Xerox Holdings Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Integration Progress: 4 months since Lexmark acquisition closed, with $50 million additional synergy opportunities identified in first 100 days. Appointed Lexmark executives in key roles.
• Product Launches: Debuted 3 new production printing presses at PRINTING United, including IJP900 and Proficio family products.
• IT Solutions Growth: IT Solutions grew pro forma revenue double digits, with over $50 million in new sales to Xerox Print clients year-to-date.
• Operational Simplification: Consolidated global business service organizations, launched AI center of excellence to drive AI-driven operational efficiencies.
• Lexmark Synergies: Eliminated over 1,200 roles, expecting run rate gross cost savings of over $125 million by year-end.
• Balance Sheet: Returned to positive free cash flow, reduced net debt by $226 million; goal to target 3x total debt to EBITDA.

Segment Performance

• Print and Other Segment:
  • Equipment sales: $383 million, up 13% in actual currency and 12% in constant currency. Pro forma for acquisitions, revenue declined ~16% in actual currency.
  • Print post sale revenue: $1.36 billion, up 23% in actual currency and 22% in constant currency. Pro forma for Lexmark acquisition, post-sale revenue declined 8% in actual currency.
  • Adjusted gross margin: 30%, down 330 basis points year-over-year.
• IT Solutions Segment:
  • Revenue and gross profit increased over 150% year-over-year. Pro forma for ITsavvy acquisition, revenue grew just over 12% in actual currency.
  • Gross profit: $44 million, gross margin 19.5%, expanded 320 basis points year-over-year.

Guidance

• 2025: Revenue expected to grow ~13% in constant currency; adjusted operating margin ~3.5%; free cash flow reduced to $150 million from $250 million due to lower revenue, profit, and integration costs.
• 2026: Formal guidance to be issued in Q4 2025; expects recovery once funding and tariff policies stabilize; IT Solutions to grow above market rate (7%-8%).
• Synergies: Incremental $50 million Lexmark synergies, with $250 million-$300 million total integration and Reinvention savings expected in 2026.

Risks

• Macroeconomic Challenges: Delays in client purchasing decisions due to tariff and government funding uncertainty, affecting transactional print equipment and supplies revenue.
• Economic Uncertainty: Continued delays in equipment purchases expected to materialize in future periods as macroeconomic environment stabilizes.
• Tariff Impact: Tariffs and product costs impacted adjusted gross margin (down 350 basis points) and operating margin (3.3% adjusted operating margin, down 190 basis points year-over-year).

Question and Answer

• Q: Top line impact to equipment sales, government vs commercial? A: Steve Bandrowczak noted IT Solutions growing less impacted by macro, Lex integration synergy acceleration, and expected recovery as government and tariff clarity returns.
• Q: Tariff headwind sizing, price increases? A: Mirlanda Gecaj stated tariff impact ~$35 million in 2025, with continued measured price increases to offset tariff impact.
• Q: Government softness across segments, free cash flow? A: Steve Bandrowczak discussed IT Solutions prioritizing IT spend despite government shutdown, and Mirlanda Gecaj outlined free cash flow guidance and finance receivables impact on future cash flow.