Xerox Stock

Good morning, everyone. Asiya Merchant here, Citi Research. I lead -- it's day 3 of Citi's TMT Global Conference. I'm very pleased to have Xerox's management here with me. Louis Pastor, the CEO; and Chuck Butler here, the CFO. This is an interactive session, so I do have some prepared commentary. And if you have any questions, I would just request that please bring -- please raise your hand, we'll bring the mic to you.

So Louis, let me just start off. Maybe I'll turn it to you. I do have some prepared comments. Just as -- I just want to understand about the revenues, right? I think that's been a key focus for a lot of investors. You're talking about revenue stabilization here. Could you just -- that has been a key priority for a lot of investors, and I know it's for you as well. So -- when investors monitor sort of the demand environment out there, we're looking at enterprise budgets getting tightened here or maybe spreading thin across servers, storage, networking. When you think about print hardware and the fact that you're guiding to revenue stabilization, help us understand why that's the case.

Yes, happy to. So maybe let's start by taking a little bit of a step back and looking at our business on the whole. So roughly speaking, I think we guided to, what, $7.6 billion this year of revenue. Let's just use really round numbers, call it, $7.5 billion. It's basically $1 billion of IT solutions and digital services, roughly $1 billion of production print and then $5.5 billion of what you would think of as almost like traditional office print, okay? And I use the term office there, but I don't love the term office because our hardware is in a multitude of environments. So it's not just offices, but it's actually retail locations, distribution warehouses, manufacturing facilities, but call it the workplace. And that's predominantly what you think of as the low end and midrange machines, so A3 -- A4 and A3. That is, I think, when people look at our business and the industry, that's probably the area of facing the most secular headwinds. It's also the biggest part of our business, okay?

And I think when you talk about revenue trends and competition for budgets in the IT space, again, that is probably the area of largest concern, not just because it's the biggest part of our business, but because it's probably the area, again, with the most sort of secular headwinds. So how do we think about stabilizing that part of our business and also, frankly, getting it to growth? And how do we do that? And this is where we talk about this gain share mix shift strategy, and this is where the gain share component of it is so important because the only way to grow in a market that's secularly challenged is to take share from others. So how do we actually take that share? Why will we be able to take that share? And this is where the Lexmark acquisition is so critical because it's not just about scale. That was a very strategic acquisition. And we acquired a set of capabilities that enable us to differentiate in the one area of this market and of this industry that can actually move the needle.

So what do I mean by that? So by acquiring Lexmark, what we acquired was a full -- the full end-to-end control of our technology stack. So from early design, development, manufacturing, delivery, installation, service of our hardware, our print hardware for the office space end-to-end. Now why that enables us to -- so we are -- there's only one other player in the industry that has that, okay? And what it enables us to do is differentiate on the service experience. So everybody in this industry, because there's been virtually no consolidation, it's highly commoditized. Everybody is competing on price, okay? As all you can compete on are reliability and price. And price is something we will never alone be able to compete on and to win on because we're not Japanese, we're American, and we need to operate with 10% operating margins, not 2% to 3% operating margins, okay?

So -- we -- the reason though that now we can take these set of capabilities, this end-to-end control and compete differently is because if you think about it, the laws of physics, okay, prevent you from taking the cost of the equipment to 0. The laws of physics prevent you from taking the cost of the supplies to 0. These are physical products in a physical world, you have to make them, you have to send them places, right? The laws of physics do not prevent you from bringing the cost of service to 0. And the thing is everybody in this industry sucks at service, because it's hard. And you have to build up these very expensive fleets of technicians and engineers who go out in the world and show up at a customer location and fix the machine when it breaks down, okay? But these machines can operate a whole lot more like your dishwasher or your washer dryer, which is to say, yes, you have to put detergent in and you have to clean the lint filter. But otherwise, you're going to buy it. And for 7 to 10 years, it's going to run and it's going to work. And when it doesn't anymore, you're going to replace it.

Now in our case, you're going to replace it before it actually breaks down rather than when it breaks down to avoid that. But then, okay, so how do we actually make it so that these machines do that? So one is we have -- by the very electrical and mechanical engineering of our products, the design and development, we actually make products that come off the manufacturing line far more reliably and that perform far more reliably than anybody else in the industry. But on top of that, because of the sensors that we build into the technology and the fact that they're all connected, we have more data about how they perform than anybody else in the industry because we have more sensors and we have a more robust fleet management capability. And now what we can do with AI is build algorithms. We used to have to do this with people, with data scientists who needed to learn the industry and study the inputs that were coming back. Now you can do it with AI.

What we can do with this data that comes off the machines and now digitally intervene to proactively and predictively maintain the machines out in the world means we don't have to maintain the service fleet and the customers have a better experience. So now you have a better customer experience. So that's the reliability component. But we can actually use this to fundamentally change the economics of the model and to compete much more effectively on price, which is ultimately in this highly commoditized space, what the economic buyers are making decisions on more than anything else. Service actually is very, very important. The experience of end users is very, very important, especially at the high end with your largest customers who have global deployments of our technology across many countries and do huge volumes, but it's better on both ends.

And that, for us, when we look at our portfolio end-to-end in that way, and we think about revenue trends moving forward, this is why we're so confident in our ability not just to stabilize this biggest part of our business, but actually grow it because this will enable us to take share from others because it's the most differentiated value proposition in the industry while competing most effectively on price. And the reason why others in the industry won't do it is because they've built up -- so one, they don't own their technology end-to-end. There's only one other player that does. And that player that does sells so much through third parties, other OEMs and partners, and they've built their business on top of those other people having to buy parts and supplies and carry all these replacement items. It's actually, like, not in their immediate near-term economic interest to do it. It requires a change in their model. And this part of their business exists solely to generate cash for investment in other parts of the business. So they're not interested in creating near-term profitable headwinds for long-term profitable growth, not here.

Okay. All right. So that's sort of where you're most focused on. And...

I think it's the biggest -- look, it's the biggest part of our business and ultimately, gaining share there while expanding our margins is the nearest-term path to getting to a more sustainable leverage profile, which ultimately is the nearest-term path for significant equity accretion and value creation for our shareholders.

Right. And you did talk a little bit about pipeline, right, that you were seeing some momentum. So is -- all these initiatives that you talked about focus on services, reflecting that in your pricing in your go-to-market. Is that what underpins the confidence that you're talking about the print pipeline momentum looks like it's improving? Is that what's -- okay, is that right?

100%. So it's like this value proposition, this vision for this part of the industry is part of what's fueling the increase in our pipeline. And what we're seeing in our pipeline as well is we sort of differentiate between kind of existing customer engagements and renewals versus competitive takeout, knockout. And what we're seeing is this value proposition, it resonates in both, but it's allowing us to grow our pipeline and mature the pipeline for competitive knockout, and we're starting to see conversion there as well.

And so those types of engagements, you get a verbal on a win. We just got one more recently like in earlier this week. That's a $5 million a year global Managed Print Services engagement. But going from verbal to signing to actually installing equipment, verbal this quarter, it will sign next quarter. The rollout and the transition will be into next year. Like it takes time for that all to convert through to revenue.

Okay. And is that -- and again, given that even the print market, like there is various segments, right? I mean there's the A3 market that's going through some declines. You have production print. So I don't know if these wins and the market share gains that you're talking about, is it across all those? Or are they -- are you focused like on maybe certain ranges within the print market?

It's a great question. I would say predominantly, what I was just talking about was A4 and A3 at the low end. And I would say there's definitely a mix shift as well sort of from the midrange to the low end. And we see that -- and we see it especially with partners going through the channel. And there's a lot of reasons for that. That -- but everything I was just describing was not really about production. In production, our strategy is a little bit different because the economic buyer is different, the market dynamics are different. There's actually secular growth. There, it's much more about having the broadest sort of end-to-end portfolio and offerings and helping our clients who are predominantly commercial printers actually grow their business. And so expanding into new segments and verticals.

And there was a great example of this actually more recently in the announcement we made about our new partnership with Xeikon, where our technology is actually embedded in their machines, and then we're going to be going to market together with them as well. But packaging and labels is, I think, a $1.8 billion market that's going to grow 15% a year for the next 7 years. So there's -- those areas of secular growth and being positioned to capture them the best where we don't really need to be vertically integrated because the economic buyer isn't just buying on price. They're buying an end-to-end solution that you need to be able to not just bring them the technology, but deliver and provide the software that makes it run most effectively and efficiently with as little labor as possible, but as a high volume as possible, you need to have the distribution capabilities to ensure they have supplies and parts and because these machines are running constantly, and you have to have the ability to service it. That's where the end-to-end value proposition is very, very powerful.

And so just -- so again, back on the ones where you are gaining share on the entry side. So there's a little bit of a mix shift that sort of happening from the midrange, maybe even the high end towards more of the entry products. How is that -- so market share gains, but then what about the margin profile across the mix shift?

It's another great question. So because the midrange historically, you had very profitable equipment sales and post sale. And in the A4 space, that's not the dynamic. You have -- in some cases, you may sell at a loss the equipment, but I think largely think of it as kind of flat, like you basically sell the equipment at very little to, if any, margin. But the post-sale streams are 70%, 80% gross margin as opposed to something that was more balanced in the midrange. And so as this mix shift takes place from the mid to the A4, so from A3 to A4, there is a headwind on equipment margin because we're going to be placing more machines that come with effectively no margin. But over time, actually, the overall margin profile of these engagements with customers is actually higher.

Okay. The lifetime value. Okay. Great. And then there's a lot of concerns also on the aftermarket post sales. Like how do you kind of prevent that -- how do you kind of make sure that you maintain your margins here in post sale?

I'm going to let Chuck do that one because Lex had refined this model quite well.

Yes. Post sales is the lifeblood of any imaging company, right? We want to get printers in the field in the installed base, and we want to keep them printing for a long time because that's what drives the highly profitable annuities on the back end. Louis mentioned the difference in the margin profile between an A3 and A4. A4 especially is indexed toward that post-sale margin. You're in the 70% plus range. And so it's important that we keep that, especially when you're placing your hardware at neutral to maybe even slightly negative in some places, you have to make sure you keep the post-sale annuities coming at the high margins.

The way Lexmark did it and what Xerox acquired with that acquisition was they had really good security chips that they put inside their printers that allow only authentic supplies to work inside these printers for the first 5, 6, 7, 8 years of a printer's life until an alternative comes in and cracks the security chip. And then they bring an alternative to the market. We don't see that for a long time. Lexmark never has. They've had best-in-class in terms of the security chip that they put in place. And then once that happens, it's time to refresh your printer anyway, and then we put a new printer out there with a new chip inside it.

Okay. All right. Talking about Lexmark, I know you guys have had some savings that you've identified as part of the synergies as you're bringing them in. Just help us understand like the targets for those synergies have increased. I think in the more recent one, you talked $350 million, I think, in synergies. What's underpinning that? I mean, why is this higher target? Why are you laying out a higher target? What are you seeing that's better than what you thought initially?

Yes. You may start.

Well, let me unpack maybe integration a little bit. So we closed on the Lexmark acquisition July 1 of last year. So the first 6 months post acquisition, which is actually the second half of last year was very much about sort of like core operational integration. Let's go get every dollar of duplicative cost out of this combined organization, right? And so that was the first 6 months. And by the end of last year, even within those first 6 months, we exited the year, we had done -- I think the number was $146 million of run rate cost out just from the first 6 months. So of that $300 million that we had originally said. Great. Second 6 months, so the first 6 months of this year, very much about unifying the go-to-market. By the way, a lot of costs come out there, too, because what we had for the first 6 months was you can't share customer information ahead of an integration, so ahead of the closing.

So you can't do that much mapping of your account coverage and things like that. So that's where the second 6-month period was, let's take what was a legacy Lexmark sales force selling legacy Lexmark offerings to legacy Lexmark accounts, right? And the same thing we had on the Xerox side. We'll put them together and have a unified sales force with one coverage model, right, selling one portfolio. That's great. A lot of costs come out there, too, because you don't need as many sellers when you do that. So that was good.

Now the second half of this year, which is kind of the third 6-month period, is very much about transitioning product. So going from the OEM sourced kind of A3 product to our own internally developed technology, and I talked about the strategic importance of that because of the end-to-end value proposition. But again, a lot of costs come out as you do that because you're capturing margin on margin and you've got the gross margin expansion because it's not sourced product. So in each of these different periods, you have significant costs coming out. And in each case, as you're doing the work, you identify new opportunities. So you set a target based on what you know at a moment in time. And for us, there's some conservatism there. And then as we go through it, we identify new and greater opportunities.

And so as we think about next year, so that's sort of the genesis of how we got to a greater number for this year. But as we think about next year, we'll obviously get the full flow-through of every action that we've taken this year, right? But on top of that, we still have opportunities with respect to systems and culture and even those will generate more savings as we go forward. So I would say our confidence not just on hitting the number that we have now sort of taken up, but even what the benefits and impacts will be as we go forward continues to go up.

The other thing I'll add to it is I don't think that we are surprised that there's more synergies there. That was the genesis of the question was what's changed in our thinking. I remember going through the process, I started out as Lexmark's CFO and then after the acquisition became the CFO of the combined company. And I remember going through that, and I was talking to Greg and I said, I think the synergies are $400 million plus. And Greg said, that's a huge number. There's no way, and I said that's kind of what I see here.

So I don't think we're surprised. I think sometimes you have to start exercising the motion, making sure you understand all the processes and how they align and then it's starting to come back to what we had originally thought anyway. But you go out with originally, this is what we have clear line of sight to right now. And that's what we led with, but now we're starting to see the other opportunities unfold.

And there are some investments though alongside as well, right? Because you do have these cost savings, but then you're investing, whether it is -- I think you talked a little bit about bringing manufacturing to Mexico. So just walk us through like when you talk about what impacts your income line or net income line or operating income line, EBIT line, how are you thinking about those savings relative to then investments, so the net impact to the operating income line?

Yes. What's -- so all the manufacturing that we're moving, Lexmark already maintained a footprint in those places. There's not a huge incremental investment. And if the only incremental investment that comes is with whatever tooling and just a little bit of incremental manufacturing capacity that you need to build in those locations. So there's not a huge cost to moving that product from an outsourced to an in-sourced product, and we receive all the benefits from not paying margin on margin, being USMCA compliant coming in through Mexico, saving on the tariffs and just the cost of the structure of the A3, the midrange box that we now source internally is $300 to $800 less than what it would be if we continue to go to our external provider.

Okay. All right. That's fair. Maybe a little bit on IT solutions. It's a smaller part of your business, obviously, not impacted by Lexmark necessarily. But just talk to us about that. Like what are you seeing in that market? Again, coming back to my original question, there's a lot of pressure on company CIOs and IT budgets are getting stretched thin because server prices have gone up, storage prices have gone up, PC prices have gone up. And so how you're thinking about where IT solutions revenue growth targets could look like relative to, let's say, when you acquired it?

Well, I would say a few things. One is we're still -- we have every bit as much conviction about the long-term opportunity with that business today as we did when we made the acquisition. So we acquired ITsavvy in November of 2024. And the idea there, and I'll differentiate it from the Lexmark acquisition where the idea was, hey, best-of-breed kind of approach where, a, it's more like a merger of equals and there's capabilities that we're acquiring and there's capabilities that we have that are even stronger together. Here, it was -- at the time, we had a roughly, call it, $300 million or so IT solutions business, but it wasn't a single business. We had pockets of businesses. We had some offerings in the Netherlands, the U.K., Canada, the U.S., all that have been sort of acquired over time, each run with their own sort of processes and systems and leadership, and they offer different things, and all were subscale.

So the genesis and thesis behind acquiring ITsavvy was to buy a scaling and scalable platform. And I use that word sort of in the broadest sense, meaning its people, its offerings, its capabilities, its processes, its systems, all of those things that are built to acquire and absorb because it was a private equity roll-up built through acquisition itself, but actually was fully integrated, to then acquire that, retain it, invest in it and actually take these disparate businesses that we had and integrate them into and onto that platform. So it was like a reverse integration.

And so now having done that -- and look, that created great cost savings, but also headwinds from -- actually from a sales perspective because a lot of the sellers in those legacy businesses churned, right? They had less control. They got to work through different systems and processes. And some of that, frankly, was healthy and good. So we onboarded new sellers. And now we're starting to see the ramp of those sellers. I talked a little bit about that on the Q2 earnings call. And we're starting to see the ramp of that and the investments that we've been making to build out our capabilities.

So our biggest opportunity with that business is, I would say, a few things. One is just penetrating the existing 200,000 customer base of Xerox as a whole, where we have -- and we are targeting where we have like the right relationship with the right economic buyer within the customer, right? Because if your relationship is with procurement versus sometimes it's with real estate, sometimes it's with the CIO, that's the relationship that we want, right? And that's where we're relevant to them. And then being able to offer them a set of capabilities that actually help them with the challenges that you're describing.

And one of the things that resonates very powerfully with those economic buyers is actually when we talk about the work that we do internally to leverage this business to get greater outcomes for our own technology spend. I mean we're a multinational 22,000 employees, $7.5 billion a year in revenue plus with a huge cost base ourselves, a lot of which goes on technology. And when we start to talk about how we've actually standardized our own operations and sort of drink our own champagne, it's very powerful, and we can give specific use cases of where we've been able to deliver better outcomes that -- building that sort of relationship with the client that we're your trusted partner, we have these set of capabilities, they're enterprise grade is very powerful.

Okay. All right. I like the reference to champagne. All right. Maybe just as we dig into that, you did talk about selling the synergies -- or sorry, selling the whole portfolio of solutions across your entire customers. Where are we on that journey now? I see like you've obviously integrated these offerings into IT solutions. But are you starting to see that 200,000 customer base that you have for Xerox Core now getting onboarded with these IT? So are we starting that momentum? Have you started to see that come through yet?

We are. And I would say we admittedly and sort of consciously did not push as hard forward on sort of the whole cross-sell, upsell motion while we were doing all of these account coverage shifts and unifying the go-to-market. And when I talk about unifying the go-to-market, it's unifying the print go-to-market. IT solutions has a separate set of sellers. And the idea here and where we -- is to not do what we have seen others in this industry do as they've tried to pivot is to try to get printer sellers selling IT solutions. It doesn't work. But the print sellers have the account relationship. And it's more of an account manager model and then the specialists on the IT solutions side who can come in.

And so a lot of it's about building the right pipeline, focusing on the right customers and clients where we have the relationship with the economic buyer, we have offerings that map to what they need and then putting in place the incentives needed to drive the right behavior. So to ensure that print sellers not just know who to call on the IT side to bring them in, but are incentivized to actually grow that account, right? And so all those incentives are now in place. So we are starting to see even more traction because of that. I think we said in Q2, we had -- I think it was like $134 million of opportunities sourced just from the print side alone for IT solutions. That's -- we expect that number to...

In the pipeline.

Yes.

It's in the pipeline. Okay. All right. And then just talking about within that IT solutions, obviously, AI is a big topic, right? I mean, to the extent that are these IT solutions sellers, are they on the devices side, like AI PCs? Are they on to -- how does AI kind of flow into that? And what are you seeing in terms of enterprise adoption for these customers? -- as it relates to AI?

So I would say for our IT solutions business, now remember, this business is, call it, 75% hardware resale, 25% services, okay? AI is a tailwind on equipment sales, on hardware sales, servers, more investment in AI-enabled devices, right, for the device life cycle management piece of the business. And then on services, AI presents a great opportunity, not just for revenue growth, but also for margin expansion. And there, we introduced a new AI-driven ITaaS platform, so IT as a Service, that allows the services clients on the IT side to have one sort of pane of glass that they go in to see all of the services that they consume from and through our organization and to be able to toggle their usage and their consumption up and down. So they're licensing and new services. And all of that is sort of AI-enabled and driven.

And then other services, again, like our Network as a Service offering is completely AI-enabled, meaning so many other people consume and utilize Network as a Service through other third parties that we compete against that is entirely really labor-driven. It's offshore models, it's -- and it's somewhat antiquated in that way. And this is more AI native. And so it's not just that we can -- it's more profitable for us than it is for them, but actually, we can compete on price and with a better and higher quality offering. So we are positioning the portfolio on the IT solutions side to benefit from AI.

I think on -- to your point on there's headwinds there, too, there is -- with like the budgets being stretched thin for your sort of your typical CIO, there's definitely challenges that on the hardware side that also just make the business sort of inherently more lumpy because prices are moving so fast and you can quote a deal at $10 million for hardware and then a week later, you have to quote it again and now it's $12 million, right? And it literally changes what's going to get purchased and when. So there's some -- that market -- part of the market is very fluid. But on the whole, I would say AI is a tailwind for the business.

Okay. All right. Just let me first make sure any questions in the audience. Sorry, did you raise? Okay. Let me talk about free cash flow. That's always very -- right in Chuck's courtyard here. Free cash flow guidance, how should investors think about that? I know you guys have talked a little bit about, obviously, your guide for fiscal '26. But then there is some tariff recovery that benefited your free cash flows because you did get some -- you did, I guess, get receivables that you sold for the tariff. But beyond just this one-off stuff, as you guys are expanding, you have margins, tailwinds here, revenue stabilizing and growing. How should we think about free cash flows ahead into fiscal '27?

Yes. I think the way I think of it is you do get some tailwinds this year for sure. While tariffs we did get the refund, we also are paying a significant amount of tariffs still to this day. So tariffs isn't really a tailwind in terms of the actual benefit to the free cash flow and operating income but it balances out. But it's a fair statement we got the refund. We also have the back book sales and the forward flow agreements. And those will get less throughout time.

But if I take those out and think about what is my core free cash flow, we said we had $335 million this year in forward flow benefits. We got $80 million from the tariff. If you take those out and you just look at normalized cash flow and then take that into next year, that improves. That improves next year based on expanding the margins through the synergy savings that we've talked about and paying less interest expense. So you're going to have better operating income, less interest expense, which will expand margins and therefore, drive to a more -- a stronger operating cash flow isolating for those onetime tailwinds that we got this year.

Okay. And the biggest drivers there, is it just top line margins, working capital?

It's margins. I mean if you think about the top line of the business, now again, we'll give more guidance on this as we do the Q4 earnings announcement. But we're looking to stabilize revenue, right? We operate in a space that declines, the largest part of our business does decline in the low single digits. There are pockets growing. We'll continue to expand in those pockets where we can. And then we anticipate growth out of that other kind of $1 billion of IT solutions and digital services in that 10% to 15% range. So year-to-year, you're not going to see a bunch of top line movements, might even see some slight compression. We haven't put it together yet, but your margins will expand significantly.

Okay. And then debt reduction, how do you kind of guys think about the leverage and the path towards leverage?

We -- Louis and I have made the stated goal, we have 3 objectives, right? We're going to stabilize the top line, we're going to expand margins, and we're going to delever this company as quickly as possible. After we signed the JV deal, we were at 7x gross leverage and 6 net. At the end of Q2, we were down to 6 and 5. And by the end of the year, we'll be down to 5 and 4. So you're down 2 full turns within 1 year after you sign the JV. Our stated midterm goal is to be down in that 3 range. Your progress toward that then will be more opportunistic retirements of debt where it makes sense, plus expanded margins and EBITDA growth.

Okay. All right. And then once you kind of reach your leverage targets, where does your capital allocation priorities lie?

What a problem I can't wait to have. We'll invest back in the business where it makes sense to. But right now, we're going to stay ultra-focused on stabilizing the top line, expanding margins and delevering this company as quickly as possible.

Okay. Well, we're up on time. So I just wanted to thank Louis and Chuck here. Thank you very much. I know there's a lot of wood to chop here at Xerox. So good luck with all of that.

A lot of opportunity as well.

Yes.

Appreciate it. Thank you very much.

Thank you very much.

Welcome to the Xerox Holdings Corporation Second 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 Second 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 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. Pastor.

Good morning, and thank you for joining our Q2 2026 earnings call. Before I get into the quarter and some of our recent initiatives, I'd like to step back and share how I think about the business and our current priorities because context matters as much as the numbers.

As I've spoken with employees, met with investors and engaged with clients, partners and vendors from this seat, I've used an analogy to bring our priorities to life, particularly in the context of our capital structure. The analogy has resonated well, so I thought it was worth repeating during today's call. We are running a race. The race has 3 hurdles. The hurdles are our 2028 debt maturities, our 2029 debt maturities and our 2030 debt maturities. Our first priority, stabilizing revenue is about how fast we run. Our second priority, increasing profitability is about how high we jump. And our third priority, reducing leverage is about lowering the height of the hurdles. Every action we take, every decision we make is now framed by these 3 priorities because this is how we win the race. If an initiative doesn't advance one of these 3 priorities, then we don't pursue it, period.

On balance, we made real progress against each of our 3 priorities in Q2. Revenue of $1.92 billion increased 22%, reflecting the inorganic benefits of the Lexmark acquisition. On a pro forma basis, revenue declined nearly 7%. This looks like a deceleration from Q1, but it's not. Adjusting for Q1's currency benefit and the supplies pull forward we flagged last quarter, our revenue trajectory modestly improved on a year-over-year basis in Q2.

Adjusted operating margin rose again to 10.6%, up 690 basis points year-over-year on a reported basis. Excluding the benefit of tariff receivables, which Chuck will discuss in detail, adjusted operating margin would have been 5.1%, up 140 basis points year-over-year. Importantly, pro forma gross margins expanded year-over-year, a trend we expect to continue, helped by Lexmark synergies. Finally, in Q2, we reduced our total debt by $223 million and improved both our current gross and net leverage ratios as well as our year-end leverage targets.

Collectively, Q2 results gave us the confidence to raise our full year 2026 revenue guidance by approximately $100 million on higher expectations for Print and Other. We're also raising our adjusted operating income guidance. The increase reflects both the one-time tariff recovery Chuck will cover in detail and real growing confidence in the plan itself. Two quarters in with the first half delivered and our synergy target now at $350 million, we're holding the operational line even as we absorb higher memory and oil costs.

The quarter had real positives, but 2 areas aren't yet where we need them to be, and I want to address both directly. I want to talk about what happened, what we're doing about it and why I'm confident we'll see improvements as the year progresses and into next year. First, equipment sales. Pro forma revenue declined in the quarter, mainly driven by softer mid-range and lower OEM sales, but demand signals remain encouraging. Our overall print pipeline continues to track ahead of last year. The macro picture outside of the Middle East remains stable, and we continue to see growth opportunities in both our entry and production segments.

Specific to entry, demand in the quarter ran ahead of our Q2 forecast, and we couldn't fully supply it, pushing installs and revenue into later quarters and creating a backlog we expect to work down over the second half of the year. In June, we launched our first hardware under the unified Xerox brand, a new entry color printer and MFP lineup targeting the small work group segment, one of the fastest-growing areas in print. These products bring the combined capabilities of Xerox and Lexmark to market for the first time and sharpen our competitiveness.

Entry color installs rose in the quarter, even though the products have only been available for a few weeks. I also want to speak about the 9 Series, a product I believe will drive our mid-range success over the next several years. Historically, Xerox sourced all mid-range equipment from a third party. This limited our ability to manage cost, working capital, availability and ultimately, our competitiveness. The 9 Series changes that. This is a platform we built ourselves as a direct result of the Xerox and Lexmark combination, and it gives us something we've never had in this segment, control. Here is what that means in practice.

The 9 Series costs us less to build with stronger economics across the platform. For our clients, our internal analysis shows a total cost of ownership advantage that becomes increasingly compelling at faster print speeds across equipment, service and supplies. Better economics for Xerox, better economics for our clients. To our channel partners and to anyone weighing a mid-range refresh, now is the time to take a hard look at the 9 Series. We built it, we stand behind it, and we'll put it up against any competitor's product.

The other area I want to address is IT Solutions. Billings grew again in the quarter, and the pipeline is building. New business, though, faced near-term pressure, and part of that is deliberate. We're rebuilding the sales force here, ramping seller productivity, adding technical sales engagement and sharpening our cross-sell motion. Newer sellers take time to reach full stride, so the transition has weighed on both near-term signings and short-term operating profit. We knew it would. There's also some friction from our current credit profile, which we expect to ease as we reduce leverage. We expect Q4 billings ahead of Q3 year-over-year and a better finish to the year as newer sellers build their books and deal conversion improves, and revenue should begin tracking more closely with billings as we move into next year.

The long-term prospects for IT Solutions remain strong, and the market opportunity is large and growing. Bringing this back to our first priority, stabilize revenue. Our higher full year 2026 revenue guidance assumes year-over-year trends for both equipment and IT Solutions improve in the second half of the year.

Turning to increased profitability. We've raised our Lexmark integration synergy guidance to at least $350 million, a $50 million increase from our prior target, primarily driven by incremental IT efficiencies, expanded sourcing and logistics benefits and the migration of selected service delivery activities into lower-cost shared-service operations. We expect half of these synergies to be realized in 2026 with the remainder flowing through in 2027 and 2028. This, along with higher revenue, has allowed us to offset a large portion of the additional memory and oil price headwinds we've endured since we first provided guidance 6 months ago. Finally, reduced leverage. In addition to paying back our $125 million bridge loan at the end of June, we retired $99 million of our debt in the open market in Q2, mainly through the repurchase of our 2028 notes.

Over the past 2 quarters, we've reduced the 2028 maturity wall by nearly $200 million or to revisit my analogy, we've lowered the height of the first hurdle in our race by more than 25% during the first half of this year. At the end of Q1, our gross and net leverage ratios were 7x and 6x, respectively. At the end of Q2, our gross and net leverage ratios fell to 5.9x and 5.1x, respectively.

Based on our current guidance, we now expect our year-end gross and net leverage ratios to fall by more than 2 turns versus Q1, better than our prior forecast of 1.5 turns to less than 5x and 4x, respectively. To the extent we have excess liquidity operating the business, we'll continue to take advantage of the dislocation in our bond prices to further lower the hurdles in front of us.

As we think about the future of this business, our priorities are clear: gain share in entry and production, protect our mid-range base and expand our addressable market in IT Solutions and digital services. We're deliberate about how we do it, retaining and strengthening the base, reducing avoidable account loss, improving renewal quality and breadth and growing wallet share with existing clients. With the Xerox and Lexmark sales forces recently coming together and the coverage, incentive and process design now more firmly in place, we are being more proactive in pursuing new logos, market expansion and partner motions. It will take time, but the model is set. Now it's about execution.

Before I hand the call over to Chuck, I want to put in a plug for our production business. When we retired 3 legacy products in 2024, some of our competitors tried to spin it as Xerox exiting production. That narrative is wrong. We're investing in production and reshaping the portfolio, moving into higher-growth segments and bringing new technology to market. We've already launched the IJP 900 and the Proficio PX300 and PX500. And over the coming quarters, you'll see the rest of the portfolio we've been building come to market.

Q3 brings new product announcements and more segment expansion. I'm proud of how far this team has come, and I can't wait for these products to hit the market. If you're attending Printing United in September, come by. I think you'll leave with a very different view of where Xerox production is headed.

With that, Chuck, over to you.

Thanks, Louis. Good morning, everyone. Last quarter, Louis and I laid out 3 priorities: stabilize revenue, increase profitability, reduce leverage. Let me walk through Q2 against that same frame. On revenue, pro forma declines modestly improved versus Q1 when adjusting for the currency and supplies dynamics Louis described, and we are raising full year guidance. On profitability, adjusted operating margin expanded year-over-year for the second consecutive quarter, and we are raising full year adjusted operating income guidance as well. On leverage, we reduced total debt by $223 million in the quarter, and we now expect to exit the year below 5x gross leverage and 4x net leverage based on the midpoint of guidance. Two quarters in, we are making progress.

Our Q2 results and guidance reflect the impact of the Supreme Court ruling on IEEPA tariffs. There are a few moving pieces here, so let me walk through the mechanics. First, the P&L. We recognized $105 million of tariff receivables in gross profit this quarter. To be clear about what this represents, we have been paying these tariffs all along, and that cost is embedded in our results over the past 12 months. The ruling allows us to recover it. This is not a windfall on top of clean results. It is the recovery of a real cost we already absorbed.

Second, the cash. Rather than wait for the government to define and process the claims, we sold the receivable to a third-party buyer for $80 million in cash. The $25 million difference is the buyer's discount recorded as OID. We put a meaningful portion of that cash to work immediately, repurchasing our debt at a discount. Third, the classification. Because the claims had not yet been processed at quarter end, the $80 million is recorded in financing rather than operating cash flow, which means it provided no benefit to Q2 reported free cash flow. Once the claims are processed, it moves to operating. The bottom line, the $80 million is real. The cash has been received and the only thing that changes with timing is the classification, not the economics.

Q2 revenue of $1.92 billion increased 22% year-over-year on a reported basis and 21% in constant currency, reflecting Lexmark's contribution. On a pro forma basis, revenue declined nearly 7% year-over-year compared to a 4% decline in Q1, which benefited from 230 basis points of higher currency tailwinds and approximately 100 basis points from the pull forward of post-sales revenue, primarily in supplies.

Turning to profitability. Adjusted gross margin was 36.4%, up 710 basis points year-over-year, driven by Lexmark's contribution, recognition of IEEPA tariff receivables and transformation benefits, partially offset by higher incentive compensation expense, increased product cost, mix and declines in the high-margin finance-related fees, largely a result of our forward flow arrangements. Adjusted operating margin was 10.6%, up 690 basis points year-over-year, driven by higher gross margins and integration synergies, partially offset by higher SAG expense. Excluding the tariff receivables benefit, operating margins were 5.1%, up 140 basis points year-over-year.

Non-financing interest expense was $100 million, up $45 million year-over-year due mainly to higher net interest expense associated with the Lexmark acquisition and the TPG JV financing. GAAP EPS was $0.07, up $0.94 year-over-year, and adjusted EPS was $0.38, $1.02 higher than a year ago, primarily due to higher revenue and profit and a lower tax rate, partially offset by higher interest expense. Our non-GAAP adjusted tax rate remains volatile because we carry a valuation allowance against certain deferred tax assets. The practical effect is that the pre-tax 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 the tax expense on profits in certain jurisdictions. It is a GAAP consequence of where we sit today, not a reflection of the operating performance or cash. As our profitability improves, we expect the tax rate to normalize and converge with our cash taxes.

Let me review segment results. Within Print and Other, Q2 equipment revenue was $387 million, up 15% versus the same period last year. On a pro forma basis, equipment revenue declined 13%, a step back from last quarter's 2% pro forma decline due to softer mid-range performance, lower OEM sales and increased backlog due to higher-than-anticipated demand for entry. We believe the larger backlog exiting Q2 as well as an increasing demand bodes well for future quarters as it converts to revenue. Print and Other post-sale revenue was $1.35 billion, up 31% as reported and up 30% in constant currency. On a pro forma basis, print post-sale revenue declined 4%, mainly due to lower service rental and other revenue, lower outsourcing and lower financing income.

Print and Other adjusted gross margin was 38.4%, up 720 basis points, driven by Lexmark's contribution, tariff receivable benefits and transformation savings. These factors were partially offset by higher product cost, mix and lower managed print volumes. Print and Other segment margin was 12.7%, up 790 basis points, driven by higher gross margin plus integration savings. Excluding tariff receivable benefits, Print segment margins were up 180 basis points year-over-year.

Turning to IT Solutions. Gross billings grew 4% year-over-year in the quarter and 11% year-to-date, while GAAP revenue fell 9% in the quarter. The total pipeline remains strong, and we expect a better finish to the year. As we noted last quarter, a growing share of what we sell, third-party service contracts, SaaS and certain fulfillment contracts is reported on a net basis, reflecting our role as agent rather than principal. We anticipate the year-over-year trends in gross billings and GAAP revenue to become more aligned over the next few quarters.

On profitability, gross profit was $35 million, reflecting a margin of 18%, up 160 basis points year-over-year, driven by changes in revenue mix and synergies, partially offset by higher memory costs. Segment profit was $7 million, reflecting a profit margin of 3.7%, down 110 basis points year-over-year as investments in the sales organization weighed on profitability.

Now moving to our cash flow and capital structure. For the quarter, operating cash was $37 million compared to a use of $11 million last year, reflecting higher net income and smaller working capital use than a year ago, partially offset by lower proceeds from finance assets. Investing activity was a $9 million use of cash compared to a use of $18 million in the prior year. In the quarter, capital expenditures of $26 million were partially offset by $19 million from the finalization of the Lexmark working capital adjustment.

Financing activity resulted in $114 million use of cash, reflecting the paydown of the 13% senior bridge notes due in June and the partial payment of the 2028 senior unsecured notes and second lien notes. This was partially offset by proceeds from the sale of tariff receivables. Free cash flow was $11 million for the quarter, up $41 million year-over-year. And to remind everyone, 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 dynamics and additional proceeds from finance receivables to deliver substantial free cash flow in the second half of the year.

We ended Q2 with $552 million of cash, cash equivalents and restricted cash, including $57 million of restricted cash and total debt of $4.2 billion, down $223 million sequentially. Approximately $1.3 billion of the outstanding debt supports our finance assets with remaining core debt of $2.9 billion attributable to the nonfinancing business. Gross and net leverage were 5.9x and 5.1x trailing 12 months EBITDA, respectively, down from 7x and 6x last quarter. Our capital allocation priority remains debt reduction, driven by EBITDA growth and continued debt paydown.

During the quarter, we paid down $125 million of 13% senior bridge notes at maturity. In addition, we repurchased $99 million of face value of our outstanding debt, inclusive of $93 million of the 2028 senior unsecured notes and $6 million of our second lien notes, -- we spent $57 million to repurchase this debt in the open market, capturing $42 million of discount. To date, debt reduction from the warrant issuance has been minimal. During the first half of the year, we reduced our 2028 maturity wall by nearly $200 million. The maturity ladder has been derisked in the near term. We have less than $180 million of scheduled debt maturities between now and December 2027.

We continue to have multiple tools to address it, organic cash flow, continued open market repurchases, the warrant mechanism and capacity within our existing capital structure. We will continue to be opportunistic when market conditions support it.

Now for guidance. We are taking up our Lexmark synergy targets to at least $350 million, higher than our previous forecast of at least $300 million, of which we expect approximately half of the benefit to be realized in 2026 with the remainder in 2027 and 2028. We continue to look for new ways to drive efficiency and increase profitability in the business. For 2026, we now expect revenue of approximately $7.6 billion compared to greater than $7.5 billion previously. The higher outlook reflects improved expectations for print and other due to an improved equipment outlook for second half and better supplies outlook. Our revenue guidance implies a 4% revenue decline in the back half of the year. We expect Q3 revenue trends to be stronger than Q2 and Q4 to be stronger than Q3 on a year-over-year basis.

Adjusted operating income is now expected in the range of $555 million to $605 million, up $105 million from the prior outlook, primarily because of the recognition of IEEPA tariff receivables in Q2. Even with this, we continue to incur material ongoing tariff expenses. We continue to expect free cash flow of approximately $250 million. Within this forecast is the inclusion of proceeds for the sale of tariff receivables to a third party, which we expect to be reclassified into operating cash flow. Also benefiting free cash flow relative to our initial guidance are lower expected CapEx and taxes. This is offset by higher in-year restructuring charges as a result of our increased synergy target, higher non-financing interest due to the TPG JV and lower than previously expected working capital.

Specifically regarding working capital, our credit profile has created some friction with partners that has modestly impacted working capital efficiency. We are actively addressing this and expect these constraints to ease over time as we continue to reduce leverage. I do want to be transparent about one risk factor. While we are generating an incremental benefit from higher revenue and improved synergy, this has been more than offset by modestly higher memory prices since our last update and oil prices that have moved meaningfully higher in recent weeks. Our prior outlook assumed oil prices would normalize by mid-year. If current levels persist or memory prices move higher still, this could present modest risk to our updated profit and cash outlook. We will monitor this closely and update you accordingly.

That said, based on our implied guidance by year-end 2026, we now expect gross and net leverage to drop by over 2 turns from Q1 to under 5x and 4x trailing 12 months EBITDA, respectively. The balance sheet is getting stronger. The business is improving, and we are moving in the right direction.

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 Alek Valero with Loop Capital.

On the quarter. My question is more so on your free cash flow guide. So I know your April free cash flow guide was $250 million, and it's $250 million again, but now you're receiving the $80 million in the tariff receivable. Can you just kind of like walk us through the offsets for that and why your free cash flow isn't higher or guided higher?

Yes, sure. Thanks for the question, Alek. Good to hear you. Thanks for joining the call. Yes, essentially, what occurred, we will add $80 million of the tariffs in the back half of the year into our free cash flow call of $250 million. That $80 million was roughly offset by some additional restructuring costs, some working capital drags, which kind of roughly offset that $80 million and stay in the same ballpark or range.

Got it. Got it. That's super clear. Just changing it up a bit on IT Solutions...

I did forget one point. There was a little additional interest related to the TPG JV in there as well. So those 3 items.

Okay. So those are the offsets.

Yes. That's right.

Got it. Just on -- also just on IT Solutions, maybe if you could speak to the kind of demand that you're seeing there. Is there anything -- like are you seeing any AI-related infrastructure demand? Or is that not your customer set yet?

Yes. I would say on AI, we hear a few things consistently from our IT Solutions customers. One is there is an expansion, I think, in certain parts of the IT budget that we serve. So we do see clients refreshing endpoints for AI PCs and modernizing infrastructure to carry AI workloads, investing in data center capacity and security. Those are tailwinds. But it definitely pushes on other parts of their budget that we're less exposed to. It gets them rethinking how they manage information. And so there's a lot of spend being absorbed in the IT Solutions space by just the large data center build-outs. And for us, that's not really our client set. We've got others and other ways to get exposure to that spend. So it's something that cuts both ways for us.

Our next question comes from Joseph Cardoso with JPMorgan.

This is Mark on for Joe Cardoso. I wanted to just ask about the gross margin dynamics. Even if I normalize for the IEEPA refund, it seems like gross margin still improved 70 basis points quarter-on-quarter. If we could just disaggregate some of the dynamics at play there, right? Like how much of that comes from in-housing manufacturing and other drivers? And then I guess, how much is being taken out, right, from input cost inflation?

Yes. I think you're asking specifically about a quarter-to-quarter bridge on gross margin.

Yes, that's right.

Yes, that's right. No, we continue to see improvement for several reasons. One of them, you're right, you normalize for the tariff receivable benefit. We're going to get additional transformation benefits, which will come largely from the synergies related to the acquisitions. You'll get -- Lexmark continues to play a high role in the improvement year-over-year. But even depending on the mix of revenue, sequentially, it has a positive impact.

And we continue to see some other benefits around the pricing of our products. Now there are a couple of headwinds that offset that. One would be you look at the revenue mix between your ESR and your post sales, which I believe are more driven toward the post sales in the second quarter. And then you have some UMC cost increases primarily through our A3 product that we externally source as we're still transitioning to the internally manufactured product.

Got it. And then maybe just a follow-up from a demand standpoint, it seems like there are a few positive demand indicators that you saw during the course of the quarter, right, such as page volumes improving, supply usage ticking up and it seems like you're still pretty confident in the back half equipment recovery. Could you just walk me through some of the drivers and what you're seeing from a demand standpoint?

Yes. Thanks, Mark. I'd say that's largely accurate. Demand is fairly stable for print. And like I said on the call, our pipeline is running ahead of last year. We see real strength in the entry level. Demand actually outran supply in the quarter. We think that will continue into the second half of the year. The honest soft spot for us is the mid-range is A3, and we're not really counting on that segment to bounce back. We're actually building products in a cost structure that win in the environment as it is. So that's really what we're focused on today.

Our next question comes from Asiya Merchant with Citigroup.

Just you talked a little bit about demand here in the back half for IT Solutions as well as you overcome some of the friction from the higher sales force. What, if anything, do you think could be a risk there that there was a little bit of more of pull forward that happened in the first half that could negatively perhaps affect how you're thinking about your back half in terms of revenues from IT Solutions and margins as well within that segment?

And if I can, one more on free cash flow. I understand the guide for this year hasn't changed. As we look into next year, can you give us some guideposts on how to think about it given that sale of receivables is likely to come down materially?

Yes. So I'll take the IT Solutions question, and then I'll kick it over to Chuck to tackle the free cash flow one. On IT Solutions, I would say, look, our clients are still investing. If anything, I think we saw actually more things actually move out from Q2 into Q3. So a little bit of slippage than we would expect things being pulled forward, which was a little bit different than in Q1. But like I said, our clients are still investing, endpoint refreshes, upgrades, modernizing infrastructure. Those demand drivers are still intact and they're building.

And so even though our Q2 bookings were softer on timing and a little bit of a tougher comp, what we see in the second half of the year in terms of execution and conversion by the sales force that we've been rebuilding and investing in as well as just the technical sales engagements, we're pretty confident in the second half of the year for this business. We've got new products landing, backlog converting, sales force hitting its stride. But we do think the step-up will be more heavily weighted towards Q4 than Q3.

Yes. Thanks, Louis. On the free cash flow, of course, we're not guiding what's going to happen next year. But if you think kind of broad topics, for how you would envision it flowing through, you're right, the forward flow receivables will decline year-over-year. That will be offset by additional synergy savings driving increased profitability as we continue to stabilize the revenue and expand margins in the business. And we'll have lower interest as we continue to retire debt. We mentioned we retired $223 million of debt in the second quarter and continue to decrease leverage. And all those benefits will flow through to next year as well. So you'll have a headwind with the forward flow receivables and you'll have some tailwinds around expanding margins, lower interest expense and less restructuring costs.

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

Thank you. One year after the Lexmark acquisition, the results are tracking the strategy. We raised guidance, reduced leverage and made real progress on synergies, while absorbing headwinds we couldn't fully see coming 6 months ago. There's still work to do, and we're clear-eyed about what's ahead. But the priorities are right, the team is delivering, and we're moving in the right direction.

In the end, this business runs on trust. Our clients trust us to help them run more efficiently, more securely and at scale. And that trust is what earns the renewals and the annuity that fund the plan. Investors extend us a version of the same trust that we'll do what we said, and we earn both forms of trust the same way by delivering on the plan over time and by being candid about where we stand every quarter. We know the hurdles in front of us, and we intend to clear them. Thank you for your time this morning. We look forward to updating you next quarter.

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

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.