Xerox Holdings Corp Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ananda Baruah - Loop Capital Markets - Analyst : Really appreciate Welcome. I'm looking forward working with you. And Xavier, if you're out there in miss working with you, really enjoyed it. So I guess, Steve, and maybe John, just real quick on ITsavvy. Can you sort of -- you do -- look, you've walked through a lot of the details on the last couple of calls, including this call in greater detail. Can you describe to us how they operate? Like I've been to their website, are they an IT solutions company with deep relationships with IT vendors? Are they like a systems integrator barite as well? And just being on the website, it looks like they sell you guys sell everything from rack servers to networking with relationships across all verticals, all end customer verticals. So I guess just a bit more of a description there would be super helpful for me. I appreciate it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 1:00PM, XRX.OQ - Q4 2024 Xerox Holdings Corp Earnings Call

Question: Ananda Baruah - Loop Capital Markets - Analyst : And so just a quick follow-up there, John. And Steve, I appreciate it. What's a useful way to think about ITsavvy's kind of revenue growth or amplification potential now with the Xerox backing. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 1:00PM, XRX.OQ - Q4 2024 Xerox Holdings Corp Earnings Call

Question: Samik Chatterjee - JPMorgan Chase & Co - Analyst : Xavier, congrats on the retirement. look forward to working with you -- maybe if I can start with Project reinvention. And I think if I get the numbers right, you're saying about 400 basis points of headwind in 2025 from the effects of Project Reinvention that's comparable to what we saw in 2024 on the revenue line. Maybe just sort of outline for us what the spillover effect largely is? And particularly, it seems like most of the actions you took in 2024, have that have a spillover effect in 2025 revenue -- is that then fair to assume that we sort of continue to see this headwind continuing into 2026 as well? And then is there sort of an expansion of project reinvention given the pending Lexmark acquisition? And I have a quick follow-up there. Unidentified Company Representative Yeah. Thank you, Samik. So our headwinds that we are describing of 400 basis points in 2025, there are continuations of actions that we took in prior years. what we are looking for in 2025 as it relates to reinvention, it's more tactical. We have kind of finished deep organizational changes that we saw in '23 and '24. So yeah, that's the difference and what we see in 2025. And we'll continue to implement the reinvention actions to deliver our gross cost savings of about $400 million. we still have to deliver in the next couple of years. As it relates to Lexmark and reinvention, our plan is to continue to deliver on reinvention -- and then once we close Lexmark, we'll reassess, we will see what we need to do from a synergy perspective. But those two just see them for now as separate enough continuing full speed with reinvention. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 1:00PM, XRX.OQ - Q4 2024 Xerox Holdings Corp Earnings Call

Question: Samik Chatterjee - JPMorgan Chase & Co - Analyst : Got it. And quickly for my follow-up, maybe just to walk through the puts and takes on the free cash flow guidance, particularly the step down from 4.60 this to at 3.75 -- sorry, 4.64 and 2024 to 3.75 at the midpoint in 2025. And what largely looks like you're guiding to sort of similar operating profit. Can you just walk me through the drivers? Is it less forward flow? Or are the underlying business sort of cash flow generation? Unidentified Company Representative Yeah. So thank you. So 2025 free cash flow, as you mentioned, we're guiding lower. And it's primarily driven when you think about lower inflow from the sale of finance receivable and this is planned, and this is in accordance with what we have disclosed and where we see our finance receivable assets will be at the end of 2026. But it also will be impacted by higher working capital and higher operating net income. So net-net, really is lower finance receivable assets, inflow and improvements in operating margin and working capital for 2025.

Question: Erik Woodring - Morgan Stanley - Analyst : And echo the sentiment from Samik and the rest of the team on Xavier's retirement and looking forward to working with you. Steve or either one of you guys, I'll target this question, too. And it's just around gross margins. The gross margins have been on a fairly consistent downward trajectory. You're obviously taking out a lot of costs as you go through reinvention -- but even with a lower share count, you still faced some EPS pressure. There's some puts and takes, obviously, around OI&E and tax rate. But can you maybe just walk us through the actions you're taking to stabilize gross margins. And really how we should be thinking about the trajectory of total company gross margins in 2025 before accounting for anything related to Lexmark? And then I have a quick follow-up. Unidentified Company Representative Yeah. So thank you. So in 2024, as I mentioned, in Q4 specifically, gross margin did decline 190 basis points and was primarily driven by mix of our A4 equipment lower print volumes and inclusion of ITsavvy. All these were partially offset by benefits of reinvention and currency. Looking into 2025, we expect gross margin to be lower than 2024, and that is primarily driven by inclusion of ITsavvy. ITsavvy has a lower gross margin than our print business as well as some product increases. We will and plan to offset those with benefits from technology-enabled pricing and offering productivity initiatives.

Question: Erik Woodring - Morgan Stanley - Analyst : Okay. Super. Really helpful with that detail. And then maybe I just want to double-click on Samik's question about free cash flow. If we kind of go back to the early days of the original four flow announcements I think you had alluded to $400 million of cash flow tailwinds per year for consecutive years. I think you've done something to the effect of almost $1.3 billion thus far. So pulled that forward a little bit. Can you maybe just talk about the kind of future of this program and how we should be thinking about the contribution from this program not just in 2025, but beyond. And really what I'm trying to get to is, is there a point at which we should be thinking this program really comes to a halt and just focusing on your core free cash flow. Just trying to maybe understand the timing of that or any factors that would help impact that. And that's it for me. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 1:00PM, XRX.OQ - Q4 2024 Xerox Holdings Corp Earnings Call Unidentified Company Representative Yeah. Thanks, Erik. And you are correct, right? We -- this program -- four-year program, we expect finance receivable balance to be around $1 billion. We started with $3.6 billion. As you mentioned, we've done about close to $1.3 billion. And right now, we have about $800 million of finance receivables that we think we will sell over the next two years. So when I think about sort of a trailing 12-month basis, we sold about 44% of total originations to our HPS partner. And that kind of like when you look at that rate in the next two years and what's to come, we will review that balance. We review our plans, and we will be able to -- or if we could sell more finance receivables and benefit our free cash flow -- but again, it's a four-year program. We still have finance receivables that are planned to go through the forward flow program in the next two years, '25, '26.