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XRX Q2 Deep Dive: Tariffs, Integration Costs, and Strategic Shifts Weigh on Earnings

By: StockStory

August 12, 2025 at 23:51 PM EDT

XRX Cover Image

Document technology company Xerox (NASDAQ: XRX) reported Q2 CY2025 results topping the market’s revenue expectations, but sales were flat year on year at $1.58 billion. Its non-GAAP loss of $0.64 per share was significantly below analysts’ consensus estimates.

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Xerox (XRX) Q2 CY2025 Highlights:

Revenue: $1.58 billion vs analyst estimates of $1.55 billion (flat year on year, 1.6% beat)
Adjusted EPS: -$0.64 vs analyst estimates of $0.07 (significant miss)
Adjusted EBITDA: $106 million vs analyst estimates of $105 million (6.7% margin, 1% beat)
Operating Margin: 1.3%, down from 3.7% in the same quarter last year
Market Capitalization: $531 million

StockStory’s Take

Xerox’s second quarter results were met with a significant market selloff, reflecting investor concern over a sharp non-GAAP loss and declining margins despite revenue meeting expectations. Management pointed to softness in print equipment demand during April and May, which they attributed to tariff-related uncertainty and government funding delays. CEO Steven Bandrowczak noted, “The improved resiliency demonstrated in Q2 provides an affirmation of our strategic direction,” but acknowledged these external pressures, as well as higher costs, weighed on profit metrics.

Looking forward, management emphasized that the completed Lexmark acquisition and expansion into IT solutions are central to efforts to stabilize revenue and return to double-digit margins. However, CFO Mirlanda Gecaj cautioned that tariff costs and the pace of synergy realization will continue to affect near-term margins and cash flow. The company expects cost synergies from the Lexmark deal to exceed previous estimates, but acknowledged that some planned savings from internal initiatives have been delayed as integration takes priority.

Key Insights from Management’s Remarks

Management highlighted the impact of tariff-related headwinds, ongoing reinvention initiatives, and the integration of Lexmark as the main factors shaping Q2 performance and future strategy.

Tariff impacts on demand: Management cited new tariffs on China-sourced products as a key reason for softer print equipment demand in April and May, causing both customers and Xerox to delay purchasing decisions until cost clarity improved.
IT Solutions segment growth: The IT Solutions segment, boosted by the ITsavvy acquisition, was a standout, with strong demand for cloud enablement services and cross-selling to legacy print clients. Management noted IT Solutions gross billings rose 8% year-over-year on a pro forma basis, reflecting momentum in PC and cloud-related projects.
Lexmark acquisition integration: The Lexmark acquisition was described as a milestone, bringing scale and access to faster-growing markets such as A4 color devices. Two senior Lexmark executives joined Xerox leadership to lead product and operations integration, with cost synergies now expected to exceed $250 million over two years.
Reinvention strategy execution: Xerox continued to execute its Reinvention initiatives, focusing on operational simplification (e.g., streamlined order processing, expanded inside sales) and realigning resources to support higher-growth segments. These changes drove a double-digit reduction in operating expenses year-over-year.
Margin pressure sources: CFO Mirlanda Gecaj detailed that margin compression was primarily due to higher product costs (including tariffs), a shift toward lower-margin IT services, and intentional delays in some cost-saving actions as the company prioritized Lexmark integration.

Drivers of Future Performance

Xerox’s outlook hinges on the successful integration of Lexmark, realization of cost synergies, and managing the impact of ongoing tariffs and market uncertainty.

Synergies from Lexmark integration: Management expects over $250 million in cost synergies, mainly from supply chain optimization, shared services consolidation, and product cost improvements. These synergies are projected to be realized within two years, driving margin expansion over time.
Tariff and pricing challenges: Elevated tariffs on China-sourced products and the associated supply chain transition to Mexico will remain a headwind through 2025. Management is gradually implementing price increases to offset these costs, but full recovery is not anticipated until 2026.
IT and digital solutions expansion: The company is prioritizing cross-selling IT solutions to both Xerox and Lexmark client bases. As IT and digital services are targeted to make up more than 20% of revenue over time, success in these areas is critical for both revenue growth and improved business mix.

Catalysts in Upcoming Quarters

Over the next few quarters, the StockStory team will be tracking (1) the pace and effectiveness of Lexmark integration, particularly the realization of cost synergies; (2) the ability to implement and maintain price increases to offset ongoing tariff-related cost pressures; and (3) continued growth in IT and digital solutions penetration within both legacy Xerox and Lexmark client bases. Execution in these areas will be critical for stabilizing revenue and restoring margin expansion.

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