Q2 2023 Xerox Holdings Corp Earnings Call

Speaker 1: You.

Speaker 2: Welcome to the Xerox Holding Corporation second quarter 2023 earnings release conference call. After the presentation, there will be a question and answer session. To ask questions at that time, please press star 1 1 at any time during this call.

Speaker 2: You can withdraw your question by simply pressing star one one again at this time. I'd like to turn the meeting over to Mr. David Beckle, vice president, head of investor relations. I'm going to turn the meeting over to Mr. David Beckle.

Speaker 2: Sir, the floor is yours.

Speaker 1: And.

Speaker 3: Morning everyone, I'm David Beko, Vice President of Investor Relations at Xerox Holding Corporation. Welcome to the Xerox Holding Corporation's second quarter, 2023 earnings release conference call, hosted by Steve Banderzak, Chief Executive Officer.

Speaker 3: He is 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.

Speaker 3: Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox.

Speaker 3: During this call, Zerox executives will refer to slides that are available on the web at www.Zerox.com slash investor.

Speaker 3: and will make comments that contain four 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: This time I'd like to turn the meeting over to Mr. Banjaj.

Speaker 4: Good morning and thank you for joining our Q2 2023 earnings call.

Speaker 4: I am pleased to report another quarter of year-over-year growth in revenue, profits, profit margins, and cash flow.

Speaker 4: consistent with recent quarters. These positive results reflect our team's balanced execution amid a dynamic macroeconomic backdrop.

Speaker 4: Summarizing results for the quarter, revenue of 1.75 billion grew 0.5% in constant currency and 0.4% in actual currency.

Speaker 4: Adjusted EPS was 44 cents, 31 cents higher year-over-year.

Speaker 4: Free cash flow was $88 million compared to negative $98 million in the prior year quarter.

Speaker 4: An adjusted operating margin of 6.1% was higher year-over-year by 410 basis points.

Speaker 4: This quarter and throughout this past year, demand for our products and services has remained resilient, particularly for our value-added print and digital services and among our mid-market clients. We Too Are Here

Speaker 4: Our ability to consistently deliver growth in revenue, profits, and cash flow through a challenging, operating environment is the result of an intense focus on three strategic priorities, client success, profitability, and shareholder returns. Our ability to consistently deliver growth in revenue, profits, and shareholder returns.

Speaker 4: A benefit of renewed focus on client success beyond the positive impact on revenue and profits is an employee base that genuinely seeks to empower clients and partners with essential products and services for today's workforce.

Speaker 4: At Xerox, we see the evolving hybrid workplace as an opportunity to improve client productivity and employee satisfaction levels, with solutions such as secure, cloud print for a distributed workforce.

Speaker 4: Automated Document and Information Workflows and Streamline Multi-Channel Customer Communications to name a few.

Speaker 4: A thriving hybrid workplace requires advanced technology solutions from trusted technology providers like Xerox.

Speaker 4: This quarter, Xerox was recognized by Cicercat as a leader in cloud print services positioned as a leader for both strategic vision and depth of service.

Speaker 4: We also advanced our leadership position in Kacirka's assessment of leaders in the print security market, an important distinction as clients place increasing importance on data security.

Speaker 4: Xerox is leading technology and our ability to deliver solutions in and around multi-functional devices help win new business with existing clients and win new clients.

Speaker 4: This quarter, we want a renewal of a leading health care service company, increasing annual contract value by close to 40%. Through our understanding of this client's needs and our broader health care vertical expertise, we have been able to increase the number of patients who are in need of a medical care service.

Speaker 4: we were able to design an integrated customer engagement solution that improves and automates patient communications processes.

Speaker 4: We also want a new business at a global chemical company, displacing a large competitor in the process by offering an advanced print management solution that will improve print compliance and security while reducing system-wide print costs by 15 to 20%. An important area of client success is a deeper understanding

Speaker 4: to drive awareness of zero access digitization and work close solutions that solves clients pain points in a dynamic hybrid workplace.

Speaker 4: This quarter we also held our first global partner summit since the pandemic.

Speaker 4: Posting close to 400 channel partners.

Speaker 4: The event showcased Xerox's commitment to its partner ecosystem and demonstrated how Xerox can grow with our partners to provide secure, sustainable, and cloud-ready solutions built for the new era of AI and digital transformation.

Speaker 4: It is clear our value proposition is resonating with clients. In the past six months, we experience a meaningful improvement in services, signings, momentum.

Speaker 4: Year to date, signings are up double digit in constant currency and revenue retention rates remain solid.

Speaker 4: Further, the greater appreciation of our workflow solution is helping drive equipment market share.

Speaker 4: In Q1, the latest quarter of market share data availability, Xerox gained two points of global market share in the markets in which we compete with strong performance in A3 and Production.

Speaker 4: Moving to profitability. In Q2, we grew our profit margin year over year for the third consecutive quarter.

Speaker 4: This improvement in margin reflects specific actions taken to drive profitable revenue growth, optimize our operations, and offset product cost inflation with price increases.

Speaker 4: We continue to look for ways to streamline and focus our operations.

Speaker 4: We recently sold Xerox Research Center of Canada, or XRCC, to Mayant Capital Partners, a leading textile computing company with a shared mission of advancing material-based innovation.

Speaker 4: As with PARC, this transaction provides Xerox with greater focus and financial flexibility to pursue growth opportunities adjacent to our core operations.

Speaker 4: Improvements in profitability and cash flow of course are crude directly to shareholder value.

Speaker 4: In the current market environment, we believe the most prudent use of cash has been the reduction of our debt balance, and in the second quarter, we reduced our debt balance again. Year-to-date, we have lowered total debt outstanding by around $600 million.

Speaker 4: Now, Shell Holder Return Policy remains the return of at least 50% of free cash flow back to our Shell Holders.

Speaker 4: We will provide more direction on how we plan to deploy free cash flow as cash flow is generated throughout the year.

Speaker 4: Before I turn the call over to Zavia, I'd like to reflect on some of the actions Xerox has taken to position the company for long-term profitability and sustainable growth.

Speaker 4: In the past year, the company has experienced significant change, not all of which may be apparent to investors.

Speaker 4: Through a calculated set of actions taken, we have bolstered our operating and financial discipline and attuned our business model to a market that has been permanently altered by changes in workplace behavior post-pandemic.

Speaker 4: In doing so, I strongly believe we have the operational and financial foundation from which we can sustainably grow our print, digital, and IT services revenue.

Speaker 4: Starting with operating discipline, the rigor and operating system instilled by project on it provides the key building blocks from which this foundation could be built.

Speaker 4: Learning from that program have now been institutionalized at Xerox, including the use of advanced technologies such as RPA, augmented reality, and AI to drive continuous operating efficiency and data-driven decision-making.

Speaker 4: Internally we use more than 600 bots to conduct 7 million transactions per quarter.

Speaker 4: These bots reduce resources required to process manual and repetitive tasks and improve client response times.

Speaker 4: And our service delivery function we use augmented reality and AI to improve remote solve rates, infield decision making, and service delivery profitability.

Speaker 4: And when CARER-AR and AI are incorporated into our service offerings, we see meaningful improvement in client satisfaction. One of the most significant decisions I have made in my time as CEO was the appointment of John Bruno as COO.

Speaker 4: John has a strong track record of leading transformational and strategic change across a range of industries.

Speaker 4: After joining the company in November , he moved quickly to redesign our strategy and further solidify our operating model, establish a number of new operating committees tasked with making the complex and difficult decisions required to drive balanced execution and reposition Xerox for long-term success.

Speaker 4: When transforming a company in challenging operating environment, focus is critical.

Speaker 4: That understanding led to a number of transactions, including the exit of our LSU joint venture, the spin-out of Naviti and Mahavi, the donation of Pauk to SRI International, and more recently, the sale of XRCC to Mayim.

Speaker 4: These transactions freed up the financial resources and managerial capacity needed to direct out efforts more conservatively towards advancements in workplace technology solutions while allowing each of the respective teams to align with organizations that will give them the capacity resources needed to direct out efforts more conservatively towards advancements in workplace technology solutions

Speaker 4: for employee success. Accordingly, in the past year, we re-instituted a number of compensation and career development programs that were placed on hold during the pandemic, including the VISTA program, which provides learning and advancement opportunities for some of our most promising up-and-coming talent.

Speaker 4: Financial discipline is equally important in providing stable base for growth.

Speaker 4: In the past year, we have taken a number of steps to improve profitability, financial flexibility, and balance sheet strength.

Speaker 4: Following the pandemic and through recent operating challenges, we have been laser focused on profit margin.

Speaker 4: Strategic actions targeted at pricing and product mix have improved base-level profits. And we plan to further bolster profitability through changes in compensation practices that emphasize this transaction and deal margins.

Speaker 4: thus allowing our sales team to focus their attention on delivering value for clients, rather than compete for commoditized business.

Speaker 4: Through the POC donation, we fundamentally changed our approach to research and development, lowering our R&D cost base while maintaining access to world-class research.

Speaker 4: The Technology Exploration and Innovation Program signed with SRI and PARC provides an on-demand access to scientists, engineers, and researchers that will enable new technologies that are more closely aligned with our print, digital, and IT services focus.

Speaker 4: The Receivable Funding Agreement we signed with a subsidiary of HPS investment partners last December significantly improved our free cash flow, generation, and lowered fiddle's reliance on Xerox's balance sheet to provide funding for lease originations. ...

Speaker 4: We have lowered our debt balance by around 760 million over the past 12 months while improving our financial outlook, providing incremental capacity to fund future growth opportunities.

Speaker 4: It has been a challenging year for sure, but I am more optimistic about Xerox future and growth opportunities that at any point in the past five years.

Speaker 4: In the past year, I've spent significant portion of my time meeting directly with some of our most important clients and partners.

Speaker 4: From those conversations, it is clear clients trust Xerox and look to us to help them solve their most pressing workplace challenges.

Speaker 4: Recent discussions have shifted to emerging technologies such as generative AI that will further stress the need for secure workplace solutions like ours that help optimize company data and workflows.

Speaker 4: With clients trust and an institutional knowledge of our clients' businesses and industries, we have a clear path to win.

Speaker 4: We aim to expand existing clients share of wallet and win new client business by delivering advanced print, digital and IT solutions.

Speaker 4: Moving forward, investors should expect us to continue evolving and reinventing our business as we shift our mix of revenue toward services that addresses a more complex, hybrid work environment. Success along this path will be driven by a service-led, software-enabled approach to improving client business outcomes.

Speaker 4: and a brand strategy more closely aligned with repositioned Xerox. To recap, it is the early days of a reinvention about company, but progress is already apparent.

Speaker 4: Balance execution against our strategic priorities is driving momentum in service signings and operating efficiencies giving us the confidence to increase our profitability and castle outlook for the year.

Speaker 4: I now hand it over to Zavie.

Speaker 3: Thank you Steve, on good morning everyone. As Steve mentioned, we deliver another quarter of growth in revenue on profits, driven by resilient demand for our equipment and services, normalizing supply chain conditions on benefits from price increases on ongoing cost efficiencies efforts.

Speaker 3: In Q2, Rubenu was slightly higher, year over a year, in actuarant constant currency.

Speaker 3: Growth was driven by equipment sales, once again reflecting a stable demand environment, improved product supply and unfavorable mix. Growth from equipment sales was offset by a decline in post sales revenue, which was mainly driven by non-contractor items.

Speaker 3: driven by equipment sales, once again reflecting a stable demand environment, improved product supplies and favorable mix. Work from equipment sales was offset by a decline in post sales revenue which was mainly driven by non-contractual items. Turning to

Speaker 3: We deliver a third consecutive quarter of year-over-year improvement in growth on operating profit margins due to higher equipment sales on favorable equipment mix, price increases enacted in prior periods, lower logistic cost and ongoing cost reduction efforts.

Speaker 3: Rough margin improved 210 basis points over the prior year quarter, mainly driven by improved product mix, lower supply chain related costs, specifically container transportation costs, and benefits associated with recent price and cost efficiency actions.

Speaker 3: Q1 2023 was the last quarter we recognized review from Fuji royalties.

Speaker 3: Adjusting operating margin of 6.1% increase 410 basis points year over year, driven by 450 basis points of improvement from ongoing operating efficiencies on pricing actions, 300 basis points from supply chain related improvement, and 300 basis points from supply

Speaker 3: including a more favourable product mix.

Speaker 3: Partially offsetting these benefits were unfavorable effect from currency, lower FJ royalty income, and higher euro value bad debt on compensation

Speaker 3: Adjusted all the right expenses net where 9 million higher year-over-year due to a 16 million benefit associated with the defined contribution pension plan refund in the prior year quarter, partially offset by lower interest expenses.

Speaker 3: Adjusting tax rate was 20% compared to 18.5% in the same quarter last year.

Speaker 3: Adjusted EPS of 44 cents in the second quarter was 31 cents higher than the prior year, driven by higher adjusted operating income partially offset by a pension benefit in Q2 2022 on a slightly higher tax rate. Gap loss per share of 41 cents.

Speaker 3: were 36 cents higher than the prior year due mainly to 132 million shares associated with the donation of PARC on higher restructuring and non-service

Speaker 3: Let me now review revenue on cash flow in more detail. Turning to revenue equipment sales of 420 million in Q2 rose 14% year-over-year in constant currency or around 15% in actual currency. Growth was driven by better

Speaker 3: particularly in the Americas on four-hour higher-margin A3 devices.

Speaker 3: As expected, backlog has now returned to normalize level.

Speaker 3: We will no longer provide detailed backlog information as it is being managed in the normal course of business and we do not expect change in backlog to materially affect results going forward. Consistent with recent partners, revenue growth outpaced equipment installation due to the favorable mix on pricing.

Speaker 3: Insulation growth was strongest for our high margin A3 product on color

Speaker 3: Entry A4 installation went down year-over-year due to the ongoing normalization of work-from-home trend.

Speaker 3: Post sales revenue of 1.3 billion fell around 3% in actual and constant currency year over year.

Speaker 3: Post-SAL decline were driven by lower IT hardware on paper cell, lower finance income on the elimination of Fuji royalty on park review.

Speaker 3: Revenue from contractual print on digital services, our largest and most stable source of revenue goes down slightly.

Speaker 3: Growth in digital services, including the benefit of a recent acquisition and benefit of pricing improvement were offset by a slight reduction in our service fleet.

Speaker 3: Geographically, both regions grew total revenue in actual and constant currency. EMEA grew faster than the Americas due to higher post-sales revenue growth, including the prior year acquisition of Go Inspire.

Speaker 3: Let's now review cash flow. Free cash flow was 88 million in Q2, higher by 186 million year over year. Operating cash flow were 95 million in Q2, compared to a use of 85 million in the prior year.

Speaker 3: Improvement were mainly driven by growth in operating income, a one-time contract termination payment in the prior year and a net source of cash associated

Speaker 3: Finance asset activity was a source of cash this quarter of $210 million compared to a use of cash of $35 million in the prior year, reflecting the benefit of our receivable funding program with HPS partially offset by higher finance asset origination activity. Offsetting these

Speaker 3: Working capital was the use of cash of 248 million, resulting in a 183 million year-over-year increase in cash use driven largely by the timing of purchases on payments.

Speaker 3: Inventory was a source of cash of $76 million, reflecting recent efforts to reduce inventory following disruption to our supply chain. Investing activity where a use of cash of $5 million compared to a source of cash of $13 million in the prior year due to lower proceeds from asset sales

Speaker 3: partially offset by lower capex. Financing activity consumed 220 million of cash this quarter, which includes a net payment of approximately 174 million of secured debt on dividend

Speaker 3: by lower capex. Financing activity consumes 220 million of cash this quarter which includes a net payment of approximately 174 million of secured debt on dividend totaling 43 million.

Speaker 3: Beginning this quarter, we revised the presentation of our segment measures, transferring revenue on costs associated with operating lease from CITEL to our print on other segments.

Speaker 3: This change was made to better reflect differences in ownership on oversight for this type of analysis between segments, including the effect of the Receivable Funding Agreement with HBS.

Speaker 3: The result is a reduction to fetal segment revenue on profit. Fetal origination volume grew 36% year over year. Captive product origination were up 45% on higher Xerox equipment revenue, particularly in the mid-market. For more information visit the

Speaker 3: Non-captive channel originations, which include third-party dealers on non-Xerox vendors, grew 26%, a function of growth in new dealers' relationships on third-party equipment origination.

Speaker 3: As expected, FITL finance receivables were down 9% sequentially in actual currency, reflecting a runoff of existing finance receivables on HBS funding of around 40% of FITL Q2 coordination.

Speaker 3: FITO revenue grew roughly 5% in Q2, mainly due to higher commissions associated with the set of finance receivable assets partially offset by lower finance income on other fees, a result of a declining FITO finance receivable asset base.

Speaker 3: Segment profit for FITOL was zero, down six million EUR per year, primarily due to higher but debt expense, reflecting EUR value origination increase.

Speaker 3: As noted last quarter, we expect improvement to bad debt expense going forward as our Finance Receivable Book Decline.

Speaker 3: Print on other revenue was essentially flat year-over-year in Q2. Print on other segment profit improved 78 million versus a prior year quarter resulting in a 470 basis point expansion in segment profit margin year-over-year driven by improved product supplies,

Speaker 3: favorable mix on the benefit of price on cost actions. Turning to capital structure, we ended Q2 with around 570 million of cash, cash equivalents on restricted cash, a reduction from Q1 level mainly due to the net repayment of

Speaker 3: net core cash of around 50 million was

Speaker 3: 2.6 billion of the remaining 3.1 billion of our outstanding debt supports our finance assets, with the remaining debt of around 500 million attributable to the non-leading businesses.

Speaker 3: Total debt consists of senior unsecured bonds, finance asset securitization, and borrowing under our asset backed credit facility.

Speaker 3: We have a balanced bond maturity ladder over the next few years.

Speaker 3: Finally, I will address guidance.

Speaker 3: Our outlook for Romeo remains unchanged at flat to down, low single digits, and continues to reflect a stable demand environment with some contingency for potential macroeconomic weakness.

Speaker 3: As a result of recent improvements in the macroeconomic outlook, on momentum in our services signings, we now expect full year revenue to come in at the upper end of that range. Regarding operating margin, we are increasing our outlook for full year adjusting operating margin by 50 basis point to a range of 5.5 to 6% due in large part to the current year.

Speaker 3: to a stronger than expected realization of operating efficiencies on RONUMIX.

Speaker 3: Regarding the implied trajectory of operating margin in the second half of the year, it is important to note that operating profit margin in the first half of the year benefited from favorable equipment mix, a one-off credit to bad debt expense, one quarter of FUJI royalties, the timing of price increases relative to incremental product costs, and lower labor costs associated with open position.

Speaker 3: This benefit may not repeat in the second half of the year. The indicated range of profit margin outcome reflects the degrees to which macroeconomic uncertainty could affect our operating profit for the year. Q3, adjusted operating income margin, is expected to

Speaker 3: We continue to work diligently to identify incremental cost efficiency and expect the benefit of a more flexible cost structure to grant incremental margin expansion beyond 2023.

Speaker 3: Finally, we are also increasing our guidance for free cash flow from at least 500 million to at least 600 million.

Speaker 3: This increase reflects an improvement in expected operating income on incremental sales of finance receivables.

Speaker 3: Our finance results on improved outlook validate that we are on the right path with a focus on our three strategic priorities. Client success, profitability

Speaker 2: We now open the line for Q&A. Certainly one moment. And our first question comes from the line of Ananda Bruja

Speaker 5: Yeah, hey guys, good morning and thanks for taking the questions. I guess two if I could, the first one certainly for Steve and could be for Xavier as well. You guys continue to sort of put up resilience top line as you talked about, Steve. And

Speaker 5: It just looks like it's lining up to be, you know, call it the fourth year in a row where you're sort of at $7 billion in revenue. And I was wondering if there's anything, you know, sort of structural about the market that you think has shifted. You've talked about Why do you think these strategies are overarching to try to get things going around?

Speaker 5: a lot of what Xerox has done, trying to address post COVID world and some of the newer tech trends. But I guess I'd love your bigger picture thoughts on what previously had been for many years in the declining market and now.

Speaker 5: in the last three years has been flattish, or at least the company's performance has been flattish. And it looks like we're looking at like a fourth straight year of $7 billion in revenue. And I have a quick follow up, too. Thanks.

Speaker 4: Yeah, so on the macro side, we have shifted significantly, as I said, over the last year towards client success. And really what that means for us is thinking about the hybrid workplace and the distributed workforce. How do we drive productivity and how do we drive efficiencies and help our clients in the macro headwinds that they're seeing? So if you think about...

Speaker 4: as we start to see more and more companies think about their own digital transformation, digital journeys, we have a tremendous position to go play there around securing data, unlocking value inside of that data. And so it's a very strategic shift for us. And so while we are focusing on obviously the macro trends of what's happening in the print industry, more importantly, the opportunity and the areas that we can play.

Speaker 4: I talked about trust and I talked about how our clients depend on us to help drive their future workplace And we've been very very successful in driving digital services and expanding inside of existing accounts. Thank you.

Speaker 3: Yeah, I'm on that just to complete from the revenue point of view what we see the equipment revenue remains strong on the demand for our products specifically A3 remains very strong which drive revenue. You know we push some price increases as well. So this is supporting revenue. The other positive news is on the post sales.

Speaker 3: post sales on the contracted revenue. You know, our customers signed contract for, you know, usually a length of five years there. The signings on, you know, the resilience we see in this post sales for this team is quite strong currently here. This is a reason why, you know, we are quite a bit, you know, with the current revenue trajectory on whether upgraded or improve our guidance.

Speaker 3: because we believe we will be closer to a flat situation compared to the low single-duty decline we had as a range before.

Speaker 5: And you guys, you mentioned on the call, I guess, the prepared remarks, you remember to go, Steve, sort of like a strategy shift towards services. And then I think you used the term reinvention as well. So is that incremental to what you last showed at the analyst stage or something that's sort of afoot right now?

Speaker 4: maybe since John has come in, this incremental, going to go forward, that you'll be talking to us about. Yeah, so we'll be talking about in the future, but we've talked about very specific vertical solutions and horizontal solutions in our existing customer base. We gave examples of working in your Issues-s journeys and working in your products, but one piece of this is that the AI will have the highest U Integration extras in the cloud-based machine Nate based on the multiple pieces of the aware Awakens

Speaker 4: universities and education working in the medical industry, working in the law firms. And so we have been digging deep into where are the areas that we have products and services, software and solutions, think about security, think about the world of AI, and how do we continuously evolve in that space and drive value for our clients?

Speaker 5: All right, that's great. I have one quick last one, just a clarification. When you mentioned, Steve, to open up the remarks, the resiliency in sort of in customer demand, you also then mentioned small-medium business. Is it small-medium business, more resilient than enterprise?

Speaker 4: Or was it just pointing out that also small-medium businesses are resilient? It's balanced, but we're finding stronger resilience there in SMB today, while we're seeing some of the large enterprises pull back a little bit. Not change, but maybe defer some of the installs and defer...

Speaker 2: some of the installations, but in general SMB was strong from us. That's great. Got it. 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.

Speaker 6: Hi, thank you. This is Maya on for Eric. Steve, if we just take a step back from the quarter and think bigger picture a little bit, we're largely past that normalization of return to office and hybrid work. So, meaning that the activity we're seeing today outside of the cycle-related dynamics is something of the new normal. So, I know you touched on this a little bit earlier, but how should we think about kind of normalized revenue growth?

Speaker 6: margins and business mix going forward? And is there a path to revenue growth? And if so, when should we expect that? And do you believe that normalized growth and operating margins should be in a post-COVID world? I know this is kind of the message you provided at an investor day, but since there's been so much change in the last 12 months, it'd be helpful for us to understand how you think about some of these metrics over a multi-year period.

Speaker 4: CEOs and companies really trying to figure out what this new normal looks like and how do we drive more productivity in that space. And it's not one size fits all. And so what we've been doing is really focusing and working on how do we drive the efficiency in the workplace of the future. That's something we have in our DNA and we've done for the last 50 years.

Speaker 4: And we have a right to play there as we start to see digital transformation in large enterprises, in SMB, and where are the areas and products and services that we can grow. So I don't think the chapter has been written in terms of what the new normal is. We're still evolving, and I think it will continue to evolve as we try to drive more productivity and we try to drive more value inside of this new hybrid workplace, number one.

Speaker 4: Number two, you know, you really think about next generation technology, whether it's AI or chat, GBT or the future of robotics or augmented reality. The reality, the underpinning of that is significant amounts of data. And we play really well in that data, securing it, having the ability to be able to orchestrate it. And so when you start to hear things like how do companies drive more productivity.

Speaker 4: with these new tools, whether it's AI, whether it's API, with the reality. We are playing really well and really trusted in helping our clients there. So we see significant growth and significant opportunities in the hybrid workplace as companies are really trying to figure out their new norm and driving productivity going forward, is that you? Yeah, Mom, to give color on this specifically for 2020.

Speaker 3: from market share but also from a revenue point of view that drove the revenue growth that we are seeing here. At the same time as I mentioned it earlier on the post sales revenue stream is still strong here and we are delivering on supporting essential services for our customers and we see that things are contractural.

Speaker 3: strength that we have signing our strong on the as well with you when you are right that we are observing with client is also show the eye attachment rate on the retention of our review.

Speaker 3: Finally, from a margin point of view, as we mentioned it, you have seen this in the guidance. We are upgrading the guidance for this year from five to five and a half to five and a half to six percent there. So just show the confidence that we have in the activity I've just described on the ability of the team to deliver operational efficiency.

Speaker 6: in above 6%. Where do the most significant upside come from the quarter? And why is that not sustainable as we look into the back half of the year, given your guidance kind of implies operating margins contract in the second half despite cost cuts?

Speaker 3: Yes, so I will comment it in two parts. So if you look at the first half, we have had during the first half some what I call one-offs items that were supporting the margin. Specifically, we had had the benefit from Fuji Xerox Royalty, which is roughly 50 basis points benefit. It was only in quarter one, it won't repeat anymore here.

Speaker 3: We are still confident in maintaining this overall margin for the second half of the year in a range which is around 500,500 persons, potentially above this one. So that's the reason why we improve the guidance and we are still focused on driving both operational efficiencies.

Speaker 3: but also ensuring that the revenue mix and margin mix come at the expected level so we can drive overall operating margin up on free cash flow.

Speaker 2: Great, thank you. Thank you, one moment for our next question.

Speaker 2: And our next question comes from the line, now, some heat chatter from JP Morgan. Your question, please.

Speaker 7: Hi, thanks for taking my questions. I guess for the first one, I'm just curious how you're thinking about seasonality through the remaining two quarters of the year. And no, you mentioned seasonality to be lower for three qu. But more curious if you can dive into that for equipment sale. The 420 million of revenue you've voted in this quarter, is that sort of, is there a tailwind there from backlog digestion? And

Should we expect normal seasonality even in relation to equipment sale for the rest of the year? Or should we be sort of looking at it as backlog? Maybe any insights on what that underlying demand is looking for for equipment sale relative to the revenue profile you have now, which might be benefiting from backlog? Follow up, please. Yes, thanks, Samik. So seasonality, as we mentioned it in the comments...

So we are expecting it to be slightly below. But if you look at equipment for new growth on even on the post cell side, we are not expecting to have a significant decline. If you're on the last year in Q3, this is where we started to have supplies coming back on track. So the compare versus Q3 will be very different compared to the compare versus Q2 here.

From the margin point of view, as I commented earlier on, we are still, if I remove the one software, we are still expecting to get the margin, the range of five on a half to six for the full year, which imply potentially a software quarter-sweep, but very strong Q4, as we have always delivered. I will comment lastly on the normalating on where we are to...

finally just from, I'll go that the usual season 80 of Cognitive just to summarize Q3, it'll be a bit softer than Q4.

And then on the cash flow, you've done, I think, around 150 million of free cash flow in the first half, if I'm calculating it right, and that leaves about 450 to be done in the second half. Can you just walk us through, sort of, the half over half, how you think we're working capital, finance, we'll sort of work plays into.

to items like working capitals on payables, this quarter, whether you're a year, impact of payables simply because last year, we have higher purchase, some of the supply chain, you know, where I would say you released, which make us having higher purchase in Q2 for revenue recognition in quarter three here.

So working capital will normalize, we will have some tailwind coming from accounts payable inventory. You notice this quarter was also a tailwind with a reduction of close to 80 million. So we will see this being driven here. So that's the operational part. The second part is on finance receivable as expected on the strategies working.

support, you know, the free cash flow, and is helping the balance it as you have noticed it as well, just my last comment. We paint down the secure debt of $480 million. So you look at the led right ratio of the company as improved significantly compared to last year.

Okay, thank you. Thanks for taking the questions. Thank you one moment for our next question.

And our next question comes to the line of Shannon Cross from Credit Suisse. Your question, please....

Thank you very much. I just have a couple. The first is I'm curious and I'm not sure what, you know, what you can talk about, but what the benefit or impact could be from the banning of the nine-star products into the US. I know you were sourcing some things from Lex Marks. I'm just curious, you know, is this potentially a positive?

People won't be able to get stuff in or is it just sort of a nonstarter, thank you. Yeah, Shana, I did a couple of things. First of all, we're constantly looking at our supply chain and making sure we're adhering to all regulatory and government requirements around the world. And nine stars was no different than that. And we immediately looked at and made sure that we continued to be a good corporate citizen around the world. From materiality standpoint, it wasn't material for us in the quarter and going forward. We should be just fine. Okay, thanks.

I'm curious, how do you think about your cash balance? And then you have about I think $560 some $1 million with a cash right now. You used to run at a higher level, company smaller, wondering what you think your cash balance needs to be. And then as you have cash come in the second half of the year.

How should we think about usage there and versus, you know, the debt repayments, which clearly you've done a good job of reducing your debt load, but you still have about a billion dollars over the next couple of years. Thank you.

Yeah, good question. So we are good with a cash balance. That means this level of 500 million on above is the level where we should be. So we manage with seasonity within the quarter of cash share. But this is so light level for us.

Regarding use of cash, as you know, it our policy has not changed. Our target distribution of at least 50% of free cash flow. We are mainly focused on the paying down or paying the dividend. So this is roughly under 1080 million of the dividend.

And I will be, I will say on comment later on, when we will generate 600 million of free cash flow, you know, how we'll have the use of cash. Just would like to comment on one topic. We do not have board authorization on share with purchase. So we are not the need to do share with purchase on any cash that we can use or we are willing to use there. We'll be too supportive.

Thank you. And this does conclude today's question and answer session. I'd now like to hand the program back to Steve Anderson, Jack Frenney, for other remarks.

to accommodate a rapidly changing hybrid work environment. In the past year, we have bolstered our operating and financial models, solidifying a foundation from which we can grow as we help clients solve their most pressing workplace challenges. I thank you each for joining our Q2 earnings call. Have a wonderful day. Thank you, ladies and gentlemen, for your participation in today's conference.