreIgnite, a new offering designed to modernize the legacy Hogan core banking platform. This platform, which supports an astounding $5 trillion in deposits and facilitates over $2.5 trillion in daily transactions, is being transformed into cloud-native, API-driven services. This move is accretive and additive, enabling banks to unlock new revenue streams from existing infrastructure without disruption. The partnership with Splitit further enhances this by allowing banks to offer "Buy Now, Pay Later" options directly from customer accounts, leveraging Splitit's AI engine for personalized offers.

In its Global Infrastructure Services (GIS) segment, DXC is developing OASIS, a unified AI-powered orchestration platform. OASIS aims to enhance client technology ecosystems through a human-led, AI-driven Intelligent Operations approach, providing comprehensive IT estate visibility and improved outcomes. Pilot deployments are anticipated in the coming months, with a broader market introduction planned for the first half of calendar year 2026. This initiative directly addresses the industry's demand for proven AI capabilities in managed services, creating new revenue opportunities for DXC.

The Insurance Services segment is also a hotbed of innovation. DXC has expanded its SaaS portfolio from 30 to 45 products, with ambitious plans to double SaaS revenue in each of the next two years. Recent launches include DXC Assure Smart Apps, a suite of AI-powered, workflow-driven applications for insurers, and Assure Broking Essentials, an AI-powered, multi-tenant SaaS solution for small and mid-sized insurance brokers. These offerings, along with the DXC APEX (Assure Platform Ecosystem Exchange) Program, aim to modernize operations, enhance decision-making, and drive growth within the insurance industry.

DXC's "Xponential" AI framework, which blends governance, automation, and human expertise, is designed to help clients move from AI pilots to tangible business impacts rapidly. This framework, combined with strategic partnerships like the one with Boomi for AI-driven integration automation and 7AI for the DXC Agentic Security Operations Center (SOC), underscores DXC's commitment to delivering enterprise-grade AI solutions. The Agentic SOC, for instance, aims to reduce operational costs through autonomous AI agents while delivering faster response times and scaling coverage, with 7AI's platform already saving security teams 224,000 analyst hours (equivalent to approximately $11.2 million) in 2025.

Financial Performance and Operational Discipline

DXC's recent financial performance reflects a company in transition, balancing revenue pressures with rigorous cost management and strategic investments. For the second quarter of fiscal year 2026 (ended September 30, 2025), total revenue was $3.16 billion, a 2.5% year-over-year decrease, with organic revenue declining by 4.2%. For the first six months of fiscal year 2026, total revenue stood at $6.32 billion, down 2.4% year-over-year, with a 4.3% organic decline. This revenue trend, while still negative, shows a slight narrowing of the decline compared to previous periods.

Despite revenue headwinds, DXC has demonstrated strong operational discipline. The adjusted EBIT margin for Q2 FY26 reached 8.0%, surpassing the high end of guidance, primarily due to disciplined cost management within the GIS segment and corporate functions. The year-over-year decline in adjusted EBIT margin of 60 basis points was attributed to productivity savings, increased investment levels for future growth, and a one-time legal settlement benefit in the prior year. Costs of services (COS) decreased due to the realignment of business development expenses to SG&A, lower revenue-driven costs, and reduced contractor expenses from cost optimization. Conversely, selling, general and administrative (SGA) expenses increased, reflecting the aforementioned reclassifications and strategic investments in marketing and IT.

Segment-wise, Consulting & Engineering Services (CES) reported revenues of $1.26 billion in Q2 FY26, with an organic decline of 3.4% and a segment profit margin of 11.6%. Global Infrastructure Services (GIS) generated $1.59 billion in Q2 FY26 revenues, declining 6.3% organically, with a segment profit margin of 7.7%. The Insurance Services segment continued its positive trajectory, with revenues of $320 million in Q2 FY26, growing 3.6% organically, and achieving a segment profit margin of 8.8%. The Insurance segment's consistent mid-single-digit organic growth is a notable bright spot, driven by software and volume-based increases in existing accounts.

Bookings performance provides a forward-looking indicator of revenue potential. DXC reported Q2 FY26 bookings of $2.7 billion, resulting in a book-to-bill ratio of 0.85x. However, the trailing 12-month book-to-bill ratio improved to 1.08x, marking the third consecutive quarter above 1.0. This momentum, particularly in CES with a trailing 12-month book-to-bill of 1.15, is expected to translate into improved revenue performance in the latter half of fiscal year 2026 and into fiscal year 2027, albeit with a time lag due to the longer duration of strategic projects.

Strengthening the Balance Sheet and Capital Allocation

DXC has made significant strides in strengthening its financial foundation. As of September 30, 2025, the company held $1.9 billion in cash and cash equivalents, with $1.1 billion held outside the U.S. Operating cash flows for the first half of fiscal year 2026 increased to $595 million, a $162 million year-over-year improvement, driven by a $197 million favorable change in working capital and improved cash conversion cycle. This marks a shift towards a more balanced cash flow cadence throughout the year, rather than being heavily weighted towards the second half.

The company's focus on reducing debt and minimizing new financial lease originations has been effective. Over the last six quarters, DXC paid down over $400 million in capital leases while limiting new originations to just $31 million. Total debt decreased by $107 million to approximately $4 billion in the first half of FY26, and net debt was reduced by approximately $770 million, significantly enhancing financial flexibility. DXC's revolving credit facility was also amended in October 2025, extending its maturity to November 2030 and providing $3 billion in available borrowings.

With a strengthened balance sheet, DXC is committed to a balanced capital allocation strategy. The company plans to continue investing in its business to drive profitable revenue growth, further reduce outstanding debt (including a portion of senior notes maturing in January 2026), and return capital to shareholders. DXC repurchased $125 million of shares in the first half of FY26 and intends to maintain this quarterly pace in Q3 FY26, with $467 million remaining under its Board-authorized share repurchase program. The suspension of quarterly dividends for fiscal year 2026 underscores the focus on financial flexibility and strategic investments.

Outlook, Risks, and Competitive Dynamics

DXC's full fiscal year 2026 guidance reflects a cautious yet optimistic outlook. Total revenue is projected to be between $12.67 billion and $12.81 billion, with the organic revenue decline narrowed to 3.5% to 4.5%. This guidance assumes a stable macro environment, with management not anticipating significant economic upturns or downturns, but building in room for potential uncertainty. Adjusted EBIT margin is expected to be between 7% and 8%, reflecting continued investments in growth capabilities. Non-GAAP diluted EPS is guided to be between $2.85 and $3.35, and free cash flow is projected at approximately $650 million, driven by improved working capital and new tax law legislation.

Near-term challenges include the lag between strong bookings and revenue conversion, particularly for larger, longer-duration deals. The project-based services market has also experienced difficulties, impacting both CES and GIS. Global uncertainties, such as trade policy and geopolitical conflicts, continue to exert pressure on discretionary corporate spending.

From a competitive standpoint, DXC is actively working to differentiate itself. While competitors like Accenture (ACN) and IBM (IBM) often lead in innovation speed and broader ecosystem integration, DXC's deep expertise in managing complex, mission-critical systems and its tailored approach to multi-cloud environments for cost-sensitive clients provide a distinct advantage. The recent win of the Carnival Cruise Line (CCL) contract, a highly competitive bid, underscores DXC's capability as a trusted partner and operator, winning on capability and foundation rather than solely on price. DXC's recognition as a leader in ISG (III)'s ServiceNow Ecosystem Partners study and Everest Group's Custom Application Development Services PEAK Matrix further validates its strategic direction and technological prowess.

However, DXC faces risks from ongoing tax litigation with the IRS, which could result in significant incremental tax expenses and cash payments if the company does not prevail. The appeal of the $194 million TCS litigation award also presents an unresolved contingency. Furthermore, the inherent challenges of enterprise AI adoption, including data readiness, privacy concerns, and the need to rethink entire business processes, represent a significant undertaking for both DXC and its clients.

Conclusion

DXC Technology is in the midst of a profound transformation, strategically repositioning itself to capitalize on the burgeoning AI economy. The company's "2-track" approach, combining disciplined optimization of its core IT services with aggressive development of AI-native solutions, forms the bedrock of its investment thesis. While the journey to sustainable revenue growth is ongoing and faces headwinds from macro uncertainties and the inherent lag in converting bookings to revenue, DXC's operational improvements, strengthened balance sheet, and focused investments in AI talent and innovative technologies are laying a solid foundation.

The company's commitment to technological differentiation, exemplified by initiatives like DXC CoreIgnite, OASIS, and its expanding SaaS portfolio in Insurance Services, is critical to building new competitive moats and driving future profitability. The ability to leverage its deep industry knowledge and existing client relationships to deliver tangible AI-driven outcomes positions DXC as a valuable partner in this new technological era. Investors should closely monitor the conversion of DXC's robust pipeline into revenue, the continued expansion and adoption of its "fast track" AI solutions, and the sustained execution of its cost management and capital allocation strategies as key indicators of its long-term success in this dynamic market.