Q2 2022 Xerox Holdings Corp Earnings Call

July 26, 2022

Good day, and thank you for standing by and welcome to the <unk> Holding Corporation second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Mr. David <unk>, Vice President of Investor Relations at Xerox Holdings Corporation. Please go ahead.

Good morning, everyone I'm, David <unk>, Vice President and head of Investor Relations at Xerox Holdings Corporation and welcome to the Xerox Holdings Corporation second quarter 2022 earnings release Conference call hosted by steep Andrew Zach interim Chief Executive Officer.

He is joined by <unk>, <unk> Executive Vice President and Chief Financial Officer at the request of Xerox Holdings Corporation. Today's conference call is being recorded other recording <unk> rebroadcast of this call are prohibited without the express permission of Xerox. During this call Xerox executives will refer to slides that are.

Payable on the web at Www Dot Xerox Dot com slash investors and we will make comments that contain forward looking statements, which by their nature address matters that are in the future and are uncertain.

Fuel future financial results may be materially different that those expressed herein at this time I'd like to turn the meeting over to Mr. <unk>.

Good morning, and thank you for joining our Q2 2022 earnings call.

I'd like to begin today's call by acknowledging the passing of our Dear friend and colleague John <unk> team.

As we mourn his loss I am inspired and deeply humbled by how the Xerox family has come together and become stronger.

We will honor John by continuing to execute across the four strategic initiatives. He articulated for returning Xerox to long term sustainable growth and.

And by operating as one cohesive team to help propel us forward.

John instilled in all of US one boat one team mentality and these words will serve as inspiration as we work to fulfill his legacy.

I am honored to have received the confidence of the board to lead this great company.

Summarizing our results for the quarter revenue of $1 75 billion declined two 6% in actual currency and grew one 1% in constant currency.

Adjusted EPS was <unk> 13.

34 cents lower year over year.

Free cash flow was a use of $98 million, which includes the one time contract termination charge of $41 million, we disclosed in last quarter's earnings compared to a source of $198 million in the prior year.

And adjusted operating margin of 2% was lower year over year by 500 basis points.

Revenue was slightly ahead of our expectation and reflects momentum in demand for our products and services notwithstanding a challenging operating environment.

Equipment revenue declined 14, 7% or 11, 4% on constant currency basis.

Supply chain constraints continue to limit our ability to fulfill demand, which remains strong as evidenced by further growth in our equipment order backlog.

Post sale revenue grew one 2% or 5% in constant currency.

This represents a sequential improvement mirroring our recovery and print related activities as employees gradually returning to the office.

Page volumes once again grew modestly this quarter and importantly, we are beginning to see the early benefits of pricing actions, particularly for our transactional goods and service agreements as a result revenue for service agreements outpaced year over year growth in page volumes this quarter.

<unk> revenue also benefited from our faster growing adjacencies.

Services, and digital services, which I will discuss in detail later.

Our margins declined year over year due in large part to a broad based inflationary pressure and supply chain constraints, but we saw a sequential improvement in both gross and operating margins this quarter, reflecting early benefits associated with price increases and project own it.

Savings.

We expect margins to continue to improve in the second half of the year as we realized benefits from additional price increases and cost reductions as well as expected improvements in returning to office trends and supply chain conditions.

<unk> of an economic slowdown have emerged but we do not yet see a slowdown in spending from our clients rather we continue to experience a recovery in demand from post pandemic lows, particularly in equipment sales.

Further our it services and digital services businesses are positioned to benefit from growing levels of investment in digital transformation projects and hybrid workplace solutions, which are far less susceptible to a pullback in spending.

And we are now starting to see signs of supply chain improvements and resilience.

Given the strength in demand, we see across our portfolio of products and services and a line of sight to margin improvement through price increases and cost reductions we are maintaining our 2022 revenue and free cash flow guidance.

As I mentioned earlier, the same four strategic initiatives that have guided us since 2018 opt.

Optimize operations.

Drive revenue.

Monetize innovation and focus on cash flow are expected to lead to sustainable and long term growth.

Last quarter, we increased our targeted project O&M savings for 2022 from 300 million to $450 million, primarily in response to inflationary pressures across our cost base.

Such an undertaking is not done lightly and in some cases requires sacrifice within our organization.

As Chief operating Officer, Xerox, I was responsible for designing and executing project own it which is driven cumulative savings of $1 8 billion from 2018 to 2021.

Project own it is more than cost cutting program, it's a philosophy.

And that philosophy, which includes the principles of continuous improvement and efficiency gains is now firmly established in the culture of Xerox.

We expect that team to achieve this year's savings target because we understand the importance of maintaining profitability and free cash flow regardless of the macroeconomic environment.

Not only for investors, but as a means of preserving the health of our business and enabling our growth strategies.

A key source of future growth for Xerox is a print and services business.

Growth will be driven by an expansion of our leading position in print and managed print services as well as continued investments in our growth Adjacencies.

Services and digital services.

In Q2, we continued to deliver the most advanced services and solutions portfolio for our customers.

And equipment, our connect key offerings lead the industry driving strong demand and growth in our backlog for end to end workplace solutions.

A four color installs grew significantly which is a key driver of profit from suppliers.

And production color had good performance in both the zero graphic and inkjet categories due to better product availability led by era desk and del Toro.

And managed print services, we were recently recognized by industry experts co circa.

As a clear leader in cloud print services.

This cloud services supports our clients drive to digitalization cost improvement and sustainability goals, while ensuring maximum scalability and commercial flexibility.

As a result, we have seen licenses sales for workplace cloud print services more than doubled year over year.

Advancements in our portfolio of offerings are resonating strongly with clients in the second quarter, we announced the expansion of our relationship with the United States Department of Agriculture.

USDA has been a xerox clients since 2016.

Over the years our teams have worked closely to provide best in class print solutions for the Usda's over 100000 employees.

This past quarter, we agreed to add services and solutions that further streamline the management of their print fleet and enhance the mobility security and productivity of their print processes.

As a trusted technology solutions partner, we help the USDA optimize their print spend while expanding the overall value of our commercial relationships, culminating in a new 10 year contract worth $164 million.

The deal is representative of the ways in which we approach our client relationships.

With the goal being to create value through advanced solutions.

Digital services comprise a growing portion of our total service signings a trend that is expected to continue well into the future as we invest in new capabilities to meet the evolving needs of our clients.

In the second quarter signings for our capturing content businesses, which includes digital mailroom data extraction and processing services. Once again grew double digits.

In July we acquired go inspire a UK based digital marketing and communications service provider to bolster our customer engagement service offering in EMEA.

And we recently launched a global intelligent document process offering to strengthen our capture and content capabilities.

This new offering leverages artificial intelligence and machine learning to deliver best in class inbound digital and physical data processing, enabling the interpretation of that information to make predictive outputs without human intervention and automate client business processes.

Our it services business grew more than 30% organically this quarter as we find new ways to partner with small and medium sized businesses that are undergoing complex digital transformation and adapting to a hybrid work environment.

And our robotic process automation offering commercial transaction volumes in Q2 grew 40% sequentially due to growth in new and repeat SMB customer signings to help automate business processes, such as invoicing or.

Boarder entry and document management.

Our new businesses are progressing along their commercial roadmaps.

<unk> grew non captive originations, 22% this quarter, a significant acceleration over Q1 growth of 7%.

Growth in non captive originations was more than offset by 25% decline in captive originations, reflecting constrained equipment availability.

Digital continues to expand its presence among independent dealers and third party Oems.

During the second quarter <unk> added 41, new deals globally.

The total dealer additions for the year to 65.

Digital expansion beyond Xerox equipment, and services has driven a stabilization of this asset balance on a constant currency basis, bringing <unk> total financing access base to $3 2 billion.

And strong underwriting has resulted in phil's asset quality remaining consistently high over the past few quarters with an LTM loan loss rate of only <unk>, 5%.

<unk> added 72, new customer logos and expanded offerings to another 50 customers in the second quarter.

<unk> continues to execute on its product development roadmap and expand its distribution network in.

In the quarter carry are added six system integrators and reseller partners.

Cary are has also benefit from an improved overall time to revenue through these relationships.

At park each of our innovation towers is pursuing opportunities in large and growing markets.

And our recently launched businesses of defining new business opportunities through the commercialization of disruptive technologies.

For example, allo three D printing business recently installed a three D liquid metal printer on the USS Essex. The first of its kind to be deployed on a U S Navy vessel.

We continue to assess the optimum means of maximizing the value of each of our new businesses.

This requires balancing the funding requirements of each new business with the needs of our printed services business, all while ensuring the adequate return of capital to shareholders and responsibly managing our capital structure.

Pre cash flow was a use of cash during the quarter of $98 million or $57 million, excluding a one time contract termination payment.

Excluding this one time payment we ended the first half with a slight use of free cash flow.

Due in part to a buildup of inventories to support growth in the second half of the year.

We remain committed to our guidance of at least $400 million of free cash flow or essentially $360 million, excluding the onetime payment.

Free cash flow generations is of Paramount importance and will remain a key tenet to our strategic priorities.

To ensure we hit our free cash flow target, we have taken appropriate measures to past pricing increases along to our customers offsetting some of the effects of inflation across our cost base. We have also taken actions to significantly lower our fixed cost base, which will not only help us to achieve.

Our free cash flow target, but provide incremental flow through of revenue to free cash flow as a return to the office and supply chain conditions improve.

To recap we are pleased to see momentum in demand across our business when.

When combined with a line of sight to price increases and cost actions. We are confident in our ability to achieve full year guidance.

We continue to be guided by our four strategic initiatives to position Xerox pushed sustainable long term growth.

The means of achieving that growth when necessarily evolve in response to a dynamic macroeconomic environment.

I will now hand, it over to Xavier.

Thank you Steven Good morning, everyone as Steve mentioned strong demand for our product on <unk>. This quarter group revenue growth in constant currency, despite ongoing supply constrained.

Equipment revenue declined as expected, but order continued to outpace supply our dividend by <unk> <unk> quarter of backlog growth.

Backlog in Q2 was $414 million.

<unk> is more than double last year level exceeds our full quarter of revenue.

Backlog remained elevated but is LC on its rate of growth decline quarter over quarter. We.

We expect to contribute substantially all of our backlog into revenue can be backlog is now at peak levels.

Both Central review group in actual currency in constant currency due to growth in 19 services on print activity driven revenue such as consumer services.

Consistent with prior quarters, we skew as crew correlation between retail took of these trends on page volumes.

In the second quarter, we were encouraged to see service revenue growth outpaced <unk> growth has contractual price increases began to materialize.

We expect that trend to continue through the remainder of the year.

Turning to profitability as weak prior year quarter, a return profits were lower year over year due to lower equipment sales lower margin on equipment on posting for new broadbased inflationary pressure on incremental investment associated with our new businesses.

Early benefit of price increases on lower spending resulted in a sequential improvement in both profit on profit margin.

Gross margin declined 370 basis points in the second quarter 340 basis points of this decline is attributable to supply chain cost on capacity restriction.

<unk> higher freight and shipping cost constrain availability of higher margin <unk> higher product on CME Scott.

Approximately 80 basis points of the decline related to investment to support future growth loyal royalty from Fujifilm business innovation on lower government subsidies.

These declines were partially offset by a currency on restructuring benefit.

We expect gross margin to improve in the second half of the year on supply constrained ease product mix improves.

Particularly with HP devices on additional price on cost actions are realized.

Operating margin of 2% decreased 500 basis points year over year, reflecting lower gross profit investment associated with our new businesses.

As shown on prior year benefit from temporary government subsidies on total Michelle.

These headwinds were partially offset by the favorable impact from currency on project only Phoenix.

<unk> expense of $459 million increased $25 million year over year.

<unk> $21 billion accelerated share based compensation expense associated with the passing of our former CEO stock expense was $4 million year over year.

The year over year increase was mostly driven by investment in new businesses benefit from temporary government subsidies on total measure in the prior year higher bad debt expense on acquisition.

These increases were partially offset by the favorable impact from currency savings from project own it on lower sales on marketing expenses.

<unk> was 84 million in the quarter appropriate 8% of revenue, which was an increase of 40 basis points as a percentage of revenue year over year.

The increase was driven largely by continued investments in our new businesses, specifically park on care, partially offset by lower spending for our print on modest productivity savings.

Other expenses net were 7 million a year year over year.

The increase was mainly driven by an $18 million increase in non service retirement related interest cost, mostly due to elevated interest cost associated with higher discount rate on higher settlement losses.

As well as a $4 million loss on the early extinguishment of debt, which will be offset by lower interest expenses in the second half of the year.

These charges were partially offset by a 60 million benefit associated with the refund of excess <unk> contribution to a defined contribution pension plan in Latin America.

Second quarter adjusted tax rate was 18, 5% compared to nine 7% last year you.

This increase was driven by prior year tax benefit associated with the change in tax law really team into remeasurement of deferred tax assets.

Adjusted EPS of 13 cents in the second quarter was 34 cents lower than in prior year.

This decline was largely driven by year over year reduction in adjusted operating income on the higher tax rate offset by the pension reform in Latin America on a lower share count.

GAAP EPS of minus <unk> 51, central aware yoga year due to an increase in adjusted items, including higher non service retirement related costs on a 21 million charge associated with accelerated share based compensation.

Turning to revenue total revenue exceeded our expectations this quarter due to momentum in demand for our products consider leases.

Equipment sales declined at a slower rates in Q3 of last year and post sales revenue grew at the fastest rates in Q2 of last year in constant currency.

Improvement in the fundamentals of our business were broad base equipment order once again outpaced supplies, resulting in a community backlog each quarter of equipment on outerwear of $414 million, a 4% increase over Q1.

We see little risk associated with the recognition of our backlog into revenue.

Unlike some type of key outerwear customer rarely placed multiple order for office printer, while they wait for equipment to arrive.

Eight of our equipment financing business model customers typically extend guarantees while waiting for new equipment on product shortage at our competitor limit the risk of detection.

Equipment sales of $366 million in Q2 declined 14, 7% year over year or 11, 4% in constant currency.

The decline was driven by supply constrained, which continued to limit our ability to fulfill demand installation was down year over year across all categories for black and white machine, which were more significantly affected by supply constraints in Colombia.

On three Colo installation grew due to higher demand for our new device on increased product availability.

And Colo installation were also up versus last year due to increased product availability, particularly for our iridex an <unk> product.

High margin mid range product continued to be most impacted by supply chain constraints.

We expect these constrained to ease.

Second half of the year driven by improved component availability on factory output that we upsell at the end of June .

Both ships revenue of $1 38 billion grew one 2% year over year or 5% in constant currency.

Page volume grew modestly year over year in Q2.

Revenue growth tied to printing activity once again improve on correlations between petroleum on usage based Postcentral new remained high.

<unk> sales growth was driven by high Tech services, which increased more than 30% year over year on inorganic basis and benefited from a full quarter of revenue from the recent acquisition of polo along in Canada.

<unk> on paper revenue, which corresponds with printing activity. Both grew this quarter on solid services revenue grew on a constant currency basis outpacing improvement in CRB speculum due to recently.

Price increases.

<unk> revenue growth was partially offset by lower Fujifilm business innovation royalty lower financing commissions underwear financing revenue.

In our services business total signings grew mid single digits year over year with increases in both new business on when you roll on were led by double digit growth in signings for our kept you on content digital services.

Let's review cash flow now.

Pre cash flow was a use of $98 million in Q2 onwards, lower year over year by $296 million driven by the receipt of $100 million Fujifilm prepaid royalty in the prior year on the $41 million of one time contract termination payment in the current quarter as well as lower.

Cash earnings, which included incremental investments in our new business is larger working capital outlay on the timing of management bonus payments.

Operating cash flow was a use of $85 million in Q2 compared to a source of 214 million tons of prior year.

Working capital was a use of cash of $65 million this quarter $30 million higher than the prior year, mainly driven by an increase in inventory in anticipation of higher second half revenues, partially offset by growth in accounts payable.

Investing activity were a source of cash of $13 million compared to a use of 55 million in the prior year due to proceeds from the sales of property and lower cash used for acquisitions.

<unk> of $13 million was slightly lower year over year Capex of Aurora support our strategic growth program on investment in it infrastructure.

Financing activity consumed $438 million of cash this quarter driven by the partial tender offer of our $1 billion 2023 senior notes on the net reduction in securitized debt.

During the quarter, we paid dividend totaling $42 million on did not repurchase any shares.

We remain committed to returning at least 50% of our free cash flow back to shareholders.

Expect to exceed this amount based on year to date share repurchases on our annualized dividend.

Turning back to profitability.

Like last quarter adjusted operating income was negatively affected by supply constrained broadbased impression early pressure across our cost structure on the investment in our new businesses.

We expect profitability to improve sequentially for the remaining two quarter of the year, our supply chain costs normalized, particularly freight cost on through an easing of product supply constrained, which will not only improve equipment sales, but the equipment gross margin as a product mix normalize.

Inflationary pressure is expected to continue in the near term, but we will offset a large portion of inflation related cost growth with price increases for our products and services.

The effects of our price increases will compound over time, particularly for our contractual business where price increases are connected at specific times throughout the year upon contract renewal.

Further offsetting each cost pressure will be saving generated through project own it.

We are on track to achieve our target gross cost savings of $450 million in 2022, the vast majority of which will be realizing system with half of the year.

Through this action, we expect to achieve a full year adjusted operating margin consistent with the prior year.

The benefit of this year cost reduction on price increase or expect it to result in the assistant ably higher operating margin in future years subject to improve supply chain on stable macroeconomic condition.

Turning to segment total revenue declined 14, 7% in Q2, mainly due to a reduction in operating lease revenue, reflecting lower xerox equipment in storage.

Segment profit increased by $2 million or 13%.

Due to lower Intersegment Commission on new lease origination, which were partially offset by incremental startup costs.

Segment margin of 11, 5% improved 290 basis points year over year on awarded high yields on our full year estimate of 8% to 9%.

We expect future margin to normalize Xerox lease volume pickup driving increase in inter segment Commission.

In Q2, FIFA finance assets were down slightly quarter over quarter due mainly to unfavorable currency translation on a constant currency basis.

Total asset balance was flat in the second quarter.

Peter origination volume declined 7% year over year due to a decline in captive product origination of 25%, which will negatively affected by product availability constraint.

Non captive channel origination, which includes third party dealers on non Xerox vendor grew 22% year over year due to growth in new dealer relationship on cell therapy equipment origination volumes.

Print on wholesale revenue fell 2% in Q2 growth of process revenue was more than offset by lower equipment sales.

On a segment profit fell 84% year on year with the 580 basis point decline.

And in segment profit margin due to lower revenue.

On gross profit.

As presented earlier print on order segment profit margin was negatively impacted by the ongoing effects of supply chain constraints on inflation as well as incremental costs associated with new business.

Turning to capital structure acted by the ongoing effects of supply chain constraints on inflation as well as incremental costs associated with new business.

Turning to capital structure, we ended Q2 with a slightly positive net cash.

Cash position.

$2 8 billion of the $3 $9 billion of our outstanding debt is allocated to support fit our lease portfolio.

Meaning that of around $1 $1 billion is attributable to the core business.

Essentially consist of senior unsecured bond on finance asset securitization.

Where the balance of bond maturity ladder will no unsecured maturity for the remainder of the year.

In the second quarter retail $42 million of cash back to shareholders in the form of dividends.

Finally, I will address guidance.

Maintaining our guidance of at least $7 1 billion of revenue at actual currency on free cash flow of at least $400 million.

A reminder, our free cash flow guidance excludes $41 million of cash cost associated with a one time product supply contract termination charge.

Supply chain on macroeconomic conditions remain fluid, but momentum in demand driven by favorable return to work trend better supply chain visibility on line of sight to price increase on cost reduction and the several half of the year gives us confidence to maintain our guidance.

We will now open the line for Q&A.

Thank you Sir.

As a reminder to ask a question. Please press star one on your telephone.

Please standby, while we compile the Q&A roster.

I show. Our first question comes from the line of Ananda Baruah from loop capital. Please go ahead.

Hey, Good morning, guys really appreciate you taking the question.

Yeah.

Just wanted to say our thoughts with.

With you guys family.

At this time as well.

Business wise, let's say congrats on the solid execution.

And the ongoing.

The solid outlook for.

The second half of the year Lake, which also speaks to execution.

I guess just.

So the starting there any any context.

Guys you can provide with regard to our customers they are actually communicating to you.

It sounds like you're sort of order patterns have been altered yet any context that theyre getting to around under what conditions may cause them.

Sort of get more cautious rethink their order patterns rethink their projects or anything like that.

Couple of quick follow ups after that.

Okay.

A lot of what we see currently.

As you'll see from EMEA at that point of view, our backlog remains strong.

TLC is demand that outpaced supplies here.

Clearly customer still planning retail reach out to the office.

If I move now on to the post sales element here you saw that there was strong pull self revenue growth at constant currency or 5% order growth.

<unk>.

I would say the board is not only related to page volume on print related activity, but it sounds well grew significantly during the quarter. So what's the customer all indicating to us.

And it was <unk> on our technology on Savage is on the demand that we see currently for this remained strong on keep US close a deal for the remaining of the year.

I got it I got it and just so just to that.

<unk>.

Can you can.

Can you give us any sense of how big the backlog is.

How big.

Sure.

Yes, how large is the backlog how does it so the backup is $414 million so backlog grew.

At Google.

And what we heard from quarter, one to quarter falsely grew roughly 5%.

We see I will say a good sign of supply chain easing Botswana 14 million.

It is more of a full quarter of equipment sales here. So.

It's called <unk>.

I should add as well good quality backlog one question with one of the concerns.

You can see on the industry.

Backlog flush that means with the customer you know stop ordering we keep very very minor cancelation. Although we are able to manage the aging of the backlog so customer order can be fulfilled overtime.

We see a bulk of our leasing and financing business were able to extend some of the lease so customers are not suffering from backlog here. So good confidence in the strength of the backlog and also we see line of sight during the second half.

Ability to realize some of the backlog during the second half of the year.

That's really helpful. Thanks, a lot I appreciate it.

Thank you.

And I show our next question.

Comes from the line of Eric.

Erik Woodring from Morgan Stanley . Please go ahead.

Hi. This is my answer Eric Thank you for taking our question today.

So where are we along that path to reach 80% of covered page volume average as some of your peers have talked about but trading close to that level.

Page volumes have stabilized given the variability and working environments.

Or are we still a little bit away.

So it's a great question. So I'm wondering if things that very closely.

And if you remember we upsell on a recurring you end up having a strong correlation between vaccination rates, which is now right.

All across the world.

Present on a return to the office.

Print volume.

What we have observed during quarter two is what we call. The collateral recovery. So we are on the trajectory to increase and to get closer to at least 80%. So geographies at different type of dynamic. So it will between the EMEA Amerigas, we see different type of dynamic segments are.

Currently what we observe is that we are getting.

In closer to the 80%.

We are also expecting during the second half of the year.

You are welcome to all of the print volumes.

Okay, great. Thank you.

Thank you.

As a reminder to ask a question. Please press star one one.

And I show. Our next question comes from the line of Cemig Chatterji from Jpmorgan. Please go ahead.

Oh, great. Thank you for taking my questions I had a couple I guess, firstly, if I'm looking at your revenue guide for the yield which you.

<unk> is a $300 million improvement second half to the first off I think in terms of Rev.

Revenues that you're guiding to I was wondering if you can give me a breakdown of how much of that is supply improvement sort of equipment revenue related to some of the price increases on services that you talked about if you can just give me.

A bit more of a full details around some of the improvement that you would expecting in the second half.

I have a follow up thank you.

Yeah, Thanks, Alex So sweet component.

The foundation of <unk>.

Sure.

What new program number one equipment sales in cold month on equipment sales per month is this mainly related to supply chain capability capacities on component availability on the other line upside based on that number from our OEM offer improvement coming into this year.

Half of the year, if you combine that with the price increase that we had indicated on the equipment side. There you have a double effect more product on product that could be sold at a higher price.

Well this is mainly related to margin it will be done with a better mix. Although one of the challenge that we have had since the beginning of the year is a lack of a suite of equipment. We have a better line of sight now offer a suite productivity ability driving profitability and margin improvement. So thats the first pillar several.

<unk> is around.

Premium volume on <unk>, we are expecting double it takes us well here, which are what the water recovery of price offsetting volume, but also combined with the price increase that we have been able to apply across a range of the contractual agreement with our customer on lastly, Ikea cavities.

Linda <unk>.

Daryl and cooperative or theyre, not getting growth of more than 30% on with also the benefit of inorganic growth there ITC have achieved both demand.

Availability I would say, we just some improved productivity ability will also drive.

Revenue equivalent to or second half of the year.

The difference that you can see based on the sweep it out here.

Got it great.

The second question is more of a follow up.

Cool.

Comments that you have on slide six about how the business fixed I noticed session and just trying to understand those comments a bit better sure, but you see towards the fuel business is contracted for multiple years and you go out to see if there is a contractual revenue risk in the near term down so maybe just if you.

Good deals there to help me understand that a bit better.

We expect some of the contracts to be borne by your customers in a near term downturn or sort of downsized, how youre thinking about sort of the.

Contractual revenue risk for reward you mentioned is two thirds of your business.

It is contracted for multiple years.

Yes, so as you know.

Our business what are these maybe on the.

What type of revenue was simply a transactional type of company on a contractual type of revenue.

The transactional.

We as a contractor so contractual is around to say out of the business. So when we enter into an area where customer.

The question around the future for Xerox is a benefit of our business model is to set up their revenue is revenue that is booked on this book on contract with an average length of the contract which is between four to five years. So this give us.

Confidence on top of the demand that we see currently because when you look at what customers are asking us to deliver today.

Mainly in Q1.

Mainly related to the demand that they have is mainly related to not only being able to ship all the processes. We print on services here, but we have also.

On the digital services, where usually this type of.

Business is ever compare a cyclical aspect when company goes through.

I would say a ritchie Sharon all try to generate savings they will invest in this technology in order to improve their own productivity, where do the cost based on delivery of their own cash flow here.

Thank you.

Yeah.

Thank you.

And I show. Our next question comes from the line of Jim Suva from Citi. Please go ahead.

Thank you so much for all the details of course are harsh.

Thoughts grow with Mr Visionchina, and his family and loved ones as a team.

Members of Xerox.

As we look ahead.

<unk> environment, both on labor costs, and other things like that I'm, just kind of curious about how should we be thinking about Europe .

Operating costs and your margins going forward I know, there's puts and takes about shipping cost material cost.

Operating margin is a better focus item can you give us any clarity at all so I don't remember are there like typical merit increases that folds into the Xerox.

<unk> base that we should kind of be mindful of as we look ahead for kind of either 2023 years believe it or not we're starting to model and look into 2023.

The inflationary environment overall.

Yes, Jim So yes, we achieved.

Sure.

<unk> pressure off inflation, however, as.

As we mentioned it somewhat erosion that we're seeing currently on our business is mainly related to ship right yet.

So the supply chain.

If you look at the gross margin that we printed for this quarter, we have a gross margin, which is down 370 basis points this quarter versus last quarter. That's the way. It's a number we're roughly the same in quarter, one with the sequential improvement, but 314 out of the 300.

70 basis points come from Chip break and then we also as you know.

Make investment in our future business is to support the future growth beat that growth outside of the print.

Having seen the business this year.

Bandwidth put on stake from last year number with loyalty government subsidies and things like that.

When you look at the way we are addressing the increasing challenges it's quite simple.

<unk> to end here of that.

Protect Amit we optimize on drives a cost base of the company to the level that we can afford so second point. After all of this is also true.

On the increased prices all across the board when I say all across the board it has been done.

Since quarter three of last year, where we increased prices on equipment, but also on post sales contractual.

Agreement that whoever's customer.

The way to look at it <unk> on the specific I would say pressure on labor costs included within the Dms.

Yes.

You try to drive improve.

Improve the productivity that you have on your labor costs on Green technology as well.

I would say leading simplify some of the processes on the offerings that we offer to customers, but the key message is that.

We believe.

This is actually on the air.

We will do.

Drive margin improvement during the second half of the year by the way.

The company has been able to achieve during the second half of the year that traditionally specifically in quarter four with a strong finish on depending on the supply chain on macroeconomic conditions being as what we know today. We are confident that we'll be able to drive gradual improvement in gross margin on operating.

Martin.

Okay.

Thank you. Thank you I appreciate it.

Thank you Jim.

Thank you Shannon.

Showing no further questions into queue at this time I would like to turn the call back over to Mr. Steve Zhang for closing remarks.

Thank you for listening to our earnings conference call. This morning.

We are seeing encouraging the second half of 2022 quota to a stronger second half of the year.

I am honored to lead this great company and team, who collectively are resolved and prime to grow revenue and profitability in the second half of 2022 and beyond Thank you for attending and have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

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The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Yes.

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Yes.

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Good day, and thank you for standing by and welcome to the <unk> Holding Corporation second quarter 2022 earnings Conference call.

To hand, the conference over to your speaker today to Mr. David <unk>, Vice President of Investor Relations at Xerox Holdings Corporation. Please go ahead.

He is joined by <unk>, <unk> Executive Vice President and Chief Financial Officer at the request of Xerox Holdings Corporation Today's conference call is being recorded.

The recording and or rebroadcast of this call are prohibited without the express permission of Xerox. During this call Xerox executives will refer to slides that are available on the web at www Dot Xerox Dot com slash investors and we will make comments that contain forward looking statements, which by their nature address matters that are in the <unk>.

<unk> and are uncertain.

Actual future financial results may be materially different that those expressed herein at this time I'd like to turn the meeting over to Mr. <unk>.

Good morning, and thank you for joining our Q2 2022 earnings call.

I'd like to begin today's call by acknowledging the passing of our Dear friend and colleague John <unk> team as.

As we mourn his loss I am inspired and deeply humbled by how the Xerox family has come together and become stronger.

We will honor John by continuing to execute across the four strategic initiatives. He articulated for returning Xerox to long term sustainable growth and by operating as one cohesive team to help propel us forward.

John instilled in all of US one boat one team mentality and these words will serve as inspiration as we work to fulfill his legacy.

I'm honored to have received the confidence of the board to lead this great company.

Summarizing our results for the quarter revenue of $1 75 billion declined two 6% in actual currency and grew one 1% in constant currency.

Adjusted EPS was <unk> 13.

34 cents lower year over year free cash flow was a use of $98 million, which includes the one time contract termination charge of 41 million, we disclosed in last quarter's earnings compared to a source of $198 million in the prior year.

And adjusted operating margin of 2% was lower year over year by 500 basis points.

Revenue was slightly ahead of our expectation and reflects momentum in demand for our products and services notwithstanding a challenging operating environment.

Equipment revenue declined 14, 7% or 11, 4% on constant currency basis.

Supply chain constraints continue to limit our ability to fulfill demand, which remains strong as evidenced by further growth in our equipment order backlog.

Post sale revenue grew one 2% or 5% in constant currency.

This represents a sequential improvement mirroring our recovery and print related activities as employees gradually returned to the office.

Revenue also benefited from our faster growing adjacencies.

Services, and digital services, which I will discuss in detail later.

Savings.

We expect margins to continue to improve in the second half of the year as we realize benefits from additional price increases and cost reductions as well as expected improvements in returning to office trends and supply chain conditions.

Three years of an economic slowdown have emerged but we do not yet see a slowdown in spending from our clients rather we continue to experience a recovery in demand from post pandemic lows, particularly in equipment sales.

And we are now starting to see signs of supply chain improvements and resilience.

Given the strength in demand, we see across our portfolio of products and services and a line of sight to margin improvements through price increases and cost reductions we are maintaining our 2022 revenue and free cash flow guidance.