Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation third quarter 2022 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 11 at any time during this call. At this time, I'd like to turn the program over to Mr. David Beckel, Vice President and Head of Investor Relations. Please go ahead, sir.

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 2022 earnings release conference call hosted by Steve Bandersack, Chief Executive Officer. He's 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 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 investors. 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. Bandrzak.

Good morning, and thank you for joining our Q3 2022 earnings call. I want to start by saying how honored I am to lead this great company and team of people as we embark on Xerox's next phase of growth. Since being named Xerox permanent CEO in August, I have spent a large portion of my time with our stakeholders, employees, clients, partners, and investors. On a recent international road trip, I spoke with dozens of clients and thousands of employees in more than 20 different cities. The goal for my meetings with clients was to hear about their current needs, what they expected from Xerox, and what we can do to improve our business. It was clear that Xerox brand and legacy are meaningful, and we have earned our clients' trust over time. And from that position of trust, clients are asking us to do more to help them streamline, optimize, and improve the overall productivity of their information workflows. We have the solutions today to help them do just that, including solutions like Workflow Central and Digital Mailroom, to name a few. And by focusing more on client solutions rather than product offerings, I believe we can maximize our relevancy and share a wallet with existing clients. We also have the reputation and credibility the right to win, to build new solutions for our clients that leverage our institutional knowledge of client processes and integrate leading technologies such as AI, AR, RPA, and machine learning. These new solutions can provide intelligence, value-added services, and automation to workflows we already process for our clients, as well as new workflows we can and will process in the future. You will hear more from me in coming quarters about how we plan to become a more customer-centric business, one that is capable of expanding and capturing more of the addressable market within our existing client base by further embedding our offerings into our clients' end-to-end processes. Summarizing results for the quarter, revenue of $1.75 billion grew 4.7% in constant currency and and declined 0.4% in actual currency. Adjusted EPS was $0.19, $0.29 lower year over year. Free cash flow was a use of $18 million compared to a source of $81 million in the prior year. An adjusted operating margin of 3.7% was lower year over year by 50 basis points. Revenue growth this quarter accelerated in constant currency. reflecting strength in demand for our products and services amid an increasingly challenging macroeconomic environment. Equipment revenue grew 6.7% in constant currency or 0.8% in actual currency, marking the first quarter of equipment revenue growth since supply chain constraints began last year. As expected, backlog declined slightly sequentially reflecting sustained order flows offset by a gradual but lower than expected easing of supply chain constraints. Post-sale revenue increased 4.1% in constant currency and decreased 0.7% in actual currency. Post-sale growth was driven by another strong quarter for consumables such as paper and supplies. Growth in consumer roles reflects the early benefit of recent pricing actions and for supplies an ongoing gradual recovery in print-related activity. Page volume continued to closely correlate with return-to-work trends. Postale revenue also benefited from strong growth in IT and digital services, including contributions from recent acquisitions. Adjusted operating margin declined slightly year-over-year but improved sequentially, reflecting the benefits of price and cost actions taken year-to-date. Improvement was slower than expected, however, due to persistent high rates of inflation across our cost base, an unfavorable geographic mix in equipment sales, and a slower-than-expecting easing of supply chain constraints. Xavier will discuss our outlook for profitability in more detail. The global macroeconomic outlook has become increasingly somber over the past three months. The current outlook notwithstanding, we believe our prospects for continued revenue growth are strong. We see resiliency in demand for our products, particularly our A3 devices. We have a sizable and healthy backlog. and we have visibility into the realization of benefits from recent pricing actions. However, the adverse effects of Western European currency on full year revenue are now forecasted to be significantly larger than expected. Therefore, we are lowering our revenue guidance for the year from at least $7.1 billion to a range of $7 billion to $7.1 billion in actual currency. While our revenue outlook declined only slightly, we are lowering our 2022 free cash flow guidance from at least $400 million to at least $125 million, both of which excludes $41 million one-time product supply termination payment. The reduction to our outlook is in part due to persistently high rates of inflation across our cost base and slower than expected supply chain improvements, both of which are expected to inhibit margin improvements this year relative to our expectations. Most of the reduction in free cash flow guidance, however, is a function of larger than expected use of working capital, which has no earnings impact. including our decision to utilize more capital to fund fiddles, origination, and operating lease growth. We continue to expect operating margins to improve going forward as supply chain conditions ease and previously enacted pricing actions are realized. When combined with additional plans to streamline our operations, we believe our 2022 free cash flow performance will be an anomaly and not a trend. I am often asked by investors if we are planning a significant strategic shift now that I have been made permanent CEO. I alluded to some of our longer-term strategic plans a few moments ago, but In the near term, we remain focused on the execution of our print and services strategy and improving operating efficiencies amid a challenging macro backdrop. As in the past, the successful execution of our strategy rests on four strategic priorities, optimize operations, drive revenue, monetize innovation, and focus on free cash flow. Operational efficiencies and flexibilities have taken on a new level of importance in light of the current macroeconomic environment. We remain on track to achieve our targeted $450 million of gross cost savings from Project Own It in 2022. Our target was designed to completely offset the effects of inflation for the year, but in the past few months, inflationary pressure has outpaced our initial expectations. With less than three months remaining in the fiscal year, we will not be amending our savings target for 2022. We will provide an update on 2023 savings target when a full year guidance is provided next quarter. Along with this update, we will provide additional details about changes to our business structure that are expected to drive greater operating efficiency and enable further penetration of services at existing clients. Our print and services products continue to resonate strongly in the marketplace as we deliver the most advanced services and solutions portfolio for our clients. I am pleased to announce that we grew our leading share in managed print services in 2021 per IDC's recent MarketScape report. In further support of our leading position in managed print, Cucerca recently named Xerox as a leader in managed print services in its 2022 landscape report. According to Cucerca, Xerox maintained the highest position overall other vendors in the market in both strategic vision and depth of service offerings. To ensure we continue gaining share in print and managed print services, we are focused on consistently improving the customer experience to meet clients' most pressing needs. To that end, in Q4, we'll be launching the Xerox Customer Experience app, which will help our clients streamline the installation of our products, better monitor supplies, and help clients self-troubleshoot our A4 product. In IT services, we are seeing traction in newer markets like Canada as we realize synergistic benefits from the recent acquisition of PowerLand and greater collaboration with our existing print and managed print services sales force. And then our robotics process automation offering once again grew signings double digits quarter over quarter. In Q3, Xerox automation expanded its presence to retail, sports and entertainment, and manufacturing verticals. In digital services, our recently acquired GoInspire business won a Breakthrough with Data Award from DataIQ for its partnership with the UK home goods company, Lakeland. GoInspire uses Lakeland's customer data to deliver a hyper-personalized experience for each of its members, resulting in a strong uptick in revenue and triple-digit return on investments. Xerox Digital Services recently launched an intelligent document processing platform which leverages AI, ML, object content recognition, and natural language tools to automate document and data processing. Born from our legacy of innovation and service excellence in this domain, the platform will help our clients recognize a variety of languages classified documents, and validate customer identities without human intervention, providing significant time and cost savings. We see the evidence of value being delivered through our integrated solutions offerings each quarter. For example, this quarter we assisted a European commercial banking client with a digital transformation project in which our devices were used to digitize document workflows and improved the client's onboarding process. For a large Brazilian insurance client, we added services to help them automate invoicing and medical claims reimbursement, improving processing time from days to hours, and reducing manual processing performed from 150 employees down to 40. Moving forward, we'll enable more of these types of success stories as we place a greater focus on holistic client solutions rather than discrete product offerings. Regarding our newer businesses, we are adjusting our approach to capital allocation in response to changes in the macroeconomic environment. As a result, we have taken recent actions to streamline our innovation portfolio by closing EloQ, scaling back our 3D print operations, and re-evaluating research priorities at PARC. Separately, we continue to see promise from Navity, an industrial predictive maintenance company created at PARC, and Mojave, an energy-efficient HVAC business leveraging PARC technology. We recently spun both companies out as a separate independent business, with Xerox continuing to hold minority share. These actions will help us preserve free cash flow while maintaining the opportunity to realize value from their future success. Meantime, we continue to invest in commercialization of Fiddle and Carry Off, both of which are executing on their strategic plans. Fiddle made significant progress this quarter in its effort to diversify its lending operations away from captive sources towards new customer and product lines. Non-captive originations grew 33%, including a more than 150% increase in originations for third-party equipment and services. Carryout completed a soft launch of Experience Builder, an intuitive, no-code toolkit which allows users to quickly self-publish instructional content at scale. We believe the Experience Builder toolkit will provide a unique point of differentiation for CareAR and further its leading position in rapidly growing service experience management market. At Xerox, we are accelerating our own use of CareAR as a means of approving operating efficiencies and client service. Our remote resolution rate is better by 9% when CareAR is used, which greatly improves equipment availability and avoids sending technicians on site. Carrier helped Xerox reduce site visits by more than 21,000 in just one year, saving more than 269,000 metric tons of CO2 as a result. Among our technicians using the product, calls escalated to higher-level reps are resolved on an average one business day sooner. We expect further efficiencies and progress towards our sustainability goals as we more fully introduce the platform to more of our clients. Free cash flow was a use of cash of 18 million in the quarter. In the first nine months of the year, free cash flow has been a use of 66 million or 25 million, excluding a one-time contract termination payment of 41 million in Q2. To be clear, our cash flow generation year-to-date has fallen well below our expectations due to our strategic decision to invest in Fiddle's growth, a slower-than-expected improvement in supply chain conditions, and persistent inflation. I do want to emphasize that free cash flow remains a key tenant of our strategic priorities and an enabler of our future growth. We expect a significant improvement in free cash flow next year as supply chain conditions improve further and benefits of additional price and cost actions are realized. To recap, the current macroeconomic environment presents risk to all businesses, but I see far more opportunity in the coming quarters and years for Xerox. I see opportunities to expand our penetration of existing products within clients and as we are doing with managed print, IT, and digital services. And I see opportunities to expand our TAM with clients by leveraging our unique position as a trusted partner to deliver value-added digital solutions to our clients' workflow processes. In the near term, we remain laser-focused on profitability and free cash flow generation. I will now hand over to Xavier.