Xerox Holdings Corporation (XRX) Earnings Call Transcript & Summary

All right. Thank you. Sorry for being a little bit tardy. Thank you, everyone, on the webcast. Thank you, everyone, for joining. I'm David Vogt. I'm the UBS Hardware and Networking analyst here. Thank you again for joining the UBS Tech Conference. We're excited to have with us this morning or afternoon, if you're listening on the East Coast, CEO, Steve Bandrowczak; and CFO for another 4, 5 months Xavier Heiss.

So we're going to start off. I've got a bunch of questions. If anyone has a question, please feel free to use the app and submit it. It will show up on an iPad here that I have. But so again, Steve, David, thank you for joining us.

Thank you, David.

Maybe we could start with Q3, what's going on in the market? Obviously, there's a lot of cross currents, company-specific macro. Maybe we could start what you saw in Q3 and where we sit today and how the company is positioning itself going forward post the quarter?

No, great, David. So I want to take a step back and this time last year, we announced our reinvention program. We had changed our shareholders. We had announced that we were going to launch a reinvention. Reinvention was a 3-year program to do 3 things: one, to adjust the cost structure aligned to the reality of what's happening in our industry, #1. Two, how do we invest in growth areas so that we can offset some of the secular decline that we see in the industry. And then more importantly, how do we invest in areas that position Xerox for the future in terms of growth, right? And so that reinvention is a 3-year program major components to that. And I've said it multiple times that it is not a straight line to that 3-year end result. So I'll start with that as the foundation. In the beginning of the year, major restructure in terms of my organization to really focusing on client success, focusing on our partners. And then we created what we call GBS, Global Business Services, which is an engine to drive continuous improvement, simplification, automation and invest in our end-to-end, whether it's procure to pay, order to cash, whatever it may be. The second piece of that was how do we start to free up our balance sheet so that we can start to invest in areas of growth. And you recently saw our ITsavvy acquisition, $450 million of IT services that we're going to bring into our mid-market clients. That industry has got a CAGR growth of low single digits to mid- high single digits over the next 5 to 7 years. These are all products and services that our mid-market clients need, whether it's Network as a Service, Security as a Service. So I give you all that as background because the reinvention quarter-over-quarter, we're going to have bumps, and we had a bump in Q3, obviously. A couple of areas that caused the bumps. Number one, in Q1, we made a major reorganization of our sales team and our go-to-market as well as the support functions. And so what we saw was an impact to our revenue, impact to our sales productivity. However, Q2 to Q1, we saw sales productivity increase. Q2 to Q3, we saw improvement from Q2 to Q3. Why? We've got a management operating system that literally on a weekly basis, we take a look at the key KPIs and performance of our business. And then we look at where did we create that disruption, put the focus and teams in place to go and fix those disruptions and get things back on track. So sales operations disruption. We also had a product launch disruption. We were going to launch product in Q3. If you think about product launch, what do you try to do? Bleed off old inventory so you don't have new inventory that comes in and then you sit with inventory that clients don't want. Well, because we disrupted the sales engine, we didn't burn off the inventory that we wanted. It caused us a problem with our product launch going into Q3 into Q4. Most of that is understood in terms of what we need to do and the fixes are in place to make sure that we get better. So the sales productivity should get better. Product launch will help us going forward. And then obviously, the ITsavvy allows us to now start to grow in areas of our business that we think will offset our secular decline.

So against the backdrop of the reinvention program and what just happened in Q3, where do we sit today in that 3-year journey in terms of the asset portfolio, you mentioned the acquisition that you did this year. Where do we sit today, I guess, in terms of how the portfolio sits within Xerox and what needs to get done on the margin to kind of hit the milestones that you laid out for the reinvention strategy over the multiyear period?

Yes. I think on the cost side of it, we announced that we had $700 million of opportunities we had identified, about $300 million we addressed in this year. And over the next 2 years, we'll address the balance of it. So we've identified the cost takeouts in terms of what we're trying to do to simplify, automate, et cetera, in our business. And that will come over the next 2 years. So very confident in what we're doing on the cost side of it. On the revenue side of it, we've got a couple of things we need to do. Obviously, ITsavvy allows us to go and penetrate our mid-market clients. We've got over 200,000 mid-market clients today. Why is that important? The economic buyer for us in the mid-market is the same economic buyer that buys print, IT services, different than on the enterprise side where the print buyer in a Citibank or UBS is different. It's the real estate person, it's the procurement person. It's not the CIO. So our relationship in the mid-market is with the CIO, which is the economic buyer of what we just bought with ITsavvy, right? So what we need to do now is to get the sales engine to be able to double our wallet share inside of existing accounts and relationships that we already have. And that's going to be the transition we need to do as we go forward. Second piece of it is, remember, I've got a large partner community. I got 10,000 partners out there that sell Xerox printers and services. I now need to help them with bringing IT services through that partner community as well. They have the same challenge that I do. They're in a secularly declining industry. They need to look at selling things that allows them to grow. So I've got to get my sales engine and my partner engine to be able to sell digital and IT services as we go forward. That will be the growth engine that will offset the secular decline in print.

Can I maybe go back to your internal customer list in the mid-market versus what they bring to the table. How much overlap is there today? I know it's a very large number customers. But when you look at sort of the potential overlap and the ability to double that wallet share, how should investors think about sort of the low-hanging fruit?

IT services and Xerox customer overlap, very small. We have different relationships, different clients, different go-to-market engines, very small. In fact, the ability to take print and bring it into ITsavvy and then selling print into a customer base that they never sold print into is an upside for us. The ability to take ITsavvy services and bring it into mid-market. By the way, we can also bring it to state and local accounts as well, which we never had services before. So very little overlap. To me, it's around an execution. How do we get the sales team to be able to sell? How do we get the market to recognize Xerox is something different than print and how do we get that message out there that we can sell these other solutions and services.

And that's going to be tough. But from a sales force productivity perspective, how do we think about that ramp because these are very different offerings and they're used to selling. So is this a 12-month productivity ramp kind of timeline to think about? And so as we sit here a year from now, as we're going into '26, that relationship should be in a much stronger position than where we sit obviously, that you just did.

No question. So 3 things. One is, as you turn over your sales force, you recruit differently. I'm going to recruit with both print and IT services skills and background that can align to what I call client success, how do we solve client problems. So that's the first thing. Second is the training engine, around training my existing sales force. And by the way, training my channel partners to be able to sell IT and digital services, right.

You work with the channel partners to get them up to speed.

So we've developed internally. Xerox used to be one of the best places to come for sales training and management training. We were the best in the world, right? I remember when I was growing up as a CIO, you used to go to Xerox for like the best training and management training program. We're getting back to that. We're investing a lot in training, a lot in certification internally. I've got this vision of you think about Alexa at home, where you go and you say, what's the weather today or order my dog food? I call it my jerry. It's kind of a laughing internal joke where I don't want people to touch keyboards. I want it to be voice activated and simply ask the question and the infrastructure will provide the answer. How do I sell AI? Help me with a mentor, online mentor that can help me sell digital services that can help me sell RPA. And we're building all that infrastructure, which is being launched as we speak.

So against that construct of retraining your internal salespeople, rehiring, however you want to phrase it, educating and training the partner community in the channel, when you think about supplanting or supporting a secularly declining print business, what do you -- and you mentioned the low single digits to high single-digit kind of CAGR earlier. Ultimately, what does the revenue model look like as this becomes more successful? Like if we sit here and say, wow, we've nailed this 12 months from now, what does the top line framework look like for Xerox under this paradigm?

Yes. So we talk about -- just take a look at the industry, not our numbers, but industry numbers, it's a 2% to 3% decline in industry over the next couple of years, right? So if you take a look at our top line core print business, I've got to be able to outrun that. Outrun that 20% of my business needs to be in IT and digital services in a growing CAGR market, right? So if I can get that balance right, by the way, with ITsavvy, I now get to about 15% of my revenue that is now in IT and digital services. And so we'll be able to now be able to start to offset some of that secular decline.

Got it. So then that begs the question. So you're at 15% roughly. Obviously, cash flow and capital allocation and your balance sheet are very important considerations today. Does that mean that you need to invest more organically to kind of take that 15% number higher to 2025? Or is that an inorganic strategy or a combination of the 2? Like how do we think about getting you over that hump to offset that low single-digit decline in print so that the mix supports obviously consolidated growth going forward?

A combination of, right? And so there may be specific tuck-in capabilities that I may need to augment and add into my IT and digital strategy conversation. I've been very vocal on inside existing accounts that we have, I believe we can double our wallet share because of the fact that they're already buying IT services. In the mid-market space, there isn't a dominant player that sells solutions services into mid-market. So if I am a large OEM, I'm going through channel partners. But the reality is a local mid-market client today, there is somebody local that's selling. It's somebody's family member. It's some local person that's providing those services. And when we started the journey of the reinvention, we went out and we pulled our mid-market clients. We said, if Xerox sold security services, network services, would you be willing to buy? And overwhelmingly, the answer was yes. Love your brand. You're already a trusted partner. You're already inside of our IT infrastructure. So you know our security, you know our data, you're trusted. If you had these services, we would buy them for you, right? And so we've now taken that and now we're going to expand those services and bring them in.

And forgive me for not knowing this. When you think about the tip of the spear in terms of services perspective, what -- when you -- since you mentioned this why I'm asking, you pulled and you queried your partners, what are they looking for right out of the gate from here? Like what is like missing in their stack that they don't currently have where they want to replace with a trusted partner like Xerox?

I think every client is differently, but if I had a macro trend, security is really important. Security is important, right?

That plays into Xerox is obviously data security, right, you have...

Most people don't realize is most CIOs see the print world as a vulnerable area in terms of security. Why? Because they don't invest in print infrastructure in terms of the same way that they invest in a server because they think a server that's sitting there 4 years is vulnerable or a laptop that's sitting there 3 years is vulnerable. Well, guess what, the print infrastructure has the same vulnerabilities after 5 and 7 years, right? And so what we're trying to do is bring education around security, around how do you deal with data in these environments as we are having those conversations, oh, you can do Network as a Service. You can do cybersecurity as a service. You can do evaluation of our print infrastructure, tell us where we have vulnerabilities and then bring a service to be able to patch all of that. Those are the things that we're doing today. So I would say security is probably the biggest one.

Is it fair to say so that the segmentation of the market allows you to attack this mid-market leverage businesses because if you're a large security vendor, you're not coming downstream. It's a local relationship built up over decades, if not longer. And so that gives you the opportunity to be kind of their preferred partner of choice?

No question.

Is that kind of the...

No question. Think about a couple of things, right? So think about some big trends that are in the industry today. Everybody is thinking about, well, what do we do with this AI thing, specifically Microsoft, right? Well, you don't just put AI on an infrastructure, you have to have orchestration of data. You've got to be able to deal with the infrastructure that allows you to put AI on top of it, right? So we're never going to be the LLM provider. We're never going to be the AI provider, but we can hand companies, especially in the mid-market is to build the infrastructure to get ready for it. Second thing is think about the challenges that are happening. So we saw this recently around VMware, right? Cost going through the roof, CIOs dealing with it. Now if you're a mid-market client and you bet your entire infrastructure on VMware today, what are you doing? You're stuck. You need help, okay? If you're going to think about ransomware, you're going to think about all the different cyber threats. The cybersecurity threat doesn't care whether it's a mid-market hospital or whether it's a giant enterprise. So if I'm a CIO of a mid-market, I don't have the capability to be able to deal with these threats. Xerox, you do that with your own internal infrastructure, you're already making investment. Can you extend your network to my network and put a node, make me a node off of your network and secure your infrastructure the same way you secure Xerox assets? That's a value proposition.

Got it. So maybe for Xavier, as we move down the strategy, we're inflecting hopefully positively on revenue growth. Margins should expand. I know cost has been a big focus from your seat. Maybe can you kind of walk us through where do you think operating margins can get to? I know there had been some maybe backing away, maybe that's not the right phase of some of the cost-cutting initiatives given the revenue headwinds. But kind of as we go through '25 into '26, how should we think about this journey from a strategic perspective and what it means for the overall profitability of the firm?

Yes. As Steve described it, I would say, quite simple. The reinvestment strategy is based on 2 pillars. One is the revenue shift. And if we execute what we just described there, '26, '27, '28, the revenue mix will be 80% print, 20% IT and digital services. And you take this. So by doing this there, revenue will flatten and then grow. By the way, next year, with the acquisition of ITsavvy, we will already show a year of growth, which is, again, so not in line with the traditional print secular decline. So revenue growth, top line is our first goal there. The second point is reinvention is based on the second pillar, which is cost. And within the cost there, Steve mentioned $700 million of gross cost savings being identified, $300 million already being delivered. And if you look at the margin this year there, you have seen quarter-by-quarter our improvement in operating margin. And goal strategy after reinvention, 10%, double digit. We are guiding this year at 5%. And if you look at the prior year, we have been on this journey of improving step-by-step sequentially, quarter-by-quarter, the operating margin improvement. So that will be a 3-year journey. We should not forget this. This is not managed quarter-by-quarter. But on this 3-year journey, the 10% goal operating margin, this is what we are reaching.

How much of the margin improvement in addition to reinvention is tied to the new strategy from bundling or adding capabilities or driving wallet share from IT services. Like could you have gotten to the margin targets over a multiyear period without this? Or is that critical to stem the revenue declines to actually grow top line and drive margin?

We need both.

You need both.

I mean they won't work in isolation because in isolation, it will be closer to what we did before only program. There was a cost play. I think let's get this business leaner and let's get it more efficient. We need both, and we need the revenue growth in order to sustain the margin improvement on a lower cost base. What does that mean? It means the efficiency of what is coming every revenue, additional incremental revenue, which is coming there is driving an incremental profitability here. So we need both there. But the cost play, it's an important one. That's the reason why we are targeting this $700 million. Behind this as well is to complete the overall picture from a financial point of view on the reinvention strategy is also deleveraging. okay, from the debt point of view. And we said it publicly, we have a target after reinvention of a 3x EBITDA leverage, gross EBITDA, where today, we are higher. We just need ITsavvy here. But over time, we'll be in a much deleveraged strategy by having in behind us the acquisition we just did, paying down the debt that we have. But at the same time, I always remind this, what we call the workflow we have this refinancing or -- this financing of the leasing business here that help us to deleverage significantly the company.

I want to come back to leverage in a second. But you mentioned for each incremental revenue dollar under the strategy comes in at a higher margin. Have you shared with your investors how that works. So we're taking margins from mid-single digits to double digits through revenue growth through the incremental addition of the IT services acquisition. So by definition, that on a lower cost base, that would imply that these new revenue streams have much better margin. Is that the right assumption?

Yes. So what we share, so from a, I would say, modeling point of view, what we shared with our investors that there is often like an implied assumption that the margin on print -- operating margin on print is higher than IT or digital services and that there will be a dilution if you have this. This is not correct. And if you really play on the IT services, not IT reselling, IT hardware there, then you can achieve operating margin. I'm not speaking gross margin, the distribution between gross margin and OpEx is different between the 2 segments there. But when you look at the bottom line operating margin, the IT services and digital services profitability is incremental. It is really accretive to the overall print business.

So the way to phrase it, these are value-added IT services, not front of the mill block and tackle, low-margin offering -- that's why I wanted to double check. Okay. So we'll come back to cash flow in a second. So we just did a deal. Obviously, you want to get more mix shift towards faster-growing IT services. You touched on it briefly earlier. If we don't do any future M&A over the next 3 years, I would imagine your targets for under reinvention and this mix are achievable, right? You don't need to do anything organic -- inorganically excuse me, to hit those numbers. Is that?

We've got to grow the IT services and digital services. We get to that.

Organically. You don't need an inorganic transaction to get you there.

Correct.

Got it. Because I know we talked to people on the capital structure side on the side that are focused on where your cash flow is going, refinancing, et cetera, of that.

There's 2 levers to this, right? It's driving efficiencies and costs as fast as we can and then changing the revenue mix, right? So we look at this as a 3-year program, and then we'll adjust accordingly, right? When we talk about the $700 million of identified opportunities, it is not all a perfectly linear, this is what we're going to do. It's a bucket of opportunities. Some will overachieve, some will underachieve, right? So if I have my IT services that's growing at 10%, 15%, that's a lot different than if I'm growing mid-single digits, right? And so we'll adjust accordingly.

Okay. Got it. We did -- we touched on it on the side here. I want to get your perspective, tariffs, economic conditions. I know you're dealing with a lot of company-specific and industry-specific issues. Do you have any thoughts on how maybe Trump 1.0 versus Trump 2.0 plays out? Supply chains are very tricky. We were talking about this earlier, very ingrained in Southeast Asia. How should we think about it? And I know it's very early days, how are you thinking about it in relation to your strategy?

Look, I think there's a couple of things. First of all, you can't react to what is not fact yet. A lot of noise, a lot of speculation when it becomes a policy or when it becomes something we will adjust accordingly, just like we've all done through the years with supply chains and everything else that's going on. The beauty about what Xerox has done and by the way, the industry has done is we've reacted extremely well to these geopolitical changes. Remember, Russia, Ukraine, what's happening in the Middle East or Gaza, I've adjusted to all of those things over the years, the global pandemic, right? So tariff sauce is no different. We will react to when there is announcement, when we see it, is it on components? Is it on finished goods? Where is it? When that comes out, we'll adjust accordingly.

Do all of your products that are manufactured assembled in Asia is the bill of lading effectively in the U.S., it comes through a U.S. port or you ship not locally, but to other regions out of that market?

So a couple of important things. First of all, remember, I got a big European business that has nothing to do with tariffs, right?

Like what percentage Asia?

45% roughly. 45% in Europe, right? So the tariffs will have 0 impact on, okay? We have 2 very large OEM providers, Fuji and Lexmark, right? Fuji, Vietnam, Lexmark, Mexico, and there's a variety of other different factors, okay? So it depends on where the tariffs originate from, how they come. Is it on components? Is it on finished goods? Is it on origin of where the product is shipped? We'll wait to see all of that, and we'll adjust it as it goes forward, all right? But 45% of my business will have 0 impact at all just because we sell into Europe and Middle East. The other 45%...

That's a definite misunderstanding for a lot of companies, like it's only U.S.-centric good...

That's right.

Effectively that are going to be subject -- well, hopefully, these tariffs, but there's no global.

But again we're all sitting, right? And so all of us are sitting there waiting for what exactly the tariffs look like. Remember, we had Trump tariffs back when he was in office, and we've adjusted to it, right? And we'll figure it out.

So along those lines...

The other point, if I may as well, David, if you compare versus our competitor have also an Asian supply chain there. And if you compare -- because at the end of the day, the overall market could be impacted by this. We are not worse or badly positioned versus our competitor. I would say we have a little bit of an advantage being an OEM on being less dependent on certain suppliers there. So at the end of the day, what will happen will happen. But this overall industry could be impacted. We do not believe this will be more impacted than competition.

So maybe sticking on federal government changes. So we've heard from a ton of companies over the last couple of months that federal spending has been somewhat challenging in IT -- it's also caused, I think, some consternation and maybe spending in other verticals. How do you think about 2025? I know you're working through your own strategic plan. But if there is a sort of unified game plan from Congress and the President and all houses kind of pro-business move things forward, have you thought about what that might mean to your business? Does the mid-market -- let's start with the mid-market. Does the mid-market exhibit more confidence quickly? Like how is that reaction? How is the feedback loop? And how would that maybe affect your business?

So I think you got a different couple of components. Fed business is not a huge percentage of our overall business. So what happens inside the Fed space, we will react to. We think that the ability to be able to have more advanced technology, digital services transformation is a big opportunity for us, right? You think about how much of the government business today is in physical paper. How do you transform that? How do you help them with the digital roadmap and please get -- right? And so we think we've got a role to play, and we're excited about helping those agencies whatever is we've got large relationships with many of the federal government agencies. In the mid-market space, we also are excited about the opportunity from a couple of perspectives. You think about what's happening with capital being increased. You think of what's happening with shortage of labor, you think of what's happening with potentially the cost of goods going up. What do CIOs have to do? Drive more productivity, efficiencies, right? That's what Xerox has been doing in the office space for years, right? And so we relish the opportunity of helping our clients in dealing with those things. Remember, subscription services, we invented back in the '60s, right? So we talk about at these SaaS-based models. We did that back in the '60s. We now can take those same services and provide it to the mid-market, whether it's Network as a Service, Security as a Service, whatever it may be. So we think with the right relationships, with the right solutions, we can actually help our mid-market clients to be able to navigate the challenging world that they're going to deal with.

I mean, if, let's say, tax cuts are extended, how quickly do they react in terms of exhibiting confidence in the health of their end markets? And...

I think every industry is different, right? I think every industry is different. It really is. I mean, regardless of what happens with tax, there are certain industries that are just challenged. Take a look at the health care industry today, right? You think about what's happening in hospitals and infrastructure. Education today. Education is being challenged today with the cost pressures and what's going on. So I think the tax will help, right, because they're not having tax up. I think the investment in R&D will help, but I also think we need to help our industries and be able to drive more productivity.

Anything that we didn't cover that came up in meetings? I want to give you an opportunity to kind of maybe educate, inform investors post Q3?

Yes. I want to keep reminding everybody, reinvention is not a straight path to success. It's a 3-year program. Quarter-over-quarter, we're going to have bumps. We're going to have upsides. We're going to have downsides. But at the end of the day, we are heading in the right trajectory direction, right? Look under the covers of not just what's happened in the quarter, what happened in the other KPIs that are driving the overall program that we're doing. We said we're going to invest in growth services, IT services. We said we're going to streamline our business. You can see what happened quarter-over-quarter, year-over-year, $200 million of costs coming out in terms of Q3 versus Q3 last year, right? So the fundamentals of what we're doing, we're going to have bumps. No question about it. We'll react to those bumps. We'll fix it and we'll get back on the right path. But our end goal of reinvention has not changed, and we're on the right trajectory to get there.

Got it. So my final question for you is if we're sitting here a year from now. What do you expect the message to be? Obviously, it's going to be bumpy. It's not going to be linear. We'll be another year into reinvention. Where does the capital structure sit? How do we think about what we're planning for the next.

Yes. So a couple of things. IT service and digital services growth for us, right? It will be important in 2025, right? You'll see that. You're going to see the stabilization of our core and our print business, right? Can we get back to the 2% to 3% decline versus what you saw today? If you take all the decisions that we made to purposely lower some of our revenue, like getting out of paper business, some of the geographies, roughly, we were a point or 2 behind where the industry was. We've got to get back to getting flat to the industry, growing our IT services business. So when I sit here, I'm talking through a flat company, and we're talking about the balance of that $700 million now becoming more solidified, cost growing, and we're moving down that path. We're also looking at deleveraging, right? How do we take a look at our balance sheet and deleveraging and getting back to that goal of 3% as we thought about going forward. So those will be the proof points next year.

All right. So I think with that, I think we're out of time. Steve, Xavier, thank you for your time. Thank you for everyone for joining, and thanks again for coming.

Thank you very much, David. Appreciate it.