Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation first quarter 2022 earnings release conference call. After the presentation, there will be a question and answer session. To ask the 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 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 first quarter 2022 earnings release conference call hosted by John Byzantine, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Executive Vice President and 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 and 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 Q1 2022 earnings call. I hope everyone is safe and healthy. Before I get to the results, I want to start by acknowledging the humanitarian tragedy taking place in Ukraine. Our thoughts are with all those who have been affected. As the situation began to unfold in late February, we took swift and decisive actions to ensure the safety and security of our people. We suspended all but emergency support operations in Ukraine and provided emergency cash grants to the Ukrainian employees through our employee relief fund. Shipments to Russia were halted as soon as the conflict started. We continue to evaluate the situation in this region and will adapt our response, hoping for the restoration of peace as soon as possible. In total, the percentage of our revenue exposed to the Eurasian region is in low single digits. The operating environment was once again challenged in Q1 and will remain fluid in Q2. At the beginning of Q1, the Omicron variant resulted in office closures in our largest markets, affecting page volumes in January and February. Supply chains are still disrupted by COVID-related factory closures in parts of Asia. Inflationary pressure is building across our cost base, including costs of goods sold, labor, and logistics. At this point, we continue to expect supply chain conditions to ease beginning in the second half of the year, albeit at a slower pace than originally anticipated. Return-to-office trends are improving. As the Omicron variant receded, page volumes increased, resulting in March being one of the highest months of post-sale revenue since the beginning of the pandemic. The continued correlation between in-office work and print activity and strong demand for equipment and consumables confirms that employees are using our equipment and services when they return to the office. Third-party data points to momentum and increasing office attendance, and we continue to expect a gradual return of workers to the office in Q2, with momentum building in the second half of the year, barring another variant outbreak. Summarizing results for the quarter, revenue of $1.67 billion declined 2.5% in actual currency and 0.7% in constant currency. Adjusted EPS was negative 12 cents, 34 cents lower year over year. Free cash flow was $50 million compared to $100 million in Q1 last year. An adjusted operating margin of negative 0.2% was lower year-over-year by 540 basis points. Revenue was in line with our expectations. Equipment revenue declined 17.6% or 16.1% at constant currency, as expected, with supply chain disruptions limiting our ability to fulfill demand. Total backlog grew 21% sequentially to $422 million as demand for our equipment continued to outpace supply. Post-sale revenue grew 1.9% or 3.7% in constant currency, reflecting improvements in print activity. Our IT services business grew double digits on an organic basis, and we expanded its reach with the acquisition of Powerland, a Canadian IT services provider. Operating costs in the quarter were higher than expected, resulting in a small adjusted operating loss and negative earnings per share. Going into the quarter, we knew supply chain constraints and investments in new businesses would weigh on our margins. What was unexpected was the magnitude and intensity of inflationary pressure across our cost base and the growth in supply chain costs. We expect the margin-dilutive effects of supply chain costs and new business investments to subside as constraints ease and our new businesses scale. The effect of inflationary pressure is more difficult to predict. but we plan to offset most inflation-related cost growth with price adjustments and additional project owner savings. Price adjustments are being implemented, but it will take time to realize, given most of our revenue is contractual. Despite the challenges we face, some of which are new since issuing our 2022 guidance, we are maintaining our revenue and free cash flow targets for the year, subject to our return to office and supply chain assumptions. Xavier will provide more color on guidance. We continue to focus on the same four strategic initiatives that guided us over the years. Optimize operations, drive revenue, monetize innovation, and focus on cash flow. Project Own It has become institutionalized and ingrained in our culture, driving each employee to pursue operational efficiencies and excellence in everything we do to help stabilize our profitability and maintain our free cash flow targets. amidst inflationary pressures and a challenging operating environment, we plan to increase our targeted savings of $300 million for 2022 by 50%. These efficiencies will catalyze operating margin improvements as our business recovers from the pandemic and recent supply chain disruptions. Moving beyond the supply-constrained environment, we are confident in our ability to grow the print and services business. Growth will be driven by factors largely within our control, including market share gains and a greater strategic emphasis on secular growth verticals, such as IT and digital services. For the full year of 2021, we gained approximately 200 basis points of equipment sales market share and achieved the number one share in our markets. These share gains reflect our differentiated go-to-market strategy and broad suite of product and services offerings. Our services offerings include our leading managed print services business, integrated workflow solutions, and a growing portfolio of IT and digital services. We continue to deliver innovation relevant for our customers, most recently refreshing our low-end A4 desktop cloud-connected models and A3 entry models with significant improvement in productivity and enhanced security with McAfee Embedded Security, all of which supports our award-winning Workflow Central platform. Yesterday, it was announced that our management services business was the sole winner of the Buyer's Lab 2022-2023 Pacesetter Award in Comprehensive MPS Programs from Keypoint Intelligence. This award reflects the breadth of our MPS offering, as well as our cloud-first development path pivot to at-home workers and inclusion of dealer channel partners. IT and digital services will become a more significant part of our print and services business over time. IT services is a natural adjacency for Xerox, given the expansive direct sales force deployed through XPS, our units serving small and medium-sized businesses. The SMB IT services market is attractive as it is growing mid-single digits, and competition is highly fragmented, and our IT services business scales efficiently. In Q1, IT services grew more than 20% on an organic basis, and we expanded our geographic reach by acquiring PowerLand, a leading IT services provider in Canada. Our IT services business is experiencing strong interest in some of the newest offerings, such as robotic process automation, RPA, data solutions, and managed security. We launched our commercial RPA business only recently, and are already seeing repeat business from customers wanting to add bots to improve operational efficiency. Our bots help customers with invoice processing, order entry, financial reporting, and document classification, and the pipeline of use cases continues to expand. In Q2, we will offer an AI solution that automates data extraction from high volumes of unstructured documents for our legal clients. Xerox Digital Services offerings are resonating with new and existing managed print services clients. These offerings help clients navigate their digital documentation transformation by providing intelligent document processing and personalized customer communication. For capture and content, which includes digital mailroom, data extraction, and processing services, signings grew 72% in the quarter, with new business signings growing more than 100%. We continue to invest in Fiddle, CareAR, and Park. In Q1, Fiddle increased its focus on providing financing solutions that extend beyond Xerox equipment and services. This quarter, Fiddle added 24 dealers and grew indirect origination 7%, including a doubling of non-Xerox products. This growth was offset by a 22% decline in Xerox direct originations for the quarter due to an equipment shortage. Fiddle remains on track to achieve the financial targets provided at our investor day. As the new business within Xerox, we expect KRAR to make consistent progress on KPIs that will drive strong revenue growth for the year. In Q1, KRAR grew its pipeline 22 million, or 34% sequentially. It added three system integrator partners, 47 new customers, and expanded ACV at another 60 customers. Carrier AR now serves clients across 13 industries and added solutions for banking, education, oil and gas, and pharmaceutical clients during the quarter. Carrier AR also announced the launch of Carrier Instruct, its second major product offering and a key competitive differentiator. Instruct expands on its flagship assist product, to incorporate self-solve capabilities for service agents and end users of complex devices. INSTRUCT utilizes a full range of Carrier's IP, including AI, AR, document storage, and content creation, to provide critical insights. At PARC, LOQ, LM, Additive Manufacturing, and Noviti target significant market opportunities and each continued to gain traction within their respective markets this quarter. In Q1, LM announced partnerships with Vertex, Oak Ridge National Laboratory, and Siemens. These partners are using our 3D printers and working with LM to expand its industrial use cases. LOQ plans to triple the number of bridges deployed in Australia during the first half of the year. It's also making headway in negotiations with several U.S. states and European countries. Navity is a newly launched company that will use Park's IoT expertise to commercialize a predictive maintenance platform for process manufacturing. Navity has a healthy pipeline of companies in the manufacturing and oil and gas industries and has signed two customers, including a pilot at Pensy Supply, one of the leading manufacturers of building materials in the U.S. We continue to fund investments in innovation and launch new products and businesses. Going forward, we will increasingly look to monetize investments in innovation through strategic transactions. These transactions can take the form of minority investments, sales, partnerships, or mergers of our businesses. We expect these transactions to create shareholder value by providing our newer businesses access to additional capital and domain expertise. We delivered positive free cash flow this quarter of $50 million based on improved working capital discipline and returned $159 million of cash to shareholders through dividends and buybacks. Notwithstanding an increasingly challenged operating environment, we expect to deliver at least $400 million of free cash flow this year while continuing to invest in new businesses. We will return at least 50% of free cash flow generated to shareholders Additionally, cash may be used for value-accretive M&A and debt reduction. To recap, our backlog remains strong and page volumes are moving in the right direction as offices reopen. Supply chain challenges and broad-based inflationary pressures will challenge us to be smarter and more productive as we remain committed to the guidance issued at the beginning of the year. With that, I'll hand it over to Xavier.