Executive Summary / Key Takeaways

• Xerox is undergoing a multi-year "Reinvention" to counter secular print declines, streamline operations, and pivot towards higher-growth digital and IT services, aiming for sustainable revenue growth and double-digit adjusted operating margins by 2026.
• Recent performance shows an improved revenue trajectory and double-digit operating expense declines (excluding one-time items), driven by initial Reinvention benefits, increased equipment installations, and early success in IT Solutions integration and cross-selling.
• Strategic acquisitions, particularly the pending Lexmark deal and the completed ITsavvy acquisition, are central to the strategy, expected to accelerate revenue diversification, enhance competitive positioning in print and IT, and contribute significant cost synergies.
• Despite facing macroeconomic uncertainty, tariff risks (with an estimated $50 million potential impact in 2025), and execution challenges inherent in a large-scale transformation, management maintains its 2025 outlook for low single-digit constant currency revenue growth and at least 5.0% adjusted operating income margin (excluding Lexmark and tariff adverse effects).
• Key factors for investors to monitor include the successful execution of the Reinvention initiatives, the integration and synergy realization from acquisitions, the resolution of tariff uncertainties, and the company's ability to stabilize core print revenue while accelerating growth in IT and digital services.

Reinventing a Document Technology Legacy

Xerox Holdings Corporation, a name synonymous with document technology since its founding in 1903, is currently navigating a profound transformation. Facing the secular decline in traditional print volumes, the company has embarked on a multi-year "Reinvention" strategy. This ambitious undertaking aims to fundamentally streamline operations, reduce costs, and strategically reposition Xerox towards burgeoning market opportunities in digital and IT services, alongside targeted, higher-growth segments within the print industry itself. The core investment thesis centers on Xerox's ability to execute this pivot successfully, translating operational efficiencies and market expansion into sustainable revenue growth and significantly improved profitability, targeting double-digit adjusted operating income margins by the end of 2026.

The Reinvention is built upon several interconnected pillars: geographic simplification, offering simplification, operational streamlining, commercial optimization, and strategic acquisitions. Geographic simplification involves transitioning direct operations in certain countries to partner-led models, a process largely completed across 18 countries by early 2025, allowing for greater focus and efficiency. Offering simplification includes exiting less profitable areas, such as the manufacturing of certain production print equipment, to concentrate on segments with more favorable growth and return profiles. Operational simplification leverages a new Global Business Services (GBS) organization and technology upgrades to drive enterprise-wide efficiencies and cost reductions. Commercial optimization focuses on realigning the sales force, enhancing productivity through tools and refined client segmentation, and improving go-to-market execution.

Central to Xerox's strategic pivot are recent acquisitions designed to accelerate its move into adjacent, higher-growth markets. The acquisition of ITsavvy Acquisition Company, Inc., completed in November 2024, significantly expanded Xerox's IT service offerings. This move is intended to leverage ITsavvy's platform and management team to drive growth and improve the overall revenue mix. Furthermore, the pending acquisition of Lexmark International, Inc., expected to close in the third quarter of 2025, aims to strengthen the core Print business by diversifying Xerox's supply chain and market reach, particularly in growing segments like A4 Color. This transaction is also anticipated to be immediately accretive to adjusted earnings and free cash flow, while improving the adjusted operating income margin and reducing pro forma debt leverage.

Xerox's technological foundation, historically rooted in xerography and printing, is evolving to support its strategic shift. The company offers a range of print hardware, from entry-level A4 devices to high-end production presses. Complementing this is a suite of workflow software, including FreeFlow and XMPie, designed to automate and personalize document processes. Recent technological developments highlighted by management include AI-enabled multifunction printers featuring adaptive learning modules and pre-loaded AI applications for tasks like summarizing and redacting documents. While specific, quantifiable performance metrics comparing these features directly to competitors are not extensively detailed, management indicates these AI capabilities are intended to save clients time and serve as a platform for broader AI-assisted workflows like intelligent document processing. Xerox also offers CareAR, an augmented reality platform for IT support, which management suggests can lead to faster issue resolution. These technological advancements, particularly in software and AI-driven solutions, represent Xerox's effort to build a services-led, software-enabled ecosystem. This approach aims to differentiate its offerings beyond hardware, enhance client value, and potentially command higher-margin recurring revenue streams, contributing to its competitive moat against rivals focused primarily on hardware efficiency.

Performance and Competitive Dynamics

Xerox operates within a competitive landscape dominated by major players like HP Inc. (HPQ), Canon Inc. (CAJ), and Ricoh Company (RICOY), alongside indirect competitors offering cloud-based document and workflow solutions. Xerox holds an estimated 5-7% market share in its primary markets, trailing significantly behind HPQ (20-25%) and CAJ (15-20%). This competitive positioning is reflected in recent financial performance.

In the first quarter of 2025, Xerox reported total revenue of $1.46 billion, a decrease of 3.0% in actual currency or 1.1% in constant currency compared to Q1 2024. This included a 6.6 percentage point benefit from the ITsavvy acquisition, partially offset by unfavorable currency impacts. Equipment sales declined 2.1% (0.7% in constant currency), an improvement in the pace of decline compared to recent quarters, supported by a 24% year-over-year increase in total equipment installations, particularly in entry-level and mid-range products. Post-sale revenue, which constitutes the majority of total revenue, declined 3.2% (1.2% in constant currency), impacted by lower managed print services and financing revenue, though ITsavvy provided an 8.2 percentage point benefit. Excluding the effects of Reinvention actions and ITsavvy, core post-sale revenue declined low single digits.

Profitability metrics highlight the ongoing challenges and the early impacts of Reinvention. The adjusted operating income margin in Q1 2025 was 1.5%, a decrease of 0.7 percentage points from Q1 2024. This reflected lower revenue and gross profit, partially offset by Reinvention-related cost savings and lower bad debt expense. Gross margin decreased slightly by 0.3 percentage points, influenced by product mix, tariff-related costs, and the inclusion of ITsavvy, though partially offset by Reinvention savings and lower charges related to the exit of production print manufacturing compared to the prior year. Selling, administrative, and general expenses decreased by $19 million year-over-year in Q1 2025, primarily due to Reinvention savings and favorable currency, despite increased expenses related to the ITsavvy and pending Lexmark acquisitions.

Financially, Xerox's TTM performance shows significant challenges, with a GAAP net loss of $1.32 billion and negative operating and EBITDA margins. This contrasts sharply with competitors like HPQ and CAJ, which exhibit positive net income, higher operating margins (HPQ ~7.5%, CAJ ~9%), and stronger cash flow generation. While Xerox's core print technology is reliable, competitors often lead in manufacturing efficiency and speed, potentially offering lower per-unit costs or faster product cycles. Xerox aims to counter this through its software differentiation and service-led approach, leveraging its brand and customer relationships, particularly in the mid-market and enterprise segments where its integrated solutions and digital services can add value. The ITsavvy acquisition is intended to bolster its competitive stance in the IT services market, an area where competitors like RICOY also have a strong focus.

Liquidity and capital allocation remain critical. Total cash, cash equivalents, and restricted cash decreased by $241 million in Q1 2025, reflecting cash used in operating and financing activities. Total debt stood at $3.3 billion at March 31, 2025, with approximately $1.7 billion supporting finance assets. The company has taken steps to manage its debt maturity profile, including recent note offerings in April 2025 to refinance existing debt and fund a portion of the Lexmark acquisition. Free cash flow in Q1 2025 was a use of $109 million, consistent with seasonal patterns, but free cash flow excluding finance receivable impacts showed improvement year-over-year due to working capital discipline. Management expects positive free cash flow in the remaining quarters of 2025, supported by seasonal improvements, working capital management, and finance receivable proceeds.

Outlook and Risks

Xerox's outlook for 2025 anticipates a return to revenue growth and improved profitability, albeit with specific exclusions and caveats. For the full year 2025, the company expects revenue to grow at low single-digits in constant currency, inclusive of a full year of ITsavvy revenue. The adjusted operating income margin is projected to be at least 5.0%. Operating cash flows are guided to be between $420 million and $470 million, with capital expenditures around $70 million. This guidance explicitly excludes any impact from the pending Lexmark acquisition and potential adverse effects from tariff and trade policy, which management notes remain fluid and unpredictable.

The rationale behind this outlook is rooted in the expected realization of Reinvention benefits, including ongoing cost savings (with a pipeline exceeding $700 million), improved sales productivity, new product launches, and continued growth in digital and IT services, augmented by the full-year contribution from ITsavvy. Management expects the negative revenue impact from Reinvention actions like geographic simplification to be less pronounced in 2025 compared to 2024. For the second quarter of 2025, revenue is expected to decline in constant currency at a pace consistent with Q1, with adjusted operating margin projected to be lower year-over-year due to the phasing of tariff-related price increases relative to costs and the timing of Reinvention savings realization.

Despite the positive outlook, significant risks and challenges persist. Macroeconomic uncertainty, including potential impacts from interest rates and inflation, could affect demand and operational costs. The fluid nature of tariff policies poses a direct financial risk, with an estimated $50 million reduction in operating income in 2025 based on tariffs in place as of early May, although Xerox is implementing mitigation strategies like shifting production and price adjustments. Execution risk for the complex Reinvention program remains, as evidenced by past challenges with sales force productivity and product launch delays. Integrating acquired businesses like ITsavvy and Lexmark presents operational and financial risks, although management reports ITsavvy integration is ahead of plan and expects significant synergies. Legal contingencies, such as the Brazil tax matters with $335 million in unreserved exposure, and potential disputes related to Lexmark acquisition financing commitments, also pose risks. Furthermore, the fundamental challenge of managing the decline in the core print market while successfully scaling the digital and IT services businesses is paramount to achieving long-term strategic goals.

Conclusion

Xerox is in the midst of a critical transformation, seeking to leverage its legacy, strategic acquisitions, and operational efficiencies to pivot towards a more profitable future. The Reinvention strategy, while complex and subject to execution risks, is beginning to show tangible benefits in improved operational metrics and a moderating revenue trajectory in its core business, complemented by growth in its nascent IT Solutions segment. The pending Lexmark acquisition holds the potential to significantly accelerate this transformation, bolstering the print business and contributing to profitability and deleveraging targets.

However, the path forward is not without significant hurdles, including navigating macroeconomic volatility, unpredictable tariff impacts, and the inherent challenges of integrating large businesses and fundamentally changing an organizational structure. Xerox's competitive position, while strong in certain software niches and leveraging a trusted brand, faces pressure from larger, more financially robust rivals and the broader shift towards cloud-based solutions. The success of Xerox's investment thesis hinges on management's ability to consistently execute the Reinvention initiatives, realize the targeted cost savings and acquisition synergies, effectively mitigate external headwinds like tariffs, and demonstrate sustained growth in its strategic focus areas. Investors should closely monitor the progress of acquisition integrations, the impact of Reinvention actions on both the top and bottom lines, and the company's ability to deliver on its financial guidance amidst a dynamic operating environment.