Xerox Aktie

Good morning, and welcome to Xerox's 2026 Annual Meeting of Shareholders, which may be -- turn out to be the last in-person Annual Meeting of Xerox shareholders. I am Louis Pastor, Chief Executive Officer of Xerox Holdings Corporation, and I will be chairing today's meeting.

Before we begin the official business of the meeting, let me introduce the other key members of our management and Board of Directors who are with us today. My fellow directors with us today are John Bruno, Tammy Erwin, Priscilla Hung, Nichelle Maynard-Elliott and Ed McLaughlin. We are also joined by the following members of management: Chuck Butler, Chief Financial Officer; Jacques-Edouard Gueden, Chief Revenue Officer; Kim Kleps, Chief People Officer; and Flor Colon, Chief Legal Officer and Corporate Secretary. Finally, we are joined by David Charles and Jeremy Budzian from PricewaterhouseCoopers, the company's independent auditor.

I will now turn it over to Flor Colon, who will handle the business of the meeting.

Thank you, Louis, and welcome to everyone who is joining us today. The proxy materials were made available to all shareholders of record of the company as of the close of business on March 27, 2026, the record date set by the Board of Directors for the purpose of voting at this meeting. Joanne Vogel of Broadridge Financial Solutions has provided an executed and notarized affidavit of mailing.

John Merva of American Election Services has been appointed to act as Inspector of Election. He has subscribed his oath of office and submitted his report as follows: There were 130,776,160 shares of common stock outstanding on March 27, 2026. The holders of approximately 88 million shares are represented at this meeting, which is approximately 67% of the outstanding shares of common stock. Accordingly, a quorum is present, and I now declare that this meeting is legally convened. This meeting is being recorded. Those who are not able to attend today's meeting will be able to listen to the recording posted on the Xerox website following the meeting.

As we go through the formal business of the meeting, I'd like to remind everyone that only shareholders may ask questions. Please limit questions to each specific proposal as presented. If you have a general comment or question, there will be a general question-and-answer period at the end of the meeting. If you would like to speak or ask a question, please step into the middle aisle, and we will have a microphone for you. Please state your name and the name of the organization you represent, if any. Please limit your comments and questions to no more than 3 minutes.

For those shareholders who wish to vote in person, there are ballots available. Please raise your hand if you need a ballot, and we will bring one to you. Those ballots will be collected when we have completed our discussion on the proposals.

I will now present the proposals to be voted upon. Each proposal has been provided in the proxy statement for this annual meeting.

Proposal 1. The first item is the election of the 9 nominees named in the proxy statement for a 1-year term as director.

Proposal 2. The second item is the ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026.

Proposal 3. The third item is the approval on an advisory basis of the 2025 compensation of the company's named executive officers.

Proposal 4. The fourth item is the approval of an amendment to the Xerox Holdings Corporation 2024 Equity and Performance Incentive Plan to increase the share reserve.

I move for the approval of proposals 1, 2, 3 and 4 as set forth in the proxy statement for this annual meeting.

Are there any questions or comments about any of the foregoing proposals?

We have received no questions or comments regarding the proposals.

With the discussion of the proposals now concluded, we will proceed to the voting. The polls are now open. If there is any shareholder who would like to vote now, please stand so that we can count your ballot and make sure your vote is counted. The ballots are in. I now declare the polls closed.

The Inspector of Election has presented his preliminary report to me. I will now present the results. I declare that all of the directors nominated by the Board have been elected, the selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for 2026 has been ratified, the 2025 compensation of our named executive officers has been approved and an amendment to the Xerox Holdings Corporation 2024 Equity and Performance Incentive Plan to increase the share reserve has been approved.

Now I'll turn the meeting back to Mr. Pastor to close.

Thank you, Flor. There being no further business to come before the meeting, the meeting is adjourned. Thank you very much for being with us today.

Welcome to the Xerox Holdings Corporation First Quarter 2026 Earnings Release Conference Call. [Operator Instructions] At this time, I would like to turn the meeting over to Mr. Greg Stein, Senior Vice President and Head of Investor Relations.

Good morning, everyone. I'm Greg Stein, Senior Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation First Quarter 2026 Earnings Release Conference Call hosted by Louis Pastor, Chief Executive Officer. He is joined by Chuck Butler, Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the express permission of Xerox.

During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. We will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I'd like to turn the meeting over to Mr. Pastor.

Good morning, and thank you for joining our Q1 2026 earnings call. Before we get into the numbers, I want to briefly introduce myself in this new capacity and share my thoughts about the role and how I intend to lead Xerox. First, I want to sincerely thank the Board for the confidence they've placed in me. This is not a responsibility I take lightly.

As many of you know, I was appointed President and COO last September. And before that, I served in leadership roles spanning operations, transformation, corporate development and legal. I know this business well. I know our people well, and I have been deeply involved in the work underway to improve our performance, much of which is starting to show up in our results.

The Board's decision to name me CEO reflects the progress we've made over the past 2 quarters, including structural cost reductions, early signs of momentum growing our revenue funnel, and the execution of key initiatives to strengthen our balance sheet, like the TPG Angelo Gordon joint venture and the warrant distribution. Separately, my decision to eliminate rather than retain and backfill the President and COO role was deliberate. There are no sacred cows here. The role is not needed anymore, and eliminating it reflects exactly the kind of cost discipline, operational efficiency and speed of execution this moment demands.

I intend to lead this company with the same operating discipline I brought to every role I've ever held. Sleeves rolled up, deeply embedded in the work and with a clear-eyed focus on what actually moves the needle. We're aware of our stock price. We're aware of our credit ratings. I'm not going to paper over the challenges that Xerox faces. Rather, I have a disciplined, pragmatic approach to tackling them, and I'm focused on actions, not excuses.

To our employees, our clients, our partners and our investors, I commit to being transparent and accountable with all of you. We will talk openly about our successes. We will acknowledge our challenges, and we will move quickly to address them. You deserve that. And frankly, it's the only way we'll make real progress.

Let me also be clear about this. I am genuinely optimistic about the future of this business. I know what this organization is capable of, and I'm confident that we are closer to an inflection point than the external narrative suggests. Xerox has real assets, real client relationships and a team that has shown it can execute under pressure. Our strategy is not changing. It doesn't need to. What this company needs and what our leadership intends to deliver is relentless, disciplined execution against the strategy we have already laid out. The plan is in place. Now we run it.

So with that, let's talk about our results. Q1 showed a continuation of the improving underlying trends we discussed on our Q4 earnings call. Revenue of $1.85 billion increased nearly 27% in actual currency and 24% in constant currency, reflecting the inorganic benefits of the Lexmark acquisition. On a pro forma basis, revenue declined 4%. Even excluding the benefit of some partner-driven pull forward from Q2, which Chuck will discuss in further detail, Q1 performance was a material improvement from the 9% organic revenue decline we saw in Q4.

Quarterly adjusted operating margin increased on a year-over-year basis for the first time in 5 quarters. Adjusted operating margin of 3.9% was up 240 basis points year-over-year on a reported basis and was also up on a pro forma basis. This is a turning point in our profit trajectory, and it reflects the cost discipline our team has maintained through a complex integration. Overall market trends have improved from 2025 when demand was materially impacted by DOGE-related spending reductions, tariff uncertainty, and the government shutdown.

In the Print segment, we're seeing steady demand in entry, led by better-than-expected performance at legacy Lexmark, continued softness in midrange and strong demand for our new production devices with Proficio, a recently launched device developed in partnership with Fujifilm, tracking well ahead of plan. Our overall print pipeline is now up meaningfully compared to this time last year, and we expect these trends to persist.

I also want to highlight a partnership that speaks directly to the momentum we are building in production. Earlier this month, Toshiba Americas announced the addition of Xerox PrimeLink color and monochrome light production printers to their portfolio. This is a powerful validation, a well-respected global player with deep client relationships choosing to sell Xerox-branded devices through their network speaks to both the strength of our brand and the competitiveness of our production portfolio.

We will actively seek to expand our distribution reach by pursuing partnerships like this with other OEMs. Our IT Solutions business delivered another solid quarter. Bookings grew 32%, billings grew 21%, and we delivered year-over-year profit growth. Total contract value of new deals continues to rise, and we are winning more managed services contracts, which provide greater visibility and long-term stability in our revenue trajectory. However, there are certain headwinds constraining that momentum.

Memory lead times have extended, and in certain cases, higher memory prices have compressed margins as we prioritize establishing new relationships and expanding wallet share. We are also investing in technical talent to support a broader service offering. We believe these investments will lead to larger, more strategic deals over time, but they may create near-term pressure on IT Solutions profit expansion. As we look to the rest of the year, our positive expectations remain intact, though subject to quarterly timing variability, driven by OEM and inventory availability.

A few other developments since our prior earnings call are worth noting. February Supreme Court ruling on tariffs is a net positive to Xerox's cost structure, particularly as it relates to our cross-border supply chain. That said, based on current forecast, those benefits will be slightly more than offset by increased memory prices, which are modestly higher than our last update, as well as higher oil prices, which impact toner, plastic and metal prices as well as transportation costs. Importantly, apart from certain international markets with exposure to the Middle East conflict, none of this to date has impacted overall demand.

Given our solid start to the year and the momentum we have generated, we are reaffirming our 2026 financial guidance and are increasingly confident in our ability to meet these commitments. Looking ahead, our priorities are straightforward and every stakeholder should understand where we are focused: stabilize revenue, increase profitability, reduce leverage. That's it.

First, stabilize revenue. Rightsizing our cost structure will remain a core focus, but we cannot cost cut our way to prosperity. We operate in a $50 billion print market facing secular headwinds, but there are real pockets of growth, particularly in entry and production. We intend to compete aggressively in those markets with better products, reduced manufacturing costs, stronger routes to market, improved service offerings and new partnerships. And over time, we expect growth in IT solutions and digital services cross-sold into our existing client base to offset print declines.

Second, increase profitability. We expect to deliver $250 million to $300 million of incremental savings in 2026, including $150 million to $200 million from the integration of Lexmark. But I want to be clear, this is not a 1-year event. It is a multiyear journey. The cost actions we are taking today will continue to benefit us well into 2027 and beyond. We have guided to double-digit operating margins over time, and we intend to get there. Finally, reduce leverage.

I want to address this priority directly because I know it is top of mind for many of you, as it is for us. While the $450 million TPG Angelo Gordon joint venture has increased our overall debt in the near term, it has provided meaningful liquidity to invest in and operate the business as well as the flexibility to take advantage of the dislocation in our bond prices. Between continued opportunistic debt repurchases and improving profitability, we expect our leverage ratios to improve as the year progresses. Reducing leverage is not just a stated priority, it is something you will be able to measure us against every quarter.

Before I turn the call over to Chuck, let me take a minute to highlight some key operational initiatives that I believe are fundamental to how Xerox executes against the 3 stated priorities that I went through. Our go-to-market is now fundamentally different. We have moved from a fragmented structure with too much overlap and friction to a unified commercial engine with a simpler strategy, take share, cross-sell, upsell and mix shift toward higher-value offerings.

On the enterprise side, we have eliminated account overlap and streamlined engagement. For corporate accounts, we have transitioned to a territory-based model with clear ownership, faster decisions and greater accountability. Our print go-to-market coverage is now structured into 3 regional theaters: North America, Western Europe and Rest of World, each designed around distinct client dynamics, routes to market and partner ecosystems.

This simpler, more client-centric approach gives us the ability to meet clients where and how they need us, leverage our expanding global partner community and accelerate growth in targeted segments, all with clear rules of engagement and stronger accountability for both clients and partners. On inside sales, an initiative we launched last year to serve our smaller commercial clients with a greater touch, but at lower cost, equipment sales grew 24% year-over-year in Q1.

On April 1, we expanded account coverage from 35,000 to 65,000 clients with revenue accountability quadrupling to more than $200 million. We expect to further scale this model over time. We also continue to take greater ownership of our product design and manufacturing, strengthening our control over quality, cost and speed to market. This will start yielding positive benefits to gross margin later this year.

Xerox is becoming and in many respects, already is, a designer, developer, manufacturer, seller and servicer of our own technology. That end-to-end control matters enormously. We own the technology roadmap. We control the design costs. We make the decisions. And frankly, it means we control our own destiny. These initiatives, a transformed go-to-market and greater manufacturing control are central to how we stabilize revenue, increase profitability and ultimately reduce leverage.

With that, Chuck, over to you.

Thanks, Louis. Good morning, everyone. Louis just laid out our 3 priorities: stabilize revenue, increase profitability, reduce leverage. I'll walk through Q1 against that same frame. On revenue, trajectory improved versus Q4. On profitability, adjusted operating income more than tripled year-over-year. On leverage, we took deliberate concrete actions to strengthen the capital structure and position us to delever from here. We are reaffirming full year guidance with even more confidence today than when we set it.

Before we get into the details, a brief note on tariffs. Our Q1 results and guidance do not reflect any potential refund benefits associated with the recent Supreme Court ruling on IEEPA tariffs. We expect additional clarity during the second quarter, and we'll provide an update on our next earnings call. Q1 revenue of $1.85 billion increased 27% year-over-year on a reported basis and 24% in constant currency, reflecting Lexmark's contribution. On a pro forma basis, revenue declined 4% year-over-year, a material improvement from a 9% decline in Q4.

As Louis alluded to, Q1 revenue benefited by approximately 1% from the pull-forward of post-sale revenue, primarily in supplies, partly driven by customer and channel concerns around potential supply disruptions related to the conflict in the Middle East. Even adjusting for this benefit, Q1 revenue would have exceeded consensus expectations by approximately $80 million. As we have discussed on our prior calls, 2025 included meaningful headwinds from the exit of certain production print device sales. While their impact is diminishing, they have not fully dissipated.

From this point on, we will no longer call these out separately. Our focus is on the trajectory of the business, not noise in prior period comparisons. On a similar note, as Louis mentioned, we have unified our go-to-market organizations. We will make select references to legacy Xerox and Lexmark on today's call where it adds context. But going forward, we will report and speak about the business as one.

Turning to profitability. Adjusted gross margin was 30.3%, up 60 basis points year-over-year, driven by Lexmark's contribution and transformation benefits, partially offset by 100 basis points of increased product costs and declines in high-margin finance-related fees, largely a result of our forward flow arrangements, which shifts certain finance income off balance sheet.

Adjusted operating margin was 3.9%, up 240 basis points year-over-year, driven by higher gross margins, integration synergies and lower marketing spend. Non-financing interest expense was $84 million, up $51 million year-over-year due mainly to higher net interest expense associated with Lexmark acquisition financing. GAAP loss per share was $0.84, down $0.09 year-over-year and adjusted loss per share was $0.43, $0.37 lower than a year ago, primarily due to higher interest expense and an unusual tax rate, the latter of which I want to address directly.

Our non-GAAP adjusted tax rate of negative 219% looks unusual because we carry a valuation allowance against certain deferred tax assets. The practical effect is that pretax losses in the U.S. and U.K., along with disallowed interest expense do not generate a corresponding tax benefit while we continue to record tax expense on profits in certain jurisdictions. It is a GAAP consequence of where we sit today, not a reflection of operating performance or cash. As our profitability improves, we expect the tax rate to normalize and converge with our cash taxes.

To put it in context, if we adjust for the impact of valuation allowances in the U.S. and U.K., EPS would have been negative $0.11, ahead of negative $0.27 consensus. We present non-GAAP taxes based on Q1 results, but we believe this is a more normalized lens to view underlying operating performance.

Let me review segment results. Within Print and Other, Q1 equipment revenue was $378 million, up 33% as reported or up 31% in constant currency. On a pro forma basis, equipment revenue declined 2%, well ahead of the 10% decline last quarter, driven by stronger year-over-year trends at both legacy Xerox and Lexmark and fewer onetime headwinds. Legacy Xerox equipment revenue fell 5% compared to a 12% decline in Q4. The sequential improvement was driven by improved demand in entry and production. Legacy Lexmark equipment revenue grew 5% versus a 6% decline in Q4 on a higher demand across the enterprise and channel and a slight reduction in backlog.

As we have noted previously, Lexmark's equipment revenue tends to be more variable than legacy Xerox, given Lexmark's higher concentration of large channel and OEM partner transactions. Print post-sales revenue was $1.31 billion, up 30% as reported and up 27% in constant currency. On a pro forma basis, print post-sale revenue declined 4%, mainly due to lower financing income and service rental and other declines within legacy Xerox. Print and Other adjusted gross margin was 31.3%, down 10 basis points year-over-year, as higher product cost, lower managed print volumes and lower high-margin finance-related fees were largely offset by transformation savings and Lexmark's contribution. The Print segment margin was 5.1%, up 190 basis points due to Lexmark's contribution, transformation benefits and integration savings.

Turning to IT Solutions. Gross billings grew 21% year-over-year. Total bookings, an indication of future billings increased 32%. Both represent sequential improvements from Q4. GAAP revenue fell 5% in the quarter, but that number understates underlying activity. A growing share of what we sell, third-party service contracts, SaaS and certain fulfillment contracts where we act as an agent is reported on a net basis. The widening difference between GAAP and gross billings reflects accounting treatment, not changes in demand. We expect it will begin normalizing later this year and into 2027, though some revenue cycles could run longer.

Going forward, gross billings and segment profit are the most useful lenses on this business. This is where you will see its health and trajectory. On profitability, gross profit was $30 million, with gross margin of 19.5%, up 230 basis points year-over-year, driven by changes in revenue mix and synergies, partially offset by higher memory cost. Segment profit was $6 million with profit margin of 3.9%, up 80 basis points year-over-year as higher gross profit was partially offset by investments in the sales and delivery organization and strategic hires. Cross-selling into our existing Xerox Print client base continues to build, with more than $32 million of new pipeline created in Q1.

Moving to our cash flow and capital structure. For the quarter, operating cash was a use of $144 million compared to a use of $89 million last year, reflecting the inclusion of Lexmark, lower proceeds from finance receivable sales and working capital timing. Investing activity was a $24 million use of cash, $21 million from CapEx compared to a source of $6 million in the prior year, which included proceeds from asset sales.

Financing activity resulted in a $242 million source of cash, reflecting the JV financing, partially offset by the paydown of the remaining IT savvy notes and partial payment of the 2028 senior unsecured notes. Free cash flow was a use of $165 million for the quarter, down $56 million year-over-year and in line with our internal expectations, as Q1 is typically a seasonal use of cash. Said differently, Q1 is our seasonal trough and the back half of the year is where the bulk of our free cash flow is generated.

We expect improvements in adjusted operating income, working capital discipline and additional proceeds from finance receivables to deliver substantial free cash flow over the remainder of the year. We ended Q1 with $637 million of cash and cash equivalents, inclusive of $52 million of restricted cash and total debt of $4.4 billion. Approximately $1.4 billion of the outstanding debt supports our finance assets, with remaining core debt of $3 billion attributable to the nonfinancing business.

On a pro forma basis, gross leverage was 7x trailing 12 months EBITDA. Our capital allocation priority remains debt reduction, driven by EBITDA growth and continued debt paydown, and we expect leverage to go down significantly as the year progresses. During the quarter, we announced an IP joint venture with TPG Angelo Gordon. This structure raised more than $400 million of liquidity net of fees against our intellectual property. Following the JV agreement, we repurchased $101 million of face value of our 2028 senior unsecured notes for $45 million, capturing $56 million of discount, reducing future cash interest and capturing real value for our shareholders.

The result of these actions is a maturity ladder that has been meaningfully derisked in the near term. We have approximately $300 million of scheduled debt maturities between now and December 2027, inclusive of the $125 million of the 13% senior bridge notes that we will be paying at the end of Q2. That is a manageable window, and we will have multiple tools to address it, organic cash flow, continued open market repurchases, the warrant mechanism and capacity within our existing debt structure. We will continue to be opportunistic when market conditions support it. Importantly, we will continue to pressure test every action against one goal. Does it create sustainable long-term value for shareholders? That is the lens.

Now, for guidance. For 2026, we still expect greater than $7.5 billion in revenue and expect adjusted operating income to be in the range of $450 million to $500 million, an increase of more than $200 million versus 2025, driven by $150 million to $200 million of in-year integration synergies and $100 million of in-year transformation savings. We expect free cash flow of approximately $250 million.

Compared to 3 months ago, our free cash flow guidance is underpinned by higher interest expense resulting from the JV, offset by reductions in CapEx, improvements in working capital and lower cash taxes. The result of our assumptions remain unchanged. Our free cash flow guidance implies greater than $400 million of free cash flow generation for the balance of 2026. As a result, based on our implied guidance, by year-end 2026, we expect gross and net leverage to drop by approximately 1.5x to 5.6x and 4.5x trailing 12 months EBITDA, respectively.

With that, I will now turn the call back to the operator to open the line for questions.

[Operator Instructions] And our first question comes from Ananda Baruah with Loop Capital.

A few, if I could. I guess, Louis, what -- you walked through a lot of great detail there in your prepared remarks. What you spoke about is new? And what might be some of the stuff that you'll be focusing on that could be new that may not have been mentioned in what you talked about? And I have a couple of follow-ups.

Yes. Thanks, Ananda. I appreciate the question. I appreciate you joining the call. To be honest, a lot of what I was trying to emphasize was that the strategy actually is already in place and doesn't need to change. What's new, I would say, is perhaps the level of rigor and focus on solely these 3 priorities that we went through. So stabilizing revenue, expanding profitability and reducing leverage. Everything that we do needs to be framed through that lens. And as we do it, it just -- like I said, it just creates the opportunity to drive even greater focus and better execution.

I got it. And a point of clarification, going back to your prepared remarks. You made mention of -- and this is me paraphrasing, focus on entry level and production where you think there's attractive opportunity. What about the midrange? I know you also said midrange remains soft. What's the right way we should, sort of, think about midrange? And when you think about the core, your core enterprise customer, how do they fall across entry and midrange in the way in which you're describing entry and midrange?

Yes. So the way we think about the strategy commercially is it's very much and we've talked about this in the past, a gain share mix shift strategy. And when we talk about the mix shift, a lot of people think just about the shift of the mix of our revenues from print in greater amounts into IT solutions and digital services. But there is also a mix shift within print. And that mix shift within print is actually part of the gain share component of the strategy. And that's the barbells that we were just talking about with entry and production.

So we are responding to and following the trends in the market, which is why our investments are going into those 2 spaces in entry. Obviously, Lexmark historically has been a leader in the space. Now we're a fully vertically integrated player, controlling design, development, delivery, manufacturing end-to-end in that space, which allows us to compete far more effectively. And on production, we're so well positioned with respect to sales, distribution and service. And with new partnerships, we're bringing new hardware to market, but we're wrapping it around an end-to-end solution.

And so part of how we grow and get back to a stable revenue stream in print is through the execution of that barbell strategy. Now the midrange is the most challenged part of the market. We've historically been a leader there. It's still highly profitable for us, and it's still a core component when we do an end-to-end managed print services offering at the enterprise. It's part of the mix of what is ultimately being purchased and delivered and serviced.

But ultimately, our focus is going to be on the areas of growth and ensuring that the midrange plays a role where it's relevant and part of a holistic solution. And we'll continue to be in the space, but the focus strategically is going to be far more on entry and production.

That's helpful context. I got one more. You mentioned memory lead times have extended and that may have some sort of profit impact. And I think this is regard to IT savvy specifically. So correct me if that's not accurate. What I -- what we've seen is, some of the distribution folks, distribution vendors have been able to pass the memory cost through, without seeing impact to elasticity yet.

So could you just give us a little more context around what it is you're seeing? Are you passing costs through? Are you able to pass costs through to some extent? Are you hitting elasticity points? Is it really a timing -- is it really a timing mechanism? Or to what degree is timing playing a role there as well? Just [ flip ] that for us, that would be great. And that's it for me.

Louis, let me start and then maybe you jump in if I missed something here. Memory, it operates in both of our segments, both in the IT Solutions and in the print side of things, but impacts on both a little differently. On IT Solutions, what you'll find is that memory will slow down the buying patterns of some of our customers that we work with. We generally try to get in there and shape their demand to see what they want to spend their available budget on, make sure we keep equal wallet share in those customer bases because we have a broad product portfolio.

And sometimes we work with them to say, look, you can extend the life of these hardware products that contain the memory and wait for the prices to come back down. So we try to help them shape that demand going forward. If they want to go ahead and buy, we largely pass that along to the end customer in the IT solutions space. On the print side of things, it can be a significant cost increase on some of the product line. The higher up you move the stack, the more price -- the more cost increase it has. What I will tell you is in our current forecast, we factored in the current macro environment for exactly where it is today, where we think it is today. So all the memory cost increases, what's happening with the fuel offset by the change in the tariff is all factored into our reaffirmation of the 2026 guidance.

Our next question comes from Samik Chatterjee with JPMorgan.

This is Mark on for Samik. I guess my first question is kind of a follow-up to one of the previous ones for Louis. I guess with regards to some of the initiatives and new strategies that he's going to be -- or approaches that he's taking, I guess, anything to elaborate on in terms of how the approaches might differ from the prior management?

No, I don't think we need to go into sort of granular detail around kind of what's changing from the prior leadership to my leadership other than to just emphasize once again kind of the 3 priorities that drive all of our decision-making. So stabilizing revenue, expanding profitability and reducing leverage. So ultimately, everything that we do is framed through that lens. We've talked about the strategy and where we're focused in what segments and how we execute the mix shift. And really, it's just continuing to make sure that everybody at this company is focused and empowered and accountable for delivering those results.

Got it.

And if I could just add a little bit. I'll tell you from my seat, one thing you noticed and Louis touched on it there, it's every decision that we make right now is put through the lens of does it stabilize revenue? Does it expand margins? And does it delever this company as quickly as possible? And it's staying incredibly focused on those 3 points.

Got it. I guess on the margin side, there was some improvement in print profit margins quarter-to-quarter. I guess what are some of the drivers in the quarter-to-quarter improvement? And like how much of that would you consider structural versus like onetime benefits?

Yes, the benefits that you're seeing as we continue to expand margin are largely related to the acquisition and synergy costs as we continue to realize those.

Got it. And then I guess the last question on top of that would be looking at the path of operating margins from around 4% this quarter to the midpoint of the guidance. I guess, what do you think about in terms of the quarterly cadence? What would be driving the step function changes? Any changes with regards to timing of how you envisioned it earlier this year?

Yes, Louis, let me start and feel free to jump in. If you think about the seasonality of how we'll realize the synergy savings, it will expand each quarter-on-quarter successively and then peaking in the fourth quarter. Some of that's really seasonality because the scale of your business increases throughout the year, fourth quarter being the larger quarter in the space for us. And some of it is just the realization of another quarter, realizing full benefits from actions that you've taken. So you'll continue to see it expand each quarter on top of the other.

Our next question comes from Asiya Merchant with Citigroup.

My question is also related a little bit to seasonality. And if you could just talk a little bit about the 2 segments. How envision sort of revenues seasonality between the 2 segments as you kind of look forward to your -- above $7.5 billion revenues for the year? And if you can also peel a little bit on cash flow here, free cash -- operating cash flow and free cash flow kind of seasonality. I think you guys are obviously expecting a lot more of it in the back half. What's driving that aside from operating income? How should we think about whether it's receivables flowing through or working capital as you progress throughout the year?

Yes, I'll start here again. When you look at the seasonality of our revenue, even legacy Lexmark and legacy Xerox acted a little bit differently, but similar. Some of them depend on school cycles, government cycles, some of them depend on your geographic mix and where you operate in. Typically, what you would have seen for Lexmark and Xerox, though broadly, is one is light, two and three are in the middle and four is the biggest revenue month. IT Solutions appears to get its biggest traction in the third quarter. And it's largely driven by schools coming back in session and different buying cycles in the spaces that they play.

Operating cash flow in the print space, working capital is a drag in the first quarter typically. And the first quarter tends to be -- it's your lower revenue month, so you don't get as much scale, and it tends to be the most compressed in those spaces. It was the same thing at legacy Lexmark. It was the same thing at legacy Xerox historically. And then the fourth quarter tends to be the best working capital and the highest revenue, so you generate the most cash flow accordingly. And you'll see that in the space.

If you look back in '25, more than all the cash flow was driven in the back half of the year. And that's generally what we're going to see here in '26. We'd like to see that a little flatter, and we'll try to find ways to normalize it, so the impacts aren't so pronounced. But it is industry that drives a large piece of that. In addition to that, because of the expanding margins and the trajectory on realizing more synergy savings quarter-on-quarter, that will drive incremental cash flow throughout the year as well. Did I answer your question?

Yes, that's helpful. In terms of your billings and bookings, I know you're reporting pretty strong billings and bookings here in IT solutions. You're also talking about talent hires. Just help me understand like how we should think about those billings and bookings translate into revenues into that segment for the year?

Yes. I'll start and then, Chuck, if you want to build on top of it. The way we run this business is with a focus on bookings and billings and then ultimately, how much of that actually pulls through to profit. So revenue is somewhat of a derivative of and a mid-level sort of gauge between those 2. But what we're really focused on is are we growing with our clients? Are we selling more to our clients? And ultimately, of what we sell, are we realizing a profit based on that?

And so the trends overall that we're looking at bookings, billings and the flow-through on profit, we continue to see improvement in growth and the pipeline, albeit there are some macro headwinds there around memory and availability. But ultimately, it continues to benefit from secular tailwinds.

Yes. The only thing I think I would add to that, a lot of times, gross billings doesn't always translate into revenue recognition on the face of your P&L. That's done based on the mix of customers and the mix of products that you take into that customer base, whether you treat it like an agent relationship or not. But the higher the gross billings go, you have a mind share and a wallet share in those customer bases that's meaningful. And the growth of that is operationally how you judge the health of that business.

So we're excited about the growth we're seeing in the gross billing side of things. In terms of hiring talent, yes, we continue to invest in the space because that's the top line of the 3 priorities that Louis mentioned, stabilizing revenue. And we're going to invest in that to make sure it becomes the engine that allows us to achieve that.

I would now like to turn the call back over to Mr. Pastor for any closing remarks.

Thank you. Q1 gave us early proof points that the work we're doing is taking hold, an improving revenue trajectory, expanding margins and a growing pipeline across both print and IT solutions. We have more work to do, and we know it, but the business is moving in the right direction. In the coming months, Chuck and I plan to actively engage with our employees, clients, partners and investors. We will listen, answer questions and take feedback while keeping everyone focused on our 3 priorities: stabilize revenue, increase profitability and reduce leverage.

Thank you for your time and for your continued support. We look forward to speaking with many of you in the weeks ahead.

This concludes the conference. Thank you for your participation. You may now disconnect.

Good morning, guys. So my name is Erik Woodring. I lead the U.S. IT hardware team here at Morgan Stanley. I'm pleased to welcome Chuck Butler, CFO of Xerox to the stage.

But before we start, I just have to read this safe harbor agreement. For important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Do you guys mind shutting the doors back there? I apologize. Thank you. Sorry.

So I'm delighted to be joined by Chuck Butler today, CFO of Xerox. He was previously CFO at Lexmark. And once the team has obviously joined, became CFO of the combined entity in December of last year. So thank you for joining us today, Chuck.

Absolutely. Thank you.

Cool. So I want to talk about here, I think maybe just to start, I'd love to get maybe your views on what you do at Lexmark, what brought you into -- obviously, we know what brought you into Xerox, but initial kind of impressions of the combined company, opportunities to lean into strengths, opportunities to improve things. Just start very high level, and we'll run from there.

Yes, that sounds great. And thanks for having me again. Yes, when I think about the combination of the 2 companies, I've been at Lexmark for 21 years. So I'm familiar with the space, been involved in the space and I started here pretty early in my career. And Xerox was always the name that carried a large weight in that space coming up, right? I grew up in the age where you would hear people say, let's go make a Xerox. It was synonymous with the word copy. So to be able to be a part of that was exciting to me.

And once -- and probably back around 2020, I became CFO of Lexmark, and we started talking to Xerox about what a possible combination would look like. And it finally came to fruition there at the end of last year, which, to me, I use the analogy, the best time to plant a tree is 20 years ago, the second best time is today. I kind of think the same thing about the acquisition. This is an acquisition that makes sense. How do we lean into each other's strengths?

What Lexmark brings to the table and what Xerox gets to purchase when they purchased Lexmark is they get their own IP, but they get their own technologies as it relates to the A4 technology. So now we own our A4 technology now. We own in-house manufacturing now. We own a GBS in-house capability, GBS is Global Business Services as we're largely Xerox was outsourced in the past. And those bring significant cost synergies and savings.

The other attractive thing is we have enough commonalities where there's significant cost savings, but not so much where you worry about any revenue dissynergies because we don't overlap in every single space. Lexmark was largely a large enterprise go-to-market and Xerox would play a little more on the A3 side of things and would be able to attack that space a little bit higher. Lexmark was -- has a presence in Asia and Xerox didn't have a presence in Asia, but Xerox is a really good name in Asia. So now we open ourselves to a market that's really big, and we're under-indexed which allows us to grow here.

So maybe just to start, and that's a very helpful starting point. I'll go back to like the point of change, which is there's been a -- not change in strategy necessarily, but now there's Lexmark, there's Xerox, there's a digital services opportunity. What are maybe the most important changes under the hood going on at Xerox right now that kind of better position the company, the combined entity of all these for the future?

Yes, that's a good question. First, I would say the strategy hasn't changed, right? Xerox underwent a reinvention strategy a couple of years ago, and we continue to execute that strategy today. And on that was the combination of the 2 acquisitions, ITsavvy and Lexmark. What does that do for us? That ITsavvy brings us a more end-to-end product proposition that we can take to our customers. And we can now -- it's not just print, we can fulfill them all the way from -- if they want hardware, if they want software, if they want a service. We have all those capabilities that can go in and really help them manage their IT budget and what they want to spend their money on going forward. And it gives us a bigger wallet share inside of these customer bases. And we're really focused on executing that along with -- the goals for Xerox are pretty straightforward. We want to stabilize the top line. We want to expand margin, and we need to delever the company. And the combination of these companies allow us to do those.

Perfect. I asked on the earnings call, and I want to kind of circle back to this, which is there is also a lot going on, and we're kind of talking about that. As CFO and kind of partnering with Louis and partnering with Steve, like how do you prioritize these moving pieces to make sure that we're kind of being successful on all fronts and not taking our eyes off the ball on many other fronts.

And I appreciate you saying that because I'm the one that says, don't take our eyes off the ball. You get people that are broader range and think bigger and want to grow, want to expand, let's buy more, let's do more. And I want to refocus people on let's think about the goals of the company. It's to stabilize the top line. It's to expand margin and to delever the company. Sometimes you have to clear out the clutter for the broader employee base to make sure you don't lose focus. And we have those conversations pretty often.

You have a lot of great one liners. I love these. So let's start on the Print business and obviously, close to you because obviously, you come over from Lexmark. I'd love just the general kind of viewpoint of the world from a demand standpoint. But also like when we talk about stabilizing top line, and we'll move into the ITsavvy and all of what that can do. But what is that -- what is stabilizing -- what does stabilizing the Print business really mean? Is there a path to growth? Just help us kind of unpack all of those together into one.

Yes, I appreciate that. When you say -- when we say, when you hear the print is shrinking, we can't shy away from that, it is. The market overall is declining low mid-single digits, but it's not declining everywhere. Like I mentioned earlier in our conversation. Lexmark has a presence in Asia Pac that we bring to the table in this integration and Xerox's name means a lot in there. So when you're really under-indexed in the broader space, even if it's shrinking, there's opportunity in those spaces.

And then when you go up through where it's shrinking and where it's growing, there's the segments like on the color side of things that do drive growth. Lexmark brings the technology that allows us to penetrate in those and Xerox brings the brand recognition to help us. So will print decline? It probably will decline. But as you -- but we can offset some of the decline with these opportunities that I just mentioned, and you have the IT solutions that isn't declining. It's growing 5% to 7% a year. And that's with -- today, they have 12,000 customers on that side of the business. There's 200,000 customers on the print side of the business. So now they have direct access to 200,000 customers and can start to penetrate that and get a bigger mind share with that customer base.

Okay. That's important. And I want to touch on Asia in kind of multifaceted question, somewhat related but somewhat unrelated. One is pricing aggression from peers in Japan. What does this combined Xerox-Lexmark entity do to combat that pricing aggression? And then second, talk to me about that Asia opportunity because obviously, following the Xerox JV dissolution, Xerox wasn't necessarily in the region. Now they are. So you have a brand, you have a product. What is the opportunity there when we talk about stabilizing top line? And kind of how long does it take you to get there? You mentioned it doesn't happen overnight, but it's a big opportunity.

Yes. No, you touched on all the right things there. So let's go back -- what's the first part of the question?

Just Asia price aggression from competitors, how do you combat that?

Honestly, we watch pricing very closely because we want to be reactive to that and make sure we're not outpriced in the marketplace. It's been pretty static. There hasn't been irrational pricing. But as you -- you have to know that Xerox and Lexmark, the combined company, Xerox, we don't play in the very low-end segment of printing, kind of that A4 less than 20 pages a minute. We don't play in that meaningfully. And those will be more price sensitive than some of the upper-end parts of the segment. Once you move up that stack, you actually become total cost of ownership, and it's not so much priced out of the gate. It's serviceability, total cost of ownership that you take your value proposition to the customer. So we've been able to do that through that, through focusing on a total cost of ownership and we sell that to the customer when we go to them.

When you talk about the market in Asia and how fast you penetrate it, what I can tell you is the Xerox name is big. And you're right, it takes time. So first thing we have to do is integrate the products, and we have to get Xerox's name on products that go into that marketplace, but we're starting that work right now. And I anticipate it to be like a snowball rolling downhill. I think it's going to catch momentum pretty quickly.

Okay. Perfect. Okay. Amazing. And then just areas of innovation or differentiation within print. Obviously, you talked about kind of the manufacturing side. That's an important one, especially as it relates to margins. But from a share shift ability to be different from your peers, where are you guys leaning into? Where are the opportunities that you guys see as this combined entity now?

Yes. It's a little bit of what I touched on at the beginning of the last question. We try to take total cost of ownership and serviceability into account. And we go to our customers with that value proposition in mind, and we sell them on that, right? We don't -- we're not trying to be the lowest place in town on any product that we sell. But we want to be helpful to the customers. We don't want the customers have to touch the box over and over again. And if you think about it over the life of the program, are they more cost out of pocket or less cost out of pocket. And our value proposition would say you're less out of pocket.

Okay. So maybe just wrapping up the conversation on print before we move to other aspects of the story. As CFO, how have you factored in, let's say, market performance, share shifts, pricing, any one-timers? Just like if we add those all together, how will we think about each factor to ultimately get it, how you're thinking about the world in 2026 from a guidance perspective?

Yes. We factored in -- if you think about the different segments we planned, we talked about print declining in low to mid-single digits. We talked about IT solutions growing 5% to 7%. That market, the total addressable market that we play in growing 5% to 7%. We think the Xerox legacy print will move about with market, low to mid-single digits. We think Lexmark will move slightly better than market. You can think of it to neutral to slightly down. And we think IT solutions will outpace the market.

Okay. So let's move into kind of digital and IT solutions, a major initiative. Obviously, a smaller business today but clear intentions to make that a bigger, more relevant business. What new services are you kind of cross or upselling? It's a very competitive market, obviously, very fragmented. So how does Xerox win? What's -- basically, the question is you take an ITsavvy, you bring it into Xerox, what's the special sauce that Xerox now uses to make this, again, a 5% to 7% plus grower?

Yes. No, good question. First, I would say it's not a material piece of the business. When you combine IT solutions with digital services, you're over $1 billion of business per year. So it is material as you think about it in totality. And when you bring, and I mentioned it a little bit earlier, when you bring IT solutions and ITsavvy into Xerox, you're moving from a 12,000 customer reach to a 200,000 customer reach. So that cross-selling -- and these are partners largely in the large enterprise space, these are partners that Lexmark and Xerox have maintained for 20-plus years. So deep relationships in here. And now we're giving at least a voice, at least given ITsavvy, IT solutions a seat at the table to say, look, we can do more for you than print. And they already trust us. They've stuck with us this long. So it gives you that foot in the door to help drive that value proposition to give you the end-to-end product portfolio that I talked about.

And what is the goal or target for the size of this business? Where do we say -- again, I know that's going to be a moving target, I understand over time. But the initial target that I think is we want this to be 20% of the business. It's just -- I think that's the answer, but just time line to get there, size, just maybe outlined that for us...

Yes, I think midterm 20% makes sense to say, but I don't even want to throw a number out. What I would say is we're sitting about 10% to 15% today, and that will grow meaningfully over the next midterm and long term.

Okay. And maybe -- so acquiring ITsavvy kind of leaning into this digital and IT services opportunity does give you kind of a broader exposure to other parts of the IT market, PCs, infrastructure, software services, everything, again, that you can kind of cross-sell beyond what the combined entity could have done before.

I realize I'm asking the CFO kind of a demand question, but I'd love to just understand what you're seeing from a demand perspective on the services side because there are kind of cross currents of there's still refresh opportunities, there's cross-sell opportunities. There's also memory headwinds and pricing headwinds. And so like what are the conversations going on with customers right now? What does the pipeline look like? Just broad perspective on what that business is seeing today?

Yes. IT solutions is seeing significant growth in gross billings. Last year, it was double digits. We anticipate significant growth this year in terms of billings. What do we see? So the first thing we do when we go into a customer is we lead with advice. We see what their priorities are, and we help work with them to say, how should you think about this now in light of the things you just mentioned? If RAM is an issue, is it the right time to refresh hardware or should we look at spending your IT budget in other areas? Because now we have a broader product portfolio that allows us to have that conversation. It's very helpful. Because while infrastructure is always going to be a critical need, the demand is not perishable. It's not going away. Might it shift? Yes, it might shift. But we want to keep the same wallet share in that IT budget spend that we can.

Okay. And is there a way that you can maybe help us understand because I think the comments that you made earlier are very important, going from 12,000 kind of customer purview to 250,000 customers. Is there a way you can understand how that breaks down between like large enterprise, SMB, government, public or something like that? And what I'm ultimately trying to understand is on the IT services side of the business, where are you seeing growth tailwinds in each of these cohorts? Where are you seeing maybe some caution? Just trying to understand how that kind of builds up into the confidence that you have for this business.

Yes, we do. We attack it from an industry vertical. I don't know the exact numbers, so I don't want to quote them right now. But if you think about legacy Lexmark, it was largely enterprise, good heavy presence in retail. Legacy Xerox, has a big presence in school, has a big presence in SLED, federal government, big presences there. And so we're attacking from all those angles. I mean, IT solutions is hungry. Now we don't want to spread them too thin, that you don't ever make any traction anywhere. So we try to identify opportunities where there's kind of a fish on the hook and say, let's go after this one because we think there's a real opportunity here.

And from a spending standpoint, can you just help us understand, are large enterprises leading into spend now or SMBs maybe more aggressive and more agile? Is government kind of coming back after the kind of budgetary discussions of last year? Just maybe a little bit of flavor of what your customers are intending to do right now?

Yes. We haven't seen any meaningful shift. We actually have really good demand on the large enterprise space right this minute and good demand on the government space right now. education could be a bit lumpy depending on where their budgets reside in that moment, right? We haven't seen anything slowing it down, really, but we're watching it cautiously. They might be the first one to kind of drag a little bit. So we'll continue to watch it. But as you move down that stack, just like I mentioned on the pricing being more sensitive as you move down, SMB will be the first one to kind of look at where they're spending their capital. And that's where we'll come in and try to advise them on maybe other ways to spend their IT spend -- budgets.

Okay. So as we as kind of investors and analysts think about this opportunity to kind of shift the portfolio from being print heavy to having this kind of tailwind from IT solutions and services, what are the milestones we should be like looking for holding Xerox accountable for? I know there isn't a target mix, but like what are the milestones we should be kind of aware of that you guys have may be set for yourselves?

Yes. Well, we want to outpace the market, right? Market is growing 5% to 7%, we want to make sure we outpace that. We want to watch gross billings very closely. If we can get billings to increase kind of near that double-digit range, then you're starting to get a bigger share of wallet inside these customers, and we want to monitor cross-selling initiatives very strongly, too. How much of the legacy customer bases are we penetrating and how much are we not penetrating to make sure that activity is there. We mentioned we're sitting at about 15% today, 20% is a good near-term goal. We'll continue to watch that growth and continue to evolve it as we move forward.

And so I want to move maybe away from demand and revenue and focus on the margin front, which almost might be more important, more interesting, a lot to do there. So as we could get back to where this business once was. And so on top of the initiatives that you have to stabilize print, kind of accelerate IT solutions, the question is, can you drive gross margin expansion while you do that? Just maybe unpack the opportunities to get margin as we think about what you're trying to do before we get to kind of the cost actions you're taking, but just from the end market perspective, what does that mean for gross margin?

Yes. Stabilized revenue growth, right, we want to stabilize revenue, we want to expand the margins, we want to delever. And I continue saying that mantra internally and externally, so it comes off the tongue pretty easy. And when we stabilize revenue, you might see a little decline in print and increase in IT solutions. The margin expansion that we're going to see there are going to be through higher-value products on the IT solutions side or through the cost synergies that you mentioned.

We talked about realizing publicly over $1 billion of reinvention savings through time. We talked about the synergy savings out of the acquisition of Lexmark, driving $300-plus million in synergies. And exiting this year with a run rate of already $200 million plus already being realized. Those will drive significant margin enhancement. Those are coming from both consolidation of workforces where you see overlap and they're coming from the fact that we have in-house manufacturing now. The reason that's important is you have a significantly decreased cost basis on your A3 product, number one, that comes in. And we do our in-house manufacturing out of Mexico, which is USMCA compliant. So it's not exposed to the tariffs.

Okay. Perfect. And then reinvention has kind of taken a lot of twists and turns over time. First, it was, as you mentioned, workforce reduction. Now it's workforce consolidation as we bring Lexmark in. What are the kind of key building blocks in 2026 of reinvention? What is reinvention trying to solve in 2026 that hadn't necessarily been touched prior, so to speak?

Yes, it's the execution. Right now, we're in charge of our own destiny. We own the technology. We've made the acquisitions that we've made for that purpose. We have an engine that can now stabilize the top line revenue growth. And so now it's our job to execute and realize those savings and see that expand the profitability on the bottom line. So in the reinvention started a couple of years ago and Xerox has executed every step they said they were going to execute, right? They change the way they go to market. They did workforce reductions to accommodate that, big acquisitions in ITsavvy, big acquisition in Lexmark. They talk about standing up a GBS environment, which they did early, and now you buy a captive environment from Lexmark that allows you to not be so outsourced and drive significant savings too. And I only say all that to say all the pieces are in place now. We've acquired them. We have to go execute now.

All right. So maybe said differently, most of the heavy lifting in terms of reorganizing things and changing what you guys want to do is done. Now it's let's put the pedal to the metal, let's make sure that we execute.

That's right.

Okay. Okay. Super helpful. I'm going to ask you the one kind of a knowing memory question that I'm basically asking everyone, which is just how are we thinking about the impact of memory cost inflation is having on Xerox. Not a ton of exposure within core print, right, but it could have an impact on IT solution or IT services. So just how are you thinking what role memory inflation plays in the outlook for both revenue and margins?

Yes. Yes. We talked about a little bit earlier on the IT solutions side of things. Infrastructure is always going to be a core tenant of any IT house, and they're going to have to upgrade it, but maybe now is not the time. So maybe that shifts, and we advise and help them find the right priorities for their current IT budget spend. Our goal is to keep the same wallet share that we would have had before. And if it's a different product, we're selling, we're okay with that because we have the ability to do that. If they still want to invest in the infrastructure because they're at a critical time where they need it, that's a pass-through cost that will go to the end customer on the IT solutions side.

On the print side, the amount of impact it has on the bill of material can be anywhere from $2 to $100 per box. And the reason I quote the absolute dollar amount is the absolute cost of a printer can go anywhere from $250 all the way up to tens of thousands of dollars on a printer. So it's not a highly material piece, but it's enough to where we'll watch it very closely. And if we need to go work with our customers and say, hey, if a printer stays in the field and continues to print supplies, I'm okay if I wait another year before you refresh it. So we'll do some diagnostic test with them. We'll say, look, this one can last a little bit longer, if you want to make it last a little bit longer to help both parties. We want to help our customer and it also protects our bottom line as well especially on the A4 side of things. The A4 is a little more margin negative out of the gate when you place a printer as the A3 makes a little money. But even on the A3, the annuities and the post sale are always more profitable. So if the ESR remains under pressure a little bit, we're okay. We can absorb that, right? As long as the printers that are in the field today, continue to print and we continue to get the post sale from it.

Right. Okay. That makes sense. So let's kind of combine all these 2 and bring it down to the operating margin level, which there is a clear initiative at least from my perspective, outside of what we've talked about at the revenue side to improve operating margins. Just help us understand the building blocks that get us there? I know on the revenue side, but just at a very high level, what's the goal? How are we going to get there?

Yes. Yes. I think historically, we've been anchored into this 10% number. I don't get as anchored into 10%. I want to get there. I would like to get further than that. I get anchored into I want to set targets that delever our company and allow us to fulfill our obligations going forward. It's a very disciplined approach that I've always tried to use. We know what our expected outflows are going to be over the next several years, right? And so we can back into exactly what we need to do from a bottom line in order to hit those and then develop the actions underneath that. And then look, I think there's tons of opportunity here. 10% is a great target to get to. It will be done through cost synergies, and we have the opportunities to drive those.

Okay. And then maybe a related question is just turning that away from the income statement to the cash flow statement and cash flow. So you're guiding to $250 million of free cash this year. Maybe first part is just the underlying drivers of getting to $250 million of free cash flow. What is kind of core free cash flow generation driven by everything that we're just talking about and then other factors such as the receivables factoring, not to say factor twice. But just what are the 2 building blocks that will get there? And then just a follow-up to that.

Yes. Finance receivables this year, we stated they are about $335 million is the impact that we anticipate to receive out of that. We're facing headwinds in the cash flow from several areas. One is the interest that we pay on the debt that we have outstanding. The more we delever, debt comes down accordingly, number one. Number two, the pension funding. We talked about $150 million to $160 million a year that we're having to fund in the pensions. That will be happening for another year or 2, and then you'll see that start to decline. You look at some of the capital investments that we're making right now because we're bringing manufacturing in-house. We're changing some stuff with our IT stack. As that passes us, that will come down. So there's -- there are tailwinds that will come to help offset as that finance receivable becomes less each year as it already is doing, that will drive the more free cash flow driven from the operations.

And I don't want to kind of pin you down on a number or anything, but is there a rule of thumb or a target in mind when it comes to like core free cash flow conversion? Again, not now, but when we move beyond this and think about all the initiatives you have in place and where you want to kind of get to, is there a target that we should be -- again, not holding you to, but like that you'd like to get to?

I don't know that I've ever put a number on it, so I wouldn't quote one right now. But I want it to be better than what it is this year. And I wanted it to be, of course, enough to fulfill the obligations of the company and service the debt that we have on the books.

Okay. So very helpful. Let's talk about deleveraging. Just a very big focus internally, obviously. Where -- maybe the question is target leverage, how long does it take to get there? And maybe just so we can think beyond kind of more technical is like if -- assuming that you get there, right, assuming that you get to where you want to go, what's next? What's after that when we think about capital allocation?

Yes. Yes, that's a good question. I would say midterm range is to be 3x gross leverage. Yes. And we'll continue to be opportunistic in ways to try to do that going forward here. After we get there, you could see we'll have to evaluate what's possible, but you could see us looking at some tuck-in acquisitions underneath the IT solutions to make sure we can expand revenue even further.

Okay. Great. So I want to maybe be a little bit more specific there and just touch on some of the moving pieces. So the pro rata warrant work that you guys did recently, you had a $450 million JV with TPG that you recently announced. Just at a high level, objective behind these initiatives? How is that -- how are these kind of contributing to exactly what we just talked about?

Yes. Well, the key tenet on both of those, right, is balance sheet improvement. Both those are intended to provide balance sheet management. Number one, let's talk about the warrants. The warrants, what we think it does is it gives us a balance sheet-friendly way to delever and to reduce our debt. It gives our bondholders optionality in how they want to participate with the company. They can turn their debt into equity and participate in the upside. And it gives our equity holders true tangible value because the warrants are worth something in the marketplace that can be traded and drives value for them. So we think of it as a win-win-win for all parties.

And if you want to get a little more technical with it, you can think of it and they can turn their gross debt into the price of the stock today to mirror whatever the debt is trading at today. That's what they're trying to do, and it gives them that kind of optionality. So we think it's a low-risk balance sheet-friendly way to help delever the company quicker. The JV that we had set up was to shore up the balance sheet here in the near term. If you follow the print industry long enough, you know that the first half of each year tends to be working capital negative for several reasons, the back half tends to be working capital positive.

In addition to that, Xerox is spacing debt amortizations in the first half of this year as well. It just gives us a little bit of headroom as we go through that to navigate it. But at the same time, we're going to continue to look at opportunistic ways to leverage that to delever overall.

Okay. Last 2 questions for me. One, this is just maybe focus on you. What -- for everyone that's kind of -- that didn't follow Lexmark that is new to you, what is your kind of role as CFO? Meaning what kind of CFO are you? I'd love to just maybe get a better understanding of what should we expect, but where do you find your strengths lie to kind of drive this evolution of everything that we just talked about?

Yes, yes. I love the business. I love being involved in it. I love the operations of the business. I tend to approach things with transparency and discipline. And I want to make sure everybody understands the direction we're heading and how we're going to get there and make sure everybody stays focused on that. There's a lot of buzzwords, right, that we throw out. We talk about the warrants. We talk about the JV. We talk about reinvention. We talk about the synergy savings. And you get all these moving pieces that are happening, and I don't want people to get distracted, hit the numbers, execute. If we execute, everything else takes care of itself. And that's the way I typically operate. I don't like to be surprised. I'm not going to tell you I can do something less I believe we can do it. I don't shoot for things like that, right? If I think I can do it, I will tell you, I can do it. And if I can't, then we'll just have to have a difficult conversation about why I got surprised.

Okay. Okay. Very fair. I love that accountability. And just as a quick follow-up to that is the KPIs that we should all be focused on to kind of hold you accountable to what you say you should be doing, is that revenue growth and operating margins? Is that operating profit dollar growth? Like what are the focused KPIs we should all be looking at to say Xerox is doing what they said they were doing?

Stabilize the top line, expand margins and delever the company. And we put guidance out to the Street. We said we'd be greater than $7.5 billion this year. We said we would be between $450 million and $500 million of operating income. I feel very encouraged about those. I hope to be coming back to you at some point during the year and saying, we did that and we can do a little bit more. We'll see how the year unfolds. But that's the goal, hold me accountable for what I told you, I could do that.

Awesome. I love that. I love that. Last question, and this is maybe just the kind of wrap up for everything is we covered a lot. There's a lot that's changing. There's a lot that you guys are leaning into. Just maybe what -- when you look out in the investment landscape, what are investors perhaps not fully appreciating or not fully understanding that you kind of want to communicate that message to everyone to say like, here's why we should be excited about the future. We have to execute through it, but here's kind of what you don't fully -- you might not fully appreciate about what we're doing under the hood.

Yes. I think it's the same thing I just mentioned about internally when I have these conversations. It's confusing sometimes right now. There's a lot going on. We've executed a couple of big acquisitions. We did the JV. We did the warrant distribution. And there's just -- it keeps -- what I want people to know is through all that, right, we're in charge of our own destiny now. We own the technology now. We own the capabilities from a back-office structure and a shared service center. We have access to markets we didn't have before, right? Everything is in our control. We have to go execute now. But we have everything in our control to go do that, right? I can understand completely, if you look back at the history of what's happened over the last couple of years and how we've done on earnings versus what we've sent the Street, why people would look at us with a raised eyebrow. But we're in control of it now, and we're going to execute accordingly.

Okay. I think that's a great place to end. Awesome. Thank you. Chuck. Thank you very much.

I appreciate that, Erik. Thank you.

Welcome to the Xerox Holdings Corporation's Fourth Quarter 2025 Earnings Conference release. [Operator Instructions] I would like turn the meeting over to Greg Stein, Senior Vice President and Investor Relations. Please go ahead, sir.

Good morning, everyone. I'm Greg Stein, Senior Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Fourth Quarter 2025 earnings release conference call hosted by Steve Bandrowczak, Chief Executive Officer. He is joined by Chuck Butler, Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the express permission of Xerox.

During this call, Xerox executives will refer to slides that are available on the web at xerox.com/investor and will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein.

At this time, I would like to turn the meeting over to Mr. Bandrowczak.

Good morning, and thank you for joining our Q4 2025 earnings conference call. On the Q3 call, I highlighted the macroeconomic challenges we are facing and the continued disruption associated with the tariff and government funding related uncertainty. Macro headwinds continue to persist, but we are cautiously optimistic that the business trends are starting to improve. Revenue in the quarter of $2.03 billion increased roughly 26% in actual currency and 24% in constant currency, reflecting the inorganic benefits of the Lexmont and IT savvy acquisitions. Pro forma for these acquisitions, revenue declined 9%. Adjusted operating income margin of 5% was lower year-over-year by 140 basis points. Free cash flow was $184 million, a decrease of $150 million versus the prior year and adjusted loss per share of $0.10 decreased by $0.46 year-over-year. For the year, revenue of $7.02 billion increased roughly 13% in actual currency and 12% in constant currency. Excluding the benefits of the acquisitions, revenue declined approximately 8%. Adjusted loss per share of $0.60 was $1.57 lower year-over-year. We generated $133 million of free cash flow, which was $334 million lower year-over-year. and adjusted operating income margin of 3.5% was lower year-over-year by 140 basis points. While macro headwinds continued to weigh on transactional print equipment sales, activity picked up following the end of the government shutdown. In addition, page volume declines moderated and supply usage stabilized. Encouragingly, we entered 2026 with a pipeline higher than this time last year with cancellations and renewal rates also improved in 2025. This gives us confidence in improving underlying trends in 2026.

What does give us pause is the recent spike in DRAM prices as they began to impact costs across storage, servers, endpoints and networking equipment, having the greatest effect on our IT Solutions business. Considering this, we are taking steps to mitigate, including moving to consumption models such as HPE GreenLake Dell Apex device as a service models and providing extended maintenance services for clients that decide to retain their old hardware. The impact is expected to be modest in our print business in the first half of the year. But based on current trends, we are expecting a larger impact from the price and availability perspective as we move into the back half of the year. Still, we remain confident in our long-term prospects of our IT Solutions business. While revenue was impacted in Q4 due to delays in enterprise deals directly tied to the recent spike in memory prices, the breadth of our business continues to grow, supported by a very strong quarter in the velocity channel. Bookings, billings and backlog all increased and pro forma profits improved meaningfully once again, aided by the synergies generated throughout the year. IT Solutions is strategically positioned to capture secular growth through differentiated platforms, including our network operating center. Through our NOC, we deliver scalable AI-enabled automation and operational intelligence underpinning our managed infrastructure services through a proprietary AI ops platform.

As we look out towards 2026, our conviction for more meaningful margin expansion is high, underpinned by our guidance of more than $200 million improved in adjusted operating income. Many of the headwinds we experienced in 2025, such as tariffs, increased product costs and the wind down of the sale of several production lines begin to moderate as we move through the year. We expect tailwinds in 2026 to steadily grow from the launch of new product offerings a fully integrated IT solutions organization and a soon to be unified Xerox Lexmark sales organization. We remain focused on the balanced execution of our 3 strategic priorities: execute reinvention, realize acquisition benefits and balance sheet strength. I will provide an update on each.

Starting with the execution of reinvention. With each court of the progress following the acquisition of Lexmark, I have become increasingly confident in the complementary nature of our businesses. Much of the original nervousness from partners following the transaction close had dissipated, and most of our clients and partners are excited about what our joint offerings mean for them. We continue to develop our route to market, and we'll have more to share next quarter as well as an update on our inside sales strategy, which we will continue to be meaningfully expanding during the year.

Last quarter, we discussed at length our enhanced global business services organization, which was launched in 2024 to create a more streamlined and comprehensive set of centralized operating processes leading to lower operating cost and improved quality. In addition to the physical changes we noted, such as greater utilization of Lexmark captive offshore and near show global capability centers we are also leveraging our AI capabilities to further drive efficiencies into this organization.

To that point, Xerox recently established an AI Center of Excellence. In the second half of 2025, we launched several internal offerings designed to streamline processes, improve customer experience and strengthen financial performance. These platforms are delivering measurable impact today. We introduced AI-powered service agents across XBS, U.S. and Latin America. These agents handle thousands of real customer interactions via chat and voice leveraging prior service cases, engineering content and large language models to deliver immediate support. This has resulted in higher success rate, reduced waiting times and improve customer experience, all at lower cost per interaction. Beyond service, AI is driving significant financial improvements using Microsoft copilot studio and advanced data science, we reduced outstanding accounts receivable, automated over $10 million in credit hold actions and surfaced actionable insights from 1.4 million collective comments. These capabilities empower faster, data-driven decisions that improve cash flow and operational resilience.

Finally, we begin to utilize AI-driven analytics to protect our supplies business, leveraging problemalistic modeling and machine learning we identified hundreds and thousands of cartridges with potential counterfeit and third-party activity, strengthening supply chain integrity and customer trust.

Moving to acquisition benefits. November 20 marked the 1-year point of our acquisition of IT savvy, and we have been thrilled with the progress to date, cross-sell performance remains strong, and we are now going to market under a unified brand, Xerox IT Solutions. The alignment and scale provides us opportunities to deliver unique value to our 200,000 customers, such as with the recent launch of Xerox Tri-Shield 360 cyber solution, a holistic cybersecurity offering targeted specifically for SMB. The solution is built upon Palo Alto Networks advanced detection technology, continuous monitoring and response platform. with cyber response provided by LUMIFY and a security operations center and cyber insurance coverage provided by the Hartford brokered by Aon. This is enterprise-grade security design for SMBs, offering scalable protection without the complexity or the cost of traditional solutions.

While operational efficiencies are a main pillar of the rationale for the Lexmark transaction, we are beginning to bear fruit as 1 company in our go-to-market operations. In the fall, we rolled out Lexmark produced A3 devices in Eastern Europe. The channel reaction so far has been very positive as this product has better features and design innovation focused on serviceability and reliability. We expect these devices to reduce service costs extend activities and post sales and lead to better uptake with partners over time. We are planning a larger global rollout in 2026 as our in-house manufacturing capacity ramps.

During the quarter, Xerox and Lexmark secured a global first joint win with Morrisons, 1 of the U.K.'s leading grocery retailers. The agreement expands our long-standing relationship with Morrisons and position Xerox as a strategic partner across both operational print infrastructure and customer marketing communications. The solutions have Xerox providing a fully refreshed central print room, leveraging cloud-based print management, web-to-print automation and Lexmark MPS for their entire state supermarkets, 15 logistics sites, the head office and with added Xerox on-site operations. Morrisons will also adopt our Go Inspire platform, including direct mail, loyalty communications, store leaflets and campaign automation through Go Inspire's digital marketing platform, Go 360, enabling more targeted data-driven customer engagement.

Earlier this month, I joined our team at the National Retail Federation Show in New York City, where for the first time together, we demonstrated legacy Xerox strength in IT solutions, production print and digital workplace with Lexmark's expertise in, in-store operation with devices intentionally engineered for retail, signage solution and Vision AI. We are excited by the reception and believe our enhanced value proposition, especially with the retail vertical will lead to greater participation in RFPs and further wins and expansion into existing accounts. We also just announced a partnership agreement with RJ Young, 1 of the largest office equipment and technology dealers in the United States. This agreement, which stems from the existing Lexmark partnership extends Xerox portfolio with Ajay Young's proven service capabilities to their customer base. We continue to look for opportunities as 1 company to commit to and invest in our partners.

Finally, balance sheet strength. For those focused on our current credit ratings, we remain extremely confident in our ability to drive increased profitability and delever. Since the Lexmark transaction closed, we have generated meaningful positive free cash flow and took net debt down by $366 million. For the near and medium term, we plan to use all excess free cash flow to repay debt. In connection, yesterday's announcement of the warrant distribution, which Chuck will speak to in more detail further supports our goal to enable balance sheet flexibility. Cost rationalization remains a top priority, and we are reaffirming our cumulative run rate gross cost synergy targets of at least $300 million from the Lexmark acquisition and the $1 billion plus of profit improvement as part of our reinvention program, inclusive of Lexmark cost synergies, delivery against this target is centrally managed and continuously updated through our Enterprise Transformation Office, or ETO, a joint team comprised of legacy Xerox and Lexmark leaders. The ETL is responsible for enabling our reinvention priorities, overseeing integration execution and building a durable transformation capabilities across the enterprise through robust analytics and disciplined governance. This includes active oversight of several core integration work streams, dozens of sub-work streams and hundreds of enterprise-wide initiatives. Each initiative is formally documented tracked through defined stage gates and subject to required milestones and approval before being incorporated into our integration and synergy forecast. This level of rigor and transparency gives us strong confidence in our ability to deliver on and potentially exceed our synergy commitments.

Before I hand the call over to our recently appointed Chief Financial Officer, Chuck Butler, I wanted to share why he is the ideal leader for this role. Chuck joined Xerox as part of the Lexmark acquisition, where he spent 21 years in a variety of senior leadership positions, most recently as their Chief Financial Officer. He brings deep experience and proven resilience having led the company through a supply chain disruption, a significant manufacturer transition due to U.S. sanctions on its former Chinese parent company and a large-scale restructuring that delivered stronger revenue and profitability. At this pivotal moment for our organization Chuck's thoughtful, pragmatic approach to driving operational excellence and profitability is just what we need. I'm excited to partner with them as we work to restore growth and strengthen the business.

Chuck, take it away.

Thanks, Steve. It's an honor to step into the CFO role at this moment in the company's history. I don't take this responsibility lightly. I spent the last couple of months getting up to speed. And while there's work to do, I'm encouraged by the talent across the company and the early signs of progress from integration. My priorities are straightforward: improve execution, strengthen the balance sheet, and drive predictable profitability and cash generation.

Let me start with the quarter. For Q4, while revenue was slightly below guidance, adjusted operating income and free cash flow came in ahead of our expectations. We saw contributions from integration activities, early synergy capture and disciplined cost actions. On a reported basis, Q4 revenue increased approximately 26% year-over-year driven by the contributions from Lexmark and IT savvy. On a pro forma basis, revenue declined 9%. Adjusting for deliberate exits, nonstrategic reductions and normalizing backlog fluctuations revenue declined about 5%. This is consistent with Q3 and reflects ongoing macro and policy-related uncertainty, particularly early in the quarter. Results this quarter were affected by unforeseen impacts, primarily from the sale of finance receivables in Portugal and France. These transactions reduced revenue by $16 million in adjusted operating income by $13 million, but were executed to strengthen the balance sheet, mitigate risk and improve liquidity. Without this effect, revenue would have been roughly in line with expectations and adjusted operating income would have been well above guidance.

Turning to profitability. Adjusted gross margin was 29.3%, down 230 basis points year-over-year reflecting 160 basis points of higher tariff costs and 160 basis points of increased product costs, partially offset by Lexmark's contribution and reinvention benefits. Adjusted operating margin was 5%, down 140 basis points, driven primarily by lower gross margin, partially offset by integration savings including head count actions executed in October and early non-headcount synergies. Adjusted other expenses net was $85 million, up $54 million year-over-year, due mainly to higher net interest expense associated with the Lexmark acquisition financing. The adjusted tax rate was 147.1% compared to 32.9% last year reflecting geographic mix of earnings and an inability to benefit from current year losses and expenses in certain jurisdictions. GAAP loss per share was $0.60, down $0.40 year-over-year and adjusted loss per share was $0.10, $0.46 lower primarily due to higher interest expense.

Let me now review segment results. Within Print and Other Q4 equipment revenue was $485 million, up 23% as reported or up 21% in constant currency. On a pro forma basis, equipment revenue declined approximately 10%, normalizing for reinvention related actions and other onetime items, equipment revenue declined around 5%. To provide additional context, Legacy Xerox equipment revenue declined 14% in constant currency or roughly 10%, excluding reinvention related items tied to our decision to discontinue manufacturing high-end production systems. This compares to a normalized 8% decline in Q3. Sequential performance was impacted by continued budget-related delays in federal and sled orders as well as softer commercial and channel demand. Lexmark equipment declined 8% in constant currency, including an estimated 12 points of year-over-year backlog fluctuations, underlying demand grew 4% versus a comparable 12% decline in Q3 and indicating a firming of demand over the quarter. Elevated backlog weighed on Q4 revenue but represents a future revenue opportunity as it converts. Print Post sale revenue was $1.39 billion, up 25% as reported and up 23% in constant currency. On a pro forma basis, print Post sale revenue declined 9%. Excluding reinvention effects, pro forma post sale revenue declined approximately 5%, a modest improvement from last quarter, reflecting moderating declines across supplies, services and outsourcing at legacy Xerox. Print and Other adjusted gross margin was 29.8%, down 280 basis points year-over-year due to higher tariff and product costs, lower managed print volumes and lower high-margin finance-related fees, partially offset by reinvention savings. Print segment margin was 5.8%, down 270 basis points due to lower gross profit, partially offset by reinvention savings and Lexmark's contribution.

Turning to IT Solutions results. Revenue increased 39% year-over-year reflecting the inclusion of IT savvy for the entire quarter versus a partial quarter in the comparative period last year. Pro forma gross billings, a reflection of business activity increased 13% year-over-year in the fourth quarter. Total bookings, an indication of future billings increased 8% in the fourth quarter. We continue to see growth in sales activity for IT products and service to existing Xerox print clients with more than $60 million of pipeline creation in 2025. IT Solutions gross profit was $36 million with gross margin of 22.7%, up 610 basis points year-over-year due primarily to IT savvy, on a pro forma basis, gross profit expanded by nearly $6 million versus prior year or nearly 20%. Segment profit grew $9 million year-over-year with profit margin reaching 5.8% and helped by the inclusion of IT savvy. On a pro forma basis, segment profit grew almost $7 million due primarily to increased gross profit and cost structure improvements. Moving to our cash flow and capital structure. For the quarter, operating cash flow was $208 million compared to $351 million last year, reflecting lower net income, lower proceeds from finance receivable sales and working capital timing. Investing activity was a $4 million use of cash with CapEx being partially offset by proceeds from real estate disposals compared to a use of $172 million in the prior year which had costs associated with the acquisition of IT savvy. Finance activity resulted in a $173 million use of cash, reflecting ABL paydown and payments on secured debt. Free cash flow was $184 million for the quarter, down $150 million year-over-year. For the full year, free cash flow was $133 million, above our $107 million comparable guide. This incorporates an adjustment to our Q3 earnings release that reallocated a use of $43 million from investing to operating cash flow. This adjustment was the result of a onetime accounting treatment related to the settlement of intercompany balances between Xerox and Lexmark. This had no effect on cash and did not impact Q4 2025 free cash flow. We ended Q4 with $565 million of cash, cash equivalents and restricted cash and total debt of $4.2 billion, which was down $160 million sequentially and including repayment of $100 million ABL borrowing that was outstanding at the end of Q3. There were no borrowings at the year-end under our ABL, we will be repaying the remaining $110 million of IT savvy notes tomorrow. Approximately $1.5 billion of the outstanding debt supports our finance assets with remaining core debt of $2.7 billion attributable to the nonfinancing business. On a pro forma basis, gross leverage was 6.7x trailing 12 months EBITDA. Our top capital priority remains debt reduction with a medium-term target of approximately 3x trailing 12 months EBITDA.

For 2026, we expect greater than $7.5 billion in revenue, which represents approximately 7% growth versus 2025, inclusive of the full year of Lexmark. This outlook incorporates several known headwinds from ongoing reinvention actions, including lower revenue related to the exit of high-end production print manufacturing and continued declines in excess finance receivables, as a result of our forward flow execution. These impacts are partially offset by expected growth within IT Solutions. On an organic basis, we expect year-over-year revenue performance to improve as we move through the year as headwinds dissipate and we realized the benefits of tailwinds Steve referenced earlier. Specific to XFS, we expect approximately $50 million of revenue headwinds and roughly $40 million of operating income headwinds in 2026 and primarily from forward flow dynamics.

Despite these impacts, we expect adjusted operating income to be in the range of $450 million to $500 million, an increase of more than $200 million versus 2025 and driven by $150 million to $200 million of integration synergies and $100 million of reinvention savings. We have clear line of sight to these savings with accountable owners sequencing and cash timing discipline, which gives us confidence in the delivery path. We expect tariffs to be a profit headwind in the first half and a tailwind in the second half as we shift more A3 production in-house, recent memory price increases are expected to offset some of that benefit. We expect free cash flow of approximately $250 million, driven by higher adjusted operating income partially offset by higher interest expense and reduced forward flow benefits. Free cash flow assumes roughly $335 million of forward flow benefits, leading to slightly over $1 billion of receivables by year-end $20 million of net interest expense, $160 million of pension contributions and moderate working capital headwinds, we expect a use of cash from operations in Q1 with improvement throughout the year.

Finally, as you may have seen yesterday, we announced a special pro rata distribution of warrants to holders of Xerox common stock, preferred stock and convertible notes. For holders as of the record date, February 9 and we will issue on warrant for every 2 shares held, which will be tradable as well as exercisable with cash or certain debt instruments at face value. We believe the issuance of these warrants with expected tangible value is a balance sheet friendly way to reward shareholders for their continued loyalty and provides bondholders the optionality to participate in Xerox equity. Those who participate in exchange with debt enable immediate leverage reduction while preserving liquidity, enabling faster balance sheet improvement and accelerating the time line to our stated leverage goals beyond free cash flow generation alone.

With that, I will now turn the call back to the operator to open the line for questions.

Certainly. And our first question for today comes from the line of Ananda Baruah from Loop Capital.

so I guess just a few, if I could. Steve, you mentioned you're starting to see orders come back post government shutdown. I think back to normal there? Sort of like order-wise?

Yes, a couple of things on the first -- thanks for the question. We're clearly seeing in certain areas, the portfolio that we have has given us a broader TAM that we're going after, and we got the opportunity to bring more products and services into state, fed local government. The strategy is working in terms of the acquisition of IT savvy and Lexmark, bringing more products and services into it. So I would say we're expanding and we're growing. Even in areas where we're seeing a slowdown in spend, there are other opportunities that we can bring solutions into the Fed space.

Yes, that makes sense. Okay. Thanks for that context. And then maybe just sticking with IT savvy. So it sounded like -- and this is more of a clarification. Memory, is it -- actually, could you just sort of unpack or clarify the impact of memory in the IT savvy business. And then it sounds like you also said there was an impact to the print business or the copier business, so maybe it's both, is that distinct from what you're seeing in IT savvy?

Yes, I think there's a couple of things. So memory across all the industries, whether it's IT services, whether it's in print, is going to be a lot of uncertainty as we think about the year, both in terms of pricing, availability and so forth. So 1 of the things we're doing, as we highlighted is we're trying to look at our IT Solutions portfolio as we're seeing memory prices going up, maybe there'll be a stall in some endpoints, but we can help our clients to extend their life of their products. We can help them with moving to as a service, such as when we talked about with HPE's offering, Dell's offering. There's a lot of SaaS platforms and things that we can move to that we're going to help our clients to navigate through the memory challenge. On the print side, first half of the year, little impact because we've got a lot of the products teed up or already in motion. We'll see what the second half of the year is in terms of availability and pricing, but we'll navigate through both of those.

And how -- just on the memory side for kind of across the portfolio, I guess. But savvy as distinct from the copier print business. what's the useful way for folks to think about -- well, first of all, are you hitting elasticity yet? And then -- or are you starting to see elasticity headwinds yet from rising memory costs. Are you passing -- are you raising prices? And sort of to what degree should we think of the margins the margin impact also.

Yes. Look, I think the industry is uncertain around what is happening with pricing and what is happening with availability throughout the year. What we're trying to do, working with us is making sure that we get the product availability, working with our clients to try to put in the right solutions so we can optimize their return on investment and things that they're trying to drive. And when we see these things and historically, when you think about supply challenges, and shortages. We look at how do we help in trying to navigate that. So we're working with all suppliers. We're working with contract manufacturers working with our end products in terms of the products that they're giving to us and trying to navigate through that. And it will be a mix shift of products. So it will be a combination of extending warranties, extending service and helping to navigate through this. There's going to be some uncertainty. And we'll just see how we play it out. We'll navigate through it.

And our next question comes from the line of Erik Woodring from Morgan Stanley.

I have 2 for you. Steve, maybe just to start, and I think I've asked this before, but would just love an update is. Obviously, there's a lot going on at Xerox right now between reinvention absorbing Lexmark, managing leveraging cash flow, kind of trying to protect the core business and all amidst this kind of very volatile macro and obviously, memory situation. Just how do you prioritize all of these different kind of moving pieces because if we go back to Chuck's comments, we want to talk about improving execution obviously, that makes execution risk higher with all these moving pieces. So just how are you prioritizing? How are you managing? And how are you making sure that you can do all of this while pushing this business forward? And then a quick follow-up, please.

Yes, a couple of things there. First of all, as we look at Q4 and navigating, revenue, operating profit cash came in as we expected, and we navigated through that. I got to tell you, from a strategic standpoint, reinvention strategy, the acquisition of IT savvy, the acquisition of Lexmark is working. We're heading in the right direction. And we're seeing that examples of that, the Morrison account where we bring in all of our capabilities, Lexmark, their MPS, our production how go inspire, all of it coming together and driving value in a large retail account. Expansion in channels. We're seeing channels now picking up on our A3 product that we manufacture internally. We drive better serviceability, better profitability as it returns as we look at supplies expansion. We're seeing the launch in IT solutions of our Cyber Shield, which is the combination of Palo Alto and insurance, nobody can bring that to the market to the SMB space like we can bring that. So the strategy is working. The execution is working. When we look at the reinvention and integration, it's 1 project to us, right? We have 1 enterprise transformation office that looks at the entire suite of all the work streams, all the things that we follow. So the management operating system, it's all under 1 management operating system that we've been executing here since the reinvention launch. So I know from an outside, it looks like a lot of moving parts. But I've got to tell you, it's coming together, and it's heading in the right direction. And as you look at our guidance in 2026, the strategic things that we've put in place give us confidence to deliver.

Last point, when you bring IT savvy together and you bring Lexmark together and you look at integration, culture is important. And I got to tell you, the culture and the combination of these 3 assets has been absolutely outstanding. Working together, bringing value to our clients, internal synergies, all the things that we've been working on have been extremely, extremely important.

And then the last piece of it, as we're going through this, we talk about reinvention. Reinvention, our end-to-end operating processes, reinvention, everything we do. We've now added an AI center of excellence to that, where we're now bringing technologies that we've never had before. as opposed to 2 years ago or 3 years ago when you look at integration, we didn't have some of the capabilities and technologies that we have today. So I am very optimistic, very, very comfortable and very excited about where we are in the process, and the team is doing an outstanding job.

All right. No, that's super helpful. I want to press you on the answer that you provided to Ananda earlier just on kind of the memory stuff. And really, my high-level question is how are you protecting yourself against kind of pull forward and the risk of a tough second half in IT services. And really the point that I'd love to try to kind of better understand is, I know you speak to double-digit growth in bookings and billings and IT services. Just based on some of the -- what we hear from a pricing standpoint, things look like we're going through a mega gig up period of inflation, however you want to characterize it. Just in the event things get tougher than expected in the second half of the year. Obviously, you're trying to reorient your cost base. How do you protect yourself with all of that going on, again, just in a world where things do get a little bit more challenging. I'd just love to hear kind of the strategy behind your thinking about that.

Yes. So 3 things. You know my background as a CIO, so I'm going to speak from a CIO perspective, the budget that I have is the budget that I've had, right? And so I have to drive value for business. I've got to drive value for internal, whether it's driving more revenue, driving more profitability. And what we're going to see from our clients is, yes, endpoints may go up, servers may go up but I could sweat those assets. I could extend them. I can move to more towards Software as a Service and look at some of these other platforms, right? And we have a full portfolio that we could take advantage of where clients are going to ship to. We can help them with sweating their assets. We can help them with bringing more productivity. We talked about AI-powered platform around end-to-end support in terms of the service IT stack. And so we're shifting and we're helping our clients navigate the increase in memory prices and ultimately, the increase in end devices. So I'm very confident that we have the capabilities, and we've got all the infrastructure to help our clients to navigate through this. Look, you can't predict the pricing, I can't predict the price and what's going to happen with chips memory over the next 18 months. What I can do is control the factors that we have, and that is knowing these are early signs of headwinds shifting our demand and helping our clients to navigate through this. And I'm confident we've got the products and we've got the line card that allows us to do that.

And our next question comes from the line of Samik Chatterjee from JPMorgan. Samik, you might have your phone on mute?

Yes. Sorry about that. This is [indiscernible] for Samik. So my question is regarding the operating cash flow to free cash flow bridge. You go from $30 million to $50 million based on the 2026 guide. So I guess what are some of the assumptions with regards to that, like the working capital assumptions, CapEx and the split between operations versus finance receivable runoff?

Yes. You're talking year-to-year -- and thanks for the question, by the way. If you think about year-to-year free cash flow from 2025 to 2026 there's a lot of puts and takes that can go on in between that bridge and the walk down. But the essential gist of it, if you boil it all down is will have a higher EBITDA driven by operating income increases of $225 million to $250 million, and then you'll have less finance receivables. And the net of those 2 kind of gets you to the year-over-year improvement and free cash flow. There are some puts and takes in there. You'll have a little bit higher cash taxes, a little bit higher interest, a little bit less restructuring. But if you netted it all down, it comes down to a higher operating income offset by lower finance receivables.

Got it. And I guess piggybacking off that with regards to the finance receivable sales and the prior question regarding prioritization between P&L and balance sheet. How do you think about finance receivable sales over the course of the year in 2026?

Yes. We had $335 million of finance receivable sales. Our forward flow benefit baked into our forecast for 2026. If you think about where we have stated we will take our finance receivables to it be a balance sheet of about $1 billion, which is where we'll exit the year. I anticipate the larger piece of that happening in the back half of the year to get to that. And then we'll see if we can be opportunistic beyond 2026.

And our next question comes from the line of Asiya Merchant from Citigroup.

This is Mike Cadiz for Asiya Merchant at Citi. Chuck, and we look forward to working with you in the coming quarters. So my 1 question is, can you talk about any cross-selling progresses that you've seen and any milestones you're targeting for this year given the large 200,000-plus client base. And what kind of penetration is targeted for this year? And also the last thing is, are the sales motions somewhat different in selling IT services to a Lexmark print client versus legacy Xerox client?

Yes. Let me start with that. So as you know, we talked about our IT solutions strategy and selling into our mid-market clients, where typically the same buyer is the buyer about print equipment as well as IT solutions equipment. So we already have the relationship. We already have a trusted partner and a trusted client. We've talked about our printers behind the firewall. We're integrated into a security stack. By the way, we're integrated into their overall data security. So it's the same economic buyer. We're now bringing IT solutions into. So for us, the go-to-market motion is leverage the relationship but bring a broader set of portfolios and products and capabilities such as we just announced with Cyber yield. That would never happen without the 200,000-plus clients that we already have that we know struggle with being able to get both cybersecurity insurance and get the scale and get the capabilities of a Palo Alto network. So the go-to-market motion for us is leverage the relationship we already have bring in the portfolio on the capabilities of IT solution and continue the expansion and the penetration into those accounts. What we've also seen and recently at the retail show as we start to look at expansion and bringing these together, we now start to see the things that everything that Lexmark had done in the retail space around signage, around IoT, AI capabilities, we now can bring IT solutions in a store in the same way, and we now can bundle and package a broader set of portfolios, including, by the way, adding production capabilities. So what we're seeing is an expansion of route to market and a penetration in existing TAM where we already have relationships, we're already trusted partners, and now we're bringing new products and services that drive meaningful outputs for our clients, which is really excited as we think about the go-to-market motion.

Chuck, anything you want to comment?

Yes, if I would add a little bit to how does that translate into bottom line performance. someone mentioned all the different projects and areas that we're working right now. But they all have 1 intended focus, and that's to increase the financial profile of this company. And I see all that occurring. I see we performed as expected in on a bottom line basis, we performed as expected or better than expected from a cash flow generation. So you're seeing some of that working capital discipline and some of the synergy savings being realized. So where we stand right now is in control of our own destiny with good momentum going into 2026.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steven Bandrowczak for any further remarks.

Thank you. While 2025 brought meaningful challenges, we exited the year with strengthening fundamentals and clear momentum. The integration of Lexmark and IT savvy is unlocking tangible commercial and operational benefits. Our core print business is showing signs of stabilization and IT Solutions delivered double-digit bookings and billings growth, all of which gives us optimism for an improved trajectory in 2026.

Looking ahead, we have high conviction in our ability to expand margins and return to profitable growth. Many of the cost and product-related headwinds began to ease as the year progresses while new product launches and unified IT solutions and sales organizations and disciplined execution of our reinvention program provide meaningful tailwinds. With a clear deleveraging plan and a robust synergy pipeline, we are confident in our path we are on.

Thank you for your continued support. We look forward to delivering a stronger 2026 for our employees, clients, partners and shareholders. Have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Welcome to the Xerox Holdings Corporation Third Quarter 2025 Earnings Release Conference Call. [Operator Instructions]

At this time, I would like to turn the meeting over to Mr. Greg Stein, Vice President and Head of Investor Relations.

Good morning, everyone. I am Greg Stein, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Third Quarter 2025 Earnings Release Conference Call hosted by Steve Bandrowczak, Chief Executive Officer. He is joined by Louis Pastor, President and Chief Operating Officer; and Mirlanda Gecaj, Chief Financial Officer.

At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor and will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein.

At this time, I'd like to turn the meeting over to Mr. Bandrowczak.

Good morning, and thank you for joining our Q3 2025 earnings conference call. It has been 4 months since the Lexmark acquisition closed, and I am extremely pleased with the progress both the Xerox and Lexmark teams have made in planning and executing the integration. Their efforts have positioned the combined company for long-term success by harnessing the strengths of both organizations, offerings and sales approaches.

As part of this progress, we have appointed several Lexmark executives in key leadership roles such as product development, business services and IT. This blend of legacy Xerox and Lexmark leaders across the company has fostered a collaborative mindset towards synergy realization, uncovering numerous new opportunities for value creation. As a result, in just the first 100 days post closing, we have already identified an additional $50 million of synergy opportunities, some of which we expect will be realized in 2026. I am, however, disappointed with Q3 results.

Macroeconomic challenges weighed on top line performance. Revenue of $1.96 billion was up roughly 28% in actual currency and 27% in constant currency, reflecting the inorganic benefits of the Lexmark and ITsavvy acquisition. Pro forma for these acquisitions, revenue declined approximately 8%. Adjusted operating income margin of 3.3% was lower year-over-year by 190 basis points. Free cash flow was $131 million, an increase of $24 million over the prior year, and adjusted earnings per share of $0.20 decreased $0.05 year-over-year.

This quarter, we experienced continued disruption associated with tariff and government-funded relating uncertainty, which primarily affected transactional print equipment revenues and to a lesser extent, supplies revenue. Throughout the quarter, we observed continued delays in purchasing decisions among clients, particularly those reliant on federal, state and local government funding.

General economic uncertainty also resulted in delays in purchasing among our commercial client base and distributors. However, page volume trends remain consistent and branded supply usage was in line with expectations, both of which indicate unchanged demand for printed pages. Therefore, we expect delays in equipment purchases to materialize in future periods as tariff policies and government funding decisions become more clear and the macroeconomic environment becomes more stable.

Economic uncertainty did not slow the progress of our IT Solutions business, which grew pro forma revenue by double digits in the quarter, supported by a balanced portfolio of offerings that address clients' most pressing IT infrastructure needs and ongoing initiatives designed to further penetrate Xerox's existing print client base.

As our attention increasingly turns to the integration of Lexmark, we remain focused on the balanced execution of 3 strategic priorities: execute reinvention, realize acquisition benefits and balance sheet strength. I will provide an update on each. Starting with the execution of reinvention and commercial optimization. We have several new product launches across print and IT solutions over the next 18 months. Two weeks ago, we announced the largest set of enhancements to our production print portfolio since last year's decision to stop manufacturing certain high-end production equipment.

At Printing United, a leading industry event, Xerox debuted 3 new production printing presses, the IJP900, which marks the return of Xerox to the growing mid-volume inkjet market and 2 new products under the Proficio family name, which comprise our next generation of digital color presses, serving the entry color production mid and high markets. We expect this and future launches to provide incremental revenue next year. These new products are an integral part of our leading end-to-end production ecosystem, which uses AI-driven workflows, personalization and advanced analytics to make the print jobs of our most demanding production print clients more efficient and profitable.

As the Lexmark integration planning work progresses, we are carefully analyzing the optimal approach to serving the more than 200,000 combined Xerox and Lexmark clients with an enhanced portfolio of print, IT and digital services as efficiently as possible. This work has revealed an opportunity to more cost effectively serve legacy Xerox clients by expanding our presence with key distribution partners, an approach Lexmark has successfully deployed to drive better operating efficiencies and higher operating margins. We recently took this approach in parts of upper Midwestern United States, where we announced an agreement with [indiscernible] Companies to transfer the servicing and sales coverage for small and midsized businesses in the region.

Further underscoring our commitment to sales efficiency and productivity, last quarter, we advanced our inside sales strategy with the opening of a new office in San Antonio with plans to scale to 180 specialists at the facility over the next several years. This model enables us to reach more clients efficiently and at scale, while AI-driven insights helps us analyze each stage of the sales cycle, identify process bottlenecks and implement targeted actions to improve performance.

While currently a small part of ESR, these initiatives are already delivering results with the 27,000 accounts transitioned into inside sales showing greater than 30% ESR growth year-over-year. Early integration work from the Lexmark acquisition has also contributed to the acceleration of our ongoing operational simplification efforts. This quarter, we consolidated best practices from the 2 companies' legacy global business service organizations to create a streamlined and more comprehensive set of centralized operating processes.

Managed by GBS and supported by a unified technology stack, integrated data architecture and a captive offshore labor model, which Louis will discuss in more detail, the structure provides the optimum foundation for scaling AI-driven operational efficiencies and enhancing our cash conversion cycle. In anticipation of future AI-driven savings, this quarter, we launched an AI center of excellence to design and distribute best practices around the adoption of enterprise AI tools and develop business plans for rapid adoption of function-specific AI-enabled operational enhancements. While still early days, we expect AI productivity solutions to derisk, if not add to existing synergy savings opportunities.

Moving to acquisition benefits. As noted in the prior quarter, the ITsavvy integration is largely complete. This quarter, the IT solutions team seamlessly transitioned legacy Xerox IT solutions, ERPs and CRMs in the U.S. to legacy IT saavvy's technology platforms, a crucial enabler of future cross-sales activities and sales acceleration more generally. Even prior to this transition, we continue to see strong progress in cross-sell pipeline build and conversion activities.

In the third quarter, year-to-date sales activity of new IT solutions sales to Xerox Print clients exceeded $50 million across more than 150 clients with an in-quarter conversion to bookings of roughly $15 million. We took the initial step towards realizing material Lexmark-related synergies this month with the elimination of more than 1,200 roles. This action and other nonlabor savings are expected to result in run rate gross cost savings of more than $125 million by the end of this year.

Finally, balance sheet strength. As a reminder, the Lexmark acquisition resulted in an increase in total debt but was immediately delevering. When the expected $300 million in synergies are included in our pro forma LTM EBITDA, gross debt leverage is currently a manageable 4.3x. This quarter, we returned to positive free cash flow and took net debt down by $226 million. With the Lexmark acquisition now closed, we expect most, if not all, free cash flow to be used to repay debt. Our goal remains to target 3x total debt to EBITDA.

I'll now hand the call over to Louis Pastor, who was recently named President and Chief Operating Officer, succeeding John Bruno. Louis has been with Xerox for 7 years, holding increasingly senior positions within the organization, including most recently Chief Administration Officer and Global Head of Operations. In that role, Louis played an integral part in helping design and execute the core components of reinvention, making him the ideal successor to John Bruno as we continue into the next phase of reinvention.

Thank you, Steve. I am honored to take on the role of President and Chief Operating Officer. Over the last 7 years, I have helped orchestrate significant change at Xerox, change to our corporate structure, our operating model and more recently, our asset base. In each case, these changes were well thought out, deliberately executed and designed to ensure Xerox, a company with more than 100 years of history, thrives as a leading provider of services-led software-enabled workplace solutions.

Reinvention has been a long and sometimes uneven path. But with the ITsavvy and Lexmark acquisitions completed, we have now executed on the core strategic components of this journey, which means we now control the levers required to deliver the expected financial outcomes of reinvention and can focus fully and completely on execution of the core operational and commercial components of reinvention.

Operationally, we are focused on combining the best-in-class capabilities of both legacy Xerox and Lexmark, optimizing our labor strategy and standardizing the consolidated enterprise on key platforms for growth that combine people, process and technology. For example, as part of our shift from a geographic operating model to a business unit operating model in early 2024, we launched a global business services organization to centralize, standardize and streamline the company's support and operational functions across regions, business units and service lines, thereby lowering operating costs, improving quality and enabling continuous improvement.

We are now accelerating our progress by adopting best practices and proven capabilities from Lexmark's award-winning GBS organization that was built and refined over multiple decades. These best practices include things like unified data governance to enable real-time insights and automation, while the proven capabilities include an integrated network of global capability centers with agile delivery models. These global capability centers, when combined with changes we previously made when establishing GBS, unlock significant opportunities for Xerox.

For instance, in 2024, as part of the establishment of GBS, we negotiated new commercial agreements with our outsourced labor providers, giving us greater control and flexibility. With Lexmark's captive offshore and nearshore centers now available to the entire combined organization, we are taking full advantage of this control and flexibility to consolidate operations, reduce costs, improve performance and deliver better client, partner and employee experiences.

In August, less than 60 days after closing on the acquisition, I traveled to Lexmark's largest global capability center in the Philippines, where we were recently ranked as a top 5 IT employer by the Philippine Daily Inquirer. I had the privilege of meeting and spending time with many of the 1,800-plus team members based there working across engineering, IT, cybersecurity, sales operations and service delivery, among other functions. Their talent, professionalism and pride in their work were truly inspiring. The genuine care for what they do and their shared sense of purpose came through in every interaction. I can't wait to meet with our teams in the global capability centers in Hungary, India and beyond in the coming quarters.

Our ability to leverage these centers is only possible because of the operating model shift we executed in early 2024, and their creation was always part of Xerox's GBS road map. But with Lexmark's assets, capabilities and continuity of leadership, we are now able to advance the progress of GBS by orders of time and magnitude, a key contributor to our increased synergy expectations. Technology is fundamental to enabling the benefits of a more robust GBS organization.

To that end, we made the decision this quarter to adopt and enhance Lexmark's existing technology stack rather than continue working toward consolidating Xerox on a net new build. The technology transition will take several years to implement in full across the globe. But by leveraging an existing system that already delivers better operational outcomes together with in-house development expertise, the business benefits are irrefutable. The change management is more streamlined and the implementation process is greatly derisked.

Commercially, within Print, we are focused on evolving our offerings in several critical ways. From a services perspective, we are focused on improving the value proposition and reducing the cost of providing managed print services. And from a technology perspective, we are focused on leveraging Lexmark's A3 platform as well as developing new high-end OEM partnerships like the recent partnership we announced with Kyocera to improve our competitive position.

This quarter, the product development and delivery teams finalized plans to adopt Lexmark's A3 technology at Xerox, which will decrease our reliance on existing suppliers and reduce the overall cost of our products, ultimately providing tailwinds to longer-term gross margins. We plan to roll out the Lexmark-produced A3 product to certain partners in our Eastern European markets in Q4 with a larger global rollout planned in 2026.

This platform is more profitable for Xerox on day 1 as well as over the life of the product, given Lexmark's focus on design for serviceability. As a result, we expect our new A3 platform to require far less service intensity than existing models, resulting in higher Managed Print Services margins and improved client satisfaction.

As Steve mentioned, our commercial focus within reinvention is not limited to offerings. It extends to our routes to market. This quarter, we began segmenting the combined Xerox and Lexmark client bases by size and vertical, which will enable us to develop a long-term coverage model that optimizes our cost to serve and aligns our offerings for maximum traction based on the needs of specific economic buyers and end users. We will provide more details on this new coverage model in future quarters.

One of the key pillars of reinvention is to drive long-term sustainable growth. While we enjoy the benefit of the contractual nature of managed print contracts, which last on average 4 to 5 years, it does limit natural opportunities to grow wallet share within those existing accounts. With our expanded IT solutions business as a result of the ITsavvy acquisition, we now have reasons to call on our clients every single day, providing Xerox with more opportunity to cross-sell, upsell and penetrate both new and existing accounts. The acquisition of Lexmark only further expands this addressable market and enables our sales reps with a greater value proposition for our clients and partners.

Lastly, I will provide an update on Lexmark synergies. Over the course of the first 100 days post close, we have held workshops and strategy sessions with each of the key functions responsible for delivering our synergy plans. These workshops have revealed $50 million of upside to our latest synergy plan, some of which is expected to be realized in 2026.

The implementation of these synergies is managed by the same enterprise transformation office that has successfully delivered more than $500 million of reinvention-related gross savings and profit opportunities since 2023. We currently have 16 integration work streams with more than 100 initiatives and a broad cross-functional team of several hundred people across both organizations engaged in the identification and realization of these synergies.

In summary, we are making meaningful progress integrating the 2 companies. As a result, we increased the Lexmark synergy forecast to at least $300 million, which firmly places expected savings from Reinvention as a whole north of $1 billion. These savings, when combined with an optimized go-to-market organization, selling offerings with greater secular demand mapped to a client base segmented by size and vertical are expected to drive revenue stabilization and a return to double-digit adjusted operating income in the next few years.

I'll now turn the call over to Mirlanda to discuss this quarter's financial results in more detail.

Thank you, Louis, and good morning, everyone. I'm recovering from a cold, so my voice may sound a bit raspy. Thank you for your understanding. As Steve mentioned, the third quarter reflected a continuation of the uncertain macro environment we saw earlier in the year. Despite these near-term challenges, we continue to execute with discipline and are making meaningful progress on cost savings. Further, we had another quarter of strong growth in IT Solutions. Q3 includes a full quarter of Lexmark results.

For comparability purposes, we have provided pro forma comparisons for the prior year period, which assumes both ITsavvy and Lexmark had been acquired as of the third quarter 2024. These pro forma comparisons will be the focus of my prepared remarks. Revenue grew roughly 28% year-over-year, including the benefits of ITsavvy and Lexmark acquisitions. On a pro forma basis, revenue declined about 8% in actual currency.

Core revenue, which excludes deliberate exits and nonstrategic reductions, declined roughly 5% this quarter on a pro forma basis, consistent with Q2, reflecting a continuation of the macroeconomic and policy-related uncertainty leading to clients deferring equipment purchases. These headwinds primarily affected the Print segment. IT Solutions showed continued strength, growing revenue double digits on a pro forma basis, led by public sector deployments, expanded cloud and networking activity and increased cross-selling momentum.

Turning to profitability. Adjusted gross margin of 28.9% was down 350 basis points, reflecting higher tariff and product costs. On a pro forma basis, adjusted gross margin also declined approximately 380 basis points year-over-year. Key drivers of the declines include tariff charges, net of price mitigation, higher product costs and revenue mix. These factors were partially offset by Lexmark's contribution and reinvention benefits. Adjusted operating margin of 3.3% was 190 basis points lower year-over-year on a reported basis and 370 basis points lower on a pro forma basis due primarily to lower gross profit, partially offset by reinvention savings.

While some reinvention initiatives were delayed due to considerations around integration activities, we remain on track to achieve our cost reduction goals and to realize incremental Lexmark gross run rate synergy benefits ahead of schedule. Despite this delay, our continuous focus on cost reduction resulted in a decline in adjusted operating expenses. Excluding $50 million of reinvention, transaction-related costs and Lexmark post-combination compensation expense, our operating base was down around 9% year-over-year.

Adjusted other expenses net was $85 million, $52 million higher year-over-year due primarily to higher net interest expense associated with Lexmark acquisition financing. Adjusted tax rate of 235% compared to 27.7% in the same quarter last year. The current year rate reflects our geographical mix of earnings and an inability to benefit from certain current year losses and expenses. Adjusted EPS of $0.20 was $0.05 lower than the prior year, primarily due to lower adjusted operating income and higher interest expenses, partially offset by tax benefits.

GAAP loss per share of $6.01 was a narrower loss of $3.70 year-over-year. The improvement primarily reflects an after-tax noncash goodwill impairment charge of around $1 billion and a tax expense charge of $161 million in the prior year quarter. Q3 2025 GAAP loss included an inventory-related purchase accounting adjustment from the acquisition of Lexmark of $85 million or $0.67 per diluted share and a tax expense charge of $467 million or $3.68 per diluted share related to the establishment of a valuation allowance against certain deferred tax assets.

Let me now review segment results. For Print and Other segment, Q3 equipment sales of $383 million increased 13% in actual currency and about 12% in constant currency. Pro forma for the inclusion of Lexmark, equipment sales declined about 16% in actual currency. Excluding the effects of reinvention-related actions and other onetime items, pro forma core equipment sales declined around 12%. I'll provide additional color for each legacy organization to help contextualize this quarter's declines.

Legacy Xerox equipment sales declined 14% year-over-year in constant currency or roughly 8%, excluding the impact of reinvention-related items, which include the decision to stop manufacturing high-end equipment. This compares to a normalized decline of 3% in the prior quarter. The sequential slowdown reflects an expansion of the macroeconomic and government policy-related uncertainty, which resulted in continued delays in federal and SLED-related ordering activity as government agencies and companies relying on government funding await budget clarity as well as delayed ordering among our commercial clients and channel partners.

Total equipment installations for legacy Xerox declined 24% this quarter, reflecting in part the impact of macroeconomic uncertainty and resulting delays in customer order activity. Overall, equipment revenue declined at a slower pace than installation due to a higher mix of color devices, which are also more profitable than mono and post sale and the benefits of tariff-related price actions.

Lexmark's equipment sales can be more volatile quarter-to-quarter than those of Xerox as a higher proportion of Lexmark sales come from large channel and OEM partners, the purchases of which can be lumpy. Lexmark's equipment sales declined 30% in the quarter in actual currency. About 18 percentage points of the decline can be attributed to difficult backlog compares in the prior year, the timing of OEM orders from one large customer who pulled orders ahead of the first half of the year and large branded equipment order delays among channel partners driven by the timing of enterprise rollouts. The remainder of the decline is due to slower run rate activity among channel partners, reflecting macroeconomic uncertainty.

Despite the challenging third quarter results for Lexmark, underlying demand trends remain healthy. Year-to-date, equipment sales for Lexmark are down 1% in constant currency year-over-year, normalizing for prior year backlog reductions and the aforementioned items. For the full year, Lexmark equipment sales are expected to be up around 2% in constant currency, normalizing for prior year backlog reductions. Total equipment installations for Lexmark declined 25% this quarter, roughly in line with revenue, reflecting the factors previously noted.

Print postsale revenue of $1.36 billion increased 23% in actual currency and 22% in constant currency. Pro forma for the Lexmark acquisition, post-sale revenue declined 8% in actual currency. Excluding the effect of reinvention actions, core print post-sale revenue on a pro forma basis declined 5% in actual currency, slightly better than last quarter's pace as higher sequential declines of supplies at legacy Xerox was offset by legacy Lexmark's outperformance. Outside of supplies, post-sale revenue was largely in line with expectations, reflecting the benefits of post-sale revenue streams that are largely contracted or recurring in nature.

Print and Other segment adjusted gross margin of 30% declined 330 basis points year-over-year. Pro forma for the Lexmark acquisition, gross margin declined 440 basis points year-over-year due to higher product and tariff costs, lower managed print volumes and a reduction in high-margin finance-related fees, partially offset by reinvention savings. Print segment margin of 3.7% declined 340 basis points year-over-year due to lower revenue and gross profit, partially offset by reinvention savings and the inclusion of Lexmark in results. Pro forma for Lexmark, Print segment margin declined 520 basis points, reflecting top line softness in the quarter.

Turning to IT Solutions results. IT Solutions revenue and gross profit increased more than 150% year-over-year, reflecting the inclusion of ITsavvy in segment results. Pro forma for the ITsavvy acquisition, IT Solutions revenue grew just over 12% in actual currency. Pro forma gross billings, a reflection of business activity, increased 27% year-over-year in the third quarter compared to 12% growth year-to-date. The sequential improvement in billings growth reflects several large public sector deployments benefiting PC sale and endpoints, another quarter of double-digit growth in infrastructure and networking revenue and acceleration in advanced solutions billing, where we continue to see strong adoption of Microsoft Cloud Service Provider.

Total bookings, an indication of future billings increased 11% in the third quarter, an acceleration from prior quarter's pace of 10%. We continue to see growth in sales activity for IT products and services to existing Xerox Sprint clients with more than $50 million of pipeline creation year-to-date. IT Solutions gross profit was $44 million and gross margin of 19.5% expanded 320 basis points year-over-year due primarily to the inclusion of ITsavvy.

Pro forma for the ITsavvy acquisition, gross margin expanded 260 basis points, reflecting benefits from platform leverage and revenue mix. Segment profit grew $18 million year-over-year, with profit margin reaching 8.1%, helped by the inclusion of ITsavvy. On a pro forma basis, segment margin grew 610 basis points due to platform leverage enabled by ITsavvy integration and synergy benefits.

Operating cash flow was $159 million compared to $116 million in the prior year quarter. The improvement in operating cash flow reflects higher proceeds from the sale of finance receivables and improved working capital, partially offset by lower net income and about $25 million of transaction expenses associated with the Lexmark acquisition. Investing activity was a use of cash of $725 million, a year-over-year increase of roughly the same amount, primarily reflecting the acquisition of Lexmark. Financing activity resulted in a source of cash of $118 million compared to a use of cash in the prior year of $74 million.

Current quarter net debt increase includes financing for the Lexmark acquisition, partially offset by the paydown of 2025 senior secured and quarterly amortization of other secured debt. Free cash flow was $131 million, $24 million higher year-over-year due to an increase in operating cash flow. We ended Q3 with $535 million of cash, cash equivalents and restricted cash. Total debt of $4.4 billion increased around $460 million from Q2 levels due to an increase in debt associated with the financing of the Lexmark acquisition. About $1.6 billion of the outstanding debt supports our finance assets with remaining core debt of $2.8 billion supporting the nonfinancing business.

Post the Lexmark acquisition closed on July 1, total debt declined $226 million on the paydown of the 2025 senior secured and quarterly amortization of other secured debt, partially offset by ABL borrowings. As noted in prior calls, the Lexmark acquisition added debt to our balance sheet, but resulted in lower gross debt leverage levels. On a pro forma basis, gross debt leverage is 6.1x last 12 months EBITDA, roughly a 1.5 turns reduction relative to Q2 levels. Our top capital priority remains the reduction of debt, and we continue to target a gross debt leverage target of 3x last 12 months EBITDA in the medium term.

Finally, I will address fiscal year 2025 guidance. Looking ahead, we have adjusted our full year outlook to reflect continued macro uncertainty and slower-than-anticipated equipment purchasing decisions, particularly the timing of the reopening of the government. We now expect 2025 revenue to grow about 13% year-over-year in constant currency with an adjusted operating margin of roughly 3.5% due to lower sales and a slower-than-expected rollout of price increases targeted at offsetting product cost increases and tariffs.

Free cash flow guidance was reduced from $250 million to $150 million. Roughly $25 million of the reduction relates to post-acquisition transaction costs classified as operating in purchase accounting with no impact ending cash. The remaining balance is a result of lower revenue and profit as well as onetime cost to achieve integration synergies at the high end of the previously provided range due to larger cost actions.

Moving to 2026. We will issue formal 2026 guidance during the Q4 2025 earnings call. In the meantime, I will build on commentary provided last quarter, providing additional color around certain expenses that are expected to partially offset gross cost savings. As we look to next year, we see meaningful opportunity for recovery once funding and tariff policies stabilize. Delayed projects are expected to convert into orders, while IT Solutions is expected to continue to outpace its markets. Consistent with our view last quarter, legacy Xerox is expected to perform in line with the broader print market, which we expect to decline low to mid-single digits with legacy Lexmark revenue expected to be roughly flat to down low single digits. IT Solutions is expected to grow above the rate of its underlying markets, which we estimate to be 7% to 8%.

Moving to adjusted operating income. As Steve and Louis mentioned, integration planning work this quarter revealed incremental upside to Lexmark synergies. Of the $50 million of incremental synergies, we expect to realize about $25 million of that amount in 2026, resulting in total expected in-year gross integration synergy and reinvention savings of between $250 million and $300 million.

Offsetting these savings, we expect $60 million of profit headwinds associated with the continued wind down of our finance receivable portfolio and around $100 million of profit headwind from incremental tariff and product cost increases. We continue to target select areas for price increases and expect to fully cover the impact of incremental product costs over time. Moving below operating income, we expect interest expense to be around $290 million. Finally, free cash flow. We continue to expect around $400 million of cash from the reduction of our finance receivable balance.

With that, I will now turn the call back to the operator to open up the line for questions.

[Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital.

A few, if I could. Just on top line impact to equipment sales, any way to discern, I guess, of the land that you talked about, it sounded like adjusted 500 more basis points of growth decline relative to last quarter, the 8% versus the 3%. Any way to discern like government impact? I guess maybe there's sort of however you want to parse this, government versus commercial, which I guess commercial is probably more macro, government sounds like it's more shutdown.

And then I would imagine tariffs layer into at least macro, I'd imagine. Does that layer into government as well? And how should we think about of the incremental, the 8% versus the 3% last quarter, parse that between kind of commercial and government? And I have a follow-up.

Ananda, Steve. A couple of things. First of all, the 2 strategic acquisitions we made are absolutely leading us in knowing that the strategy is going to sustain long-term growth and profitability. If you look at ITsavvy, right, grew billings now 3 quarters in a row, bookings 3 quarters in a row. We're now penetrating our existing customer base on the Xerox side. Operating profit grew. The 2 companies, ITsavvy and IT solutions, fully integrated and completely integrated going forward, enhancing their operating profit growth.

In that sector, specifically, what we're seeing is actually growth and less less of an impact from the macroeconomics, both in terms of government shutdown and in terms of tariffs for a couple of reasons. One, strategically, we're aligning to where IT is making investments to drive productivity to offset some of the cost pressures that they're seeing. So I want to bifurcate and segment this out a little bit. ITsavvy, IT solutions, clearly growing, clearly see that growing in the future. You will see more activity in our areas in terms of SaaS and moving towards solutions, right?

On the Lex integration, the Lex acquisition, we've seen a couple of things. One, we obviously see acceleration in our synergies over the first 100 days. We're now increasing our synergies by $50 million. What are we seeing there? We saw some slowdown with our partners in there trying to understand what was happening with the acquisition, the 2 companies coming together. But we also saw any clients that were impacted or could be impacted by either federal or the tariffs was pausing, right? So we haven't seen a pace decline. We haven't seen a slowdown in activity. What we've seen is the hesitation specifically in the ESR growing. And so what we're looking at there is now that we're going to get certainty going forward as the government opens up, as tariff opens up, we expect that business and that volume to come back.

Lastly, as we think about the cross-sell opportunities, which is really important, we now can take our IT solutions, our production solutions, take it into the Lexmark client base and take it to the Lexmark partners, which allows us to further accelerate our revenue synergies. So it's a tale of a couple of stories there. When we talk about the government shutdown, IT solutions growing. We see pieces and pockets of opportunity even as part of the Lex acquisition. We haven't talked about Asia expansion, which is on the table for us. So the federal government is slowing down. some of our buying from our clients and from our partners, we expect that to come back as we go forward.

Any other comment, Mirlanda?

Yes. Thank you, Steve. And yes, and the weakness, Steve really explained it well. On the ESR, this is where we saw top line client just slowing demand. And as it relates to post sale, the trends are very similar to Q2.

That's really good description, guys. That's super helpful. And then on the savings, the increased savings from integration, I guess this is really an overall savings question. Is there any way yet to discern what portion could ultimately go to the bottom line?

[indiscernible] and we're thinking about the increased, the $50 million that we upped our synergy targets for Lexmark acquisition from $250 million to $300 million. We expect about half of that to flow through in 2026 and the rest in 2027, 2028. So I would say half of it.

And is that to op income? Or is that recognized gross? I guess what I'm getting at.

Yes, it's a mix. Gross profit, gross margin and operating margin will benefit.

Yes. And the other thing I'll highlight is, look, we're 100 days into this, right? We've accelerated and found another $50 million. We've got multiple work streams that we're looking at, and we will see continued expansion of our synergy savings as we start to roll out and get deeper into those activities. So we're not done. We talked about the $300 million plus. There are more work streams and activities. We will see more synergy savings from those activities.

Our next question comes from Erik Woodring with Morgan Stanley.

This is Maya on for Erik. Last quarter, you sized the tariff headwind at about $30 million to $35 million for 2025. Maybe if we put the impact from delayed purchases at the top line level aside, you noted tariffs as one of the underlying reasons for the reduction in adjusted operating margin guidance for the full year. How would you size this headwind now? What has really changed, I guess, in the last 90 days?

And you also mentioned a little -- it took a little bit longer to flow through price increases. Are there more price increases to come in response to tariffs? Or have those kind of fully flowed through now?

Yes. Thanks, Maya. With respect to tariffs, last quarter, we provided a range, as you mentioned, $30 million to $35 million. Right now, we see that being on the high end of the range. We expect about $35 million net impact from tariffs in 2025, and that is included in our guidance. We are continuing with price increases, but have been very measured because we are talking to our customers. We're looking at the demand and impact it has.

And given the softness because of all the reasons that we discussed in our prepared remarks, we are taking a step back and looking at case by case as we apply these price increases. We still expect to continue to offset the impact of tariffs in future periods with price increases and changes to our supply chain. But for now, again, 2025 has about $35 million of tariff impact in our guidance.

Our next question comes from Asiya Merchant with Citi.

Two, if I may. One, just if you could unpack -- I think you talked about the various levels of government softness that you were seeing on the equipment side of things, on the print side of things. But on the -- at the same point, you talked about ITsavvy doing better. So if you could just talk about the weakness that you saw in the government across the different levels between those 2 segments, federal, state, local, that would be great.

And then you talked about free cash flow improvements into next year. I get 400 basis -- about $400 million, sorry, from finance receivables flowing through. Just if you can walk us through how we should think about sort of some of the other items that could impact free cash flow into next year. Clearly, better income. So how should we kind of think about free cash flow into next year versus the $150 million that you guys are guiding to for '25?

Yes. Thank you. This is Steve. I'll take the first part of it. So when you think about the federal shutdown, it impacts the ecosystem. You think about their suppliers, you think about the contractors, you think about state and local who require funding from the federal government. And so we see a brand overall impact on spending. However, when you think about priorities in IT spend, there are pockets and areas that they will invest. So for example, if you're going to invest in AI infrastructure so that you can accelerate productivity and take advantage of using of AI, you could take advantage of looking at how do you move more towards a captive and more into the cloud, how do you think about Network as a Service, cybersecurity, et cetera.

So we are seeing pockets where they continue to invest to drive productivity based on prioritizing their IT spend. And that's where ITsavvy is taking advantage of the spending that's happening out there that is, in fact, less less impacted by the federal shutdown because IT organizations are prioritizing certain areas that we're actually playing in, and we're taking advantage of that. The other aspect of it is what we're seeing is, so as you start to think about the trickle down, there's a little bit of uncertainty in terms of profitability for the company. So they're pulling back capital in general. And when you think about the print infrastructure, sweating the assets and not putting in new equipment is where we're seeing the biggest input.

So we're seeing page volumes okay. We're seeing supplies okay, but we're not seeing the turn on equipment that we anticipate in terms of buying new equipment, which reduces our ESR. We anticipate that coming back once we see certainty when the federal government opens and once we see certainty in budgets and when that will start to flow.

Do you want to take the cash flow?

Yes. Thanks, Steve. So we'll provide official guidance when we report our earnings in Q4 earnings, but some guidelines to consider. So yes, we expect $400 million of proceeds from the continued reduction in finance receivables. We expect about $50 million in onetime costs associated with synergy savings. And then when we think about working capital, we expect to have a more normalized working capital, higher operating income, which is net of incremental expenses, which will contribute to an improved conversion of free cash flow from adjusted operating income in 2026.

Great. And just can I -- if you don't mind, if I could ask one more on just the competitive dynamics. I think you talked about the ESRs seeing impact from all the shutdowns and the lack of clarity, et cetera. Is this -- when you talk about some of this coming back, what's the clarity? Should we expect like competitively, your market share as you kind of see it has remained stable. And so this is more of an industry-wide shutdown? Or is there anything else from a competitive standpoint that we should consider?

No, we don't see losing share. We're holding share. And so from a competitiveness, we don't see anything unique that we're not competitive in this space. We're seeing a basic pullback across the board.

I would now like to turn the call back over to Steve Bandrowczak for any closing remarks.

Thank you. While the near-term environment remains complex and our strategic priorities are clear and unchanged, execute the Lexmark integration to capture both revenue and cost synergies faster than initially planned, drive profitable growth in IT solutions through advanced infrastructure, networking and advanced solutions, maintain financial discipline with debt reduction remaining our top capital priority and a clear path to reach 3x gross leverage ratio over the medium term.

We recognize there is still more to do, but we're confident that the actions we are taking are positioning Xerox for long-term sustainable profitability. I want to thank our employees, clients and partners for their continued dedication and support. I wish everyone a great day.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Welcome to the Xerox Holdings Corporation Second Quarter 2025 Earnings Release Conference Call. [Operator Instructions] At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Second Quarter 2025 Earnings Release Conference Call, hosted by Steve Bandrowczak, Chief Executive Officer. He is joined by John Bruno, President and Chief Operating Officer; and Mirlanda Gecaj, Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox.

During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor and we'll make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I'd like to turn the meeting over to Mr. Bandrowczak.

Good morning, and thank you for joining our Q2 2025 earnings conference call. The closing of the Lexmark acquisition in early July marked an important milestone in Xerox Reinvention. With this transaction, we unite 2 industry leaders with complementary sets of operations, offering strengths and market reach. Xerox and the Lexmark offering will be combined and optimized to enhance client value, providing the foundation from which we can expand the penetration of our IT solutions and digital services businesses as we help our clients navigate the increasingly digital nature of document workflows and processes.

I'd like to commend both the Xerox and Lexmark teams who this quarter navigated a challenging operating environment while preparing for an accelerated transaction close and integration time line. Summarizing results for the quarter. Revenue of around $1.58 billion was roughly flat with the prior year in actual currency and declined 1.1% in constant currency, inclusive of ITsavvy. Adjusted operating income margin of 3.7% was lower year-over-year by 170 basis points. Free cash flow was a use of cash of $30 million, reflecting in part a delay in the sale of large portfolio of finance receivables.

And adjusted loss per share of $0.64 declined $0.93 year-over-year due in large part to an unfavorable tax rate. This quarter demonstrated the improved resiliency of revenue and adjusted operating income afforded by our Reinvention, specifically the benefits of a more favorable mix of revenue from faster-growing businesses and a more flexible and simplified operating structure. In the second quarter, strong demand for cloud enablement services at our IT Solutions segment helped offset a brief period of softer demand for print equipment in April and May amid peak DOGE and tariff-driven uncertainty. And our relentless focus on cost discipline helped preserve adjusting operating income, offsetting the effects of lower-than-expected sales of print equipment and higher tariff costs.

The improved resiliency demonstrated in Q2 provides an affirmation of our strategic direction, the benefits which are expected to be further enhanced through the acquisition of Lexmark. Our strategic focus this year in anticipation of the close of Lexmark acquisition has been the continued execution of Reinvention, ensuring the full realization of benefits from the ITsavvy and Lexmark acquisition and preserving balance sheet strength. I'll provide a brief update on this quarter's progress in each of these areas. Starting with the execution of Reinvention. In the second quarter, we advanced a number of Reinvention initiatives aimed at optimizing our commercial offering and simplifying operations, each of which will provide benefits well beyond the Lexmark integration.

This quarter, we expanded our inside sales program to cover new territories and product lines, further enabling our direct sales force to concentrate on larger client opportunities. We also reduced the time it takes to process orders at our [ XBS ] business unit by 4 days, improving both time to revenue and client satisfaction. In IT Solutions, we continue to build momentum in the cross-sell of advanced IT offerings in Xerox print client base, an important contributor to this segment's recent strength. An ongoing operational simplification efforts leveraging technology-driven efficiencies enabled another double-digit percentage reduction in adjusted organic operating expenses.

We will continue advancing Reinvention initiatives currently in flight and those planned for the future as we progress the phasing of our Reinvention to now include the integration of Lexmark. John will describe the evolution of our Reinvention strategy to incorporate the Lexmark integration in more detail. Moving to acquisition benefits. The integration of ITsavvy is largely complete, and we are ahead of schedule in the realization of the planned strategic and financial benefits associated with that acquisition. The IT Solutions team has embraced the spirit of Reinvention and continuous improvement to find operating synergies beyond those originally contemplated.

As an example, Xerox IT Solutions has consolidated the purchase of Xerox Corporation's IT assets, which were previously handled by an external partner. The in-sourcing of Xerox IT spend reduces the cost of Xerox Corporation's IT products and results in an improved status with and higher rebates from IT Solutions OEM partners. Moving to Lexmark. The integration of Lexmark is progressing well, aided by the addition of 2 seasoned Lexmark leaders to the Xerox Executive Committee, Billy Spears, who will lead product development, manufacturing and supply chain for the combined business; and Chuck Butler, who will run the combined Global Business Services organization. Detailed integration planning work had been conducted prior to the acquisition close and is now firmly in an execution phase.

As we have progressed this work, our confidence in realizing synergies has increased. Accordingly, we now expect cost synergies associated with the Lexmark acquisition to total more than $250 million from our original estimate of more than $200 million, all of which remains realizable within the next 2 years. Finally, balance sheet strength. The Lexmark acquisition was funded primarily with debt, but results in lower gross debt leverage ratio after accounting for the nearly $300 million of Lexmark's acquired EBITDA. With the Lexmark acquisition now complete, our top capital allocation priority is the repayment of debt. Following the implementation of cost synergies, which require an upfront cash investment, we expect improved free cash flow from core operations and more than $600 million of proceeds expected from the reduction of finance receivables between now and the end of 2027 to be deployed to repay debt.

This year, we reduced our dividend to place even greater focus on the repayment of debt. We will reevaluate our dividend policy as Xerox gross debt leverage ratio approaches our medium-term target of 3x trailing 12 months EBITDA. Before I hand the call to John, I'd like to put the Lexmark acquisition in context of our broader Reinvention strategy and comment on the improved competitive profile of the combined Xerox and Lexmark businesses. In 2023, we implemented our Reinvention strategy to ensure we are operationally and strategically best positioned to continuously address the evolving workplace needs of our clients.

This required reducing or exiting activities and businesses that are not central to our legacy business or development of higher growth value-add adjacencies such as IT solutions and digital services. Last year, we simplified our business model to enable closer alignment between our businesses and evolving needs of our economic buyer of our Workplace Solutions. We also established a Global Business Services organization, or GBS, to centralize key processes and drive continuous operating efficiencies throughout our Reinvention and beyond. Greater strategic focus and a leaner, more simplified business model freed up the resources and managerial bandwidth to execute and successfully integrate 2 transformative acquisitions that will contribute to our Reinvention goals of revenue stabilization and a return to double-digit adjusted operating income margins, ITsavvy, which enhances our IT solutions offering and Lexmark, which will strengthen and diversify our print business.

The Lexmark acquisition enhances Xerox's position as a leading provider of services-led software-enabled hybrid Workplace Solutions. It creates a larger vertically integrated leader in print and Managed Print Services. And Xerox's portfolio of value-added higher growth adjacencies in IT solutions and digital services provides an important point of competitive differentiation relative to our peers. Combined on a pro forma basis, Xerox generated $8.6 billion of revenue and more than $870 million of EBITDA in 2024. Around 2/3 of the revenue comes from recurring sources and more than 10% of the revenue comes from a faster-growing IT solutions and digital services businesses. Xerox is now a top 3 player in each major print category within its current market with close to half of the print revenue generated from sales and services associated with A4 devices.

A4 is one of the most strategically advantaged parts of the print ecosystem as clients look to refresh their print fleets with smaller, more technology advanced machines. Reinvention is not complete, but the assets and operating model are now firmly in place to achieve our Reinvention goals. I will now hand over the call to John, who will provide additional context around the strategic advantages of the Lexmark acquisition and an update on Reinvention and our near-term integration priorities.

Thank you, Steve. We are very excited to have closed the Lexmark acquisition and are now in full execution mode with the integration of the 2 companies. Lexmark strengthens our print business by adding scale and exposure to faster-growing parts of the market like A4 color. These advantages are expected to improve revenue and gross margin in print as well as accelerate the growth of our IT and digital solutions businesses. I'll expand on 4 specific ways in which the Lexmark acquisition directly benefits our near-term financial outlook on Slide 7.

Starting with the print market share gains. We expect to leverage the top 3 position we now hold in all major print categories to expand our share of print-related spend with existing and new clients. The overlap between Xerox and Lexmark clients and partners is relatively small, enabling the combined companies to sell a broader set of offerings into a larger combined client base, including the 43 Lexmark A4 product configurations that were not previously offered to Xerox clients and partners. We also expect our combined engineering teams to advance the pace of innovation of Lexmark's leading A4 and recently launched A3 platforms. A more diverse and competitive offering is expected to improve win rates, a view that is supported by the positive feedback and excitement we are hearing from clients in just a month since the transaction closed.

Market expansion opportunities in print are expected to contribute to an improved revenue trajectory. We will leverage Lexmark's distribution footprint in the Asia Pacific region to begin selling Xerox's A3 and high-end products as well as our suite of software and services where until now, we've had no presence. We expect to grow Lexmark's recently launched A3 OEM platform, which addresses a $12 billion print market. The Lexmark acquisition also enhances service expansion opportunities. Our print, IT and digital service businesses address stable or growing markets and provide differentiation in a competitive environment. An early focus of our integration efforts will be the standardization and evolution of Managed Print Services. Xerox and Lexmark combined serve approximately 25% of this $14 billion market.

We expect the sharing of best practices and an optimization of our respective service models to result in a combined managed print offering that is more attractive to clients and more profitable to operate. Beyond print, we'll accelerate our efforts to promote the cross-sell of IT and digital solutions to the combined Xerox and Lexmark client bases. These markets in total are more than 10x the size of the print market. Cross-sells of IT solutions to legacy Xerox clients even prior to the acquisition of Lexmark are running ahead of our initial expectations. Year-to-date, we have generated an IT product and services pipeline of close to $50 million from more than 80 traditional Xerox print clients.

We've barely scratched the surface of this opportunity with IT solutions penetration of the Xerox print client base currently in the low single-digit range. Lexmark adds around 15,000 print clients for our IT solutions business to target. Most importantly, the Lexmark acquisition provides us with an opportunity to improve profitability with more than $250 million of identified cost synergies realizable within 2 years. Many of the expected synergies will address print product costs, enabling improvement in gross margin. Key among the opportunities is the adoption of the Lexmark A3 platform, which reduces our landed product costs for this important segment. We also expect product cost improvements from the transition of Lexmark toner to Xerox's technology, which is 30% more cost effective, the integration of Lexmark's more efficient controller technology into Xerox machines and the utilization of Lexmark's Mexico facility to optimize global tariff exposure.

I'll now provide an update on Reinvention and its role driving these cost synergies to realization. With the Lexmark acquisition complete, our Reinvention will begin to incorporate the strategic priorities of the combined businesses. The directives of our Reinvention remain in place and the guiding principles of operating simplification, commercial optimization and growth will continue to influence our approach to the integration of Lexmark. Operational simplification efforts will focus near term on combining our operating capabilities, including our respective Global Business Services functions, consolidating corporate organizations, optimizing labor spend and standardizing technology platforms.

Commercial optimization initiatives address the value proposition cost to serve of Managed Print Services, the expansion and the diversification of Xerox's print portfolio and the continued optimization of our regional and channel distribution presence. Product expansion and diversification will be driven by the adoption of Lexmark's A3 technology and the addition of new high-end OEM partnerships, such as the partnership with Kyocera announced today. This partnership provides Xerox with the ability to offer Kyocera's leading cut-sheet inkjet products to our production print clients, strengthening our suite of production print products while wrapping Xerox's software and solutions around a more diverse production print ecosystem.

As noted in the previous slide, growth initiatives will focus on expanding Xerox's presence in higher-growth print markets such as APAC, A4 color and cut-sheet inkjet as well as the continued expansion of Xerox IT and digital solutions into our client base. The financial objectives of Reinvention also remain the same revenue stabilization and a return to double-digit adjusted operating income margin. Revenue stabilization will be driven by an improved trajectory in print, supported by stronger print business post Lexmark and an improved mix of revenue from higher-growth businesses. IT services and digital solutions today comprise more than 10% of revenue on a pro forma basis.

Over time, we expect these businesses to comprise more than 20% of our revenue. Revenue stabilization will, in turn, allow more savings to fall to the bottom line. We continue to expect more than $700 million of gross cost savings and profit opportunities associated with the Reinvention strategy. When combined with more than $265 million of Lexmark and ITsavvy acquisition-related synergies, we expect around $1 billion of savings and profit improvement opportunities to be realized through our Reinvention by 2028 with around half or $500 million, which have yet to be realized.

Focusing now on Lexmark synergies. The more than $250 million of gross cost synergies are wide ranging, covering our shared services and global support functions, service delivery, engineering, manufacturing and other organizations. In 2025, we expect to implement synergies with run rate savings of $100 million to $125 million, which will result in an in-year cash investment of about $50 million to $75 million. These initial synergies will be focused on the elimination of duplicative shared service overheads and technology spend. In 2026, the focus of synergies will turn to the optimization of our supply chain, R&D and certain cost and purchasing advantages afforded by a larger operating scale.

We expect that most of the run rate synergies will be implemented by the end of 2026. And in 2027, we will realize the benefits of a consolidated real estate footprint and IT infrastructure and continue to optimize our managed print delivery structure. To summarize, the Reinvention through integration has begun. The next phase is expected to strengthen our print business and drive improved mix of revenue from higher-growth businesses, leading to revenue stabilization and a higher flow-through of roughly $500 million of identified cost savings and profit opportunities yet to be realized. I'll now turn the call over to Mirlanda to discuss this quarter's financial results.

Thank you, John, and good morning, everyone. Revenue this quarter was roughly flat year-over-year in actual currency or 1.1% lower in constant currency. Organic core revenue, which excludes ITsavvy and the effects of currency and Reinvention actions declined around 5% this quarter. This pace of decline was larger than our expectations, reflecting softer print equipment demand in April and May amid peak DOGE and tariff-related uncertainty and to a lesser extent, delays in the sales of OEM supplies due to recently implemented tariffs. Despite these unexpected headwinds, revenue was in line with our guidance due to stronger-than-expected results at our IT Solutions segment, which benefited from an acceleration in demand and momentum in the cross-sale of IT Solutions to Xerox print clients.

Turning to profitability. Adjusted gross margin of 29.3% declined around 420 basis points year-over-year. Around 300 basis points of the decline reflected lower financing and other fees associated with the intentional reduction of our finance receivable portfolio and higher product costs. Around 100 basis points of the year-over-year decline was due to the inclusion of ITsavvy, which has a lower gross margin but similar operating margin profile as the print business. And nearly 100 basis points of the decline reflected tariff charges, net of price-related mitigation actions and adverse currency impacts. These effects were partially offset by Reinvention related and other cost reductions.

Adjusted operating margin of 3.7% was 170 basis points lower year-over-year, reflecting lower gross profit and to a lesser extent, higher bad debt expense, partially offset by Reinvention savings and other cost reduction efforts as well as the inclusion of ITsavvy, which carries a lower operating expense base than our print business. Adjusted operating income of $59 million was $4 million below the low end of our Q2 guidance range. A continued focus on cost control drove operating expenses $32 million lower year-over-year. Included in operating expenses in the second quarter were $9 million of Reinvention and transaction-related costs and $14 million of ITsavvy operating expenses.

Excluding these costs, operating expenses declined $55 million, a reduction to our operating expense base of around 12% year-over-year. Adjusted other expenses net were $41 million, $11 million higher year-over-year due primarily to higher net interest expense. Excluded from adjusted other expenses this quarter was $12 million of net interest expense associated with debt financing that was contingent upon the completion of the Lexmark acquisition. Adjusted tax rate of 528% compared to 25.5% in the same quarter last year. The current year rate reflects an inability to deduct certain losses and expenses, including interest. We continue to assess the impact of the Lexmark acquisition and recent tax law changes on our effective tax rate for the remainder of the year.

We expect the Lexmark acquisition and tax law changes to contribute favorably to adjusted operating income and adjusted tax rate in future periods. Adjusted loss per share of $0.64 was $0.93 lower than the prior year, primarily due to a higher adjusted tax rate as well as lower adjusted operating income and higher interest expenses. GAAP loss per share of $0.87 was $0.98 lower year-over-year. The increase in GAAP loss reflects a higher tax expense, lower operating income, higher net interest and onetime costs associated with the Lexmark transaction in the current year and insurance proceeds related to a legal settlement in the prior year.

Let me now review segment results. Q2 equipment sales of $336 million declined 5.6% in actual currency and 6.7% in constant currency. Excluding the effects of Reinvention-related actions, equipment sales declined around 3% compared to a decline of around 1% in Q1. The sequential slowdown reflected a period of softer equipment demand in April and May, which was partially offset by a recovery and return to normalized demand conditions in June. Total equipment installations declined 12% due in part to the aforementioned period of demand weakness in the beginning of quarter 2 and the effects of prior year's Reinvention actions, including geographic and offering simplification.

Entry installations declined 14%, driven in part by a prior year reduction and current year build in backlog for mono devices. Mid-range installations declined 6% as continued strength in sales of the recently launched PrimeLink 9200 series was partially offset by slower demand for other products. Entry and mid-range equipment revenue declined at a slower pace than installations due to a stronger mix of color devices and the benefits of tariff-related price actions. High-end equipment installations and revenue both declined year-over-year, reflecting in part the ongoing evolution of our production print portfolio and high-end offering simplification actions taken last year.

Print post-sale revenue of around $1 billion declined 9.5% in actual currency and 10.5% in constant currency. Excluding the effect of Reinvention actions, print post-sale revenue declined around 6% in constant currency. The decline in core print post-sale revenue reflects lower supplies and page volumes, offset by growth in digital services. Print segment adjusted gross margin of 31.2% declined 330 basis points year-over-year due to higher product costs, including tariff expenses, lower financing fees, lower managed print volumes and unfavorable equipment channel mix and currency effects, partially offset by Reinvention savings and other cost reduction efforts.

Print segment margin of 4.8% declined 240 basis points year-over-year due to lower revenue and gross profit, partially offset by Reinvention savings and other cost controls. Turning to IT Solutions results. In Q2, IT Solutions revenue and gross profit increased more than 150% year-over-year, reflecting the inclusion of ITsavvy in segment results and strong organic growth from the legacy ITsavvy business. Pro forma for the acquisition of ITsavvy, IT Solutions gross billings, a reflection of business activity, increased 8% year-over-year compared to an increase of 0.4% in Q1.

The sequential improvements in billing growth reflects strong PC sales in part associated with the Windows 11 upgrade cycle and an acceleration in demand for infrastructure and networking products with particular strength in Microsoft cloud service provider implementations. As Steve and John noted, we're seeing momentum in the cross-sale of IT products and services to existing Xerox print clients, which helped contribute to another quarter of double-digit growth in gross bookings, a measure of forward billings. IT Solutions gross profit grew $22 million year-over-year and gross margin of 16.4% expanded 90 basis points compared to the prior year, reflecting the inclusion of ITsavvy. Segment profit grew $9 million year-over-year due to the inclusion of ITsavvy. Segment profit now reflects the full run rate benefit of annualized synergies.

Let's now review cash flow. Operating cash flow was a use of $11 million compared to a source of $123 million in the prior year quarter. The reduction in operating cash flow reflects lower pretax cash net income and lower proceeds from finance receivable, partially offset by ongoing improvements in working capital, lower restructuring payments and lower cash taxes. Investing activity was a use of cash of $18 million compared to a use of $2 million in the prior year quarter due primarily to an increase in capital expenditures associated with the implementation of a new enterprise-wide technology platform and lower proceeds from the sale of assets.

Financing activity resulted in a source of cash of more than $600 million compared to the use of cash in the prior year of $336 million. Current year financing activity included proceeds from the sale of first and second lien notes, partially offset by the early redemption of a portion of our 2025 notes, the prepayment of a portion of our term loan and quarterly amortization of other secured debt. Prior year financing activity included the repayment of our 2024 senior unsecured notes and other secured debt payments. Free cash flow was a use of $30 million in the second quarter, $145 million lower year-over-year. The reduction in free cash flow reflects, in part, fewer-than-expected proceeds from the sale of finance receivables due to a delay in the sale of roughly $100 million of European finance receivables not expected in quarter 3.

In the second half of the year, we expect seasonal improvements in adjusted operating income, continued working capital discipline and benefits from the reduction in finance receivables to drive positive free cash flow. As is typical, we anticipate quarter 4 to be our seasonally strongest quarter of free cash flow generation. However, as noted, free cash flow in quarter 3 is expected to benefit from a higher-than-normal level of finance receivable sales. Moving to capital structure. We ended Q2 with $985 million in cash, cash equivalents and restricted cash, of which around $500 million reflects proceeds from the sale of second lien notes, which were held in escrow to fund the Lexmark acquisition.

Total debt of $3.9 billion at quarter end increased by more than $600 million from Q1 levels due primarily to financing activity associated with the Lexmark acquisition. Around $1.6 billion of the $3.9 billion of outstanding debt supports our finance assets, resulting in core debt of $2.3 billion related to the nonfinancing business. Adjusted for the Lexmark acquisition, which closed on July 1 and repayment of the August 2025 unsecured notes, total debt was $4.3 billion and total core debt, which excludes financing allocated debt, was $2.7 billion. The Lexmark acquisition increased total debt levels but resulted in a lower gross debt leverage ratio.

On a pro forma basis, gross debt leverage is 5.4x trailing 12 months EBITDA, more than a half turn lower than our Q1 leverage ratio. Including the more than $250 million of expected synergies, gross debt leverage would be reduced further to 4.1x trailing 12 months EBITDA. Our top capital allocation priority remains the reduction of debt, and we continue to target a gross debt leverage ratio of 3x trailing 12 months EBITDA in the medium term. Finally, I will address fiscal year 2025 guidance, which now includes Lexmark's expected results beginning July 1. We expect revenue to grow 16% to 17% in constant currency, inclusive of around $1 billion of Lexmark revenue.

As noted, we experienced a recovery in equipment demand in June following a period of softer demand in April and May. While demand conditions are currently stable and expected to remain stable in the absence of further tariff and trade-related disruption, our guidance for the second half of the year accounts for a degree of conservatism to reflect the volatile and unpredictable nature of tariff and other government policies. For the full year, we expect an adjusted operating income margin of around 4.5%, inclusive of $100 million to $110 million of adjusted operating income from Lexmark. Lexmark's expected contribution excludes $10 million to $15 million of onetime intercompany gross profit eliminations.

Relative to prior Xerox-only guidance, this updated guidance reflects $30 million to $35 million of tariff charges net of mitigation efforts, a delay in the in-year realization of certain Reinvention-related gross cost savings and a more conservative outlook for full year equipment demand, partially offset by a modest amount of Lexmark synergies. As John noted, our target for Reinvention-related gross cost savings and other profit improvement opportunities remains unchanged at more than $700 million. However, we expect to realize fewer Reinvention-related savings in 2025 than originally expected as we evaluate the pace and scope of certain Reinvention initiatives relative to Lexmark integration priorities.

Any delayed savings in 2025 are timing related and expected to directly benefit adjusted operating income in 2026 or 2027. The high end of the $30 million to $35 million range of expected tariff expense net of mitigation efforts reflects tariff rates currently proposed to take effect August 1. The full year tariff impact is larger than previously communicated due to a brief period of 145% tariffs applied to goods sourced from China, a higher-than-expected increase in transition costs associated with product moved from China to Mexico and a more deliberate rollout of price increases as we await final tariff rates. Assuming rates remain unchanged, we expect to recover the net impact of 2025 tariff expenses in 2026.

Finally, free cash flow is expected to be around $250 million. The roughly $125 million reduction in free cash flow relative to the midpoint of prior guidance reflects higher in-year cash tariff expenses and $50 million to $75 million of expected cash payments associated with an accelerated implementation of Lexmark synergies. These headwinds are offset by expected improvements in working capital and mild in-year free cash flow accretion from Lexmark net of incremental interest expense. We continue to aggressively manage working capital to improve the conversion of free cash flow from adjusted operating income. Free cash flow associated with the Lexmark acquisition is expected to improve in future periods as run rate synergies outpaced implementation costs.

It is important to note that expected free cash flow in 2025 will be impacted by certain onetime items that are not expected to recur in future years. Current year cash tariff outlays net of mitigation efforts of $60 million to $65 million are expected to be recouped over time through future price increases. Synergy implementation costs of $50 million to $75 million in 2025 are expected to decline in 2026 and be reduced to less than $25 million in 2027. And this year, we incurred a roughly $50 million onetime cash flow headwind associated with changes in inventory ownership terms with a large supplier partner.

Excluding the impact of these items, excess pension payments and the expected contribution of finance receivable proceeds, free cash flow conversion from adjusted operating income would approach Xerox's target range of 35% to 40% this year, a range that is expected to be further supported in future periods as adjusted operating income increases and interest expense decreases. For purposes of modeling results between quarters, in the second half of 2025, we expect stronger than typical seasonal operating income generation in Q4 due to the consolidation of Lexmark, which has a heavier weighting of operating income in Q4 than the legacy Xerox business and the cumulative benefits of tariff mitigation, Reinvention and synergy savings, which are expected to be more heavily weighted to quarter 4.

Moving to 2026. To help model results for the combined companies, we are providing preliminary operating expectations for 2026. Starting with revenue. We expect the legacy Xerox print business to decline at roughly the pace of the broader print market, which we assume to be low to mid-single digits, consistent with recent trends. This expectation reflects the ongoing benefits of various Reinvention-related sales productivity and service renewal initiatives as well as market share growth opportunities afforded by the Lexmark acquisition, offset by a degree of conservatism associated with future integration planning. Lexmark revenue is expected to be relatively flat year-over-year, resulting in another $950 million of revenue, net of intercompany eliminations in 2026.

And our IT and digital solutions businesses are expected to grow faster than their respective markets as we continue to benefit from growth in the penetration of both types of services within the legacy Xerox print and now the Lexmark print client bases. We expect significant year-over-year growth in adjusted operating income resulting from the inclusion of Lexmark, synergy realization and further Reinvention-related savings. Addressing items that contribute to adjusted operating income, we expect the full year consolidation of Lexmark to add around 50 basis points to 2025's achieved gross margin in 2026, reflecting Lexmark's gross margin of around 35%, excluding intercompany revenue.

Adjusted operating income growth is expected to be further supported by at least $250 million of year-over-year cost reductions from acquisition synergies, Reinvention savings and ongoing cost discipline. Moving below, operating income. Interest expense is expected to be around $300 million, reflecting the additional debt used to finance the Lexmark acquisition, offset by the paydown of more than $200 million of debt in 2026. Further, adjusted tax rate is expected to be around 35% as we benefit from improved adjusted operating income and recent changes in tax policy. Finally, free cash flow. In 2026, we expect free cash flow to benefit from around $400 million of cash from the reduction of finance receivables and as noted, better conversion of adjusted operating income to free cash flow, excluding finance receivable benefits.

To conclude, I'm excited to welcome the Lexmark team to Xerox. Lexmark improves our competitive position in print and will be an important contributor to Reinvention's financial targets of revenue stabilization and double-digit adjusted operating income margins. We'll now open the line for Q&A.

[Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital.

I have probably 3, if I could, and thanks for all the great detail. I guess the first one is the June -- so you mentioned June, July slowdown. You mentioned it stabilized. And I think you guys mentioned in the prepared remarks that sort of -- you mentioned DOGE and tariffs. And so was there just DOGE related -- was there a meaningful sort of federal component to the softness that you guys had? And then I guess the tariff comment. Does that sort of speak to that there was broader sort of pricing pressure? You had mentioned tariffs were a little bit more onerous than you had anticipated. So do you think it was sort of print-specific pricing that caused it? Or do you think your customers were just sort of like in wait-and-see mode, generally speaking, and not related to pricing? And I got a couple of follow-ups.

That's all right. No problem. It's John. And you're spot on. The timing, I just want to be clear, it was May, June. [ Excuse me, it's ] actually April, May, with the June recovery, my apologies. And you're correct in your last component. You have a lot of these environments, SLED and Fed that are dependent upon funding, right? And so all of those DOGE and DOGE-related issues just causing pause. nothing has come out as a cancellation. We've seen no cancellations in the pipeline, just a delay.

And the tariff piece for sure. But the tariff piece is not as much as a cost flow-through in those particular months as it is an impact of people making decisions as they look at landed cost and the type. We had been the same. You can imagine, we did the same. When we didn't understand what the destination and the source was on the tariff-related products, we had to hold and make some decisions before we let things get shipped to us because we had no idea what we were applying to that actual cost basis.

So we wanted to hold until we started getting clarity. And that has been consistent throughout the industry. We've seen and heard that with consistency. That's not unique to us. But those types of things is what gives you the softness in that kind of April, May time frame. That's why we saw such a stronger June recovery against both of those related issues.

Appreciate that. And then this is more of a clarification, ITsavvy related. On the IT Solutions segment results slide, the ITsavvy impact of 154% constant currency growth, is that against the total revenue growth? And I guess, is that to say, John, that the entirety of the growth was ITsavvy related? I'm just trying to [indiscernible].

I'm trying to understand the question. Are you saying -- because I mean, we had very significant gross billings growing year-over-year in that space. So the answer to your question, yes. The IT -- the core ITsavvy piece of it or -- and as well as the legacy part of our business combined is what combines to give you that growth. So we saw a strong gross bookings increase and strong gross billings increase against [indiscernible] against the revenue.

Yes, that's correct. And/or the 150% growth that you see there, it's purely driven through ITsavvy. We do not give guidance for the full IT Solutions segment. But if you were just to look at the legacy IT Solutions revenue declined 3%. So the 150% growth came all from ITsavvy included in our results in Q2 2025.

I will say, though, to add to that, and this is why I think this is important, while that is true that we were -- we declined 3%, our legacy gross billings actually grew 13% (sic) [ 8% ] year-on-year. And that was really due to strong activities in Canada. And that's why we've been trying to focus mostly on our pro forma gross billings and our order activity because that's an indicator of future billings and both are robust, which is why we provided that number.

That's right. And yes -- and John, gross billings grew actually 8%, which are an indicator of activity with gross bookings, as you said, we've grown even more in Q2 2025.

That's right.

Yes. That's helpful. And then did I hear accurately that, John, you said mid -- for ITsavvy, mid-single-digit penetration only into the Xerox customer base...

No, no, it's actually low. Yes, it's sub 5%. That's why we're so encouraged. I mean we have -- the cross-sell activities have really been embraced by -- our investment thesis had always been that our direct sellers across our XBS units would be able to open doors across the thresholds of so many accounts, and they've built a pretty robust pipeline now greater than $50 million of these types of activities. And we're just seeing the traction we had hoped for, and it's great to see it become realizing it, and that's what's driving this growth in the back end.

Our next question comes from Erik Woodring with Morgan Stanley.

It's Maya on for Erik. I was wondering if you could maybe unpack some of that weakness you saw in April and May broad-based across customer segments or more prevalent in like SMB, for example, and across geographies as well. And then does your full -- I understand some conservatism baked into the back half of the year with your updated outlook. Does that assume demand remains stable and doesn't improve from the end of June? Or does that take into account an incremental softness in demand from where you exited the quarter?

Well, I'll start with -- it's a little bit choppy, but it's more -- enterprise was relatively stable. We saw more Fed and SLED accounts is where we saw more of the pressure inside the business. And what we really focused on is our installations. A lot of this is changes between quarters and some sequential slowdowns. But when I look at it between our entry products and our mid products, the entry products was really changes in our backlog where our mid declines was really just that softness in April and May. But that was offset, as Mirlanda pointed out, with very strong growth in our PrimeLink installs, which was 30% plus. So we expect to at least hold our share in the market in future periods.

And the high-end declines, which we -- which is self-inflicted, these are the ones that we did on purpose basically on reflecting the areas of our print product portfolio in the places in which we exited. So we intentionally exit certain segments to reintroduce ourselves back into these segments with the right products. So that's why the Kyocera -- this Kyocera announcement this morning was so important because this cut-sheet inkjet part of production, we wanted to shrink the production portfolio down on products that were declining with higher cost to make ourselves available to go after.

And if you look at the market data there, cut-sheet inkjet is greater than 13% on a compounded annual growth rate forecasted by external analysts between 2025 and 2030. So you take that product, at our free flow, our finishing, our remote services, branding and you add that and stabilizing mid, this is why the bookends of this strategy we've talked about so much is critically important in A4 color and, of course, cut-sheet inkjet on the high end of production. So that's kind of the choppiness that we saw through there, both market and product.

Yes. But Maya, also to add to John's, right, you clearly pointed out and we mentioned in our prepared remarks, our guidance for the rest of the year has some conservatism on it, right? We saw that softness, and we build that into our equipment demand for the rest of the year.

Got it. So it's more so on the equipment side is where that incremental conservatism comes from.

That's correct.

Great. And then just one last one from me. Apologies if I missed it, but can you remind me, did you guys actually end up implementing price increases over the quarter? I know you guys talked about doing so at earnings last quarter. And if so, were they just for specific products in the U.S. market? Or is it across the board globally? And what are you hearing from customers on even the potential future price increases?

Well, we were very consistent with our price increases. And yes, we did implement them to partially offset some of the tariff-related issues. As we came into the period, there's lots of discussions in the industry whether we could apply a tariff surcharge or whether we had to take it in price. And you know all the headwinds with regard to potential calling out tariff surcharges. And so we followed suit with price increases in the places in which we could. We had some pushback in the areas of contractual price increases, as you'd imagine, from customers in our post-sale environments.

But on our equipment part of our revenue, we applied them as judiciously as we can, and we're going to continue to do that as we go through the period because we could not adjust the headwinds with price increases in the period. That's going to take time to recover. That's going to take us out of 2025 and into 2026, which is precisely why we've provided the guidance there on what we did because these are the pressures on the operating income. It really comes down to the timing of which we can gain price increases, the tariff-related impact, the slowdowns, et cetera, and some of the intentional things that we did. But fundamentally, we have applied those price increases, and we have been able to pull them through from an equipment and a transactional revenue perspective.

Our next question comes from Samik Chatterjee with JPMorgan.

This is Priyanka Thapa on for Samik Chatterjee. I got a couple of questions on Lexmark. One of them is, why is the outlook for Lexmark's revenue in 2026 expected to be flat when they're exposed to growth markets and -- at least stronger growth markets than legacy Xerox print?

Yes. I can answer that. So from a Lexmark perspective, our expectation of Lexmark being flat, that is better than industry, which we expect is reducing by 3%. What drives that is Lexmark is very well positioned in the A4 market, which is an area that is growing, to say the least. 80% of their revenue is basically annuity-based and gives them an upper hand as it relates to the print market in 2025 and going forward.

All right. And what is the driver of operating margins declining to 4.5% for the full year in '25 versus 5% before?

Yes. So let me unpack a little bit of the operating margin for 2025. When we start with the revenue, we are talking about revenue in 2025 growing 16% to 17%, which kind of includes $1 billion of Lexmark revenue. What that means is if we were to go back now to the Xerox legacy, that anticipates roughly 150 basis point lower than prior guidance, which, as we mentioned previously, has a degree of conservatism in the equipment outlook given the demand softness that we saw in April and May.

Also I want to remind again that our full year Xerox legacy guidance includes 400 basis points of headwind from the Reinvention initiatives that we took in the prior year and are flowing through in 2025. As a result, our implied core revenue will be in the range of Xerox, 3% to 4%, a slight improvement from the prior year 4% decline. And we expect to continue to improve that Xerox legacy revenue trajectory driven by market share gains, growth in digital legacy IT solutions. So with that, that has an impact into our 2025 gross and adjusted profit margin, 4.5% in 2025 in relation to the adjusted profit is driven by mainly this decline in top line revenue -- our gross margin is expected to be between 29% and 30%.

And the tariffs, right, when we think about sort of the biggest drivers, tariffs is expected to impact our adjusted operating margins, $30 million to $35 million, and that is net of our initiatives that is higher than we initially had discussed in Q1 related to some of our products coming in from China at 145% tariffs. Some of them slipped through. We have higher costs expected for moving our supply chain from China to Mexico as well as -- as we're going through our price increases, as John mentioned, we're being very balanced in passing those price increases to the customers. 2/3 of the decline on the operating profit margin.

So 1/3, let's say, tariffs. 1/3 would be our slowdown and intentional delays into our Reinvention actions as we are preparing to integrate and preparing for the synergies with Lexmark, we intentionally are reviewing certain Reinvention initiatives. And so those will get pushed to '26 and '27. And then a piece of it was related to our demand softness, macro and some of the conservatism that I mentioned, we're building into the equipment sales and revenue top line for the rest of 2025.

Thank you. I would now like to turn the call back over to Mr. Bandrowczak for any closing remarks.

Thank you, everybody. Recapping today's call, the addition of Lexmark advances our Reinvention by strengthening our print businesses. A stronger print business improves Xerox revenue trajectory and provides a platform from which we can accelerate the growth of IT solutions and our portfolio of digital services offered as demonstrated this quarter, leading to revenue stabilization. And revenue stabilization is key to realizing the value of our roughly $500 million of identified gross savings in operating income, and we target a return of double-digit adjusted operating income and substantially higher free cash flow generation. Thank you, everybody, and have a great day.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.