Xerox's Q3 2025 Earnings Call: Contradictions in Tariff Impact, Pricing, Macroeconomics, ITsavvy Integration, and Sales Performance

Date of Call: October 30, 2025

Financials Results

• Revenue: $1.96B, up ~28% year-over-year (27% constant currency); pro forma revenue declined ~8% (reflecting inorganic benefit from Lexmark and ITsavvy)
• EPS: $0.20 adjusted EPS, down $0.05 year-over-year; GAAP loss per share $6.01, improved by $3.70 year-over-year
• Gross Margin: 28.9%, down 350 basis points year-over-year; pro forma adjusted gross margin down ~380 basis points (tariffs, higher product costs, mix)
• Operating Margin: 3.3% adjusted operating margin, down 190 basis points year-over-year (pro forma down ~370 basis points)

Guidance:

• 2025 revenue expected to grow about 13% year-over-year in constant currency.
• 2025 adjusted operating margin expected to be roughly 3.5%.
• 2025 free cash flow guidance reduced to $150M (previously $250M).
• Expect in-year 2026 gross integration + Reinvention savings of $250M–$300M; ~$25M of the $50M incremental synergies to be realized in 2026.
• Anticipate ~$290M interest expense and ~ $400M cash inflow from reduction of finance receivables.
• Formal 2026 guidance to be issued on the Q4 2025 call.

Business Commentary:

• Revenue and Acquisitions:
• Xerox Holdings Corporation reported revenue of $1.96 billion for Q3 2025, up 28% in actual currency and 27% in constant currency, reflecting the inorganic benefits of the Lexmark and ITsavvy acquisitions.
• On a pro forma basis, revenue declined approximately 8%, with pro forma adjusted operating income margin of 3.3%, lower year-over-year by 190 basis points.

• The decline was attributed to macroeconomic challenges weighing on top line performance, particularly in the print segment.

• IT Solutions Growth:

• The IT Solutions segment grew pro forma revenue by double digits, supported by a balanced portfolio of offerings addressing clients' pressing IT infrastructure needs.
• Strong growth was observed in public sector deployments, cloud and networking activities, and increased cross-selling momentum.

• This growth was driven by client demand for IT infrastructure solutions and the integration of ITsavvy's capabilities.

• Lexmark Synergy Expectations:

• Xerox identified an additional $50 million in synergy opportunities within the first 100 days post Lexmark acquisition, with expectations to realize some benefits in 2026.
• The increased synergy forecast now stands at at least $300 million, aiming to drive revenue stabilization and return to double-digit adjusted operating income margins.

• The acceleration in synergy identification was due to the integration planning and workshops held to uncover new opportunities.

• Free Cash Flow and Debt Reduction:

• Free cash flow improved to $131 million, an increase of $24 million over the prior year, with a debt reduction of $226 million.
• Total debt increased due to the Lexmark acquisition but remains manageable at a 4.3x gross debt leverage ratio.
• The focus remains on reducing debt further, targeting a 3x gross debt leverage ratio, with most, if not all, free cash flow directed toward debt repayment.

Sentiment Analysis:

Overall Tone: Neutral

• Management expressed disappointment in Q3 results ('I am, however, disappointed with Q3 results') while highlighting integration progress and synergy upside (identified an additional $50M of synergies, increased Lexmark synergy forecast to at least $300M), returned to positive free cash flow and reduced net debt by $226M — balancing near-term weakness with confidence in medium-term recovery.

Q&A:

• Question from Ananda Baruah (Loop Capital Markets LLC, Research Division): On top-line impact to equipment sales, can you parse the incremental decline (8% vs. 3% last quarter) between government impact and commercial/tariff effects?
  Response: Equipment weakness was driven largely by government funding uncertainty and tariff-related hesitation; commercial customers also delayed purchases, while IT Solutions remained resilient and grew, and management expects deferred equipment orders to return once funding/tariff clarity improves.

• Question from Ananda Baruah (Loop Capital Markets LLC, Research Division): On the increased integration savings, how much will ultimately flow to the bottom line and timing?
  Response: About half of the $50M incremental Lexmark synergies (~$25M) is expected to flow through in 2026, with the remainder in 2027–2028; benefits will accrue to both gross profit and operating margin (mix of gross and opex improvements).

• Question from Maya Neuman (Morgan Stanley, Research Division): You previously sized tariff headwind at $30–35M for 2025; how do you now size that headwind and are more price increases to come?
  Response: Tariff headwind is at the high end of prior guidance, ~ $35M in 2025 (included in guidance); measured price increases are ongoing case-by-case and management expects to offset incremental product costs over time.

• Question from Asiya Merchant (Citigroup Inc., Research Division): Can you unpack government softness across federal/state/local in Print vs. IT, and walk through drivers of expected free cash flow improvement into next year?
  Response: Federal funding delays are suppressing equipment purchases across levels (printers/equipment lags) while prioritized IT spending (AI, cloud, networking, security) supports ITsavvy growth; for cash flow, expect ~ $400M proceeds from finance receivable reductions, ~ $50M one-time integration costs, more normalized working capital and higher operating income to improve FCF conversion in 2026.

• Question from Asiya Merchant (Citigroup Inc., Research Division): Is the equipment/ESR weakness industry-wide or is Xerox losing share competitively?
  Response: Management said the pullback is industry-wide and Xerox is holding share — no signs of competitor-driven share loss.

Contradiction Point 1

Tariff Impact and Cost Management

It involves differing assessments of the tariff impact and cost management strategies, which are crucial for financial forecasting and competitive positioning.

- Maya Neuman (Morgan Stanley)

2025Q3: Tariff impact is now expected to be $35 million for 2025. Price increases are measured and case-by-case due to soft demand. We aim to offset tariffs through future price increases. - Mirlanda Gecaj(Executive VP & CFO)

Why maintain full-year guidance despite tariff impacts? - Eric Woodring (Morgan Stanley)

2025Q1: Guidance remains unchanged as tariffs are fluid. We're accountable to deliver planned results and keep investors informed of potential tariff impacts. - Mirlanda Gecaj (Incoming CFO)

Contradiction Point 2

Tariff Impact and Price Increases

It involves the company's strategy to address tariff impacts and soft demand, which can affect financial performance and customer responses.

What is the current magnitude of the tariff headwind? What has changed in the last 90 days? Are there more price increases to come? - Maya Neuman (Morgan Stanley)

2025Q3: Tariff impact is now expected to be $35 million for 2025. Price increases are measured and case-by-case due to soft demand. We aim to offset tariffs through future price increases. - Mirlanda Gecaj(CFO)

How will the company's free cash flow trajectory develop in 2025 and beyond, given the forward flow program? - Erik Woodring (Morgan Stanley)

2024Q4: We expect tariff headwinds of $50 million and $60 million in 2024 and 2025, respectively. We have taken pricing actions to partially mitigate these tariff impacts. - Unknown Executive (Rolando Giza, incoming CFO)

Contradiction Point 3

Impact of Macroeconomic Factors and Government Spending

It highlights varying levels of impact from macroeconomic factors and government spending on the company's performance, potentially influencing investor perceptions and strategic planning.

Can you clarify the impact of top-line equipment sales (government vs. commercial) and tariffs? How should we interpret the 8% vs. 3% decline in commercial vs. government sales last quarter? - Ananda Baruah (Loop Capital Markets LLC)

2025Q3: IT Solutions, ITsavvy, are growing, less impacted by macroeconomics. Lexmark integration saw acceleration in synergies, but clients paused due to federal and tariff uncertainty. We expect business to return as government opens up, enhancing cross-sell opportunities. - Steven Bandrowczak(CEO & Director)

Have you seen any impact from macroeconomic factors yet? What are your large customers and VARs communicating? - Ananda Baruah (Loop Capital)

2025Q1: In Q1, we didn't see real impact, with an acute focus on government funding in SMBs which has eased off. Clients are monitoring macroeconomic conditions but haven't cancelled orders, with softening due to delays rather than cancellations. - John Bruno (President and COO)

Contradiction Point 4

ITsavvy's Impact on Revenue and Margins

It involves the company's projections and actual performance in relation to ITsavvy's integration and its impact on revenue and margins, which are crucial for investor expectations.

Can you break down the impact of top-line equipment sales by government vs. commercial segments and tariffs? How should we interpret the 8% vs. 3% decline in these segments last quarter? - Ananda Baruah (Loop Capital Markets LLC)

2025Q3: IT Solutions, ITsavvy, are growing, less impacted by macroeconomics. Lexmark integration saw acceleration in synergies, but clients paused due to federal and tariff uncertainty. We expect business to return as government opens up, enhancing cross-sell opportunities. - Steven Bandrowczak(CEO & Director)

What actions are being taken to stabilize gross margins amid declining trends and reinvention pressures? - Erik Woodring (Morgan Stanley)

2024Q4: The gross margin decline in 2024 was due to A4 equipment mix, lower print volumes, and ITsavvy inclusion. For 2025, continued gross margin decline is expected due to ITsavvy's lower margins and product cost increases. Benefits from technology-enabled pricing and productivity initiatives will offset these declines. - Unknown Executive (Rolando Giza, incoming CFO)

Contradiction Point 5

Government and Commercial Sales Performance

It highlights differing explanations of the impact of government and commercial sales on the company's performance, which is crucial for understanding market dynamics and revenue streams.

How can we distinguish the impact of government vs. commercial equipment sales and tariffs on top-line growth? How should we interpret the 8% commercial vs. 3% government sales decline in the last quarter? - Ananda Baruah (Loop Capital Markets LLC)

2025Q3: IT Solutions, ITsavvy, are growing, less impacted by macroeconomics. Lexmark integration saw acceleration in synergies, but clients paused due to federal and tariff uncertainty. We expect business to return as government opens up, enhancing cross-sell opportunities. - Steven Bandrowczak(CEO & Director)

Can you explain the June slowdown and what factors caused it, particularly related to DOGE and tariffs? - Ananda Prosad Baruah (Loop Capital Markets LLC, Research Division)

2025Q2: Slowdown occurred in April and May due to DOGE-related issues causing pauses, especially in government and education environments, and tariffs leading to delays in decision-making as companies sought clarity on costs. The recovery in June was driven by the resumption of these projects. - John G. Bruno(President, COO & Director)