XRX

Core Company Priorities

All business decisions are framed around three core priorities tied to addressing upcoming debt maturities (the "hurdles" in management's race analogy):

• Stabilize revenue: Improve long-term revenue growth trajectory
• Increase profitability: Expand margins and operational efficiency
• Reduce leverage: Lower debt to de-risk the maturity schedule and improve the balance sheet

Q2 2026 Core Operational Progress

• Reported total revenue of $1.92 billion, up 22% YoY from the Lexmark acquisition; pro forma revenue declined ~7% YoY. After adjusting for Q1 2026 currency tailwinds and a supplies revenue pull forward, YoY revenue trajectory modestly improved from Q1.
• Adjusted operating margin reached 10.6% YoY (up 690 bps YoY); excluding one-time tariff receivable benefits, adjusted operating margin was 5.1% (up 140 bps YoY), with pro forma gross margins expanding YoY.
• Total debt reduced by $223 million in Q2; trailing 12-month gross leverage fell to 5.9x from 7.0x at end-Q1, and net leverage fell to 5.1x from 6.0x at end-Q1. Over the first half of 2026, the 2028 maturity wall was reduced by nearly $200 million.
• Raised cumulative Lexmark acquisition synergy targets to at least $350 million, a $50 million increase from prior guidance, driven by incremental IT efficiencies, expanded sourcing/logistics benefits, and lower-cost shared service delivery. Half of the total synergies will be realized in 2026, with the remainder in 2027 and 2028.

Segment Specific Operational Updates

• Equipment Print Business: Entry-level segment demand outpaced Q2 forecasts, creating a backlog that will convert to revenue in H2 2026. The first unified Xerox-Lexmark entry-level color printer/MSP lineup launched in June 2026, with entry color installs already rising. The new in-house built 9 Series mid-range platform replaces prior third-party sourcing, lowering production costs and delivering better total cost of ownership for customers, improving competitiveness in the mid-range segment. The production print portfolio is being reshaped for higher growth segments, with new products launching starting in Q3 2026.
• IT Solutions Business: The sales organization is currently being rebuilt, which has weighed on near-term new business signings and short-term profitability, as new sellers require time to reach full productivity. Credit profile friction also creates near-term pressure. Management expects billings to rise YoY from Q3 to Q4 2026, with revenue aligning more closely to billings in 2027. Long-term market opportunity remains large and growing, with tailwinds from customer infrastructure modernization for AI workloads.

• Full year 2026 revenue guidance is raised to approximately $7.6 billion, up ~$100 million from the prior guidance of greater than $7.5 billion, driven by higher expected performance from Print and Other.
• Full year 2026 adjusted operating income guidance is raised, reflecting both the one-time tariff receivable recovery and increased confidence in the company's operational plan.
• The 2026 full year free cash flow guidance is maintained at approximately $250 million. The $80 million in proceeds from the sold tariff receivable (to be reclassified to operating cash flow after claims processing) is offset by higher restructuring charges, higher non-financing interest expense from the TPG-JV, and working capital headwinds, leaving the overall guidance unchanged.
• By year-end 2026, management now expects gross leverage to fall to under 5x and net leverage to under 4x (trailing 12-month EBITDA), a reduction of more than 2 turns from end-Q1 2026. This is an improvement from the prior forecast of a 1.5x reduction, putting the company well ahead of its original deleveraging plan.
• Cumulative Lexmark synergy guidance is raised from $300 million to at least $350 million, with half the benefits realized in 2026.

1. Print and Other:

   • Equipment revenue: $387 million (15% YoY growth reported, 13% pro forma YoY decline). Pro forma decline was driven by softer mid-range performance, lower OEM sales, and unmet entry-level demand that created backlog.
   • Post-sale revenue: $1.35 billion (31% YoY growth reported, 30% YoY growth in constant currency; 4% pro forma YoY decline, driven by lower service, rental, outsourcing, and financing income). Post-sale revenue accounts for 77.7% of total Print and Other revenue, while equipment accounts for 22.3%.
   • Adjusted gross margin: 38.4% (up 720 bps YoY, including tariff receivable benefits; even excluding tariffs, segment margin was up 180 bps YoY).
   • Segment margin: 12.7% (up 790 bps YoY).

2. IT Solutions:

   • Gross billings grew 4% YoY in Q2 and 11% YoY year-to-date; GAAP revenue fell 9% YoY, due to a growing share of net-basis agent reporting for third-party contracts.
   • Gross profit was $35 million, with a gross margin of 18% (up 160 bps YoY, driven by mix and synergies, partially offset by higher memory costs).
   • Segment profit was $7 million, with a segment profit margin of 3.7% (down 110 bps YoY, pressured by ongoing investments in rebuilding the sales organization).

• Persistently elevated current oil prices (which were expected to normalize by mid-2026) and higher-than-expected memory prices create modest downside risk to 2026 updated profit and cash flow outlooks, if current levels hold or increase further.
• The company's current credit profile creates working capital friction with vendor and partner partners, modestly reducing working capital efficiency; this is expected to ease as leverage is reduced, but remains a near-term headwind.
• Mid-range equipment sales are experiencing ongoing softness, and the transition from third-party sourcing to in-house production for the new 9 Series platform has resulted in near-term cost increases for externally sourced mid-range units.
• IT Solutions new business growth is pressured by near-term growing pains during the sales force rebuilding process, which is weighing on near-term margins and signings.

Q: Why is 2026 full-year free cash flow guidance maintained at $250 million, despite the company receiving $80 million in cash from selling the tariff receivable? What offsets this incremental cash? / A: The $80 million in tariff receivable proceeds (which will be added to free cash flow when reclassified to operating cash flow in H2 2026) is fully offset by three factors. These are higher incremental restructuring costs tied to the increased synergy target, working capital drag from credit profile related friction, and higher interest expense associated with the TPG joint venture. These three items offset the $80 million almost exactly, so the full-year guidance stays the same.

Q: What is the impact of AI on IT solutions demand for Xerox? Is there AI-related infrastructure demand that benefits the business? / A: AI is creating both tailwinds and headwinds. It drives expansion in parts of the IT budget that Xerox serves, as clients refresh endpoints for AI PCs, modernize infrastructure to support AI workloads, and invest in data center capacity and security. However, large AI-related data center build-outs absorb significant IT spend that Xerox does not directly participate in, as that is not Xerox's core customer set, so it crowds out some other spend. Overall, AI is a mixed impact for the business.

Q: What are the core drivers of the sequential gross margin improvement even after normalizing for the tariff receivable benefit? How much of this comes from in-house manufacturing versus other sources versus input cost headwinds? / A: Multiple drivers underpin the improvement. Transformation benefits and Lexmark acquisition synergies are the largest contributors, followed by favorable product pricing dynamics and a positive impact from Lexmark's higher margin mix. The gains are partially offset by headwinds: a shift toward lower-margin post-sale revenue mix in the quarter, and higher input costs for still-transitioned externally-sourced A3 mid-range products during the shift to in-house manufacturing.

Q: Management expects a second half equipment recovery — what demand drivers support that expectation, and what is the current demand landscape? / A: Overall print demand is stable, and Xerox's total sales pipeline is tracking ahead of last year. The biggest strength is in the entry-level segment, where demand outstripped supply in Q2 and created a backlog that will convert to revenue in H2. The only material soft spot is mid-range A3 equipment, and management does not expect this segment to bounce back. Instead, the focus is on the new in-house 9 Series platform that can compete effectively in the current demand environment, rather than relying on a segment-level recovery.