Xerox Holdings Corporation

Welcome to the Xerox Holding Corporation fourth quarter 2021 earnings release conference call. After the presentation, there will be a question and answer session. To ask a question at that 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 would now 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 fourth 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. Byzantine. Mr. Byzantine, you may begin.

Good morning, and thank you for joining our Q4 2021 earnings call. I hope everyone is safe and healthy. Summarizing results for the year, revenue of $7.04 billion grew slightly year-over-year in actual currency, but was down 1.4% in constant currency. Adjusted EPS of $1.51 was $0.10 higher year-over-year. Full-year gap earnings of minus $2.50 reflects an after-tax non-cash goodwill impairment charge of $750 million, or $4.08 per share. which is largely a reflection of the impact of COVID-19 pandemic has had on our print business. We generated free cash flow of 561 million, 87 million greater than the prior year. Adjusted operating margin of 5.3% was lower year over year by 130 basis points due primarily to supply chain related disruption and incremental investments in our new businesses. Our assumption entering the year was that in-office work would normalize following 2020 winter's wave of COVID-19 infections and the global rollout of effective vaccines. However, the Delta and Omicron variants of COVID-19 delayed companies' plans to return workers to the office, causing a reduction in expected post-sale revenue and profits. In the second half of the year, we experienced an unprecedented level of supply chain disruption with conditions deteriorating throughout the final two quarters of the year. These disruptions resulted in revenue falling below expectations we laid out at the beginning of the year, with most of the shortfall comprised of high-margin, mid-range devices and post-sale revenue. Supply chain disruptions also drove an increase to our backlog of equipment and IT hardware to nearly 350 million. which is approximately two and a half times higher than at the end of 2020. I am proud of the progress our team made this year, advancing initiatives that will set Xerox up for long-term growth in revenue and profits. We continue to streamline and optimize our operations and exceeded our target project on its savings of 375 million in 2021. We invested in and grew areas of our print and services business that will lay the foundation for long-term stabilization and growth, areas such as IT services, digital document services, and hybrid workplace solutions. We stood up three new businesses, CareAR, XFS, and Innovation, and developed a blueprint for monetizing investments in innovation as evidenced by the formation of our LOQ joint venture and the outside investment in CareAR we received from ServiceNow. valuing Carrier at $700 million on a post-money basis. And we generated more than $500 million of free cash flow while investing significant amounts to expand our capabilities and grow our new business. Despite continued uncertainty, there are many reasons to be optimistic as we head into 2022. Demand for our equipment remains strong, as evidenced by our backlog, which stands at close to $350 million as of year-end. That is 31% higher than the prior quarter and is primarily comprised of high-margin office equipment. This suggests to us that companies are continuing to invest in printing equipment in anticipation of a return of the workers to the office. We expect nearly all of this backlog to be installed, given previous quarters' timely clearing rates and limited risk of cancellation. But we do expect to carry an elevated backlog at least through the first half of the year. As the backlog clears, our equipment revenue mix will improve, driving gross margin higher. We continue to believe that a broader return of workers to the office in 2022 is a matter of when, not if. And for Xerox, the correlation between return-to-work trends, page volumes, and post-sale revenues remains strong, which suggests employees print when they return to the office and clients continue to value printing services. Our breadth of product offerings, suite of digital document workflow solutions, and externally recognized securities capabilities position us well to address evolving workplace needs going forward. We stood up three businesses in 2021, XFS, Software, now CareAR, and Innovation, and each is executing its own strategy for growth. At our investor day on February 23rd, We will share more detail about each business's strategy and their respective pathways to monetization. We will also provide sufficient detail about these businesses to allow analysts and investors to value each component separately. We are expecting revenue to grow in 2022 to at least $7.1 billion in actual currency. Underlying that expectation is an improvement in return to office trends in the second half of the year. which will drive improvements in high-margin post-sale revenue. We expect supply chain constraints to ease in the back half of the year, resulting in a gradual reduction of our backlog thereafter. But we do not expect to fully deplete the backlog by the end of the year. The rate of revenue growth and margin improvement we achieve in 2022 will depend on duration of supply chain disruptions and the rate at which workers return to the office. We also expect to generate at least $400 million of free cash flow. Our free cash flow guidance reflects the absence of non-recurring Fuji royalty payments we received in 2021 and cash investments in our recently stood-up businesses of approximately $200 million, which is close to a 50 percent increase relative to 2021 levels. Our ability to deliver growth in light of secular challenges we face is a testament to the strategic initiatives that drive our business, optimize operations, drive revenue, invest in and monetize innovation, and focus on cash flow. We first introduced Project Own It in 2018 with the mission of simplifying operations and instilling a culture of continuous improvement across the organization. We exceeded our gross saving targets of $375 million for Project Own It in 2021. bringing total savings since inception to around $1.8 billion. We expect to generate another $300 million of gross savings in 2022. These savings have allowed Xerox to invest in innovation and strategic growth priorities despite the difficult operating conditions we faced over the past two years. The program has also driven greater operating efficiencies throughout the organization, improving revenue flow-through and return on assets. We see evidence of Project Own It's ability to drive continuous process improvement throughout the organization. For example, we exited the year with 500 bots in production, executing over 5 million internal transactions per quarter, which represents 200% growth year over year. These bots answer sales requests, manage parts and services, and expedite case management and billing for our newly integrated partner, Lexmark. These same bots are now operationalized commercially providing a differentiated offering for our IT services clients. We continue to see favorable results from our efforts to harness growth opportunities in our print and services business. One of the primary reasons we grew revenue and actual currency in 2021 is our ability to consistently grow market share. As per the most recent report from IDC, we gained two points of revenue market share in Q3. This marks the fifth consecutive quarter of market share gains with particularly strong gains in office-centric products. Market share gains are an important part of our strategy for stabilizing and growing our print and services business. We believe these gains are sustainable because they are the product of Xerox's comprehensive and differentiated offerings and direct sales presence. We go to market with a comprehensive suite of hardware, software, and services, all with award-winning security features and with a focus on adding value to our clients' printing and document management processes. And our clients recognize this value. In October, Xerox became the only provider of managed print services in distributed workplaces to receive Gartner's Customer First Badge, which is earned through the accolades of positive customer feedback and ratings. We are also seeing our collection of app-based workflow solutions gain traction with clients, particularly those that are accommodating hybrid workforces. This year, we extended the document workflow solutions available through our ConnectKey multifunction printer interface to all devices, including PCs and smartphones, through our Workflow Central offering. In 2021, new hardware business attributable to our application saw a 35% increase. Regarding global document services, we had another strong quarter of signings for our capture and content services, which helps clients digitally extract, categorize, and automate workflows. Signings increased 36% in Q4 and 48% for the year. Growth was strong across renewals and new business in Q4, including a multimillion-dollar deal to support a leading financial institution's digitization strategy as it consolidates its physical footprint. In IT services, we saw strong double-digit growth in managed IT services for both the quarter and the year. Managed IT services do not include equipment sales but rather are comprised of, among other things, technology product support, professional engineering, and commercial robotic process automation. We have signed 16 RPA deals since our launch last year. including our first $1 million-plus deal with Veritex Legal Solutions. We will expand our IT services offerings in 2022 to include managed security and cybersecurity and a range of digital solutions, including product and information management, master data management, and e-commerce and custom web development. In the past year, we stood up three new businesses, XFS, our financial services business, software, now called Carrier, and Park Innovation. I am pleased with the progress we have made to date. These businesses are expected to contribute strongly to future growth and to shareholder value creation. In 2021, we transitioned our separate software business into an end-to-end augmented reality service experience management platform called CareAR. CareAR was officially formed in Q3 in conjunction with an investment by ServiceNow valuing our software business at $700 million. And CARE-AR is quickly progressing along its product roadmap. This past quarter, we launched CARE-AR Instruct, which provides AI and AR-driven self-solved equipment service solutions. This complements CARE-AR's flagship remote-solve offering, CARE-AR Assist. Investments in CARE-AR's capabilities and go-to-market partnerships drove 45 new logo signings in 2021. Giving us confidence CARRIER will generate revenue of at least $70 million in 2022. At PARC, we continue to progress on our path to commercializing novel and disruptive technologies in each of our primary innovation pillars, Internet of Things, cleantech, and 3D printing. At LOQ, in the first half of 2022, we will triple the number of bridges in Australia that have installed our sensors. And we are in talks with select European countries to deploy our bridge monitoring solutions. In the US, we are in discussions with multiple states to start deploying pilots in 2022. In cleantech, we successfully completed testing the alpha prototype of our energy efficient air conditioning technology. And we are developing a beta prototype based on requirements from a leading air conditioning manufacturer. We also partnered with a global auto manufacturer to test new methods of developing higher energy density batteries. In 3D, we grew our pipeline of potential LMX customers in the heavy manufacturing, aerospace and defense, and automotive industries. In 2021, XFS expanded its offerings beyond Xerox equipment and embarked on a strategy that emphasizes portfolio growth through new dealers, new types of equipment at existing dealers, and new product-vendor relationships. The pandemic and supply chain disruptions drove volumes of Xerox equipment financings lower in 2021, but XFS grew originations 14% year-over-year due primarily to greater penetration at XPS and added 136 new independent dealers. We look forward to sharing more details about specific customers and use cases for each of our new businesses at Investor Day. Since 2018, on average, we have returned more than 100% of annual free cash flow to shareholders. During the fourth quarter, we generated $182 million of free cash flow, bringing the total for the year to $561 million, ahead of our 2021 guidance of $500 million. For the full year 2021, we returned close to $1.1 billion of cash to shareholders through stock buyback and dividends, nearly double our free cash flow generation, all while continuing to invest in innovation and other strategic growth opportunities and without increasing total debt. Our guidance calls for a continuation of strong free cash flow generation and capital returns in 2022. We expect to generate at least $400 million of free cash flow in 2022 and remain committed to returning at least 50% of free cash flow back to the shareholders. We will balance cash flow returns with investments in growth and value-accretive M&A opportunities. Before I hand it over to Xavier, I would like to emphasize a few points. 2021 was a challenging year for Xerox, and I commend our team for its ability to navigate the evolving uncertainty associated with the pandemic and the operational volatility caused by the supply chain disruptions. Uncertainty persists as we move into 2022, but we have learned how to successfully manage our business through it and evolve our capabilities to meet the needs of our clients, no matter what type of workplace model they choose. We have the right team and the right strategy in place to stabilize and grow our print services business and drive growth across each of our newly stood-up businesses. I will now hand it over to Xavier to cover our financial results.