Q3 2022 Xerox Holdings Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Welcome to the Xerox Holdings Corporation third quarter 2022 earnings release conference call. After the presentation. There will be a question and answer session to ask a question at that time. Please press star one one at any time during this call at this time.
I'd like to turn the program over to Mr. David <unk>, Vice President and head of Investor Relations. Please go ahead Sir.
Good morning, everyone and David Banco Vice President and head of Investor Relations at Xerox Holdings Corporation welcome.
Welcome to the Xerox Holdings Corporation third quarter 2022 earnings release Conference call hosted by Steve <unk>, Chief Executive Officer.
He is joined by that'd be a hoist.
Executive Vice President and Chief Financial Officer.
At the request of Xerox Holdings Corporation Today's conference call is being recorded other 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, who will 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 than those expressed herein at this.
I'd like to turn the meeting over to Mr. <unk>.
Good morning, and thank you for joining our Q3 2022 earnings call I want to start by saying how honored I am to lead this great company and team of people as we embark on Xerox next phase of growth.
Being named Xerox permanent CEO in August I have spent a large portion of my time with our stakeholders.
Ploys clients partners and investors.
On a recent international road trip I spoke with dozens of clients and thousands of employees and more than 20 different cities. The goal for my meetings with clients was to hear about their current needs what they expected from Xerox and what we can do to improve our business.
It was clear that Xerox brand and legacy are meaningful.
And we have earned our clients' trust over time and from that position of trust clients are asking us to do more to help them streamline optimize and improve the overall productivity of their information workflows.
We have the solutions today to help them do just that including solutions like workflow central and digital mailroom to name a few and.
And by focusing more on client solutions, rather than product offerings. I believe we can maximize our relevancy and share of wallet with existing clients.
We also have the reputation and credibility the right to win to build new solutions for our clients that leverage our institutional knowledge of client processes and integrate leading technologies, such as AI AAR RPI and machine learning.
These new solutions can provide intelligence value added services and automation to workflows, we already process for our clients as well as new workflows, we can and will process in the future.
You will hear more from me in coming quarters about how we plan to become a more customer centric business. One that is capable of expanding and capturing more of the addressable market within our existing client base by further embedding our offerings into our clients' end to end processes.
Summarizing results for the quarter revenue of $1 75 billion grew four 7% in constant currency and declined 4% in actual currency.
Adjusted EPS was <unk> 19, and.
29 <unk>.
Lower year over year.
Free cash flow was a use of $18 million compared to a source of $81 million in the prior year and adjusted operating margin of three 7% was lower year over year by 50 basis points.
Revenue growth this quarter accelerated in constant currency, reflecting strength in demand for our products and services amid an increasingly challenging macroeconomic environment.
Equipment revenue grew six 7% in constant currency or 8% in actual currency.
Marking the first quarter of equipment revenue growth since supply chain constraints began last year.
As expected backlog declined slightly sequentially, reflecting sustained order flows offset by a gradual but lower than expected easing of supply chain constraints.
Post sale revenue increased four 1% in constant currency and decreased <unk>, 7% in actual currency.
Wholesale growth was driven by another strong quarter for consumables, such as paper and supplies.
Growth in consumables reflects the early benefit of recent pricing actions and for supplies an ongoing gradual recovery in print related activity.
Page volume continued to closely correlate with returned to work trends.
Post sale revenue also benefited from strong growth in it and digital services, including contributions from recent acquisitions.
Adjusted operating margin declined slightly year over year, but improved sequentially, reflecting the benefits of price and cost actions taken year to date.
Improvement was slower than expected however, due to persistent high rates of inflation across our cost base and unfavorable geographic mix in equipment sales and a slower than expected easing of supply chain constraints.
Xavier will discuss our outlook for profitability in more detail.
The global macroeconomic outlook has become increasingly somber over the past three months.
The current outlook notwithstanding we believe our prospects for continued revenue growth are strong.
We see resiliency and demand for our products, particularly our <unk> III devices, we have a sizable and healthy backlog and we have visibility into the realization of benefits from recent pricing actions.
However, the adverse effects of western European currency on full year revenue are now forecasted to be significantly larger than expected.
Therefore, we are lowering our revenue guidance for the year from at least $7 1 billion to a range of $7 billion to $7 $1 billion in actual currency.
While our revenue outlook declined only slightly we are lowering our 2022 free cash flow guidance from at least 400 million to at least $125 million.
Both of which excludes $41 million, one time product supply termination payment.
The reduction to our outlook is in part due to persistently high rates of inflation across our cost base and slower than expected supply chain improvements.
Both of which are expected to inhibit margin improvements this year relative to our expectations.
Most of the reduction in free cash flow guidance. However is a function of larger than expected use of working capital, which has no earnings impact, including our decision to utilize more capital to fund <unk> origination and operating lease growth.
We continue to expect operating margins to improve going forward as supply chain conditions ease and previously enacted pricing actions are realized when combined with additional plans to streamline our operations. We believe our 2022 free cash flow performance will be.
An anomaly and not a trend I.
I am often asked by investors. If we are planning a significant strategic shift now that I had been made permanent CEO .
I alluded to some of our longer term strategic plans a few moments ago, but in the near term we remain focused on the execution of our print and services strategy and improving operating efficiencies amid a challenging macro backdrop.
As in the past the successful execution of our strategy rests on four strategic priorities.
Optimize operations drive revenue monetize innovation and focus on free cash flow.
Operational efficiencies and Flexibilities have taken on a new level of importance in light of the current macroeconomic environment.
We remain on track to achieve our targeted $450 million of gross cost savings from project own it in 2022.
Our target was designed to completely offset the effects of inflation for the year, but in the past few months inflationary pressure has outpaced our initial expectations.
With less than three months remaining in the fiscal year, we will not be amending our savings target for 2022, we will provide an update on 2023 savings target when our full year guidance is provided next quarter.
Along with this update we will provide additional details about changes to our business structure that are expected to drive greater operating efficiency and enable further penetration of services at existing clients.
Our printing services products continue to resonate strongly in the marketplace as we deliver the most advanced services and solutions portfolio for our clients.
I'm pleased to announce that we grew our leading share in managed print services in 2021.
Our Idc's recent market Scape report.
Further support of our leading position in managed print two circuit recently named Xerox as a leader in managed print services and it's 2022 landscape report.
According to circa Xerox maintained the highest position overall other vendors in the market in both strategic vision and depth of service offerings.
To ensure we continue gaining share in print and managed print services. We are focused on consistently improving the customer experience to meet clients most pressing needs.
To that end in Q4, we will be launching the Xerox customer experience App, which will help our clients streamline the installation of our products better monitor supplies and help clients self troubleshoot our April products.
In it services, we are seeing traction in newer markets like Canada, as we realize synergistic benefits from the recent acquisition of power land and greater collaboration with our existing print and managed print services sales force.
And then our robotics process automation offering once again grew signings double digits quarter over quarter.
In Q3, Xerox automation expanded its presence to retail.
Sports and entertainment and manufacturing verticals.
Digital services. Our recently acquired go inspire business won a breakthrough with data award from data IQ for its partnership with the UK home goods Company Lake Glenn.
Go inspired uses <unk> customer data to deliver a hyper personalized experience for each of its members, resulting in a strong uptick in revenue and triple digit return on investments.
<unk> digital services recently launched an intelligent document processing platform, which leverages AI ml object content recognition and natural language tools to automate document and data processing.
Born from our legacy of innovation and service excellence in this domain the platform will help our clients recognize a variety of languages.
<unk> documents and validate customer identities without human intervention, providing significant time and cost savings.
We see the evidence of value being delivered through our integrated solution offerings. Each quarter. For example, this quarter, we assisted a European commercial banking client with a digital transformation project in which our devices, we use to digitize document workflows and improve the clients on.
<unk> process for.
For large Brazilian insurance client, we added services to help them automate invoicing and medical claims reimbursement improving processing time from days to hours and reducing manual processing performed from a 150 employees down to 40.
Moving forward, we will enable more of these types of success stories as we place a greater focus on holistic client solutions, rather than discrete product offerings.
Regarding our newer businesses, we are adjusting our approach to capital allocation in response to changes in the macroeconomic environment.
As a result, we have taken recent actions to streamline our innovation portfolio by closing <unk> scaling back out <unk> print operations and reevaluating research priorities at park.
Separately, we continue to see promise from novelty and industrial predictive maintenance company created a park and Mojave and energy efficient HVAC business leveraging path technology.
We recently spun both companies out as a separate independent business with Xerox continued to hold minority share.
These actions will help us preserve free cash flow, while maintaining the opportunity to realize value from their future success.
Meantime, we continue to invest in commercialization of fiddle and carry off both of which are executing on their strategic plans.
<unk> made significant progress this quarter in its effort to diversify its lending operations away from captive sources towards new customer and product lines.
Non captive originations grew 33%.
Including a more than 150% increase in originations for third party equipment and services.
Carryout completed a soft launch of experienced builder and intuitive no code toolkit, which allows users to quickly self published instructional content at scale.
We believe the experience build the toolkit will provide a unique point of differentiation for <unk> and further its leading position and rapidly growing service experienced management market.
At Xerox, we are accelerating our own use of carrier as a means of improving operating efficiencies and client service.
Our remote resolution rate is better by 9% when carry ours used which greatly improves equipment availability and avoid sending technicians on site.
Kerry I helped Xerox reduced site visits by more than 21000 in just one year saving more than 269000 metric tons of Cotwo as a result.
Among our technicians using the product calls escalated to higher level reps are resolved on an average one business day sooner.
We expect further efficiencies and progress towards our sustainability goals as we more fully introduced the platform to more of our clients.
Free cash flow was a use of cash of $18 million in the quarter.
And the first nine months of the year free cash flow has been a use of $66 million or $25 million. Excluding a one time contract termination payment of $41 million in Q2.
To be clear.
Cash flow generation year to date has fallen well below our expectations due to our strategic decision to invest in <unk> growth or.
A slower than expected improvement in supply chain conditions and persistent inflation.
I do want to emphasize that free cash flow remains a key tenant of our strategic priorities and enabler of our future growth.
We expect a significant improvement in free cash flow next year as supply chain conditions improved further and benefits of additional price and cost actions are realized.
To recap the current macroeconomic environment presents risk to all businesses, but I see far more opportunity in the coming quarters and years for Xerox.
I see opportunities to expand our penetration of existing products within clients as we are doing with managed print.
In digital services, and I see opportunities to expand our Tam with clients by leveraging our unique position as a trusted partner to deliver value added digital solutions to our clients' workflow processes.
In the near term, we remain laser focused on profitability and free cash flow generation.
I will now hand over to Xavier.
Thank you, Steve and good morning, everyone.
Steve noted quarter three results reflect continued strength in demand for our product from services. We saw an acceleration of revenue growth in constant currency on delivered the highest rate of constant currency growth in over a year.
Currencies.
The euro and British pound negatively impacted revenue by more than 500 basis points this quarter.
Equipment revenue grew for the first time since Q2 2021 in both actual and constant currency driven by LTE demand on modest improvements in productivity ability.
Equipment backlog of $429 million declined slightly quarter over quarter, but remain well above historical levels.
Improvement in supply chain conditions did not materialize to the extent expecting.
We continue to expect backlog to decline in Q4 on our 2023 supply chain conditions ease.
<unk> revenue grew again in constant currency due to strong growth in consumables such as paper on supplies.
Digital services, including benefits from recent acquisitions.
Consistent with prior quarter, we continue to see a strong correlation between return to a police trends on page volumes. We are encouraged to see that knows their quarter of page volume improvement related to 2019 levels.
<unk> page volumes are recovering you sort of work than we expected as employers effort to bring employees back to offices have been slow to gain momentum.
Turning to profitability.
It will lower year over year due to a slight decline in revenue at actual currency the.
The effect of persistent high inflation on cost of goods sold on the slower than expected improvement in supply chain conditions, which negatively impacted product geographic mix.
This factor along with a really that bad debt reserves in the prior year drove adjusted operating income margin lower on a year over year basis.
However, adjusted operating margin improved 170 basis points sequentially due to benefit associated with pricing and cost reduction actions.
We expect operating margin to improve sequentially in Q4, but at a slower pace than previously communicated.
I will discuss later gross margin declined 60 basis points in the third quarter.
Ron on the availability of equipment on put us cost inflation net of lower logistic costs contributed the majority of the decline.
Favorable currency pricing on restructuring benefits were offset by lower benefit of government subsidies in the prior year.
Zero non product related operating costs.
More specifically supply chain constraint adversely affected the geographic mix of equipment installed in Q3.
We expect gross margin to improve significantly in Q4, as geographic and product mix improve.
Youre portion of contractual price increases are realized on the we see Ben.
Fit from improvements in supply chain.
Adjusted operating margin of three 7% decreased 50 basis points year over year, reflecting lower gross profit higher bad debt expense on inflation related operating cost increases.
Partially offset by lower R&D spending on project only savings.
Specifically supply chain disruption on higher product costs accounted for 60 basis points of the decline in operating margin.
But that expense on government subsidies benefits in the prior year accounted for another 10 basis points of the decline.
Offsetting this impact will benefit from pricing currency on the recent cost reduction actions noted above.
Sag expenses of $418 million increased $5 million year over year.
So year over year increase was largely driven by an increasing bad debt expense of $11 million, reflecting a release of bad debt expenses reserve in the prior year as well as labor inflation.
Of recognition on benefit from temporary government subsidies in the prior year.
These increases were partially offset by currency benefit on savings from project own it slightly.
<unk> expense declined sequentially by $20 million.
Excluding the onetime accelerated share based compensation expense recognized in Q2 due to project own it savings offset by the effect of acquisition and investment in new businesses.
<unk> was $73 million in the quarter or four 2% of revenue, which was a decrease of 50 basis points as a percentage of revenue year on year.
The reduction was driven by lower spending for print on the suspension or deferral of innovation project.
Other expenses net were 34 million higher year over year.
The increase was mainly driven by lower sales of noncore business asset an increase in non service retirement related interest costs due to higher discount rate on higher litigation expenses.
Third quarter adjusted tax rate was 42, 1% compared to minus three 5% last year.
Increase was largely due to changes in election made to certain tax position for recently filed return as well as the prior year on year nonrecurring tax benefit from tax return filing position on the remeasurement of deferred tax assets.
Adjusted EPS of <unk> 19 in the third quarter was 29 central worse than in the prior year.
This decline was driven by your year over year reduction in adjusted operating income lower sales from non core business asset on the higher tax rate offset by a lower share count.
GAAP loss per share of $2 48 was stood alone 96 cents lower year over year due to enough tariff tax non cash goodwill impairment charge of $395 million or $2 54 on an increase in adjusted items, including high yield.
Non service retirement related on restructuring costs.
So goodwill impairment charge reflects the reevaluation associated with macroeconomic uncertainty.
Well as higher discount rate applied to our forecast.
Turning to revenue demand for our product and services was strong in Q3, but total revenue fell slightly below our expectation due to significant euro and British pound weakness.
Despite adverse currency movement equipment revenue was at <unk>.
Highest level seen supply chain constraints began last year.
Sales from new grew mid single digits on a constant currency basis for the <unk> straight quarter increase.
<unk> of the benefit of acquisitions.
Why do we our pumps, having increased caution from some of our customer the underlying driver of demand on revenue growth for our business remains industry.
Equipment orders continued to benefit from years of under investment in printer hardware growth in supplies revenue reflects improvement in print activity manage screen.
On digital services revenue is growing.
One we are realizing the early benefit of recent price increase.
Equipment sales of $390 million in Q3 grew six 7% year over year in constant currency or 0.8% industrial currency constant currency growth was driven by strength in EMEA.
So geographic disparity of revenue growth between region. This quarter reflects the availability of unique more than demand trends, which remained resilient in both regions, particularly for <unk> III equipment.
We received more equipment specific to European market than expected, which negatively affected gross margin has achieved selling prices are lower in EMEA.
Installation way of down year over year across all category of black and white machine, but our year on year over year for all categories of Codell machines. This reflect our prioritization of Easter shift to higher value Colo equipment.
Margin benefit associated with an improvement in the mix of color devices were offset by geographical mix on the installation of equipment from our backlog.
Does not yet reflect recent price increases we expect a more favorable geographic channel and product mix in Q4, both cells from new of 136 billion grew four 1% in constant currency year over year on cell, 0.7% in actual currency.
Both sales growth and constant currency was driven by high Tech services, which includes revenue associated with our recent acquisition of <unk> in Canada on growth in source supplies on paper.
Maintenance on outsourcing services revenue growth accelerated this quarter in constant currency due to recent pricing action on the acquisition of inspire.
These improvements were partially offset by lower financing revenue, which was impacted by Xerox product availability.
Let's now review cash flow free cash flow was a use of $18 million and crucially on was lower year over year by $99 million driven by a $60 million increase in the use of working capital on an incremental $46 million of capital use to finance origination on.
Operating lease growth as Peter.
Operating cash flow was a use of cash of $8 million in Q3 compared to a source of cash of 100 million in the prior year.
Working capital was a use of cash of $14 million this quarter $16 million high yields under prior year.
Given by the later received a product in the quarter on an increase in inventory in anticipation of higher <unk> revenues.
Additionally, cash used to fund an increase in finance receivable on operating lease was $54 million in the quarter compared to a use of fund of $8 million in the prior year quarter.
Reflecting peter portfolio growth strategy.
Investing activity, where use of cash of $73 million compared to a source of cash of $18 million in the prior year due in large part to $41 million of cash used to acquire businesses on lower proceeds from the sale of noncore business asset, partially offset by lower capex.
Capex of $10 million was 9 million lower year over year Capex, mainly support our investment in 19 infrastructure.
Financing activity consumed $168 million of cash this quarter driven by a net reduction in securitized debt.
During the quarter, we pay dividend totaling $43 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 this amount based on our year to date share repurchases.
Our annualized dividend.
Turning back to profitability.
Adjusted operating income margin improved sequentially this quarter, but at a slower pace than expected due to the effect of supply constrain geographic mix on the impact of high yield unexpected inflation across our cost structure.
We remain on target to deliver a $450 million of gross cost savings each year through project own it but I level of inflation. It caused a rising operating costs above the level expected when we increase our savings target to $450 million in Q1.
Further supply chain conditions are improving but not at the pace, we anticipated as recently as last quarter.
We expect adjusted operating margin to improve again in Q4.
<unk> supplies constrain <unk> on a we realize the benefit of incremental pricing benefit more profitable geographic mix on cross section. However.
However, we no longer expect our full year operating income margin to exceed prior year levels.
We are not providing an update to our 2023 margin outlook today, but I will provide some perspective.
Profitability improvement is a most important meantime, prerogative for our management team.
We expect adjusted operating margin to improve in Q4 and continue into 2023, specifically.
Specifically price increases and cost actions taken this year have trading on compounding benefit for 2020 suite on incrementally if revenue continues to grow as we expect it will.
Further aiding our profitability next year Aussie actions <unk> taken to reduce our spend on innovation projects with longer period of realized benefit.
We will provide more detail on expected 2023 savings from adjusting spending on new businesses. When we provide 2023 guidance next quarter.
Finally, we remain diligent in our approach to managing our overall cost structure.
Project own it will have delivered more than $2 2 billion of savings since 2018 by the end of this year.
How do we have noted in prior calls only it is as much about generating operating efficiencies igt's cost cutting.
We have additional capacity to do bookings are coming year as Steve noted. We are currently undergoing a detailed strategic review of our business tricked here. The result of which is expected to yield significant savings on enable greater ourselves.
We expect the combination of margin improvement from better supply chain condition on price on construction already executed along with future profit and seeing actions will drive operating margin in 2020 suite closer to the level indicated that our February 2022 Investor day.
Turning to segment.
Revenue declined 12, 3% in Q3, mainly due to a reduction in operating lease revenue, reflecting lower equipment and store due to product constraints.
<unk> profit fell 16 million or 67% due to lower profit from operating lease on higher bad debt expense, including a reserve release of approximately $14 million in 2021.
Which were only partially offset by lower E tail segment commissions due to lower originations.
Segment margin was five 4% compared to 14, 3% a year ago.
Year to date, Peter margin of nine 3% remained above our full year estimate of 8% to 9%.
We continue to expect Peter margin to full industrial range for the full year.
<unk> leads volume pick up gradually increase the new test segment Commission.
In Q3, Sito's finance assets were stable at constant currency quarter over quarter Peter.
Peter origination volume grew 6% year over year non captive channel originations, which includes third party dealers on non Xerox vendor grew 33% year over year due to growth in new dealer relationship on third party equipment overdue nation volumes.
This growth was partially offset by a decline in captive product origination of 11%, which were negatively affected by Xerox product availability.
Print on OS our revenue grew slightly in Q3 in actual currency.
Printer knows our segment profit grew 14% year over year with a 50 basis point expansion in segment profit margin, despite being negatively impacted by the ongoing effects of supply chain constrained on inefficient.
Turning to capital structure, we ended Q3 with a neutral net cash position.
$2 7 billion of the $3 7 billion of our outstanding debt is allocated to <unk> fit our lease portfolio.
So remaining debt of around 1 billion is attributable to the core business that.
<unk> consists of 10 year unsecured bond on finance asset securitization.
We have a balanced bond maturity ladder on no unsecured maturity for the remainder of the year.
As a reminder, we plan to refinance the entirety of our 2020 sweep obligation with additional takeaway receivable financing.
The vast majority of our debt carries a fixed rate.
Our result.
We do not expect material near term profitability or free cash flow headwind associated with the rising interest rate.
Finally, I will address guidance.
We lowered our revenue guidance from at least $7 1 billion to a range of seven to $7 1 billion at actual currency largely due to adverse currency movement onto a lesser extent slower than expected easing of supply chain constraints.
Since we last gave guidance currency fluctuation had caused a $70 million headwind to our revenue outlook industrial guarantee.
Our constant currency outlook for full year of revenue growth is largely unchanged as we maintain a sizable backlog on a good visibility to Q4 product shipments.
We lowered our free cash flow guidance for the year from at least 100 million to at least $125 million.
As noted on previous calls our guidance was predicated on an easing of supply chain condition on the unexpected level of paid volume improvement.
What do we have experience improvement on both fronts on continued to expect improvement going forward. The improvement realized to date are lower than our initial expectation.
More than underpinned $50 million of the decrease in free cash flow guidance reflects a greater than expected use of working capital to fund our origination growth of fetal on inventory, which was the largest and expect good use of cash in Q3 due to late delivery of equipment.
Neither of these have any impact on profitability on our investment in people portfolio are expected to produce double digit margins and return on investment over time.
So the remainder of the reduction in free cash flow guidance reflect a lower operating profit outlook for the second half of the year due to slower than expected improvement in soup like constrained page volume trends on schoolgirls unexpected inflation across our cost base.
The effect of which will expect will normalize in 2023.
Similar to my comment on margin I want to be clear that we are in no way satisfied with this year expecting free cash flow result.
Our team is working tirelessly to improve margin on working capital efficiency, and we expect significantly stronger free cash flow result in the years ahead due in part to improvements in supply chain constrained on new leasing of inflationary pressure on our cost base in combination with additional strategic action.
Our expectation is that pre cash flow will more than cover our dividend of $1 per share, which we have every intention of maintaining.
We now open the line for Q&A.
Certainly ladies and gentlemen, once again as a reminder, if you have a question at this time. Please press star one one on your telephone and our first question comes from the line of David.
<unk> from loop capital your question. Please.
Hey, good morning, guys. Thanks.
Thanks for taking the question a lot of really really useful detail. So appreciate that.
I guess I.
I guess the big one for me is really.
Ill.
And then on revenue, which has held up really well.
Any customer contacts you can share there would be useful.
And I guess, even including any thoughts you guys have for how much of the revenue that you've been putting up.
And driven by backlog.
Relative to fresh organic demand coming on as you've been moving forward.
And I guess, what's your ex debt without giving a guide.
'twenty three guidance.
What.
What.
What would you convey.
Your expectation for us with a guidance as to how you see macro kind of manifesting.
On your customer base.
Appreciate that.
Thanks Emily.
So we.
We notice it so our demand for our product and services remain very I would say if.
You understand.
Macro environment is challenging at the same time, what we have seen is with them.
And for our product remains strong our backlog moderately reduce it was only 8% although as we mentioned it in quarter. Two we are expecting the backdrop to tail off then to reduce the one quarter three quarter four we have seen a high demand of our.
Our product I would say all product French on specifically on a suite.
And what we see from the macro and the amount is not that we are not.
The reduction in investments related to our product and our products ship off.
The regimen shown are how our customer our country looking at addressing some of the challenges that they had specifically when you speak about workflow solution everything which is around digital savvy space, where we have a set of solutions that address some of that challenge yet so in a nutshell, we don't see.
Demand decreased order backlog is steady.
Expecting to absorb some of the backlog as well in Q4 on the what we are facing currently is mainly <unk>.
Challenges, we faced during the quarter was mainly related to supply chain on nutrition pressure.
And then I would say the other thing is yes and yes.
I would say is on productivity.
<unk> customers are facing the same headwinds that everybody else is doing on the macro side in our products and services are really helping to drive productivity inside of their infrastructure. So we see strong demand where we've got clients that are trying to deal with inflationary costs as well as we are and our products help us significantly there.
And Steve Thanks for that and I believe you May have mentioned you expect could you guys expect to grow in 2023 is that accurate.
And I.
I guess, what underpins that is it really just sort of the stuff you talked to just a moment ago is there anything anything incremental to that thanks.
Yes, so obviously I would give you two data points 12, datapoint is owned equipment revenue equipment revenue as the backlog still remains strong we have followed up on $29 million of backlog. It was down only 8% during the quarter straight on the if you compare this backlog compared to the total.
Equipment revenue, we are used to generate is close to a one quarter of the full year revenue. So it was still a strong backlog here on the I would call that as well as a healthy backdrop I gave a data point by saying less.
So that's done.
50 or more than 50% of this backlog is less than 90 days or so it does not mean that this backlog is aging we do not see consolidation of orders from customer. So it helps shape, although customer clearly waiting just supply chain challenges to be a fixture.
Adding post sales, although as you have noticed it in quarter two by the way both on equipment on pulse had since quarter. Two 2021. So this was the first time, where we started to face some of the.
Ship igen challenges, there, but the equipment procurement <unk> boss revenue, both digital revenue growth in constant currency.
Since both on a year, which is a good indication that we sort of gradual recovery of the atrium, but what's also also running also.
<unk> training process.
Taking shape.
Generating additional revenue here, we mentioned into the call.
So it was growing a shipyard business was growing so it's a <unk> so.
Quite a good indication I also quoted at 80%.
When when you compare to.
2019 processor ordinary is now at 80% of where we will add in 2019.
So.
If you take all these component on your project is for next year, we are expecting revenue to grow ESI will be a key driver, but iag's emphasis as well or is there a revenue stream in process will drive the growth.
So a lot of good detail I appreciate it guys. Thanks a lot.
Thank you Rhonda.
Thank you.
One moment for our next question.
Next question comes from the line of Erik Woodring from Morgan Stanley . Your question. Please.
Hi, Good morning, guys. This is <unk> on for Eric let Bryan. Thank you for taking my questions.
Maybe just to start you highlighted that project deployments are taking a little bit longer and that page volume commitments or <unk>.
<unk>.
When did you see this behavior start to change and how should we think about what linearity looks like in the quarter.
Yes so.
Just two indication as to how that's one question, we often a reshape of around or how do you see as a process of new stream going sure. So as I mentioned it process was a growth in the quarter towards our constant currency growth of four 1%. So still I would say a healthy stream here. However, we have noticed in some.
Okay John .
Customers are taking longer to deploy and project it could be related to a weight on Tuesday, our face, but also I would say project decisions that theyre, making this delay in project does that mean that it has a direct impact on wound up losing revenue. It goes offline as customers are currently using our search and so this is an expansion of the current contract up to.
Next contract.
Painting on the page volume.
We have seen in quarter three over a quarter to a second share growth increase of her page volume we have.
We are not yet.
80% some of our geography US 80% of what we were in 2019.
Gradual recovery to be.
I would say a transparent in our expectation, but we're expecting a higher recovery during this quarter, but it just reflects some of the challenges that our firm are currently facing and bringing employees back to the office.
However, despite this it was still growth. So this is Jeff Dyke petroleum going down it's a steady growth quarter over quarter. All of the sequential improvement are on scales correlations that we flagged in the past between presence through <unk>.
Okay.
Great. Thank you.
Just a follow up question can you provide a little more color on what exactly the goodwill impairment charge relates to.
And then.
Yeah, I'll, let you guys. Thank you.
Okay.
I would say some simple a technical.
So every year, we conduct at this time of the year and assessment of.
Our goodwill goodwill is mainly related to a prior year goodwill being booked on the acquisition.
Mainly two components when you make this adjustment.
One key component is what is the interest rate assumptions that you have when youll be the case, so a discount rate on how you calculate the walk on the vast majority of the.
Big chunk of this goodwill impairment is driven by this due to the current macro environment. So somewhat element is related towards the way we look at our forecast on how we.
Just adjusted all of that.
One of the components.
Help us to assess.
How is that a good way, we should be sustaining the free tier.
I want to reiterate six points aerospace is a non cash items.
You have noticed this is treated below the line. So this is some things that we're doing every year.
On the <unk> challenges after the company outpacing elsewhere.
Great. Thank you so much.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of <unk> <unk> from Jpmorgan. Your question. Please.
Hi, good morning, and thanks for taking my question I guess I wanted to go back to the comment about volumes again.
I think I heard you say volume recovery has been slower than expected and wanted to see if you can dig into that debate is that is it.
Understanding that that's driven by less Red Dawn will be office or.
<unk> been doing behavior sort of been different even though the employees have come back in as you're starting to sort of see some budget considerations from your customers.
Isn't that.
More of where we would you would expect sort of your customers to fix certain budget decisions a variety of use based on the volumes that you're seeing like one data set of priorities.
Just change it on trend why shouldn't we think of that integrate with <unk> and I have a follow up please.
Yes, Thank you Sammy.
The main point that we observe here is that the return to the office has been slower in the company.
Is your expectation or incentive employees to Wyndham coordinate our NGL phase following year Enbrel. We commented just a range of a prior quarter, we see employees using the devices on printing even if they are on their working parallel of the umbrella was giving just a couple of three days out of five three days out of five could mean 60, 60%.
Of page volume, we are getting our trajectory to grow to 60%. We are getting closer towards December all I mentioned, some geographic already above 80%.
We are not yet in every play stage theyre getting closer or gradual improvement but.
We do not offset given where like a <unk>.
Significant shifts or changes in the printing pattern of our embraer.
Another point is we still have a strong demand around our NPS managed print solution around working.
Walking from all while on per year once.
Company wants to see both are working from home.
<unk> business or the demand that we've seen on the <unk> business is on the solution that we are leveraging <unk>.
Quest was quite strong in the quarter here.
And finally, I would like to add one point because February Miss one indicator, but then other indicate areas out of how the devices are being used by our customer.
I would like to flag that the if you remember we launched earlier this year.
I would say a shrink tougher.
Software that customarily using which is called <unk> central which can now do I would say a lot of things much more than printing for customer like they can do a translation reduction or conversion to audio on the this quarter. We have seen the sales of this solution for Walker that are either walking.
From all NGL face rising significantly on being very close to a sale that we're saying we are seeing LG ups that we're setting on their productivity. So this is encouraging because what does that mean it means that the page volume is an indicator, but we see also also a revenue stream around the multi function.
AIC is being generated.
Got it.
And for my follow up if I can ask on the cash flow the change in guidance from 400 to 125 for the year.
Can you just outline how much of that is just the <unk>.
Sort of.
And point related to inventory given some of the supply challenges.
One off versus more underlying sort of profitability and then you mentioned you were looking to scale back on investments in bonds. I believe you had updated US did you spend looking at cash flow got.
Cash investment to both DSO and.
But maybe just update us in terms of what you're thinking there as it will for what the run rate could be in terms of cash.
But on an annual basis.
Yes, so the way to look at it on to simplify it so.
So a reduction between Florida Orlando on 25 more than 150 is related to working capital one item of working capital as you describe it as more of a one off it is related to inventory on this is late.
Later.
Roll off product in Q3, which is a good news because it will help us as well to deliver a strong quarter for from an ESR point of view.
The second part of this working capital as well.
What I call a good collateral is the use of cash in order to fund fit our cost if at all is a business, where you borrow money on damage or scale of this money back to customer as part of our financing arrangement with customers there.
The fact that filter is growing it's a good thing because what does that mean electronic portfolio fit out now at constant currency is flattish on the staff has a trajectory to reverse the trend that trend down but does that mean that it'll enable I would find that xerox to growth although to generate origination.
New businesses with known Xerox equipment, which is exactly the strategy that we've been profitable.
Working capital or it's more than $150 million of decline.
Cash flow declined on different Gsk's guidance, the remainder which is around 125 is mainly related to <unk>.
Profitability on beyond profitability issues or supply chain in face of supply chain challenges that we face on the fact that the mix of product set that we are receiving on the inflation, we see on supply chain, but wont be able to correct that project towards this year.
I want to repeat this message because I think it's important we expect sequential improvement in margin on free cash flow in Q4 and in 2023.
So we don't know why it is mainly related to the fact that we have put in place price increases on cross section to address some of the.
Inflation pressure, we are also seeing improvement in supply chain as I mentioned at <unk>, delivering Q3 means growing delivery and quantify what installing copper fall.
We have also taken actions all of that we mentioned during our Cogs are whether youre seeing some of the R&D on the innovation project. Some of these projected longer radiation caveat. So we are focusing on the better return on investment that some of these projects are always.
Project own. It is one of the driver of our cost base adjustment. So again I want to rebate on reinforced this message here improvement in margin sequentially on free cash flow in Q4 and 2027.
Okay. Thank you thanks for taking my questions.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Shannon Cross from Credit Suisse. Your question. Please.
Thank you very much I was wondering can we take a step back and just talk a bit I mean, if we went back to the analyst day and there was all this focus on growth businesses, which obviously.
Aren't working out our costing too much I guess.
The HVAC business in that and how should we think about the value or how to track the.
Hey.
So Shannon we have no issue with paying a dividend on the maintaining the dividend.
From a debt point of view we have.
Generate $650 million to pay.
In March 2023, as part of the Covenant.
Whether the covenants that we have trimmed up on 58 will be paid on December will be entirely funded by securitization on this is in flight.
We have no concern.
<unk> points here regarding our free cash flow again in quarter four what I mentioned here. The vast majority of the Q3 use of free cash flow was related to it our growth. It is a good thing to add on deals are citing inventory.
I clearly expect inventory situation to reverse high generate Q4 is always our strongest quarter on we're still sitting with a backlog of $420 million. So we should have a strong quarter for from our nearest point of view that will be played TSA or inventory and what you will see some inventory down.
Okay. Thank you very much.
Thank you Shannon.
One moment for our final question.
And our final question for today comes from the line of Jim Suva from Citi. Your question. Please.
Thank you so much for fitting me in can you help me better understand how the bridge with.
More investment in that and we just reducing your sales outlook.
Customers are asking you to finance more or is it the cost of capital more or like building or expanding something within pivotal because sales are being challenged and you have a more cautionary outlook on macro concerns building civil <unk>.
Seems kind of.
Interestingly if you can help me bridge that that'd be great.
Yeah, So Jim I will step back a little bit on the described fit our strategy. So if at all has been for a long time that captive operation.
Other captive was bidding is what you described which was completely linked collected correlated with Xerox equipment. When does that looks a coupon project was up.
Originations were up on vendor financing as Scott was up on the opposite was true as well.
Since I would say two years now since we.
We initiated a reinvigorated fit all.
Due to the fact that fit all.
Strong credit assessment capability, a good platform on the ability to expand beyond Xerox.
Our team management team is extending well beyond the pure <unk> product on the what we have noticed in Costar suite, although what we are expecting from the team is growth outside of Xerox, what I call captive activity.
Is what is happening across our suite.
As I described it at clubs that have good credit shareholders. Because this is a <unk>.
Use of cash that would have a strong return double digit return in the future.
This is as well.
And activities.
And our edit to shrink some thunder keep a good relationship with our partner on that with our reset us on their end customer so.
So back to your question I. Appreciate the question is was mainly related to non Xerox equipment, all solution growth not correlated to the pure Xerox equipment.
That makes sense. Thank you so much.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Steve <unk> for any further remarks.
Thank you for listening to our earnings conference call. This morning, the past few years have tested the resolve about people.
I'm honored to lead this company that is filled with great people, who have a proven time and again their ability to overcome incredible challenges.
When I meet with our clients and our employees I am filled with optimism about <unk> ability to do more with our clients and about the team we have in place to deliver more value to our key stakeholders, including shareholders clients partners and employees. Thank you for listening to this call and have a great day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
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