DXC Q3 Deep Dive: AI Strategy Gains Traction Amid Revenue Decline

IT services provider DXC Technology (NYSE:DXC) met Wall Streets revenue expectations in Q3 CY2025, but sales fell by 2.5% year on year to $3.16 billion. The company expects next quarter’s revenue to be around $3.2 billion, close to analysts’ estimates. Its GAAP profit of $0.20 per share was 19.6% below analysts’ consensus estimates.

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StockStory’s Take

DXC Technology’s third quarter saw sales decline year-over-year, though the market responded positively to the results. Management attributed the period’s mixed performance to continued pressure in discretionary custom application projects and slower bookings, especially in its GIS and CES segments. CEO Raul Fernandez described the company’s transformation as ongoing, highlighting that "we are laser-focused on building a predictable and growing company with better execution and pipeline conversion in the quarters ahead." While DXC’s adjusted profitability outperformed expectations due to cost discipline, operating margins declined as the company invested in new offerings.

Looking forward, DXC’s management is prioritizing an accelerated shift toward AI-driven solutions and cloud-based services. Fernandez emphasized that the company’s new 'fast track' AI initiatives are expected to drive higher-margin growth, stating, "Fast track solutions have a goal to be 10% of our business within 36 months." The leadership team is also confident in the company’s robust pipeline of large deals, which they believe will support a return to revenue stability and improved book-to-bill trends. Management cautioned, however, that the pace of customer project ramp-ups and the broader business environment remain key factors for the remainder of the year.

Key Insights from Management’s Remarks

Management cited cost discipline, investments in AI-based solutions, and a renewed focus on core offerings as the key drivers shaping third quarter results and forward strategy.

• AI-powered product development: The launch of the 'fast track' program marks DXC’s push into AI-native and AI-infused solutions, with offerings like CoreIgnite for banking and the OASIS orchestration platform for IT services. These products are designed to be replicable and are expected to deliver higher margins than legacy services.
• Core business optimization: Management acknowledged underperformance in converting its large SAP consulting practice into revenue and outlined plans to double SAP-related revenue over the next three years by improving go-to-market execution.
• Segment trends diverge: The CES segment faced continued weakness due to lower demand for discretionary custom projects, while the insurance segment grew organically, driven by expanded cloud-based software and volume increases from existing accounts.
• Cost actions and margin management: DXC’s operating margin declined, but cost containment measures—especially in GIS and corporate functions—helped offset top-line pressure. Leadership noted that AI-driven internal automation is expected to further reduce costs.
• Pipeline and deal momentum: The company reported a robust pipeline of large deals, particularly in GIS, and expects book-to-bill ratios to recover above 1.0 as these opportunities close. Management believes recent product and talent investments have strengthened DXC’s positioning in competitive bids.

Drivers of Future Performance

DXC’s outlook is anchored in expanding AI-driven solutions, stabilizing core revenues, and disciplined investments to support profitability.

• AI solution scaling: Management plans to accelerate deployment of AI-infused products across client verticals, targeting fast-track solutions to contribute a material share of future revenue and improve margin mix.
• Core business execution: The company is focused on converting its SAP and other core consulting capabilities into stronger sales, with structured plans to address underperformance and drive higher productivity from existing resources.
• Margin and cash flow priorities: Continued cost discipline, combined with internal adoption of AI productivity tools, is expected to help preserve margins and sustain free cash flow generation, though leadership noted that investments in product and talent may moderate near-term margin gains.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) the pace at which DXC converts its large deal pipeline into bookings and revenue, (2) the early adoption and customer feedback on new AI-powered solutions like CoreIgnite and OASIS, and (3) the company’s ability to stabilize and grow its core SAP and insurance businesses. Execution on internal productivity initiatives and further margin improvements will also remain key markers of progress.

DXC currently trades at $13.51, up from $12.94 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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