Xerox Holdings Corporation

We're standing by and welcome to the Xerox Holding Corporation's fourth quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Please go ahead, sir.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation fourth quarter 2024 earnings release conference call hosted by Steve Vanderjack, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer, and Merlanda Gatsai, Incoming 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 slash investor. and will make comments that contain forward-looking statements, which by their nature address matters that are in the future and uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I'd like to turn the meeting over to Mr. Bandershak.

Good morning, and thank you for joining our Q4 2024 earnings call. 2024 was an important year for Xerox. We executed a critical phase of our reinvention journey by implementing widespread structural changes all in efforts to better position Xerox for sustainable growth in revenue and profit. Changes include the shift from a geographic to a business unit-led operating model, realignment of our sales organization, and the centralization of key business processes within the newly formed Global Business Service Organization. We now have stronger alignment with the economic buyer of our offerings and improved organizational efficiencies, both of which are critical enablers of our long-term reinvention goals. Further, a simpler and more resilient operating model put us in a better position to acquire and integrate IT Savvy and Lexmark, transactions which are expected to accelerate our path towards revenue stabilization and double-digit adjusted operating income margins. We ended the year with improved execution, achieving revised full-year revenue and free cash flow guidance. And for the second consecutive quarter, adjusted operating income and margin improved year over year despite a decline in total revenue, which we view as a proof point of the intended benefits of a more efficiently run business. Summarizing results for the year. Revenue of $6.2 billion decreased 9.7% in actual currency and 9.5% in constant currency. Excluding the benefits of around five weeks of IT-savvy results, revenue declined 10.2% in constant currency. Adjusted EPS was $0.97, $0.85 lower year over year. we generated $467 million of free cash flow, which was $182 million lower year-over-year, and adjusted operating income margin of 4.9% was lower year-over-year by 70 basis points. The decline in full-year revenue was affected in part by backlog reductions in the previous year, the impacts of geographic and offering simplification, and other intentional reductions of non-core revenue. We expect reinvention-related reductions in revenue to largely cease after 2025. Core organic revenue, which excludes these effects and the acquisition of IT Savvy, declined around 4% in 2024, reflecting modest market share losses in equipment and lower page volumes offset by growth in digital and legacy managed IT services. Throughout the year, underlining print market conditions were stable, and demand for our products and services remained strong. We attribute the decline in our equipment market share primarily to the pace and scale of business model changes implemented at the beginning of last year. With the benefit of lessons learned from 2024, we are confident our team has the experience and knowledge to once again grow print equipment share, helping drive an improved trajectory in core print revenue in 2025. I commend the team's hard work and resiliency over the past year in driving structural improvements to Xerox core business and sustainable operating efficiencies amidst widespread organizational change. Starting with our core business, The organizational redesign streamlined our sales, marketing, and distribution teams, allowing a more efficient and effective means of driving positive outcomes for our clients through Xerox offerings. Salesforce productivity is an important leading indicator to our ability to improve revenue trajectory as we continue optimizing our go-to-market operations. We did not experience a large enough increase in sales productivity in 2024 to fully offset reductions in headcount. However, the ongoing implementation of productivity initiatives drove a 20% sequential improvement in sales force productivity in Q4, continuing the progress observed earlier in the year. Greater alignment with our client, a more focused selling approach, and improved client perception resulted in an increase in new business signings year over year. And for the year, we once again grew our digital and legacy managed IT service businesses, key contributors to our planned shift in revenue mix towards markets with higher underlying rates of growth. We expect the acquisition of IT Savvy and the pending acquisition of Lexmark to further strengthen our core businesses. IT Savvy's enhanced offering should drive increased penetration of Xerox IT Solutions business across our existing client base. And Lexmark provides an opportunity to strengthen the print business by diversifying our supply chain, market reach, and exposure to growing markets within print, such as A4Color. Assuming the second half closing of the LexMod transaction, we plan to begin realizing the benefits of both transactions in 2025 with greater benefits expected in 2026. Moving to costs. In 2024, we achieved the targeted $200 million of gross reinvention cost savings and total company operating expenses declined close to 12% excluding IT-savvy and one-time transaction costs. The successful execution of geographic and offering simplification efforts resulted in a more efficient distribution model in select countries and streamlined print portfolio, both of which are critical enablers of future cost reductions. Finally, in 2024, we executed a balanced approach to capital allocations We used $467 million of free cash flow generated to pay $141 million in dividends, repay secured debt obligations as they came due, and acquire IT Savvy. Through a series of debt refinancing transactions, we improved liquidity by extending the maturity of our unsecured debt obligations. The announced acquisition of LexMod is expected to result in an immediate reduction in pro forma debt leverage and free cash flow accretion from that transaction should improve our capacity to reduce debt further. Finally, additional forward flow programs such as the recently executed deal with DeLong-Landed Financial Services Canada Inc. are expected to support free cash flow generations over the next few years. I'll now move to 2025 priorities. In 2025, we plan to build on the structural changes implemented in the past year to focus on, one, executing the next phase of our reinvention strategy, two, realizing the benefits associated with the IT Savvy and announced Lexmont acquisition, and three, improving balance sheet health. Starting with the execution of reinventions. The focus of reinvention in 2025 will progress to specific initiatives designed to further optimize our commercial operations and simplify the business, and will continue to leverage the GBS organization to design and implement continuous operating efficiencies. John Bruno will describe some of the reinvention initiatives expected to be implemented this year in more detail. 2025 is an important year for realizing the benefits of the IT Savvy acquisition, which closed last November, and planned acquisition of Lexmark. With the addition of IT Savvy, Xerox IT Solutions business offers clients a more comprehensive suite of IT infrastructure solutions, better position Xerox to target a wider spectrum of clients' IT budgets, a TAM we estimate to be around 10 times the size of print. Our IT solutions business is favorably positioned to take advantage of key market tailwinds, including growth in endpoints driven by hardware refreshes, Windows 11 upgrades, and the AIPC, Microsoft Cloud Solution adoption, and spend on the modern data center, aided by return-to-work trends. We expect an enhanced IT solutions offering to drive incremental penetration of these services within our existing client base. Xerox IT Solutions will be a separately reported segment beginning Q1 of this year. We will provide updates on client penetration and other KPIs associated with the growing business as the integration is completed. And we are well on our way to realizing the more than 15 million of expected run rate cost synergies from this acquisition, most of which we intend to realize this year. Separately, we are working diligently to close the LECMAR transaction and begin integration planning in order to capture the more than 200 million of expected cost synergies over a two-year period. Finally, balance sheet strength. We continue negotiations to expand our forward flow program to Europe. Finance receivable sales associated with the expansion are expected to generate incremental free cash flow as we reduce our finance receivable portfolio. As noted during the Lexmont Acquisition Conference call, our primary capital allocation priority is now the repayment of debt. and we plan to return cash to shareholders via an annual dividend of 50 cents per share. I'll now hand the call over to John to provide an overview of our operational roadmap as we move forward in our reinvention journey.