Hi. Hi, good afternoon. I'm Samik Chatterjee with the hardware companies at J.P. Morgan. For the next session, we're hosting Xerox. We have the pleasure of hosting Steve Bandrowczak, who's the CEO, as well as Xavier Heiss, who's the CFO of the company. Thank you both for being here and attending the conference. We're starting off most of our sessions with sort of getting almost like a sentiment or a temperature check with the companies about, you know, various things. I'll start you off with three sort of common questions we're asking. The first one, obviously, macro is a big discussion point at this time of the year, and as you look to the remainder of the year, where do you see the biggest macro risk to your business?
I think, you know, a couple of things. First of all, you know, we are very pleased that our demand remains resilient to the economy today. That's mostly because of the services and the products that we provide to our customers and our clients going forward. A little bit different than traditionally in the IT services hardware area, where endpoint and capital investments is driven by where a company is. We are providing services and solutions and have been incredibly resilient in terms of our ability to drive value. The other thing is that we have the opportunity in the current macro trends, whether it's around inflationary pressures, labor pressures, what companies are seeing in terms of challenges in capital, we can bring significant solutions to drive client success and very specific solutions around driving productivity.
We've been pretty resilient to the macro trend that's out there. I've been very pleased with where we are and what we can do to help our customers in these macro trends that are out there.
Okay. Okay. In terms of the macro trends, I think we've seen sort of two ways it's played out. One is there were certain hardware categories that had a lot of pull forward of demand due to sort of during the pandemic years, and there's more of a digestion, in some cases inventory, in some cases just the demand sort of coming to a normal, digestion due to a replacement cycle having been pulled forward, or just a more real demand slowdown from their customers.
As you think about the business, do you have visibility into any of the underlying drivers if you sort of do see more macro deterioration from here on, is it going to be more sort of worse because of the pull forward of demand, or is it more just sort of think of the macro in general being a bit worse and the demand slows down, but you really don't have much inventory to really work through?
Yeah, look, I think if you focus on our business as a service and driving client success and driving outcomes in and around service, we focus on how do we help our clients drive productivity, drive activity. If you think about services and specifically digital services, you think about workflow services, we have the ability to help our clients drive productivity. So in actually the macro environments that we're seeing today and the challenges that we're seeing in our clients, we have the opportunity to help them and bring new products and services and existing clients that we're in today.
If you think about workflow and the ability to drive productivity through workflow in and around our ecosystem, which happens to be our end devices, we have an opportunity to actually increase and expand our business in these accounts by helping them with the macro trends that are out there today.
Okay. Yep. Maybe this almost lends itself to the next question I'm asking most companies is, how does AI impact your business? How does it sort of lend itself to your business? Seems like what you're doing on the services side exactly sort of goes into playing right into the hands of what AI can leverage or expand further on, but maybe just flesh that out a bit more how you're thinking about the impact here.
Look, I think the AI and the whole ChatGPT question that's out there is a perfect opportunity for Xerox. Let me talk first of all internally today, how we're thinking, we're using AI, so very specifically, redefining how we think about service and service delivery, using augmented virtual reality, using IoT and augmented data, and then using artificial intelligence to help with try to drive a customer sat outcome. Think about historically, we would have a printer that would have an error. You'd call our help desk. We'd log a ticket. Today, we see that error that's in a data lake. That error goes into a central location.
Artificial intelligence picks up that particular error, brings it to my client success team, gives them the top three ways to solve that error. I send you a text which allows me to do an augmented virtual reality where I can do customer self-serve. That impacts two things. One, it reduces the number of truck rolls that I have. It increases my customer sat because I've got them up and running faster. I also use AI in my HR processes. I use it in my finance processes. We use it in supply chain. Think about supply chain today. Internally, we have been using and driving AI internally. We now can take those same solutions and now bring it to our mid-market customers, right?
Every one of our mid-market customers are thinking about how they drive productivity, and one of the things you need to think about in terms of AI underlining it is data. Where is data? Pages that are scanned, pages that are printed, Word documents, PDF documents, files that have voice in it, have video in it. Xerox has been driving and orchestrating all that data for years to drive workplace productivity. AI is a natural extension where we can help our clients use and take advantage of AI to drive productivity on top of the data and the processes that we've already been involved in. We think it's a great opportunity for us to grow and have further service and further penetration inside of our client accounts.
Okay. Okay. no, thanks for that. Let me sort of pivot to the more company-specific questions. The first one was going to be more in terms of your role as a CEO. You took over less than a year ago, if I remember it right.
Yeah.
Maybe delve into some of the more material strategic decisions that you've taken since then and sort of more in some cases, like deviating from maybe where the company was headed in the past.
A couple of things. First of all, I wanted to get clients-focused and client outcome-focused, meaning that we had to shift the company and really think about client outcomes. What that means is how do we drive, create products, create solutions that drives client outcome? AI is a perfect example of that, where we can use AI, we can use RPA robotics and really drive client output and client outcomes. What does that mean? I'm helping clients to improve their revenue, improve their cash flow, improve their productivity. That's the first major pivot that we had. That includes not only services, but software and products around our ecosystem that we play in today. Second thing is we went and hired a new president and chief operating officer to really focus on simplification of our business and driving more technology into our business.
We talked about what we did in service. How do I reinvent the service industry, specifically starting with Xerox, and then helping our clients think about service industry? You know, we get questioned all the time about what and how do we impact green initiatives, right? You think about reducing truck rolls, remote solve. That is all leading into how do we help improve the climate, help our customers and our partners improve their green initiative. Last one is we made a big shift with PARC, and you may have seen a recent announcement that PARC is now being donated to SRI, two great research institutes. One of the things that I wanted to do is I wanted to preserve all the great attributes of PARC and the contribution that PARC has made to not only Xerox, but other industries and other companies.
We've solved some of the world's biggest challenges in PARC. We wanted to preserve that and keep that. We also wanted to make sure that Xerox had the opportunity to take advantage of what was in PARC, looking at future technologies, having the ability to take those technologies and bring them into our products and services in the future. Not only did we preserve PARC with the donation to SRI, we improved the doubling of the two organizations coming together in terms of research, but more importantly, we have preserved optionality for Xerox to see those few technologies and then bring them into products and services. Those are the big shifts that we've made since I've been CEO.
Okay. Maybe since we're on the topic of PARC, I think the decision to donate it, and combine it with SRI sort of screens as limiting some of the downside, and improves your own profitability, while I think the general perception is going to be that you're sort of sacrificing some of the upside on potential revenues that can come through the innovation at that facility. How do you encourage investors to look at it in terms of how you're preserving the upside there?
I would say just the opposite. We have the ability to be able to take the things that PARC and SRI are now developing, bring it into our products and services and drive revenue just like we've always done, and have the ability to not spend and not use our capital for research into things that may or may not become products in the future, right? I have the balance and the beauty of continuing research with PARC and SRI going together for things that are great for not only other companies and the economies and the world in general, but more importantly, I got the optionality to see when they have particular problems that they've solved and they wanna productize it, they can come to Xerox, we can work together, and we can take that and bring it to market.
I've got the best of both worlds where we continued future research, expanded research without using my capital, and then having the ability to be able to take the great work that they're doing when it pertains to either IT services or AI or digital services or office productivity. We can take those capabilities and bring them inside of Xerox, co-develop together, turn them into a product, and I can bring them into a revenue stream. We didn't see any downside by the transaction.
Okay. I'm still gonna go back to sort of your tenure over the last year and outside of the strategic decisions that we talked about over that last year, what have been sort of the learnings from that? The key challenges that you maybe ran into compared to sort of when you started versus some of the things that maybe even helped out compared to your expectation?
I think on the upside and the pleasant side is, you know, client centricity has allowed us to change the conversation and start the conversations much different than we've ever done before. I think some of the macro trends has helped. For example, we can now start conversations in and around green initiatives, how we help our clients with green initiatives and how we can impact their SEC filings and what they're trying to do with the green initiative. Second, you know, ChatGPT and AI are big topics that are inside of every company today, we're educating our clients to say, without data, AI has no value. ChatGPT has no value, right? You think about the billions of pages and billions of images that come through our infrastructure on an annualized basis. What is all that? All that's data.
All that's significant value that we can bring insight to our clients. If you think about things like law firms, right? Contracts and law firms, you now have the ability to bring AI, now have the ability to bring Robotics as a Service, and you can dramatically add new value and insight to those documents and those data. Some of it's physically on paper, where you can scan it and put it in the cloud. Some of it's already in Word and PDF documents. We have the ability to orchestrate all of that and then bring value on top of it. You know, AI trends, ChatGPT trends is our friend. The other thing is the hybrid workforce. Think about the hybrid workforce that happened. We got the hybrid workforce, and then we've got distributed in terms of where people actually work from.
The reality is, after COVID, we didn't materially change the workflow and the tools that people have other than looking at a Zoom or looking at Teams. Now you think about teleworkers, you think about telemedicine, you think about all the different things, distant learning. You think about churches and synagogues and mosques, and now you have some in-person sessions, some remote sessions in churches. We play in that space. We can print things for the pews that are in churches, but we also can help them with online services, online donations. We have been able to change the workplace over the last, you know, as long as we've been in existence, we've drived productivity in the workplace. The new hybrid environment gives us a great opportunity to actually drive more productivity.
You add AI and ChatGPT and the struggles that customers are trying to figure out. How do we use this? How do we take advantage of it? What a great way in which Xerox is already using it. We bring those examples. For example, we do about 7 million transactions on RPA every month. 7 million. When I go to my mid-size customers, they have enterprise challenges without enterprise capabilities. You know, we developed managed print services years ago. Why did we do that? Because a customer wanted a printer, wanted supplies, but they just wanted to print. That's all they cared about. Xerox, you take care of all that, and you charge me by the click. Think about that in Robotics as a Service. I don't have to have and buy a UiPath or a Microsoft.
I don't have to have skills in that space. I don't need to know the process. Xerox can come in. I already know your process. I'm already trusted. Why is that important that I'm trusted? Because I'm already behind their firewall. I am already embedded in their IT infrastructure, their security infrastructure. What have we been doing for years? Securing data or enacting data, having the ability to do workflow around data or making sure that it's in safe hands. Same thing with AI. Same thing with robotics in the future. We can bring these products and services that we're using internally, and I like to think about bringing enterprise-grade solutions to mid-market customers that have enterprise problems. Ransomware has no discrimination between the size of the client, whether it's a church, university, or it's a large corporation like J.P. or Xerox.
We have IT organizations that can do that. Mid-market companies and clients do not. We get a chance to bring that as a service to those clients and get a chance to give them enterprise-grade solutions in that space.
Okay. Okay. Got it. One of the key themes for you in the recent years has been the return of return to office for employees, that helped on the momentum in the print services side. In the latest quarter, though, when I look sort of on in towards that sort of one quarter view, your post-sale revenue grew about 0.5% in constant currency. It does sort of hint there's something limiting that even as employees are coming back to office. Like, how do you sort of play the theme overall of employees coming back, and yet you sort of have very modest growth or limited growth on that front?
Yeah, great question, Samik. Key point here is this quarter four was in the similar vein as well as the last five quarter, have seen the resiliency of the Xerox business model. Resiliency based not only on print, but what we call contracted, you know, revenue streams there. Roughly 2/3 of Xerox revenue is contracted upfront. Our ability, you know, to offset some of the print dynamic, usual print dynamic there with two elements there. One, everything Steve described before, digital services, IT services, how we leverage your re-existing relationship with customer on offset, you know, some of the dynamics in print. The second point is that with price increase that we have enacted in the prior quarter since 2021 there, we are seeing now the benefit of this price increase supporting the revenue streams there.
This give us a good confidence in this 2/3, this, part of the revenue stream here for the rest of the year on, how the balance between the equipment transactional revenue and the rest of the revenue will go there.
Okay. Okay. On the equipment side, the more transactional, I guess, revenue, you have benefited from backlog that you've been working down slowly over the last few quarters. When you think about backlog normalizing, I think you've said by the end of 2Q, why shouldn't we expect a period of below normal demand for equipment as if you go back and say, equipment demand has been helped by pull forward of demand, why shouldn't we think there's a period of below normal demand, evening it out?
Yeah. The first key important element there, the demand is still there. Steve mentioned it. On the demand for our equipment, A3 and A4 equipment is still very strong there. We've seen quite a good demand on the equipment side. The backlog is just a timing of the revenue. As we commented during Q1 earnings, we plan to normalize the backlog during Q2, and we always have a backlog. The value we have given is in the range of $100 million-$125 million. We expect this to normalize and not disclose any more in quarter three, quarter four backlog because it will be like BAU here. The true compare will start, you know, after this year. Over time, that mean it will be year-over-year, like a normal compare here.
What we are pleased with is to still see the demand, specifically the A3. As you know it, this is the product range that attracts the highest margin and the mix help the overall margin improvement, growth margin improvement for the company.
Okay. I mean, it does sort of raise the question, though. You outlined services being really resilient. Post-sale, you have contractual revenue. Pricing is coming through. Everything sort of sounds like it should be flat to up, and yet your full year guidance is for flat to down. How do we match that up?
It quite simple there. When we did the guidance at the beginning of the year, we wanted, so I've got David Beckel being here representing higher. I will say that we were looking at this being conservative. I will say the macro environment specifically around, you know, the second part of the year was quite uncertain. I mean, we were discussing this morning with certain investor, the debt ceiling story did not exist, you know, when we issued the guidance there. Will that happen? Will that impact us? We don't believe so. We have been taken into account not the debt ceiling, but some macro trends within this year. We had a good start. Quarter one, you know, was a good leading indicator into the years. Quarter two so far, we are seeing like a good signs.
May will close soon, so we will see for the rest of the quarter. You know, the cycle in the quarter is like the last month is quite important for us. I would say we will look after quarter two earnings and see what would be the guidance from you that we will provide you.
Okay. Okay. Got it. Going back to services, You outlined sort of the opportunity that you're seeing in the mid-market, maybe just talk about how you go about the sort of the process of inserting more services with your customers, both at the large enterprises and mid-market. What do you typically end up seeing as the insertion opportunity to drive more business with existing customers? How do you introduce that sort of portfolio to new customers?
Yeah. I think it's a couple of things. First of all, I always say that Xerox is an incredibly trusted brand that has incredible relationships with our clients. What do I mean by that? There are clients that we've been in there since their inception, 15, 20 years, literally. I go to clients all the time, and they say, "If you ever take that service person away from me, I'm gonna, you know, terminate your account," because they're embedded inside of these enterprises, inside these accounts, so we're trusted. What does trusted mean? They know we're gonna be around. That we're behind the firewalls. We're integrated into their IT process. We're integrated into security process. We are trusted with the data and the privacy of the data, the redaction of documents, the workflow, and the flowing of documents, we're trusted.
We add on top of that things that our clients need in the future. We talk about IT services, whether it's around Robotics as a Service, whether it's around Security as a Service, AI as a Service. Because I'm trusted, because they know we've been there, because they know we understand their processes, we now can start to bring very significant solutions in and around IT services. This isn't about endpoints. We're selling value-added services into these clients to help drive their outcomes. Simple example, you know, you take a look at law firms today, where they get a lot of inbounds, a lot of queries. Something changed with an EU regulation on data. How many contracts are impacted by that change? They get regulatory change that happens, how many contracts are impacted by that change?
You think about the administration tasks that they have to do when they file with the judicial systems. All those things we now can do with AI, and we can do with RPA robotics. We're looking at driving very specific client outcome in the SMB space, but more importantly, focused on client outcomes. You know, you think about hospitals today, patient administration, patient discharge. Think about what it takes to go through in a hospital, whether it's setting up appointments, setting up dietary needs, setting up pharmaceuticals, leaving the hospital and getting everything signed off. All those things are very process-intensive and candidly, very paper-intensive or workflow-intensive. We play in that environment that we can drive that end experience using our capabilities in that space. I am really excited about how we can drive productivity and how we can drive client outcomes in the IT services space.
Look, you know, in the SMB market, we're talking, you know, $700 plus billion TAM. I always say we can drive and expand our business significantly in the accounts that we're already in. I got asked on the last, you know, last analyst call, "Are we gonna go into Asia?" I don't need to expand into other regions. I've got capabilities. I've got service on the ground. I've got trusted relationships, and I can expand my business significantly just by bringing products and services that we already have ready to go into our existing clients today.
Okay. you outlined the, you mentioned the TAM on the mid-market or the SMB side, maybe if I take another approach to looking at it, Which are the verticals within that SMB that you intend to sort of then go after first? Obviously, there's also the allocation of resources.
Sure.
the sales force to go after those.
I'll tell you ones we're already working in today. Legal and law firms, we're working in today to help them with productivity, to help them with a lot of the things that you see administrationally inside of law firms. Education, whether it's around colleges or whether it's around K-12. You know, you think about the administrative tasks that teachers are now doing today. We don't want teachers doing administrative tasks. We want them teaching and educating our students. Things like language translations in and around our devices. You scan something in in English, we can have multiple output languages that we can have. You can speak through our devices, and we'll translate it and do a voice translation.
We can have the ability to scan a resume in, use RPA and AI and take that resume and put it against your open requisitions in Workday to see if that job fits. This whole workplace productivity is extremely important in universities, in K-12. I mentioned hospital, that's another area. If you think about hospitals, you think about education K-12, and then you start to think about what we're doing in law firms. I would say the other one is a very large digitalization that's going on inside of state and local governments and the federal government, right? They're all trying to drive and digitize a lot of the documents that they have today. It's not just about digitization. Anybody can scan and put it into a digital format.
It's how do you digitize and then add value with that, like AI, like Robotics as a Service. It's not just the digitalization of documents, it's what can we do and what insight can we provide? Those are the verticals that we're looking at today.
Okay. Moving over to the cost side of things. We talked about the top line of the revenue drivers a bit. Project Own It, that's continued to deliver savings every year. Obviously, one of the questions from investors has been how long can it continue to deliver, right? Just sort of frame for us how sort of you think about the headroom there or the roadmap of what you continue to work on to drive those savings and how much more sort of can we expect?
Yeah. Project Own It has been very successful for the company, more than $2.2 billion been delivered since we initiated there. As you know it, in 2023, we did not quoted our.
Yeah.
for Project Own It. The reason is very simple. It's because over time, Project Own It became the way we manage costs within the company. On the way of managing it is very simple, is, adjusting the cost base, I would say, regardless of the environment we are facing. COVID has been a good price point on this one. Supply chain challenges as well, inflation challenges as well there. COVID, the Project Own It has been really, you know, stress test during the recent years here. What we have indicated during Q1 earnings call there is that we are expecting to continue our journey of cost reduction. When I say cost, I'm speaking cost of goods sold on OpEx, we are expecting a low to mid-single digit, you know, overall cost-based reduction.
Which is what is required if you want to sustain the growth margin or operating margin trajectory that we have quoted up in the past year.
Yeah. Just following up on that. I mean, you mentioned the reduction in the operating cost of the company. That is sort of you're doing that with the plan that there'll be a macro deterioration in the second half, and your revenues will be down. When I think about sort of the opportunity to flex it up or flex it down further, how are you thinking about, particularly if the macro doesn't deteriorate and you're being conservative around that for the second half, where do you sort of think about, how do you think about OpEx? Do you still continue to drive those savings to that level? Or would you need to then sort of come back a bit and offset that revenue upside?
On it. On the DNA of Own It give us this flexibility to adjust up or down and to measure cost base as flexible as possible. Steve gave a great example with what we did with the PARC. PARC in isolation was, I would say, quite a significant, you know, investment that we're making in overall research and was impacting OpEx. By doing the deal on the donation to SRI, Steve described it, he said, "The best of both world." From a financial point of view, also it help us big time to flexibilize and still get access to the research here. This is what we are bringing.
We are also working with a significant, I will call that a partner here, in order to leverage more than balance sheet than our balance sheet, to get the cost balance right and adjust it, depending on the macroeconomy. In a nutshell there, much more flexibility in the bottom part of the P&L and also the ability to anticipate the ups and down on the macro, so we can react as efficiently as possible.
Okay. Okay. Let me just check any questions in the audience? Yeah.
When do you expect to see an impact from AI, just like on the economics of the business? Just give us, like, an idea of the roadmap, you know, what that looks like this or both in the medium long term?
Yeah. Let me talk about a couple of ways. First of all, internally, you know, we started our journey with RPA robotics internally, three years ago. We're now up to about 7 million transactions per month. We are driving that same intensity with AI internally as well. I gave the example of disruption of the service industry and how we think about service today and going forward. We'll continue to embed AI in our products going forward. If you think about AI in our products in terms of self-service, in terms of healing, in terms of being able to predict when products are going to fail, and then bringing back into our call center and having proactive experience with our customers, we'll continue to embed AI in there. We're also embedded AI in our overall supply demand chain, right?
You think about supply chain, what's happening in the supply chain. COVID gave us a great opportunity to improve how we think about supply chain and resiliency in supply chain. AI is playing a big part there, playing a big part in our HR function going forward. As we look at that internally, we're then taking that and giving it and sharing that with our clients externally, right? If you think about any company that has a service arm, whether it's telecommunications, any hardware company. You know, you think about medical devices, you think about the, you think about the airline industry. Anybody that has physical people that go out and touch something could use what we described as revolutionizing and changing the service industry with augmented virtual reality and AI.
CareAR is a product that we already have today, it's growing, and it's expanding very nicely in the service space. You will see more solutions from us in verticals. I talked about law firms. I talked about hospitals. You know, you think about how you think about AI inside of hospitals and workflow. Where is workflow? Well, think about X-ray technicians that are working from home and the ability to help in that workflow with X-ray technicians. There's a lot of areas that we can bring AI and workflow and capability into our client accounts, and you'll see a lot more from that from us going forward.
Let's move to talking about FITTLE a bit. How do you think about the synergies between FITTLE and the equipment business? Just curious with the HPS transaction that you've done, where you've taken some of the risk off your balance sheet. That's how we perceived it, basically. How does that strategically change your intent to continue to grow that business?
First of all, for those who do not know, FITTLE is our captive financing business. This is where Xerox for years have always leveraged our own balance sheet to finance our equipment. The first thing is this business is strategic for Xerox. Customers, specifically in the current environment with macro uncertainty on credit, you know, being shrinked for some of the SMB customer, having your own financing or captive company help you know, on supporting the business. Number two, when FITTLE was growing and when the portfolio was growing, it translated into something that the investor did not get immediately. Which is, "Oh, you are growing, this is a good news, but your free cash flow is reducing. We don't like this." Strategically, and for a certain period of time, we have worked on a solution, and this solution is called HPS.
HBS is a company who is now doing what you call forward flow. Forward flow is very simple. At the end of the day, we are selling every quarter the receivable of the origination that we are generating with FITTLE. The financing equipment, they take this and they take it out of our balance sheet and they finance it. The great news with this here, is now this financing business can grow, can expand, and it is not at the detriment of Xerox balance sheet and Xerox free cash flow. We have the best of both world, and we have also protected the economic, because as you know it, the financing business is not only a spread discussion between interest rate, what you sell and what you buy.
It's also a fee discussion, and it's also a commission on, you know, some annuities that you build with the client there. We have managed with this transaction, which is strategic for us, to keep the best, being able to provide financing to our client, but at the same time to have and avoid the impact of the free cash flow on balance sheet impact on Xerox here.
Just, following up. I think the transaction that you've announced earlier is for the U.S., right?
Yeah.
How should we think about appetite to expand that more broadly?
More to come.
More to come, okay. Last question. As we go through sort of your free cash flow generation, obviously there are different drivers here, right? For all the hardware companies, inventory is normalizing, that helps you on working capital. There's the HPS transaction that helps you. Maybe, if you can share any thoughts around what the normalized free cash flow sort of outlook should be for the company, and then how should we think about then that helping you reinstate some of the capital allocation in terms of buybacks, et cetera. Just any thoughts on that?
I will start by framing first, you know, what is our strategic capital allocation policy, 50% return to shareholder. We gave a guidance of at least $500 million of free cash flow being generated this year. We also said that over time with, you know, potential additional forward flow transactions that we'll have, we'll give additional guidance on it there. The second point from a capital allocation on the 50% shareholder, you know that we're distributing a dividend of $1, which is a 5%-6% yield with the current share price of Xerox here. We're committed to this dividend, which is roughly $180 million. You say $500 million divided by 2 is $250. $180 is allocated to the dividend.
It give us room, you know, to allocate to shareholder. Also we are allocating the remaining 250 by investing in business and also paying down debt. If you have noticed this, over the last years we have deleveraged the company, paid down more than $1 billion debt last year and at the beginning of this quarter. quarter one, more than $450 million of debt repayment here. That, you know, how we are driving the capital allocation. We will provide more information and more guidance on how we will do based on the forward flow progress, how we will do further capital allocation.
We're out of time. I'll wrap it up there. Thank you both for coming to the conference. Thank you for attending. Thank you.
Thanks.