Xerox (XRX) Q4 2025: Pro Forma Revenue Down 9% as Integration and Cost Synergies Take Center Stage

2026-01-29 | By EarningsIQ Research

Underlying revenue contraction persists at Xerox despite headline growth from acquisitions, spotlighting the challenge of turning integration into sustainable core growth. Integration of Lexmark and IT Savvy is yielding operational and financial synergies, but margin and cash flow pressure remain. Management sets a high bar for margin expansion and deleveraging in 2026, but execution risks tied to memory inflation and core print demand cannot be ignored.

Summary

• Integration Drives Near-Term Results: Acquisitions of Lexmark and IT Savvy mask continued pro forma revenue decline.
• Margin Recovery Hinges on Cost Discipline: Cost synergies and reinvention initiatives are central to the 2026 profit recovery narrative.
• Execution Risks Remain Elevated: Memory inflation, print demand softness, and integration complexity are key watchpoints for 2026.

Performance Analysis

Xerox reported headline revenue growth in Q4, but the underlying story is one of continued contraction in its core business. Reported revenue of $2.03 billion rose 26% due to the Lexmark and IT Savvy acquisitions, but on a pro forma basis, revenue declined 9%. This signals ongoing headwinds in legacy print and transactional equipment sales, only partially offset by inorganic expansion. Adjusted operating margin fell to 5%, down 140 basis points, reflecting margin dilution from higher tariffs, input costs, and ongoing transformation expenses.

Free cash flow deteriorated sharply, dropping $150 million year-over-year in Q4 and $334 million for the full year. Management cited deliberate exits from non-strategic businesses and the wind-down of high-end production lines as contributing factors. Print equipment revenue for legacy Xerox fell 14% in constant currency, while Lexmark equipment revenue declined 8%, though underlying demand for Lexmark improved sequentially. The IT Solutions segment, bolstered by the IT Savvy acquisition, was a bright spot, with segment revenue up 39% and pro forma gross billings up 13%.

• Headline Growth Obscures Core Decline: Pro forma revenue fell 9%, highlighting ongoing weakness in the legacy business.
• Margin Pressure Persists: Tariff and product cost inflation reduced gross margin by 230 basis points, partially offset by synergy capture.
• Cash Flow Remains Under Strain: Lower net income and finance receivable sales contributed to a sharp drop in free cash flow.

Despite incremental improvements in pipeline and bookings, Xerox’s core print business continues to contract, with stabilization in page volumes and supplies only partially offsetting broader declines.

Executive Commentary

Strategic Positioning

1. Integration of Lexmark and IT Savvy

The Lexmark and IT Savvy acquisitions are fundamental to Xerox’s effort to reinvent its business model. Lexmark brings manufacturing scale and channel access, while IT Savvy provides a platform to cross-sell IT services to the existing print customer base. The unified IT Solutions brand and the launch of new offerings like TriShield 360 Cyber Solution, an SMB-focused cybersecurity bundle, aim to unlock incremental revenue from the 200,000-client installed base.

2. Operational Reinvention and AI Enablement

Xerox is leveraging AI to drive both cost and service efficiencies. The establishment of an AI Center of Excellence and the deployment of AI-powered service agents and advanced analytics are already reducing accounts receivable, automating credit holds, and identifying counterfeit supply risk. These moves are intended to support margin recovery and operational resilience, but the scale of impact versus the size of ongoing print declines remains a key question.

3. Cost Reduction and Synergy Capture

Cost rationalization is central to the turnaround narrative, with $300 million in gross cost synergies targeted from Lexmark and over $1 billion in profit improvement from the reinvention program. The Enterprise Transformation Office, a combined Xerox-Lexmark team, is tasked with rigorous tracking and delivery of these savings, which are expected to underpin margin expansion in 2026.

4. Channel Expansion and Product Innovation

Xerox is rolling out Lexmark-produced A3 devices and expanding its retail vertical offering, including a notable win with Morrison’s in the UK, which leverages both print infrastructure and digital marketing automation. These moves signal a shift toward higher serviceability, recurring revenue, and vertical-specific solutions, but the overall print market remains pressured.

5. Balance Sheet and Deleveraging Focus

Debt reduction is a stated top priority, with all excess free cash flow earmarked for deleveraging. The special warrant distribution provides an alternative path to equity participation for bondholders, while net debt is down $366 million since the Lexmark transaction. The medium-term leverage target is three times trailing EBITDA, but gross leverage remains elevated at 6.7 times.

Key Considerations

Xerox’s transformation is at a critical juncture, with integration and cost actions offsetting secular headwinds in print and macro volatility. The ability to cross-sell IT solutions and deliver on synergy commitments will determine whether the company can return to profitable growth.

Key Considerations:

• Secular Print Headwinds: Ongoing declines in core print volumes and equipment sales continue to pressure the legacy business model.
• Execution Complexity: Integrating Lexmark and IT Savvy, while simultaneously reinventing processes and launching AI initiatives, increases operational risk.
• Margin Expansion Reliance: The 2026 profit outlook depends heavily on cost synergy realization and moderation of input cost inflation.
• Cash Flow and Deleveraging: Free cash flow is under pressure, with deleveraging plans reliant on both operational improvements and opportunistic asset sales.

Risks

Memory price inflation and supply chain volatility pose material risks to both IT Solutions and print margins, especially in the second half of 2026. The pace of print market decline, integration execution, and the ability to capture cross-sell opportunities are all critical swing factors. Elevated leverage and reliance on synergy capture add to the risk profile, while persistent macro uncertainty and tariff exposure could further pressure results.

Forward Outlook

For Q1 2026, Xerox expects:

• Revenue growth to accelerate through the year as integration and reinvention tailwinds build
• Profit headwinds from tariffs and memory inflation to moderate in the second half

For full-year 2026, management guided:

• Revenue above $7.5 billion, up 7% year-over-year with full Lexmark consolidation
• Adjusted operating income of $450-$500 million, up over $200 million versus 2025
• Free cash flow of $250 million, assuming $335 million of finance receivable sales

Management highlighted confidence in delivering margin expansion through synergy realization and cost discipline, while flagging ongoing macro and input cost headwinds.

• Tailwinds from unified sales force and new product launches
• Tariff and memory cost impact to be closely monitored

Takeaways

Xerox’s 2025 results highlight a business in transition, where inorganic growth and cost actions are buying time for the core to stabilize and new platforms to scale.

• Synergy Realization is Critical: The 2026 margin and cash flow outlook is heavily dependent on capturing integration and reinvention synergies; any execution miss could undermine deleveraging and profit recovery.
• Print Remains a Drag: Legacy print declines continue to offset gains in IT Solutions, and stabilization in page volumes is necessary but not sufficient for growth.
• Watch for IT Solutions Traction: Investors should monitor cross-sell penetration, memory cost containment, and the pace of recurring revenue growth in IT Solutions as key forward indicators.

Conclusion

Xerox enters 2026 with a larger, more integrated platform and a clear cost agenda, but the core business remains challenged. Success will hinge on synergy delivery, IT Solutions momentum, and the ability to navigate inflation and secular print decline.

Industry Read-Through

Xerox’s results reinforce the secular decline in print and the necessity of pivoting toward IT services and managed solutions. The company’s integration of Lexmark and IT Savvy is a microcosm of broader industry consolidation and transformation, as legacy hardware players seek margin and growth through services, AI, and cross-vertical integration. Memory cost inflation and supply chain volatility are likely to impact other print and IT infrastructure vendors, while the focus on balance sheet flexibility and deleveraging will resonate across capital-intensive legacy tech businesses. The ability to deliver synergy and margin expansion through integration will be a key differentiator for all players in the space.

XRX Technology IT Services Integration Cost Synergy Print AI Deleveraging