Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation second quarter 2025 earnings release conference call. After the presentation, there will be a question and answer session. To ask your questions at that time, please press star 1-1 at any time during this call. You can withdraw your question by pressing star 1-1 again. At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation second quarter 2025 earnings release conference call hosted by Steve Vanderjack, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer, and Rolanda Getzai, 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 prohibitive 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 are 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. Bandersack.

Good morning and thank you for joining our Q2 2025 earnings conference call. The closing of the Lexmart acquisition in early July marked an important milestone in Xerox reinvention. With this transaction, we unite two industry leaders with complementary sets of operations offering strengths and market reach. Xerox and the Lexmart offering will be combined and optimized to enhance client value. providing the foundation from which we can expand the penetration of our IT solutions and digital services businesses as we help our clients navigate the increasingly digital nature of document workflows and processes. I'd like to commend both the Xerox and Lexmark teams who this quarter navigated a challenging operating environment while preparing for an accelerated transaction close and integration timeline. Summarizing results for the quarter, revenue of around $1.58 billion was roughly flat with the prior year in actual currency and declined 1.1% in constant currency, inclusive of IT Savvy. Adjusted operating income margin of 3.7% was lower year-over-year by 170 basis points. Free cash flow was a use of cash of $30 million, reflecting in part a delay in the sale of large portfolio of finance receivables. An adjusted loss per share of 64 cents declined 93 cents year over year due in large part to an unfavorable tax rate. This quarter demonstrated the improved resiliency of revenue and adjusted operating income afforded by our reinvention. Specifically, the benefits of a more favorable mix of revenue from faster-growing businesses and a more flexible and simplified operating structure. In the second quarter, strong demand for cloud enablement services at our IT Solutions segment helped offset a brief period of softer demand for print equipment in April and May amid peak DOGE and tariff-driven uncertainty. And our relentless focus on cost discipline helped preserve adjusting operating income offsetting the effects of lower than expected sales of print equipment and higher tariff costs. The improved resiliency demonstrated in Q2 provides an affirmation of our strategic direction, the benefits which are expected to be further enhanced through the acquisition of LexMod. Our strategic focus this year in anticipation of the close of LexMod acquisition has been the continued execution of reinvention, ensuring the full realization of benefits from the IT Savvy and LexMod acquisition and preserving balance sheet strength. I'll provide a brief update on this quarter's progress in each of these areas. Starting with the execution of reinvention. In the second quarter, we advanced a number of reinvention initiatives aimed at optimizing our commercial offering and simplifying operations, each of which will provide benefits well beyond the Lexmart integration. This quarter, we expanded our inside sales program to cover new territories and product lines, further enabling our direct sales force to concentrate on larger client opportunities. We also reduced the time it takes to process orders at our XPS business unit by four days, improving both time to revenue and client satisfaction. In IT solutions, we continue to build momentum in the cross-sell of advanced IT offerings in Xerox print client base, an important contributor to this segment's recent strength. An ongoing operational simplification efforts leveraging technology-driven efficiencies enabled another double-digit percentage reduction in adjusted organic operating expenses. We will continue advancing reinvention initiatives currently in flight and those planned for the future as we progress the phasing of our reinvention to now include the integration of Lexmark. John will describe the evolution of our reinvention strategy to incorporate the Lexmark integration in more detail. Moving to acquisition benefits, the integration of IT Savvy is largely complete and we are ahead of schedule in the realization of the planned strategic and financial benefits associated with that acquisition. The IT Solutions team has embraced the spirit of reinvention and continuous improvement to find operating synergies beyond those originally contemplated. As an example, Xerox IT Solutions has consolidated the purchase of Xerox Corporation's IT assets, which were previously handled by an external partners. The insourcing of Xerox IT spend reduces the cost of Xerox Corporation's IT products and results in an improved status with and higher rebates from IT Solutions OEM partners. Moving to Lexmark. The integration of Lexmark is progressing well, aided by the addition of two seasoned Lexmark leaders to the Xerox Executive Committee. Billy Spears, who will lead product development manufacturing, and supply chain for the combined business, and Chuck Butler, who will run the combined global business service organization. Detailed integration planning work had been conducted prior to the acquisition close and is now firmly in an execution phase. As we have progressed this work, our confidence in realizing synergies has increased. Accordingly, we now expect cost synergies associated with the LexMod acquisition to total more than $250 million, from our original estimate of more than $200 million, all of which remains realizable within the next two years. Finally, balance sheet strength. The LexMod acquisition was funded primarily with debt but results in lower gross debt leverage ratio after accounting for the nearly $300 million of LexMod's acquired EBITDA. With the LexMod acquisition, Now complete, our top capital allocation priority is the repayment of debt. Following the implementation of cost synergies, which require an upfront cash investment, we expect improved free cash flow from core operations and more than $600 million of proceeds expected from the reduction of finance receivables between now and the end of 2027 to be deployed to repay debt. This year, we reduced our dividend to place even greater focus on the repayment of debt. We will re-evaluate our dividend policies as Xerox's gross debt leverage ratio approaches our medium-term target of three times trailing 12 months EBITDA. Before I hand the call to John, I'd like to put the Lexmark acquisition in context of our broader reinvention strategy and comment on the improved competitive profile of the combined Xerox and Lexmark businesses. In 2023, we implemented our reinvention strategy to ensure we are operationally and strategically best positioned to continuously address the evolving workplace needs of our clients. This required reducing or exiting activities and businesses that are not central to our legacy business or development of higher growth value-add adjacencies such as IT solutions and digital services Last year, we simplified our business model to enable closer alignment between our businesses and evolving needs of our economic buyer of our workplace solutions. We also established a Global Business Services Organization, or GVS, to centralize key processes and drive continuous operating efficiencies throughout our reinvention and beyond. Greater strategic focus and a leaner, more simplified business model freed up the resources and managerial bandwidth to execute and successfully integrate two transformative acquisitions that will contribute to our reinvention goals of revenue stabilization and a return to double-digit adjusted operating income margins. IT Savvy, which enhances our IT solutions offering, and Lexmart, which will strengthen and diversify our print business. The LexMod acquisition enhances Xerox's position as a leading provider of services-led, software-enabled hybrid workplace solutions. It creates a larger, vertically integrated leader in print and managed print services. And Xerox's portfolio evaluated higher growth adjacencies in IT solutions and digital services provides an important point of competitive differentiation relative to our peers. Combined on a pro forma basis, Xerox generated $8.6 billion of revenue and more than $870 million of EBITDA in 2024. Around two-thirds of the revenue comes from recurring sources, and more than 10% of the revenue comes from a faster growing IT solutions and digital services businesses. Xerox is now a top three player in each major print category within its current market, with close to half of the print revenue generated from sales and services associated with A4 devices. A4 is one of the most strategically advantaged parts of the print ecosystem, as clients look to refresh their print fleets with smaller, more technology-advanced machines. Reinvention is not complete, but the assets and operating model are now firmly in place to achieve our reinvention goals. I will now hand over the call to John, who will provide additional context around the strategic advantages of the LexMod acquisition and an update on reinvention and our near-term integration priorities.