Xerox Holdings Corporation (XRX) is executing a comprehensive reinvention strategy to transform the company and position it for long-term growth. The company reported annual revenue of $6,886 million, annual net income of $1,000 million, annual operating cash flow of $686 million, and annual free cash flow of $649 million in its latest fiscal year.

Recent Developments

In the first quarter of 2024, Xerox implemented a major organizational redesign, marking a significant milestone in its multi-year journey to build a stronger, more stable business that is operationally efficient and responsive to the evolving workplace needs of its clients. The company took initial actions to unlock savings associated with simplified product offerings and global routes to market, including the decision to exit certain production print manufacturing operations and sell direct operations in four Latin American countries.

Financials

Equipment sales of $290 million in the first quarter of 2024 declined 25.8% year-over-year, primarily due to the prior year effect of backlog reduction and geographic simplification. Total equipment revenue, however, outpaced equipment installation activity, driven by favorable product mix. Post-sale revenue of $1,212 million declined 8.5% year-over-year, primarily due to reductions in non-strategic, lower margin paper and IT endpoint device placements, as well as the effects of geographic simplification, the termination of the Fuji Royalty, and the absence of PARC revenue. Excluding these effects, post-sale revenue decreased low-single digits.

The company reported a pre-tax loss of $150 million for the first quarter of 2024, compared to pre-tax income of $85 million in the prior year period. The pre-tax loss primarily reflected lower revenues and associated gross profit, a loss related to the divestitures of certain direct business operations in Latin America, higher Restructuring and related costs, net, and higher Other expenses, net, partially offset by lower Research, development and engineering expenses and lower Selling, administrative and general expenses.

Adjusted operating income decreased $85 million year-over-year in the first quarter of 2024 due to lower equipment and post-sale revenue, including the termination of Fuji royalty income and PARC revenue, lower gross profit, and higher bad debt expense, partially offset by cost savings associated with structural simplification efforts.

In March 2024, Xerox completed the sales of its direct business operations in Argentina and Chile to Grupo Datco. These divestitures align with the company's ongoing Reinvention strategy.

Segment Performance

Xerox's two operating and reportable segments are Print and Other, and Xerox Financial Services (XFS). Print and Other segment revenue decreased 12.6% year-over-year in the first quarter of 2024, primarily due to lower equipment sales and post-sale revenue. XFS segment revenue decreased 10.8% year-over-year, primarily due to lower financing revenue reflecting a reduction in the average finance receivables balance.

Outlook

The company continues to expect a total revenue decline of 3% to 5% in constant currency in 2024, which includes the effects of prior year backlog reductions and the exit of non-strategic businesses. Core business revenue is expected to be roughly flat year-over-year, reflecting stable Print demand, growth in Digital and IT Services, and neutral macroeconomic conditions. Xerox expects pre-tax income and adjusted operating income margins to improve in 2024, primarily driven by structural simplification actions enabled by the organizational redesign, including the effects of the workforce reduction decisions announced in January 2024.

The company expects operating cash flows to be at least $650 million in 2024, benefiting from a reduction in its finance receivables balance, partially offset by approximately $50 million of higher contributions to its pension plans. Capital expenditures are expected to be approximately $50 million.

Business Overview

Xerox's strategic priorities continue to guide its decision framework as it executes the Reinvention. The company is focused on strengthening its core business, expanding its digital and IT services offerings, improving cost efficiencies, and maintaining a balanced capital allocation approach.

In the core business, the change to the business unit led operating model and related changes to the sales organization were designed to catalyze market share growth by bringing sales and operations in closer alignment with the economic buyer of Xerox offerings while improving sales efficiencies. The company is seeing early evidence of success on both fronts, with equipment orders and pipeline both higher year-over-year in the first quarter of 2024.

Xerox is also expanding its digital and IT services penetration across its client base, driven by stronger alignment between product development, solutioning, and sales teams. The company signed deals in the second quarter of 2024 to provide end-to-end customer acquisition solutions and digital workflow solutions leveraging AI and machine learning to existing print clients in the European telecom and insurance industries, respectively.

On the cost improvement front, Xerox's global business service organization is a key enabler of future savings, driving continuous operating efficiencies through shared capabilities and platforms. The company has identified over $700 million of gross cost savings through Reinvention from 2023 to 2026, with close to $200 million expected to be realized in 2024.

Liquidity

Xerox's balanced capital allocation approach includes delivering year-over-year growth in free cash flow despite lower operating income and lower sales of finance receivables in the first quarter of 2024. The company is in advanced talks to expand its forward flow agreement outside the U.S., which will enhance its free cash flow profile by reducing capital required to fund future lease originations in other regions. Xerox expects free cash flow in future periods to be sufficient to both fund value-accretive growth in digital and IT services and reduce debt, with a target of reducing leverage below three times EBITDA by the end of 2026.

Conclusion

Overall, Xerox's Reinvention strategy is transforming the company to be better positioned for long-term growth. The company's focus on strengthening its core business, expanding digital and IT services, improving cost efficiencies, and maintaining a balanced capital allocation approach is expected to drive sustainable value creation for shareholders.