Business Overview and History: Xerox Holdings Corporation (NASDAQ:XRX) is a technology company with a storied history that has navigated numerous transformations over its century-long existence. Founded in 1906 as the Haloid Photographic Company, the business evolved from its roots in photography equipment to become a global leader in document management solutions and services. Today, Xerox is in the midst of a strategic reinvention, seeking to diversify its revenue streams and improve operational efficiency amidst industry headwinds.
Xerox's origins date back to 1906 when the Haloid Company was founded in Rochester, New York. The company initially focused on manufacturing photographic paper and equipment. In 1938, the company introduced the first automated document copier, known as the Model A. This innovation laid the foundation for Xerox's rise as a dominant force in the office equipment industry throughout the 20th century.
In 1959, the company changed its name to Xerox Corporation to better reflect its focus on xerography, the electrostatic dry printing process that had become its core business. Throughout the 1960s and 1970s, Xerox experienced tremendous growth, becoming a household name and dominating the copier industry. The company introduced many groundbreaking innovations during this time, including the first personal computer, the Alto, and the first graphical user interface.
Xerox's research and development arm, Palo Alto Research Center (PARC), made pioneering advancements in graphical user interfaces, ethernet networking, and other technologies that would shape the modern computing landscape. This period was marked by Xerox's focus on research and development, with PARC developing many pioneering technologies.
However, in the 1980s and 1990s, Xerox faced significant challenges as it struggled to keep up with competition from Japanese manufacturers who were able to produce copiers at lower costs. The company was also slow to adapt to the rise of digital technology, which eroded its dominance in the copier market. As a result, Xerox went through several rounds of restructuring and cost-cutting measures to try to regain its footing.
In the early 2000s, Xerox began to refocus its business on document management services and IT services, in addition to its traditional hardware products. This shift in strategy helped the company recover from its earlier struggles, though it continued to face headwinds from the decline of traditional document-based workflows.
In 2016, Xerox split into two independent publicly traded companies: Xerox Corporation, focused on document management solutions, and Conduent Incorporated, a business process services provider. This separation was intended to unlock shareholder value and enable each entity to pursue its own strategic priorities more effectively.
Today, Xerox Holdings Corporation, the parent company of Xerox Corporation, is in the midst of a multi-year reinvention strategy aimed at streamlining operations, optimizing its revenue mix, and positioning the company for long-term growth. Under the leadership of CEO Steve Bandrowczak, who joined the company in 2021, Xerox is implementing organizational changes, divesting non-core assets, and investing in complementary IT services and digital solutions to diversify its revenue streams.
Financial Overview: Xerox's financial performance has been mixed in recent years, reflecting the challenges of navigating industry disruption. In the fiscal year 2023, the company reported total revenue of $6.89 billion, a slight decline from the $7.11 billion reported in 2022. Net income for 2023 was a modest $1 million, compared to a net loss of $322 million in the prior year. Operating cash flow for 2023 was $686 million, with free cash flow of $649 million, representing a significant improvement from the $102 million generated in 2022.
In the third quarter of 2024, Xerox reported revenue of $1.53 billion, a 7.5% decline year-over-year (7.3% in constant currency). Net income for the quarter was negative $1.2 billion, down $1.3 billion year-over-year, primarily due to a $1 billion non-cash goodwill impairment charge and a $161 million charge related to a valuation allowance. Adjusted net income was $34 million, down $43 million year-over-year. Operating cash flow for Q3 2024 was $115 million, down $8 million year-over-year, while free cash flow was $107 million, down $5 million year-over-year.
Despite the topline pressures, Xerox has made progress in improving its profitability and cash flow generation. In 2023, the company's adjusted EBITDA margin was 8.5%, up from 7.2% in 2022, indicating the benefits of its ongoing cost optimization efforts.
Liquidity: Xerox's balance sheet remains reasonably healthy, with $590 million in cash and cash equivalents as of Q3 2024. The company's debt-to-equity ratio stands at 2.50, reflecting its leveraged position. Xerox has access to a $425 million asset-based lending (ABL) facility, with no borrowings or letters of credit outstanding as of Q3 2024. The company's current ratio is 1.26, and its quick ratio is 0.95, indicating adequate short-term liquidity.
Recent Developments and Outlook: In the third quarter of 2024, Xerox reported a revenue decline of 7.5% year-over-year. The company attributed the revenue shortfall to a combination of factors, including delays in the global launch of new products, lower-than-expected improvements in sales force productivity, and the impact of strategic actions taken to simplify its business operations.
Despite the revenue challenges, Xerox's profitability metrics improved during the quarter. Adjusted operating margin reached 5.2%, up 110 basis points year-over-year, reflecting the benefits of the company's cost reduction initiatives. Adjusted earnings per share for the quarter were $0.25, down from $0.46 in the prior-year period.
Looking ahead, Xerox has lowered its full-year 2024 revenue guidance, now expecting a decline of around 10% in constant currency, compared to its previous outlook of a 5-6% decline. The company also revised its adjusted operating income margin guidance to around 5%, down from the prior expectation of at least 6.5%. Free cash flow guidance for 2024 has been reduced from at least $550 million to a range of $450 million to $500 million, reflecting the reduced adjusted operating income outlook.
The reduction in guidance is primarily attributable to the impact of delayed product launches, lower-than-expected sales force productivity, and intentional reductions in non-strategic revenue streams as part of the company's reinvention strategy. Xerox no longer expects to grow adjusted operating income $300 million above 2023 levels by 2026 due to the lower than expected revenue in 2024.
However, Xerox remains confident in its ability to return to revenue growth and double-digit adjusted operating income margins over the course of its multi-year reinvention plan. Looking ahead to 2025, the company expects a return to revenue growth, supported by the ITsavvy acquisition, new product launches, improved sales productivity, and growth in digital and IT services. They also anticipate growth in adjusted operating income and margin in 2025.
A key component of Xerox's transformation is the pending acquisition of ITsavvy, an Illinois-based provider of IT products and services. The $400 million transaction, expected to close in the fourth quarter of 2024, is expected to be immediately accretive to Xerox's earnings and free cash flow, while also diversifying the company's revenue mix and expanding its presence in the growing IT services market.
Segment Performance: Xerox operates through two main segments: Print and Other, and Xerox Financial Services (XFS).
The Print and Other segment includes the design, development, and sale of document management systems, solutions, and services, as well as associated technology offerings including Digital and IT services and software. In Q2 2024, this segment saw a 9.9% decline in revenue compared to the prior year period. Equipment sales revenue declined 15.2%, primarily due to backlog fluctuations and non-strategic reductions in revenue, including offering and geographic simplification. Post-sale revenue decreased 8.2%, mainly due to reductions in non-strategic, lower margin IT endpoint device placements and paper sales.
The XFS segment provides global leasing solutions for direct and indirect channel customer purchases of Xerox solutions. This segment reported an 11.9% decline in revenue for Q2 2024. Financing revenue decreased 22.4%, reflecting a reduction in the average finance receivables balance and lower originations.
Risks and Challenges: Xerox faces several risks and challenges as it navigates its reinvention journey. The company operates in a highly competitive and rapidly evolving industry, where it must contend with nimble competitors, technological disruption, and changing customer preferences. The ongoing shift from traditional print-centric solutions to digital document management and IT services poses a significant threat to Xerox's legacy business model.
Furthermore, Xerox's transformation efforts have been complicated by the ongoing global supply chain challenges and inflationary pressures, which have impacted its ability to execute new product launches and maintain optimal operational efficiency. The company's reliance on hardware sales, which have been declining, also exposes it to cyclical trends in the broader technology market.
Geopolitical tensions and macroeconomic uncertainty could also have a detrimental effect on Xerox's international operations and global supply chain. The company's significant presence in the United States, Europe, and other regions makes it vulnerable to fluctuations in currency exchange rates and potential trade policy changes.
Despite these headwinds, Xerox's management team remains committed to its reinvention strategy, focusing on streamlining operations, diversifying revenue streams, and positioning the company for long-term growth and profitability. The successful integration of ITsavvy and the continued execution of cost-saving initiatives will be crucial in determining Xerox's ability to navigate the industry's challenges and emerge as a stronger, more adaptable organization.
Conclusion: Xerox Holdings Corporation is a company with a rich history of innovation, having played a pivotal role in the evolution of document management and office technology. However, the company has faced significant challenges in recent decades as it has grappled with the digital transformation of its core business.
Under new leadership, Xerox is currently undertaking a strategic reinvention to streamline operations, optimize its revenue mix, and position itself for long-term growth. While the company's recent financial performance has been mixed, with revenue declines and margin pressures, Xerox's cost-saving initiatives and planned acquisition of ITsavvy point to a path forward that could strengthen its competitive position and diversify its offerings.
As Xerox navigates the complexities of industry disruption and global macroeconomic headwinds, its ability to successfully execute its reinvention strategy will be crucial in determining the company's long-term trajectory. Investors will closely watch Xerox's progress in transitioning to a more balanced and resilient business model, one that can capitalize on the growing demand for digital solutions and IT services while maintaining a strong presence in its core document management operations.