Improving revenue trajectory and cost actions expected to drive profitability growth in second half

Financial Summary

• $1.75 billion of revenue, down 2.6 percent year-over-year or up 1.1 percent in constant currency.
• GAAP (loss) earnings per share (EPS) of $(0.05), down $0.51 year-over-year, and adjusted EPS of $0.13, down $0.34 year-over-year.
• Adjusted operating margin of 2.0 percent, down 500 basis points year-over-year.
• Operating cash flow use of $85 million, lower by $299 million year-over-year.
• Free cash flow use of $98 million, lower by $296 million year-over-year.

Xerox Holdings Corporation (NASDAQ: XRX) today announced its 2022 second-quarter results.

“While we mourn the passing of our leader and friend, John Visentin, we continue to be guided by – and benefit from – the four strategic initiatives he articulated for returning Xerox to long-term, sustainable growth,” said Xerox interim CEO Steve Bandrowczak. “Our revenue grew in constant currency in the second quarter, driven by improving demand for our products and services and the realization of pricing growth. Inflation and supply chain challenges affected margins this quarter, but we expect sequential margin improvement throughout the remainder of the year as we realize further price increases, Project Own It savings, and benefits from a more favorable supply chain environment. Strong demand and line of sight to margin improvement give us confidence to reiterate full-year guidance.”

Second-Quarter Key Financial Results

^{(1) Refer to the “Non-GAAP Financial Measures” section of this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.}

Beginning in the first quarter of 2022, the Company made a change to its reportable segments from one reportable segment to two reportable segments - Print and Other, and Financing (FITTLE).

Second-Quarter Segment Results

^{(1) Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other Segment for the lease of Xerox equipment placements.}

2022 Guidance

We are maintaining our revenue and free cash flow guidance for 2022. Our guidance assumes supply chain disruption will begin to subside and return-to-office trends will continue to improve throughout the second half of the year. Our free cash flow guidance excludes a one-time payment associated with a product supply contract termination charge.

• Revenue of at least $7.1 billion in actual currency.
• Free cash flow of at least $400 million.
• Return at least 50% of free cash flow to shareholders.

Non-GAAP Measures

This release refers to the following non-GAAP financial measures:

• Adjusted EPS, which excludes Restructuring and related costs, net, Amortization of intangible assets, non-service retirement-related costs, and other discrete adjustments from GAAP EPS, as applicable.
• Adjusted operating income and margin, which exclude the EPS adjustments noted above as well as the remainder of Other expenses, net from pre-tax (loss) income and margin.
• Constant currency (CC) revenue change, which excludes the effects of currency translation.
• Free cash flow, which is operating cash flow less capital expenditures.

Refer to the “Non-GAAP Financial Measures” section of this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.

Forward Looking Statements

This release, and other written or oral statements made from time to time by management contain “forward looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “will”, “should”, “targeting”, “projecting”, “driving” and similar expressions, as they relate to us, our performance and/or our technology, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially.

Such factors include but are not limited to: the effects of pandemics, such as the COVID-19 pandemic, on our and our customers' businesses and the duration and extent to which this will impact our future results of operations and overall financial performance; our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; reliance on third parties, including subcontractors, for manufacturing of products and provision of services and the shared service arrangements entered into by us as part of Project Own It; our ability to attract and retain key personnel; the risk that confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyberattacks or other intentional acts or that cyberattacks could result in a shutdown of our systems; the risk that partners, subcontractors and software vendors will not perform in a timely, quality manner; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring and transformation actions; our ability to manage changes in the printing environment like the decline in the volume of printed pages and extension of equipment placements; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; interest rates, cost of borrowing and access to credit markets; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; funding requirements associated with our employee pension and retiree health benefit plans; changes in foreign currency exchange rates; the risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws; the outcome of litigation and regulatory proceedings to which we may be a party; and any impacts resulting from the restructuring of our relationship with Fujifilm Holdings Corporation. Additional risks that may affect Xerox’s operations and other factors are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of Xerox Holdings Corporation's and Xerox Corporations combined 2021 Annual Report on Form 10-K and combined Quarterly Reports on Form 10-Q, as well as in Xerox Holdings Corporation’s and Xerox Corporation’s Current Reports on Form 8-K filed with the Securities and Exchange Commission.

These forward-looking statements speak only as of the date of this release or as of the date to which they refer, and Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

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XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED)

⁽¹⁾ Referred to as “Pre-Tax (Loss) Income” throughout the remainder of this document.

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Second Quarter 2022 Overview

During the second quarter 2022, we continued to see strong demand for our products and services despite a challenging operating environment. Supply constraints continued to inhibit our ability to fulfill demand, resulting in the growth of our backlog¹ to $440 million, a 4.3% sequential increase and more than double prior year period's levels. Although backlog remains elevated, it is considered manageable and its growth rate did decline quarter over quarter reflecting a slowing increase as product supply improves. Post sale revenue grew in actual and constant currency, due to growth in IT Services, which included the benefits from recent acquisitions, and print activity-driven revenue, such as consumables and services. Consistent with prior quarters, we see a very strong correlation between return-to-office trends and page volumes. Although return-to-office trends have been gradual, in Q2 2022, service revenue growth outpaced page volumes growth as contractual price increases began to materialize. We expect that trend to continue through the remainder of the year. The Company expects profitability to improve sequentially for the remaining two quarters of the year as supply chain costs normalize, particularly freight costs, and through an easing of product supply constraints, which will not only improve equipment sales but equipment gross margins, as product mix normalizes. Inflationary pressures are expected to continue in the near-term, but we expect to offset a large portion of inflation-related cost growth with price increases for our products and services. The effects of our price increases will compound over time, particularly for our contractual business, where price increases are enacted at specific times throughout the year, or upon contract renewal. Further offsetting these cost pressures will be savings generated through Project Own It. The Company is targeting gross cost savings of $450 million in 2022, the vast majority of which will be realized in the second half of the year. With respect to the war in Ukraine, we halted shipments to Russia when sanctions were imposed. The resulting financial impact has thus far been minimal. The Eurasian region in total comprised a low single digit percentage of our revenue and operating profits in 2021. Despite this challenging operating environment, we are maintaining our revenue and cash flow outlook, as we continue to expect supply chain constraints and return-to-office trends to improve in the second half of the year, and we are implementing counteractive measures in response to geopolitical uncertainty and inflationary pressures. Our outlook is also based on current exchange rates.

Reportable Segment Change

During the first quarter of 2022, the Company made a change to its reportable segments from one reportable segment to two reportable segments - Print and Other, and Financing (FITTLE) to align with a change in how the Chief Operating Decision Maker (CODM), our Chief Executive Officer (CEO), allocates resources and assesses performance against the Company’s key growth strategies. As such, prior period reportable segment results and related disclosures have been conformed to reflect the Company’s current reportable segments.

1. Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings. Second quarter 2022 backlog of $440 million excludes sales orders from Russia and Powerland Computers, Ltd., which was acquired in the first quarter of 2022.

Financial Review

Revenues

CC - See "Constant Currency" in the Non-GAAP Financial Measures section for a description of constant currency.

1. Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other segment for the lease of Xerox equipment placements.

2. Refer to Appendix II, Reportable Segments and Geographic Sales Channels, for definitions.

Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

⁽¹⁾ Refer to the Non-GAAP Financial Measures section for an explanation of the non-GAAP financial measure.

Other Expenses, Net

Segment Review

1. Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other segment for the lease of Xerox equipment placements.

2. Segment margin based on external net revenue only.

Print and Other

Print and Other includes the design, development and sale of document management systems, solutions and services as well as associated technology offerings including IT and software products and services.

Revenue

1. Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other segment for the lease of Xerox equipment placements.

Detail by product group is shown below.

CC - See "Constant Currency" in the Non-GAAP Financial Measures section for a description of constant currency.

1. Refer to Appendix II, Reportable Segments and Geographic Sales Channels, for definitions.

2. Includes $5 million and $7 million of equipment sales related to the Financing (FITTLE) segment for the three months ended June 30, 2022 and 2021, respectively.

Financing (FITTLE)

Financing (FITTLE) represents a global financing solutions business, primarily enabling the sale of our equipment and services.

Revenue

1. Other Post-sale revenue includes operating lease/rental revenues as well as lease renewal and fee income.

2021 Segment Review

The following are our 2021 results that correspond, for comparison purposes, to the new segment reporting in 2022.