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...
Speaker 2: 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 Bandarjak, 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 evidenced 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. Consistent with recent quarters, we are seeing isolated pockets of softer installation activity.
Speaker 3: 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 strengthen 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. Xavier will cover results for the quarter and guidance in more detail.
Speaker 3: 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.
Speaker 3: 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. One such solution is recently launched CARER in Struct App, which leverages CARER's augmented reality technology, and allow-
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, Zerax 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. CaryR Instruct is also available to support our existing and future client's field service management requirements.
Speaker 3: Another example is the expansion of our digital services offerings to the mid-market, bolstering our TAM opportunity in the largest print marketplace we currently serve.
Speaker 3: We now provide clients in this market the same types of accounts payable, digital mail, and intelligent document processing capabilities we provide to our largest enterprise and government clients. We see particularly high levels of demand for these services among our mid-market clients in the public sector.
Speaker 3: healthcare, education, and financial services industries.
Speaker 3: Our digital services security and productivity solutions provide us with a true competitive advantage in an industry most think of as being mature.
Speaker 3: and recognition of these advantages.
Speaker 3: Keypoint Intelligence awarded Zirax the BLI 2023 Smart Workplace Software Align of the Year for the fifth consecutive year, acknowledging our diverse portfolio of applications, software and services that helps solve modern workplace challenges.
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.
Speaker 3: In total, the addition of these services drove total contract value higher by 20% and further the 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 Almodo is patients 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. Most specifically, we have helped clients in the healthcare services industry transition patient records
Speaker 3: from paper to digital systems, added intelligence to paper and digital inbound communications and helped automate certain types of outbound communications like clinical outcomes and guidance.
Speaker 3: Additional industries with identified verticalization potential include consumer goods, banking and insurance to name a few.
Speaker 3: Our second strategic priority is profitability. In the first quarter, we delivered the second consecutive quarter of growth and operating profitability.
Speaker 3: Lower transportation and logistics costs and lower bed bed expense contributed to the year-over-year improvement in profitability.
Speaker 3: But the bulk 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 taken 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.
Speaker 3: which, like POC, is one of the world's leading research institutions. 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.
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.
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. Finally, sharehold the returns.
Our 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. In Q1, we decided the most responsible use of cash was the pay down of 450 million of debt.
To recap, we got off to a strong start for the year.
The operational discipline instilled in our organization by Project Onit and other specific actions recently taken are driving more margin improvement than expected.
As a result, we increased our profitability outlook for the year.
Despite a challenging and fluid business environment, the resiliency of the man 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. 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 the R-month for our equipment on services, improvement in product supply on supply chain related costs, on the benefit of price on cost action taken last year. Starting with revenue, the momentum in sales growth we experienced
A percentage of current currency was negatively impacted by 270 basis points of currency aid wins, and reflected improved product supplies, healthy equipment order flows, and growth in contractual print on digital services. Turning to profitability.
We deliver a seven consecutive quarter of year-over-year improvement in growth on operating profit margins, driven by higher equipment sales on travel over mix.
price increases, lower logistic cost on a reduction in operating expense, including a 20-screen million reduction in bad debt expense.
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.
This benefit were partially observed by ongoing product cost increases. Adjusted operating margin of 6.9% increase 7.10 basis point year over year. Griven by 380 basis point from cost reduction actions, 250 basis point of supply chain related cost improvement.
lower year over year due to lower net interest expenses associated with lower core debt, partially offset by 11 million of currency losses in the current quarter.
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 EPS of 49 cents in the first quarter was 61 cents higher than the prior year, driven by higher adjusted operating income, lower net interest expense on the lower tax rate, partially offset by currency.
Gap earnings per share of 43 cents was 81 cents higher due to the same factors as well as a contract termination expense in the prior year quarter.
Let me now review Ragnu, Casho on profitability in more detail.
Turning to revenue, equipment sales of 391 million in Q1 grew 27% year-over-year in constant currency or roughly 25%
Growth was driven by better availability of product in both the Americas and EMEA, particularly for our higher margin S3 device on color production equipment.
Backload decline for the third consecutive quarter as supply chain condition further normalize.
We expect our backlog to return to typical levels which range from under to under 25 million by the end of Q2. Equipment revenue outpaced installation this quarter due to a greater mix of office A3 and production equipment as well as the continued benefit of price increases.
Intellation growth was Congress for our I-Martin Meet-Range product on color product molecular product chin equipment.
And three of our interracial were done slightly year over year, due to the stoppage of shipment of Russia on the ongoing normalization of work from home trans.
Post-expovenue of 1.32 billion goes 0.5% in content currency year over year, on decline 2.2% in actual currency.
Post-set growth in Conflan County 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, our largest on most stable source of revenue, has 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. Growth this quarter was further added by an improvement in office-related print activity.
Geographically, both region grew mid-single-digit in constant currency. Yemi grew slightly faster than the Americas due to stronger post-Cels growth including the prior year acquisition of going Spire.
That's now rev you cash flow. Free cash flow was 17 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 159 million year-over-year decrease in cash flow, driven by a reduction in accounts payable on a larger use of cash for inventory, reflecting greater productivity.
strategic buying action on positioning ahead of Q2.
The unfavorable timing of all the liability payment also resulted in a greater use of operating cash in cash to this quarter.
Positively offsetting this effect were higher operating income on the net source of cash from finance on Twitter about
Finance-asset activity was a source of cash's 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 lease placements.
Investing activity will use 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 under 50 million of secure debt.
During the quarter, we paid dividends totaling 45 million on the neutral purchase initially. Kelonick of Propheedability tutorials,
Q1, are you still operating profit margin expanded 700 and 10 basis going to your whole tenure 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-aid employers.
We also benefited from strategic action taken in 2022 to make our cost-based more flexible.
Why we are not providing an official cost-setting target for 2023, we do expect to deliver low-to-mitsegal 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 future product cost increases through ongoing contractual pricing increases, a more flexible cost structure, future business simplification effort on greater diversification of product source.
Turning to segment. Feet or orientation volume, GOO 57% year over 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-zerox vendors, grow 55%, a function of growth in new dealer relationships on third-party equipment origination.
Despite the continued growth in origination activity, fatal 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????? Inciting Uidedon's remains.
Feetal Revenue declines 3% in Q1, mainly due to a reduction in operating lease revenue which reflects lower zero-act 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 years earlier, due to a decline in revenue, IR Inter-Segment Commission on higher-boring costs partially offset by lower-budget expense. Segment margin was 7.9%
down 310 basis point year over year. Print on also revenue grew 4.1% into one.
Print on all their Figma Profit, improve 126 million versus a prior year quarter, resulting in an 810-digit-smonged expansion in Figma Profit margin year over a year, driven by improved product supplies, low-er logistic costs, mix on the benefit of price on cost action taken last year.
Turning to capital structure, net core cash of around 200 million was down from the Priocorder.
We ended Q1 with around 700 million of cash, cash equivalent on restricted cash, 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 on-secure bonds on finance asset securitization.
We have a balanced bond maturity ladder over the next few years with note that coming due over the next 12 months.
a balanced 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 17's consumers in terms of pa?stin kori, private IRC shops and helix, which is of average
which is expected to normalize across Q2 on video quarter.
Q1 profit margin also benefited from a credit to bad debt on lower labor cost associated with a higher than expected number of open position. This benefit may not repeat in future quarter.
Let's 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 reflect 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. We did not 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.
We now open the line for Q&A. Sir, the Libyan gentleman once again, if you have any question 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 a number of... Question comes from the line of...
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 30 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, and on the good morning, Steve. A couple of things on the services. So, you know, 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, really trying to help them with productivity. So with that said, we're taking things that we've already implemented internally to help ourselves like robotics as a service.
artificial intelligence in around document, document flow, and taking those and bringing them both to the enterprise customers, which we've been doing with things like digital mail, helping with things like accounts payables and workflow, now bringing it to our mid-market customers. So taking a lot of the things that we've been doing internally.
and now turn 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 of 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 sort of describe the manifestation of it so far relative to your initial expectations? Is it as planned, is it a little bit stronger given what's going on with macro?
in the common area we help, we'll just 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 truck to the side.
So it's a little bit of mix, I think, in state local government, in midsize 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 they're seeing and we're seeing some success in those areas.
Cool, cool. And then the follow up is, can you sort of disupdate us on how you view, how incremental you got view for the potential for the small, medium, business hardware opportunity? To be, it's been a meaningful part of the company's narrative of the last few years.
but would love to get, now that you've been in the city, you know, for a few quarters, love to get your sense of how material you think hardware. And then the broader services portfolio and the file from that can incrementally be to the content that it takes. Thanks.
Good morning and I will take this question. We are doing a SMB hardware. The interesting part of Azure Enable is we attract higher margin on this type of cells, specifically on the A3 devices on the led with the HBS here in the US here. But we have seen quite a resilient demand.
also this type of hardware. We also position pricing and pricing increases in the past to have set some of the cost increases that we were facing. So currently this is one of the strong drivers of the profit-yping improvement. Only we have quite positive around the rest of the year with product availability normalizing.
Do you believe there's a meaningful share gain opportunity? It's really share participation opportunity for the company in small and medium business hardware.
Yeah, I think an honest, it's not just the hardware. It's going to be the solution in services we provide around that hardware. You know, you think about our eight three 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. Absolutely.
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 then really nice operating margin expense. And so congrats on that. I just want to 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 and enterprise spending patterns.
Thanks. Let me start, Eric, and then I'll turn it over to the other side. So I think if you look at the macro trends over the last 24 months in the hybrid workforce, we saw a lot of placement of end devices in the homes, whether it's laptops or whether the printers. And that cycle, as we all know, is very cyclable. And so I think what we're seeing in the hardware space, certainly on end points.
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, we hadn't seen that big upside 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 and 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 cloud base. David? Eric Avuda as well. As you know, it's quite a region business model. The region business model is based on some simple pit-offs. The number one is our contractual revenue base. What is contracted for four or five years, even more in some cases here, because I'm too sure that I will run you.
So we are less subject to the bumps and the high unloads that some of our traditional hardware competitors are facing.
The second point is we still see a strong demand, and demand for equipment and demand for service. We 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. On 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 well thank you guys, thanks for all of their color. And then maybe as I've just had touch on, I'm a point you just made. You know, 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.
result of working down that backlog. If that's still the same view you take today.
Yes, so it's quite simple backlog normalized value is around 100 to 125 million. So I will simplify it by saying around 1 month to 1 month and a half of equipment revenue. So currently we are running above. I believe on this is our assumption that in quarter 2 we will clear the backlog. The backlog is solid.
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 this backlog is refilled every quarter and this refresh, the way we see it is back to the prior command. We still see a strong demand of our equipment. We have orders from customers not only for next quarter, but also that will be deployed during the rest of the year.
So I'm not looking at the back of the club being like a way to hide a slow word demand or more of a recession. I mean, you know our photo revenue guidance that we're publishing here. We are still sticking with these guidance which is flat to low mid-single digital decline. We end up using the screen quarter to compare versus last year.
How should we think about your opportunity to go after the age of Pacific market? I know you didn't mention that. Is that a focus? Is that not really a focus? Maybe help us understand? Yes or no? And then second to that, why it would or would not be a focus for potential growth going forward? And that's it for me. Thank you so much.
Yeah, I think there's a couple of things. One, focusing on profitable growth and expansion in our existing accounts and our existing regions. We see more than enough opportunity to expand the TAM within IT services, digital services, and software and services in and around the products that we already have. All right.
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 and 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 Samit Chatterjee from JP Morgan. Your question please.
Thank you. Thanks for taking my questions. I have a couple. The first one was really an operating margin, the guide that you are issuing or raising today. 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 or.
First quarter margins are typically the lowest and your OpEx is typically the highest in one queue. Even if I keep some of the macro headwinds and some of the one-offs you called out, like, seems like OpEx and there's probably more room on the OpEx to go in the second half, you know, to drive the margins to remain at these levels or even higher. So, I'm just maybe...
Maybe more for the obvious is 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 explain it was helped 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 high and equipment was higher the age for equipment was.
range for this quarter of something which is around 5.5% here. That's the reason why when we guided for the rest of the year, we are not expecting a deterioration of the margin. If you look at the implied growth 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 some of the item that I'm in turn, 4.1.
Also, we want to consider potentially what we call macro-edwins. There are some uncertainty around the state from COSITEMS and how some normalization of the COS space will happen here. And that is just so quickly, follow up before 71 in all the peaks that you have in 1Q.
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 was included in our guidance. So, you know, we were working on this contract on the one in January . We have given the guide on there. So the park benefits on the, you know, the flexibulization of the ARD and Ecos Bay.
of the point of view, I believe I mentioned that in my screen, we're expecting around overall it's not only impact but cost-based there, around low to mid-single digit growth cost efficiency, the only engine on the traditional way of looking at how we address the cost-based and we make it flexible.
I want to say regardless, but taking into account potentially some of the macawed win, that some of the economies are indicating for the backend of the year. And if I ask a question, if I may, sorry for the multiple questions here, but just what we've heard from Gen U distributors and VARs is a lot more pressure in the financial services, customer verticals, and see.
headwinds on the banking side, any way to ballpark what your exposure to that customer, what it is and if there has been a more sort of pocket of softness there since what happened over the last couple of months and that's it for me. Thank you. This is a good question and I will look at it in two ways and fit on will be at the core of the answer.
It's quite steady, it's quite strong. We have not changed any way. We do credit or reshrating for our customer. So our own performance from a final thing point of view with our own customer, we remain resilient on strong. The other point, and I think you have also this in mind there.
is the fact that some of the SMB business, unfortunately some of these bank difficulties here could drive more business for FITAL. This is a 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 yourself on this. Thank you. Thank you.
Thank you one more for our next question.
That 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 park? I mean, I've worked with multiple CEOs over the year to all expect it to monetize park. 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 ZOVA you could touch on it. Thanks. Let me go back to when I took the CEO Rosha and I took very specifically about a shift in two areas. One was a focus on R&D that was a little bit nearer to our revenue horizon and very specifically we took actions around nobody, Mahavi as...
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. And so as we looked at part, we saw our significant shifts in the industry in terms of valuation of startups and products, et cetera. And we decided that if we were looking at too long a horizon and too big a 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 innovation, still have insight to technology. By the way, I have the greatest researches in the world focused on some of the toughest world's challenges and very specifically some of the challenges we see
longer term development while we can focus our capital resources on more near-term revenues. That's why we made the decision, Jim.
Okay, thank you. And then I guess, is there 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 laser. More to come, you know, when, you know, the overall credit will be an architecture, or will disclose, you know, when the amount...
because you had to go out and maintain them, you had to drop ships and you had to bring them to a loading dock. 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, Ken, Shannon, let me start them. The return of his MBA. So, you know, we've been focused.
embedding technology inside of our overall processes. So simple example is what we've talked about with CARAR. We now launch products with CARAR automatically as 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 Dobie'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 of years with Project Donate, not only putting a management operating system in place, putting discipline in place for our people, but more importantly, using technology that drives sustainable and continuous improvement. And we're on that journey, we'll continue that journey. And that's why we launched Project Donate, the name, because it's now embedded in a culture.
of the company and we'll continue to do that, is that it? Yeah, on the other hand, just to build up from a pure financial on the P&N Idol Exhaur. So we focus on usually on growth margin expansion, pricing is a griver, and we are also as Chief Mention, you know, attacking any cost of good sold opportunities that we have. We have some headwinds with, you know, raw material increase and some material increase there. But if you notice it, our growth margin is still expanding.
This is not related specifically to one of type of items. It is structurally done with what Steve mentioned. The other ratio that we are monitoring constantly is a ratio of a PECS or early and E plus SAC versus total revenue. And if you notice this year or a year, it is a ratio that we are pushing to improve. If you exclude also the benefit on some cases in the impact of bad debt, just looking at setting on G&A, press RD&E, all these metrics.
This is a focus of the management team to drive them down on to make the cross-based flexible. Thank you. 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 Vandrosik for any further remarks. Thank you.
Yeah, thank you for listening to our earnings conference call this morning. The man-for-all products and services remains 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 the 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. Bye-bye.
And.