Q3 2020 Xerox Holdings Corp Earnings Call

October 27, 2020

[music].

Good morning, and welcome to the Xerox Holdings Corporation third.

When it's when the earnings release conference call hosted by John Byzantine Vice Chairman and Chief Executive Officer. He is joined by Xavi Heis interim Chief Financial Officer. During this call Xerox executives will refer to slides that are available on the web at www Dot Xerox Dot com forward slash.

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.

To answer your questions at that time. Please press star one at any time. During this call you can withdraw your question by pressing the pound key.

During this call or questions at that time. Please press star one at any time. During this call you can withdraw your question by pressing the pound key.

During this 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.

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. Byzantine Mr. Byzantine you may begin.

Good morning, and thank you for joining our Q3 2020 earnings call.

I hope everyone is safe and healthy.

For the third quarter revenue totaled $1.77 billion down 19.7% in constant currency year over year and up 302 million from last quarter free cash flow was $88 million down $243 million year over year and up $73 million.

From the second quarter.

Adjusted earnings per share totaled 48 cents down 32 cents year over year and up 33 cents from the second quarter.

Adjusted operating margin was 7.4% down 460 basis points year over year, and up 320 basis points from the second quarter.

I couldn't be more proud of our team.

With all this year are thrown at US. The team has remained steadfast and determined to provide exceptional support to our clients while driving our transformation forward.

The third quarter results reflect the agility of our business and the team is laser focused on xerox's for strategic initiatives.

Optimize operations drive revenue Reenergized, the innovation engine and our focus on cash flow and increasing capital returns, let's walk through each area.

Project owned it Hasnt still the strong sense of discipline and responsibility throughout the company.

Please at all levels I understand the need to make smart decisions that drive continuous operational improvements while preserving cash.

That's been especially true during the pandemic.

This foundation enabled us to react quickly to the business impacts while continuing to invest in the future.

Project own it provides the framework to strike that balance while positioning us to deliver at least 450 million and gross savings this year.

We have taken and will continue to take actions focused on discretionary spending as needed.

The company's flexible cost structure gives us confidence we are well positioned to manage the business through the pandemics uncertainty.

We're investing in a number of areas that are making us more efficient and better able to serve our clients, including supply chain robotic process automation and analytics.

For instance, we use predictive analytics to anticipate customers future print needs and ensure devices and services are optimally positioned.

In the third quarter, our robotic process automation team oversaw a one and a half million transactions, that's up 300% year over year.

We expect to see a similar increase over the next 18 months.

Pandemic has spurred new opportunities for growth across our portfolio of businesses balance their workforce needs.

While companies plan to return many of their employees to a workplace once it's safe.

They are adopting more flexible work policies and the technologies to say.

The office has never been a stagnant place it has evolved over decades and will continue to do so in the future.

And Xerox will remain an important partner in that evolution focused on providing security collaboration and productivity for businesses Big too small.

Highlights from this quarter included.

As more businesses reopened in Q3, we saw print volumes and demand for printing devices increased compared to Q2.

Assign pre pandemic behaviors resumed as people return to the workplace.

This uptick helped drive the improvement in our rate of revenue decline compared to the last quarter.

And the Americas, we maintain the overall market share leadership for equipment sales revenue. According to the most recent ITC data.

In production, we grew market share in the areas Xerox serves.

Our ball Toro Inkjet press remains unmatched in the marketplace.

Demand for this kras is strong with installs up year over year.

Demand by customers, who provide essential services such as the government healthcare organizations and schools remains strong.

IP services grew year over year in the third quarter demonstrated increased needs of smbs to protect their infrastructure and customers critical data.

Within our service portfolio, we grew new business signings and renewals year over year.

Digital hub and cloud print and capture and content are key drivers of this growth as they allow clients to manage content no matter, where they are working.

There is a strong pipeline for these services for the remainder of the year.

Security and investments in new technology are helping drive demand for Xerox products and services as company support remote workers and business increasingly is conducted online.

Cyber criminals are seeking to exploit security gaps at enterprises, and small and medium size businesses during the pandemic.

For employees working remotely and using their own personal devices companies, often don't know what is being printed and whether that devices secure xerox devices at an additional level of security as they are arm to help the tech that prevents malicious attacks the proliferation of malware and misuse of unauthorized access to.

Renters.

By expanding our intelligent workplace services to their home, we are providing existing clients with the protection they need.

Similarly investments in software such as document sharing go are bridging to home and office.

Go is a new cloud based content management platform that uses artificial intelligence and machine learning to organize content allows users to collaborate on files and optimize workflows.

With enterprise grade security, it's designed with the small business user in mind.

Uses a simple SAS pay as you go model and can be set up within minutes.

Enhancements to the doctor's share portfolio hover in Xerox industry recognition.

Most recently dark you share received a gold award and the enterprise content management category from Infotech Research Group. This award is determined based on end user feedback on the southwest features service and innovation among other things.

We expect to build momentum within our software portfolio as companies increasingly need tools to support a hybrid work environment.

Monetizing innovation remains a key focus and the team continued to make progress across the innovation pillars with Threed printing aiotv sensors and solutions and clean Tech.

In three D., we are on track to launch the first version of the liquid metal Threed printer. This product will print aluminum four 008, which is an alloy used in multiple industries and will produce prototype thing preproduction and specific end use parts I wrote.

Matt includes expanding the range of metal alloys that we can print, enabling us to meet the needs of a broader set of applications and parts overtime we.

We are making progress and I would see and have been awarded contracts for external pilots with select customers.

For example, we are working with the defense Advanced research projects agency known as DARPA on the Ocean of things a project to expand what scientists know about the seas.

DARPA is deploying small low cost the drifters, and the southern California bite and Gulf of Mexico to collect data on the environment and human impact.

Park built drifters for the first phase of the project and will deliver up to 10000 more that are more compact and cost effective for the next phase.

Data gained in this round will help further optimize the final design at which point DARPA expects to deploy large volumes of these drifters.

In clean Tech the team is on track to complete the prototype and 2021 that has the potential to cut energy consumption of air conditioners by up to 80% reduce greenhouse gas emissions and improve indoor air quality in the buildings.

This is all while reducing energy bills for businesses and individuals.

In healthcare, we access the demand for hand, sanitizer, disinfecting solutions and ventilators on a quarterly basis.

All require little Capex.

As we said at the onset of the health crisis. These initiatives are about helping save lives and we will keep doing this as long as there's a need.

While investments in our innovation pillars, our longer term plays the revenue and client engagements are promising.

In the third quarter, we strengthened the company's liquidity ending the quarter with approximately 3.3 billion of cash cash equivalents and restricted cash and a 1.8 billion undrawn revolver.

In the quarter, we refinance all of our outstanding 2020 debt maturities and in October we prepaid a portion of our 2021 debt we.

We did this using proceeds from issuing 1.5 billion of new senior unsecured bonds and a receivable securitization.

As a result, the company has only modest debt coming due for the next two years.

We continue to evaluate acquisition targets large and small using our established M&A playbook that focuses on ROI and IR are among other things.

We completed a $150 million of share repurchases in the third quarter and plan to complete at least another $150 million in the fourth quarter.

We remain committed to our shareholders return policy of returning at least 50% of annual free cash flow to shareholders and maintaining the companys current dividend rate.

I covered many of these frequently asked questions in my earlier comments, but I will recap a few key points.

Our financial results improved sequentially, while this isn't a measure we generally use and there's another data point to understand how we are managing through the pandemic and its impact.

While we can't reliably predict what happens next we have modeled numerous scenarios the.

The company's flexible cost structure and discipline allow us to manage the business smartly through this crisis.

Strategic investments in Xerox's core adjacent and new areas are focused on addressing client needs today and tomorrow.

These and other actions position Xerox to emerge from this time in a position of strength.

I want to spend a moment on corporate social responsibility.

While managing the effects of the pandemic, we raise the bar on ourselves to contribute to a better more sustainable future Xerox has long been recognized as a leader in diversity and inclusion.

Knowing there's more all of us can do.

We created a new diversity and inclusion roadmap to increase our impact both within Xerox and our communities.

Another area, we committed to do more with on greenhouse gas emissions.

Having reached a 2025 goals six years early in 2019, we plan to achieve carbon neutrality, no later than 2040 and reduce emissions by at least 60% by 2030.

The teams work and Xerox the title one of the most sustainably manage companies in the world by the Wall Street Journal additional information is available in Xerox's recently published CSR report on Xerox Dotcom.

Before asking Xavi to review the financials, let me share some details on his background.

The veteran of Xerox. He has held a number of leadership positions in finance business transformation and sales in fact these for his promotion to president of EMEA operations Xavi served as our corporate controller and CFO of the Americas operations.

Zambia work closely with Bill and served as an executive Committee member.

He is well positioned to lead us through this transition.

Got it.

So in Q4 was the introduction John also our business continues to be impacted by could lead 19 revenue improved compared to the second quarter in all regions and businesses began to gradually reopened on them. Please return to the workplace, resulting in more of the hybrid work on their own.

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This increased activity enabler to how your equipment installations on clean PBT tooling renewal where rate of decline in creep page volumes sequence your cost savings from our web project only transformation program as well as savings from DTT actions to preach to have cash that focused on this.

Christian Ben Hi, Tim in response to Depomed Aneek.

We generated 88 million of free cash flow into quarter on 253 million year to date, and we maintain our commitment to shareholder returns, we understand 50 million of share repurchase disease on 61 million in dividends paid in quarter three.

We ended the quarter, we point 3 billion of cash cash equivalent and restricted cash.

We also strengthened our balance sheet and improve liquidity in the quarter by refinancing approximately 1 billion of debt that matures in Twentytwenty and in October we pre paid 750 million of 1.1 billion bond.

That matures in May Twentytwenty one.

Our 1.8 billion, we will advance that mature in August Twentytwenty, two remains undrawn looking at our third quarter financial results.

Total revenue of approximately one point 77 billion each quarter declined 19.7% at constant currency year over year.

Later on.

302 million above second quarter to 420 million decline in revenue year over year reflect the impact of 19, which has resulted in business clearly here on has limited the number of people returning to place see decline in revenue as moderated compared to the second quarter.

Which I will speak about in more detail shortly.

Looking at profitability to yield ratio was on Michigan's present, it continued to be impacted by the decline in revenue, resulting from covered 90.

Adjusted operating margin of 7.4% was 460 basis point lower year over year on 320 basis points above second quarter.

We continue to partially mitigate the impact of revenue decline with cost reduction from project only on from owner actions implemented hasn't reached our touch upon the unique which include cost relief from Tempur recall government assistance programs separately after the enabler to less in quarters.

Gross margin was 56.8% a decrease of 320 basis point year over year on year. So.

The decline reflects lower revenue price promotion investment transaction currency on targets that were partially offset by benefit from project or.

Government assistant program on additional cost actions.

So as a percentage of revenue increased 170 basis points year over year as accelerated revenue declines from the funding mix more than offset so productivity benefits from project Onep on older discretionary expense reduction.

Bad debt expense increased by $3 million in the quarter compared to second quarter 2019.

One bad debt reserve for our trade on final tissue Board in line with our models.

Andy any as a percentage of revenue was 30 basis points lower year over year.

And the only cost reduction included savings from actions taken to simplify our core technology portfolio benefited from temporary cost reduction actions onto favorable timing of investment.

These savings were partially offset by higher investment in our focused innovation area, where we continue to make progress but was there any expenses net was a credit of 15 million, which was 14 million better than prior year, primarily due to a gain from the Knesset sales as well as the.

Lower non service retirement related costs, reflecting lower discount rates on the decrease in pension settlements.

Our third quarter adjusted tax rate was 21.1% compared to 27.3% in the prior year, primarily due to the geographic mix of profit as well as the impact of discrete items on lower pre tax income.

Adjusted EPS of 14 cents or 72 cents lower than the same quarter last year, driven by the impact of COVID-19, which more than offset the benefit from cost reductions revenue.

Our tax rate underwear shares.

It was just 33 cents increase compared to second quarter GAAP EPS of 41 cents per share was 27 cents lower year over year, including 72 cents decline in adjusted EPS on a year over year decline in non-GAAP adjusted Hi, Tim.

Non-GAAP adjusted to EPS include restructuring unrated cost the amortization of intangible assets non SAP. These retirement related cost on transaction related costs net as well as the income tax on zoos adjustment.

In quarter suite, we recorded 20 million of restructuring and related cost compared to 27 million in the second quarter last year now.

Next I will discuss cash flow.

Just third quarter, we generated on that from 6 million of operating cash flow from continuing operation, which was down 242 million from prior year on up $72 million from the second quarter.

So the year over year decline is primarily driven by lower net income on the use of cash from working capital, which was partially offset by an increase in cash from real where finance asset.

Cash from working capital was under 243 million lower than prior year due to the lower cash from accounts receivable and inventory that was partially offset by an increase in cash from accounts payable.

The change in cash from accounts receivable is primarily a result of higher quarter over quarter revenue compared to last year, while the change in cash from inventory reflects lower sales volumes delayed equipment installation on lower purchases from indirect channel partner will continue to manage.

Our liquidity as they work towards a polemic.

While our indirect partner increased the level of purchases compared to last quarter to meet demand they are managing inventory levels cruising.

The increase in cash from accounts payable is primarily due to the timing of payments to vendors.

Restricted payment of 11 million were 6 million lower than prior year.

Capex was 18 million into quarter on free cash flow was 88 million we.

We expect capex to be in line with prior guidance for full year Twentytwenty supporting our strategic growth programs, including continued investment in our it infrastructure.

So we'll know acquisition in the quarter Oliver we continue to assess our pipeline of tuck in acquisition on strategy M&A as.

As a reminder, we spend another 93 million in Q1 to expand our SMB strategy internationally, and we expect full year spend for tuck in M&A will be in line with prior guidance.

We didn't financing cash flow, we issued 1.5 billion of unsecured bond in August on closer to 340 million securitization of finance assets in July.

Proceeds from the bones on securitization were used to refinance our 2020 debt maturities of approximately 1 billion. We returned 211 million to shareholders in the quarter, including 61 million in dividends on on that on 50 million in share repurchases.

And we'll be to repurchase at least 300 million of share this year.

We ended the quarter with 3.3 billion of cash cash equivalent on restricted cash which include seven.

750 million of cash proceeds from our August bond insurance, which was used in October to prepay a portion of 1.1 billion bonds that mature in May Twentytwenty one.

Turning to slide eight I will review revenue in more detail.

Second quarter revenue declined 19.7% at constant currency.

The impact of COVID-19 on our business is still sizeable but less profound compared to Q2.

Total revenue was approximately 300 million high year sequentially, we saw improvement in the rate of decline in equipment sent on post sales revenue in both the Americas on EMEA.

This is consistent with a gradual are reopening of business on and per year wrote turning to the workplace sat enabler equipment sales on installation on drove an increase in print volumes sequentially.

In addition, we had 52% increase in store of our low end black and White entry April MSP devices.

Which is partly driven by print demand in the hybrid work undetermined.

In EMEA, which has a larger indirect channel compared to the U.S.. We saw an increase in purchases from channel partner. However, they continue to monitor their liquidity I'll now closely managing inventory levels.

In North America. We also saw sequential improvement, we do need TBS on indirect partners on performance remained strong in government customer within large enterprise.

Equipment sales revenue was down 16.1% in constant currency compared to a decline of 38% last quarter improvement in the year reflect increased demand of entry product on sales of mid range of products, including inorganic revenue from the UK based ddrs acquired in.

The first quarter of this year.

In the U.S. So there was a softening in the decline in revenue within our SBS on indirect channel due to the opening of more business in the quarter compared to last quarter.

Why a large enterprise continue to see year over year growth intends to federal government customer will be less impacted by the country mix compared to commercial customer.

We didn't see America Latin America continues to suffer as Locdown FCC more broadly.

Looking at product categories activity, improving all segment compared to second quarter mid.

Retrench product, mostly used in shale workplaces on therefore, we are most impacted by of his crew here in quarter two on in quarter three.

However in quarter three we did see strong demand for our recently launched prime lean devices on our new generation outstanding Connectkey devices on higher sales to government customers in the us in this category.

In the high end cars 19 continues to impact demand for our production cost or product, including the advancement entry production color system on every desk production price, where installers decline year over year.

This decline was partially offset by continued strength in demand for our cut sheet inkjet system back to rule, which is doing well in EMEA on the Emory guest.

In entry, we saw strong demand for our April black and white devices in both EMEA on Zika Americas, which is in part a result of the hybrid work under government push.

Sales revenue declined 20.7% in constant currency in the quarter compared to 33.6% last quarter, reflecting upon the mix impact on business opening on employees gradually returning to the workplace.

Our post sales revenue is largely contract youre on most of our contract include minimum fixed charge on a vibrant charger based upon print volume.

We saw a sequential improvement in the rate of decline in post sense from Q2, which is in part due to a moderation in the rate of decline in page volume as more business reopened.

Post sales also include unbundled supplies paper on order sales, which are largely sold through our indirect channel.

Sales of unbundled supplies paper on Poser declined 20.2% in the quarter compared to a decline of approximately 48% last quarter when inventory purchase from indirect channel. We are greatly reduced in response to lower demand as a result of the company.

We expect channel partner, we continue to closely monitor their purchases until they reach a stable recovery in page volume.

Revenue from IP services are also recorded imposed sense on grew during the quarter in both our CBS channel in the U.S. on from recently acquired dinner outside the U.S.

Xerox services revenue declined 21.3% year over year in constant currency compared to 28.2% decline last quarter covered.

Well the 19 continued to impact the timing of customer purchasing decision, but we are seeing positive signs in our services business, including an increase in new business signing on an increase in our revenue will win rate in quarter three specifically for digital.

On cloud print services on content management.

Our new business pipeline remains strong on these up in both America, and EMEA, which continues to give us confidence that our business will continue to improve as the economy with bonds.

Next onto slide nine on our profitability on earnings.

Adjusted operating margin was 7.4% in the quarter, which was 460 basis points lower year over year, but improved 320 basis points from the second quarter. So.

The second trial improvement reflects a moderation in the rate of decline in revenue as well as continued focus on cost reduction to our project on the program on cash preservation action focused on discretionary items that are helping to mitigate the impact of covered 90, we expect product.

Only if we deliver at least 150 million of gross cost savings. This year. In addition to around 1 billion of gross cost savings since its inception in mid 2018.

He actions developed and executed under project Onep and help to transform our business to be in a position to react quickly to this year's event, which contributed to delivering positive earnings.

In addition to protect Puneet, we are continuing actions focused on discretionary spend which includes the use of theft and temporary government program to provide cost relief, while minimizing the impact on our employees. We will continue to utilize assistance as available in the fourth quarter.

Adjusted EPS of 14 cents declined 62 cents year over year or second shows shortage, we sent improvement from last quarter. As a result of the impact of COVID-19 on our operation, which more than offset the benefit from cost reduction and a lower tax rate on lower share.

Let's turn to slide 10 on a review of our capital structure.

In the third quarter, we took actions that significantly increased our liquidity position.

We refinanced approximately 1 billion of Twentytwenty debt maturities with new five and eight year senior unsecured bonds owned is 340 million private securitization of our us finance receivables.

Our bond issuance was very well received on we raised 1.5 billion in profit.

In October we use the remaining bone proceed to prepaid 750 million of 1.1 billion bond that matures in May Twentytwenty one for.

During this prepayment our debt balance remained 4.3 billion flat from year end on we now have only around 300 million of senior unsecured debt maturing in 2021 on Monday debt maturities, who 2020 two.

3 billion of our total debt to support customer financing activities on therefore, we break down our debt between financing debt Oncomed that final.

Financing debt these allocating buy airplanes seven to one leverage to our finance receivables on equipment on operating lease, which together comprise our total finance asset to remaining debt is our debt, which was around $2.1 billion at that time of the quarter on the we ended the quarter.

It was around 3.3 billion of cash cash equivalent unrestricted cash we put us in a net cash position of around 1.2 billion when knitting cash gains caught that.

Our pension funded status is updated annually on as of December 31st 2019, our net unfunded pension liability was 1.2 billion, which include around 850 million of unfunded pension liabilities for plan that by design or not.

Funded.

In 2019, we contributed 141 million two worldwide pension plans on expect Twentytwenty contribution will be in line with prior guidance. We have 1.8 billion bunker revolver, which is fully available to us on as I. Just mentioned we ended the quarter.

With approximately 3.3 billion of cash cash equivalents on restricted cash.

Lastly, turning to slide 11, I will wrap up.

Expected to slow gradual recovery in the second half under our base scenario.

While our business improved quarter over quarter, we remain cautious moderating multiple can argue given the uncertainty around the pandemic on its recent studies around two groups.

We do not anticipate a recovery in our revenue to preclude 19 levels. This year, having said that we have identified levers that can be action to manage to a nail and get good recovery if required.

Under the numerous recovery scenario, we have modeler, we expect to deliver positive free cash flow and earnings in the fourth quarter, but.

But given the level of uncertainty around the pandemic, we are not providing more specific financial guidance for 2020.

Regarding capital allocation, we strengthened our balance sheet in the quarter on improved our liquidity by refinancing near term efforts, resulting in modest debt maturing in 2021 and 2022.

Our cash position supports our shareholder return policy.

To return at least 50% of annual free cash flow to shareholders, including dividends on share repurchases and we plan to repurchase at least 150 million of share in the fourth quarter. In addition to the underground 50 million repurchase industrial quarter.

This time, our unprecedented on the Ontario gearbox management team is focused on cash on cost management in order to anticipate scenarios that may develop.

I will now turn it back to John.

Thank you Doug now, let's open the line for questions.

Ladies and gentlemen, once again, if you have a question at this time. Please press Star then one our first question comes from the line of Ananda Baruah from the capital your question. Please.

Hey, Good morning, you guys really appreciate you taking the questions and congrats.

Congrats on continued progress.

I know this probably a lot of questions. So ill try to keep it break the I guess the first is that could you talk you gave good detail about the dsos in sort of high level. It on the environment can you give a little more context on some of the comments that you made.

Around sort of adding and renewing contracts with fortune 500.

You think this is something that has lagged there are people genuinely looking at Ed, yes, sort of putting on projects in doing refreshes that are put on the side and and things like that and then and then along with that is you talked in growing market share in production.

Growing share and entry segment and could you talk to why that is or why you believe thats the case and.

And are there any structural shifts going on they are leading to that and then I have one quick follow up thanks.

Okay. So good morning on them so.

So regarding the audio mountains or when Youre contractor has you know it garik is focused on the setting where people added value contractor to our customers there.

What we see from a renewal point of view its first our renewal rate improved sequentially.

Sequentially quarter over quarter, and though we saw as well you know an uptick in what is our new offerings supporting Cobi 90, specifically all offerings around software on the digital transformation, including digital hub.

On the cloud print services. So good traction company are still looking at the transforming some of their processes and leveraging our offerings there were.

Regarding your market share yes.

You know this is I'd see data quarter two data.

But crowd operating maintain our prediction leadership on both region America on EMEA with I would say significant improvement. There. We are also seeing of this is related to see how could that I agreed welcome. The enrollment. We're also seeing a lot of activity around.

Entry product April printer up there and we are quite unique here by providing under safe secure control on the cost competitive and we are a month, we are providing offerings to customer that's much of equipment.

That's helpful. And then just quickly on free cash flow for December what is what are the different sort of levers and offset.

That could have the free cash flow not be positive, it's usually a strong quarter your strongest free cash for the quarter and your positive this quarter and so what would cause it what are the different levers and what would cause that not today.

Yes. So so as you know is that we have put in place the cost discipline and I would put that finance flexibility in our model.

That give us confidence that we can deliver.

Positive earnings on the free cash flow during quarter four.

One key labor with indices around the you know first delivering you know our earning seven point is on working capital on the we have you know labor here that we have identified on this the team you know reserve currently putting a lot of discipline around improving some of the working capital lever.

Okay. Appreciate it thanks guys.

Thank you.

Thank you. Our next question comes from the line of Matt to profit from Credit Suisse. Your question. Please.

Yes. Thank you.

You guys have started to see customers return to the office were wondering if you could talk about what page volume or usage trends have looked like for those customers compared to pre pandemic level and then looking forward. Just curious if you think a sequential improvement in revenue continues into Q4 and into next year or if you've seen things start to slow down a lot.

But as cases have begun to pick up again around the world.

Yeah.

And then the third another lender.

Matt sorry about that more in there as.

As we want to look at it as we do our modeling we're modeling a modest improvement quarter over quarter and again, we can't model the uncertainty at a pandemic, we really can't predict what is going to look like but I can say that our strategy continues to capture the topline opportunities and I think of where how we.

Go about doing it as companies are in a hybrid environment today.

Requiring technologies that increase productivity and that that's a discussion that goes on while maintaining security security is becoming a big issue in this.

Hybrid environment as well as cost effectiveness.

And we have been investing in these offerings in IP services and that you share grow our intelligent workplace services are capturing content and that's a bit what's allowing us to capture not only renewals, but also new deals going forward.

Okay, and then as my follow up circling back to the prior answer on working capital just wondering if you talk a little bit more about when you think that'll start to reverse particularly on inventory given some of the revenue dynamics and thinking about capital allocation more broadly what are you talking about your ability to.

Maintain this level of buybacks as we head into next year, and how you're sort of weighing M&A versus repurchases going forward.

Okay. So regarding.

Good morning, Matt So regarding working capital as I mentioned it here is.

Our real focus in quarter four as you know that usually sequentially our quarter has like the seasonality.

I don't know if you'll notice this there but the in quarter three quarters, we was our highest quarter from a revenue point of view this year, where usually quarter. Two came other civil into quarter. Four is the best quarter here. So we expect on we have modeled with different models here.

Managing your modeling you use a different outcomes that could happen during the quarter, but we expect quarter four to be a stronger quarter from a revenue point of view the FCS quarter three sequentially. On this will help you know some of these labor that we have been working capital on specifically on the inventory.

An hour and the only thing I would add is that we continue to be opportunistic about M&A. Despite the COVID-19 crisis and we evaluate our pipeline with a disciplined approach looking at IR ROI see cash flow yields and we are looking both at tuck ins and strategic acquisitions, that's ongoing that happens now.

Thank you.

Thank you. Our next question comes from the line of Shannon Cross from Cross Research. Your question. Please.

Hi, Thank you very much John I was wondering if you could talk a bit about.

How you're thinking about the various scenarios, you're modeling and what I'm trying to get at is is there an opportunity for maybe some fundamental changes in how Xerox approaches business you've done certain things you outsourced obviously with global imaging the HD out for back office I'm wondering thinking back to some other things that may be the intelligence.

Over the years as they face some pretty significant revenue challenges.

Maybe maybe more inside sales I don't know changing the way that you approach from a site.

Alright technicians standpoint in a maintenance standpoint, I'm just curious as to maybe you can give us an idea of the scope of our.

What you're looking at and how much flexibility you think there is on the model and then as a fashion.

Yes, so as we're modeling we're modeling all scenarios as you can imagine and if we look at what happened in Q2, we still managed to deliver a positive free cash flow.

We're modeling going forward, we continue to make sure that as part of our modeling we are continuing investments. So if we think of just inside of our business I spoke briefly about our peer in robotics and in the quarter just a robotic process automation, we saw over one and a half million transactions across the organization, that's like 300% in.

This year over year and that's in everything from order to cash for supply chain for human resources to sales were also focused on this whole Doc you share grow I come back to the hybrid environment and what we're seeing as a trend of clients asking for security and cost effectiveness, because we're not modeling everyone going back.

Back to the office in the near future because if that happens we don't need the model that we have it but what we are modeling how we're helping our clients transition and assure that their employees are secure and productive going forward and finally I would say in innovation, we continue to invest in innovation, we're continuing to invest in monetizing the long term innovation and an l.

Areas that gives us a little bit of confidence as we're starting to see contract work. The DARPA contract that we just explain in clean Tech we're going to have a prototype in 2021 that seems to be on track right. Now. So there is a lot of exciting coming into innovation, while we're not anticipating the revenue this year if it helps us.

With the future.

Okay. Thank you and then I'm curious from a.

An equipment standpoint, clearly there are some pressure on margins I assume because of the mix shift more to the lower end devices, but just in general as you talk to your suppliers and think about where pricing is and the environment.

Yes, Hello, how should we think about the ability to hold and margins and.

Also on page volume, how should we think about our cost per page I guess, how should we think about the pricing environment, Eric here, given the weak weak environment that we're in thank you.

Good morning, Shannon there. So as you know it you know we manage very carefully the margin here on them. We are not we called that like me two and beyond where we just have to sell the price of a boxer the equipment that we have come we services there on the we brought on as well.

With the clinic he'll be removed a lot of functionality that our customer required currently into new local government. So all the ability the ability to manage well through on.

The creation of the document has done into currently around here. So the mix change that you mentioned there is you know one of the things that we observe there but at the same time, we manage this year just for you maybe to get inside on those this quarter currency has a little bit of an impact there on the margin.

But from a pressure on the little bit of time reef when you speak about year over year, but also quarter over quarter you with some of the tariffs had an impact too. So we still continue to manage your margin is very strictly here Honda we want to be certain you know to get you those are right for the right price in front of our customers.

Great. Thank you very much.

Thank you. Our next question comes from the line of Paul Coster from JP Morgan Your question. Please.

Yes, thanks for taking my questions just the first one block more entry level product were seems to be doing quite well at moen or into the hybrid model.

How much did you feel like that's got legs to it and how has it changed your sort of go to market motion I mean, some of the fulfillment obviously is going to be to the home and I imagine some of the purchase decisions have shifted to the employee.

In some businesses, perhaps you can just talk us through the book.

Yes, so good morning, Paul.

Good morning, So first thing is that the.

What you call the entry modalities, So April black and White is now becoming part of the new hybrid model. There and then as you know with you to equal you could be up to work from anywhere on the working from home is also a trend that we are seeing zero. However, we are not like in the past and our printing.

Model jail. So we are speaking here about literally what enterprise customers ask us to deliver which is secured by secure means no bullet proof can be or month from a security point of view so.

Company knows at what is been printed have been sent to printer safely printed there on second point a core competency.

Set of machine here by cost competitive is not only the price of the equipment, but also to both sales and the cost of consumable coming we see a good lender. So we see progressive easy shift on this is complementing the offerings that we have currently with our existing set of products there.

To answer your second point regarding your channel inventory.

The good point is that our channel inventory week of inventory and improve from quarter to quarter three on the we see as I mentioned it to our channel partner, making wise decision on cash management. There on we are supporting you know is there.

Okay is there on though we are clearly driving the activity when they had year the endpoint among them with them. There. So generally inventory is not a concern on the we have you know the route to market to enable this new ways of.

Working disagreed on beyond that.

Okay quick follow up for John.

I mentioned youre on certain foods really an expression of your customers uncertainty and in the enterprise space. So no I imagine most of them are sort of making a few suppliers that go along here because we all are but.

How many of them said too we've had a fundamental rethink about the way in which we use princes good or bad so.

So strategic level decision, but you think we should be aware of.

No I would say that the discussions more based on.

I have this workforce for workforce today that remote how do I keep secure otherwise sure what their printing is not going to get me in trouble in the future because it's a lot of information that's out there secondly, the conversation that happens at least at my level and below and is the costs. So.

While at the beginning everybody went running home and acquiring printers in Pcs and all that.

The ones pretty much acquiring their own supplies and there's really no control. So there are two things are looking at so this hybrid environment. We don't know how long it's going to be we don't know what percentage is going to come back to the office fall, but we do know that as this goes on productivity becomes important security becomes important workflows understanding what.

The work flow as becomes important and that's where we've been focusing on with our clients.

In the large enterprise.

SMB same conversation slightly different where they're looking at virtual friends and they are looking at ways that if they have to work from home how do they know what's being what's being workload at home and how to reassure they keep their information that's.

That's a little bit where we're seeing upticks and we've looked at our T. services, and our software and all of them growing quarter over quarter and year over year.

Thank you very much.

Thank you. Our next question comes from the line of Jim Suva from Citigroup. Your question. Please.

Yes. Thank you very much first one clarification question, then kind of a more detailed question on a clarification question on your prepared comments you mentioned keeping the dividend rate where it is some people interpret rate in two different manners. One is a payout rate like as a percent of cash flow generation some people.

Considering as a rate like a yield percentage and some people consider the rate like you currently have I think it's about a dollar per share.

Well, if we could just maybe clarify that and then a more.

Q3 2020 Xerox Holdings Corp Earnings Call

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