DXC Technology Co Q2 FY2027 earnings call

• Strategic Focus on AI and Agentic Solutions: DXC is prioritizing the commercialization of agentic and AI-based solutions, leveraging its global technical talent and industry expertise. Over 5,700 colleagues have earned AI certifications since June.
• GrowthX Modernization Win: Secured a major win with a leading global banking institution to modernize its core banking system using AI-powered platforms and industrialized delivery, demonstrating scalable legacy transformation capabilities.
• OASIS Platform Momentum: Utilization of the OASIS platform surged 6x from the previous quarter. Patch management has emerged as a leading use case, with new customer pilots underway.
• Insurance Business Innovation: The Assure SaaS platform now exceeds 275 enterprise accounts. DXC sold its first 'smart apps' and the pipeline for these AI-enabled applications grew over 20%.
• Cybersecurity Product Launch: Approved the productization of 'Claude Mythos' into 'DXC Frontier Code Assurance,' a managed service that identifies, validates, and prioritizes software vulnerabilities using frontier AI reasoning.
• Leadership Changes: Paul Taylor joined as President to focus on operational accountability, removing global friction, and improving sales execution.
• Talent Development: Engineers participated in multi-platform boot camps with partners like Anthropic, AWS, and Eleven Labs to build expertise across various AI models.

Total revenue was $3 billion, down 4% year-over-year. Adjusted EBIT margin was 6.2%, a decline of 180 basis points year-over-year. Non-GAAP diluted EPS was $0.67. Key segment highlights include:

• CES (Core Enterprise Services): Revenue declined 3.3% year-over-year, in line with guidance. Book-to-bill ratio was 0.79, reflecting a 17% decline in bookings driven by application services.
• GIS (Global Infrastructure Services): Revenue declined 10%, slightly below expectations due to short-term project dynamics and large deal timing. Book-to-bill ratio was 0.8, with a 13% year-over-year reduction in bookings.
• Insurance: Revenue grew 23% year-over-year, significantly above expectations, primarily driven by an unanticipated one-time contract modification. Excluding this modification, underlying revenue was consistent quarter-over-quarter. SaaS business within insurance grew at a strong double-digit rate.

• Full Fiscal Year 2027 Organic Revenue: Revised downward to a decline of 5% to 5.5% year-over-year, citing weaker-than-expected second-quarter bookings and lower pipeline conversion rates continuing into the second half.
• Segment Guidance (FY2027):
  • CES: Expected to decline in the mid-single-digit range.
  • GIS: Expected to decline in the high-single-digit range, with modest sequential improvements in Q3 and more pronounced improvement in Q4.
  • Insurance: Revised upward from low single-digit to mid-single-digit revenue growth, driven by the Q2 contract modification.
• Financial Metrics (FY2027):
  • Adjusted EBIT Margin: Revised downward to a range of 5.75% to 6.25%.
  • Non-GAAP Diluted EPS: Revised downward to a range of $2.25 to $2.50.
  • Free Cash Flow: Expected to be approximately $600 million.
• Third Quarter FY2027 Outlook:
  • Total organic revenue expected to decline approximately 6% year-over-year.
  • CES expected to decline mid-single digits; GIS expected to decline high-single digits; Insurance expected to grow similar to Q1.
  • Adjusted EBIT margin expected to be approximately 6%; Non-GAAP EPS expected to be approximately $0.55.

• Pipeline Conversion and Deal Timing: Significant delays in large deals, particularly in the UK public sector and Americas financial services/retail sectors, have impacted bookings and revenue recognition.
• Competitive Pressure: Stiffened competition in the Americas has led to reduced win rates and some deal losses or deferrals.
• Customer Decision Cycles Lengthening: Customers are re-evaluating traditional IT projects versus agentic/AI approaches, leading to longer sales cycles and shorter contract terms (e.g., shifting from five-year to two-year deals).
• Revenue Decline Impact: Lower revenue guidance necessitates deeper cost takeout plans for fiscal 2028 to protect margins.
• AI Implementation Complexity: While demand is strong, the complexity of enterprise-level AI delivery and concerns around data security, sovereignty, and safety can slow adoption and increase implementation timeframes.

Q: Analyst asked for details on lower pipeline conversion, specifically whether deals were lost or deferred, and how market dynamics differ from peers.

A: CFO Rob Del Bene clarified that larger GIS deals in the UK public sector are delayed but still in negotiation, while smaller project-based services in the Americas faced a mix of delays and dropouts due to stiffened competition. CEO Raul Fernandez added that customers are debating traditional upgrades vs. agentic approaches, lengthening decision cycles, though small AI deals move faster and unlock follow-on work.

Q: Analyst questioned if pricing pressure is increasing and how budget allocation for AI/security impacts IT services demand.

A: CFO noted pricing is stable/slightly down, with window rates dropping slightly. CEO explained that while customers prioritize AI and security budgets, the complexity of enterprise AI delivery ensures continued need for external providers. He highlighted a bifurcation where clients operate existing systems but need partners to reimagine workflows via agentic solutions.

Q: Analyst asked about backlog erosion risk and drivers behind the full-year guidance reduction.

A: CFO stated backlog erosion remains consistent with historical levels, showing no elevated risk. He attributed the guide takedown equally between CES and GIS, driven by deferred large deals and lower pipeline conversion rates carrying into H2. He confirmed the one-time insurance benefit had no offset.

Q: Analyst inquired about share loss issues, who is winning lost deals, and sales execution improvements.

A: CEO explained DXC is simplifying customer interactions to a single point of accountability to reduce internal friction. He acknowledged past go-to-market imperfections contributed to lost conversions but expressed confidence in the portfolio's strength and improved execution under new leadership. He emphasized matching supply signals with demand signals more effectively.

Q: Analyst asked about updates on GrowthX and competitive moves by Guidewire acquiring Hyper-exponential.

A: CEO described GrowthX's modernization win as proof of concept for scalable legacy transformation with significant follow-on potential. Regarding Guidewire, he noted that high valuations are driven by sticky customers, recurring revenue, and regulatory moats—attributes DXC also possesses in its insurance business and other segments.