XBP (XBP) Q3 2025: Gross Margin Expands 190bps on AI Automation Despite 18% Revenue Decline
XBP’s first post-merger quarter reveals a business in transition, with automation-driven margin expansion offsetting top-line contraction. Despite revenue headwinds from project completions and client exits, operational leverage and AI adoption are driving profitability gains. Management signals a robust pipeline and renewed client engagement, positioning XBP for stabilization and future growth post-acquisition.
Summary
- Margin Expansion via Automation: AI-driven workflows and cost discipline widened margins even as revenue fell.
- Client Diversification and Retention: No single customer exceeds 7.5% of revenue, with top clients averaging 15-year tenures.
- Pipeline Rebuild Underway: Leadership cites new contract wins and moderating revenue declines as early signs of recovery.
Performance Analysis
XBP’s Q3 2025 marks the first consolidated quarter following the transformative acquisition of Accel Technologies BPA, with results reported on a pro forma basis to reflect the combined entity. Total revenue fell 18.1% year-over-year, but the decline moderates to 8.3% when excluding a large, one-time client project from the prior year. The drop was primarily attributed to the completion of major client engagements and some customer attrition, both legacy issues tied to pre-acquisition uncertainty.
Gross margin expanded by 190 basis points to 21.9%, a direct outcome of scaling automation and operational efficiency. Adjusted EBITDA rose 7%, and margin improved by 260 basis points to 11.2%, reflecting disciplined cost management and higher productivity. Segment detail shows the Applied Workflow Automation business, about 90% of revenue, declining 18.9% (or 8% ex-project), while the Technology segment, though only 10% of revenue, contributed 30% of gross profit thanks to its 55–65% margin profile. The company’s revenue per employee, now above $80,000, stands out versus peers and underscores the impact of AI-enabled process optimization.
- Revenue Declines Centered on Project Completions: Large prior-year projects and client exits drove the bulk of the top-line contraction.
- Automation and Cost Control Drove Margin Gains: Operational leverage lifted both gross and EBITDA margins, offsetting revenue softness.
- Technology Segment Margin Outperformance: High-margin software and services remain a critical profit engine despite being a smaller revenue contributor.
While the revenue base contracted, XBP’s financials show clear progress on margin structure and efficiency, positioning the company for improved profitability as top-line trends stabilize.
Executive Commentary
"Our vision for the company is to grow with purpose. We engineer mission-critical systems that enable hyper-automation through domain expertise, adaptive AI, and measurable outcomes."
Andrey Yonovich, Chief Executive Officer
"Our pro forma gross margin expanded to 21.9% in the quarter, up 190 basis points year over year. This was driven by operational efficiencies fueled by automation and better operating leverage throughout the organization."
Dan Abramovich, Chief Financial Officer
Strategic Positioning
1. Post-Merger Integration and Scale
The acquisition of Accel Technologies BPA has created a global platform with 2,500 clients in 20 countries, supported by 11,000 employees. Leadership emphasizes a renewed focus on governance, institutional ownership, and global reach, aiming to leverage combined scale for cross-selling and operational synergies.
2. Automation and AI as Core Differentiators
AI-enabled intelligent document processing (IDP) now automates up to 75% of workflows in marquee accounts, combining neural network-based data extraction with human-in-the-loop oversight. This hybrid agentic AI approach is credited with driving both cost savings and improved client outcomes, particularly in healthcare claims processing and financial services.
3. Diversified Client Base and Industry Reach
No single client exceeds 7.5% of revenue, and the top 10 clients account for 34%, with an average tenure of 15 years among the largest 25 accounts. Industry exposure is balanced, with meaningful presence in healthcare, banking, and public sector, reducing concentration risk.
4. Rebuilding Sales Pipeline and Win Rates
Management highlights several recent contract wins, including New York City’s Department of Finance and a large insurance carrier, as evidence of renewed commercial momentum. While not yet reflected in reported results, leadership points to a “robust pipeline” and moderating revenue declines as signals of stabilization.
5. Margin Focus and Operating Leverage
Gross margin expansion and rising revenue per employee are central to XBP’s thesis. As automation deepens, leadership expects incremental revenue to flow disproportionately to the bottom line, given fixed cost leverage and ongoing headcount rationalization.
Key Considerations
XBP’s Q3 2025 is a transitional quarter, with legacy revenue headwinds offset by clear operational and margin progress. The company’s future trajectory hinges on successful pipeline conversion, automation scaling, and client retention post-acquisition.
Key Considerations:
- AI-Driven Efficiency: Rapid automation adoption is improving margins and productivity, but requires ongoing investment and change management.
- Client Retention and Diversification: Deep relationships and balanced industry exposure reduce risk, but must be maintained as legacy contracts roll off.
- Sales Pipeline Rebuild: Recent wins are encouraging, yet broad-based revenue growth will depend on sustained new business momentum.
- Technology Segment Leverage: High-margin software and services offer profit stability, but are exposed to project-based revenue swings.
Risks
XBP faces execution risk as it integrates BPA and seeks to reverse revenue declines, particularly given historic client attrition tied to pre-acquisition uncertainty. Macro headwinds, the pace of automation adoption, and competitive intensity in workflow automation and AI also present ongoing challenges. Leadership’s decision to withhold forward guidance this quarter reflects the inherent uncertainty during this transitional period.
Forward Outlook
For Q4 2025, XBP did not provide formal guidance, citing the recent completion of the BPA acquisition and the complexity of integration. Management committed to offering guidance in future quarters once operational baselines are clearer.
- No quantitative guidance for Q4 or FY25 issued this quarter
- Emphasis on pipeline growth, client engagement, and automation-driven margin gains
Management highlighted several factors that will guide near-term performance:
- Continued automation expansion and operational leverage
- Conversion of pipeline opportunities into revenue and client retention
Takeaways
XBP’s Q3 2025 shows a business in strategic transition, with automation gains and margin improvement offsetting top-line pressure. The company’s ability to convert its pipeline and sustain client relationships will determine the pace of recovery.
- Operational Leverage on Display: Margin expansion and rising productivity signal successful automation deployment, even amid revenue contraction.
- Post-Acquisition Stabilization: Leadership’s focus on pipeline rebuild and client engagement is critical as legacy projects wind down and new wins ramp up.
- Future Growth Hinges on Commercial Execution: Investors should watch for evidence of revenue stabilization and accelerating pipeline conversion in upcoming quarters.
Conclusion
XBP’s first consolidated quarter post-merger reveals a company leveraging automation to drive profitability gains despite revenue headwinds. Sustained improvement will depend on commercial traction and the successful integration of acquired operations, with margin structure now providing a stronger foundation for future growth.
Industry Read-Through
XBP’s experience underscores the challenges and opportunities facing workflow automation and business process outsourcing (BPO) firms amid AI adoption and client risk diversification. Margin expansion through automation is achievable, but top-line stability demands commercial agility and deep client partnerships. Industry peers should note the importance of hybrid AI-human workflows and the risk of project-based revenue swings, especially during periods of organizational change. The broader sector read-through is clear: efficiency gains are necessary but not sufficient—sustained growth will require both operational excellence and commercial renewal.