Good morning, everyone. I am David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Second Quarter twenty twenty one Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor.
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. After the presentation, there will be a question and answer session. During this conference call, Xerox executives 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 would like to turn the meeting over to Mr. Visentin.
Good morning, and thank you for joining our Q2 twenty twenty one earnings call. I hope everyone is safe and healthy. We saw growing demand for our products and services in the second quarter. Revenue totaled $1,790,000,000 up 22.4% year over year or 18.1% in constant currency. Free cash flow was $198,000,000 up $183,000,000 year over year.
Adjusted earnings per share totaled $0.47 up $0.32 year over year. And adjusted operating margin was 7%, up two eighty basis points year over year. Increased equipment sales and print volumes are consistent with the continuing gradual return to the office and give us confidence to reaffirm our revenue and free cash flow guidance for the year. In the second quarter, we increased investments in our operations and targeted growth areas while generating greater free cash flow. Our reaffirmed full year cash flow guidance reflects our commitment to fund initiatives that will return Xerox to long term growth.
Our four strategic initiatives: optimize operations, drive revenue, reenergize the innovation engine, and focus on cash flow and increasing capital returns continue to guide us and serve us as the foundation of our transformation. The operating discipline instilled through Project Own It has enabled our team to navigate through an unprecedented level of uncertainty, including a pandemic and the resulting disruption of the global supply chain, while continuing to deliver value to our clients. Increased demand and material shortages impacted the supply chain of certain products to our customers this quarter, creating a backlog of equipment, including IT product that is nearly double that of last year's. Despite these constraints, we delivered strong equipment sales to result in the second quarter. We expected supply chain challenges to persist through at least the third quarter and possibly through the year.
We are working with our global suppliers and transportation partners to mitigate the impacts to both Xerox and to our clients. The team remains committed to further optimizing operations to make it easier for customers and partners to work with Xerox while reducing costs. Project It is on track to deliver three seventy five million dollars of gross cost savings this year. At the same time, Project Own It has freed up cash, allowing us to reinvest in targeted growth areas and digital transformation technologies. Robotic process automation and analytics were our initial areas of focus for digital transformation.
Bots are now managing increasingly more complex transactions across the enterprise in every business and function, completing 4,000,000 transactions per quarter, up 300% year over year. We have expanded our investment focus to include augmented reality and artificial intelligence. Utilizing these technologies internally will improve the service experience for customers, make us more efficient, and create additional opportunities for Project Own It related savings in the future. The gradual return of workers to the office, combined with strong demand for our products and services, positions Xerox to return to growth this year. The correlation between greater levels of in office work and increased page volumes continued in the second quarter as page volumes increased slightly compared to the first quarter.
Based on what we know today, more customers are planning to bring employees back on-site beginning in the third quarter, building to a more fulsome return by the end of the year. With this, we expect page volumes and post sale revenue to improve, driving higher margins in the second half of the year. In preparation for bringing more employees back on-site, customers are investing in more office technology. This is demonstrated by our year over year growth in equipment sales revenue for office centric devices. ESR in every category grew compared to q two twenty twenty.
In print, taking market share is an important part of our strategy to return to growth. Enhancements to our print portfolio, coupled with investments in security, cloud and automation, are enabling us to capture share. According to the latest data available from research firm IDC, our market share performance for the first quarter was our best in the past three years, having taken share in all product segments in the regions Xerox serves. Managed Print Services also benefited from these investments. According to the most recent IDC NPS twenty twenty market share report, Xerox continues to be the global and U.
S. Leader, and we expanded our lead in The US, where we grew our share to 21%. In fact, we were the only provider to grow market share in 2020. MPS remains an attractive market for Xerox. MPS spend in both the enterprise and SMB markets is projected to grow over the next three years.
The SMB market continues to play a key role in our strategy to return Xerox to growth. To accelerate our expansion in this market, we acquired two document solution providers in the second quarter, '1 in The U. S. And one in Canada. Each acquired company is well established in a growing local market, giving us an opportunity to knock out competitors and provide NPS and adjacent offerings such as IT services.
In the second quarter, IT services sales and signed deals continued to be strong. Our managed IT services includes high growth offerings such as advanced security services and RPA. RPA launched in February and is already seeing early success with SMBs in various industries, including legal, healthcare, and financial services. Earlier in the year, Xerox Financial Services expanded its leasing platform to provide customers and OEMs with a total solution for financing equipment, software, IT services and other office needs. In the quarter, we used $60,000,000 of cash to fund originations growth.
XFS grew originations compared to last year and the first quarter, up 54% year over year and 7% compared to last quarter. We expect XFS to carry this momentum throughout the remainder of the year. In software, we are revolutionizing the way service technicians and customers solve technical challenges. At the same time, we are helping businesses solve three of their biggest challenges, the skills gap, talent shortages, and greenhouse gas emissions. Companies are looking to technology to overcome these challenges, which is why the total addressable market for next generation service delivery software is expected to reach 80,000,000,000 by 2027.
Our software solution makes expertise instantly accessible for customers, employees, and field workers through live visual interactions, instructions, and insights as part of a seamless digital workflow experience. To deliver this experience, we integrated augmented reality from KAR, DocuShares content management system, personalization software from XMPie, and artificial intelligence from Park to create the industry's first service experience management platform. Making any user an expert capable of solving technical issues means companies can service their customers with fewer dispatches of highly experienced technicians. This is why blue chip companies such as Verizon are starting to use our service experience management platform. PAR continues to execute on its commitment to monetize innovation.
Part of our strategy includes working with strategic partners to accelerate the commercialization of new technologies in our focus areas, three d printing, industrial IoT, and cleantech. Collaborating with partners provides several benefits from speeding up product development to expanding our reach. One example of this is our partnership with Victrac, a state owned enterprise in Victoria, Australia. Together we announced LOQ, a joint venture to commercialize park developed industrial IoT technology that will remotely monitor the structural health of critical infrastructure assets such as roads and railway bridges. This solution tackles a global secular challenge, the world's crumbling infrastructure.
In The US alone, 42% of bridges are at least 50 years old, and nearly 231,000 bridges are in immediate need of repair and preservation work. The recent closure of the I-forty bridge over the Mississippi River demonstrates the fragility of the world's aging bridges, the safety issues, and the economic impact that results when they fail or need to be closed. The bridge has now been closed on an emergency basis for more than seventy five days since a cracked steel beam was first discovered, and there is no reopening date yet set. The US trucking industry loses $2,000,000 every day the bridge is closed, and this ongoing closure further strains country's already fragile supply chain. Our ElliQ solution uses tiny fiber optic sensors that attach to a bridge to accurately measure its structural health.
Advanced analytics are then used to evaluate the sensor's data and deliver insights directly to the bridge owners and operators in real time, revealing if the bridge has structural problems or damage that needs repair. As a result, infrastructure operators can rely on technology and data to prioritize repairs rather than waiting until a physical inspection reveals a major problem. The Victorian government has already committed 50,000,000 Australian dollars to deploy LOQ's technology on bridges across the state, including several of its high priority bridges by year end. The team is now engaging public officials and infrastructure managers in The U. S.
And other countries about deploying this new technology elsewhere. For the quarter, free cash flow was $198,000,000 up $183,000,000 year over year. We delivered strong improvements in free cash flow while investing in our operations and our targeted growth areas, such as XFS, software, park innovation. In the quarter, we also repurchased $251,000,000 of outstanding shares, demonstrating our continued commitment to shareholder returns. In the second half, we expect free cash flow to grow as revenue and margins improve.
This gives us confidence in our ability to generate at least $500,000,000 of free cash flow for 2021, while we continue to make investments that position the company for long term sustainable growth. Before turning it over to Xavier, let me recap a few key points. We expect the return to the workplace around the world and increasing demand will enable Xerox to return to growth in 2021. Along the way, there will be challenges we can predict, such as supply constraints, and challenges we cannot predict, such as the impact of the Delta variant. But the Xerox team has demonstrated it can navigate through difficult periods full of unanticipated challenges.
Long term sustainable growth will be driven by taking share in print and growing our adjacent offerings as well as XFS, software and park innovation. We plan to provide more details on our strategy at our November Investor Day. Now I would like to hand it over to Xavier to cover our financial results in detail.
Thank you, John, and good morning, everyone. We are pleased with our Q2 result. We experienced significant year over year growth in all key financial metrics and sequential improvement in revenue, free cash flow and earnings. Revenue growth reflected strong demand for both equipment and supplies and page volume which grew sequentially from Q1 to Q2 continue to demonstrate a high degree of correlation with a gradual reopening of workplaces. Strong demand along with ongoing supply chain disruption resulted in an order backlog for equipment including IT product that is significantly higher than last quarter.
Higher revenue and operating leverage drove significant growth in our profitability in Q2. Gross margin declined two nineteen basis points year over year due to higher mix of equipment sales, lower government subsidies, net of project only savings, lower FUJIFILM business innovation royalty revenue and higher freight and delivery costs. Adjusted operating margin of 7% increased two eighty basis points year over year, reflecting the flow through of higher revenue, lower bad debt expense and savings from product owned it, which were partially offset by the impact of lower government subsidies, increased R and D investments supporting our targeted growth areas on higher compensation accruals. SAG expense of EUR $434,000,000 increased EUR 8,000,000 year over year including a EUR 15,000,000 negative impact from translation currency. This increase was partially offset by lower bad debt expense of around EUR €10,000,000 which included a €6,000,000 reserve reduction.
RD and E grew year over year yet improved 80 basis points as a percentage of revenue. We remain committed to investing in Parks Innovation Towers, CaresAir next generation service experience management platform and enhanced product and solution for our print on IT services clients. Other expenses net of 1,000,000 was $6,000,000 lower year over year primarily driven by a reduction in non service retirement related costs partially offset by higher net interest expense. Second quarter adjusted tax rate was 9.7% compared to 23.4% last year. The 13.7% year over year decrease primarily reflect a 16 percentage point benefit from a change in tax law resulting in the re measurement of deferred tax asset as well as the geographical mix of earnings.
Adjusted EPS of $0.47 in the second quarter increased $0.32 year over year. This increase reflects higher profit from operation, lower taxes, a reduced share count and lower bad debt expense, partially offset by higher net interest expense. GAAP EPS of $0.46 was $0.35 higher year over year due to a decrease in adjusted items including lower year over year non service retirement related costs partially offset by higher restructuring charges. Turning to revenue, we continue to see improving trend across geographies on customer segment and solid demand drove increased sales in the quarter. Sales were particularly strong through indirect channel partners which had begun rebuilding inventory level in anticipation of a recovery.
EMEA has a larger indirect channel compared to The US and grew 33.2 in constant currency year over year compared to 12.7% in The America. Both geographies had strong growth in equipment and supply sales. Despite growth in revenue, we like many other businesses have experienced supply chain challenges. As a result, our backlog for equipment including IT product in the June was almost double that of the prior year and our equipment backlog is well ahead of pre COVID levels. We expect supply chain disruption to continue in the third quarter, but we are actively working with current and alternative suppliers to mitigate any potential disruption to our customers.
Equipment sales of €429,000,000 in Q2 increased 38.4% year over year or 34% in constant currency. Similar to Q1, sales increased across entry, mid range and high end product on both North America and EMEA. This quarter, sales of office centric devices led the increase indicating a trend toward businesses planning for return to work. Post sales revenue of €1,400,000,000 increased 18.1% year over year or 13.8% in constant currency. Page volume modestly increased sequentially in quarter two with economies such as UK, France and Germany beginning to come out of partial lockdown in the quarter.
While we are seeing a correlation between return to office trend on print volume, the pace of employees returning to office has been gradual. We expect continued improvement in page volume throughout the remainder of the year consistent with the pace of workplace and school reopenings. Post sales also include unbundled supplies, which grew significantly reflecting increased demand, particularly through resellers. IT services, which is included in other sales, was impacted by global supply constraint that affected hardware technology installed. Demand for our IT services offerings, including our RPA solutions for the small and medium sized business is growing across industry verticals and signings continue to be stronger.
Last, our services signings grew in the quarter as did our renewal win rate. Our services pipeline is strong. Next, turning to cash flow. We are pleased with our free cash flow result. Free cash flow grew significantly in the quarter from €15,000,000 in the prior year to 198,000,000 this year.
Importantly, we generated this solid growth in free cash flow while continuing to invest in our operations on targeted growth area. We generated EUR $214,000,000 of operating cash flow in the quarter which was an increase of EUR 180,000,000 compared to prior year. Working capital was a use of cash of EUR 35,000,000 but was EUR12 million better than prior year. This reflects year over year improvement in inventory on accounts payable which was partially offset by an increased use of cash from accounts receivable driven by revenue growth. However, DSO was significantly better than Q2 twenty twenty.
Other notable cash related items in the quarter include €100,000,000 1 time payment from Fujifilm Business Innovation related to the two year extension of a license for the continued use of our brand in Asia Pacific. This increase was partially offset by a €60,000,000 use of cash to grow the lease portfolio of our XFS business. I will talk more about XFS shortly. Cash from investing was a €55,000,000 use and includes the acquisition of dealers in Canada and The U. S.
To support our SMB growth strategy. CapEx was €16,000,000 in the quarter. CapEx primarily support our strategic growth program on investment in IT infrastructure. Within financing cash flow, 115,000,000 of securitization debt was repaid. This debt amortized monthly and we expect to issue additional securitizations in support of XFS growth in 2021.
Finally, in the quarter, we repurchased $251,000,000 of share and paid 54,000,000 in dividend resulting in a return of cash to shareholder of $3.00 5,000,000 well in excess of free cash flow of €198,000,000 Looking at profitability, the second quarter improvement in adjusted operating margin reflects the flow through of higher revenue, disciplined expense management and cost savings generated by Project Own It, which is on track to deliver €375,000,000 of gross cost savings this year. Further, we are managing supply chain disruptions impacting our business including increased delivery and freight costs. We are confident in our ability to mitigate this impact from both a price and cost perspective. We expect continuing improvement in operating margin in 2021 driven by improvement in revenue as more people return to the office and we execute on our strategy to gain share in print and grow our XFS IT services and software businesses. Turning to XFS, we are progressing on our growth plan and look forward to providing more financial and operating detail about this business at our Investor Day in November.
XFS lease origination increased in the quarter both sequentially and year over year mainly driven by XBS. We expect the portfolio will continue to grow throughout the year and we execute on our strategy to expand XFS presence beyond Xerox equipment and services. Cash wise, XFS portfolio growth created a €60,000,000 use of operating cash compared to a source of cash of €74,000,000 in the prior year's quarter. Continued growth of XFS portfolio is included in our cash flow guidance for 2021. Next, looking at capital structure, we ended June with a net core cash position of €1,000,000,000 3 billion euros of the €4,200,000,000 of debt outstanding is allocated to and support the XFS lease portfolio.
The remaining debt of around €1,200,000,000 is attributable to the core business. Debt primarily consists of senior unsecured bonds on asset securitization. We have a balanced bond maturity ladder with no bonds maturing in 2021 and €300,000,000 maturing in 2022. We also had €2,200,000,000 of cash, cash equivalent and restricted cash at the end of the quarter. We have spent €413,000,000 on share repurchase since the beginning of the year, which contributed to the €300,000,000 decrease in net core cash since the end of twenty twenty.
Finally, we will move to guidance. Growth in installed activity, our backlog and print volume indicate our customers are planning for a broader return of employees to offices in the back half of the year. Accordingly, we expect to see an increasing level of in office work more weighted to the end of Q3 and Q4 on a gradual recovery in our business. We remain focused on executing our strategy to grow revenue and cash flow. We are maintaining our full year guidance of at least €7,200,000,000 of revenue and despite ongoing supply chain disruption, we remain confident in our ability to generate at least €500,000,000 of free cash flow in 2021.
Thank you. And now back to John.
Thank you, Xavier. Now let's open the line for questions.
Certainly. Our first question comes from the line of Ananda Baruah from Loop Capital. Your question please.
Hi, good morning guys. Thanks for taking the question. Just two quick ones, if I could. I guess the first is on the free cash flow. You guys are tracking, I think, 300,000,000 year to date And typically, second half of the year, particularly December is stronger than the first half of the year.
So is it just a healthy dose of conservatism? I know the guidance is at least 500,000,000 but it would seem like you guys are set up to do probably more than 600,000,000 unless there's some puts and takes. And I have a quick follow-up. Thanks.
Yes. Thanks, Armando. So yes, so we are pleased with the result we deliver in quarter two, both from a revenue, but specifically as well from a free cash flow point of view. As you know it, we have a plan to invest in the business in our different levers here, including XFS. That's the reason why we keep this guidance to EUR 500,000,000.
So it's important for us to leverage this strategy, including the investment, not only cash, but also in a P and L that we'll have for the rest of the year.
Got it. And then just with regards, John, your remarks around the business environment. Now that we're halfway through the year, how would you characterize sort of the tracking of the business environment to what you guys are anticipating? Is it relatively in line? Or are there any meaningful differences, positive or negative, this point?
Yeah, good morning, Amanda. I would say that, look, June had an uptick in Q2 in terms of employees going back to the office. And as we look at the rest of the year, you're hearing a lot of CEOs saying that in the third quarter everyone's going back to the office, the vaccination going on. And the way we see it is that the way we're projecting it is probably near the end of the Q3, And then we'll start seeing more and more folks coming to the office in Q4. What gives us confidence is our ESR and our pipeline and our backlog in that area.
So you can see that a lot of companies are setting up for this. In fact, that we're gaining market share in that area gives us confidence. But, yeah, that's how we see it, Ananda.
All right, that's helpful. I appreciate it. Thanks, guys.
Thank you. Thanks, Ananda.
Thank you. Our next question comes from the line of Matt Cabral from Credit Suisse. Your question please.
Thank you. I wanted to actually follow-up on that last question. Guess as we think about the correlation you guys called out between usage and the return to the office, just wondering if you could be a little bit more explicit on what you're seeing in terms of usage relative to the pre COVID baseline, both overall within the base and then within areas that have been a little bit quicker to return back to the office. And as we start thinking out longer term, just curious for your impact on what COVID has done to the steady state for office print.
Okay. Hi, Matt. So, as you know, we are monitoring it on the series and we observe a strong correlation between vaccination, people returning back to the office on the print volumes. And we track it, you know, day by day, month by month with data point showing how is this data correct here. So as you observe it, you know, we don't have yet, you know, full population being vaccinated here, but we are encouraged by the progress that we have seen.
And we are seeing sequentially progress in print volume under directly related to the presence in the office. We are not the only one reporting this type of indicator, but this give us confidence that for quarter three, back end of quarter three, specifically September and for quarter four, we will return to better print volumes that we have here. Regarding your second point on the trend on how people are working. What we observed today is that there is a mix of different approach company by company around bringing employees back to the office certain number of days. But what we see that when employees are back to the office, they print on some of the volume that they print up, some of the volume they easier do not print at home or volumes that could be printed on, I would say lower type or lower different type decentralized solution.
I won't call it the hybrid work, but what we see currently is that overall the print volume on the present store face remains strongly correlated.
Got it. That's helpful. And then shifting over to gross margins, just wondering if you could dig a little bit more into some of the pressure points that you're seeing. And I know you guys called out supply chain issues as one of the factors. I'm wondering if you could quantify that impact.
And guess similar to my last question is, as we look out longer term, historically, this business had been one that supported gross margins kind of around that 40% range prior to COVID. I guess I'm curious, do you think that's still an achievable level going forward? Or has something structurally changed as we think about emerging on the other side of COVID from a profitability standpoint?
Yes. So I will start with your first question, which is around what has driven the gross margin difference in this quarter here. So as you have seen it, the product mix, which is more equipment sales revenue, by the way, with very strong news on equipment sales revenue here. John mentioned it, but we gained market share on both what we call the base business, the ESA type of business, but also on NPS. So we are a leader on our segment, in our territory.
And this is quite important because it clearly show the correlation between employers wanting to have employees being back investing in this in in their infrastructure. So, you know, they can operate when they are back in the office. Regarding the specific element or specific impacts that we have on gross margin, so product mix is the number one. The second one is we have faced as a lot of industry some increased freight on delivery cost, specifically related to certain tension in containers on the cost of shipment here. As you know it as well, a third element is FUJIFILM.
We have lower royalty from FUJIFILM, even if we have had some good news from a cash point of view in our free cash flow in FUJI. But from a profit point of view, we had lower royalty. On last item, on this more year over year compare, government subsidies were at the highest point in quarter two last year at the peak of the pandemic. And they have been lower, as I mentioned it in my initial comment here. So now back to the gross margin, your gross margin question, what is a normalized view?
Clearly, there is a straight correlation between revenue, our ability to drive the revenue growth and gross margin and specifically on post sales revenue. So is it possible to go back to the gross margin with all the activity gross margin we had before with all the activities that we are driving both from a only point of view and also supporting post sales activity. Yes, the trend is going on will be favorable for the second half of the year.
Thank you. Thank you. Our next question comes from the line of Chatterjee from JPMorgan. Your question please.
Hi, good morning. This is Angela Jin for Samik Chatterjee. You reiterated that your full year guidance is seven point two billion dollars in revenue. Thank you for that guidance. So what do you see are risks to the upside and downside of that target?
So we are quite confident, know, in this confidence, Angela, in this guidance here. So obviously, you know, there are things that we can control and there are things that are more difficult to control. So the things we can control is the way we will execute the presence to the office is some things that we feel, I would say quite strong. However, it is dependent on I would call that one element, which is the pandemic is still present on the delta variance could have an impact. But so far, what we have seen is that the impact on our existing impact on the geography we are managing is quite manageable.
The second element will be supply demand. So far, we have a clear line of sight on how we can manage it here. But if the supply demand on some of the tension on certain component on raw material will stay specifically in the fourth quarter, then we will consider the action. But so far, we are managing even in Q2, I mentioned it, we have had a little bit of supply chain tension here. We manage it, we find alternative ways on supplier to overcome the challenge and we feel confident that we can deliver the 7,200,000,000.0.
All right, great. Thank you. And just a quick follow-up question. So what is your view on print market consolidation broadly speaking?
Okay. So this is a trend that we have seen. This is like historical. I will always use this expression by saying in order to dance, need to have two parties. You know that we have been active on this one.
And we are clearly open to, I call that a dance here on finding the right parties. But industry consolidation is a long items in this print industry. This is something that will happen over time.
Great, thank you so much.
Thank you, Angela.
Thank you. Our next question comes from the line of Kathy Huberty from Morgan Stanley. Your question please.
Yes, thank you. Good morning. With the return to the office in the fourth quarter of this year and the behavior of print in the office that you mentioned earlier, should we assume that post sales revenue in 4Q twenty twenty one can look more similar to 4Q twenty nineteen pre COVID levels? Obviously, assuming the Delta variant doesn't impact current return to office plans. Just want understand how you're thinking about that.
Yeah,
Katie, in our model for our guidance, we're not assuming 2019, to go back to 2019 numbers in 4Q, we're assuming a more modest return. And then off to 2022.
Okay. And then in a normal environment, EPS is typically about flat in 3Q relative to 2Q. How should we think about the EPS trajectory in the September this year?
So normal environment usually use, you know, from up to first, EPS is mainly driven by revenue. So when revenue is coming, EPS is expanding. So and then we manage via projector need all the cost element of the company. Usually, quarter three is a softer quarter. I'd say usually prior to pandemic, a softer quarter than quarter two.
The two highest quarter being quarter four, first and then quarter two. So this year is a little bit special because we see this gradual recovery. And as an example, schools and certain firms have not been open for quite a long time, open to presence in the office or present in schools. And it will be one of the trends that we will monitor into the quarter. So if I look at how we look at the quarter, we said gradual recovery and specifically by gradual, we expect September to show clearly a pickup versus last year and then quarter four to follow this trend here.
And just quickly, the tax rate was much lower in 2Q, cannot sustain into 3Q or should we assume that the tax rate comes up and that's gonna be a headwind to the sequential EPS?
Yeah, so, know, Katie that we manage our tax rate, you know, on a global basis. We are present in a lot of different countries here. Here, we have an international, I would call that exceptional items, which is related to a law change in one of our European countries that give us the opportunity to get a one off credit of a deferred tax asset. After this depending on how this law change are applied country by country, we will obviously follow the tax guidance here on the adjusted tax rate. But I do not expect quarter three to be as positively impacted as what we have in quarter two.
Thank you very much.
Thank you, Katie.
Thank you. Our next question comes from the line of Shannon Cross from Cross Research. Your question please.
Thank you very much. I wanted to see what's going on with regard to channel inventory. Xavier, I think you said something about some of the sales in the reseller channel was were those companies looking to replenish probably in anticipation of demand, I would assume. But I'm just curious where you see inventory at right now? Thank you.
Yes. So what we've seen on this is mainly compared versus last year. If you remember in quarter two, last year, channel depleted their inventory mainly to protect their cash position. So we have seen it all across the industry. And step by step, this inventory have been rebuilt.
What we are pleased with is that in quarter two, this inventory rebuild a little bit stronger than what we saw in former quarter. However, it is not like I call that a very high number. I mean, our we track what we call week of inventory. On the week of inventory are still at this stage lower than some of the highest point we could have had pre COVID. So channel are coming back, but step by step gradual as well.
As I mentioned it on you saw that on SMB on the mid on entry, which is mainly office type of activity, we gain share. And the channel are part of this share gain on being able to drive our revenue up quarter over quarter.
Okay, thanks. And then both of you, I think during your script mentioned investments in growth areas as use of cash and some impact to margin. Can you be a bit more specific exactly where you're putting your investment dollars and how we should think about ways to track return on investment or how quickly you expect to see benefit from that? Thank you.
So as you know, we invest in three, I would say, areas of business. And by the way, this is the area of business that we informed you in the past by saying we will stand up these businesses. This is XFS software on innovation. And I'm pleased to report that in each of these areas of business, we achieve milestone and we continue despite the environment. We continue to invest in the business.
I will give you two example here. On XFS, I believe we mentioned that in our presentation. In XFS, we grew origination on the portfolio is growing. When you do that, it means that you use free cash flow. And we have used this quarter EUR 60,000,000 of free cash flow in order to support this activity.
What does that mean? It means that we are building for the future of the portfolio, because all this origination will drive future revenue and profit growth for XFS. In innovation, we carry on our investment. And I'm sure you remember that we announced in quarter two LOQ. And LOQ is this joint venture that we have with the Australian Victoria government here.
And this joint venture is now running, has been enabled. And we have a commitment from the government to invest $50,000,000 in Australian dollars in the infrastructure and to set up more of this bridge sensor that we are developing here. So it's just example sharing that in RD and A, some of our costs, despite the current environment on free cash flow, we carry on investing in order to develop the future of the growth of the company. And Analyst Day will Yes. On the on the yeah.
In November, as you know, it's Alan, we announced that in November, we'll have an analyst day and we will provide you more detail on each of these towers.
Okay, thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to John Vistantine for any further remarks.
Okay, thank you all for your questions. Look, the events of the past eighteen months have tested the Xerox team in ways we never imagined possible. But these unexpected challenges made the team stronger. The resiliency of this team paired with our sound strategy gives me confidence that Xerox's future continues to be bright. Be safe and be well.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.