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].
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 I am David <unk>, 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 highest 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.
Time, 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.
Since being named Xerox permanent CEO in August I have spent a large portion of my time with our stakeholders.
Employees 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 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 had 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.
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.
29.
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 continues to closely correlate with returned to work trends.
Wholesale revenue also benefited from strong growth in it.
In 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.
I am pleased to announce that we grew our leading share in managed print services in 2021 per Idc's recent market Scape report.
And further support of our leading position in managed print queues.
Circuit recently named Xerox as a leader in managed print services and it's 2022 landscape report.
According to circa <unk> 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 users Lakeland 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 Xerox 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 classified 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 client onboarding process for.
For a 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 <unk> 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 federal and Carryout, 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 publish 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 our cash flow generation year to date has fallen well below our expectations due to our strategic decision to invest in <unk> growth.
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 an 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 as 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.
Guaranteed.
The euro and British pound negatively impacted revenue by more than 500 basis points this quarter.
Equipment revenues 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, <unk>, our 2023 supply chain conditions ease.
<unk> revenue grew again in constant currency due to strong growth in consumables, such as paper on supplies and.
Digital services, including benefit from recent acquisitions.
Consistent with prior quarter, we continue to see a strong correlation between return to at least trends on page volumes. We are encouraged to see another quarter of petroleum improvement related to 2019 levels.
However page volumes are recovering you sort of work than we expected as employer of effort to bring employees back to offices have been slow to gain momentum.
Turning to profitability profit were lower year over year due to a slight decline in revenue at actual currency the effect of persistent high inflation on cost of goods sold on the slower than expected improvement in supply chain condition, which negatively impacted product geographic mix.
This factor along with a really that bad debt reserves in the prior year growth adjusted operating income margin lower on a year over year basis.
<unk> adjusted operating margin improved 70 basis points sequentially due to benefit associated with the 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.
<unk> on the availability of equipment on put us cost inflation net of lower logistic cost 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 constrained adversely affected the geographic mix of equipment installed in Q3.
We expect gross margin to improve significantly in Q4 as geographic and product mix improved.
Youre portion of contractual price increases are realized on the we see currently have been.
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 spending on project only savings.
Specifically supply chain disruption on higher product costs accounted for 60 basis points of the decline in operating margin higher bad debt 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.
<unk> expenses of $418 million increased $5 million year over year.
So year over year increase was largely driven by an increase in bad debt expense of $11 million, reflecting a release of bad debt expenses reserve in the prior year as well as labor inflation, the effect of acquisition and benefit from temporary government subsidies in the prior year.
These increases were partially offset by currency benefit on savings from project own it.
<unk> expense declined sequentially by $20 million, excluding the onetime accelerated share based compensation expense recognized in Q2 due to project only 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.
So 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 non core business assets, an increase in non service retirement related interest costs due to higher discount rate on high year 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% 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 reflect a reevaluation associated with macroeconomic uncertainty.
Well as a 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 the adverse currency movement equipment revenue was at its highest level in supply chain constrained begun last year.
Gross sales from new grew mid single digits on a constant currency basis for the <unk> straight quarter.
<unk> of the benefit of acquisitions.
Why do we are observing 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 $319 million in Q3 grew six 7% year over year in constant currency.
0.8% industrial currency constant currency growth was driven by strength in EMEA.
So geographic disparity of revenue growth between the region. This quarter reflects the availability of unique more than demand trend, which remained resilient in both regions, particularly for <unk> equipment.
We received more equipment specific to European market and expected, which negatively affected gross margin has he 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 reflects our prioritization of essential to higher value <unk> equipment.
Margin benefit associated with an improvement in the mix of Colo devices.
Were offset by geographical mix on the installation of equipment from our backlog that does not yet reflect recent price increases we expect most of our rubber geographic channel and product mix in Q4.
Sales from new of 136 billion grew four 1% in constant currency year over year on Europe , 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 Poland 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 in Q3 was lower year over year by 19 9 million driven by a $60 million increase in the use of working capital on an incremental $46 million of capital used to finance our 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 $60 million high yield 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 funds of $8 million in the prior year quarter.
Reflecting peter portfolio growth strategy.
Investing activities were a 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.
<unk>.
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 mix of addiction and securitizing them.
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 on our annualized dividend.
Turning back to profitability.
Adjusted operating income margin improved sequentially this quarter, but at a slower pace unexpected due to the effect of supply constrained 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 the high level of inflation that 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.
Alex 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.
Not providing an update to our 2023 margin outlook today, but I will provide some perspective.
Profitability improvement is a most important near term prerogative for our management team.
We expect adjusted operating margin to improve in Q4 and continue into 2023.
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 <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 as it is cost cutting.
We have additional capacity to do bookings are coming year.
Steve noted we are currently undergoing a detailed strategic review of our business structure.
Sort 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 to enhancing actions will drive operating margin in 2020 suite closer towards the level indicated that our February 2022 Investor day.
Turning to segment filter revenue declined 12, 3% in Q3, mainly due to a reduction in operating lease revenue, reflecting lower equipment and store due to product constraints.
Segment 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 inter 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> lead volume pick up driving increase in inter segment Commission.
In Q3 features finance assets were stable at constant currency quarter over quarter.
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 origin nation of 11%, which were negatively affected by Xerox product availability.
Print on OS a review grew slightly in Q3 in actual currency.
<unk> 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 constraints on inefficient.
Turning to capital structure, we ended Q3 with a neutral net cash position too.
$2 7 billion of the $3 $7 billion of our outstanding debt is allocated to answer profit our lease portfolio. So.
So remaining debt of around 1 billion is attributable to the core business.
<unk> consists of 10 year unsecured bond on finance asset securitization.
We have a balance of bond maturity ladder on no unsecured maturity for the remainder of the year.
As a reminder, we plan to refinance the entirety of our 'twenty 'twenty sweep obligation with additional takeaway receivable financing.
The vast majority of our debt carries a fixed rate.
A 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 lower 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 has 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 shipment.
We lowered our free cash flow guidance for the year from at least 100 million to at least $125 million.
As noted on previous call our guidance was predicated on an easing of supply chain condition on the unexpected level of paid volume improvement.
What we have experienced improvement on both fronts and continue to expect improvement going forward. The improvement realized to date are lower than our initial expectation.
More than $150 million of the decrease in free cash flow guidance reflects a greater than expected use of working capital to fund origination growth of fetal on inventory, which was the largest and expect to use of cash in Q3 due to late delivery of equipment.
Neither of these have any impact on profitability on our investment in <unk> 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 lower operating profit outlook for the second half of the year due to slower than expected improvement in supply constrained page volume trends on schoolgirls unexpected inflation across our cost base and the effect of which we expect will normalize in 2002.
<unk> Suisse.
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 on who 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 a 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 on your telephone and our first question comes from the line of.
<unk> from loop capital your question. Please.
Hey, good morning, guys.
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.
No.
And then on the revenue, which has held up really well.
Any customer contacts you can share there would be useful.
And I guess, even including any sense you guys have for how much of the revenue that you've been putting up.
Is 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 sort of in the 23 guidance.
What.
What would you convey a year expectation for US a guide as to how you see macro kind of manifesting.
And your customer base at all.
I appreciate that thanks.
Thanks, Annabel so we.
We notice it so our demand for our product and services remain very I would say yes.
You understand the macro environment is challenging.
Same time, what we have seen is the demand for our product remains strong our backlog moderately reduce it was only 8% although as we mentioned it in quarter. Two we are expecting that backdrop towards tail of them to our radios that one quarter three quarter four we have seen a high demand.
Our product I would say all product French on specifically on a suite on the what we see on the from the macro on their advantage is that we are not asset reduction in investments related to our product and our products ship off.
The reservation or 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 services, where we have a set of solutions that address some of that challenge yet so in a nutshell, we don't see that.
Non decrease.
The backlog is steady.
Expecting to absorb some of the backlog as well in Q4 on the what we are facing currently is mainly related challenges.
Challenges, we faced during the quarter was mainly related to supply chain administration pressure.
And I would say the other thing is yes.
The other thing I would say.
Productivity 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 expected you guys expect to grow in 2023 is that accurate.
I guess, what what underpins that is it really just sort of the stuff you talked to just a moment ago is there anything incremental to that thanks.
Yeah. So obviously I won't give you a data point that that point is on our equipment with new equipment crop years of backlog still remains strong we have followed up on $29 million of backlog it was down only 8% during quarter three.
If you compare six 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 buy.
On the Holdco debt as well as a healthy backdrop.
But at a point by USAA.
Less than 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 customers.
Although customer clearly waiting just supply chain challenges to be a fixture regarding post sales.
You haven't noticed it in quarter two by the way both on equipment on post sale since quarter. Two 2021. So this was the first time, where we started to face some of the.
<unk> shipped igen challenges there, but the equipment question on post hedged both revenue.
Digital revenue grew in constant currency.
Since both on a year, which is a valuable indication.
We saw a gradual recovery of the edge volume, but what's also also broadening our wholesale revenues training process.
<unk> taken.
Faith on generating additional revenue here, we mentioned into the call ITC, Obviously star Wars growing the <unk> business was growing so it's a <unk> so quite.
Quite a good indication I also or is that the 80%.
When you compare to.
2019, Pulsates prognosis now at 80% of where were at in 2019.
So.
If you take all these component on New project is for next year, we are expecting revenue to grow ESI will be a key driver, but iag's emphasis as well on <unk> newest training in process will drive it across.
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 led rang. 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 are slower.
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 receive or Rhonda how do you see the process for new stream going sure. So as I mentioned at <unk> 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 more.
Customers are taking longer to deploy and project it could be already came to our retail Tuesday of H, but also I would say project decisions that theyre, making this delay in project does that mean that it has a direct impact on wildlife roofing revenue. It goes often discussed them are currently using our search share. So this is an expansion of the current <unk>.
Tracked up to next contract.
Commenting on the page volume.
We have seen in quarter three over a quarter of sequential growth increase offer page volume.
Yes.
We are not yet.
80% some of our geography US 80% of what we were in 2019.
Youre welcome Brian to.
To be I.
I would say a transfer antaya in our expectation, but we're expecting a higher recovery during this quarter, but 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 scaled growth quarter.
Over a quarter of sequential improvement at all.
Sales of correlations that we flagged in the past between presidential GFS on February .
Great. Thank you.
Just a follow up question can you provide a little more color on what exactly the goodwill impairment charge relates Tim.
And then.
Yes, I'll, let you go 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 acquisition.
Mainly two components when you make this adjustment.
Another key component is what is the interest rate assumptions that you have when you will be the case, so a discount rate on how you get paid to walk on the vast majority.
Big chunk of this goodwill impairment is driven by this due to the current macro environment. So some of that amount is related to the way we look at our forecast, although how we.
Just adjusted all of that.
One of the components.
Help us to assess.
How is that a good way, we should be sustained in the future.
I want to reiterate six points aerospace is a non cash items on you have noticed this is treated below the line. So this is some things that we're doing every year.
On the <unk> challenges as a company are facing us.
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.
Who do you see volume recovery has been slower than expected and wanted to see if you can dig into that debate is that.
Is it your understanding that that's driven by less Red Dawn will be office or has been thing 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.
Why isn't that more off where we would you would expect.
To fix certain budget decision.
A variety of use based on the beach volumes that you're seeing like one data set of priorities and budgets change. It on trend why should we think of that integrated way and I have a follow up please.
Yes, thank you that makes sense.
The main point that we observe here is that the return to the office has been slower in the company, where <unk> expect it our incentive employees to Wyndham coordinate our NGL phase following year Enbrel. We commented is the range of a prior quarter, we see employees using the devices on printing even if they are.
They are working in parallel.
<unk> 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 to December and I mentioned, some geographic already above 80%.
But we are not yet in every place as theyre getting closer or gradual improvement.
We do not of SaaS like.
A significant shift or changes in the printing pattern of our employees.
Another point is we still have a strong demand around our MTS managed print solution around working.
Walking from or more while importantly once.
Company wants to see both are working from home.
<unk> business. So the demand that we're seeing on the <unk> business is on the Sony Shannon that there we are leveraging <unk>.
Quest was quite strong in the quarter here.
And finally, I would like to add one point because petroleum is one indicator, but then those are indicate areas out of how is 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.
This quarter, we have seen the sales of this solution for Walker that are either working from home all NGL face rising significantly on being very close to sales that we're seeing we are seeing on the apps.
We are sitting on their product here. So this is encouraging because what does that mean it means that the page volume is an indicator, but we see also wholesale revenue stream around the multi function devices 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>.
That's helpful.
Good 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 and bought it I believe you.
You had updated US did you spend looking at cash flow.
Got your investment about DSO.
But maybe just update us in terms of what you're thinking that as you go forward what the run rate could be in terms of cash.
Spend on an annual basis.
Yeah. So.
The total capital to simplify it so.
The 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 and this is late.
Later.
All of product in Q3, which is a good news because it will help us as well to deliver a strong quarter for the ESR point of view.
The second part of this working capital is what I call. A good collateral is the use of cash in order to fund fit our cost on <unk> 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.
The fact that filter is growing it's a good thing because what does that mean you accelerated the portfolio fit out now at constant currency is flattish on the Scott has a trajectory to reverse the trend that will trend down but does that mean that study table 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 so that.
Working capital, it's more than $150 million of decline.
Cash flow declined are different Gsk's guidance. So reminder, we think around a 125 is mainly related to.
Profitability on the end profitability tissues of 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 are each year.
I want to repeat this message because I think it's important we expect second showed 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 curious remains growing delivery and quantify what installing waterfall.
We have also taken actions all of them, we mentioned during our call today or would.
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 of 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.
There was so much of our focus on three D printed in the bridge business and.
The HVAC business in that and how should we think about the value or ahead of track.
From a debt point of view we have.
In March 2023 is part of the covenant.
Whether the covenants that we have trained up on <unk> will be paid on December will be entirely funded by CCAR position on this is in flight.
We have no concern.
Six points here.
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 growth, which is a good thing to add on deals are site inventory.
Clearly expect inventory situation to reverse I generate Q4 is always our strongest quarter on elasticity with a backlog of $420 million. So we should have a strong quarter for from a near term point of view that will deeply TSA, our inventory on reducing inventory down.
Okay. Thank you very much.
Thank you Shannon.
Thank you 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 the table and we just are reducing your sales outlook is it your 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 <unk>.
More cautionary outlook on macro concerns buildings, it'll just seems kind of.
Interestingly if you can help me bridge that that would be great.
Yes, 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 all of these other captive was giving US what you described which was completely linked collected correlated with Xerox a quick one quarter you. When did you Alex a coupon project was up.
Irrigation were up on vendor financing as Scott was up on the opposite was true as well.
Since I would say two years now and teams.
<unk>.
The initiatives, we invigorated fit all.
Due to the fact that fit all of ours are.
Strong credit assessment capability, a good platform on the ability to expand beyond Xerox.
Our team management team has expanded well beyond pure Xerox product on the what we have noticed in quarter three although what we are expecting from the team is growth outside of Xerox, what I call captive activity.
What did happen in Costar suite.
As I described it I called it out a good credit shareholders. Because this is a use of cash it will have a strong return double digit return in the future.
Positions us well and activities.
<unk> added towards shrank some thunder keep a good relationship with our partner on that with our reset us on their end customer here. 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 agreement.
That makes sense. Thank you so much.
Thank you.
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 of our 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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