Xerox Holdings Corporation

Thank you for standing by and welcome to Xerox Holdings Corporation's third quarter earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. David Beckel, Vice President 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 2024 earnings release conference call hosted by Steve Bandersack, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer of and 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 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. Benderzak.

Good morning, and thank you for joining our Q3 2024 earnings call. The benefits of reinvention are driving improved financial results, albeit at a slower pace than expected. Positive proof points from the quarter include a second consecutive period of moderating revenue declines, year-over-year improvements in adjusted operating income and income margin, and more than 100% free cash flow conversion from adjusted operating income. Further, the pending acquisition of IT Savvy is expected to improve our mix of revenue from complementary value-add businesses with higher underlining rates of revenue growth. Summarizing results for the quarter. Revenue of $1.5 billion decreased 7.5% in actual currency and 7.3% in constant currency. Excluding the impact of year-over-year fluctuations in backlog and reductions in non-strategic revenue associated with the reinvention, core business revenue declined low single digits and at a pace consistent with the prior quarter. Adjusted EPS was $0.25, $0.21 lower year over year due primarily to the one-time sale of non-core business assets in the prior year quarter. Free cash flow was $107 million, $5 million lower year over year, and adjusted operating margin of 5.2% was higher year over year by 110 basis points, reflecting the benefits of organizational simplification. The reinvention of Xerox is difficult but necessary. Reinvention is a multi-year journey to sustainably streamline operations while positioning the company to benefit from favorable long-term trends within print, digital, and IT services. Progress has been steady and confirmatory of our original thesis. but the financial proof points of the strategy's success are not unfolding in a linear fashion. This quarter, print equipment sales fell below expectation due to delays in global launch of two new products and lower-than-expected improvements in Salesforce productivity. Tactical challenges associated with the timing of Hurricane Helene and increase in competitive activity in certain markets also contributed to the shortfall. We have analyzed the factors that contributed to the product launch delays and are confident those factors will be resolved as we recalibrate global product launch plans. And despite lower productivity improvement than expected in Q3, we are confident ongoing sales efficiency and effectiveness programs will drive productivity sustainably higher in 2025 and beyond. Shortfalls in equipment sales masked the breadth of reinvention progress made today, much of which is expected to reveal itself in our annuity revenue streams and a substantially lower cost base over time. In quarter three, we made progress along each of our strategic priorities in furtherance of our long-term reinvention goals. Starting with a stronger core, a key tenet of reinvention is closer alignment between our organization and the economic buyers of our products and services. We realized early in our reinvention that a refined sales coverage model and investment in client perception and Salesforce productivity were required to more efficiently and effectively serve clients' needs in a rapidly evolving print and workplace services landscape. The realignment of our sales organization has not been as smooth as we would like, but we are seeing encouraging signs that a leaner, more focused sales team can deliver improved client outcomes and more efficiently than in the past. While sales productivity fell short of our expectation in Q3, it has improved year to date through a greater end market focus and a reduction in administrative burden. We expect the cumulative effect of productivity actions taken to date, future scale efficiencies, including additional capacity in our dedicated virtual sales center and other initiatives designed to foster incremental client interactions, will drive sales productivity higher than Q3 levels in Q4 and into 2025. Net promoter score, a key barometer of client's perception, has improved 11 points this year in the Americas through increased client engagement and integrated sales and marketing outreach. The increase reflects improved client satisfaction and a brand consideration, which we expect will drive an increase in purchase intent from clients that understand and appreciate our position in the market as a leading provider of print, digital, and IT workflow efficiency solutions. We see evidence of the strength of our value proposition with clients most prominently in our services metrics. In the last 12 months, our revenue retention rate for large client renewals remained above 100%, meaning on average, clients are buying more print and digital solutions from us when renewing long-term service contracts. Our portfolio of digital and managed IT services continues to resonate strongly with clients. In Q3, digital services new business signings were up double digits, with renewal rates above plan, and digital and managed IT services revenue also grew double digits, reflecting sustained signings growth in the current and prior periods. And the pending acquisition of IT Savvy is expected to drive growth as we leverage an improved expanded portfolio of IT services to grow penetration with existing clients. Moving to cost improvements. Operating expense decreased more than 50 million year-over-year in Q3 and 125 million year-to-date, reflecting the benefits of strategic actions taken in the prior year current year reductions in headcount associated with the structural reorganization of our business and ongoing operating efficiencies driven by our global business service organization. Certain reinvention actions taken this year have resulted in reduction of revenue. For example, the transition from direct to indirect distribution in certain markets, as is the case with geographic simplification, or measures taken to simplify our offerings, as was the case with our decision to exit the manufacturing of certain production equipment. Our intent with these actions is to reduce the level of operating expense that previously supported those activities by a greater amount than the associated reductions in gross profit. While still early, we are beginning to see the thesis play out in our financial results. At a total company level, adjusted operating income improved this quarter despite a reduction in revenue. We expect this trend to continue in quarter four. In future years, we expect our pipeline of more than $400 million of gross cost savings that have either been actioned but not yet realized in results or have been identified for future implementation to support operating income growth. Finally, balanced capital allocation. This quarter we generated more than $100 million of free cash flow, including the benefits of reduction in finance receivables, marking the fourth consecutive quarter of more than 100% free cash flow conversion from adjusted operating income. We continue to make progress sourcing finance receivable funding agreements outside the U.S., including a recently signed agreement to sell future finance receivable originations in Canada to DeLagge Landon Financial Services Canada Inc. Balance sheet health improved again this quarter as we reduce our debt balance quarter over quarter. Dependent acquisition of IT Savvy will be funded in part with debt, but is expected to be leveraged neutral in a little more than a year and deliver a return on capital well in excess of our weighted average cost of capital. I will now hand the call over to John Bruno.