Is Xerox seeing any AI-related infrastructure demand within its IT Solutions customer base?

AI is a mixed bag; it drives endpoint refreshes and infrastructure modernization for AI workloads, which are tailwinds. However, it also pushes spend to large data center build-outs, which is not Xerox's primary client set, creating some friction. “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.”

Can you disaggregate the drivers of gross margin improvement, even when normalizing for the IEEPA refund, and how much is offset by input cost inflation?

Gross margin improvement is driven by additional transformation benefits from Lexmark synergies, Lexmark's contribution, and product pricing. These are partially offset by revenue mix shifts towards post-sales and increased product costs, particularly for externally sourced A3 products during the transition to internal manufacturing. “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.”

What are the key drivers behind the confidence in a back-half equipment recovery, given positive indicators like page volumes and supply usage?

Demand for print is stable, with the overall print pipeline ahead of last year. Strong demand in the entry-level segment outran supply in Q2, creating a backlog for H2. The mid-range (A3) remains a soft spot, but the company is building products with a cost structure to compete effectively in the current environment. “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.”

XRX

Xerox Holdings (XRX) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Industrials· Jul 30, 2026

Source: earnings call transcript

Executive summary

Xerox Holdings Corporation Q2 FY26 — Lexmark Synergies and Debt Reduction Drive Improved Outlook

Xerox delivered a mixed Q2 FY26, with strong reported revenue growth driven by the Lexmark acquisition and significant progress on debt reduction and synergy realization. While pro forma revenue declined, management expressed confidence in a second-half recovery for both Print and Other and IT Solutions, driven by new product launches and sales force ramp-up. The company is focused on stabilizing revenue, increasing profitability, and reducing leverage to navigate its debt maturities.

Highlights

Revenue of $1.92 billion increased 22% year-over-year, reflecting the Lexmark acquisition.
Adjusted operating margin rose to 10.6%, up 690 basis points year-over-year.
Total debt reduced by $223 million in Q2 FY26.
Lexmark integration synergy guidance raised to at least $350 million, a $50 million increase.
Full-year 2026 revenue guidance raised by approximately $100 million.

Concerns

Pro forma revenue declined nearly 7% year-over-year, mainly driven by softer mid-range and lower OEM sales.
IT Solutions GAAP revenue fell 9% in the quarter, with segment profit margin down 110 basis points due to sales force investments.
Higher memory and oil prices present a modest risk to updated profit and cash outlook if current levels persist.
Free cash flow guidance of $250 million for FY26 remains unchanged despite $80 million tariff receivable, due to offsets from restructuring, working capital, and TPG JV interest.

Guidance & targets

Category	Target	Timeline	Confidence
Lexmark integration synergy	at least $350 million high materiality	FY26-FY28	High
Full-year 2026 revenue	approximately $7.6 billion high materiality	FY26	High
Full-year 2026 revenue decline (H2)	4% decline medium materiality	H2 FY26	High
Q3 FY26 revenue trend	stronger than Q2 medium materiality	Q3 · FY26	High
Q4 FY26 revenue trend	stronger than Q3 medium materiality	Q4 · FY26	High
Full-year 2026 Adjusted operating income	$555 million to $605 million high materiality	FY26	High
Full-year 2026 Free cash flow	approximately $250 million high materiality	FY26	High
Year-end 2026 Gross leverage ratio	under 5x high materiality	Q4 · FY26	High
Year-end 2026 Net leverage ratio	under 4x high materiality	Q4 · FY26	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
Print and Other Equipment revenue growth was driven by Lexmark contribution, but pro forma declined due to softer mid-range, lower OEM sales, and increased backlog for entry. Post-sale revenue decline pro forma was due to lower service rental, outsourcing, and financing income. Segment margin improved due to higher gross margin and integration savings. Equipment revenue: $387 millionEquipment revenue growth YoY: 15%Pro forma equipment revenue decline: 13%Post-sale revenue: $1.35 billionPost-sale revenue growth YoY: 31%Post-sale revenue growth constant currency: 30%Pro forma post-sale revenue decline: 4%Adjusted gross margin: 38.4%	—	—	—	12.7%
IT Solutions GAAP revenue declined due to reporting on a net basis for certain contracts. Gross billings grew, and the pipeline remains strong. Segment profit margin declined due to investments in the sales organization. Gross billings growth YoY: 4%Gross billings growth YTD: 11%Gross profit: $35 millionGross profit margin: 18%	—	-9%	—	3.7%

Orderbook & backlog

Entry-level product backlog increased Q2 FY26 end

Expected to work down over the second half of the year, converting to revenue.

Product announcements

Product	Type	Timeline
Entry color printer and MFP lineup	launch	June 2026
9 Series platform	launch	current
IJP 900 and Proficio PX300 and PX500	launch	past

Deals & partnerships

Lexmark Integration of Lexmark operations into Xerox

The Lexmark acquisition is a key driver of current revenue growth and synergy realization. The unified Xerox brand launched its first hardware products combining capabilities from both companies.

Risks & headwinds

Softer mid-range and lower OEM sales Q2 FY26

Main driver of nearly 7% pro forma revenue decline in Q2 FY26

Mitigation:Building new products (9 Series) with stronger economics and TCO advantage to compete in the current environment.

IT Solutions sales force transition friction Q2 FY26, near-term

Weighed on near-term signings and short-term operating profit (segment profit margin down 110 bps YoY)

Mitigation:Rebuilding sales force, ramping seller productivity, adding technical sales engagement, sharpening cross-sell motion; expect Q4 billings ahead of Q3 and revenue tracking with billings next year.

Credit profile friction for IT Solutions current

Modestly impacted working capital efficiency and created friction with partners

Mitigation:Expected to ease as leverage is reduced; actively addressing these constraints.

Higher memory and oil prices current, ongoing

More than offset incremental benefit from higher revenue and improved synergy since last update

Mitigation:Monitoring closely; could present modest risk to updated profit and cash outlook if current levels persist or memory prices move higher.

Working capital efficiency Q2 FY26

Modestly impacted by credit profile friction

Mitigation:Actively addressing and expect constraints to ease as leverage is reduced.

What to watch in Q3 FY26

IT Solutions gross billings growth

Q4 FY26

Current 4% YoY (Q2 FY26)

Target stronger than Q3 YoY

Why it matters

Indicates the effectiveness of sales force investments and the recovery of the IT Solutions segment, which is key for addressable market expansion.

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.

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Q&A highlights

Why is the full-year free cash flow guidance unchanged at $250 million, despite the $80 million tariff receivable proceeds?

The $80 million from tariff receivables is offset by additional restructuring costs, working capital drags, and additional interest related to the TPG JV, keeping the free cash flow guidance stable.

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

asked by Alek Valero · answered by Chuck Butler

2 min read 6 chapters

Detailed narrative

Strategic Priorities and Debt Management

Xerox is focused on three core priorities: stabilizing revenue, increasing profitability, and reducing leverage, framed as 'hurdles' for its 2028, 2029, and 2030 debt maturities. The company made progress in Q2, reducing total debt by $223 million and improving gross and net leverage ratios. Management aims to continue opportunistic debt repurchases to lower future maturity walls.

Revenue Trajectory and Equipment Sales

While reported revenue increased 22% due to the Lexmark acquisition, pro forma revenue declined nearly 7%. This was primarily driven by softer mid-range and lower OEM sales. However, demand for entry-level products outran supply, creating a backlog expected to convert in H2 FY26. The overall print pipeline remains strong, tracking ahead of last year.

Lexmark Integration and Synergy Expansion

The Lexmark integration is progressing well, with synergy guidance raised by $50 million to at least $350 million. These synergies are driven by IT efficiencies, expanded sourcing, logistics benefits, and migration of service delivery to lower-cost operations. Half of these synergies are expected in 2026, with the remainder in 2027 and 2028, helping to offset higher memory and oil costs.

IT Solutions Performance and Outlook

IT Solutions billings grew 4% year-over-year in Q2, but GAAP revenue fell 9%. This segment is undergoing a sales force rebuild and productivity ramp-up, which has weighed on near-term signings and operating profit. Management expects Q4 billings to be stronger than Q3 year-over-year, with revenue tracking more closely with billings into next year, driven by new products and improved deal conversion.

Production Business Investment

Xerox is actively investing in its production business, contrary to competitor narratives. The company has launched new products like the IJP 900 and Proficio PX300/PX500, with more portfolio expansions and new product announcements expected in Q3. This strategic focus aims to reshape the portfolio towards higher-growth segments and new technology.

Impact of IEEPA Tariff Receivables

The company recognized $105 million of IEEPA tariff receivables in gross profit this quarter, representing a recovery of previously absorbed costs. Xerox sold the receivable to a third party for $80 million cash, which was recorded in financing cash flow due to timing. This cash was partially used to repurchase debt at a discount, capturing $42 million of discount.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.