Q1 2023 Xerox Holdings Corp Earnings Call

Speaker 2: Welcome to the Xerox Holdings Corporation first quarter 2023 earnings release conference call. After the presentation, there will be a question and answer session. To ask a question at this time, please press star 11.

Speaker 2: At any time during this call, you can withdraw your question by pressing star 1-1 again. At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President of and Head of Investor Relations. Please go ahead, sir.

Speaker 3: Good morning, everyone. I'm David Beckl, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation first quarter 2023 earnings release conference call hosted by Steve Banderschak, Chief Executive Officer. He's joined by Xavier Heiss, Executive Vice President and Chief Financial Officer.

Speaker 3: At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox.

Speaker 3: During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com slash investor and will make comments that contain forward-looking statements, which by their nature address matters that are in the future and are uncertain.

Speaker 3: Actual future financial results may be materially different than those expressed herein.

Speaker 3: At this time, I'd like to turn the meeting over to Mr. Bandyzak.

Speaker 3: Good morning and thank you for joining our Q1 2023 earnings call. I would like to start by complimenting the Xerox team in its execution of another solid quarter. We delivered another quarter of revenue and profitability growth in what continues to be a dynamic and challenging operating environment.

Speaker 3: Some of the challenges we faced in prior quarters, such as supply constraints and elevated logistic costs, have receded, but new challenges have emerged as central banking policies remain restrictive to global economic growth.

Speaker 3: Against this backdrop, we at Xerox remain focused on the execution of our 2023 priorities and the goal of delivering client success through products and services that address the productivity challenges of today's hybrid workplace.

Speaker 3: In other words, we are focused on making work, work for our clients.

Speaker 3: Summarizing results for the quarter, revenue of 1.72 billion grew 5.5% in constant currency and 2.8% in actual currency.

Speaker 3: Adjusted EPS was 49 cents.

Speaker 3: 61 cents higher year over year.

Speaker 3: Pre-cash flow was $70 million compared to $50 million in the prior year quarter. An adjusted operating margin of 6.9% was higher year-over-year by 710 basis points.

Speaker 3: Demand for our print equipment and related services remains resilient, as evidence by another quarter of constant currency growth in both equipment and post-sale revenue.

Speaker 3: This quarter we also observed a pickup in office-related print activity. As a result, we continue to expect a stable revenue and demand outlook for the year.

Speaker 3: Consistent with recent quarters, we are seeing isolated pockets of softer installation activity, often the result of delays in project deployments rather than order reduction.

Speaker 3: This softness, however, is being offset by continued strength in our office print business, particularly for state and local government, education, and mid-market accounts.

Speaker 3: as well as strength in our print and digital service offerings.

Speaker 3: We believe current secular and macro business challenges, such as hybridization of the workplace, higher inflation, labor shortages, and liquidity constraints play to our service offering strength.

Speaker 3: particularly those that utilize AI, machine learning, augmented reality, and other leading technologies to help optimize our client workflows and improve workplace productivity.

Speaker 3: Xavier will cover results for the quarter and guidance in more detail. I'd like to focus my comments on our strategic priorities.

Speaker 3: Our team continues to work diligently on the development of a long-term plan for generating sustainable growth in profits.

Speaker 3: For this year, we remain focused on executing against our three strategic priorities. Client success, profitability, and shareholder returns. I am pleased to say we are making progress on each measure.

Speaker 3: Starting with client success.

Speaker 3: It is clear from our market research and client conversations that the success of any strategy we deploy will be measured against our ability to enable positive business outcomes for our clients.

Speaker 3: Critical to enabling these outcomes is the delivery of products and solutions that solve our clients' most challenging, hybrid, and workplace productivity needs before they need them.

Speaker 3: One such solution is recently launched CareAR instruct app, which leverages CareAR's augmented reality technology and allows users of our entry printers to self troubleshoot machine disruptions.

Speaker 3: wherever they happen to be working.

Speaker 3: Much like Keras field service solutions, the app uses augmented reality to provide an immersive self-support experience.

Speaker 3: Complete with step-by-step guidance, instructional content, and interactive 3D visualization to help users solve common issues quickly.

Speaker 3: When combined with another recently launched service, the easy assist app, Zirax users can walk through machine setup, perform routine maintenance tasks, and order supplies on their own.

Speaker 3: Through the convenience of their mobile devices, KERRIR Instruct is also available to support our existing and future clients field service management requirements.

Speaker 3: Another example is the expansion of our digital services offerings to the mid-market bolstering, out-tam opportunity, and the largest print marketplace we currently serve. We now provide clients in this market the same types of accounts payable.

Speaker 3: Digital mail and intelligent document processing capabilities we provide to our largest enterprise and government clients.

Speaker 3: We see particularly high levels of demand for these services among our mid-market clients in the public sector, healthcare, education, and financial services industries. Our digital services security and productivity solutions provide us with a true competitive advantage.

Speaker 3: in an industry most think of as being mature.

Speaker 3: In recognition of these advantages, Keypoint Intelligence awarded Xerox the BLI 2023 Smart Workplace Software Line of the Year for the fifth consecutive year, acknowledging our diverse portfolio of applications, software, and services that help solve modern workplace challenges. semantic

Speaker 3: This technology advantage is driving an expansion of wallet share with existing clients.

Speaker 3: For example, this quarter we sold an expansion of services to a large British telecom client. The initial mandate involved helping this client optimize their print needs for direct marketing campaigns.

Speaker 3: Under the new agreement, we are moving up the value chain to provide services such as customer acquisition database hosting,

Speaker 3: data analysis and marketing consultation services. In total, the addition of these services drove total contract value higher by 20 percent and further solidifies an already strong business relationship.

Speaker 3: Moving forward, we see an opportunity to standardize these successful business outcomes by verticalizing workplace productivity solutions across industries.

Speaker 3: One such example is the healthcare industry where a motto is patience not paperwork.

Speaker 3: Through years of intense collaboration with healthcare providers, we have developed a suite of digital solutions that drive synchronicity between inbound and outbound communications.

Speaker 3: Most specifically, we have helped clients in the health care services industry transition patient records from paper to digital systems, added intelligence to paper and digital inbound communications and helped automate certain types of outbound communications like

Speaker 3: clinical outcomes and guidance.

Speaker 3: Additional industries with identified verticalization potential include consumer goods, banking and insurance to name a few.

Speaker 3: A second strategic priority is profitability.

Speaker 3: In the first quarter, we delivered the second consecutive quarter of growth and operating profitability.

Speaker 3: Lower transportation and logistics costs and lower bad debt expense contributed to the year-over-year improvement in profitability.

Speaker 3: But the bulb came from operating efficiencies driven by the management system putting place under Project ONIT, including the implementation of new technologies to simplify and streamline operations.

Speaker 3: as well as specific actions taking to implement a more flexible cost base.

Speaker 3: One such action that will drive profit improvement in the remainder of the year is the donation of Pock to SRI International, which, like Pock, is one of the world's leading research institutions.

Speaker 3: The donation and resulting research partnership provides Xerox greater capacity to focus on our innovation efforts on projects in print, IT, and digital services.

Speaker 3: It also supports a more flexible and focused approach to R&D spend by lowering our run rate R&D costs and preserving access to SRI and Pox leading research capabilities.

Speaker 3: Innovation is in Xerox's DNA and will continue to be a priority for the company going forward.

Speaker 3: Importantly, our relationship with Pock is not ending rather, it is being extended through a new technology exploration and innovation program with SRI and Pock.

Speaker 3: Through this program, SRI and POC scientists, engineers and researchers will work with us and our clients to pioneer new technologies that are closely aligned with our print, digital and IT services focus.

Speaker 3: Finally, Shareholder returns.

Speaker 3: Now capital return policy is designed to provide shareholders a means of participating in our success through the distribution of at least 50% of our free cash flow. We will update investors on specific plans for distributing free cash flow and excess cash as it builds throughout the year.

Speaker 3: In Q1 we decided the most responsible use of cash was the pay down of 450 million of debt.

Speaker 3: To recap, we got off to a strong start for the year. The operational discipline instilled in our organization by Project Donate and other specific actions recently taken are driving more margin improvement than expected.

Speaker 3: As a result, we increased our profitability outlook for the year. Despite a challenging and fluid business environment, the resiliency of demand for our products and a demonstrated ability to control costs leave us confident in our ability to achieve updated guidance. I will now hand it over to Zavia.

Speaker 4: Thank you Steve, on good morning everyone. As Steve mentioned, we delivered another strong quarter of growth across all key metrics, due to a stable demand on their month for our equipment and services, improvement in product supply on supply chain related costs.

Speaker 4: on the benefit of price and cost action taken last year.

Speaker 4: Starting with revenue, the momentum in sales growth we experienced in the second half of last year, carried over to start this year.

Speaker 4: In Q1, we posted the first consecutive quarter of constant currency growth in total revenue on the third consecutive quarter of constant currency growth in both equipment and both sales revenue.

Speaker 4: Revenue growth this quarter of 2.8% at actual currency was negatively impacted by 270 basis point of currency aid winds on reflected improved product supplies, healthy equipment order flows on growth in contractual print on digital services.

Speaker 4: Caring to profitability. We deliver a second consecutive quarter of year-over-year improvement in growth on operating profit margins, driven by higher equipment sales on travel over than back to

Speaker 4: price increases, lower logistic cost on a reduction in operating expense, including a 23 million reduction in budget expense.

Speaker 4: Gross margin improved 250 basis point over the prior year quarter, mainly driven by lower supply generated cost, benefits associated with price on cost action taken in 2022, currency on improved product mix.

Speaker 4: These benefits were partially offset by ongoing product cost increases.

Speaker 4: Adjusted operating margin of 6.9% increased 7.10 basis point year of earlier, driven by 380 basis points from cost reduction actions, 250 basis points of supply chain related cost improvement, 130 basis points from lower-but-debt expense, on 90 basis points from price increases.

Speaker 4: Partially of settings is benefit where effect from currency. Adjust the other expenses net were 10 million lower year over year due to lower net interest expenses associated with lower court debt, partially offset by 11 million of currency losses in the current quarter.

Speaker 4: Adjusted tax rate was 15.5% compared to 52.9% in the same quarter last year. The decrease in tax rate reflects benefit in the current quarter from the redetermination of certain unrecognized tax positions on non-recuring benefit in the prior year quarter. Adjusted EBS of 49.9% in the first quarter was 15.5% compared to 52.9% in the first quarter was 15.5% in the first quarter last year.

Speaker 4: to contract ammunition, expand in the prior year quarter.

Speaker 4: Let me now review Ragnu, CacheLow on profitability in more detail.

Speaker 4: Turning to revenue, equipment sales of 391 million in Q1 grew 27% year-over-year in Confront currency or roughly 25% in actual currency.

Speaker 4: Growth was driven by better availability of product in both the Americas and EMEA, particularly for our higher margin A3 device on color production equipment.

Speaker 4: Backlog decline for the third consecutive quarter as supply chain condition further normalize.

We expect our backlog to return to typical levels, which range from 100 to 125 million by anyway.

Equipment for new outpaste installation is quartered due to a greater mix of office A3 on production equipment, as well as a continued benefit of price increases.

Intellation growth was Congress for our I-Martine Meet Ranch product on Color Productation Equipment.

Entry and for insulation were done slightly year over year due to the stoppage of shipment of Russia on the ongoing normalization of work from home trans. Post-expo revenue of 1.32 billion grew 0.5% in content currency year over year.

on decline 2.2% in actual currency. Post-SELF growth in constant currency was driven by growth in consumable on contractual print on digital services.

including the acquisition of Go Inspire, partially offset by lower sales of IT hardware. Contractual print on digital services are our largest on most stable source of revenue as grown as a consistent pace at constant currency for more than a year. Despite only a modest return of work to the office on macro uncertainty,

due in large part to the expansion of our digital services of friends on pricing crisis.

Groz's quarter was further added by an improvement in office-rated print activity.

Geographically, both region grew mid-single digit in constant currency. Yemi-e-grum slightly faster than the Americas due to stronger post-cells growth including the prior year acquisition of Go Inspire.

Let's now review caselo. 3 caselo was 70 million in Q1 higher by 20 million year over year.

Operating cash flow of 78 million in Q1 compared to 66 million in the prior year.

Working capital was a use of cash of 66 million, resulting in a 159 million year over a year decreasing cash flow, driven by a reduction in accounts payable on a larger use of cash for inventory, reflecting greater product availability.

strategic buying action on positioning ahead of Q2.

The unfavorable timing of other liability payment also resulted in a greater use of operating cash to this vehicle in cash.

Positively offsetting this effect were higher operating income on the next source of cash from finance receivable. Finance asset activity was a source of cashis quarter of 120 million. Compared to a source of cash of 5 million in the prior year, reflecting the benefit of our recently signed receivable funding program with HPS.

partially offset by higher operating least placement.

Investing activity were used of cash of 17 million compared to a use of cash of 75 million in the prior year, due to lower M&A activity on lower cap ex.

Financing activity consumes 505 million of cash is quarter, which includes the payment of the remaining 300 million of 2023 notes on approximately 150 million of secure debt. During the quarter, we paid dividends totaling 45 million on the noteworthy purchase initials.

Keh'ouni cooperatei

Q1, are you still operating profit margin expanded 7010 basis point year over year for reasons previously discussed?

We are carefully monitoring our cost-based in the context of macro uncertainty. As Steve mentioned, profitability improvement this quarter reflects the ongoing benefit associated with operating discipline instilled by project-owned-8 employers.

We also benefited from strategic action taken in 2022 to make our cross-base more flexible.

Why we are not providing an official cost saving target for 2023, we do expect to deliver low to mid-single digit of gross operating cost efficiency for the year, driven by our culture of continuous improvement on specific cost reductions.

These efficiencies are expected to support margin growth in 2023, despite an expected increase in product cost. We are confident in our ability to more than offset figure product cost increases through ongoing contractual pricing increases, a more flexible global manufacture. Great work to you.

future business simplification effort on greater diversification of product source. Turning to segment. Feetal origination volume grew 57% year over a year. Captive product originations were at 59% on higher Xerox equipment revenue, particularly in the mid market.

Non-capitive channel origination, which includes third-party dealers on non-Gerrocks vendors, grow 55%, a function of growth in new dealer relationships on third-party equipment origination.

Despite the continued growth in origination activity, fetal finance assets were down 3% sequentially in actual currency due to the runoff of existing finance receivable on HPS funding of close to 50% of fetal Q1 origination.

Piter Revenue declined 3% in Q1, mainly due to a reduction in operating list revenue which reflect lower-zero equipment installs in prior period. This decline was partially offset by IRFIs, included tools associated with a new receivable funding agreement.

Segment profit was 12 million, down 5 million year-over-year, due to a decline in revenue, higher inter-segment commission on higher-boring costs, partially offset by lower bad debt expense.

Segment margin was 7.9% down 300.10 basis point year over year.

Print on also revenue grew 4.1% into one. Print on all the Figma profit, improve 126 million versus a prior year quarter, resulting in an 810 on 10-Basic point expansion in segment profit margin year over year, driven by improved products applies, lower logistic cost.

Mix on the benefit of price on cost action taken last year.

Turning to capital structure, net core cache of around 200 million was down from the prior quarter. We ended Q1 with around 700 million of cache, cache equivalent on restricted cache, a reduction from Q4 level, mainly due to the 300 million repayment of our 2020 swing notes.

on roughly under 1050 million of secure debt. 2.8 billion of the remaining 3.3 billion of our outstanding debt is allocated to on support federal lease portfolio, with the remaining debt of around 500 million attributable to the core business. Total debt consists of senior, unsecured bonds on finance asset securitization.

We have a balanced bond maturity ladder over the next few years with no debt coming due over the next 12 months.

balance bond maturity ladder over the next few years with note that coming due over the next 12 months. Finally, I will address guidance.

Our outlook for raw new remain unchanged at flat to down, low single digit, on continue to reflect a stable demand environment with some contingency for potential macroeconomics weakness. Regarding operating margin, Q1 operating profit margin benefited from a favorable equipment vulnerability or increase in price.

which is expected to normalize across Q2 on Fidio Quarters. Q1 profit margin also benefited from a credit to bad debt on lower labor cost associated with the higher than expected number of open position.

This benefit may not repeat in future quarter. That say, we are increasing adjusting operating income margin guidance from at least 4.7% to a range of 5 to 5.5%. The increase in margin guidance reflects better than expected Q1 profitability.

Even after excluding the previously mentioned item, as well as the success of ongoing efficiency programs, partially offset by greater than expected unfurlable currency which mainly affect profit in Q2.

The indicated range of profit margin outcomes largely reflects the degree to which macroeconomic uncertainty could affect our operating profit for the year. Within a change free cash flow guidance, but no change were made to our assumption of free cash flow conversion, which is still expected to be 90-100% of adjusted operating income.

Excluding financial receivable activity. We now open the line for Q&A. Certainly, ladies and gentlemen, once again, if you have any questions at this time, please press star 11 on your telephone, one moment for our first question. And our first question comes from the line of...

if I could. The first one is...

Could you sort of highlight for us any of the remaining...

sort of expansion of services that you guys are continuing to provide to customers. And if there's any distinction between enterprise customers as well as business customers, that would be helpful as well. But any, you spoke at least some on the call.

about, about thoroughly expanded services offerings. But if there's any that you haven't spoken to, could you give us some sense of what those are and what your philosophy is around the services expansion and how those are resonating, that would be super helpful and I have a follow-up. Thanks.

Yeah, not in the good morning, Steve. A couple of things on the services. So, you know, as we've been talking about for a while now, we're trying to help and focus on client success, really looking at the headwinds that our clients are dealing with in terms of inflationary headwinds, labor, et cetera, and the hybrid workforce, right? Really trying to help them with productivity. So with that said, we're taking things that we've already implemented internally to help ourselves.

in them externally and helping out both our enterprise customers and more importantly, where we have mid-sized customers that have enterprise needs but don't have enterprise solutions, we are bringing those two out customers. So a couple examples, robotics is a service in law firms, really helping law firms.

with clerical and with things around paper and workflow and document flow, helping in hospitals and in schools and universities around administrative tasks, around digital services and very specifically, helping them with document flow, helping them with driving more productivity. So we're seeing more of that, and especially as we see the macro trends more and more about clients are asking us to help them.

to offset the macro trends in the headwinds that are seeing in the industry without technology and services. Yeah, that's tough Steve. And how would you describe the manifestation of the so far relative to your initial expectations?

Is it as planned? Is it a little bit stronger, given going on with macro, any color in there would be helpful, just to get the sense of resignation? I would say a little mixed, right? Where we talked about the enterprise customers just slowing down a little bit and installs, but not backing off. And then we're seeing acceleration in other areas.

where customers are asking us to accelerate so that we can drive their cash flow and drive their productivity. So it's a little bit of mix, I think, in state, local government, in mid-sized customers, we're seeing opportunities to grow the tam and existing accounts that we're in. I've talked about this before.

How do we take out current products and services and really expand it inside of existing customer base and really focusing on its client success? That's a big shift for us and really focusing on how do we help clients succeed in the macro environment and the challenges that they're seeing and we're seeing some success in those areas.

Cool, cool. I said the follow up is can you can you sort of dis update us on how you view how incremental you got you the potential for the small meeting business hardware opportunity to be it's been a meaningful part of the company's narrative of the last few years. But it's love to get now that you've been in the seat you know for a few quarters.

love to get your sense of how material you think hardware and then and then the broader services portfolio and a file from that can incrementally be to the content of the data. Yeah, good morning and I will take this question. So we are doing a SMB hardware. So the interesting part of as you know it's so we attract, you know, higher margin on this type of self, specifically on the H3 devices on the web with the VSC in the US here.

But we have seen quite a resilient demand of this type of hardware. We also position pricing on pricing increases in the past to offset some of the cost increases that we were facing. So currently this is one of the strong driver of the profit-yping improvement.

On the work quite positive around the rest of the year, we've product availability normalizing on the ability to keep the margin at the expected level of margin that we have in our assumptions.

And Xavier, Steve Xavier, do you structurally speaking in coming years? Do you believe there's a meaningful...

Share gain opportunities really share participation opportunity For the company and small media business hardware

Yeah, I think a nut is not just the hardware. It's going to be the solution in services we provide around that hardware. You think about our A3 devices, think about it as an engine that we can bring products and services in and around, so things like language translation, things like being able to help universities and help hospitals in administrative tasks.

not just around the hardware, but around the software that we can provide around there, things like Connect Key, things like Print in the Cloud, and then adding AI to it. So it's really how do we advance those other digital services in and around our hardware that I think is going to be the differentiation?

And the more we focus on client success, meaning the more we drive customer outcomes, help them with their P&L, the more successful we're going to be. And do I see that as an opportunity for growth absolutely?

Thank you. Appreciate it, guys. Thanks so much. Thank you. One moment for our next question. And our next question comes from the line of Eric Woodring from Morgan Stanley . Your question, please. Hey guys, good morning. Thank you for taking my questions. I have a few as well. And.

And then really nice operating margin expansion. So congrats on that. I just want to have a double click on some of your guys is macro comments or spending comments. Obviously last week there were some shots at the bow from some hardware companies that seemed to expose some potential deterioration in enterprise spending patterns.

perhaps mid-March and beyond, and maybe even to April . Can you maybe just address kind of linearity in the quarter for you guys, how your client conversations are trending, how that's trended into April , just to give us a little more comfort around maybe what you're seeing compared to maybe what perhaps others outside of the print world that's still exposed to enterprise.

And so I think what we're seeing in the hardware space, certainly on endpoints, is we're now seeing that refresh cycle has ended. And now you'll see the low like we normally see in most laptops and most of those technology life cycles. What we have seen though, is we haven't seen that big up side in COVID. And so now what we're seeing is an opportunity to expand on the base that we have.

with products and services in and around how do we help client success in productivity in and around things like digital services, software. And so for us, it's an expansion on the base that we have and we have an opportunity to bring new products and services into existing client base. David? Yeah, Eric, I would add as well that as you know it we have quite a resilient business model. The original business model is based on some simple pillars.

The number one is our contractual revenue base. What is contracted for four or five years, even more in some cases here, because on two-third of our revenue. So we are less subject to the bumps on the high on lows that some of our traditional hardware competitors are facing.

The second point is we still see a strong demand on the demand for equipment or demand for service. You have noticed we have reduced our backlog, but we still have some backlog to clean during quarter to here with a good mix. The third item, to close on this one, price increases.

We have been able to enact during the prior year at a difficult time, you know, pricing crisis. And the pricing crisis that we apply not only on the equipment from New, on the hardware, but also on the contracted revenue will be now with us for three, four or five years depending on the customer contract. Okay, the two are going to thank you guys. Thanks for all of the color.

And then maybe, Xavi, just to touch on a point you just made, you were obviously, or maybe over the last two quarters, you've been able to work down backlog. It looks like you ended at $180 million versus $435 million a year ago. So I know you made the comment about backlog being normalized. I think you said around $225 million.

But shouldn't we interpret this as backlog being below normalizer? Maybe just help me square that and then help me understand kind of as a result of that point, how if we should still think about a stronger first half of equipment sales relative to maybe a week or second half, just as a result of working down that backlog? If that's still the same view you take today.

Yes, so it's quite simple. Backlog normalize values around 1205 billion. So I will simplify it by saying around one month to one month and a half of equipment revenue. So currently we are running above. I believe on this is our assumption that in quarter to we will clear the backlog. The backlog is for...

And then maybe just to the last part in terms of, should that still imply a weaker second half of equipment sales relative to the first half? I think that's what you guys said 90 days ago. I just want to see if that's still how you're thinking about the world today.

No, the way we see it because you know this backlog is we film every quarter and this refresh the way we'd see it is on back to the prior command we still see a strong demand of our equipment. We have orders you know from customer not only for next quarter but also that will be deployed during the rest of the year. So I'm not looking at the backlog being like a way to hide.

we are still sticking with the guy not here.

Perfect, that's very helpful. And then to be maybe the last question for you was, I think the licensing agreement with the existing Fuji Zero Accidentity has now expired as of the end of last quarter. How should we think about your opportunity to go after the Asia Pacific market? I know you didn't mention that. Is that a focus? Is that not really a focus? Maybe help us understand?

need to expand the TAM within IT services, digital services, and software and services in and around the products that we already have. If you think about the amount of capital of what it takes to go put into a new region, building a supply chain, building services, building inventory equipment.

and that ecosystem, it's a pretty long put in terms of setting that up in the cost associated with that. So right now we see the regions that we're in as an opportunity to expand profitable growth and expand inside the existing account. So at least short term, we have no desires to go and spend a whole lot of money to start up and spin up in a new region.

Super, very helpful. Thank you, guys. Thank you one moment for our next question.

And our next question comes to the line of semi-chatter G from JP Morgan. Your question, please. Thank you. Thank you for taking my questions. I have a couple. The first one was really on operating margin. The guide that you are issuing or raising today and Congress on the strong execution here to set that up. But...

I'm also trying to think about the reasons that the operating margin has to moderate into the second half, particularly if you go back and look historically your first quarter margins are typically the lowest and your op-ex is typically the highest and one queue, even if I keep some of the macro headwinds and some of the one-offs you've called out, like seems like op-ex and it's probably more room on the op-ex to go in the second half to drive the margins to remain at these levels or even higher. So I'm just maybe more for this obvious just to sort of outline why should we expect margins to moderate material in the second half because...

Typically that hasn't happened in the prior years and I'll follow. Good morning, Sammy. Good question. So this is very simple. The margin for quarter one was a strong margin. For the reason we explained it was held by your mix product mix. A little bit like what we're doing Q4 that was more favorable.

we expect this mix to normalize if you look at the chart the IN equipment was higher the A3 equipment was higher A4 was a little bit lower so this helped you know the equipment margin the other items is in Q1 we have had some one-off benefits specifically about that benefit here that we are not seeing at this as a recurring item there so when you normalize here we are in the in which is around 5.5% here

That's the reason why when we guide it for the rest of the year, we are not expecting a deterioration of the margin. If you look at the implied gross margin for the rest of the year, it is around 4.7 to 5.1, a little bit higher here. So we are not expecting a margin deterioration, but we have to take into account the margin for the loss of the margin.

Some of the items that I mentioned, and also we want to consider potentially what we call macro headwinds. There are some uncertainty around, you know, still some cost items on the how, you know, some normalization of the cost base will happen.

And that is just to quickly follow up the 471 in all packs that you have in one queue. What's the best way to think about the run rate exiting the year, particularly with the park benefits coming in as well? Yes, so on park under we, I think we commented that or we put that in the press release there on park park, who was included.

have it and also with Noviti when we spend these businesses to be more flexible on this there. But some of these benefit in quarter one and obviously in quarter two, quarter three, quarter four will have further benefit from part but you should consider this being already included in the guidance there.

From a Northex point of view, I believe I mentioned that in my screen, we're expecting around overall, it's not only about cost-based there, around low to mid-single digit growth cost-efficiency, which is the only engine on the traditional way of looking at how we address the cost-based and we make it flexible.

I won't say regardless, but taking into account potentially some of the macro headwinds that some of the Economies are indicating for the back end of the year. And if a last question if I may and sorry for the multiple questions here, but Just what we've heard from general distributors and vars is a lot more pressure in the market.

Yeah, this is a good question. And I will look at it in two ways. And FITON will be at the core of the answer. The first way is if I look at what you call the bad debt situation for Xerox, the bad debt related to FITON here, it's quite steady, it's quite strong. We have not changed any way.

I think you have also this in mind there is the fact that some of the SMB business, unfortunately some of this bank difficulties here could drive more business for FITOL. This is the way we look at it. There is an opportunity, but I want to be right clear on this one. We won't do that at the detriment of the quality of our losing portfolio. On the team, it's right to frame Giants on this.

Thank you. Thank you. Thank you. Thank you, Juan Muldoon, 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, Steve. Can you talk to us a bit about your decision regarding donating PARCC? I mean, I've worked with multiple CEOs over the years who all expected to monetize PARCC.

And, you know, generally we're unsuccessful. So I'm not sure this, I think it's probably the right decision. I'm just curious, you know, as you looked at it, you know, can you maybe talk a bit about why you think that was the case? And then, you know, are there any other benefits? I understand on R&D savings, but in terms of tax benefits or that, maybe Zawia, you could use a touch on it. Thanks.

Let me go back to when I took the CEO Roshan, I took very specifically about a shift in two areas. One was the focus on R&D that was a little bit nearer to our revenue horizon. Very specifically, we took actions around Nabri, Mojave as a

Zavia talked about a little bit earlier and that was we weren't going to continue to use out cash as those particular products and those particular businesses were growing. So as we looked at part, we saw significant shifts in the industry in terms of valuation of startups and products, et cetera. And we decided that we were looking at too long a horizon.

and two biggest spend and continue to invest in those things. However, it was very important for us to be able to see insight to that innovation and have the ability to take advantage of that innovation going forward with our overall strategy around R&D. So the PocSRI donation fit perfectly into what we were trying to do. Meaning.

that we could still have insight to innovations, still have insight to technology. By the way, I have the greatest researches in the world focused on some of the toughest worlds, challenges and very specificities, some of the challenges we see in clean tech, et cetera, et cetera. And we have the ability to be able to take our long-range plan, meaning our R&D and our business strategy work with

to help us to develop our strategy and get insights to those technologies. So I see it as an expansion about park capabilities in terms of seeing insights to technology and getting access to longer term development while we can focus our capital resources on more near-term revenues. So that's why we made the decision, Jim.

Okay, thank you. And then I guess, obviously anything from a tax credit benefit with charity, I don't know if there's a benefit there down the road. Yeah, so the result tax credit, we do not disclose a number, you know, pre-size leisure, more to come, you know, when, you know, the overall credit will be an act in there, or we'll disclose, you know, when the...

structure because you had to go out and maintain them, you had to drop, you can drop ships them, you had to bring them to a loading dock, all of that. So how do you see your cost basis maybe over the next couple of years shifting, you know, what's fixed versus variable now and where do you think you can get to over the next few years? Thank you. So, Shannon, let me start on that my turn to this, Abby. So, you know, we've been focusing on driving operational efficiencies and driving sustainability.

part of when a customer receives a box. They see CARAR in terms of how the unbox and actually install that CARAR session helps us to reduce service calls. We can do more things remotely. We talk about artificial intelligence and helping and using artificial intelligence to help our service delivery team and help them resolve problems quicker and in fact sometimes not even have to go to a customer site.

So we have been embedding technology inside of our processes, inside of WBA's area using technology, artificial intelligence, business intelligence, and how we run our management operating system. So we have been very systematically over the last couple years with Project ONIT.

of type of item, it is structurally done with what Steve mentioned. The other ratio that we are monitoring constantly is a ratio of OPEX, so Air DNE plus SAG versus total revenue. And if you notice this year over year, this is a ratio that we are pushing to improve. If you exclude also the benefit on some cases in fact of bad debt, just looking at selling on GNA versus Air DNE, all these metrics.

This is the focus of the management team to drive them down and to make the cost base flexible.

Thank you. That was very helpful. Thank you. This does include the question and answer session of today's program. I'd now like to hand the program over to Steve Banderosik for any further remarks.

Yeah, thank you for listening to our earnings conference call this morning. The man-for-all products and services remain resilient, amid a challenging macroeconomic background, and we are making progress in our effort to improve profitability. Our performance is a credit to our hardworking team for embraced our strategy, strategic priorities.

by developing customer success while focusing on profitability. I thank you for attending today's call. Thank you, ladies and gentlemen, for your participation at today's conference. This does include the program. You may now disconnect. Good day.