Earnings Call Transcript - XRX Q4 2025

Operator, Operator

Welcome to the Xerox Holdings Corporation's Fourth Quarter 2025 Earnings Conference Release. After the presentation, there will be a question and answer session. To ask a question at that time, please press 11 at any time during this call. You can withdraw your question by pressing 11 again. At this time, I would like to turn the meeting over to Greg Stein, Senior Vice President and Investor Relations. Please go ahead, sir. Good morning, everyone. I'm Greg Stein, Senior Vice President and Head of Investor Relations at Xerox Holdings Corporation.

Greg Stein, Senior Vice President and Investor Relations

Welcome to the Xerox Holdings Corporation Fourth Quarter 2025 Earnings Release Conference Call. Hosted by Steven John Bandrowczak, Chief Executive Officer. He is joined by Chuck Butler, Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. And we'll make comments that contain forward-looking statements, which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Mr. Bandrowczak. Good morning, and thank you for joining our Q4 2025 earnings conference call.

Steven John Bandrowczak, Chief Executive Officer

On the Q3 call, I highlighted the macroeconomic challenges we are facing and the continued disruption associated with the tariff and government funding-related uncertainty. Macro headwinds continue to persist, but we are cautiously optimistic that the business trends are starting to improve. Revenue in the quarter of $2.03 billion increased roughly 26% in actual currency and 24% in constant currency. Reflecting the inorganic benefits of the Lexmark and IT Savvy acquisitions, revenue declined 9%. Adjusted operating income margin of 5% was lower year over year by 140 basis points. Free cash flow was $184 million, a decrease of $150 million versus the prior year. And adjusted loss per share of 10¢ decreased by 46¢ year over year. For the year, revenue of $7.02 billion increased roughly 13% in actual currency, and 12% in constant currency. Excluding the benefits of the acquisitions, revenue declined approximately 8%. Adjusted loss per share of 60¢ was $1.57 lower year over year. We generated $133 million of free cash flow, which was $334 million lower year over year. While macro headwinds continued to weigh on transactional print equipment sales, activity picked up following the end of the government shutdown. In addition, page volume declines moderated and supply usage stabilized. Encouragingly, we enter 2026 with a pipeline higher than this time last year. With cancellations and renewal rates also improved in 2025. This gives us confidence in improving underlying trends in 2026. What does give us pause is the recent spike in DRAM prices, as they began to impact costs across storage, servers, endpoints, and networking equipment. Having the greatest effect on our IT solutions business. Considering this, we are taking steps to mitigate including moving to consumption models such as HPE GreenLake, Dell Apex devices and service models, providing extended maintenance services for clients that decide to retain their old hardware. The impact is expected to be modest in our print business in the first half of the year, but based on current trends, we are expecting a larger impact from the price and availability perspective as we move into the back half of the year. Still, we remain confident in the long-term prospects of our IT solutions business. While revenue was impacted in Q4 due to delays in enterprise deals directly tied to the recent spike in memory prices, the breadth of our business continues to grow. Supported by a very strong quarter in the Velocity channel. Bookings, billings, and backlog all increased and pro forma profits improved meaningfully once again, aided by the synergies generated throughout the year. IT Solutions is strategically positioned to capture secular growth through differentiated platforms, including our network operating center. Through our NOC, we deliver scalable AI-enabled automation and operational intelligence underpinning our managed infrastructure services through a proprietary AIOps platform. As we look out towards 2026, our conviction for more meaningful margin expansion is high, underpinned by our guidance of more than $200 million improvement in adjusted operating income. Many of the headwinds we experienced in 2025, such as tariffs, increased product costs, and the wind-down of the sale of several production lines, begin to moderate as we move through the year. We expect tailwinds in 2026 to steadily grow from the launch of new product offerings, a fully integrated IT solutions organization, and a soon-to-be unified Xerox Lexmark sales organization. We remain focused on the balanced execution of our three strategic priorities: execute reinvention, realize acquisition benefits, and balance sheet strength. I will provide an update on each. Starting with the execution of reinvention. With each quarter, the progress following the acquisition of Lexmark, I have become increasingly confident in the complementary nature of our businesses. Much of the original nervousness from following the transaction close had dissipated, and most of our clients and partners are excited about what our joint offerings mean for them. We continue to develop our route to market and we'll have more to share next quarter as well as an update on our inside sales strategy, which we will continue to be meaningfully expanding during the year. Last quarter, we discussed at length our enhanced global business services organization, which was launched in 2024 to create a more streamlined and comprehensive set of centralized operating processes leading to lower operating costs and improved quality. In addition to the physical changes we noted, such as greater utilization of Lexmark's captive offshore and nearshore global capability centers, we are also leveraging our AI capabilities to further drive efficiencies into this organization. To that point, Xerox recently established an AI center of excellence. In 2025, we launched several internal programs designed to streamline processes, improve customer experience, and strengthen financial performance. These platforms are delivering measurable impact today. We introduced AI-powered service agents across XBS US and Latin America. These agents handle thousands of real customer interactions via chat and voice leveraging prior service cases, support, engineering content, and large language models to deliver immediate financial improvements. Beyond service, AI is driving significant financial improvements. Using Microsoft Copilot Studio and advanced data science reduced outstanding accounts receivable, automated over $10 million in credit hold actions, and surfaced actionable insights from 1.4 million collector comments. These capabilities empower faster, data-driven decisions that improve cash flow and operational resilience. Moving to acquisition benefits. November 20 marked the one-year point of our acquisition of IT Savvy, and we have been thrilled with the progress to date. Cross-sell performance remains strong, and we are now going to market under a unified brand Xerox IT Solutions. The alignment and scale provide us opportunities to deliver unique value to our 200,000 customers. Such as with the recent launch of Xerox Tri Shield 360 cyber solution. A holistic cybersecurity offering targeted specifically for SMBs. The solution is built upon Palo Alto Networks advanced detection technology, continuous monitoring, and response platform. With cyber response provided by Lumify and its security operations center and cyber insurance coverage provided by the Hartford, brokered by Aon. This is enterprise-grade security designed for SMBs offering scalable protection without the complexity or the cost of traditional solutions. While operational efficiencies are a main pillar of the rationale for the Lexmark transaction, we are beginning to bear fruit as one company in our go-to-market operations. In the fall, we rolled out Lexmark produced three devices in Eastern Europe. The channel reaction so far has been very positive as this product has better features and design innovation focused on serviceability and reliability. We expect these devices to reduce service costs, extend activities in post-sales, and lead to better uptake with partners over time. We are planning a larger global rollout in 2026 as our in-house manufacturing capacity ramps. During the quarter, Xerox and Lexmark secured a global first joint win with Morrisons, one of the UK's leading grocery retailers. The agreement expands a long-standing relationship with Morrison's and positions Xerox as a strategic partner across both operational print infrastructure and customer marketing communications. The solutions have Xerox providing a fully refreshed central print room, leveraging cloud-based print management, web-to-print automation, and Lexmark MPS for their entire estate of 500 supermarkets, 15 logistics sites, and the head office with added Xerox on-site operations. Morrisons will also adopt our GoInspire platform including direct mail, loyalty communications, store leaflets, and campaign automation through GoInspire's digital marketing platform Go 360, enabling more targeted, data-driven customer engagement. Earlier this month, I joined our team at the National Retail Federation show in New York City where, for the first time together, we demonstrated legacy Xerox strength in IT solutions, production print, and digital workplace with Lexmark's expertise in in-store operations with devices intentionally engineered for retail signage solution and Vision AI. We were excited by the reception and believe our enhanced value proposition, especially with the retail vertical, will lead to greater participation in RFPs and further wins and expansion into existing accounts. We also just announced the partnership agreement with RJ Young, one of the largest office equipment and technology dealers in the United States. This agreement, which stems from the existing Lexmark partnership, extends Xerox's portfolio with RJ Young's proven service capabilities to their customer base. We continue to look for opportunities as one company to commit to and invest in our partners. Finally, balance sheet strength. For those focused on our current credit ratings, we remain extremely confident in our ability to drive increased profitability and deleverage. Since the Lexmark transaction closed, we have generated meaningful positive free cash flow and took net debt down by $366 million. For the near and medium term, we plan to use all excess free cash flow to repay debt in connection with yesterday's announcement of the warrant distribution, which Chuck will speak to in more detail, further supports our goal to enable balance sheet flexibility. Cost rationalization remains a top priority, and we are reaffirming our cumulative run rate gross cost synergy targets of at least $300 million from the Lexmark acquisition and the $1 billion plus of profit improvement as part of our reinvention program. Inclusive of Lexmark cost synergies. Delivery against this target is centrally managed and continuously updated through our enterprise transformation office or ETO, a joint team comprised of legacy Xerox and Lexmark leaders. The ETO is responsible for enabling our reinvention priorities, overseeing integration execution, and building actionable transformation capabilities across the enterprise through robust analytics and disciplined governance. This includes active oversight of several core integration work streams, dozens of sub work streams, and hundreds of enterprise-wide initiatives. Each initiative is formally documented, tracked through defined stage gates, and subject to required milestones and approval before being incorporated into our integration and synergy forecast. This level of rigor and transparency gives us strong confidence in our ability to deliver on and potentially exceed our synergy commitments. Before I hand the call over to our recently appointed chief financial officer, Chuck Butler, I wanted to share why he is the ideal leader for this role. Chuck joined Xerox as part of the Lexmark acquisition where he spent twenty-one years in a variety of senior leadership positions most recently as their chief financial officer. He brings deep experience and proven resilience having led the company through supply chain disruption, a significant manufacturer transition due to US sanctions on its former Chinese parent company, and a large-scale restructuring that delivered stronger revenue and profitability. At this pivotal moment for our organization, Chuck's thoughtful, pragmatic approach to driving operational excellence and profitability is just what we need. I'm excited to partner with him as we work to restore growth and strengthen the business.

Chuck Butler, Chief Financial Officer

Thanks, Steve. It's an honor to step into the CFO role at this moment in the company's history. I don't take this responsibility lightly. I spent the last couple of months getting up to speed, and while there's work to do, I'm encouraged by the talent across the company and the early signs of progress from my priorities which are straightforward: improve execution, strengthen the balance sheet, and drive predictable profitability and cash generation. Let me start with the quarter. For Q4, while revenue was slightly below guidance, adjusted operating income and free cash flow came in ahead of our expectations. We saw contributions from integration activities, early synergy capture, and disciplined cost actions. On a reported basis, Q4 revenue increased approximately 26% year over year driven by the contributions from Lexmark and, adjusting for deliberate exits, nonstrategic reductions, and normalizing backlog fluctuations, revenue declined about 5%. This is consistent with Q3 and reflects ongoing macro and policy-related uncertainty, particularly early in the quarter. Results this quarter were affected by unforeseen impacts, primarily from the sale of finance receivables in Portugal and France. These transactions reduced revenue by $16 million and adjusted operating income by $13 million, but were executed to strengthen the balance sheet, mitigate risk, and improve liquidity. Without this effect, revenue would have been roughly in line with expectations and adjusted operating income would have been well above guidance. Turning to profitability, adjusted gross margin was 29.3%, down thirty basis points year over year reflecting 160 basis points of higher tariff cost and 160 basis points of increased product cost, partially offset by Lexmark's contribution and reinvention benefits. Adjusted operating margin was 5%, down 140 basis points driven primarily by lower gross margin, partially offset by integration savings, including headcount actions, executed in October and early non-headcount synergies. Adjusted other expenses net was $85 million, up $54 million year over year due mainly to higher net interest expense associated with the Lexmark acquisition financing. The adjusted tax rate was 147.1%, compared to 32.9% last year, reflecting geographic mix of earnings and an inability to benefit from current year losses and expenses in certain jurisdictions. GAAP loss per share was 60¢, down 40¢ year over year and adjusted loss per share was 10¢, 46¢ lower primarily due to higher interest expense. Let me now review segment results. Within print and other, Q4 equipment revenue was $485 million, up 23% as reported, or up 21% in constant currency. On a pro forma basis, equipment revenue declined approximately 10% normalizing for reinvention-related actions and other one-time items. Equipment revenue declined around 5%. To provide additional context, legacy Xerox equipment revenue declined 14% in constant currency, or roughly 10% excluding reinvention-related items tied to our decision to discontinue manufacturing high-end production systems. This compares to a normalized 8% decline in Q3. Sequential performance was impacted by continued budget-related delays in federal and state local orders as well as softer commercial and channel demand. Lexmark equipment declined 8% in constant currency, including an estimated 12 points of year-over-year backlog fluctuations, underlying demand grew 4% versus a comparable 12% decline in Q3 indicating a firming of demand over the quarter. Elevated backlog weighed on Q4 revenue but represents a future revenue opportunity as it converts. Print post-sale revenue was $1.39 billion, up 25% as reported and up 23% in constant currency. On a pro forma basis, print post-sale revenue declined 9%. Excluding reinvention effects, pro forma post-sale revenue declined approximately 5%, a modest improvement from last quarter, reflecting moderating declines across supplies, services, and outsourcing at Legacy Xerox. Print and other adjusted gross margin was 29.8%, down eighty basis points year over year due to higher tariff and product cost, lower managed print volumes, and lower high-margin finance-related fees, partially offset by reinvention savings. Print segment margin was 5.8%, down seventy basis points due to lower gross profit, partially offset by reinvention savings and Lexmark's contribution. Turning to IT solutions results, revenue increased 39% year over year, reflecting the inclusion of IT Savvy for the entire quarter versus a partial quarter in the comparative period last year. Pro forma gross billings, a reflection of business activity, increased 13% year over year in the fourth quarter. Total bookings, an indication of future billings, increased 8% in the fourth quarter. We continue to see growth in sales activity for IT products and services to existing Xerox print clients with more than $60 million of pipeline creation in 2025. IT solutions gross profit was $36 million, with a gross margin of 22.7%, up 610 basis points year over year due primarily to IT Savvy. On a pro forma basis, gross profit expanded by nearly $6 million versus the prior year or nearly 20%. Segment profit grew $9 million year over year, with profit margin reaching 5.8% helped by the inclusion of IT Savvy. On a pro forma basis, segment profit grew almost $7 million due primarily to increased gross profit and cost structure improvements. Moving to our cash flow and capital structure. For the quarter, operating cash flow was $208 million compared to $351 million last year reflecting lower net income, lower proceeds from finance receivable sales, and working capital timing. Investing activity was a $4 million use of cash with CapEx being partially offset by proceeds from real estate disposals compared to a use of $172 million in the prior year which had costs associated with the acquisition of IT Savvy. Finance activity resulted in a $173 million use of cash, reflecting ABL paydown and payments on secured debt. Free cash flow was $184 million for the quarter, down $150 million year over year. For the full year, free cash flow was $133 million, above our $107 million comparable guide. This incorporates an adjustment to our Q3 earnings release, that reallocated a use of $43 million from investing to operating cash flow. This adjustment was the result of a one-time accounting treatment related to the settlement of intercompany balances between Xerox and Lexmark. This had no effect on cash and did not impact Q4 2025 free cash flow. We ended Q4 with $565 million of cash, cash equivalents, and restricted cash, and total debt of $4.2 billion was down $160 million sequentially including repayment of $100 million ABL borrowing that was outstanding at the end of Q3. There were no borrowings at year-end under our ABL. We will be repaying the remaining $110 million of IT Savvy notes tomorrow. Approximately $1.5 billion of the outstanding debt supports our finance assets, with remaining core debt of $2.7 billion attributable to the non-financing business. On a pro forma basis, gross leverage was 6.7 times trailing twelve months EBITDA. Our top capital priority remains debt reduction with a medium-term target of approximately three times trailing twelve months EBITDA. For 2026, we expect greater than $7.5 billion in revenue, which represents approximately 7% growth versus 2025 inclusive of the full year of Lexmark. This outlook incorporates several known headwinds from ongoing reinvention actions, including lower revenue related to the exit of high-end production print manufacturing and continued declines in XFS finance receivables. As a result of our forward flow execution, these impacts are partially offset by expected growth within IT Solutions. On an organic basis, we expect year-over-year revenue performance to improve as we move through the year as headwinds dissipate and we realize the benefits of tailwinds Steve referenced earlier. Specific to XFS, we expect approximately $50 million of revenue headwinds and roughly $40 million of operating income headwinds in 2026, primarily from Ford Flow Dynamics. Despite these impacts, we expect adjusted operating income to be in the range of $450 million to $500 million, an increase of more than $200 million versus 2025 driven by $150 to $200 million of integration synergies and $100 million of reinvention savings. We have clear line of sight to these savings with accountable owners, sequencing, and cash timing discipline, which gives us confidence in the delivery path. We expect tariffs to be a profit headwind in the first half and a tailwind in the second half as we shift more A3 production in-house. Recent memory price increases are expected to offset some of that benefit. We expect free cash flow of approximately $250 million driven by higher adjusted operating income, partially offset by higher interest expense and reduced forward flow benefits. Free cash flow assumes roughly $335 million of forward flow benefits, leading to slightly over $1 billion of receivables by year-end, $290 million of net interest expense, $160 million of pension contributions, and moderate working capital headwinds. We expect a use of cash from operations in Q1 with improvement throughout the year. Finally, as you may have seen yesterday, we announced a special pro rata distribution of warrants to holders of Xerox common stock, preferred stock, and convertible notes. For holders as of the record date, February 9, we will issue one warrant for every two shares held, which will be tradable as well as exercisable with cash or certain debt instruments at face value. We believe the issuance of these warrants with expected tangible value is a balance sheet-friendly way to reward shareholders for their continued loyalty and provides bondholders the optionality to participate in Xerox equity. Those who participate in exchange with debt enable immediate leverage reduction while preserving liquidity, enabling faster balance sheet improvement, and accelerating the timeline to our stated leverage goals. Beyond free cash flow generation alone.

Operator, Operator

This does conclude the question and answer session of today's program. I'd like to hand the program back to Steven John Bandrowczak for any further remarks.

Steven John Bandrowczak, Chief Executive Officer

Thank you. While 2025 brought meaningful challenges, we exit the year with strengthening fundamentals and clear momentum. The integration of Lexmark and IT Savvy is unlocking tangible commercial and operational benefits. Our core print business is showing signs of stabilization, and IT solutions delivered double-digit bookings and billings growth. All of which gives us optimism for an improved 2026. Looking ahead, we have high convictions in our ability to expand margins and return to profitable growth. Many of the cost and product-related headwinds began to ease as the year progresses while new product launches and unified IT solutions and sales organizations and disciplined execution of our reinvention program provide meaningful tailwinds. With a clear deleveraging plan and a robust synergy pipeline, we are confident in our path we are on. Thank you for your continued support. We look forward to delivering a stronger 2026 for our employees, clients, partners, and shareholders. Have a great day.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's program. This does conclude the program. You may now disconnect. Good day.