Xerox Holdings Company (NASDAQ:XRX) This fall 2022 Earnings Name Transcript
Xerox Holdings Company (NASDAQ:XRX) This fall 2022 Earnings Name Transcript January 27, 2023
Operator: Welcome to the Xerox Holdings Company’s Fourth Quarter and 2022 Earnings Launch Convention Name. At the moment, I want to flip the assembly over to Mr. David Beckel, Vice President of Investor Relations. Please go forward, sir.
David Beckel: Good morning, everybody. I am David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Company. Welcome to the Xerox Holdings Company Fourth Quarter 2022 Earnings Launch Convention Name hosted by Steve Bandrowczak, Chief Govt Officer. He’s joined by Xavier Heiss, Govt Vice President and Chief Monetary Officer. On the request of Xerox Holdings Company, right this moment’s convention name is being recorded. Different recording and/or rebroadcasting of this name are prohibited with out the categorical permission of Xerox. Throughout this name, Xerox executives will check with slides which can be accessible on the internet at www.xerox.com/investor, and can make feedback that comprise forward-looking statements, which, by their nature, deal with issues which can be sooner or later and are unsure. Precise future monetary outcomes could also be materially totally different than these expressed herein. At the moment, I might like to show the assembly over to Mr. Bandrowczak.
Steve Bandrowczak: Good morning and thanks for becoming a member of our This fall 2022 earnings name. One 12 months in the past, it could have been tough to foretell the quantity and severity of obstacles we and plenty of different firms would face in 2022. Provide chain situations have been challenged coming into this 12 months. In February, Russia invaded Ukraine and the humanitarian tragedy that disrupted provide chains additional and led to the efficient shutdown of our operations in these markets. These and the aftereffects of the pandemic fueled an unprecedented stage of inflation and forex dislocation. And Central Financial institution efforts to regulate inflation drove historic will increase in rates of interest. Lastly, for Xerox, final 12 months, we unexpectedly misplaced our pricey good friend and chief, John Visentin.
I’m proud to report that we managed via these challenges taking important corrective actions to match provide with demand and decrease price to offset inflationary headwinds. For the 12 months, income of $7.1 billion elevated 1% in precise forex and 4.8% in fixed forex. Our first 12 months of fixed forex income progress since our separation from Conduent. Nevertheless, progress in revenues and value financial savings have been greater than offset by broad-based inflationary stress, leading to a decline in working earnings and free money move. Nonetheless we delivered income and free money move above the revised steerage ranges given final quarter. All year long, our firm and our individuals remained resilient and by no means misplaced concentrate on what’s most vital, offering worth to our purchasers.
I could not be extra pleased with the trouble our workforce expended within the fourth quarter to ship the best stage of quarterly tools income since 2019, an accomplishment that was instrumental in driving full 12 months income and free money move above our revised steerage. We ended the 12 months with momentum in our values and enterprise efficiency. Sustainability has lengthy been a high precedence for Xerox, and our sustainability efforts are being acknowledged within the market. Xerox was just lately named one of many World 100 most sustainable companies on the earth by Company Knights and acquired an A ranking from the Local weather Disclosure Challenge for local weather transparencies, one of many main evaluators of company environmental reporting efforts. Importantly, the progress we now have made to enhance the sustainability of our choices is driving enchancment at our purchasers’ personal sustainability objectives.
And our capability to assist purchasers handle their sustainability objectives is more and more a aggressive differentiator within the market. Turning to our efficiency. In Print and Managed Print Companies, tools income grew on the highest charge since earlier than the pandemic as a consequence of improved product provide. Consumables akin to provides and paper, grew once more this quarter and contractual print companies, our largest, most steady income, grew low single digits in fixed forex, together with contributions from just lately acquired Go Encourage. In Q1, we plan to launch a sequence of buyer expertise functions to enhance the setup, safety and productiveness of apparatus geared in direction of small and residential workplace customers. Included in these plans is the launch of CareAR Instruct, which gives augmented actuality help for our A4 gadgets utilizing digital twin know-how.
IT Companies grew income double digits for the quarter and the 12 months, together with contributions from Powerland in Canada. Enabling that progress is the breadth of enterprise-class companies we convey to mid-market purchasers. Xerox Automation, our robotics course of automation options, as soon as once more grew signings meaningfully on a quarter-over-quarter foundation. The automation group wins enterprise by understanding at a deep stage our purchasers’ enterprise, trade and desires after which use that information to drive buyer success via personalized options. More and more, our workforce is integrating automation with different main applied sciences akin to object content material recognition and machine studying to drive productiveness enhancements. For instance, this quarter, our automation group received new enterprise from an current U.Ok. shopper by creating an end-to-end doc workflow options that mixes a number of superior applied sciences to extract, classify and course of digitized data from scanned paperwork, saving the shopper important money and time.
Digital Companies signings additionally grew double digits within the quarter and for the complete 12 months, and our choices are resonating within the market. In December, Xerox was named a Prime Accounts Payable Answer Supplier by CFO Tech Outlook in recognition of our capability to help purchasers with digital transformation of their payables course of. Our AP workflow optimization answer delivers a discount in processing prices and enchancment in working capital for our purchasers and is only one of many digital companies we provide. In 2023, we are going to start providing our suite of digital companies to the mid-market, additional augmenting the forms of enterprise-class companies and answer units we will convey to mid-market purchasers. FITTLE grew originations this quarter greater than 40% for each captive and noncaptive leases, capping off a 12 months the place complete originations grew excessive single digits, together with double-digit progress in noncaptive leases.
We just lately introduced an revolutionary funding answer for FITTLE, enabling a strategic shift in its enterprise mannequin to concentrate on being an asset-light best-in-class supplier of leasing companies and options. This funding settlement additionally permits for progress in FITTLE’s portfolio with out the usage of Xerox steadiness sheet. Xavier will clarify this funding answer in additional element. I’ll now contact on our priorities for 2023. Amid all of the volatility and uncertainty within the market, we, at Xerox, are centered on what we will management to drive progress in earnings and shareholder worth. Our 3 essential priorities this 12 months are buyer success, profitability and shareholder returns. Beginning with buyer success, we will ship extra worth to our purchasers by making it simpler to do enterprise with Xerox.
I’ve spent numerous time since turning into Xerox CEO assembly with our purchasers and companions to debate the methods we will prolong {our relationships} via further value-added digital companies. And all too usually I’ve heard, I did not know Xerox might do this. To leverage this chance and drive income progress, we’re taking a extra holistic client-centric strategy to bettering buyer outcomes by delivering important services and products which can be carefully aligned with our purchasers’ wants. The present macro backdrop performs to our benefit on this regard as our IT and digital companies are designed to extend productiveness by lowering the associated fee and complexity related to purchasers’ know-how and doc workflows. Additional, it’s obvious from our market analysis that Xerox has a transparent path to win extra enterprise inside the IT and Digital Service markets due to the belief we now have constructed over time, offering worth to our purchasers.
We’re assured our model and shopper relationships could be leveraged to develop our penetration of pockets share, and we’re assured in our capability to develop shopper TAM over time as we spend money on and develop new forms of digital companies for a hybrid office and distributed workforce. An instance of our capability to extend pockets share is the current renewal and addition of companies at a big telecom operator in Canada. This shopper, like many, is adapting to the complexities related to a hybrid office. Leveraging our deep relationships throughout the corporate, we took a holistic strategy to tailoring a set of print and digital companies that may assist them within the hybrid transition and enhance general productiveness. We additionally included superior analytics for print administration, digital mail, to convey pace, safety and value financial savings to their mail and service operations and superior software program options to streamline and improve their manufacturing print operations.
By leveraging {our relationships} and portfolio of choices, we’re capable of drive buyer success whereas rising our annual contract worth by double-digit charge. One other precedence for 2023 is the continued concentrate on profitability. Since 2018, Challenge Personal It has been a cornerstone of our transformation efforts and a focus for the optimization of our price base. We reached our 2022 focused gross price financial savings of $450 million, bringing complete financial savings since 2018 to greater than $2 billion. Simply as vital as these financial savings, nevertheless, is the administration working system, the set of disciplines round measuring and monitoring enterprise processes that was instilled in our organizational tradition by Challenge Personal It. We don’t plan to offer annual financial savings targets going ahead, however the behaviors engendered by this system will support in our steady effort to implement a extra versatile price base and working mannequin.
Simply as we are going to make it simpler to do enterprise with Xerox, we are going to make it simpler to do enterprise inside Xerox by investing in processes that drive incremental organizational efficiencies and allow the forms of collaboration required to supply holistic options to our purchasers. The present macroeconomic atmosphere necessitates a higher focus and scrutiny on the profitability of our choices and working models. Accordingly, we now have turn into extra disciplined about the place and the way we do enterprise, putting emphasis on metrics akin to return on funding and the era of revenue, not simply income {dollars}. This self-discipline has already been utilized to our investments in R&D. Up to now few months, we now have taken actions to decrease and in some instances, redirect investments in R&D in direction of tasks with extra sure and near-term returns.
We exited our three way partnership Eloque and pared progress investments in 3D printing. Novity and Mojave, 2 profitable companies incubated at PARC have been spun out, permitting these companies the liberty and suppleness to draw exterior progress capital at their very own tempo. To be clear, investments in innovation stay a precedence at Xerox, however will likely be extra centered on tasks and partnerships that increase our current strengths and alternatives inside print, IT and digital companies. Lastly, we are going to proceed to prioritize shareholder returns, a higher concentrate on buyer success and profitability will naturally end in larger earnings, however we additionally stay laser-focused on money move era. Regardless of a robust end to the 12 months, free money move in 2022 fell beneath our preliminary expectations.
2022 was an anomaly, not a pattern. Past anticipated enhancements in profitability for 2023, we now have already taken steps to enhance our capability to generate extra free money move per revenue {dollars}, akin to FITTLE’s receivable funding settlement. We additionally stay centered on bettering working capital and count on enhancements in stock effectivity in 2023 as provide chain situations normalize. Every of those priorities, buyer success, profitability and shareholder returns will stay cornerstones of our long-term strategic plan. And every of those priorities are mirrored in our full 12 months steerage, which requires steady revenues amid a difficult and risky financial atmosphere and progress in adjusted working revenue margin and free money move, the main points of which Xavier will present.
To recap, 22 was a difficult 12 months, one which examined the resolve of our staff and the power of our enterprise mannequin. The teachings realized from overcoming these challenges will serve us nicely as we execute on our strategic priorities for the 12 months. And these priorities will finally type the muse of a long-term plan for delivering sustainable progress in earnings. I’ll now hand over to Xavier.
Xavier Heiss: Thanks, Steve, and good morning, everybody. As Steve talked about, 2022 was a difficult 12 months on numerous fronts. Income and profitability have been impacted by surging inflation, provide chain challenges, forex disruption, the warfare in Ukraine, larger rate of interest and as a consequence an unsure and unpredictable macroeconomic atmosphere. Encouragingly, we ended the 12 months stronger with full 12 months income exceeding our preliminary steerage of not less than $7.1 billion, regardless of greater than $250 million of forex headwinds and a greater than $90 million headwinds from halting gross sales to Russia. Adjusting working margin improved sequentially every quarter this 12 months and grew 440 foundation factors year-over-year in This fall, due largely to improved product availability.
Full 12 months of free money move exceeded our revised steerage, and we put in place a funding answer at FITTLE that may enhance future free money move era whereas supporting FITTLE’s progress. This fall income grew in precise and fixed forex for the primary time since quarter 2 of 2021 as a consequence of resilient demand for our product and companies and enhancements in product provides and blend. Income progress of 9.2% at precise forex was negatively impacted by 470 foundation factors of forex headwind, notably the euro and British pound. Tools income grew considerably, reaching its highest stage since This fall of 2019 as a consequence of an enchancment in provide chain situations. In consequence, our backlog, together with tools on IT {hardware}, declined 43% sequentially to $246 million.
Our backlog stays elevated, nevertheless it’s wholesome. We count on backlog to say no via the primary half of the 12 months as provide chain situations additional normalize. Publish-sale income grew mid-single digit in fixed forex for the fourth consecutive quarter. Development this quarter was pushed by IT companies, which incorporates the acquisition of Powerland and consumable. The resiliency of contractual print companies income was noticed once more this quarter, aided by current pricing motion and the acquisition of Go Encourage. Turning to profitability. Earnings have been larger year-over-year, pushed primarily by higher tools gross sales, improved product and geography combine and decrease logistics prices, partially offset by larger unhealthy debt expense. We count on profitability to enhance additional in 2023 as we notice the good thing about worth and value motion taken in 2022, additional enchancment in product availability, decrease logistic price and extra working effectivity.
Photograph by Financial institution Phrom on Unsplash
Gross margin improved 190 foundation factors over the prior 12 months quarter, primarily pushed by a positive shift in product and geography combine, decrease provide chain-related prices and profit related to worth and value actions taken all year long, partially offset by ongoing product price will increase and the impact of current acquisitions. OpEx, excluding unhealthy debt expense, was decrease year-over-year as a consequence of our concentrate on improved return on R&D funding and Challenge Personal It motion. Adjusted working margin of 9.2% elevated 440 foundation factors year-over-year, pushed by 300 foundation factors of provide chain-related price enchancment, 130 foundation factors from price reductions motion and 100 foundation factors from worth enhance on forex. Partially offsetting this profit have been larger unhealthy debt expense related to the discharge of reserve within the prior 12 months.
Different expense web have been $7 million decrease year-over-year as a consequence of a $39 million profit from gross sales of noncore enterprise belongings, partially offset by a rise in nonservice retirement-related prices and better forex losses as a consequence of forex volatility in sure geographies. Fourth quarter adjusted tax charge was 21.8% in comparison with minus 8.8% final 12 months. The rise was largely as a consequence of prior tax profit for modifications within the remeasurement of unsure tax place. Adjusted EPS of $0.89 within the fourth quarter was $0.55 larger than the prior 12 months, pushed by larger adjusted working revenue, gross sales of noncore belongings and a decrease share depend, partially offset by the next tax charge. GAAP earnings per share of $0.74, was $4.71 larger, primarily as a consequence of a noncash goodwill impairment cost of $750 million or $4.38 per share within the prior 12 months.
Let me now overview income, money move and profitability in additional particulars. Turning to income. Tools gross sales of $554 million in This fall, grew 49% year-over-year in fixed forex or 44% in precise forex. Development was pushed by higher availability of product throughout all classes and areas, significantly for higher-margin A3 gadgets within the Americas area. The sequential progress in tools income mirrors the decline in tools backlog, revealing a resilient order exercise amid an unsure macroeconomic backdrop. We proceed to see specific power in demand for our A3 workplace machines. Tools income progress outpaced set up this quarter as a consequence of favorable product combine and the good thing about current pricing actions. Set up progress was strongest for higher-margin mid-range product and Shade A4 multifunction tools.
Shade A4 outperformed Black & White as a consequence of a cease in cargo of A4 mono product to Russia and provide scarcity. Publish-sales income of $1.39 billion, grew 4.2% in fixed forex year-over-year and declined 0.4% in precise forex. Publish-sales progress in fixed forex was pushed by IT companies, together with profit related to the current acquisition of Powerland in Canada and progress in consumable. Contractual print companies income was resilient and grew low single digit year-over-year in fixed forex, reflecting good thing about current pricing motion and the acquisition of Go Encourage. Notably, this vital element of our annuity income grew modestly in 2022, regardless of a slower-than-expected return of staff to workplaces and ongoing macroeconomic concern.
We consider we now have now reached a normalized stage for this income stream. Development in post-sales income at fixed forex was partially offset by decrease financing income, reflecting a decrease FITTLE receivable steadiness. Geographically, each areas grew in fixed forex. The Americas area grew sooner than EMEA due primarily to raised product availability and blend in addition to stronger progress in consumable gross sales. Let’s now overview money move. Free money move was $168 million in This fall, decrease year-over-year by $14 million. Working money move was $186 million in This fall in comparison with $198 million within the prior 12 months. Working capital was a supply of money of $73 million this quarter, $120 million decrease than the prior 12 months, pushed by larger accounts receivable on the usage of money to place inventories forward of Q1, partially offset by the next account payable.
Moreover, money used to fund finance receivable and working lease was $169 million within the quarter in comparison with a use of money of $50 million within the prior 12 months, reflecting improved tools gross sales exercise and FITTLE progress technique. Positively offsetting this impact have been larger working revenue within the present quarter and favorable timing of different legal responsibility cost. Going ahead, we count on FITTLE receivable funding settlement to end in finance receivable being a supply of money as new originations are more and more funded by third-party financing accomplice whereas assortment runoff of current receivables continues. Investing actions have been a supply of money of $17 million in comparison with a use of money of $31 million within the prior 12 months due largely to an asset sale within the present quarter, partially offset by barely larger CapEx, which primarily help our investments in IT infrastructure.
Financing actions consumed $67 million of money this quarter, which is comprised of dividend cost on the early cost of a portion of our 2023 notes, netted by proceeds from finance receivable securitizations. In the course of the quarter, we paid dividend totaling $43 million and didn’t repurchase any shares. Turning to profitability. Quarter 4 adjusted working revenue margin grew considerably on a sequential year-over-year foundation for the explanations beforehand mentioned. Importantly, margin expanded sequentially every quarter this 12 months as we took corrective measure to offset an unprecedented stage of inflationary stress and ongoing provide chain challenges. We efficiently applied worth will increase throughout our portfolio of services and products and took motion to rein in prices, most notably, throughout areas of funding the place the anticipated payback interval prolong throughout a number of years or was much less sure.
Many of those actions have been reflecting within the achievement of our focused Challenge Personal It financial savings of $450 million. As Steve famous, we’ll not be offering our focused financial savings quantity for 2023, however the precept of steady enchancment and working effectivity instilled by Challenge Personal It’ll play an vital position in driving anticipated margin enchancment in 2023 and past. Turning to phase. In This fall, FITTLE finance belongings have been $3.3 billion, up 7% sequentially in precise forex. FITTLE origination quantity grew greater than 40% year-over-year. Each noncaptive channel origination, which incorporates third-party sellers and non-Xerox vendor and captive product origination grew greater than 40%, a perform of progress in new seller relationships and third-party tools origination in addition to larger Xerox tools for lease.
FITTLE income declined 9.6% in This fall, primarily as a consequence of a discount in working lease income, which replicate decrease tools put in in prior durations. Phase revenue was minus $5 million, down $30 million year-over-year as a consequence of a reserve launch of $12 million within the prior 12 months quarter, decrease web financing revenue, larger intersegment fee related to larger Xerox origination, larger unhealthy debt bills and strategic start-up price on funding. Phase margin was adverse 3.4% in comparison with optimistic 15.2% a 12 months in the past. Over time, we count on present and future receivable funding answer to end in decrease financing income and revenue for FITTLE, which will likely be partially offset by progress in fee-based fee and servicing income. Nevertheless, in 2023, we don’t count on a fabric change in FITTLE income or revenue as decrease finance income will likely be offset by larger upfront fee and decrease unhealthy debt expense.
Print and Different income grew 10.2% in This fall. Print and Different phase revenue tripled over the prior 12 months quarter, ensuing within the 640-basis level growth in phase revenue margin year-over-year, pushed by improved product provides and blend and the good thing about worth and value actions taken all year long. I might prefer to spend a while now to debate how FITTLE just lately receivable funding association is anticipating to have an effect on free money move for the 12 months. The settlement Xerox and FITTLE signed with an affiliate of HPS Funding Companions contemplates gross sales of FITTLE lease receivable of round $600 million in 2023. This quantity may have in any other case been funded by Xerox, so this discount in our funding obligation will end in a direct profit to working money move.
Nevertheless, this profit is anticipated to be partially offset by progress in our lease receivable portfolio. When contemplating the year-over-year change in free money move, the web receivable funding profit will likely be additive to free money move. Extra settlement overlaying U.S. non-direct controlling receivables usually are not included in steerage however would additional enhance anticipated free money move for the 12 months. Receivable funding agreements are anticipated to contribute to free money move for a number of years, however at a lowering stage because of the timing of prior lease receivable runoff. Turning to capital construction. We ended This fall with $1.1 billion of money, money equivalents and restricted money. $2.9 billion of the $3.7 billion of our excellent debt is allotted to — onto FITTLE lease portfolio.
The remaining debt of round $800 million is attributable to the core enterprise. Debt consists of senior unsecured bond and finance asset securitization. We now have a balanced bond maturity ladder over the following few years and count on to repay the remaining $300 million of debt maturing this 12 months in March 2023. Lastly, I’ll deal with steerage. We count on income to be flat to down low single digit in fixed forex in 2023. As famous earlier, demand for our portfolio of merchandise and repair stay resilient, significantly for our most materials and worthwhile A3 workplace gadgets. Contractual print companies income, our largest contributor to post-sales income, is anticipated to stay regular. Whereas we now have not but skilled a significant pullback in demand for our product or companies as a consequence of macroeconomic stress, our income outlook does account for a possible deterioration in macroeconomic situations.
If financial situations have been to degrade additional, we consider the almost definitely impact will likely be delays in tools purchases or service implementations, not cancellation or order discount and issue implementing future worth will increase. Offsetting these dangers are the annuity-like nature of our post-sell enterprise on the countercyclicality of lots of our IT and digital companies for which demand is anticipated to extend even when IT budgets are rationalized. This 12 months, we’re reinstituting steerage for adjusted working revenue margin. For the 12 months, we count on adjusted working revenue margin to be not less than 4.7%, an 80-basis level enhance over 2022 stage, pushed by current enacted and anticipated worth and value motion in addition to decrease logistic prices. We count on to generate not less than $500 million of free money move, together with the good thing about FITTLE receivable funding answer.
Excluding the web good thing about the receivable funding answer, we count on free money move to be within the vary of 90% to 100% of adjusted working revenue. Lastly, our coverage of returning not less than 50% of free money move to shareholders stay unchanged. Whereas we don’t present quarterly steerage, I wish to present some colour on the anticipated quarterly cadence of our end result. First, on income, tools gross sales progress is anticipated to be larger within the first half as a consequence of simpler products-to-price evaluate. And presently, we don’t count on a big deviation within the quarterly progress charge of post-sales income. For adjusted working margin, we count on sequential enchancment in margin after quarter 1 and year-over-year enhance in margin in quarter 1 to quarter 3.
The sequential enchancment displays regular seasonality, the clearing of the remaining backlog and the cumulative impact of decrease R&D spend, which is anticipated to profit margin within the second half relative to the primary half. Lastly, free money move. The money move good thing about the receivable funding association are anticipated to be realized all year long at roughly the identical cadence as tools gross sales income. We’ll now open the road for Q&A.
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