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Earnings Call Transcripts·

Q3 2026 Xerox Holdings Corporation Earnings Conference Call - Xerox Holdings Corporation

XRX

  • Explicit Guidance:

    • Full-Year 2026 Adjusted Operating Income: Lowered to $450–$475 million (previously $555–$605 million); driven by $60M headwind from memory/oil, mix shift to entry hardware, weaker IT solutions, and ~$90M in tariff impacts.
    • Full-Year 2026 Revenue: Maintained at approximately $7.6 billion (down <5% YoY), though volumes weigh on profit.
    • Full-Year 2026 Free Cash Flow (FCF): Lowered to $50–$100 million (previously ~$250 million); due to lower operating income, reduced finance receivable sales ($300M vs. $335M), and timing of tariff refunds ($30M in 2026 vs. $80M previously, with $50M deferred to 2027).
    • Full-Year 2026 Adjusted Tax Rate: Expected to remain volatile with an estimated 70% rate due to valuation allowances on deferred tax assets.
    • 2026 Leverage: Year-end gross and net leverage expected at approximately 5.6x and 4.7x (trailing 12-month EBITDA); timeline to reach long-term targets of <5x gross and <4x net has extended.
    • 2027 Guidance: No specific numbers provided yet; to be detailed in the Q4 2026 earnings call.
    • Dividends: Board has suspended common and preferred dividends effective immediately; saves approximately $28 million annually to support deleveraging.

  • Business-Segment Outlook:

    • Print & Other Equipment: Entry device revenue grew 21% (installs +16%); Production grew 14% (installs +13%); Mid-range declined 15% (installs -20%). Market shift from mid-range to entry is accelerating; entry hardware is unprofitable at the hardware level but marginally comparable over the device lifecycle via supplies/service.
    • Print & Other Post-Sale: Revenue down 5% (reported) driven by lower service and managed print volumes. Long-term goal to drive service disruption costs toward zero via the "9 Series" (50% fewer service calls than prior gen) and increasing remote resolution rate to 70% (currently >50%).
    • IT Solutions: Revenue down 17% (Product -23%, Services -7%). Backlog up 24%; expecting better YoY comparison in Q4. Growth slower than expected due to sales force ramp time and tighter supplier/distributor terms (credit profile issues). Medium/long-term view remains confident for high single-digit to low double-digit growth.
    • Xerox Financial Services (XFS): Net finance receivables reduced from $3.1B (2022) to ~$1.2B; targeting a stable book of ~$1B. Expects to continue selling remaining receivables to unlock cash.
    • Zykon Partnership: Entering packaging and labels markets; expected to drive share gains in the ~$9B growing production segment.

  • Market and Competitive Outlook:

    • Global Print Market: IDC forecasts 2026 unit growth of just >1% (vs. 7% in 2025, 11% in 2024) due to higher costs and geopolitical uncertainty. Xerox expects to gain share despite the weaker environment.
    • Competitive Dynamics: Highly competitive with ~10 global scaled competitors. Price-cutting strategies are becoming strained for all players facing input cost inflation. Xerox expects "rational behavior" but remains dynamic.
    • Supply Chain: Inventory levels are high entering Q4; management plans to reduce inventory built in Q3.
    • Structural Shifts: Budgets shifting from hardware/print to AI, compute, and software; Xerox views this as a challenge to address via differentiated service economics.

  • Macro / Industry Outlook:

    • Input Costs: Memory prices expected to rise to 15% of machine cost in 2027 (up from 10% today); oil prices also rising. Combined impact estimated at $60 million on 2026 adjusted operating income.
    • Tariffs: Tariff-affected input costs remain a headwind of approximately $90 million for 2026. Management expects input costs to be a larger headwind in 2027 than in 2026.
    • Currency: Revenue guidance maintained on a constant currency basis.
    • Capital Allocation: Prioritizing debt reduction; dividend suspension preserves cash.

  • Strategic Initiatives:

    • Pricing Actions: Beginning Q1 2027, implementing pricing across the portfolio to offset costs. Effectiveness limited for existing multi-year contracts; benefits build over time.
    • Cost Reduction: Launching incremental cost program in 2027 beyond Lexmark Synergies (expected $100 million additional YoY savings in 2027). Includes: simplifying organization/management, expanding Global Capability Centers (currently 15% of workforce), consolidating distribution centers/real estate, and renegotiating vendor contracts.
    • Technology & Service: Full-stack ownership of 9 Series; leveraging AI for predictive maintenance to reduce service calls.
    • Debt Management: Announced exchange of ~$174M of 2028 senior notes for 2030 first-lien notes (75 cents on dollar in value), reducing debt by $53 million and extending maturities. Next significant maturity is August 2028.
    • Sales Force: Rebuilding IT solutions sales team; benefits of rebuild expected to materialize slowly through late 2026/2027.

  • Risks and Headwinds to Outlook:

    • Input Cost Volatility: Continued rises in memory, oil, and electrical component costs.
    • Product Mix: Accelerated shift from high-margin mid-range to low-margin entry hardware, pressuring near-term profits.
    • Market Softening: Weaker demand due to macro uncertainty, geopolitical issues, and competing IT priorities (AI).
    • Service Costs: Service revenue declines directly impact gross profit due to fixed technician density requirements; slow ramp in service revenue growth.
    • IT Solutions Execution: Slower sales force ramp, longer customer decision cycles on price increases, and friction from tighter supplier/distributor credit terms.
    • Pricing Limitations: Inability to fully pass on costs immediately due to multi-year contract re-pricing cycles and market acceptance.

  • Management Tone on the Future:

    • Candid and Realistic: Management explicitly states the outlook is not what they wanted and refuses to "dress it up."
    • Confident in Long-Term Fundamentals: Asserts the foundation is stronger than a year ago due to full technology stack ownership, improving print trends, and a structural cost advantage in service.
    • Focus on Execution: Emphasizes "disciplined execution" to offset headwinds, protect cash, and reduce debt.
    • Hedges: Notes that 2027 outlook will be "set against" larger input cost headwinds and continued mix shifts; pricing success is not guaranteed and depends on market dynamics.

  • Miscellaneous:

    • Non-GAAP Items: Includes a non-cash goodwill impairment charge of $959 million in Q3 (no impact on cash or covenants).
    • Liquidity: Total liquidity of ~$726 million ($412M unrestricted cash + ~$314M ABL borrowing base net of LCs).
    • Synergies: Lexmark Synergies on track; expecting $100M incremental savings in 2027.
    • Capital Expenditures: No specific CapEx guidance provided, but focus on real estate consolidation and distribution efficiency.