Xerox Holdings Corporation

Welcome to the Xerox Holding Corporation's second quarter 2023 earnings release conference call. After the presentation, there will be a question and answer session. To ask questions at that time, please press star 1-1 at any time during this call. You can withdraw your question by simply pressing star 1-1 again. At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations. Sir, the floor is yours.

Good morning, everyone. I'm David Beckel, Vice President of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation second quarter 2023 earnings release conference call hosted by Steve Bandersack, 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 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. This time, I'd like to turn the meeting over to Mr. Bandersack.

Good morning, and thank you for joining our Q2 2023 earnings call. I am pleased to report another quarter of year-over-year growth in revenue, profits, profit margins, and cash flow. Consistent with recent quarters, these positive results reflect our team's balanced execution amid a dynamic macroeconomic backdrop. Summarizing results for the quarter, revenue of 1.75 billion grew 0.5% in constant currency and 0.4% in actual currency. Adjusted EPS was 44 cents, 31 cents higher year over year. Free cash flow was 88 million compared to negative 98 million in the prior year quarter. An adjusted operating margin of 6.1% was higher year-over-year by 410 basis points. This quarter and throughout this past year, demand for our products and services has remained resilient, particularly for our value-added print and digital services and among our mid-market clients. Our ability to consistently deliver growth in revenue, profits, and cash flow through a challenging operating environment is the result of an intense focus on three strategic priorities, client success, profitability, and shareholder returns. A benefit of renewed focus on client success beyond the positive impact on revenue and profits is an employee base that genuinely seeks to empower clients and partners with essential products and services for today's workforce. At Xerox, we see the evolving hybrid workplace as an opportunity to improve clients' productivity and employee satisfaction levels with solutions such as secure cloud print for a distributed workforce, automated document and information workflows, and streamlined multi-channel customer communications, to name a few. A thriving hybrid workplace requires advanced technology solutions from trusted technology providers like Xerox. This quarter, Xerox was recognized by Cucerca as a leader in cloud print services, positioned as a leader for both strategic vision and depth of service. We also advanced our leadership position in Cucerca's assessment of leaders in the print security market, an important distinction as clients place increasing importance on data security. Xerox's leading technology and our ability to deliver solutions in and around multifunctional devices help win new business with existing clients and win new clients. This quarter, we want a renewal of a leading healthcare service company, increasing annual contract value by close to 40%. Through our understanding of this client's needs and our broader healthcare vertical expertise, we were able to design an integrated customer engagement solution that improves and automates patient communications processes. We also want a new business at a global chemical company, displacing a large competitor in the process by offering an advanced print management solution that will improve print compliance and security while reducing system-wide print costs by 15% to 20%. An important element of client success is a deeper understanding of Xerox's value proposition among clients and partners. In Q2, we launched a new integrated brand and demand generation campaign, We Make Work Work. This is the most significant marketing campaign the company has launched in many years, and is meant to drive awareness of Xerox's digitization and workflow solutions that solves clients' pain points in a dynamic hybrid workplace. This quarter, we also held our first Global Partner Summit since the pandemic, hosting close to 400 channel partners. The event showcased Xerox's commitment to its partner ecosystem and demonstrated how Xerox can grow with our partners to provide secure, sustainable, and cloud-ready solutions built for the new era of AI and digital transformation. It is clear our value proposition is resonating with clients. In the past six months, we experienced a meaningful improvement in services, signings, momentum. Year-to-date, Signings are up double-digit in constant currency, and revenue retention rates remain solid. Further, a greater appreciation of our workflow solution is helping drive equipment market share. In Q1, the latest quarter of market share data availability, Xerox gained two points of global market share in the markets in which we compete with strong performance in A3 and production. Moving to profitability. In Q2, we grew our profit margin year over year for the third consecutive quarter. This improvement in margin reflects specific actions taken to drive profitable revenue growth, optimize our operations, and offset product cost inflation with price increases. We continue to look for ways to streamline and focus our operations. We recently sold Xerox Research Centre of Canada, or XRCC, to Myant Capital Partners, a leading textile computing company with a shared mission of advancing material-based innovation. As with Park, this transaction provides Xerox with greater focus and financial flexibility to pursue growth opportunities adjacent to our core operations. Improvements in profitability and cash flow of costs accrue directly to shareholder value. In the current market environment, we believe the most prudent use of cash has been the reduction of our debt balance, and in the second quarter, we reduced our debt balance again. Year-to-date, we have lowered total debt outstanding by around $600 million. Our shareholder return policy remains the return of at least 50% of free cash flow back to our shareholders. we will provide more direction on how we plan to deploy free cash flow as cash flow is generated throughout the year. Before I turn the call over to Xavier, I'd like to reflect on some of the actions Xerox has taken to position the company for long-term profitability and sustainable growth. In the past year, the company has experienced significant change, not all of which may be apparent to investors. Through a calculated set of actions taken, we have bolstered our operating and financial discipline and attuned our business model to a market that has been permanently altered by changes in workplace behavior post-pandemic. In doing so, I strongly believe we have the operational and financial foundation from which we can sustainably grow our print, digital and IT services revenue. Starting with operating discipline, The rigor and operating system instilled by Project Own It provides the key building blocks from which this foundation could be built. Learnings from that program have now been institutionalized at Xerox, including the use of advanced technologies such as RPA, augmented reality, and AI to drive continuous operating efficiency and data-driven decision-making. Internally, we use more than 600 bots to conduct 7 million transactions per quarter. These bots reduce resources required to process manual and repetitive tasks and improve client response times. In our service delivery function, we use augmented reality and AI to improve remote solve rates, infield decision-making, and service delivery profitability. And when CareAR and AI are incorporated into our service offerings, we see meaningful improvement in client satisfaction. One of the most significant decisions I have made in my time as CEO was the appointment of John Bruno as COO. John has a strong track record of leading transformational and strategic change across a range of industries. After joining the company in November, he moved quickly to redesign our strategy and further solidify our operating model, establish a number of new operating committees tasked with making the complex and difficult decisions required to drive balanced execution and reposition Xerox for long-term success. When transforming a company in challenging operating environment, focus is critical. That understanding led to a number of transactions, including the exit of our LOQ joint venture, the spin-out of Navity and Mojave, the donation of Park to SRI International, and more recently, the sale of XRCC to MIAM. These transactions freed up the financial resources and managerial capacity needed to direct our efforts more concertedly towards advancements in workplace technology solutions while allowing each of the respective teams to align with organizations that will give them the capacity and resources needed to stay focused on their areas of innovation. Last but not least, investments in our people. As we place more importance on client centricity and client success, We need to do more to recognize and enable our employees' success. Accordingly, in the past year, we reinstituted a number of compensation and career development programs that were placed on hold during the pandemic, including the VISTA program, which provides learning and advancement opportunities for some of our most promising up-and-coming talent. Financial discipline is equally important in providing stable base for growth. In the past year, we have taken a number of steps to improve profitability, financial flexibility, and balance sheet strength. Following the pandemic and through recent operating challenges, we have been laser focused on profit margin. Strategic actions targeted at pricing and product mix have improved base level profits, and we plan to further bolster our profitability through changes in compensation practices that emphasizes transaction and deal margins, thus allowing our sales team to focus their attention on delivering value for clients rather than compete for commoditized business. Through the Park donation, we fundamentally changed our approach to research and development, lowering our R&D cost base while maintaining access to world-class research. The Technology Exploration and Innovation Program signed with SRI and PARCC provides an on-demand access to scientists, engineers, and researchers that will enable new technologies that are more closely aligned with our print, digital, and IT services focus. The receivable funding agreement we signed with a subsidiary of HPS Investment Partners last December significantly improved our free cash flow generation and lowered Fiddle's reliance on Xerox's balance sheet to provide funding for lease originations. Accordingly, we have lowered our debt balance by around $760 million over the past 12 months while improving our financial outlook providing incremental capacity to fund future growth opportunities. It has been a challenging year for sure, but I am more optimistic about Xerox's future and growth opportunities than at any point in the past five years. In the past year, I've spent significant portions of my time meeting directly with some of our most important clients and partners. From those conversations, it is clear clients trust Xerox and look to us to help them solve their most pressing workplace challenges. Recent discussions have shifted to emerging technologies such as generative AI that will further stress the need for secure workplace solutions like ours that help optimize company data and workflows. With clients' trust and an institutional knowledge of our clients' businesses and industries, we have a clear path to win. We aim to expand existing clients' share of wallet and win new client business by delivering advanced print, digital, and IT solutions. Moving forward, investors should expect us to continue evolving and reinventing our business as we shift our mix of revenue towards services that addresses a more complex hybrid work environment. Success along this path will be driven by a service-led, software-enabled approach to improving client business outcomes and a brand strategy more closely aligned with repositioned Xerox. To recap, it is the early days of a reinvention of our company, but progress is already apparent. Balanced execution against our strategic priorities is driving momentum in service signings and operating efficiencies, giving us the confidence to increase our profitability and cash flow outlook for the year. I now hand it over to Xavier.