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Earnings Call Transcripts·

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

XRX

  • Financial Performance:

    • Q3 2026 total revenue was $1.87 billion, declining less than 5% year-over-year (YoY) with a 180 basis point sequential improvement; print and other revenue declined 3% YoY.
    • Adjusted operating margin reached 6.6%, an improvement of 330 basis points YoY, driven by gross margin expansion to 29.5% (up 60 bps, excluding $20M IP licensing income).
    • Adjusted EPS was $0.02, negatively impacted by higher interest expenses ($93M) and an adjusted tax rate of 70%.
    • Net loss per share was $7.73, primarily due to a $959 million non-cash goodwill impairment charge in the print and other unit due to revised long-term forecasts.
    • Operating cash flow was $30 million (down from $116M YoY); Free Cash Flow (FCF) was $7 million (down $81M YoY) but improved by ~$50M when excluding cash from shrinking finance receivables.
    • Capital structure showed gross leverage of 5.4x and net leverage of 4.7x (down from 5.9x and 5.1x Q2), with total liquidity of ~$726 million ($412M unrestricted cash + ABL capacity).
    • Inventory costs shifted significantly, with memory costs rising from 2% to 10% of machine cost, expected to reach 15% in 2027; input costs (memory, oil, tariffs) are projected to reduce adjusted operating income by ~$60M.

  • Guidance and Future Outlook:

    • Full-year 2026 revenue guidance maintained at approximately $7.6 billion.
    • Full-year 2026 adjusted operating income guidance lowered to $450–$475 million (previously $555–$605 million).
    • Full-year 2026 free cash flow guidance lowered to $50–$100 million (previously ~$250 million).
    • Year-end 2026 leverage is projected to be 5.6x (gross) and 4.7x (net), extending the timeline to achieve long-term targets below 5.0x/4.0x.
    • 2027 outlook will be provided in Q4; expected actions include pricing actions starting Q1 2027, further cost reductions, and continued leverage reduction.
    • Management anticipates input cost headwinds to be larger in 2027 than 2026, necessitating pricing and cost program offsets.

  • Business Segments and Product Lines:

    • Print & Other: Equipment revenue grew 3% YoY, marking the first YoY organic equipment growth in over three years; entry equipment grew 21% (offsetting a 15% decline in mid-range), and production equipment grew 14% (with installs up 13%).
    • Post-Sale (Print & Other): Revenue declined 5% YoY due to lower service, outsourcing, and financing income; segment margin improved to 8.1%.
    • IT Solutions: Revenue declined 17% YoY to $187M due to lower billings, mix shifts, and delayed customer decisions; backlog remains strong at +24%, with conversion expected to improve in Q4.
    • Strategic Shifts: Moving focus to entry-level devices and high-growth production segments; leveraging the full technology stack (9 Series) to reduce service disruptions and costs.
    • Xerox Financial Services (XFS): Continuing the strategic shift to a capital-light model, reducing net finance receivables from $3.1B (2022) to ~$1.2B; targeting ~$1B long-term receivable balance.

  • Market and Competitive Landscape:

    • Market trends indicate a structural shift from mid-range to entry devices; IDC forecasts 2026 print market growth at just over 1% (down from 7% in 2025).
    • Xerox believes it gained market share in Q3 2026 based on IDC data and equipment install growth.
    • Competitive landscape is highly concentrated with ~10 global competitors; price cuts are becoming less feasible due to shared input cost inflation, though competition remains intense.
    • Budget shifts toward AI and software are impacting print hardware spending, particularly in ESR (Installed Equipment Sales) metrics, though Xerox sees opportunity in the entry-barbell strategy.
    • Xerox differentiates via control of the full technology stack and AI-driven remote service resolution, targeting 70% of service calls resolved without a technician (currently >50%).

  • Risks and Challenges:

    • Input Costs: Rising memory, oil, and electrical component costs, plus inflation in parts, freight, and tariffs (projected $90M impact for 2026), are eroding margins faster than offset strategies can be implemented in Q4.
    • Product Mix: The shift from profitable mid-range devices to lower-hardware-margin entry devices is pressuring near-term profitability, despite long-term parity in lifecycle profitability.
    • IT Solutions Execution: Slower ramp-up of the rebuilt sales force and tighter supplier/distributor credit terms are delaying revenue conversion despite a strong backlog.
    • Macroeconomics: Geopolitical uncertainty, higher costs, and competing IT priorities are suppressing overall market demand.
    • Service Costs: Service labor density requirements mean revenue declines directly impact gross profit, driving the need for a structural cost-to-serve reduction.

  • Management Commentary and Tone:

    • Tone was candid and transparent, acknowledging the "two realities" of progress in rebuilt parts of the business versus deterioration in cost-exposed areas.
    • CEO Louis Pastor emphasized "disciplined execution" and stated, "This is not the outlook we wanted to give you today, and I'm not going to dress it up."
    • Management expressed confidence in the long-term platform, full technology stack ownership, and the structural advantage of their AI-driven service model.
    • Priorities remain fixed: stabilize revenue, increase profitability, and reduce leverage.

  • Analyst Questions and Answers:

    • IT Solutions Terms: Management clarified that tighter credit terms from vendors/distributors are a new challenge exacerbating sales ramp delays, but long-term business strength remains intact.
    • 2027 Cost/Price Offsets: Confirmed $100M in additional synergies from Lexmark integration in 2027 plus incremental cost programs (organization simplification, GCC expansion, real estate consolidation) to outpace input cost inflation.
    • Debt Strategy: The board confirmed openness to future exchange transactions to manage the debt ladder, citing the recent reduction of the 2028 maturity from $750M to $382M as a positive step.
    • AI Budget Shifts: Management acknowledged structural budget shifts away from print hardware toward AI; response is to leverage the 9 Series reliability to win share in a challenging environment.
    • Competitive Response: While the market is highly competitive, pricing power is limited; Xerox relies on its full-stack control and service differentiation rather than pure price cuts.
    • IT Solutions Growth Outlook: Management reiterated confidence in high-single to low-double-digit growth over the medium term, pending sales force ramp completion.
    • XFS Receivables: Future cash releases from receivable sales are expected to continue, though XFS will retain a ~$1B balance sheet footprint to support customer financing needs.

  • Other Key Points:

    • The Board has suspended common and preferred dividends effective immediately, preserving ~$28M annually for deleveraging and liquidity.
    • A debt exchange was executed: $174M of 2028 senior notes swapped for 2030 first lien notes and equity, reducing total debt principal by $53M.
    • Q3 saw 16% growth in entry device installs and 14% growth in production equipment installs; entry revenue exceeded mid-range revenue for the first time reported separately.
    • Management is implementing weekly deal-by-deal reviews in Q4 to maximize conversion and ensure install timing.
    • The "9 Series" device is already demonstrating 50% fewer service calls compared to the prior generation, validating the remote resolution strategy.