DXC Technology Company (DXC) Earnings Call Transcript & Summary

All right. We're going to kick off here. I'm Bryan Bergin from TD Cowen. I cover IT services and payments. Very pleased to have DXC Technology with us next for this fireside. With us from DXC, we have Raul Fernandez, President and CEO; and Rob Del Bene, CFO. We also Roger Sachs, Tiffany Horvath, in the room from IR. So I appreciate all your time today.

Thank you.

DXC, for those who don't know, it's a diversified IT services vendor serving enterprise clients with application, consulting, engineering services, infrastructure, workplace offerings, other solutions. It's broad-based workforce comprises approximately 120,000 professionals globally, and it serves a wide variety of enterprise Fortune 2000 companies. I think what will be best Raul will be kind of a an opener on the DXC state of the union.

So you've been in the CEO seat now for a bit over a year, right? Talk about how -- what that primary focus for you has been since taking the helm. And just at a high level, how would you characterize that state of the union?

Yes. Sure. So look, I think it's a bit of context is helpful here. So DXC came together as a combination of CSC and HP. But if you look at the 23andMe chart of DXC, it's made up of a lot of companies, right? And I think one of the things that I knew coming into it and then one of the things that became a deeper sense of appreciation awareness, was there was a lot of Federated operations. So offerings in countries and subsets of divisions, really not working as a unified team. And so that was one of the big opportunities that I noticed very early on and began, really, the rebuild and the turnaround around kind of 4 pillars: people, process, culture and scale. People brought in a tremendous amount of talent at the executive level and then 2 or 3 levels down that I knew came from a different background that had kind of like the best way to put it is the survivability DNA, right? They've been through situations where they've had to figure it out. It wasn't a, "Oh, I'll just do what the last guy did." and that's what you needed here. You need a fresh look. Company is incredibly blessed with incredible clients and a wonderful history with those clients. So if you were to start any business from scratch, what do you want? You want a good product and you want a good client base. Well, we have a good product and we have an incredible client base. The product, our services can still have a lot of upside, and that again is where people leadership comes in, but processes, better ways, best practices in pre-solutioning, better practices in marketing, better practices in sales, better practice in sales performance management. I noticed that when I came in a year ago, I was coming in at the beginning of the new fiscal year. So budgeting cycles were already underway. I really didn't have a chance to put my imprint on it. As we went through last calendar year and fiscal year, I realize that there is a lot more oversight needed in our revenue function, and I stepped in as interim Chief Revenue Officer in November, recruited somebody who ramped up over the first few months of the year, and then we announced them in March. But being able to be in the process pre-fiscal year of quota development planning, cross-referencing, territories and people and accounts and making sure that we're paying for the right things was something that, again, hadn't been done in the past was remedial. You think it's the basic, it is basic, but hadn't been done. So the discernment that a lot of basic foundational work needed to be done, got the people to begin to get that done, got a culture change in terms of how we approach things, how we're going to be more self-propelled, how we're going to be more entrepreneurial and then processes that are repeatable, like, okay, here's what good looks like, here's what great looks like. And we're going to repeat great over and over and scale it and train it. So those are kind of -- that's the state of where we were. We've laid a strong foundation, we've had some great early wins, both quantitatively and qualitatively. Quantitatively, quarter-over-quarter of a book-to-bill of over 1.0 is obviously building a good track record mathematically at some point. Over 1.0 gets you into a positive revenue trajectory, and that's our #1 goal is to get to positive revenue, profitable growth, in the right categories, super indexed on AI, super index and a couple of industries where we've got a degree of knowledge and insight that exceeds some of our competitors. Financial services, core banking and some modernization work is super excited about some of the early wins there. But it's a great, great global company. It's big enough to be globally important, but small enough to still be able to manage. So if you think about the heavy weights, we're on the lighter side of the heavyweights in terms of scale, but that's easier to try to get more nimble. And be more nimble.

Okay. Makes sense. You touched on a lot there. Obviously, people, process, culture. When you think about what's furthest along versus what you need to lead into most catch up? What -- where would you categorize those?

Processes, replicability. There's early, "Hey, this worked, we won. Let's do it again." now let's do it again in all the offerings and all the geographies and all the languages and then let's make sure that we're doing again from the ground up and that it's not a one-off to be successful, right? Like I know at any given day, I can field the team that can beat anybody. But I can't do that at scale yet. So I have to do that at scale.

Okay. Okay. As you think about the time line for these major initiatives, so how did you build that plan? So we're talking 1, 2, 3 years? I know you'll get to a state where there will always be continuous improvement. But the heavy lifting, how long do you think that's going to take?

This is a foundational setting year. So we identified what needed to be fixed in the first year. I can remember to call it, calendar year versus fiscal year, the first calendar year, this new calendar year, which again blends in fiscal years is leadership mainly in place foundational go-to-market elements, everything from the delivery side to the pre-sales and sales side in place need to get repeatability and replicability of certain winning motions and actions and then lean into a couple of new things that we think are going to be great spearheads for us and beachheads for us in terms of getting new work, AI-centric work.

Okay, makes sense. So then as we kind of talk about that leadership and the changes you've made are pretty notable, at least the count here. On the last call, you talked about 22 changes in the extended leadership team in about 15 months, including that new Chief Revenue Officer. So talk a little bit about those backgrounds. You mentioned kind of survivability. Just double click...

It's people that have worked with either in an operating role. I've worked with because I've been an investor in their company, a Board member in their company, but they've had to constantly figure things out on their own. And they've had to constantly not just accept or take a current business model or a current set of opportunities that reshape it, and reshape it with will and with intelligence and with teamwork. And so having personally recruited a lot of these people, I knew they were successful in their past. And I think that the trait from a DNA standpoint, is just -- I think there are great people that know playbooks and they run playbooks. They are great people that run playbooks. They run playbooks and then they also make the next playbook, and that's what we have here.

Okay. So it certainly sounds like scrappy, but also challenging everything that's been done in the past within the company?

Yes.

Okay. Okay. When you make a lot of these changes is naturally as leadership comes in, they have their people that follow them and take their roles. There's execution risk around that. How do you think about building that into the plan?

I think the execution risk of not making changes is higher than the execution risk of keeping people. And that's a different point of view, right? Usually like, oh my gosh, I don't mind. I know I can get more people. I know I have a deep bench of talent at all levels instead of my people. And so if we're not aligned on doing things in a different way because clearly, 8 years of revenue decline is nothing -- there's nothing winning about that. And I'm not here to continue that trend. I'm here to reverse that trend and make it positive. And I'm going to bring and do everything I can as fast as I can to make that happen.

Okay. All very clear. Why don't we pivot to demand? So it's obviously been a very volatile environment in technology and services, particularly. What have you seen over the last several quarters? Just kind of talk about the progression of client demand and the conversation.

We can talk about macro a bit. At the micro level, I've met over 100 customers, big ones, $500 million in TCV, $100 million, $50 million all sizes, new work at $100 million. And I am incredibly positively shocked every time I meet them, and I talk about another part of the business that they're not using from our services standpoint. And they all say, well, you need to send that person in or that division needs to come in and present, there's more opportunities here. We clearly do a lot with you. We can do more with you, you're a trusted partner. We're getting the list of our trusted partners. They're shrinking. You should be taking a bigger share of that. And if I'm hearing that at that level, that should be across the board. So much more engagement with customers, we have the skill sets. We have the case studies. We have the references. You just have to engage and you have to be present to win. This company, early pre-COVID went very remote. COVID, obviously, a very remote. But we're, like other tech companies, swinging back using every facility we have to fill it up as fast as possible, not just from an execution standpoint, does that make us better as teammates. But you have to be there to learn from both the good things you do and the bad things that you do. That's how I learned from watching others that were ahead of me professionally, do both the positive things and the negative things. So that's another culture shift as well. But so from a demand standpoint, great customers, great relationships, great reason to go have a conversation from an offering standpoint, some really innovative things that we are now positioned from an AI standpoint in a way that's understandable. A lot of this early stuff is a lot of new terms that are thrown around and new things that in 2 years will be like, well, of course, that's that. But cutting through that noise and actually seeing real bottom line results and then also taking advantage of the leverage we have. Being so close to these customers, we have the most insight on infrastructure readiness, on data readiness and on people and process readiness. We are uniquely positioned to know where they are on the spectrum to take in massive AI projects, and we're uniquely positioned to help them get there. And so that insight and that positioning is one we just have to take better advantage of it. So yes, macro uncertainty, certain industries obviously hit more, pauses, elongation but I've lived through since the late '90s, a bunch of these highs and lows in the macro environment. And this one so far, yes, a little bit of turbulence, a little bit of noise, heavier in some industries than other, but I think our own self-help execution outweighs anything that overhangs today from a macro standpoint.

Okay. That's clear, too. There's a bit of a difference here for what you're seeing in those conversations. Are you able to attach that though, those -- the company-specific kind of goodness of the changes in the processes you're making versus that sentiment of the client and their decision-making and even recent weeks, has been obviously good and bad headlines around tariffs. Is there anything that's changed?

Yes. Look, I think you're seeing certain industries that have been hit directly on their cost of goods input and they're pausing certain things or recasting their outlooks or taking away guidance. There are some that are hit more than others and there are some that even though they're hit, they're in a category like we have a luxury car partner manufacturer where we run the production floor, plus we run some of the in-car infotainment systems. And they've got pricing power. They can pass along 20% tariff increase. So every customer and every industry has a different story on how they're dealing with this. But I think the counterbalance to this is you cannot not go into these AI initiatives. And the early ones are going to be wide and maybe not have the ROI. But I'll give you the experience to understand where is it that you can double down? Where do you have to fix your data, where do you have to fix your processes? Where do you have to restack your people in terms of skill sets? And how quickly can you get an ROI on all that stuff?

Okay. You've had -- you're showing some building traction, some early traction. You've got 2 straight quarters now of that book-to-bill above 1. How do you feel about the ability to sustain that in the near term? You're entering a new fiscal year, so we understand that there could be seasonality, but any color you could share there?

Yes. So far, our just connecting a couple of thoughts here. We do see strength in our pipeline, particularly in strategic projects. So we're seeing -- we see a little bit of a slowdown in demand in the shorter-term project-based services and it's what Raul was referring to. And if you look at our bookings for the second half of the fiscal year, and our pipeline in the short term for the first and second quarter, those project-based shorter-term services are kind of flattish as opposed to robust growth, but strategic projects, the larger strategic projects are where we really succeeded in the second half of the year and the pipelines going forward are really strong in those categories as well. And our full year pipe for the company is encouraging. And we have to convert and progress the pipe naturally. But early indications are that pipeline is looking robust and certainly better than it did a year ago.

Revenue is the key to this, right? It's general. More revenue cures a lot of sense, right? And so having a better go-to-market, having a better top of the funnel pipeline and then making sure that your conversion rate, which historically has been pretty good for us, stays the same or gets better, will lead you to book-to-bills over 1 and over time, that will leave you into the positive revenue trajectory. But it all starts with a qualified, larger base funnel opportunities. Revenue opportunities.

Right. And certainly converting on new opportunities...

Exactly. And then the other piece, it's offense and defense. So that's the offense. The defense is when all your renewals, keep all your customers happy, which by a lot of metrics in the last 12 months, they've gone -- they're in great positions and don't lose anything on the defensive side, meaning your renewals. And then on the offensive side, get better at capturing more business in those accounts and then capturing net new accounts, which is one of the reasons we highlighted Carnival Cruise Lines in our last earnings call because that was one where the pursuit started in, I want to say, the February time frame of last year, some of the new players were actually touching literally the proposal of those going in and we made it through a field of 22 competitors, be it an incumbent, didn't win on price. We won on quality and overall execution capability. So it's a great -- that's why I feel so confident that on any given day, we can do that. I can't do it at scale yet, and scale is what we've put the foundational elements for the company in place with the people and the processes to do that at scale.

Okay. Okay. What can you say about kind of the mix of work that you have been winning in that new versus renewal or extension? And then also just any trends around the ACV in some of these the duration of ACV? Just to give us context as that layers in.

I'll take the second one first. The ACV because the bookings we've had are longer term in nature, durations are longer. So the ACV is robust, but it's -- the mix is different than last year's ACV and it's more spread out over time, which is why we guided the way we did for the full year. So that's been factored into our guide along with the resale continuing to decline year-to-year because of the economic environment. 6 months ago, I would have said resale would be flat in fiscal '26. And now we're calling for a decline because it's discretionary companies could stop a refresh of equipment very quickly and postpone it, right? And that's what that's what's blood into our pipe and into our guide for the year. The bookings -- I mean, the bookings have been -- my comments related to the bookings are pretty consistent across CES, across that business. And in project-based services within GIS, there's consistency there as well where discretionary is being postponed, strategic or being given the green light. And then with the insurance business, that's extremely lumpy related to renewals. So those will bounce up and down. But our confidence in our backlog and during the year in the insurance business is very strong.

Okay. Okay. Now as you -- we talk about all these qualitative trends, we've been some quantitative, but when we bring that to a guidance framework as you thought about fiscal '26. What are some of the nuances there as it related to maybe client ramp progression? Any assumptions of deal wins or conversion? Any of those factors that are important to consider?

Yes. The guide of minus 3% to minus 5%, we left room at the low end of that guide for further economic uncertainty. And baked into those numbers, is the resale impacting us by about 1 point year-to-year. Is project-based services continuing as it has in the last couple of quarters, continuing for the year. And that's another point. So there's a couple of points of economic uncertainty baked into the guide. And for improvements and the project-based services are released, we would be in the better end of the guide. And if not, we've factored that in. Short of worsening, I think, or the first half versus the better end of the guide versus the worse end of the guide.

It's been nice. Relatively consistent since. More or less, right?

Yes.

Okay. And then when you think about coverage, right, how much you already have in hand in that backlog to get to the middle of your range. How do you forecast that?

We have a really good view of backlog entering the year. So we -- so we know exactly how much sell and deliver we need within the year and our supporting backlog at the beginning of fiscal '26, is similar in magnitude to historical rates. So we're not expecting an outsized performance or improvement in the opening backlog. It's kind of similar to previous years is consistency. And we'll be looking over time, we'll be looking for improvements to that backlog position as we progress.

Okay. Do you feel that the changes you've made in the front end, the go-to-market, the sales comp structure does that give you improved visibility as you build this out? Does it help?

It gives us, I'd say coverage is a better word. And again, being able to have looked at the deployment of the quotas this year versus last year, I got -- it was too late, like I was got here and it was -- they were out the door. This year is better than last year. And next year will be even better than this year because I've got somebody that will have been there a year full time, not part time because I was literally just doing it because we didn't have 1 and it will get better.

Yes. The discipline in recording opportunities and we use sales force -- the discipline and recording opportunities and progressing those opportunities is vastly improved from a year ago. So it's much better. So we -- the predictability of the pipe is better than it was a year ago.

Okay. Let's shift to margin. So you've laid out an adjusted EBIT margin target of 7% to 8% for '26. You're obviously making any changes in the organization investments, but at the same time, there's optimization. Is there a way to scale like the growth savings that you're driving in the plan? And then obviously, the net investment that comes from that?

And from a -- I think when you do turnarounds, there's a period of time, period of performance where you're paying for multiple things at once while you're sorting things out, right? So it's never perfect where you're like, okay, I'm going to offload these people, these costs, these systems and I'm unloading. So it's never a perfect wave. There's always going to be some -- so part of what we have this year is an overlap overhang, which we're going to work through with the new leadership in place. But those are investments and, in some cases, paying for some things that next year, we're just going to be better fine-tuned to refine and go, okay, this is the winning play, and we can take out this other stuff. So that's one of the overhangs on the expense side.

Yes. So we -- one way to think about it is that the pressure associated with the revenue declining and both the variable and fixed costs that we have to take out of the system as a result of the revenue declining where we've been very successful in keeping pace with the revenue declines and ripping out enough cost. And we've gone -- included in that has been substantial overhead reductions and efficiencies that will draw process efficiencies we're driving throughout the company. And we've been able to, in '25, make investments and compensate for the revenue declines. And the plan for '26 is going to be similar that we still are guiding to a revenue decline. So we have cost takeout plans that are similar in magnitude to last year, plus overhead, nonvolume-related reductions plus investments we'd like to make that account for the guide we gave. And we've got room in there to make incremental investment if we have more opportunity or want to increase sales capacity.

Okay. Okay. Let's keep this moving down from margin to cash flow then. So I think you've given out $600 million guide for free cash flow. Walk us from maybe the EBIT or the net income level to that. Any moving pieces then within net working capital or CapEx?

So the way to think about it is, on a year-to-year basis, we're going from the $680 million, $690 million range to $600 million in the guide. And that is simply the reduction in after-tax EBIT. And accounting for $30 million increase in restructuring year-to-year. So that's the simple math. And we think that positions us well. And then we have a lot of other free cash flow levers that we will work during the year to try to improve our position and give us more flexibility. So other than the EBIT decline and the restructuring reductions, think of all else being flat year-to-year. And we're going to go work the basics on every line item.

Okay. Obviously, a lot of moving pieces beyond that with finance leases to that -- and when you net those together, talk about the trend you've seen over the last 2 years.

Yes. So we -- yes, thank you for that. So we made a change in '25 where we stopped -- almost completely stopped. Signing up for new capital leases, and we ran everything through capital expenditures, which is free cash flow. So if you normalize for that fundamental -- and we did that to pay down debt, if you will. Paying off our capital leases without signing new originations. So it pays down the debt. So that was purposeful. We said we'd do it at the beginning of the year. We executed on that. And if you were to normalize for that activity over the last 3 years, our free cash flow has actually grown nicely. And I showed that chart in the earnings call, right? So it was really good normalized free cash flow performance on a year-to-year basis. And we're going to continue that strategy on capital leasing or minimizing capital leasing in fiscal '26.

Okay. So as you work through all these changes in the organization, you're driving to get to growth. As if you're successful on this, what does -- as we sit back and think about margin or free cash flow margin, what is an optimized free cash flow profile for this business look like?

I think the -- in terms of optimizing, our goal is with sustained profitable revenue growth, we expand margins, and we've got room for margin expansion. Think of it as 3-, 4-point range that we could foresee that would drop to free cash flow. But that's the way we think about it.

Okay. And you've done a lot of the heavy lifting in the net working capital programs now in the balance sheet. So...

Yes.

Okay. Last one on guidance here. Just as we think about cadence for fiscal '26, any important puts and takes as you move through the year on growth or margin or cash flow?

Look, we -- from a guidance perspective, I think the revenue guide, as I mentioned earlier, leaves room at the lower end if economic conditions worsen a bit. The -- for us, execution of this opportunity pipeline is paramount. I have confidence that we'll execute on the cost reductions that we need to make. I have confidence that we'll be able to deliver consistently strong free cash flows. The pluses and minuses to those numbers will be our execution of the pipeline and performing on the revenue line.

Okay. Okay. I'll go last topic here with capital allocation. So you're starting the buyback. You've laid out a $150 million repurchase target in '26. Maybe first off, how are you thinking about the deployment of that? Is it opportunistic? Is this relatively even throughout the year? How would it...

In our guide, we mentioned that we should think of it as being linear through the year. And around the edges, if there's -- we're going to remain opportunistic in the very short term here.

Okay. And you're aiming to do that while maintaining, I think, a cash level that's pretty consistent, right, entering an exiting year?

Yes. That's correct. That's correct.

As you do that, how does the rank order of capital allocation priorities change? Talk to that dynamic as understanding the [ 150 ] repo now. But as you complete that program and as we look ahead, when do you feel that M&A may come back into the picture?

So I think part of what didn't happen before was things weren't integrated. So I've got to fix stuff in the past. I've got to make sure the foundation is solid. And then it has to be a win-win. It's just not accretive, but it's got to be, keep the customers, keep the key people expand your either offering or geography in some way that you're doing it faster through an M&A exercise than organically. And then something else like whether it's the company has an incredible ability to get talent and scale that talent in a better way in that part of the world than we do. So I've -- look I bought and sold a lot of things, I invest a lot of things. So I'm pretty conservative when it comes to doing this because I think we have a lot of the right stuff in place. So it's not like I need to buy anything to win. When I buy something, it's got to be a clear winner for us. It's got to be a clear winner for them, but it's going to be mathematically and operationally out of the park.

Okay. And presuming you guys are successful in executing on your own shares are likely even more attractive than...

Exactly.

Okay. On the other side of this, you acquire things also divest things. There's been talk over time about portfolio pruning as you look at what you have today, that still in the conversation? Do you likely to have? How you're thinking about that...

Yes. Look, I think we know that there are certain business units because of the flavor of revenue, the margin that are valued more than holdco, obviously, there. But our #1 goal is positive revenue growth. And once we're down that path, we can then hopefully we have a different point of view on valuation. And then we can think about what's the best move to go to the next stair step of value creation for shareholders. I mean, we're all aligned. We want the most value creation as quickly as possible, but on a solid foundation. So near term? No. Medium term, let's see how it plays out in terms of the marketplace.

Okay. That's clear. We're out of time. Raul, Rob, thank you very much.

Thank you.

Thank you so much.