Xerox Holdings Corporation

Good morning and welcome to the Xerox Holdings Corporation first quarter 2021 earnings release conference call hosted by John Vizentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com forward slash investor. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox. After the presentation, there will be a question and answer session. To ask your questions at that time, please press star one at any time during this call. You can withdraw your question by pressing the pound key. During this conference call, Xerox executives will make comments that contain the forward-looking statements which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Mr. Byzantine. Mr. Byzantine, you may begin.

Good morning, and thank you for joining our Q1 2021 earnings call. I hope everyone is safe and healthy. Our first quarter results were in line with our expectations. Revenue totaled $1.71 billion, down 8.1% year-over-year or 10.4% in constant currency. Free cash flow was $100 million, down $50 million from last year. Adjusted earnings per share totaled $0.22, up $0.01 year-over-year. And adjusted operating margin was 5.2%, up 50 basis points year-over-year. In the first quarter, in an environment where many offices remained closed, we grew equipment sales and IT services revenue year over year. I am proud of how our employees have continued to deliver for our customers during the pandemic. With small and medium-sized businesses and enterprise clients planning to return more employees to the office, our differentiated offerings are well-positioned to serve their growing needs. The strength of our performance portfolio and strategy gives us confidence we will return Xerox to growth in 2021. The team remains laser focused on our four strategic initiatives. Optimize operations, drive revenue, re-energize the innovation engine, and focus on cash flow and increasing capital returns. We made progress across each of these initiatives during the quarter. Continuing to optimize operations for simplicity, improve our cost structure, and expand margins must be balanced against investing in growth. Project Own It helps us strike the right balance, as does our focus on cash. Project Own It is on track to deliver $375 million of gross cost savings this year. Part of these savings are funding investments in growth areas and transformational initiatives, such as our effort to reimagine the service experience from supply chain logistics to customer care. Our investments in artificial intelligence, augmented reality, predictive analytics, robotics, and workflow automation are reducing our costs and making it easier to work with Xerox. We have now integrated these technologies to create software solutions that can transform how service teams support customers. We deployed these software solutions within our technical service organization. Our differentiated capabilities paired with our experience have allowed us to commercialize both the software solutions and a technical services offering, creating new revenue streams for Xerox. In fact, we recently signed our first competitive OEM customer for technical service. This OEM will outsource parts of their field service operations to Xerox. Our solution will help them gain efficiencies and provide quality service to their customers. We plan to introduce this offering to other OEMs and companies outside of our industry as well. We have observed a positive correlation between vaccination distribution, people returning to the workplace, and page volumes from our equipment. For the quarter, volumes on the whole remained relatively flat versus Q4. As vaccination distribution progressed, we saw volumes in certain geographies start to increase modestly in late March. For example, in Israel, where more than half the population is vaccinated, the highest vaccination rate in the world, work from home transitioned to more of a hybrid work environment, and page volumes returned to near pre-COVID levels. The return to the office and accelerating vaccine distribution combined with strong demand for our equipment during the first quarter are leading indicators that the improvement in our revenue trend will continue throughout the year. Investments in our workplace A3 and A4 and production portfolios have allowed us to grow equipment sales revenue in every category year over year, and take share in our territory, according to the most recent IDC data. New capabilities in workflow automation and enhanced security are driving increased interest in our workplace products and earning Xerox industry recognitions. Corsica recently recognized the strength of our hardware and security, as well as our cloud software and delivery capabilities, by naming Xerox the leader in its worldwide managed print services market report. Our IT service business grew for the third consecutive quarter. The team is winning increasingly sizable and comprehensive deals to manage the full IT stack for SMB customers. In the quarter, we expanded our IT services portfolio by launching robotic process automation as a service, leveraging our own experience deploying this technology internally across all of Xerox. The pandemic has challenged SMBs to find sustainable cost reductions while maintaining productivity. Our offerings to automate routine tasks such as deal pricing, order processing, payroll, and resource management have already gained traction with customers. In software, the team started to integrate Carrier, an enterprise augmented reality company we acquired in late 2020, both operationally and from a portfolio perspective. Carrier makes any user an expert capable of solving issues remotely through live visual interactions, self-guided instructions, and contextual data for greater insight. This technology provides many benefits, from reducing costs and downtime to improving the customer experience and eliminating many on-site visits. Carrier is at the center of our software solutions, which integrates Park's artificial intelligence technology, Alto AI, our content management system, DocuShare, and XMPIE's personalization software. These solutions focus on three main areas. digital platform as a service, content creation and management, and automated workflows and intelligence, and have several industry-specific applications. Use cases include training retail associates, virtually processing claims, helping with facility-related issues, and troubleshooting data center operations. Within a few months' time, we launched pilots with several global businesses in hospitality, high-tech and IT services. We also signed up major partners, including ServiceNow, Deloitte, and HCL. These partnerships are already helping us reach new prospective clients and build a strong and growing pipeline. Regarding Xerox Financial Services, we signed our first OEM partner. Our strategy focuses on adding other OEMs and customers outside of our industry while increasing penetration rates of Xerox accounts, all of which should enable us to grow their portfolio. Park Innovation has continued to make progress across our focus areas, including 3D printing, industrial IoT, and cleantech. In additive manufacturing, our solutions are designed to integrate into manufacturing operations to reduce risk in the supply chain. Global supply chains that rely on just-in-time model are becoming increasingly more vulnerable. The recently launched Xerox LMX3D liquid metal printer can help alleviate some of that vulnerability. This printer provides advantages over powder-based metal 3D printing, which is predominantly deployed technology today. The LMX printer is safer, more cost-effective, and faster. At the end of last year, we established a product development collaboration with U.S. Naval Postgraduate School. This collaboration will aid NPS in pushing the adoption of 3D printing throughout the U.S. Navy. The military supply chain is among the most complex in the world, and NPS understands firsthand the challenges manufacturers must address. Their feedback is helping us refine the LMX's roadmap which includes incorporating additional metal alloys, more complex geometries, and larger build volumes of production parts. In IoT, we are preparing to commercialize solutions that monitor the health and critical infrastructure, such as bridges and roads. Aging infrastructure is a global challenge. We recently completed a pilot with Victrack, a state-owned enterprise in Victoria, Australia, to monitor various infrastructure assets for structural degradation and prioritize maintenance. Public-private partnerships will be critical in solving the infrastructure challenges there and throughout the world. Xerox has a long history of inventing technologies that make the world more sustainable, and we are now carrying forward our legacy with our clean technologies. The team continues to make progress on engineering an air conditioning solution that significantly reduces greenhouse gas emissions through greater energy efficiencies. Other research projects include batteries, green hydrogen, and environmental sensing and monitoring. These innovations will open the doors to new partnerships for park innovation and can potentially have major impact on the world. Given the progress we've made, We are accelerating our plans to stand up XFS, Xerox software, and PARC innovation as separate businesses, which will provide greater focus, visibility, and flexibility for each business. And now we expect to complete this in 2021 and will provide more information on each business, including financial metrics and relevant KPIs, such as loan originations for XFS. Balancing investments in new and existing businesses while generating cash continues to remain a focus for this team. Our free cash flow in the first quarter was in line with our expectations. The first quarter is seasonally our smallest quarter, and the business continued to experience headwinds from the impacts of COVID-19, though we kept investing because we are managing the company to deliver long-term, sustainable growth. We closed the quarter with $2.5 billion of cash, cash equivalents, and restricted cash on hand. In the quarter, we purchased 162 million of shares, demonstrating our confidence in the company's long-term trajectory. We remain committed to our shareholders' return policy, including our current dividend rate, and plan to return at least 50% of annual free cash flow. Before turning it over to Xavier, Let me address some of the frequently asked questions we receive. We expect the improvement in our revenue trend to continue. More employees returning to offices, the acceleration of vaccine distribution, and increased demand for our equipment during the first quarter give us confidence that we will meet our full-year guidance. We are managing modest supply constraints. The investments we have made in our portfolio of offerings are starting to pay off. IT services grew organically for a third consecutive quarter. Expanding this portfolio to include robotic process automation as a service will further enhance our momentum. We are seeing increased interest in our differentiated software solutions, which have the potential to transform the service experience across many industries. We will continue to invest in our future while managing our expense profile. We are accelerating our plans to stand up XFS, Xerox software and PARC innovation, positioning Xerox to return to growth and unlock value sooner. Now I'd like to hand it over to Xavier to cover our financial results in detail.

Thank you, John, and good morning, everyone. As John mentioned, we are pleased with quarter one performance. For revenue, we delivered a strong improvement compared to the trend over the last three quarters. Both equipment and post sales revenue improved in March, consistent with the progress of vaccinations on the gradual reopening of workplaces. Equipment revenue growth was stronger than higher margin post-sales revenue, driving the 260 basis point growth margin erosion year over year. I will provide more details on revenue in the next slide. Adjusted operating margin of 5.2% in the first quarter increased 50 basis point year over year, The 50 basis point improvement in margins reflects a favorable impact from lower bad debt expense, savings from project on it, and discretionary spend action partially offset by the impact of lower post sales gross profit. SAG expense of $448 million decreased $93 million year over year, reflecting a continuous focus on cost. The improvement includes the impact of an incremental $60 million bad debt reserve, Taken in the first quarter of 2020, lower selling expense, cost savings associated with project only, and temporary cost reduction measure. RDNA investments were maintained to protect innovation in future revenue streams. Investments focused on existing on new product and solution in the print business, as well as adjacencies on innovation power. Quarter one RDNA as a percent of revenue was 4.3%. 20 basis points lower year-over-year, reflecting continuous optimization of the print portfolio. Other expenses, net of $4 million, was $19 million lower year-over-year, primarily driven by a reduction in non-service retirement-related costs, partially offset by higher net interest expense. First quarter, adjusted tax rate was 27.7%. compared to 29.4% last year. The 170 basis point year-over-year decrease results primarily from a change in the geographical mix of earnings. Adjusted EPS of 22 cents compared to 21 cents in the same quarter last year, reflecting a slightly lower adjusted net income impacted by 10 million higher net non-financing interest expense, which was more than offset by a reduced share count. Gap EPS of $0.18 was $0.21 higher year-over-year due to lower year-over-year restructuring on rated costs, non-service retirement-related costs, and transaction-unrated costs. Turning to revenue, trend improved across all geographies. In EMEA, the rate of revenue declined moderated more significantly than in the U.S. in part due to the earlier onset of COVID-19 in EMEA last year, and partly due to a higher proportion of SMB customers in the region. SMB customers have been returning to workplaces more rapidly than large enterprises, who are slower to return to large office buildings. Equipment sales of $381 million increased 17.2% year-over-year, or 14.2% in constant currency. Sales increased across entry, mid-range, on high-end product, and in both North America and in EMEA. We are encouraged by the increased activity, indicating customers' confidence in returning to the workplace. Indirect channel sales in EMEA and the U.S. remain strong in entry mono. Channel sales of mid-range product, including low-end color on black and white devices, as well as as the recently launched Primelink light production devices grew significantly. Resellers continue to manage inventory below pre-pandemic levels, but are modestly increasing inventory based upon firming demand. In the Americas, sales in North America were in line with expectations. In the U.S., federal government sales remain strong and education is starting to recover. as schools prepare to reopen. Post-sales revenue of 1.3 billion in Q1 declined 13.4% year-over-year, or 15.6% in constant currency. However, secondarily, the rate of decline in post-sales revenue improved by 7.9% in constant currency. Post-sales revenue is largely contractual, and most of our contracts include a minimum fixed charge on a variable charge based upon print volume. Print volumes remain below 2019 levels, e.g. pre-COVID-19, in the quarter, primarily as a result of COVID-19-related business closures. However, we saw a modest sequential increase in page volume as the quarter progressed, consistent with the rollout of vaccination on more employees returning to offices. Post sales also include unbundled supplies, paper on other sales, which are largely sold through indirect channels and are more transactional. The rate of decline of unbundled supplies improves sequentially across all geographies, reflecting higher equipment sales on increasing page volume in the quarter. IT services sales for the quarter, which are included in other sales, grew organically, in XBS in the U.S., and grew in the U.K. and Canada as a result of prior year acquisitions. We are pleased with the traction in IT services, and we are continuing to expand the coverage of these offerings to SMB customers. While the environment remains uncertain, we are encouraged by the quarter performance, the strength of the service contract pipeline and installed backlog, which provide confidence that businesses are ready to reopen and resume investing. Turning to cash, we closely manage cash at every level of the organization. Also, COVID-19 headwinds continue to impact quarter one result. We generated 117 million of cash from operation. So continued focus on working capital management resulted in a 43 million source of cash in the quarter, down 48 million year over year, with strong year over year improvement in cash from inventory, partially offset by lower cash from accounts receivable on accounts payable. Cash from accounts receivable was impacted by a lower sequential decrease in revenue as compared to the prior year. For accounts payable, cash was impacted by the timing of payment as well as lower purchase in Q1 2021 due to inventory reduction effort on lower expenses. CAPEX was $17 million in the quarter, supporting the strategic growth program on continued investment in IT infrastructure. We continue to expect CAPEX of $100 million for the full year. Within financing cash flow, we repaid $94 million of debt from securitizations. This debt amortized monthly, and we expect to refinance it with new securitizations in support of XFS, the global payment solution business. We also repurchased $162 million of shares in the quarter and paid $54 million in dividends. We expect to repurchase shares opportunistically and had $338 million of repurchase authority remaining as of March 31st. Free cash flow for the quarter was $100 million, with a maniacal focus on cash. we remain confident in the guidance of generating at least 500 million of free cash flow in 2021. Regarding profitability, we are relentless in the effort to optimize operations to drive profit on cash. Since its inception in late 2018, we have taken 1.4 billion of gross costs out of operations through the project-owned cost transformation program. Another $375 million of gross cost savings is targeted in 2021. We generated positive cash flow on adjusted earnings in every quarter impacted by the pandemic due to a flexible cost structure on discipline expense management. Not only do we expect margin on cash flow to improve in 2021 as the economy recovers, but through continuous focus action, we expect margin to improve beyond this year. Let's focus on XFS now. In January, we discussed plans to stand up three businesses, XFS, software, and park innovation. Looking at XFS, Xerox has provided leasing options to customers for decades. XFS product enables customers to purchase the newest technology on office equipment while managing their cash flow. XFS growth strategy includes expanding leasing options beyond print, to adjacencies like IT services and software. We have also expanded leasing beyond Xerox product and solution through OEM partners such as Lexmark, which we announced will be partnering with Xerox to provide financing for managed print services engagement. We know and understand leasing in this space. Today, XFS manages over 700,000 equipment leases across a diverse portfolio of customer and geographies. we employ a proprietary and disciplined credit approval process that drives low annualized loss rate while allowing for a wide credit window. XFS list origination increased in the quarter as compared to Q1 2020 due to an increased level of XBS origination in line with the strategy. At the end of March, XFS has 3.4 billion of finance asset consisting of finance receivable on equipment on operating lease. We leverage finance asset at a 7 to 1 debt to equity ratio today. Therefore, 2.9 billion of total debt support XFS assets. XFS debt includes senior unsecured bond on securitization, and we plan to increase the amount of securitization which provide cost-effective funding. Looking at capital structure, net core cash was $1 billion at the end of the first quarter on $4.4 billion of debt outstanding, the majority of which, $2.9 billion, support XFS. The remaining debt of around $1.5 billion supports the core business. Debt primarily consists of senior, unsecured bonds, unsecured decisions, and there are no bonds maturing in 2021. We had 2.5 billion of cash, cash equivalent on restricted cash at the end of the quarter, which, when netted again core debt, result in a net core cash position of 1 billion. The decline in cash from year-end primarily reflects the initiation of opportunistic share repurchase, given the confidence in our strategy. Now, to wrap up. We are pleased with the gradual recovery during the first quarter given the evolution of the pandemic. The pace of global rollout of the vaccinations should result in more employees returning to the workplace in the coming weeks and months. Therefore, we expect a recovery in the business throughout the year, especially in the second half. This, along with first quarter results, provide us confidence in delivering full-year revenue of at least $7.2 billion and generating at least $500 million of free cash flows in 2021. Thank you, and now back to John.

Thank you, Xavier. Now let's open the line for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Ananda Baruhu with Loop Capital. Your line is open.

Hi. Good morning, guys, and congrats on solid progress. Hey, a few if I could. You guys mentioned that small-medium business is opening up faster than large enterprise makes sense. I know that small-medium business expansion in general is an important part of the structural strategy. And so I was wondering if there's anything that you're doing there to accelerate the small and medium business expansion, given that that's the part of the economy that you see opening up more quickly. And then I have two follow-ups. Thanks. Quickly.

Yeah, Ananda, with small and medium business, we're seeing progress in different areas. Our IT services business, so we're helping them not only open up again, but we're helping them focus on their cost reductions and managing their businesses. So our IT services offerings, we've seen some good progression in SMB. We just announced six bot offerings that inside of the first quarter we already had clients that are taking it over. So it's a full solution for SMB, and that's how we've been approaching it.

John, do you have a – I guess like sort of if you dial it back, you know, kind of five, six quarters ago, Do you believe the revenue opportunity there over time because of some of the new solutions that have arisen as a result of the last 12 months or so, do you think that levels up the revenue opportunity there?

Yeah, I think what gives us confidence is if you look back, we announced the IT services. We continue to announce offerings in SMB. We've also expanded IT services in the U.K., And what gives us confidence is seeing not only our growth in these services, but also our growth in the ESR and in the hardware that we saw in the first quarter.

That's awesome. And just real quick on large enterprise, or just enterprise in general, as you think from SMB, do you have any context you can share from your conversations with enterprise customers, sort of the timing of after they open up? when they may begin, like how long before they begin to put print projects on?

What we've noticed is as clients open, our clicks, as we call them, continue to increase. But I think, you know, as we're looking at the correlation between the vaccination rates, the page volumes, and our geographies, we're seeing our post-sales growth as well. and more and more CEOs are talking not if they're going to reopen but when and at what speed.

Okay, that's helpful. And then one quick one for Xavier. Xavier, any reason that long-term free cash flow should not return to the same percentage of net income as historically it's been?

So, as John mentioned, the problem, As you know, our business is based on two revenue streams, the equipment stream and the post-time stream. The post-time stream is gradually recovering, and this is the stream that has the higher margin here. So when, over time, this mix will improve, and we see that we have seen some positive signs on paid volume coming back, and also activities that we are doing for our customers, which are not directly related to print, but related to transactional volume. As these volumes are increasing, we see the opportunity for income growing and then, you know, free cash flow growing as well.

Okay, that's helpful, guys. Thanks a lot. Appreciate it.

Thank you.

Thank you. Our next question comes from Matt Cabral with Credit Suisse. Your line is open.

Yes, thank you. Good bounce back on the equipment side this quarter. I guess as we dig underneath there, I'm curious how much you'd characterize as some sort of backlog or pent-up demand as employees are returning to the office versus more just the underlying demand picture that you're seeing. And just going forward, how we should think about the cadence of equipment revenue for the balance of the year.

So, Matt, what we see that the first – Our equipment property grew in every segment. So as you have seen it on the A4 entry segment, it was a significant growth, but also A3 on production grew during the quarter. So we see a confidence from customer bringing back in line with vaccination employees in the office on the, you know, acquiring or renewing, you know, some equipment. So which will drive, as you know, there's a paid volume on the annuity stream that is one of the mainstream of our reviews here. So it's not only like a backlog. We ended the quarter with a strong backlog, but it's not only like a backlog recovery. It's literally related to confidence that the business has currently in order to bring back employees in the office. Thanks for that.

And then on... SFS on the Finco. I'm wondering if you could expand a little more on the opportunity you see to securitize as a cheaper way to get access to financing versus, you know, historically you use the wider Xerox balance sheet as you've tried to get capital. And I guess as that securitization picks up going forward, I'm curious what that means in terms of incremental balance sheet capacity for more of the core business. And assuming that does free up some capacity, just what you'd look to do with it going forward.

Yes, so first one, securitization, as you mentioned, it gives us, you know, two benefits. The first benefit is it moderates or decreases, you know, the cost of funds that we have to support this business. And this is part of the strategy that we initiated by funding up XFS. So as you know, XFS is a significant, you know, part of, you know, the enablement that we bring in this business. And I'm sure you saw it as well. We are now expanding the XFS portfolio and offering not only to Xerox products, but to other third-party OEM and other vendors here. So, securitization helped us from a front point of view. Securitization helped us also on our ability, you know, to expand this activity and to manage properly our free cash flow on this one. We will certainly be more, I would say, industrial, more structured in the way we approach the securitization quarter by quarter. And we have started last year having, you know, two main tranches of securitization, and we're carrying on this year on securitization as well.

Thank you.

Thank you. Our next question comes from Katie Huberti with Morgan Stanley. Your line is open.

Thank you. Good morning. I'm a little surprised to see the America's revenue so weak, just given the success of the vaccine rollout here, and also given all the surveys are showing that U.S. tech spending is rebounding much faster than Europe. I know you made a few comments about SMB exposure in Europe, but Can you talk a little bit more about why that is? Are European customers less likely to be on contract? So that's just a more transactional business. And then just as a second part to that, what do you think the contribution to equipment sales was in the quarter from inventory rebuild at some of those channel partners?

Okay. So, Katie, I will take care of America first. The American revenue is in line with our expectations. As you mentioned it, vaccination progress here. However, a large enterprise, you know, are starting, you know, slowly to bring people on SMB. We saw growth specifically on our SMB businesses here. I say growth. We saw improvement, you know, in the paid volume, you know, coming back here. We, Europe, as you know, it has been hit last year, earlier as well. So when you look at the year-over-year compare, you had more weeks of COVID-19 impacts in Europe compared to this year. You have seen as well that in both geographies, EMEA and in Europe, after a quarter four where we saw some activity coming back on paid volume, December we have seen some lockdown, and then January, February, in certain geographies, EMEA, Canada is an example, certain states in the U.S., certain geographies were slower. The good sign on indicators that we are seeing currently is in March, in both geographies, both territories, we saw page volume improving and transaction improving here, which give us confidence as well, added to the fact that ESR revenue was strong, give us confidence in the revenue trajectory. Commenting now on the equipment sales on the building inventory there, there is no direct correction. What we saw is that there is a progressive rebound or step-by-step improvement in inventory level, but these levels are not the levels that we were seeing before.

Okay. And if you think longer term about a more hybrid workforce, would you expect page volumes and post-sales revenue to return to pre-COVID levels, or do you think we should contemplate post-sales revenue that's maybe a little bit below where we were pre-COVID once the end market stabilized.

We have, Katie, as John mentioned, we have one data point, you know, on a country which has a high vaccination rate, which is Israel, and we are monitoring this country specifically here. In Israel, with more than 60% of the population being vaccinated, we observe paid volume coming back to pre-COVID. very close or slightly lower than the pre-COVID-19 levels. What we observe as well is that even when you are in an hybrid environment, we see hybrid having different definition company by company. When we are an hybrid model, when employees return to the office, their page volume is also page volume that will cover some of the pages they are not printing at home as well. So far, a little bit early to confirm all these cases here, but as I mentioned, in March, we saw page volume increasing. We clearly monitor and track the correlation between vaccination, office presence, and page volume, and these three indicators correlate very strongly.

Great. And then just lastly, the $60 million of bad debt expense, is that largely coming from your small-medium business customers? Is that from channel partners, and was there any concentration by region?

60 million, Katie, was a provision we took last year across our entire XFS portfolio. As I commented here, XFS has very strict rules and strict ways of looking at the credit risk of partners. Our portfolio is diversified by geography, but also by customer type. And we have, you know, like AAA, AA, and, you know, high-level type of rating, rated company here. The provision was put there in order to assess, you know, what could be. In fact, we are running every quarter what we call stress test on our portfolio. And currently, we are confident that this provision is at the correct level. You know, our lease contracts are, in average, have, in average, a four-year period. So it's too early at this stage, you know, to declare that the provision is, I would say, overvalued. Currently, what we are just assessing is that this provision is sufficient to cover the risk we could have in the portfolio.

Okay, understood. Thank you so much.

Thank you, Katie.

Thank you. Again, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Again, that's star one to ask a question. Our next question comes from Shannon Cross with Cross Research. Your line is open.

Thank you very much. I have a few questions as well. John, just from a big picture standpoint, and some of your peers in Japan have started talking about this more, when you go out, say, three or four years, how do you envision Xerox? And what I'm trying to figure out is, you know, what kind of revenue percentages would be coming from printing versus some of your more focused areas, you know, software, park, XFS, services. And then how do you sort of, again, 50,000-foot level, see the margins shifting? Because, you know, obviously print is a very high-margin business, but it's not growing. And some of the others, you know, have more opportunities. So I'm just trying to get an idea of maybe from a high-level perspective how you see the business shifting?

And then I have a couple follow-ups. Yeah, Shannon, what excites us is our four-pronged strategy. So one of them being monetizing innovation and driving revenue. And in there, we've seen progress in our software business. We've seen progress in XFS. We've seen progress also in all our innovation. And we did just say that we're going to be standing up these businesses before the end of the year. We're doing that for a few reasons. You know, one, it's focus, it's flexibility, but also to provide transparency to our investors. So you can expect us to have an analyst day in the second half of the year where we will be going through this and explaining to our investors why Xerox is a good investment for now and for the future.

Okay. So we can't get it quite yet. I guess then in terms of cash usage, you know, you used $216 million during the quarter. you said you'll return at least 50% to shareholders and targeting $500 million at a minimum for cash. So clearly there's a little more room, but, you know, if I add in what you've done so far plus keeping the dividend, you're going to be somewhere around 75% of cash usage already or cash, sorry, free cash generation already. So how should we think about share repurchase as you go forward? And, you know, obviously I'm assuming the dividend is solid. Thank you.

Hey, Shannon here. So here, as we mentioned, we will always look at the share repurchase in an opportunistic way here. As you mentioned it, we repurchased $462 million of shares during the quarter. We mentioned in prior calls there that we have an authority of $500 million. So there is still more than $300 million which is currently left here. And we will do that opportunistically for the year.

Okay. And then my final question is just to some extent going back to Katie's. As you talk to customers these days and now that we're, you know, a year plus through the pandemic and people are kind of reevaluating how their offices are going to look and what they're going to do, what kind of changes are you hearing in terms of structure? Are people looking at more distributed printing? I would assume so given the growth in the low end. But, you know, and then how are they thinking about, you know, what contract levels they're willing to sort of commit to given there's still uncertainty in terms of who's going to be in the office and, you know, how many people are going to go hybrid? Thank you.

Yeah, Shannon, like, you know, if we look at just surveys that were done with CEOs last summer, you had like 69% on a certain survey that were CEOs said they're going to downsize their real estate footprint This was just reconducted recently and it's down to 17%. I think the focus is going to be at what rate and pace will the employees be going back to the office. And it's a direct correlation to vaccination and to safety. The other thing that we're starting to see a little trend on is that they go back to the office, even in a hybrid environment, the print volumes go up. For cost reasons, for security reasons, it's a lot less expensive to print. in an office than it is to print at home for security reasons. So we're seeing that trend, and that's what gives us confidence with our guidance for this year to get back to revenue growth.

What's your plan for Xerox when you're going back to the office?

April 19th.

Thank you.

Shannon, just to talk to your question on that customer, what customer are you buying currently? They buy... The multifunction, as you know, it is much more than a printer. The multifunction is a core of workflow that customers are looking at. And there is something that we learned during COVID-19, it's like this concept of digital transformation or enabling, you know, a workflow which is much more efficient for employees, required device, which is able to support this process transformation. And multifunction are chosen currently by customers as a prime Thank you.

Thank you. Our next question comes from Paul Koster with JPMorgan. Your line is open.

Thanks for taking our questions. On the OpEx side, we saw, you know, big decline on cost execution, lower discretionary spend in 20. And 1Q run rate is, you know, pretty in line as well. Just want to get some sense for what you think about OpEx in the back half as some of those costs come back. And then secondly, where are you targeting those, you know, investments and marketing spend when it does come back? Thank you.

Okay. OPEX, you know, you need to look at it by looking at last year versus this year. We have had last year, you know, some tailwind. We declare, you know, the government subsidies we benefit from. We also look at, you know, all cost opportunities we had while the pandemic was at the highest point, specifically in quarter two, quarter three. This year, we resume, you know, some of the benefits of the provision we have for compensation. And also the, I would say, tailwind rate related to government subsidies are less, as you know, this year. However, what we see is, you know, from a cost point of view, we have kept the mantra, the focus that we have with Product Own It. We declare that for this year we will run another $375 million of growth savings driven by this program. And it is, again, you know, across all the different areas of Xerox Cosplay here. We have a specific focus on the innovation, on what I say innovation, automation, on improving our current processes, making, you know, customer relationship and customer transaction easier and simpler by bringing simplification here. So you should look at this as being like a maniacal focus that we have on cost. I mentioned it in former calls. We have delivered positive EPS and positive free cash flow every quarter despite COVID-19. And this is, you know, a key drive that we have currently.

Thanks. That was very helpful.

Thank you. Our next question comes from Jim Suva with Citigroup. Your line is open.

Thank you. I have a question probably for each of you, and I'll ask them immediately at this time so you can decide how to answer them in any order you want. But John or Xavier, can you talk about for the services that are being offered? You know, there's so many services out there in the world. Where's the success that Xerox is having on the type of services? Because I find it very intriguing and quite encouraging. It seems like it's on the small and midsize, but is it, you know, help desk? Is it robots or bot programming? Or what are some examples so we can kind of grasp and visualize it? And then my second question is, has there been an impact from the semiconductor shortages? Globally, some sectors like automobiles or PCs have seen a very severe shortage of semiconductor chips. So I'm just kind of wondering if that has replicated or found its way into the sectors you deal with, or maybe it hasn't. Thank you.

Yeah, hi, Jim. Look, our IT services is focused primarily on SMB, and basically our mission is to provide end-to-end professional IT solutions to them. We've introduced new offerings such as RPA as a service, But at the end of the day, we're not a VAR. Our design is to manage the IT stack of an SMB, the goal being virtual CIOs for them. And our customers are largely served by our XBS organization in the US. They're served by our channels in Europe. And these are direct sales organizations that have skills at local touch points so that we can expand on our offerings, cross-sell, and into existing accounts and new customers. And we've seen a lot of good traction Even with our RPA products that we've been focused on, we've seen traction on that whole area of how do we help them be more efficient as they're coming back to the office. And we've been very pleased with our results in all of that.

Semiconductor? Okay. Semiconductor. Yeah, yeah, Jim, also two other things where we see, you know, traction currently. Everything around, I call that digital transformation, but behind content on capture, on customer engagement, you know, services that we have as part of our global business services offering here is currently having a lot of focus. And, you know, customers are interested in transforming, digitalizing, or, you know, making their process leaner by combining both the print and the digital part of this. Another, I would say, highlight I would like to flag is Care AR. As you did to it here, we made the acquisition of this company in December 2020. And currently, with augmented reality supporting field service management and customer service management, we see initial traction being confirmed or being developed by signings that were with customers being interested in this technology and how we transform the way field service management and customer service management is being delivered. Your question regarding semiconductor shortage here is, we see, like you observe it here, you know, some shortages on certain components, also on certain raw materials. Does not believe at this stage it is impacting us directly. We are monitoring it, and we are looking, you know, at the potential backlog that we could have related to it. But it's not, you know, at this stage, a high level or high area of concern for us.

Great. And then a quick follow-up. On the bad debt reserve, it sounds like it was a release in that it was a positive that you reserved a year ago a higher amount for potential uncertainty of customers if they'd be able to pay given the pandemic uncertainties. And it turns out that you're collecting better than previously thought. Am I correct on that? And is that kind of a annual assessment or quarterly assessment where there could be some more positive releases?

Jim, it was not a release. So it's a difference. It's a year-over-year compare. Last year, we booked around $60 million of provision for potential bad debt release across our leasing portfolio. And you know, as you know, this portfolio has an average maturity date of around four years. So this is regarding the current lease on the future event that could happen to this disease here. We did not release any provision. We kept this provision because it's very early in the cycle for us to assess if and when we should release any of these provisions at this stage. Currently, our assessment is that the provision level that we have is sufficient to cover the potential risk.

Thank you so much for the details and clarifications. It's greatly appreciated.

Thank you, James.

Thank you, and ladies and gentlemen, that does conclude our Q&A session for today. I would now like to turn the call over to John Byzantine for closing remarks.

Thank you for your questions. This past Sunday, we celebrated our 115-year anniversary. We believe today our future is filled with exciting possibilities that we are working to make realities. Xerox has repeatedly redefined how the world works, and we are well on our way to doing it yet again. Be safe and be well.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.