Xerox Holdings Corp (XRX) September 10, 2026 Conference Transcript

Good morning, everyone. Asya Merchant here, Citi Research. It's day three of Citi's TMT Global Conference. I'm very pleased to have Xerox's management here with me, Louis Pasteur, the CEO, and Chuck Butler here, the CFO. This is an interactive session, so I do have some prepared commentary. And if you have any questions, I would just request that please raise your hand. We'll bring the mic to you. So, Louis, let me just start off, you know, maybe I'll turn it to you. You know, I do have some prepared comments here. Just ask, just want to understand about the revenues, right? I think that's been a key focus for a lot of investors. You're talking about revenue stabilization here. Could you just, that has been a key priority for a lot of investors, and I know it's for you as well. So, when investors monitor sort of the demand environment out there, we're looking at enterprise budgets getting, you know, tightened here, or maybe spreading thin across servers, storage, networking. When you think about print hardware and the fact that you're guiding to revenue stabilization, help us understand why that's the case.

Yeah, happy to. So maybe let's start by taking a little bit of a step back and looking at our business on the whole. So roughly speaking, Being, you know, I think we got into, what, $7.6 billion this year of revenue. Let's just use really round numbers. Call it seven and a half. You know, it's basically a billion dollars of IT solutions and digital services, roughly a billion dollars of production print, and then five and a half billion dollars of what you would think of as almost like traditional office print. Okay. And I use the term office there, but I don't love the term office because our hardware is in a multitude of environments. So it's not just offices, but it's actually, you know, retail locations, distribution warehouses, you know, manufacturing facilities, but call it the workplace. And that's predominantly what you think of as the low-end and mid-range machines, so A4 and A3. That is, I think, when people look at our business and the industry, that's probably the area of facing the most secular headwinds. And it's also the biggest part of our business. And I think when you talk about revenue trends and competition for budgets in the IT space, again, that is probably the area of largest concern, not just because it's the biggest part of our business, but because, you know, it's probably the area, again, with the most sort of secular headwinds. So how do we think about stabilizing that part of our business and also, frankly, getting it to growth? And how do we do that? And this is where, you know, we talk about this gain-share mix-shift strategy, and this is where the gain-share component of it is so important, because the only way to grow in a market that's that's secularly challenged is to take share from from others so how do we actually take that share why will we be able to take that share and this is where the lexmark acquisition is so critical because it's not just about scale you know that that was a very strategic acquisition and we acquired a set of capabilities that enable us to differentiate in the one area of this market and of this industry that can actually move the needle so what do i mean by that so by acquiring lexmark what we acquired was uh a full the full end-to-end control of our technology stack so from early design development manufacturing delivery installation service of our hardware our print hardware for the office space end to end now why that enables us to so we are there's only one other player in the industry that has that okay and what it enables us to do is differentiate on the service experience so everybody in this industry because there's been virtually no consolidation it's highly commoditized everybody's competing on price okay there's all you can compete on a reliability and price and and price is something we will never alone be able to compete on and to win on because we're not japanese we're american and we need to operate with 10 operating margins not two to three percent operating margins right okay so we we the reason though that now we can take these set of capabilities this end-to-end control and compete differently is because if you think about it, the laws of physics prevent you from taking the cost of the equipment to zero. The laws of physics prevent you from taking the cost of the supplies to zero. These are physical products in a physical world. You have to make them. You have to send them places. The laws of physics do not prevent you from bringing the cost of service to zero. And the thing is everybody in this industry sucks at service because it's hard and you have to build up these very expensive fleets of technicians and engineers who go out in the world and, you know, show up at a customer location and fix the machine when it breaks down.

Okay.

But these machines can operate a whole lot more like your dishwasher or your washer dryer, which is to say yes you have to put detergent in and you have to clean the lint filter but otherwise you're going to buy it and for seven to ten years it's going to run and it's going to work and when it doesn't anymore you're going to replace it now in our case you're going to replace it before it actually breaks down rather than when it breaks down to avoid that but then okay so how do we actually make it so that these machines do that so one is we have we buy the very electrical and mechanical engineering of our products, the design and development, we actually make products that come off the manufacturing line far more reliably and that perform far more reliably than anybody else in the industry. But on top of that, because of the sensors that we build into the technology and the fact that they're all connected, we have more data about how they perform than anybody else in the industry because we have more sensors and we have a more robust fleet management capability. And now what we can do with AI is build algorithms. We used to have to do this with people, with data scientists who needed to learn the industry and study the inputs that were coming back. Now you can do it with AI. What we can do with this data that comes off the machines and now digitally intervene to proactively and predictively maintain the machines out in the world means we don't have to maintain this service fleet and the customers have a better experience. So now you have a better customer experience. So that's the reliability component. But we can actually use this to fundamentally change the economics of the model and to compete much more effectively on price, which is ultimately in this highly commoditized space, what the economic buyers are making decisions on more than anything else. Service actually is very, very important. The experience of end users is very, very important, especially at the high end with your largest customers who have global deployments of our technology across many countries and do huge volumes. But it's better on both ends. And that, for us, when we look at our portfolio end-to-end in that way and we think about revenue trends moving forward, this is why we're so confident and our ability not just to stabilize this biggest part of our business, but actually grow it. Because this will enable us to take share from others, because it's the most differentiated value proposition in the industry, while competing most effectively on price. And the reason why others in the industry won't do it is because they've built up. So one, they don't own their technology end to end, there's only one other player that does. And that player that does, sells so much through third parties, other OEMs and partners. And they've built their business on top of those other people having to buy parts and supplies and carry all these replacement items. It's actually not in their immediate near-term economic interest to do it. It requires a change in their model. And this part of their business exists solely to generate cash for investment in other parts of the business. So they're not interested in creating near-term profitable headwinds for long-term profitable growth, not here.

Okay. All right. So that's sort of where you're most focused on.

I think it's the biggest, look, it's the biggest part of our business and ultimately gaining share there while expanding our margins is the nearest term path to getting to a more sustainable leverage profile, which ultimately is the nearest term path for significant equity accretion and value creation for our shareholders.

Right. And you did talk a little bit about pipeline, right, that you were seeing some momentum. So is all these initiatives that you talked about focused on services, reflecting that in your pricing, in your go-to-market, is that what underpins the confidence that you're talking about, that print pipeline momentum looks like it's improving? Is that what's, okay, is that what's- 100%.

So it's like, you know, this value proposition, this vision for this part of the industry is part of what's fueling the increase in our pipeline. And what we're seeing in our pipeline as well is, you know, we sort of differentiate between kind of existing customer engagements and renewals versus competitive takeout, knockout. And what we're seeing is this value proposition, it resonates in both, but it's allowing us to grow our pipeline and mature the pipeline for competitive knockout. And we're starting to see conversion there as well. And so those types of engagements, you get a verbal on a win. And, you know, we just got one more recently, like as in earlier this week, that's a $5 million a year global managed print services engagement. But going from verbal to signing to actually installing equipment, you know, verbal this quarter, it'll sign next quarter, the rollout and the transition will be into next year. Like it takes time for that all to convert through to revenue.

Yeah. And is that, and again, given that, you know, even the print market, like there's various segments, right? I mean, there's the A3 market. It's going through some declines. You have production prints. So I don't know if these wins and the market share gains that you're talking about, is it across all those or are they, are you focused like on maybe certain ranges within the print market?

It's a great question. I would say, you know, predominantly what I was just talking about was A4 and A3 at the low end. And I would say there's definitely a mixed shift as well, sort of from the mid-range to the low end. And we see that, and we see it especially with partners going through the channel. And there's a lot of reasons for that. But everything I was just describing was not really about production. In production, our strategy is a little bit different because the economic buyer is different. The market dynamics are different. There's actually secular growth there. It's much more about having the broadest sort of end-to-end portfolio and offerings and helping our clients who are predominantly commercial printers actually grow their business. And so expanding into new segments and verticals. And there was a great example of this actually more recently in the announcement we made about our new partnership with Zycon, where our technology is actually embedded in their machines. And then we're going to be going to market together with them as well. But packaging and labels is, I think, a $1.8 billion market that's going to grow 15% a year for the next seven years. So there's those areas of secular growth and being positioned to capture them the best where we don't really need to be vertically integrated because the economic buyer isn't just buying on price. They're buying an end-to-end solution that you need to be able to not just bring them the technology, but deliver and provide the software that makes it run most effectively and efficiently with as little labor as possible, but as high a volume as possible. You need to have the distribution capabilities to ensure they have supplies and parts because these machines are running constantly and you have to have the ability to service it. That's where the end-to-end value proposition is very, very powerful.

And so just, so again, back on the ones where you are gaining share on the entry side. So there's a little bit of a mix shift like sort of happening from the mid-range, maybe even the high-end towards more of the entry products. How does that, you know, so market share gains, but then what about the margin profile across the mix shift?

It's another great question. So, you know, because the mid-range historically, you had very profitable equipment sales and post-sale. And in the A4 space, that's not the dynamic. You have, you know, in some cases, you may sell at a loss the equipment, but I think largely think of it as kind of flat. You basically sell the equipment at very little to, if any, margin, but the post-sale streams are 70%, 80% gross margin, as opposed to something that was more balanced in the mid-range. And so as this mixed shift takes place from the mid to the A4, so from A3 to A4, there is a headwind on equipment margin because we're going to be placing more machines that come with effectively no margin. But over time, you know, actually the overall margin profile of these engagements with customers is actually higher.

Okay, the lifetime value. Okay, right. And then there's a lot of concerns also on the aftermarket post-sales. Like, how do you kind of make sure that you maintain your margins here in post-sales?

I'm going to let Chuck speak to that one because, you know, Lex had refined this model, yeah, quite, quite well.

Yeah, post-sales is the lifeblood of any imaging company, right? We want to get printers in the field, in the install base, and we want to keep them printing for a long time because that's what drives the highly profitable annuities on the back Louie mentioned the difference in the margin profile between an A3 and an A4. A4 especially is indexed toward that post-sale margin. You're in the 70% plus range. And so it's important that we keep that, especially when you're placing your hardware at neutral to maybe even slightly negative in some places. you have to make sure you keep the post-sale annuities coming at the high margins. The way Lexmark did it and what Xerox acquired with that acquisition was they had really good security chips that they put inside their printers that allow only authentic supplies to work inside these printers for the first five, six, seven, eight years of a printer's life until an alternative comes in and cracks the security chip. And then they bring an alternative for the market. We don't see that for a long time. Lexmark never has. They've had best in class in terms of the security chip that they put in place. And then once that happens, it's time to refresh your printer anyway. And then we put a new printer out there with a new chip inside it.

Talking about Lexmark, I know you guys have had some savings that you've identified as part of the synergies as you're bringing them in. Just to help us understand, like, you know, the targets for those synergies have increased. I think in the more recent one, you talked about 350, I think, in synergies. What's underpinning that? I mean, why is this higher target? Why are you laying out a higher target? What are you seeing that's better than what you thought initially?

Yeah, give me a start. Well, let me unpack maybe integration a little bit. So we closed on the Lexmark acquisition July 1st of last year. So the first six months post-acquisition, which is actually the second half of last year, was very much about sort of like core operational integration. you know let's go get every every dollar of duplicative cost out of this combined organization right and so you know that was the first six months and by the end of last year even within those first six months we exited the year we had done i think the number was 146 million dollars of run rate cost out just from the first six months so of that you know 300 that we had originally said great second six months so the first six months of this year very much about unifying the go-to-market. By the way, a lot of costs come out there too, because what we had for the first six months was, you can't share customer information ahead of an integration, ahead of a closing. So you can't do that much mapping of your account coverage and things like that. So that's where the second six-month period was, let's take what was a legacy Lexmark Salesforce selling legacy Lexmark offerings to legacy Lexmark accounts, and same thing we had on the Xerox side, we'll put them together and have a unified Salesforce with one coverage model, right? Selling one portfolio. That's great. A lot of costs come out there too, because you don't need as many sellers when you, when you do that. So that was good. Now the second, now the second half of this year, which is kind of the third six month period is very much about transitioning product. So going from the, you know, the OEM sourced kind of a three product to our own internally developed technology. And I talked about the strategic importance of that because of the end-to-end value proposition. But again, a lot of costs come out as you do that because you're capturing margin on margin and you've got the gross margin expansion because it's not source product. So at each of these different periods, you have significant costs coming out. And in each case, as you're doing the work, you identify new opportunities. So you set a target based on what you know at a moment in time. And for us, there's some conservatism there. And then as we go through it, we identify new and greater opportunities. And so as we think about next year, so that's sort of the genesis of how we got to a greater number for this year. But as we think about next year, we'll obviously get the full flow through of every action that we've taken this year. But on top of that, we still have opportunities with respect to systems and culture. And even those will generate more savings as we go forward. So I would say our confidence, not just on hitting the number that we have now sort of taken up, but even what the benefits and impacts will be as we go forward continues to go up.

The only thing I'll add to it is I don't think we are surprised that there's more synergies That was the genesis of the question was, what's changed in our thinking? I remember going through the process. I started out as Lexmark CFO, and then after the acquisition became the CFO of the combined company. And I remember going through that, and I was talking to Greg, and I said, I think the synergies are for 100 million plus. And Greg said, that's a huge number. There's no way. And I said, that's kind of what I see here. So I don't think we're surprised. I think sometimes you have to start exercising the motion, making sure you understand all the processes and how they align. And then it's starting to come back to what we had originally thought anyway. But you go out with originally, this is what we had clear line of sight to right now. And that's what we led with. But now we're starting to see the other opportunities unfold.

And there are some investments, though, alongside as well, right? Because you do have these cost savings, but then, you know, you're investing, whether it is, I think you talked a little bit about bringing manufacturing to Mexico. So just walk us through, like, you know, when you talk about what impacts your income line or net income line or operating income line, EBIT line, how are you thinking about those savings relative to then investments? So the net impact to the operating income line?

Yeah. So all the manufacturing that we're moving, Lexmark already maintained a footprint in those places. There's not huge incremental investment in it. The only incremental investment that comes is with whatever tooling and just a little bit of incremental manufacturing capacity that you need to build in those locations. So there's not a huge cost to moving that product from an outsourced to an insourced product, and we receive all the benefits from not paying margin on margin, being USMCA compliant, coming in through Mexico, saving on the tariffs, and just the cost of the structure of the A3, the mid-range box that we now source internally, is $300 to $800 less than what it would be if we continue to go to our external provider.

Okay. All right. That's fair. Maybe a little bit on IT solutions. It's a smaller part of your business, obviously, you know, not impacted by Lexmark necessarily, but just talk to us about that. Like, you know, what are you seeing in that market? Again, coming back to my original question, there's a lot of pressure on company CIOs and IT budgets are getting stretched thin because, you know, server prices have gone up, storage prices have gone up, PC prices have gone up. And so how are you thinking about, you know, where IT solutions, revenue growth targets could look like relative to, let's say, when you acquired it?

Well, I would say a few things. One is we're still, you know, we have every bit as much conviction about the long-term opportunity with that business today as we did when we made the acquisition. So, you know, we acquired IT Savvy in November of 2024. And, you know, the idea there, and I'll differentiate it from the Lexmark acquisition where the idea was, hey, you know, best of breed kind of approach where, A, it's more like a merger of equals. And, you know, there's capabilities that we're acquiring and there's capabilities that we have that are even stronger together. So here, it was, you know, at the time, we had a roughly call it $300 million or so IT solutions business, but it wasn't a single business. We had pockets of businesses. We had some offerings in the Netherlands, the UK, Canada, the US, all that had been sort of acquired over time, each run with their own sort of processes and systems and leadership. And they offered different things and all were subscale. So the genesis and thesis behind acquiring IT Savvy was to buy a scaling and scalable platform, and I use that word sort of in the broadest sense, meaning it's people, it's offerings, it's capabilities, it's processes, it's systems, all of those things that are built to acquire and absorb because it was a private equity rollup built through acquisition itself, but actually was fully integrated. to then acquire that, retain it, invest in it, and actually take these disparate businesses that we had and integrate them into and onto that platform. So it was like a reverse integration. And so now having done that, and look, that created great cost savings, but also headwinds actually from a sales perspective, because a lot of the sellers in those legacy businesses churned.

Right.

They had less control. They got to work through different systems and processes. And some of that, frankly, was healthy and good. So we onboarded new sellers. And now we're starting to see the ramp of those sellers. I talked a little bit about that on the Q2 earnings call. And we're starting to see the ramp of that and the investments that we've been making to build out our capabilities. so you know our biggest opportunity with that business is you know i would say a few things one is just penetrating the existing 200 000 customer base of xerox as a whole where we have and we're targeting where we have like the right relationship with the right economic buyer within the customer right because if your relationship is with procurement versus sometimes it's with real estate, sometimes it's with the CIO, that's the relationship that we want, right? And that's where it were relevant to them. And then being able to offer them a set of capabilities that actually help them with the challenges that you're describing. And one of the things that resonates very powerfully with those economic buyers is actually when we talk about the work that we do internally to leverage this business to get greater outcomes for our own technology spend. I mean, we're a multinational 22,000 employees, you know, seven and a half billion dollars a year in revenue, you know, plus with a huge cost base ourselves, a lot of which goes on technology. And when we start to talk about how we've actually standardized our own operations and sort of drink our own champagne, it's very powerful. and we can give, you know, specific use cases of where we've been able to deliver better outcomes, that, you know, that building that sort of relationship with the client, that we're your trusted partner, you know, we have these set of capabilities, their enterprise grade is very powerful.

Okay. Right. I like the reference to champagne. So, all right. Maybe just as we dig into that. You did talk about selling the synergies or selling, sorry, selling the whole portfolio of solutions across your entire customers. Where are we on that journey now? I see like you've obviously integrated these offerings into IT solutions, but are you starting to see that 200,000 customer base that you have for Xerox Core now getting onboarded with these? So are we starting that momentum? Have you started to see that come through yet?

Yeah, we are. And, And I would say, you know, we admittedly and sort of consciously did not push as hard forward on sort of the whole cross-sell, up-sell motion while we were doing all of these account coverage shifts and unifying the go-to-market. And when I talk about unifying the go-to-market, it was unifying the print go-to-market. IT Solutions has a separate set of sellers. And the idea here and where we've is to not do what we have seen others in this industry do as they've tried to pivot is to try to get printer sellers selling IT solutions. It doesn't it doesn't work. But the print sellers have the account relationship. And it's more of an account manager model. And then the specialists on the IT solution side who can come in. And so a lot of it's about building, you know, the right pipeline, focusing on the right customers and clients where we have the relationship with the economic buyer. We have offerings that map to what they need and then putting in place the incentives needed to drive the right behavior. So to ensure that print sellers, you know, not just know who to call on the IT side to bring them in, but are incentivized to actually grow that account. Right. And so all those incentives are now in place. So we are starting to see even more traction because of that. I think we said in Q2, we had, I think it was like $134 million of opportunities sourced just from the print side alone for IT solutions. That's, you know, we expect that number to go over time.

It's in the pipeline. All right. And then just talking about within that IT solutions, obviously AI is a big topic, right? I mean, to the extent that are these IT solutions sellers, you know, are they on the devices side, like AI PCs? Are they on to, you know, how does AI kind of flow into that? And what are you seeing in terms of enterprise adoption for these customers as it relates to AI?

So I would say for our IT solutions business, now remember, this business is, call it, 75% hardware resale, 25% services. Okay. AI is a tailwind on equipment sales, on hardware sales. servers, you know, more investment needs to, you know, AI, you know, enabled devices, right, for the device lifecycle management piece of the business. And then on services, AI presents a great opportunity, not just for revenue growth, but also for margin expansion. And there, you know, we introduced a new AI driven ITAS platform. So IT as a service that allows the services clients on the IT side to have one sort of pane of glass that they go in to see all of the services that they consume from and through our organization, and to be able to toggle their usage and their consumption up and down. So their licensing and, you know, new services, and all of that is sort of AI enabled and driven. And then other services, again, like our network as a service offering is completely AI enabled, meaning, you know, so many other people consume and utilize network as a service through other third parties that we compete against, that is entirely really labor driven. It's offshore models, and it's somewhat antiquated in that way. And this is more AI native. And so it's not just that we can, you know, it's a more profitable for us than it is for them, but actually, we can compete on price and with a better and higher quality offering. So, you know, we are positioning the portfolio on the IT solution side to benefit from AI. I think on To your point, there's headwinds there, too. There is, with the budgets being stretched in for your typical CIO, there's definitely challenges on the hardware side that also just make the business sort of inherently more lumpy because prices are moving so fast. And you can quote a deal at $10 million for hardware, and then a week later, you have to quote it again, and now it's $12 million, right? And it literally changes what's going to get, you know, what's going to get purchased and when. So there's some, you know, that market, part of the market is very fluid. But on the whole, I would say AI is a tailwind for the business.

Just let me first make sure any questions in the audience? Sorry, did you, were you raising? Okay. Let me talk about free cash flow. That's always very, you know, right in Chuck's courtyard here. um free cash flow guidance you know how should investors think about that i know you guys have talked a little bit about obviously your guide for fiscal 26 but then there is some tariff recovery um that benefited your free cash flows because you did get some you did i guess get receivables that you sold for the tariff but beyond just this one-off stuff you know as you guys are expanding you have margins tailwinds here revenue stabilizing and growing how should we think about free cash flows ahead into fiscal 27?

Yeah. I think the way I think of it is you do get some tailwinds this year, for sure. While tariffs, we did get the refund, we also are paying a significant amount of tariffs still to this day. So tariffs isn't really a tailwind in terms of the actual benefit to the free cash flow and operating income probably balances out. But it's a fair statement we got the refund. We also have the back book sales and the forward flow agreements. And those will get less throughout time but if i take those out and think about what is my core free cash flow you know we said we had 335 million this year uh in forward flow benefits we got 80 million from the tariff um if you take those out and you just look at normalized cash flow and then take that into next year that improves that improves next year based on expanding the margins um through the synergy savings that we've talked about and paying less interest expense so you're going to have better operating income less interest expense which will expand margins therefore drive to a stronger operating cash flow, isolating for those one-time tailwinds that we got this year.

Okay. And the biggest drivers there, is it just top line, margins, working capital?

It's margins. I mean, if you think about the top line of the business, now, again, we'll give more guidance of this as we do the Q4 earnings announcement, but we're looking to stabilize revenue, right? We operate in a space that declines. The largest part of our business does decline in the low single digits. There are pockets growing. We'll continue to expand in those pockets where we can. And then we anticipate growth out of that other kind of billion dollars of IT solutions and digital services in that 10 to 15 range. So year to year, you're not going to see a bunch of top line movements, might even see some slight compression. We haven't put it together yet, but your margins will expand significantly.

Okay. And then debt reduction, you know, how do you guys think about the leverage and the path towards leverage? Yeah.

We, you know, Louie and I have made the stated goal. We have three objectives, right? We're going to stabilize the top line. We're going to expand margins, and we're going to delever this company as quickly as possible. After we signed the JV deal, we were at 7x gross leverage and 6 net. At the end of Q2, we were down to 6 and 5, and by the end of the year, we'll be down to 5 and 4. So you're down two full turns within one year after you signed the JV. Our stated midterm goal is to be down in that 3 range. your progress toward that then will be more opportunistic retirements of debts where it makes sense, plus expanded margins and even a growth.

Okay. All right. And then once you kind of reach your leverage targets, where does your capital allocation priorities lie?

What a problem I can't wait to have. You know, we'll invest back in the business where it makes sense to but you know right now we're going to stay ultra focused on stabilizing the top line expanding margins and delevering this company as quickly as possible

okay well we're up on time so i just wanted to thank louis and chuck here thank you very much you know there's a lot of uh wood to chop here at xerox so good luck with all of that a lot of opportunity as well appreciate it thank you very much