Xerox Holdings Corporation

Welcome to the Xerox Holding Corporation's fourth quarter 2025 earnings conference release. After the presentation, there will be a question and answer session. To ask a question at that time, please press star 11 at any time during this call. You can withdraw your question by pressing star 11 again. At this time, I would like to turn the meeting over to Greg Stein, Senior Vice President and Investor Relations. Please go ahead, sir.

Good morning, everyone. I'm Greg Stein, Senior Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation fourth quarter 2025 earnings release conference call, hosted by Steve Bandersack, Chief Executive Officer. He is joined by Chuck Butler, 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 are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Mr. Bandrzak.

Good morning, and thank you for joining our Q4 2025 earnings conference call. On the Q3 call, I highlighted the macroeconomic challenges we are facing and the continued disruption associated with the tariff and government funding-related uncertainty. Macro headwinds continue to persist, but we are cautiously optimistic that the business trends are starting to improve. Revenue in the quarter of $2.03 billion increased roughly 26% in actual currency and 24% in constant currency, reflecting the inorganic benefits of the Lexmont and IT Savvy acquisitions. Pro forma for these acquisitions, revenue declined 9%. Adjusted operating income margin of 5% was lower year-over-year by 140 basis points. Free cash flow was $184 million, a decrease of $150 million versus the prior year. And adjusted loss per share of $0.10 decreased by $0.46 year-over-year. For the year, revenue of $7.02 billion increased roughly 13% in actual currency. and 12% in constant currency. Excluding the benefits of the acquisitions, revenue declined approximately 8%. Adjusted loss per share of $0.60 was $1.57 lower year over year. We generated $133 million of free cash flow, which was $334 million lower year over year. and adjusted operating income margin of 3.5% was lower year-over-year by 140 basis points. While macro headwinds continued to weigh on transactional print equipment sales, activity picked up following the end of the government shutdown. In addition, page volume declines moderated and supply usage stabilized. Encouragingly, we entered 2026 with a pipeline higher than this time last year, with cancellations and renewal rates also improved in 2025. This gives us confidence in improving underlying trends in 2026. What does give us pause is the recent spike in DRAM prices as they began to impact costs across storage, servers, endpoints, and networking equipment. having the greatest effect on our IT solutions business. Considering this, we are taking steps to mitigate, including moving to consumption models such as HPE GreenLake, Dell APEX devices or service models, and providing extended maintenance services for clients that decide to retain their old hardware. The impact is expected to be modest in our print business in the first half of the year, But based on current trends, we are expecting a larger impact from the price and availability perspective as we move into the back half of the year. Still, we remain confident in our long-term prospects of our IT solutions business. While revenue was impacted in Q4 due to delays in enterprise deals directly tied to the recent spike in memory prices, the breadth of our business continues to grow. supported by a very strong quarter in the velocity channel. Bookings, billings, and backlog all increased, and pro forma profits improved meaningfully once again, aided by the synergies generated throughout the year. IT Solutions is strategically positioned to capture secular growth through differentiated platforms, including our Network Operating Center. Through our NOC, we deliver scalable AI-enabled automation and operational intelligence, underpinning our managed infrastructure services through a proprietary AI ops platform. As we look out towards 2026, our conviction for more meaningful margin expansion is high, underpinned by our guidance of more than $200 million improved in adjusted operating income. Many of the headwinds we experienced in 2025, such as tariffs, increased product costs, and the wind-down of the sale of several production lines, begin to moderate as we move through the year. We expect tailwinds in 2026 to steadily grow from the launch of new product offerings, a fully integrated IT solutions organization, and a soon-to-be unified Xerox Lexmark sales organization. We remain focused on the balanced execution of our three strategic priorities, execute reinvention, realize acquisition benefits, and balance sheet strength. I will provide an update on each. Starting with the execution of reinvention, with each quarter, the progress following the acquisition of Lexmont, I have become increasingly confident in the complementary nature of our businesses. Much of the original nervousness from partners following the transaction close has dissipated, and most of our clients and partners are excited about what our joint offerings mean for them. We continue to develop our route to market, and we'll have more to share next quarter, as well as an update on our inside sales strategy, which we will continue to be meaningfully expanding during the year. Last quarter, we discussed at length our enhanced global business services organization, which was launched in 2024 to create a more streamlined and comprehensive set of centralized operating processes, leading to lower operating costs and improved quality. In addition to the physical changes we noted, such as greater utilization of Lexmart captive offshore and nearshore global capability centers, we are also leveraging our AI capabilities to further drive efficiencies into this organization. To that point, Xerox recently established an AI Center of Excellence. In the second half of 2025, we launched several internal offerings designed to streamline processes, improve customer experience, and strengthen financial performance. These platforms are delivering measurable impact today. We introduced AI-powered service agents across XPS US and Latin America. These agents handle thousands of real customer interactions via chat and voice, leveraging prior service cases, engineering content, and large language models to deliver immediate support. This has resulted in higher success rate, reduced waiting times, and improved customer experience, all at lower cost per interaction. Beyond service, AI is driving significant financial improvements. Using Microsoft Copilot Studio and advanced data science, we reduced outstanding accounts receivable, automated over 10 million in credit hold actions, and surfaced actionable insights from 1.4 million collector comments. These capabilities empower faster, data-driven decisions that improve cash flow and operational resilience. Finally, we begin to utilize AI-driven analytics to protect our supplies business. Leveraging probabilistic modeling and machine learning, we identified hundreds and thousands of cartridges with potential counterfeit and third-party activity, strengthening supply chain integrity and customer trust. Moving to acquisition benefits. November 20th marked the one-year point of our acquisition of IT Savvy. And we have been thrilled with the progress today. Cross-sell performance remains strong, and we are now going to market under a unified brand, Xerox IT Solutions. The alignment and scale provides us opportunities to deliver unique value to our 200,000 customers, such as with the recent launch of Xerox Tri-Shield 360 Cyber Solution, a holistic cybersecurity offering targeted specifically for SMB. The solution is built upon Palo Alto Network's advanced detection technology, continuous monitoring, and response platform, with cyber response provided by Lumify and its Security Operations Center, and cyber insurance coverage provided by the Hartford brokered by Aon. This is enterprise-grade security designed for SMBs, offering scalable protection and without the complexity or the cost of traditional solutions. While operational efficiencies are a main pillar of the rationale for the Lexmark transaction, we are beginning to bear fruit as one company in our go-to-market operations. In the fall, we rolled out Lexmark-produced A3 devices in Eastern Europe. The channel reaction so far has been very positive, as this product has better features and design innovation focused on serviceability and reliability. We expect these devices to reduce service costs, extend activities in post-sales, and lead to better uptake with partners over time. We are planning a larger global rollout in 2026 as our in-house manufacturing capacity ramps. During the quarter, Xerox and Lexmark secured a global first joint win with Morrison's, one of the UK's leading grocery retailers. The agreement expands a long-standing relationship with Morrison's and positions Xerox as a strategic partner across both operational print infrastructure and customer marketing communications. The solutions have Xerox providing a fully refreshed central print room, leveraging cloud-based print management, web-to-print automation, and Lexmart MPS for their entire estate, 500 supermarkets, 15 logistics sites, the head office, and with added Xerox on-site operations. Morrison's will also adopt our GoInspire platform, including direct mail, loyalty communications, store leaflets, and campaign automation through GoInspire's digital marketing platform, Go360, enabling more targeted, data-driven customer engagement. Earlier this month, I joined our team at the National Retail Federation show in New York City, where for the first time together, we demonstrated legacy Xerox strength in IT solutions, production print, and digital workplace with Lexmart's expertise in an in-store operation with devices intentionally engineered for retail, signage solution, and Vision AI. We were excited by the reception and believe our enhanced value proposition, especially with the retail vertical, will lead to greater participation in RFPs and further wins and expansion into existing accounts. We also just announced a partnership agreement with R.J. Young, one of the largest office equipment and technology dealers in the United States. This agreement, which stems from the existing Lexmart partnership, extends Xerox portfolio with R.J. Young's proven service capabilities to their customer base. We continue to look for opportunities as one company to commit to and invest in our partners. Finally, balance sheet strength. For those focused on our current credit ratings, we remain extremely confident in our ability to drive increased profitability and deliver. Since the Lexmark transaction closed, we have generated meaningful positive free cash flow and took net debt down by $366 million. For the near and medium term, we plan to use all excess free cash flow to repay debt In connection, yesterday's announcement of the warrant distribution, which Chuck will speak to in more detail, further supports our goal to enable balance sheet flexibility. Cost rationalization remains a top priority, and we are reaffirming our cumulative run rate gross cost synergy targets of at least $300 million from the Lexmont acquisition and the $1 billion plus of profit improvement as part of our reinvention program. inclusive of Lexmark cost synergies. Delivery against this target is centrally managed and continuously updated through our Enterprise Transformation Office, or ETO, a joint team comprised of legacy Xerox and Lexmark leaders. The ETL is responsible for enabling our reinvention priorities, overseeing integration execution, and building a durable transformation capabilities across the enterprise through robust analytics and disciplined governance. This includes active oversight of several core integration work streams, dozens of sub-work streams, and hundreds of enterprise-wide initiatives. Each initiative is formally documented tracked through defined stage gates and subject to required milestones and approval before being incorporated into our integration and synergy forecasts. This level of rigor and transparency gives us strong confidence in our ability to deliver on and potentially exceed our synergy commitments. Before I hand the call over to our recently appointed Chief Financial Officer, Chuck Butler, I wanted to share why he is the ideal leader for this role. Chuck joined Xerox as part of the Lexmart acquisition where he spent 21 years in a variety of senior leadership positions, most recently as their chief financial officer. He brings deep experience and proven resilience, having led the company through supply chain disruption, a significant manufacturer transition due to U.S. sanctions on its former Chinese parent company, and a large-scale restructuring process that delivered stronger revenue and profitability. At this pivotal moment for our organization, Chuck's thoughtful, pragmatic approach to driving operational excellence and profitability is just what we need. I'm excited to partner with him as we work to restore growth and strengthen the business.