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Earnings Call Transcripts·

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

XRX

  • Explicit Guidance:

    • FY2026 Adjusted Operating Income: Lowered to $450–$475 million (previously $555–$605 million).
    • FY2026 Free Cash Flow: Lowered to $50–$100 million (previously <del>$250 million), reflecting lower operating income, reduced finance receivable sales (</del>$300M vs. prior $335M), and delayed tariff refunds (~$30M in 2026, $50M deferred to 2027).
    • FY2026 Revenue: Maintained at approximately $7.6 billion.
    • FY2026 Leverage: Implied year-end gross leverage of ~5.6x and net leverage of ~4.7x (down from 5.9x/5.1x previously; prior expectation was <5.0x/4.0x).
    • FY2027 Input Cost Headwinds: Expected to be larger than the ~$60 million impact in 2026, driven by memory costs (projected to reach 15% of machine cost in 2027) and oil prices.
    • FY2027 Tariff Impact: Ongoing impact estimated at approximately $90 million for 2026; future levels to be assessed.
    • Dividends: Common and preferred dividends suspended effective immediately, preserving ~$28 million annually for liquidity and deleveraging.
    • Debt Maturities: Less than $160 million scheduled to mature through 2027; next significant maturity in August 2028 (exchanged $174M of 2028 notes to 2030 notes, reducing principal by $53 million).

  • Business-Segment Outlook:

    • Print & Other: First year-over-year organic equipment growth in over three years; entry equipment revenue exceeded mid-range for the first time. Production equipment revenue grew 14% with 13% installation growth. Three new platforms announced in late 2026 will enter the market in 2027.
    • Mid-Range Devices: Expected to continue declining faster than entry/mid-range due to industry-wide shift toward entry; margin gap between entry and mid-range exceeds 30 points on hardware, impacting near-term profitability despite long-term parity.
    • IT Solutions: Q4 expected to show better year-over-year comparison vs. Q3 due to 24% backlog growth and a stronger pipeline, though full-year 2026 revenue guidance is reduced due to slower sales force ramp and conversion friction. Long-term medium/medium-term growth outlook remains consistent with medium/long-term market expectations (high single to low double-digit).
    • Service: Target to increase remote resolution rate from ~50% to 70%, aiming to drive service disruption costs toward zero. 9 Series devices generating ~50% fewer service calls than prior generation.
    • Backlog/Pipeline: IT Solutions backlog up 24%; print pipeline described as "strong" with late-stage opportunities carrying committed install dates.

  • Market and Competitive Outlook:

    • Print Market Demand: IDC forecasts full-year 2026 unit growth of just over 1%, down from 11% (2024) and 7% (2025), driven by higher costs, geopolitical uncertainty, and competing IT priorities.
    • Competitive Dynamics: Highly competitive environment with ~10 global scaled competitors. Competitors are facing similar cost pressures; past strategies of price-cutting are becoming strained as companies attempt to pass costs to customers.
    • Share Gains: Management confident in gaining share in the first half of 2026 and Q3, positioning to grow share despite a softer market.
    • Structural Shifts: Observed shift in IT budgets toward AI/compute and away from hardware/print infrastructure; strategy involves a "barbell approach" focusing on entry and production equipment to capture secular growth.

  • Macro / Industry Outlook:

    • Input Costs: Memory costs projected to rise from 2% to 15% of machine cost by 2027; oil prices and inflation in electrical components remain headwinds.
    • Supply Chain: Knock-on inflation in electrical components; parts, freight, and tariff-affected costs rising faster than planned.
    • FX/Tariffs: Tariff rates have declined, but costs on tariff-affected inputs remain high; tariff refunds timing impacts cash flow timing rather than total cash position.
    • Credit Environment: Tighter supplier and distributor credit terms impacting IT Solutions; customers extending asset lifecycles ("sweating assets") and delaying project funding.

  • Strategic Initiatives:

    • Pricing Actions: Implementing pricing adjustments across the portfolio beginning Q1 2027, segmented by product/market, with stricter placement discipline for entry devices.
    • Cost Reduction: Launching incremental cost programs in 2027 to simplify organization, expand Global Capability Centers (currently 15% of workforce, up from 11%), consolidate distribution centers/real estate, and renegotiate vendor contracts.
    • Technology & Service: Leveraging owned technology stack (9 Series, 500 fewer parts) and AI-driven remote resolution to reduce service costs.
    • Balance Sheet: Debt reduction remains top priority; executing exchanges (e.g., 2028 notes to 2030 notes) and reducing debt by $53 million; reducing finance receivables on balance sheet (down from $3.1B in 2022 to $1.2B today).
    • IT Solutions: Aligning cost base with current run rate via autonomous delivery platforms (ITAS, INOC) and expanding agentic solutions.

  • Risks and Headwinds to Outlook:

    • Input Cost Volatility: Continued rises in memory and oil prices could further pressure margins beyond current guidance.
    • Mix Shift: Accelerated shift from higher-margin mid-range to lower-margin entry devices weighing on profitability in the near term.
    • Market Softness: Weaker print market demand (1% growth forecast) and slower customer budget allocation to hardware.
    • IT Solutions Execution: Slower than expected ramp of new sales force; conversion friction and tighter credit terms delaying revenue recognition.
    • Pricing Power: Inability to fully pass through cost increases to customers if market demand is too weak or competitors resist.
    • Service Cost Base: Service labor density remains inflexible relative to revenue declines, pressuring post-sale margins.

  • Management Tone on the Future:

    • Confidence Level: Cautiously optimistic on long-term strategic foundation (technology stack, service model, share gains) but realistic and transparent about near-term headwinds.
    • Hedges: Explicitly states "this is not the outlook we wanted," acknowledging external factors (memory, oil) and internal execution lags (IT solutions).
    • Sentiment: "Resolute" in priorities (stabilize revenue, increase profitability, reduce leverage); focus on "disciplined execution" and "owning the result."
    • Forward Outlook: Management anticipates 2027 will be more challenging regarding input costs than 2026 but believes pricing, cost programs, and service innovations will offset these headwinds.

  • Miscellaneous:

    • Capital Allocation: Dividend suspension effective immediately to preserve $28M/year. $174M note exchange executed to reduce debt and extend maturities.
    • Goodwill Impairment: Non-cash charge of $959 million recorded in Print unit due to lower long-term forecasts; no impact on cash, liquidity, or debt covenants.
    • Adjusted Tax Rate: Expected to be ~70% for 2026 due to valuation allowances against deferred tax assets, causing adjusted EPS to remain at $0.02 despite operating income improvements.
    • Xerox Financial Services: Strategy confirmed to retain origination/customer relationships while partners fund the book; net finance receivables targeted to stabilize around $1 billion.