Xerox Q3 Earnings Call Highlights

Key Points

• Xerox cut its 2026 outlook, reducing adjusted operating income guidance to $450 million–$475 million from $555 million–$605 million and free-cash-flow guidance to $50 million–$100 million, while maintaining revenue guidance near $7.6 billion.
• Third-quarter revenue fell less than 5% to $1.87 billion, but core equipment trends improved: Print and Other equipment revenue rose 3%, with entry-level and production equipment growth offsetting a decline in mid-range devices. IT Solutions revenue dropped 17%.
• To preserve cash and reduce debt, Xerox suspended common and preferred dividends and announced a debt exchange that is expected to reduce principal by about $53 million; the company cited higher memory and oil costs, unfavorable product mix and weaker demand as key pressures.

Xerox NASDAQ: XRX lowered its full-year adjusted operating income and free-cash-flow outlook, suspended its common and preferred dividends and announced a debt exchange after higher input costs, unfavorable equipment mix and slower IT Solutions performance overshadowed improving trends in its core print business during the third quarter.

Chief Executive Officer Louis Pastor said the company’s rebuilt business areas showed progress, including better print revenue trends and year-over-year equipment revenue growth. However, rising memory and oil costs, a weaker print-market outlook, the shift toward lower-margin entry-level devices and IT Solutions underperformance created pressures that Xerox said it could not fully offset in the fourth quarter.

Third-Quarter Results Show Equipment Growth, Margin Improvement

Third-quarter revenue totaled $1.87 billion, down less than 5% from a year earlier on both a reported and constant-currency basis. The decline represented a sequential improvement from the prior quarter’s 7% pro forma revenue decline, according to Chief Financial Officer Chuck Butler.

Adjusted operating margin was 6.6%, improving 330 basis points year over year, while adjusted gross margin rose 60 basis points to 29.5%. The gross-margin result included $20 million of intellectual-property licensing income, which added about 70 basis points. Excluding that income, gross margin was slightly lower as higher memory and oil prices, product mix, lower managed print volumes and lower financing fees outweighed transformation benefits and favorable supplies mix and pricing.

Xerox reported a GAAP loss per share of $7.73, including a $959 million non-cash goodwill impairment charge in its Print and Other reporting unit. Butler said the impairment reflected a lower long-term forecast based on current input-cost and market conditions and did not affect cash, liquidity or debt covenants. Adjusted earnings per share were $0.02.

The company’s Print and Other equipment revenue increased 3% to $393 million, marking the first year-over-year organic equipment-sales growth since the second quarter of 2023. Entry-level equipment revenue rose 21% and production equipment revenue grew 14%, more than offsetting a 15% decline in mid-range equipment revenue.

Pastor said Xerox expects industry data to show it gained share during the quarter. Production installs increased 13%, while production equipment revenue rose 14%. The company also said its entry equipment revenue exceeded mid-range equipment revenue for the first time since Xerox began separately reporting the categories.

Input Costs and Mix Shift Pressure Outlook

Xerox cited four primary headwinds behind its reduced outlook: higher input costs, a shift in equipment mix toward entry devices, softer print-market conditions and weaker IT Solutions results.

The company now expects memory and oil costs to reduce 2026 adjusted operating income by about $60 million, with most of the impact occurring in the fourth quarter as higher-cost inventory moves through cost of goods sold. Pastor said memory represented about 2% of the cost of a machine entering 2026, has increased to 10%, and is expected to reach 15% in 2027. Xerox is also experiencing inflation in electrical components, parts, freight and tariff-affected costs.

While entry-level equipment installations rose 16% and revenue increased 21%, Pastor said entry devices are unprofitable at the hardware level. The margin gap between an entry-level device and a mid-range device can exceed 30 percentage points, although Xerox expects lifetime profitability to be similar because supplies and service margins are higher for entry devices.

IDC now forecasts just over 1% second-half unit growth for 2026, compared with typical second-half-over-first-half growth of about 11% in 2024 and 7% in 2025, according to Pastor. He cited higher costs, geopolitical uncertainty and competing IT priorities as factors affecting demand.

IT Solutions revenue fell 17% to $187 million, as product revenue declined 23% and services revenue decreased 7%. Gross billings fell 14% to $226 million, though they remained up 1% year to date. Xerox said the business faces slower-than-expected ramping by newly rebuilt sales teams, longer customer decision cycles and tighter supplier and distributor terms. The company said IT Solutions backlog increased 24% and its fourth-quarter pipeline is larger than it was in the prior-year period.

Guidance Cut; Dividends Suspended to Preserve Cash

Xerox maintained its full-year revenue outlook of approximately $7.6 billion but reduced expected adjusted operating income to $450 million to $475 million, from prior guidance of $555 million to $605 million.

The company also cut its free-cash-flow forecast to $50 million to $100 million from approximately $250 million. Butler attributed the reduction primarily to lower operating income, reduced expected proceeds from finance receivable sales and the timing of tariff refunds. Xerox now expects $300 million of cash from finance receivable sales in 2026, versus a prior expectation of $335 million, and expects about $30 million of tariff refunds this year rather than $80 million.

The board suspended common and preferred dividends effective immediately, a move expected to preserve approximately $28 million in annual cash. The company said reducing debt remains its top capital-allocation priority.

Xerox ended the quarter with approximately $726 million of total liquidity, including $412 million of unrestricted cash and about $314 million of available asset-based lending borrowing capacity, net of letters of credit. Total debt was $4.2 billion, including $2.9 billion of core debt attributable to the non-financing business.

The company announced an agreement to exchange approximately $174 million of August 2028 senior notes for first-lien senior secured notes due in October 2030 and common equity. Xerox said the transaction reduces total debt principal by approximately $53 million and leaves about $382 million of the August 2028 notes outstanding, compared with $750 million at the start of the year.

2027 Actions Focus on Pricing, Costs and Service Model

For 2027, Xerox plans to implement pricing actions across its portfolio beginning in the first quarter, tighten placement requirements for entry devices and expand cost-reduction measures. The company expects approximately $100 million of additional year-over-year savings in 2027 from its Lexmark Synergy program.

Additional initiatives include simplifying the management structure, expanding global capability centers, consolidating distribution centers and real estate, renegotiating vendor contracts and aligning the IT Solutions cost base with current operating levels. Xerox said it will provide the full size of its 2027 cost program and outlook on its fourth-quarter call.

Pastor also emphasized service as a long-term margin opportunity. Xerox has nearly 9 million devices in the field and generates more than $3 billion annually from service, maintenance and rentals. More than half of service calls reaching its client experience center are currently resolved remotely, and the company is targeting a 70% remote-resolution rate. Pastor said the Xerox 9-Series has generated about 50% fewer service calls than the prior generation.

“Our print business is gaining momentum,” Pastor said in closing remarks. “At the same time, the external environment is getting tougher, and we’ve reset our expectations to reflect that.”

About Xerox (NASDAQ:XRX)

Xerox Holdings Corporation NASDAQ: XRX is a technology and workplace solutions company that provides printing, document management and digital services to businesses and other organizations. The company serves customers across a range of industries, including government, education, healthcare, financial services and professional services.

Xerox offers office printers, multifunction devices, production printers and related supplies, software and support services. Its portfolio also includes document workflow and content-management solutions designed to help organizations digitize, automate and manage business processes.

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