Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation third quarter 2021 earnings release conference call. After the presentation, there will be a question and answer session. To ask a question at this time, please press star 1 at any time during this call. You can withdraw your question by pressing the pound key. At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation third quarter 2021 earnings release conference call hosted by John Byzantine, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. 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. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com slash investor, and will make comments that contain 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'd like to turn the meeting over to Mr. Vizitiz. Mr. Vizentine, you may begin.

Good morning, and thank you for joining our Q3 2021 earnings call. I hope everyone is safe and healthy. Revenue this quarter of $1.76 billion was essentially flat with the prior year's third quarter, despite a challenging operating environment. Adjusted EPS of $0.48 was flat year over year, and we generated free cash flow of $81 million down slightly from $88 million in the prior year. Adjusted operating margin of 4.2% was lower year-over-year by 320 basis points. This quarter's results were negatively affected by two significant secular challenges, a deterioration of global supply chain conditions and the Delta variant. As the third quarter progressed, the challenging supply chain conditions we highlighted on our Q2 earnings call deteriorated further. Specifically, raw material and component shortages limited the availability of certain of our products and supplies, particularly our A3 devices. Transportation constraints extended delivery times by weeks and drove unit shipping costs multiples higher than normal levels. And when our products arrived, labor shortages further delayed delivery times. These challenges accounted for two-thirds of the year-over-year decline in this quarter's gross margin and caused equipment revenue to fall short of our expectations. Demand for our product remained strong, resulting in further growth of our backlog of equipment and third-party hardware to $265 million, which is approximately 90% higher year-over-year and more than 20% higher than the prior quarter. Our backlog also has a larger proportion of high-margin A3 devices relative to the previous periods. Post-sale revenue grew 1.7% year-over-year but fell below our expectations as the Delta variant disrupted many companies' plans to return workers to the office. We expect vaccination rates will improve as governments encourage companies to implement vaccination mandates. And we continue to see a strong correlation between vaccination rates, a return of employees to the workplace, page volumes, and importantly, post-sale revenue, which carries a higher margin than equipment revenue. And we are seeing improvements across each of these metrics. For example, September was the second highest month since the pandemic began in terms of page volumes and services and outsourcing revenues. which are two of the largest components of post-sale revenue and the components that are most closely tied to page volumes. Based on what we know today, we expect supply chain challenges to continue during the fourth quarter and through the first half of 2022. We continue to expect the return of workers to the workplace, but our expectations for a broader return have been pushed from Q4 into 2022. For these reasons, we are reducing our revenue guidance for the year to $7.1 billion in actual currency or $7 billion in constant currency. Importantly, we are reaffirming our guidance for free cash flow of at least $500 million. Our focus on cash generation gives us the confidence to maintain cash flow guidance in spite of the top-line headwinds we face, all while continuing to invest in our strategic growth initiatives. Throughout these challenges, we have been guided by our four strategic initiatives, optimize operations, drive revenue, invest in and monetize innovation, and focus on cash flow. In Q3, we made progress across each of these initiatives. Project Own It has made our organization more agile and efficient. That agility was demonstrated this quarter as our operational team responded to unprecedented levels of disruption and uncertainty across our global supply chain. Our team responded quickly and is working diligently to mitigate the adverse effects of the supply chain disruptions on our business. For example, we are working to accommodate a wider array of products and materials, pre-purchase components and freight, and selectively increase pricing to offset higher costs. and we are doing everything we can to minimize disruptions to our clients' operations. We cannot control the pace of supply chain normalization or office reopenings, but we are driving revenue growth in areas we can control. In our core print business, we gained share of total print devices again in Q2, per the most recent report from IDC, marking the fourth consecutive quarter of annualized market share gains. Growth in market share is a key pillar of our strategy in print, and it's being driven by the quality of our product and our ability to provide secure, connected workflow solutions that our clients need across their multifunction printer fleets. Complementing our leading position in equipment, our suite of digital solutions is resonating with clients who are increasingly digitizing document workflows and adapting to a hybrid work environment. Global signings for our capture and content services which help clients extract, categorize, and automate document routing, such as our digital mailroom offerings, increased 67% year-over-year in Q3. Our subscription-based workflow central platform allows clients to manage document workflow from any device, including PCs, tablets, and smartphones, with the enhanced security and functionality clients expect from our leading multifunction printers. Our products and solutions are evolving to enable productivity from wherever our clients' employees choose to work. Our IT services business grew double digits this quarter, despite a year-over-year increase in our backlog of third-party equipment. Within IT services, RPA continues to gain traction. We now have 500 internal bots performing 4 million transactions per quarter. These transactions create a platform and set of use cases for us to deploy externally, and in the third quarter, we deployed bots to support our Lexmark managed services integration and enable document classification and posting for our SMB clients. We continue to invest in the expansion of our IT services footprint to deliver a wider set of services to new and future SMB clients. Earlier this month, we acquired Competitive Computing, or C2, a leading IT services business based in Vermont. C2 provides us with access to a broader set of clients and capabilities that we can leverage throughout our IT services business. A key strategic focus in 2021 has been the standing up of the three new businesses, software, innovation, and XFS. This quarter, we made progress towards our goal of standing up these businesses and monetizing our investments in innovation. In early September, we announced the formation of our software business, CareAR, a Xerox company. CareAR is the industry's first service experience management platform, and we believe it will transform service and customer experiences with live, visual augmented reality and artificial intelligence-driven interactions, instructions, and insights. CARRIR solves a number of critical secular challenges facing field service management, including a systematic loss of institutionalized knowledge due to the accelerated workplace retirement and the need to be more eco-friendly. CARRIR solves both challenges by enabling field workers with access to live and eventually AI-driven expertise, and it reduces field service visits by more frequently fixing problems the first time around. We estimate the total addressable market for Carrier will grow to $80 billion by 2028. We also announced that ServiceNow, a leader in digital workflows, invested $10 million in Carrier at a post-money valuation of $700 million. This investment serves as an endorsement of Carrier's technology and will support its growth, as Carrier is a leading certified and integrated AR solution within ServiceNow's field service and customer service management platform. In the third quarter, we expanded the go-to-market reach for CARE-AR by adding 15 resellers and forming a partnership with L&T Technology Services or LTTS, a leading industrial manufacturing and engineering services company. With LTTS, we will develop joint solutions across a range of industries, including discrete manufacturing, truck and off-highway vehicle maintenance, and oil and gas. Momentum in new client signings and pipeline growth gives us the confidence to reaffirm our expectation of Carrier generating at least $40 million of revenue in 2021 and at least $70 million of revenue in 2022. At PARC, we made advancements across our three primary innovation pillars, Internet of Things, 3D Print, and Cleantech. In IoT, we continue to deploy LOQ's bridge sensor technology in Australia. The data being gathered by these sensors allows asset owners and operators to monitor the health of critical infrastructure assets in real time, which is particularly useful after the events such as the recent 5.9 magnitude earthquake that hit Melbourne and Australia in late September. Our technology deployed in Longwood, Victoria, allowed immediate assessment of the strain caused by the earthquake, resulting in a decision that the bridge was safe to operate without needing to wait for manual inspection. Our technology helps bridge operators optimize maintenance schedules, limiting expensive field service visits, and ultimately lowering the carbon footprint associated with infrastructure maintenance activities. We estimate the total addressable market of LOQ's technology offering is $9 billion, and we are currently in conversation with multiple transportation authorities around the world about deploying our technology. In 3D print, early feedback of our liquid metal printer LMX has been positive, resulting in a healthy pipeline in our target verticals of manufacturing and defense. We are working to add additional materials which will expand our addressable use cases. In clean tech, we are optimizing the performance of the alpha prototype for our energy efficient air conditioning technology. This will inform the design of our beta prototype, which we plan to complete by the end of 2022. This technology can help reduce energy consumption in air conditioners by up to 80%. We look forward to sharing more about this groundbreaking technology in the coming quarters. Our work in cleantech is just one example of how we are working to reduce our impact on the environment. In our recently published 2021 Global Corporate Social Responsibility Report, we announced a roadmap to reach net zero by 2040. At XFS, originations grew approximately 10% year over year. We further expanded XFS penetration within XPS and began offering leasing solutions for IT services. the quality of our book of loans remains high, with lost provisions below 1.5% despite the ongoing pandemic. During the quarter, we generated $81 million of free cash flow, only a slight decline from the prior year levels despite the effects of supply chain constraints on our operating profit. Our focus on free cash flow has served us well, and we have delivered positive free cash flow every quarter during the pandemic, And that focus gives us the confidence to reaffirm our guidance of at least $500 million of free cash flow this year, despite the reduction to our revenue outlook and while continuing to invest in our strategic growth initiatives. That focus, along with our strong balance sheet, also gave us the confidence to request that our board authorize a new $500 million share repurchase program. We will opportunistically buy back shares and remain committed to returning at least 50 percent of free cash flow to investors, while continuing to invest in innovation and pursue value-accretive M&A. Before I hand it over to Xavier, I would like to emphasize a few points. The third quarter presented us with an unprecedented level of supply chain disruption and further delays in companies' plans to reopen offices. I would like to commend our team for its resiliency while facing these challenges. Revenue and margins have fallen below our expectations for the year, but demand for our products and services remains strong, our backlog is growing, and our new business remains on track to deliver future growth and a strategic optionality for Xerox. Through it all, our focus on delivering cash flow has not changed, and the buyback authorization allows us to deploy that cash in a highly accretive manner. We also continue to look at M&A transactions, both small and large, that are accretive to our business. I will now hand it over to Xavier to cover our financial results and details.