Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation's fourth quarter and 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 1-1 at any time during this call. You can withdraw your question by pressing star 1-1 again. At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President of Investor Relations. Please go ahead, sir.

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 2022 earnings release conference call hosted by steve vanderjack chief executive officer he's joined by zabia 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 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. Bandershak.

Good morning, and thank you for joining our Q4 2022 earnings call. One year ago, it would have been difficult to predict the number and severity of obstacles we and many other companies would face in 2022. Supply chain conditions were challenged entering this year. In February, Russia invaded Ukraine and the humanitarian tragedy that disrupted supply chains further and led to the effective shutdown of our operations in those markets. These and the after effects of the pandemic fueled an unprecedented level of inflation and currency dislocation, and central bank efforts to control inflation drove historic increases in interest rates. Finally, For Xerox, last year we unexpectedly lost our dear friend and leader, John Byzantine. I am proud to report that we managed through these challenges, taking significant corrective actions to match supply with demand and lower costs to offset inflationary headwinds. For the year, revenue of $7.1 billion increased 1% in actual currency and 4.8% in constant currency. our first year of constant currency revenue growth since our separation from conduit. However, growth in revenues and cost savings were more than offset by broad-based inflationary pressure, resulting in a decline in operating profits and free cash flow. Still, we delivered revenue and free cash flow above the revised guidance levels given last quarter. Throughout the year, our company and our people remain resilient and never lost focus on what is most important, providing value to our clients. I couldn't be more proud of the effort our team expended in the fourth quarter to deliver the highest level of quarterly equipment revenue since 2019, an accomplishment that was instrumental in driving full-year revenue and free cash flow above our revised guidance. We ended the year with momentum in our values and business performance. Sustainability has long been a top priority for Xerox, and our sustainability efforts are being recognized in the marketplace. Xerox was recently named one of the Global 100 Most Sustainable Corporations in the World by Corporate Knights and received an A rating from the Climate Disclosure Project for Climate Transparencies. one of the leading evaluators of corporate environmental reporting efforts. Importantly, the progress we have made to improve the sustainability of our offerings is driving improvement in our clients' own sustainability goals. And our ability to help clients manage their sustainability goals is increasingly a competitive differentiator in the marketplace. Turning to our performance, in print, and managed print services, equipment revenue grew at the highest rate since before the pandemic due to improved product supply. Consumables, such as supplies and paper, grew again this quarter, and contractual print services, our largest, most stable source of revenue, grew low single digits in constant currency, including contributions from recently acquired Go Inspire. In Q1, we plan to launch a series of customer experience applications to improve the setup, security, and productivity of equipment geared towards small and home office users. Included in these plans is the launch of CareAR Instruct, which provides augmented reality support for our A4 devices using digital twin technology. IT services grew revenue double digits for the quarter and the year, including contributions from Powerland in Canada. Enabling that growth is the breadth of enterprise-class services we bring to mid-market clients. Xerox Automation, our robotics process automation solutions, once again grew signings meaningfully on a quarter-over-quarter basis. The automation group wins business by understanding at a deep level our client's business, industry, and needs, and then uses that knowledge to drive customer success through customized solutions. Increasingly, our team is integrating automation with other leading technologies such as object content recognition and machine learning to drive productivity enhancements. As an example, This quarter, our automation group won new business from an existing UK client by developing an end-to-end document workflow solution that combines multiple advanced technologies to extract, classify, and process digitized information from scanned documents, saving the client significant time and money. Digital services signings also grew double digits in the quarter and for the full year, and our offerings are resonating in the marketplace. In December, Xerox was named a top accounts payable solution provider by CFO Tech Outlook in recognition of our ability to assist clients with digital transformation of their payables process. Our AP workflow optimization solution delivers a reduction in processing costs and improvement in working capital for our clients and is just one of many digital services we offer. In 2023, we will begin offering our suite of digital services to the mid-market, further augmenting the types of enterprise class services and solution sets we can bring to mid-market clients. Fiddle grew originations this quarter more than 40% for both captive and non-captive leases, capping off a year where total originations grew high single digits, including double-digit growth in non-captive leases. We recently announced an innovative funding solution for Fiddle, enabling a strategic shift in its business model to focus on being an asset-light, best-in-class provider of leasing services and solutions. This funding agreement also allows for growth in Fiddle's portfolio without the use of Xerox balance sheet. Xavier will explain this funding solution in more detail. I will now touch on our priorities for 2023. Amid all the volatility and uncertainty in the marketplace, we at Xerox are focused on what we can control to drive growth in profits and shareholder value. Our three main priorities this year are customer success, profitability, and shareholder returns. Starting with customer success, we can deliver more value to our clients by making it easier to do business with Xerox. I have spent a lot of time since becoming Xerox CEO meeting with our clients and partners to discuss the ways we can extend our relationships through additional value-added digital services. And all too often I have heard, I didn't know Xerox could do that. To leverage this opportunity and drive revenue growth, we are taking a more holistic client-centric approach to improving customer outcomes by delivering essential products and services that are closely aligned with our clients' needs. The current macro backdrop plays to our advantage in this regard, as our IT and digital services are designed to increase productivity by reducing the cost and complexity associated with clients' technology and document workflows. Further, it is apparent from our market research that Xerox has a clear path to win more business within the IT and digital service markets, because of the trust we have built over time providing value to our clients. We are confident our brand and client relationships can be leveraged to expand our penetration of wallet share. And we are confident in our ability to expand client TAM over time as we invest in and develop new types of digital services for a hybrid workplace and distributed workforce. An example of our ability to increase wallet share is the recent renewal and addition of services at a large telecom operator in Canada. This client, like many, is adapting to the complexities associated with a hybrid workplace. Leveraging our deep relationships across the company, we took a holistic approach to tailoring a set of print and digital services that will help them in the hybrid transition and improve overall productivity. We also included advanced analytics for print management, digital mail to bring speed, security, and cost savings to their mail and carrier operations, and advanced software solutions to streamline and enhance their production print operations. By leveraging our relationships and portfolio of offerings, we are able to drive customer success while growing our annual contract value by double-digit rate. Another priority for 2023 is the continued focus on profitability. Since 2018, Project Own It has been a cornerstone of our transformation efforts and a focal point for the optimization of our cost base. We reached our 2022 targeted gross cost savings of $450 million, bringing total savings since 2018 to more than $2 billion. Just as important as these savings, however, is the management operating system, the set of disciplines around measuring and monitoring business processes that was instilled in our organizational culture by Project Own It. We do not plan to provide annual savings targets going forward, but the behaviors engendered by the program will aid in our continuous effort to implement a more flexible cost base and operating model. Just as we will make it easier to do business with Xerox, we will make it easier to do business within Xerox by investing in processes that drive incremental organizational efficiencies and enable the types of collaboration required to offer holistic solutions to our clients. The current macroeconomic environment necessitates a greater focus and scrutiny on the profitability of our offerings and operating units. Accordingly, we have become more disciplined about where and how we do business, placing emphasis on metrics such as return on investment and the generation of profit not just revenue dollars. This discipline has already been applied to our investments in R&D. In the past few months, we have taken actions to lower and, in some cases, redirect investments in R&D towards projects with more certain and near-term returns. We exited our joint venture, Eloqueue, and paired growth investments in 3D printed. Navity and Mojave, two successful businesses incubated at PARC, were spun out, allowing these businesses the freedom and flexibility to attract external growth capital at their own pace. To be clear, investments in innovation remain a priority at Xerox, but will be more focused on projects and partnerships that augment our existing strengths and opportunities within print, IT, and digital services. Finally, we will continue to prioritize shareholder returns. A greater focus on customer success and profitability will naturally result in higher profits, but we also remain laser focused on cash flow generation. Despite a strong finish to the year, free cash flow in 2022 fell below our initial expectations. 2022 was an anomaly, not a trend. Beyond expected improvements in profitability for 2023, we have already taken steps to improve our capacity to generate more free cash flow per profit dollar, such as FIDL's Receivable Funding Agreement. We also remain focused on improving working capital and expect improvements in inventory efficiency in 2023 as supply chain conditions normalize. Each of these priorities, Customer success, profitability, and shareholder returns will remain cornerstones of our long-term strategic plan. And each of these priorities are reflected in our full-year guidance, which calls for stable revenues amid a challenging and volatile economic environment and growth in adjusted operating income margin and free cash flow, the details of which Xavier will provide. To recap, 2022 was a challenging year, one that tested the resolve of our employees and the strength of our business model. The lessons learned from overcoming these challenges will serve us well as we execute on our strategic priorities for the year. And these priorities will ultimately form the foundation of a long-term plan for delivering sustainable growth in profits. I will now hand over to Xavier.