Q2 2023 Xerox Holdings Corp Earnings Call
Speaker 1: Welcome to the Xerox Holding Corporation's second quarter, 2,023 Earnings Release Conference Call. After the presentation, there will be a question and answer session. To ask questions at that time, please press star 11 at any time during this call.
Speaker 1: You can withdraw your question by simply pressing star 11 again. At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.
Speaker 1: The floor is yours.
Speaker 2: Good morning everyone. I'm David Beckel, Vice President of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation second quarter 2023 earnings release conference call hosted by Steve Banderszak, Chief Executive Officer. He is joined by Xavier Heiss, Executive Vice President and Chief Financial Officer.
Speaker 2: At the request of Xerox Holdings Corporation, today's conference call is being recorded.
Speaker 2: Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox.
Speaker 2: During this call, Zerox executives will refer to slides that are available on the web at www.Zerox.com slash investor.
Speaker 2: and will make comments that contain four looking statements which by their nature address matters that are in the future and are uncertain.
Speaker 2: Actual future financial results may be materially different than those expressed herein.
Speaker 2: This time I'd like to turn the meeting over to Mr. VanJek.
Speaker 3: Good morning and thank you for joining our Q2 2023 earnings call.
Speaker 3: I am pleased to report another quarter of year-over-year growth in revenue, profits, profit margins, and cash flow.
Speaker 3: Consistent with recent quarters, these positive results reflect our team's balanced execution amid a dynamic macroeconomic backdrop. Summarizing results for the quarter, revenue of 1.75 billion group, 0.5% in constant currency, and
Speaker 3: 0.4% in actual currency.
Speaker 3: Adjusted EPS was 44 cents, 31 cents higher year-over-year.
Speaker 3: Pre-cash flow was $88 million compared to negative $98 million in the prior year quarter.
Speaker 3: and adjusted operating margin of 6.1% was higher year over year by 410 basis points.
Speaker 3: 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.
Speaker 3: 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.
Speaker 3: 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 3: 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 3: automated document and information workflows, and streamlined multichannel customer communications to name a few.
Speaker 3: A thriving hybrid workplace requires advanced technology solutions from trusted technology providers like Xerox.
Speaker 3: This quarter, Jerox was recognized by Kiserka as a leader in cloud print services positioned as a leader for both strategic vision and depth of service.
Speaker 3: We also advanced our leadership position in Kerserka's assessment of leaders in the Prince Security market an important distinction as clients place increasing importance on data security.
Speaker 3: 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. This quarter, we want a renewal of a leading healthcare service company increasing annual contract value by close to 40%.
Speaker 3: Through our understanding of this client's needs and our broader healthcare vertical expertise, we were able to design an integrated customer engagement solution that improves and automates patient communications processes. All instances are affected and are
Speaker 3: 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%.
Speaker 3: An important oeuvre of client success is a deeper understanding of Xerox's value proposition among clients and partners.
Speaker 3: In Q2 we launched a new integrated brand and demand generation campaign. We make work work.
Speaker 3: This is the most significant marketing campaign the company has launched in many years and is meant to drive awareness of zero access digitization and work close solutions that solves clients' pain points in a dynamic hybrid workplace.
Speaker 3: This quarter we also held our first global partner summit since the pandemic.
Speaker 3: Posting close to 400 channel partners.
Speaker 3: 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 3: It is clear our value proposition is resonating with clients. In the past six months, we experienced a meaningful improvement in services signings momentum.
Speaker 3: Year to date, signings are up double digit in constant currency and revenue retention rates remain solid.
Speaker 3: Further, the greater appreciation of our workflow solution is helping drive equipment market share.
Speaker 3: 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 3: The latest quarter of market share data availability, Xerox came two points of global market share in the markets in which we compete with strong performance in A3 and production. Moving to profitability.
Speaker 3: In Q2, we grew our profit margin year over year for the third consecutive quarter.
Speaker 3: This improvement in margin reflects specific actions taken to drive profitable revenue growth, optimize our operations, and offset product cost inflation with price increases. We continue to look for ways to streamline and focus our operations.
Speaker 3: We recently sold Xerox Research Center of Canada or XRCC to my capital partners, a leading textile computing company with a Shad mission of advancing material-based innovation.
Speaker 3: As with Pauk, this transaction provides Xerox with greater focus and financial flexibility to pursue growth opportunities adjacent to our core operations.
Speaker 3: Improvements in profitability and cash flow of course are crude directly to shareholder value.
Speaker 3: In the current mocking 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. Yet a date, we have lowered total debt outstanding by around 600 million. Now, she'll hold the return policy remains the return of at least 50%.
Speaker 3: Xerox has taken to position the company for long-term profitability and sustainable growth.
Speaker 3: In the past year, the company has experienced significant change, not all of which may be apparent to investors.
Speaker 3: 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 3: 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 3: Starting with operating discipline, the rigor and operating system instilled by Project Own It provides the key building blocks from which this foundation could be built.
Speaker 3: Learnings 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 3: Internally, we use more than 600 bots to conduct 7 million transactions per quarter.
Speaker 3: These bots reduce resources required to process manual and repetitive tasks and improve client response times.
Speaker 3: In our service delivery function, we use augmented reality and AI to improve remote solve rates, in-field decision making, and service delivery profitability.
Speaker 3: And when KERA-R and AI are incorporated into our service offerings, we see meaningful improvement in client satisfaction.
Speaker 3: One of the most significant decisions I have made in my time as CEO was the appointment of John Bruno as COL. John has a strong track record of leading transformation and strategic change across a range of industries.
Speaker 3: 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 3: When transforming a company in challenging operating environment, focus is critical.
Speaker 3: That understanding led to a number of transactions including the exit of our LQ joint venture, the spin out of Navi and Mojave, the donation of Park to SRI International, and more recently the sale of XRCC to Miami.
Speaker 3: 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 and resources needed to direct out efforts more conservatively towards advancements in workplace technology solutions.
Speaker 3: employees success.
Speaker 3: Accordingly in the past year, we reinstituted a number of compensation and career development programs that will place 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 3: Financial discipline is equally important in providing stable base for growth. In the past year, we have taken a number of steps to improve profitability, financial flexibility, and balance sheet strength. Following the pandemic and through recent operating challenges,
Speaker 3: we have been laser focused on profit margin. 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 emphasizes transaction and deal margins.
Speaker 3: Thus allowing our sales team to focus their attention on delivering value for clients rather than compete for commoditized business.
Speaker 3: 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 3: The Technology Exploration and Innovation Program signed with SRI and PAUC 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 3: The Receivable Funding Agreement we signed with a subsidiary of HPS investment partners last December significantly improved our free cash flow, generation, and lowered Fiddles Reliance on Xerox's balance sheet to provide funding for lease originations.
Speaker 3: Accordingly, 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 3: 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 3: In the past year, I've spent significant portion of my time meeting directly with some of our most important clients and partners.
Speaker 3: For those conversations, it is clear clients trust year-ox and look to us to help them solve their most pressing workplace challenges.
Speaker 3: Recent discussions have shifted to emerging technology such as generative AI that will further stress the need for secure workplace solution like hours that help optimize company data and workflows. With clients trust and an institutional knowledge about clients' businesses and industries,
Speaker 3: We have a clear path to win. We aim to expand existing clients' share of wallet and win new client business by delivering advanced print, digital and IT solutions.
Speaker 3: 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.
Speaker 3: Success along this path will be driven by a service-led, software-enabled approach to improving client business outcomes and a brand strategy more closely aligned with repositioned Xerox.
Speaker 3: To recap, it is the early days of a reinvention of our company, but progress is already apparent.
Speaker 3: 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 2: now hand it over to Xavier. Thank you Steve and 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
Speaker 2: In Q2, revenue was slightly higher year over year in actual and constant currency.
Speaker 2: Growth was driven by equipment sales, once again reflecting a stable demand environment, improved product supplies and favorable mix.
Speaker 2: Growth from equipment sales was offset by a decline in post sales revenue, which was mainly driven by non-contractual items.
Speaker 4: Turning to profitability.
Speaker 4: 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 4: Rough margin improves 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 4: These benefits were partially offset by unfavourable currency effects on around 50 basis points of impact from lower Fuji royalties.
Speaker 4: Adjusting operating margin of 6.1% increased 410 basis points year over year, driven by 450 basis points of improvement from ongoing operating efficiencies on pricing actions, and 300 basis points from supply chain related improvements, including a more favorable product mix.
Speaker 4: Partially offsetting these benefits were unfavorable effects from currency, lower FJ royalty income, and higher EUR-V-E by debt on compensation expenses.
Speaker 4: Adjusted other expenses net were 9 million higher year-over-year due to a 16 million benefit associated with a defined contribution pension plan refund in the prior year quarter partially offset by lower interest expense.
Speaker 4: Adjusting tax rate was 20% compared to 18.5% in the same quarter last year.
Speaker 4: 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
Speaker 4: 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 4: Let me now review revenue and cash flow in more detail.
Speaker 4: Turning to Review, Equipment sales of 420 million in Q2 rose 14% year-over-year in constant currency, or around 15% in actual currency.
Speaker 4: Growth was driven by better availability of product, particularly in the Americas and for our higher margin A3
Speaker 4: As expected, backlog has now returned to normalize level.
Speaker 4: 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.
Speaker 4: revenue of 1.3 billion fell around 3% in actual and constant currency year over year.
Speaker 4: Post-SAL declines were driven by lower IT hardware on paper cells, lower finance income on the elimination of Fuji royalty on Park Review.
Speaker 4: Revenue from contractual print on digital services, our largest and most stable source of revenue goes down slightly.
Speaker 4: 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 4: 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 4: Let's now review cash flow.
Speaker 4: Free cash flow was 88 million in Q2, higher by 186 million year over year.
Speaker 4: Operating cash flow were 95 million in Q2 compared to a use of 85 million in the prior year.
Speaker 4: Improvement were mainly driven by growth in operating income, a one-time contract termination payment in the prior year on the net source of cash associated
Speaker 4: 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.
Speaker 4: 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. Inventory was a source of cash of 76 million, reflecting recent efforts to reduce inventory following disruption to our supply chain.
Speaker 4: Investing activity were 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 partially offset by lower capex. Financing activity consumed $220 million of cash this quarter, which includes a net payment of approximately $5 million.
Speaker 4: 174 million of secured debt on dividend totaling 43 million.
Speaker 4: million of secular debt on dividends totaling 43 million.
Speaker 4: Beginning this quarter, we revised the presentation of our segment measures, transferring revenue and costs associated with operating lease from CITEL to our print on other segments. This change was made to better reflect differences in ownership and oversight for this type of lease between segments.
Speaker 4: The result is a reduction to fetal segment revenue on profit.
Speaker 4: Peter origination volume grew 36% year over year. Captive product origination were up 45% on higher Xerox equipment revenue, particularly in the mid-market. Instagram. Which has with degree.
Speaker 4: 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 4: 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 origination.
Speaker 4: FITOL revenue grew roughly 5% in Q2, mainly due to higher commission associated with the set of finance receivable assets partially offset by lower finance income on other fees, a result of a decline in FITOL finance receivable asset base. Non-profit for FITOL was zero.
Speaker 4: down 6 million euro per year, primarily due to higher bad debt expense, reflecting euro value origination increase.
Speaker 4: As noted last quarter, we expect improvement to bad debt expense going forward as our Finance Allowable Book Decline.
Speaker 4: 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, lower logistic cost, favorable mix on the
Speaker 4: 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 4: net core cash of around 50 million was down from the prior quarter. 2.6 billion of the remaining 3.1 billion of our outstanding debt supports our finance assets with a remaining debt of around 500 million attributable to the
Speaker 4: Total debt consists of senior unsecured bonds, finance asset securitization, and borrowing under our asset backed credit facility.
Speaker 4: We have a balanced bond maturity ladder
Speaker 4: we have a balanced bond maturity ladder over the next few years. Finally, I will address Guy-downs.
Speaker 4: 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 4: 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.
Speaker 4: in the first half of the year, benefited from favorable equipment mix, a one-off credit to bad debt expense, one quarter of foodie royalties, the timing of price increases relative to incremental product cost, and lower labor costs
Speaker 4: These benefits may not repeat in the soon half of the year. The indicated range of profit margin outcome reflects the degrees to which macroeconomic uncertainty could affect our operating
Speaker 4: Q3, Adjusting Operating Income Margin, is expected to be lower than Q4, reflecting seasonality. We continue to work efficiently to identify incremental cost efficiency and expect the benefit of a more flexible cost structure to drive incremental margin expansion beyond Q3.
Speaker 4: We are also increasing our guidance for free cash flow from at least $500 million to at least $600 million. This increase reflects an improvement in expected operating income on incremental sales of finance receivables.
Speaker 4: 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 4: We now open the line for Q&A.
Speaker 1: Certainly, one moment. And our first question comes from the line of Ananda Bruja from Loop Capital. Your question, please..
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 resilient top line as you talked about Steve and this looks like it's lining up to be called the fourth year in a row.
Speaker 5: and some of the newer tech trends. But I guess I'd love your bigger picture thoughts on what previously been for many years the declining market. And now for the last three years has been slavish, or at least the company's performance has been slavish. And it looks like we're looking at like a fourth straight year of seven billion revenue.
Speaker 3: and how do we drive efficiencies and help our clients in the macro headwinds that they're seeing. So if you think about headwinds on inflation, headwinds on use of capital, our solutions and what we're driving is to help them solve their solutions. And that's a strategic shift for us in bundling around.
Speaker 3: our equipment, our software, our cloud solutions, and so forth. Second is really driving digital services. You know, 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, wow.
Speaker 3: 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. 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. Xavier?
Speaker 4: Yeah, I'm not that just to complete from the revenue point of view, what we see is the equipment review remains strong on the demand for our products, specifically A3. We main very strong, which drive revenue, you know, we push some price increases as well. So this is supporting revenue. Because the positive news is on the post sales, post sales on the contracted revenue, you know, our customer find contract for, you know, usually a length of five years.
Speaker 5: heard the answer range before. And you guys you mentioned on the call again the prepared remarks you want me to go Steve sort of like a street a strategy shift towards services and then I think you used the term reinvention as well so is that incremental?
Speaker 3: the future but you know we've talked about very specific vertical solutions and horizontal solutions in our existing customer base and we gave examples of working in universities and education, working in the medical industry, working in
Speaker 3: 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. And we really focus on client success. When I talked about freeing up both...
Speaker 3: financial and management capacity. That's exactly what we're doing, really focusing on specific how do we drive client success with products and services. You will see a lot more from us in the future. All right, that's great. I have one quick last one, just a clarification. When you mentioned...
Speaker 5: Steve to open up and pay 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? Or was it just pointing out that also small medium business is resilient?
Speaker 3: 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 some of the installations. But in general, SMB was strong from us.
Speaker 1: That's great. Thanks so much. Thank you. One moment for our next question. And our next question comes from the line, 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 normalization?
Speaker 6: It would be helpful for us to understand how you think about some of these metrics over a multiyear period. And then I have a follow-up. Thank you.
Speaker 3: Doug, great. Thank you for the questions. Let me start with the macro and then Hepsavia comment on some more specifics. So we really take a step back. I really believe today the workflows and the hybrid workplace is really trying to continuously drive productivity and transformation. And we're seeing CEOs and companies really trying to figure out what this new normal look like and how do we drive more productivity in that space. And it's not one side.
Speaker 3: been written in terms of what the new normal is, we're still evolving and I think we'll 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. 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 is the underpinning of that is significant amounts of data and we play really well.
Speaker 3: 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 with these new tools, whether it's AI, whether it's RPO, with reality, we are playing really well. I'm really trusted in helping our clients there. So we see significant growth and significant opportunity.
Speaker 4: you have noticed it in quarter one, quarter two, quarter four last year as well. We have been able to mix up by having product, how your margin product, how your revenue product with some price increases. That support it on growth from an activity point of view from market share, but also from a value point of view that growth as a revenue growth.
Speaker 4: that we are seeing here. At the same time, as I mentioned it earlier on, the post sales review stream is still strong here and we are delivering on supporting essential services for our customers. We see that in the contractual trends that we have, signing are strong.
Speaker 4: and as well, renewal rates that we are observing with clients that also show the high attachment rate on the retention of our review.
Speaker 4: 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 5 to 5.5 to 5.5 to 6% there to 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 did 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 4: 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 radical one-off item that we're supporting the margin. Specifically, we had had the benefit from Fuji the rocks for reality, which is roughly 50 basis point benefit. It was only.
Speaker 4: We are still confident that the reason why we upgraded the guidance, we are still confident in maintaining this overall margin for the second half of the year. In a range with a 1.5.5% potential, we hope this one.
Speaker 4: So that's the reason why we improve the guidance. And we are still focused on driving both operational efficiencies, 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 1: Great, thank you. Thank you, one moment for our next question.
Speaker 1: And our next question comes from the line of Samit Chatterjee from JP Morgan. Can you answer 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 queue, but more curious if you can dive into that four 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 X backlog, maybe any insights on what that underlying demand is looking for equipment sale rate up to the revenue profile you have now, which might be benefiting from backlog. And follow up, please. Yeah, I have ties to mix. Seasonality, as we mentioned it in the comments.
We are expecting Q3 as usual. That means this is not a surprise. My eyes usual to be a little bit softer than Q4. As you know, Q4 is a very strong quarter. This is usually where we have the also higher mix of margin of equipment on the larger deals being signed towards the end of the year.
So we're 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 a very strong Q4, as we have always delivered. I will comment lastly on the normalating on where we are.
And finally, just from how could that the usual season 80 of code view just to summarize Q3, a little bit softer than Q4. And then, Zavi, 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 the half-over-half, how you think about working capital finance, we see what plays into that significant improvement into the second half? This is also aligned with the traditional season 80. We have, if you remember, last year, with the last year on the Europe before a very similar pattern, the second half is much specifically related to items like working capital on payables.
This quarter we have a year-over-year impact of payables simply because last year we have higher purchase, some of the supply chain were 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 I would say tailwind coming from...
surprises here. This is planning as expected. We've got the full benefit of now having close to 40. It was 40 this quarter, 40% of our origination been funded by HBS, which support you know, the free cash flow and is helping to balance it as you have noticed it as well. Just my last comment. Has beenVI out
we pay down the secured debt of roughly under $18 billion. So if you look at the lead right to ratio of the company, it has 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 in the line of Shannon Cross from Credit Suisse. Dear 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? And people won't be able to get stuff in or is it just sort of a non-starter? Thank you.
Yeah, Shana, I think 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. And then I'm curious, how do you think about your cash balance and then, you know, use of cash? You have about, I think, $560 some odd million worth of 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 in the second half of the year, how should we think about usage there and versus 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, we have seasonity within the quarter of cash. But this is so right level for us. Regarding use of cash, as you know, it our policy has not changed, shareholder 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 dividend. And 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 both the authorization on share with purchase. So we are not planning to do share with purchase on any cash that we can use or we are willing to use here. We'll be too support the business development. So does that mean you're looking more at M&A or just internal like ramping up cat-backs? We are looking at any opportunity.
It could be organic, it could be inorganic, emanating sports of the list.
organic, it could be inorganic, M&A's part of the list. Thank you.
Thank you. And this does include today's question and answer session. I'd now like to hand the program back to Steve Anderson's Act for any further remarks. Thank you for listening to our earnings conference called this morning. We continue to face dynamic operating environment as workplace behavior and technology needs evolved to accommodate a rapidly changing hybrid work environment.
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