Xerox Holdings Corp. Q2 FY2025 earnings call

• Execution of Reinvention: Expanded inside sales program, reduced order processing time at [XBS] business unit, continued cross-selling of advanced IT offerings in Xerox print client base, and achieved double-digit percentage reduction in adjusted organic operating expenses.
• ITsavvy Integration: Integration is largely complete, and ahead of schedule in realizing strategic and financial benefits. IT Solutions team found operating synergies beyond original contemplation, like in-sourcing Xerox IT spend.
• Lexmark Acquisition: Integration progressing well; cost synergies now expected to total more than $250 million (originally over $200 million), realizable within next 2 years. Leveraging Lexmark's distribution in APAC, cross-selling IT/digital solutions, and optimizing print service models.
• Balance Sheet Strength: Lexmark acquisition funded primarily with debt, but gross debt leverage ratio lower after accounting for Lexmark's acquired EBITDA. Top capital allocation priority is debt repayment, with plans to deploy proceeds from finance receivables reduction to repay debt.

Print Segment: Equipment sales of $336 million declined 5.6% in actual currency and 6.7% in constant currency. Print post-sale revenue of around $1 billion declined 9.5% in actual currency and 10.5% in constant currency. Print segment adjusted gross margin was 31.2% and declined 330 basis points year-over-year. IT Solutions Segment: Revenue and gross profit increased more than 150% year-over-year, reflecting inclusion of ITsavvy and strong organic growth. Pro forma for ITsavvy acquisition, IT Solutions gross billings increased 8% year-over-year, and gross margin expanded 90 basis points to 16.4%.

• 2025 Guidance: Revenue expected to grow 16%-17% in constant currency, inclusive of ~$1 billion from Lexmark. Adjusted operating income margin around 4.5%, inclusive of $100 million-$110 million from Lexmark. Free cash flow expected to be around $250 million. Tariff charges net of mitigation efforts $30 million-$35 million. Delayed Reinvention-related savings timing related, to benefit 2026/2027.
• 2026 Preliminary Expectations: Legacy Xerox print business expected to decline at low to mid-single digits pace. Lexmark revenue flat year-over-year. IT and digital solutions businesses expected to grow faster than respective markets. Significant year-over-year growth in adjusted operating income due to Lexmark inclusion, synergy realization, and Reinvention savings.

• Tariff-Driven Uncertainty: Softness in print equipment demand in April-May due to peak DOGE and tariff-driven uncertainty. Higher-than-expected tariff costs and impact on pricing and margins.
• Demand Softness: Period of softer demand for print equipment in April and May, though June saw recovery. Conservatism built into 2025 back half guidance due to volatile demand and tariff policies.
• Integration Challenges: Ensuring successful integration of Lexmark, including managing synergies, aligning operations, and addressing potential disruptions during the integration process.

Q: Could you elaborate on the softness in April and May, including whether it was broad-based across customer segments and geographies?

A: Softness was more in Fed and SLED accounts. Enterprise was relatively stable. Softness was due to DOGE and tariff-related uncertainty, with a recovery in June. Geographically, some areas faced pressure but June showed improvement.

Q: Why is Lexmark's revenue outlook for 2026 expected to be flat when exposed to growth markets?

A: Lexmark is well-positioned in the A4 market, which is growing, but its revenue outlook being flat is better than the industry decline. 80% of Lexmark's revenue is annuity-based, giving an upper hand in the print market.

Q: What drives the decline in operating margins to 4.5% for full year 2025 versus prior expectations?

A: Decline is due to revenue softness, 400 basis points headwind from Reinvention initiatives, tariff charges net of mitigation efforts ($30 million-$35 million), and intentional delays in some Reinvention initiatives to focus on Lexmark integration, which will benefit 2026/2027.