Q2 2022 Xerox Holdings Corp Earnings Call

July 26, 2022

Yeah.

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 Backhaul, 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 Steve Bender, Zack interim Chief Executive Officer.

He is joined by Zombie highest executive Vice President and Chief Financial Officer at the request of Xerox Holdings Corporation Today's conference call is being recorded.

The 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 available on the web at www Dot Xerox dot com slash investors and well.

I'll make comments that contain forward looking statements, which by their nature address matters that are in the future and are uncertain.

Actual future financial results may be materially different 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.

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.

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 realize benefits from additional price increases and cost reductions as well as expected improvements and returned 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 optimize.

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 our printing 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 It services and digital services.

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

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 supplies.

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 quote circa <unk>.

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 enhanced 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.

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 contact 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 deal has globally.

The total dealer additions for the year to 65.

Federal expansion beyond Xerox equipment, and services has driven a stabilization of this asset balance on a constant currency basis, bringing <unk> total financing asset 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 the quarter carry are added six system integrators and reseller partners.

Carrier 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, alum or 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 one time payment.

Free cash flow generations is of Paramount importance and will remain a key tenant 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 will necessarily evolve in response to a dynamic macroeconomic environment.

I will now hand, it over to Xavier.

Thank you Steve on good morning, everyone, Hi, 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 as evidenced by another quarter of backlog growth.

Backlog in Q2 was $414 million, which 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 competing 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 consumable conservative.

Consistent with prior quarters.

Crew correlation between retail two of these trends on page volumes.

In the second quarter, we were on.

Encourage 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 return profits were lower year over year due to lower equipment sales lower margin on equipment on posting towards new broadbased inflationary pressure on incremental investment associated with 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, including higher freight and shipping cost constrained availability of higher margin <unk> higher product on canvas.

Scott.

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

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

We expect gross margin to improving the second half of the year on supply constrained ease product mix improved, particularly with HP devices on additional price on cost actions are realized.

Adjusted operating margin of 2% decreased 500 basis points year over year, reflecting lower gross profit investment associated with our newer businesses acquisition on prior year benefit from temporary government subsidies on furlough measures.

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

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

Excluding $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 furlough measures 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 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 print on modest productivity savings.

Hoser 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 costs, 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.

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 towards 18, 5% compared to nine 7% last year.

The increase was driven by prior year tax benefit associated with the change in tax law Ricky team into a remeasurement of deferred tax asset.

Adjusted EPS of <unk> into 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 contain 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 fundamental of our business were broad base equipment order once again outpaced supplies, resulting in a community backlog each quarter of equipment on it all the way up 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.

The hit of our equipment financing business model customers typically extend galleys, 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 on Colombia sheet.

On tricolor installation grew due to high yield demand for a 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.

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

We expect these constrained to ease into second half of the year driven by improved component availability on factory output that we observed 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 <unk>.

Revenue growth tied to printing activity once again improve on correlations between petroleum on usage base postage revenue remained high.

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

So supplies on paper revenue, which corresponds with printing activity. Both grew this quarter on sold services revenue grew.

<unk> currency basis outpacing improvement in <unk> due to recently enacted price increases.

<unk> revenue growth was partially offset by lower Fujifilm business innovation loyalty 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 award on were led by double digit growth in signings for our kept it 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 <unk> hundred million.

Fujifilm prepaid royalty in the prior year.

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.

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

We expect to exceed you can moan based on year to date share repurchases on our annualized dividend.

Turning back to profitability.

Last quarter adjusted operating income was negatively affected by supply constrained broad based inflationary 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 equipment gross margin as a product mix normalizes.

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

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 these 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.

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

<unk> of this year cost reduction on price increase are expect it to result in the assistant ably higher operating margin in future years.

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 equivalent in store.

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 was higher than our full year estimate of 8% to 9% we.

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.

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 surpassing equipment origination volumes.

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

On a segment profit fell 84% year on year with a 580 basis point decline in <unk>.

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 integration as well as incremental costs associated with new business.

Turning to capital <unk> tier impacted 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 Peter 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.

We have a 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 dividend.

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. As 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 several of 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 taking the question.

Yeah.

Just wanted to say our thoughts are 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, which which also speaks to execution.

I guess just.

Starting there any any contacts.

Guys you can provide.

With regard to our customers they are actually communicating to you.

Yet it sounds like you're sort of order pattern at all if you get any kind of think that they're getting to around under what condition may cause them.

Sort of get more cautious rethink their order patterns and so we think there.

Anything like that.

Couple of quick follow ups after that thanks.

Okay.

A lot of what we see currently is that the as you've seen from our point of view our backlog remains strong.

TLC is demand that outpaced supplies here.

Clearly customer theatres planning retail reach out to the office.

If I move now onto the post sales element here you saw that there was strong pull self revenue growth at constant currency of 5% was a broad across.

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 is.

<unk> on our technology and services on the demand that we see currently for <unk> remains strong on keep US good deal for the remaining of the year.

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

<unk>.

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

<unk> no doubt.

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

At Google.

And what we had from quarter one to waterfall. So it grew roughly 5%.

We see I won't say, a good sign of supply chain easing, but 414 million.

It is more than a full quarter of a percent of revenue 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 in the industry with this.

Backlog flush that means with the customer you know stop ordering we see very very minor cancelation.

To manage the aging of the backlog so customer order can be fulfilled on time.

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 is 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 Amanda.

Thank you.

And I show our next question.

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 we're trading close to that level are we at the point, where page volumes have stabilized given the variability and working environments.

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 straight correlation between vaccination rates, which is now raised all across the world.

<unk> total return to the.

Pre volume.

What we have observed during quarter two is what we call. The glad you woke up right. So we are on the trajectory to increase and to get closer to 80%, So geography and different type of dynamic so between EMEA Americas, we see different types of aerodynamic segment, there, but currently what we.

Chairman.

Clearly there to give us.

<unk>.

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

For taking my question, So I had a couple of years.

I guess for.

If I'm looking at your revenue guide for the yield which you.

There's a 300 million improvement second half for the first off I think in terms of revenues.

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 sort of the improvement that you would expecting in the second half.

And then I have a follow up thank you.

Yes, Thanks, Alex.

<unk> component.

The foundation of.

Second half.

What new programs take number one equipment sales.

Cold month on equipment sales and per month. This is mainly related to supply chain capabilities capacities on component availability on we have a line of side based on the recent number from our Oems.

Improvement coming into the second half of the year. If you combine that with the price increase that we had indicated on the equipment.

You have a double effect more product on product that would 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 the second Peter.

<unk> is around <unk>.

Volume on <unk>.

Improvement on we are expecting.

And Thats why we took what the war will cover price and volume, but also combined with the price increase that we have been able to apply across a range of contractual agreement with our customer.

And lastly, <unk> cylinders.

And I'll leave Gerald incorporate two or theyre, not getting growth of more than 30% on we have also the benefit of inorganic growth there hygiene services both demand on.

Availability I would say well just some improved productivity will also drive.

Revenue improvement during the second half of the year.

The 300 million difference that you can see based on the sweep it off here.

Got it great.

The second question is more of a follow up.

Two comments.

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.

Two thirds of your business is contracted for multiple years.

You go out to see if there is a contractual revenue risk in the near term down so maybe just.

If you can give more details there to help me understand that a bit better do you.

Some of the contracts to be borne by your question wasn't 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.

This contracted for multiple years.

Yes, so as you know.

Our business model is made.

I would say what type of revenue with simply a transactional type of probably on the contractual type of project.

The transactional stuff.

With the contract so contractual is around to service the business. So when we enter into all the way up customer.

<unk> owns a feature phone 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 gives 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 what it into.

Mainly related to demand that their head is mainly running into 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.

Businesses.

Tariffs cyclical aspect when company goes to I'd.

I'd say, a ritchie Sharon all tried to generate savings they will invest in this technology in order to improve their own productivity. When you have the cost base on <unk> on cash flow here.

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, our hearts.

<unk>.

Fox grow with Mr. Visionchina, and his family and loved ones to the team members at 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 costs material costs are.

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 employee 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, James So, yes, we'll see.

Yes.

Our business pressure off inflation.

As we mentioned at some of the erosion that we're seeing currently on our business is mainly related to supply chain on the <unk>.

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.

Number one is the same in quarter, one that was a sequential improvement, but 340 out of the 300.

70 basis points come from Chip break and then we also make investment in our future business is to support the future growth beat that growth outside of the print on establishing the business here.

We have put on stake from last year number.

LTE government subsidies and things like that but.

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

Thanks James.

And here of that via protect Amit, we optimize on drives a cost base of the company to the level that we can afford to certain point. After this is also to increase 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 we average customer.

That's the way to look at it employees on the specific I would say pressure on labor cost increase.

Included within the Dms.

Yes.

You try to drive these improved the productivity that you have on your labor cost on bringing technology as well.

I would say leading or simplify some of the processes on the offerings that we offer to the customer, but the cumulative Jim.

We believe this action.

But we will.

Drive <unk>.

Margin improvement during the second half of the year by the way.

The company has been able to achieve doing just second half of the year is.

That traditionally specifically in quarter four with a strong finish on depending on the supply chain of macroeconomic condition being as what we know today. We are confident that we'll be able to drive gradual improvement in gross margin on operating margin.

Thank you. Thank you I appreciate it.

Thank you Kim.

Thank you Shannon.

No further questions in the queue at this time I would like to turn the call back over to Mr. Steve <unk> 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.

<unk> and have a great day.

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

Okay.

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

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Yeah.

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.

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 Steve Bender, Zack interim Chief Executive office.

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 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>.

Future 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.

John instilled in all of US one boat one team mentality and these words, who 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 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.

<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 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 realize benefits from additional price increases and cost reductions as well as expected improvements in return to office trends and supply chain conditions.

Fears 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.

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 and 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 our 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 supplies.

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 close 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.

The 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 the trusted technology solutions partner, we helped 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.

In the second quarter signings for our capturing contact 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.

Order entry and document management.

Our new businesses are progressing along their commercial roadmaps.

Digital 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 deal has globally.

Bringing the total dealer additions for the year to 65.

Federal expansion beyond Xerox equipment, and services has driven a stabilization of this asset balance on a constant currency basis, bringing <unk> total financing asset base to three 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%.

Cary are 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 the quarter Carryon added six system integrators and reseller partners.

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