Q3 2023 Xerox Holdings Corp Earnings Call

October 24, 2023

Okay.

Welcome to the Xerox Holdings Corporation third quarter 2023 earnings release conference call. After the presentation. There will be a question and answer session to ask your questions at that time. Please press star one one at any time. During this call you can withdraw your question by simply pressing star one again.

At this time I would like to turn the meeting over to Mr. David <unk>, Vice President of Investor Relations. Please go ahead Sir.

Good morning, everyone I'm, David Backhaul, Vice President and head of Investor Relations at Xerox Holdings Corporation.

Looking to the Xerox Holdings Corporation third quarter 2023 earnings release Conference call hosted by Steve <unk>, Chief Executive Officer.

He is joined by Doug Aron Executive Vice President and Chief Financial Officer.

At the request of Xerox Holdings Corporation today's conference call is being recorded.

Other recording and or rebroadcast of this call are prohibited without the expressed permission of Xerox during.

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

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

At this time I'd like to turn the meeting over to Mr. <unk>.

Good morning, and thank you for joining our Q3 2023 earnings call before I get to this quarter's results I would like to start today's call by acknowledging the tragic events unfolding in the middle East our thoughts and prayers are with the victims and their families which include our local employees clients and partners. We are all.

Hoping for a peaceful resolution.

In Q3, the successful execution of our strategic priorities resulted in another quarter of growth in adjusted operating income.

And free cash flow.

<unk> results for the quarter revenue of 165 billion declined five 7% in actual currency and seven 4% in constant currency.

Adjusted EPS was <unk> 46 cents.

27, <unk> higher year over year.

Free cash flow was $112 million compared to a use of $18 million in the prior year quarter.

And adjusted operating margin of four 1% was higher year over year by 40 basis points.

While im never pleased to report a decline in revenue. This quarter's top line results were largely anticipated the.

The decline in revenue reflects a relatively stable demand environment for our products and services offset by declines in certain cyclical low margin post sale revenue categories as well as declines in revenues associated with strategic actions put in place to simplify our business.

Despite a reduction in revenue in Q3, we once again grew operating income and operating income margin on a year over year basis. This growth is due to a reduction in costs associated with recent business simplification efforts, our ability to offset product cost increases with higher prices.

And the purpose of avoidance of revenue opportunities bearing low levels of profitability.

As I will discuss we expect the continued simplification of our business to drive substantial incremental improvement in profit margin and profit levels over the next few years.

Free cash flow improved $130 million year over year in Q3, and as the increased by more than $330 million year to date.

Growth in free cash flow was due in part to a change in <unk> strategy and its approach to funding new originations, which we expect will generate meaningful amounts of incremental free cash flow for many years to come as always we remain focused on our three strategic priorities client.

Operator: Welcome to the Xerox Holdings Corporation, third quarter of 2023 earnings release conference call. After the presentation, there will be a question and answer session to ask your questions at that time. Please press star 11 at any time during this call. You can withdraw your question by simply pressing star 11 again.

Success profitability and shareholder returns.

<unk> success is a strategic imperative for Xerox, our ability to solve clients' most challenging workplace productivity needs and offset the effects of rising inflation labor constraints and the higher cost of capital with productivity enhancing solutions helps us not only gain market share in print.

David Beckel: At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President of Investor Relations.

Operator: Please go ahead, Sarah.

David Beckel: Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation, third quarter 2023 earnings release conference call hosted by Steve Bandrowczak, Chief Executive Officer. He's joined by Zave Heiss, Executive Vice President and Chief Financial Officer. After a question, 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.

But expand client wallet share through incremental services.

This quarter Xerox was recognized as a leader in IDC market Scapes worldwide transformation vendor assessment for our breath of transformative workplace technology solutions, both related shoe and adjacent to cranes.

Our advanced solutions provide us a distinct advantage as we compete for new and renewal business.

David Beckel: During this call, Xerox executives will refer to slides that are available on the web at www. Xerox.com slash investor. We will make comments that contain four looking statements which, by their nature, address matters that are in the future and uncertain. Actual future financial results may be materially different than those expressed herein.

This quarter and year to date service signings grew double digits in constant currency led by growth in digital services, Inc.

Increasingly digital services, such as advanced customer engagement and intelligent document processing are replacing traditional print demand as contracts with existing clients renew.

Steven Bandrowczak: At this time, I'd like to turn the meeting over to Mr. Bandrowczak. Good morning, and thank you for joining our Q3 2023 earnings call.

Steven Bandrowczak: Before I get to this court as a result, I would like to start today's call by acknowledging the tragic events unfolding in the Middle East. Our thoughts and prayers are with the victims and their families, which include our local employees, clients, and partners. We are all hoping for a peaceful resolution. In Q3, the successful execution of our strategic priorities resulted in another quarter of growth in adjusted operating income, EPS, and pre-cash flow, summarizing results for the quarter, revenue of 1.65 billion declined, 5.7% in actual currency, and 7.4% in constant currency.

Year to date, the revenue replacement rate for a majority of renewed service contract is 100% or higher despite the ongoing consolidation of print demand as companies adapt to more permanent hybrid workplace arrangements.

Moving to profitability in Q3, we took additional actions to simplify our operations and improve the efficiency of our cost structure.

In August we saw the <unk> print business Allen additive solutions to added Tech and in September we announced the expansion of our relationship with peak solutions and affiliate of Hps investment partners to include the provision of leasing services to bid those network of independent dealers.

Steven Bandrowczak: Adjusted EPS was 46 cents, 27 cents higher year-over-year. Pre-cash flow was 112 million compared to a use of 18 million in the prior year quarter, and adjusted operating margin of 4.1% was higher year-over-year by 40 basis points. While I'm never pleased to report the decline in revenue, this court's top-line results were largely anticipated that the decline in revenue reflects a relatively stable demand environment for our products and services offset by declines in certain cyclical low-modge and post-cell revenue categories, as well as declines in revenues associated with strategic actions, could in place to simplify our business.

Both actions improved our flexibility about cost base, while enabling greater focus on our core capabilities in and around print.

Digital and it services.

Finally shareholder returns.

Few weeks ago, we repurchased roughly 34 million shares previously owned by Carl Icahn and affiliates, resulting in a reduction of our share count of around 22%.

A decision to repurchase these shares was consistent with the capital allocation and shareholder returns philosophy, which is to deploy cash in areas, providing the highest return for shareholders Matt.

Management and the board of Directors believe this transaction will create substantial value for shareholders overtime.

Steven Bandrowczak: Despite a reduction in revenue in Q3, we once again grew operating income and operating income margin on a year-over-year basis. This growth is due to reduction in costs associated with recent business simplification efforts, our ability to offset product costs increases with higher prices, and the purposeful avoidance of revenue opportunities bearing low levels As I will discuss, we expect the continued simplification of our business to drive substantial, incremental improvement in profit margin and profit levels over the next few years.

As the reduction of shares allows equity holders greater participation in the expected earnings growth associated with our transformation, which I will discuss shortly.

The transaction is expected to be EPS accretive, while preventing the type of market overhang normally associated with an open market disposal of significant equity states.

Our three strategic priorities have been instrumental in laying the groundwork for our direction moving forward.

Steven Bandrowczak: Precast flow improved 130 million year-over-year in Q3 and has increased by more than 330 million year-to-date. Growth in free cash flow was due in part to a change in fiddle strategy and its approach to funding new originations, which we expect will generate meaningful amounts of incremental free cash flow for many years to come. As always, we remain focused on our three strategic priorities, client success, profitability, and shareholder returns. Client success is a strategic imperative for Xerox, our ability to solve clients' most challenging workplace productivity needs, and offset the effects of rising inflation, labor constraints, and higher costs of capital with productivity enhancing solutions.

On our Q2 call. We provided examples of the ways in which we are simplifying our business to refocus on our core operations of print digital and it services.

Those actions were critical enablers of an even more significant transformation of our business.

For the past year with the help of outside experts, we have analyzed our business model competitive strengths and market opportunities to define an optimal strategic path and today, we are sharing with investors the preliminary framework for a multi year strategic transformation plan.

Which we referred to as reinvention.

First let me define what reinvention means to Xerox Green.

Reinvention is a comprehensive and operational simplification of our business, resulting in a strategic repositioning of the company to take advantage of favorable macro trends, including the digitalization of document workflows associated with the power of AI while man.

Steven Bandrowczak: Helps us not only gain market share and print, but expand client-loyalty through incremental services. This quarter Xerox was recognized as a leader in IDC market scapes worldwide print transformation vendor assessment for our breadth of transformative workplace technology solutions, both related to and adjacent to print. Our advanced solutions provide us a distinct advantage as we compete for new and renewal business. This quarter and year-to-date service signings grew double digits in constant currency, led by growth in digital services, increasingly digital services such as advanced customer engagement and intelligent document processing are replacing traditional print demand as contracts with existing clients renew. Year-to-date, the revenue replaced rate for a majority of renewed service contract is 100% or higher, despite the ongoing consolidation of print demand as companies adapt to more permanent hybrid workplace arrangements.

<unk> the secular headwinds associated with traditional print.

Reinvention does not mean, we're abandoning our core print business, which we expect to continue generating strong profits and cash flow for many years reinvention means building new capabilities on top of a solid print core.

Management and the board believes the most direct and probable path to sustainable growth and profit free cash flow and shareholder returns requires a structural redesign of our operations combined with selected reinvestment and capability is essential to addressing clients most challenging work.

Place productivity needs.

Workplace has evolved and Xerox is evolving with it to ensure we power the productive workplace of today and tomorrow.

The ultimate goal of reinvention is to facilitate Xerox shifts from a leader in print technology to an unparalleled technology and service provider.

Steven Bandrowczak: Moving to profitability, in Q3 we took additional actions to simplify our operations and improve the efficiency of our cost structure. In August, we sold out 3D print business element additive solutions to add a tech and in September, we announced the expansion of our relationship with peak solutions and affiliate of HBS investment partners to include the provision of leasing services to fiddle network of independent dealers. Both actions improved the flexibility of our cost based while enabling greater focus on our core capabilities in and around print, digital and IT services.

There are three primary components of the reinvention first is a geographic optimization, which entails taking a more selective approach to direct operations in certain markets and when appropriate shifting to a partner led distribution model.

This optimization of our go to market approach is expected to result in lower revenue initially, but provide a stronger and more profitable foundation from which to grow revenue going forward.

Second is the optimization of our product offering and pricing models through the reinvention, we will streamline our product offerings to maximize profitability and allow greater internal focus on the delivery of products and services that address the evolving needs of our hybrid workplace.

Steven Bandrowczak: Finally, shareholder returns. A few weeks ago, we repurchased the roughly 34 million shares previously owned by call icon and affiliate, resulting in a reduction of our share count of around 22%. The decision to repurchase these shares was consistent with the capital allocation and shareholder return philosophy, which is to deploy cash in areas, providing the highest return for shareholders. Management and the Board of Directors believe this transactional creates substantial value for shareholders over time as the reduction of shares allows equity holders greater participation in the expected earnings growth associated with out transformation, which I will discuss shortly. The transaction is expected to be EPS accretive while preventing the type of market overhang normally associated with an open market disposal of significant equity states.

We will introduce a more consumer like touchless experience to improve client satisfaction and will simplify our pricing models to deliver faster and more effective decisioning when pursuing new and renewal business the.

The optimization of our geographic footprint product offerings and pricing models will in turn enable an end to end organizational and structural simplification of our business unlock in the third component of the reinvention operating efficiencies across it.

Business support functions and the supply chain.

While the reinvention is expected to result in a more profitable and streamlined organization. It is not simply a cost cutting program.

Really important if not more so is <unk> ability to transition over time to become a services led software enabled provider of advanced workplace solutions.

Steven Bandrowczak: Our three strategic priorities have been instrumental in laying the groundwork for our direction moving forward. On our Q2 call, we provided examples of the ways in which we are simplifying our business to refocus on our core operations of print, digital, and IT services. Those actions were critical enablers of an even more significant transformation of our business. For the past year with the help of outside experts, we have analyzed our business model, competitive strengths, and market opportunities to define an optimal strategic path.

A transition of this magnitude requires select investment in organic and inorganic growth opportunities.

These investments are expected to be self funded and we'll target opportunities to grow our share of wallet in print and print services as well as high growth.

Jason markets, where we have a clear path to win such as managed services for small and mid sized clients and digital services.

Steven Bandrowczak: And today, we are sharing with investors the preliminary framework for a multi-year strategic transformation plan, which we refer to as reinvention. First, let me define what reinvention means to Xerox. Reinvention is a comprehensive and operational simplification about business, resulting in a strategic repositioning of the company to take advantage of favorable macro trends, including the digitalization of document workflows associated with the power of AI while managing the circular headwinds associated with traditional print.

In total reinvention is expected to generate substantial improvement in operating income and income margin over the next few years.

2026, we expect to deliver an improvement to 2023 adjusted operating income of at least $300 million.

<unk> and returned to double digit adjusted operating income margins.

Importantly, this improvement is inclusive of investments in growth, which are expected to drive a more diversified revenue mix with greater exposure to markets with high rates of growth.

Steven Bandrowczak: Reinvention does not mean we are abandoning our core print business, which we expect to continue generating strong profits and cash flow for many years. Reinvention means building new capabilities on top of a solid print core. Management and the board believe the most direct and probable path to sustainable growth in profit, free cash flow, and she'll hold the returns, requires a structural redesign of our operations combined with selected reinvestment in capability's essential to addressing client's most challenging workplace productivity needs.

We will provide more specifics and the phasing of operating income improvements as specific actions are taken in future quarters.

To recap we are confident in our ability to successfully execute this reinvention project own. It has instilled in this company a culture of continuous operating improvement.

Management team is more than capable of delivering a transformation of this magnitude and our brand client relationships and history of innovation give us the right to play and win in digital and managed it services <unk>.

Steven Bandrowczak: The workplace has evolved, and Xerox is evolving with it to ensure we power the productive workplace of today and tomorrow. The ultimate goal of reinvention is to facilitate Xerox shifts from a leader in print technology to an unparalleled technology and service provider.

Reinvention will not only improve xerox profitability, but reposition the company for long term sustainable growth.

And with strong free cash flows supporting our dividend investors will be rewarded as the strategy progresses.

I will now hand over to Xavier <unk>.

Thank you, Steve and good morning, everyone as Steve mentioned, we delivered another quarter of growth in adjusted operating income and income margin. Despite the decline in revenue. If you don't see our ability to manage profitability Amit <unk> in revenue.

Steven Bandrowczak: There are three primary components of the reinvention. First is a geographic optimization, which entails taking a more selective approach to direct operations in certain markets, and when appropriate, shifting to a partner led distribution model. This optimization of our go-to-market approach is expected to result in lower revenue initially, but provide a stronger and more profitable foundation from which to grow revenue going forward. Second, is the optimization of our product offering and pricing models.

So year over year decline in revenue this quarter was driven mainly by declines in transactional non contractual posts, hence revenue components equipment revenue declined modestly relative to the prior year due in large part to a reduction in equipment backlog in the prior year quarter turning to profitability.

We did a <unk> consecutive quarter of year over year improvement in gross and operating profit margin.

Steven Bandrowczak: Through the reinvention, we will streamline our product offerings to maximize profitability and allow greater internal focus on the delivery of products and services that address the evolving needs of a hybrid workplace. We will introduce a more consumer-like, touchless experience to improve client satisfaction, and we'll simplify our pricing models to deliver faster and more effective decisioning when pursuing new and renewal business. The optimization of our geographic footprint, product offerings, and pricing models will in turn enable an end-to-end organizational and structural simplification of our business, unlocking the third component of the reinvention, operating efficiencies across IT, business support functions, and the supply chain.

Gross margin improved 60 basis points over the prior year quarter, mainly due to the benefit associated with pricing increases on cost efficiency actions, partially offset by a 50 basis point headwind from the combination of <unk>.

Encourage you can product costs were more than offset by improvement in supply chain related expense on pricing actions.

Adjusted operating margin of four 1% increased 40 basis points year over year as the effect of lower revenue and gross profit along with higher compensation on bad debt expenses were offset by close to 400 basis points of improvement from ongoing operating efficiencies and pricing actions.

Adjusted other expenses net were $29 million lower year over year due to higher gains from the sense of noncore business asset on low well known financing interest expense.

Steven Bandrowczak: While the reinvention is expected to result in a more profitable and streamlined organization, it is not simply a cost-cutting program. Equally important, if not more so, is Xerox's ability to transition over time to become a services-led software-enabled provider of advanced workplace solutions. A transition of this magnitude requires select investment in organic and in organic growth opportunities. These investments are expected to be self-funded and will target opportunities to grow a share of wallet in print and print services, as well as high-growth adjacent markets where we have a clear path to win, such as managed IT services for small and mid-size clients and digital services.

Adjusted tax rate was seven 3% compared to $42 one percentage of same quarter last year.

Jody due to tax benefits associated with the release of uncertain tax positions on the re measurement of deferred tax asset during the current period.

As well as a nonrecurring unfavorable effect of changes in <unk> tox addiction in the prior year period.

Adjusted EPS of <unk> 46, <unk>, the third quarter was 27% a year tens of prior year driven by an increase in the sale of non core business asset on the lower tax rate.

GAAP EPS of <unk> 28 was $2 76, a year Thunder prior year, mainly due to <unk> tax noncash goodwill impairment charge of $395 million or $2 54 per share in the prior year.

Steven Bandrowczak: In total, reinvention is expected to generate substantial improvement in operating income and income margin over the next few years. By 2026, we expect to deliver an improvement to 2023 adjusted operating income at at least 300 million, resulting in return to double-digit adjusted operating income margins. Importantly, this improvement is inclusive of investments in growth, which are expected to drive a more diversified revenue mix with greater exposure to markets with high rates of growth. We will provide more specifics and the phasing of operating income improvements as specific actions are taken in future quarters.

Well no EPS impact this quarter associated with our recent repurchase of share from Carl Icahn that pdx.

<unk> revenue on cash flow in more detail.

Turning to revenue equipment sales of $386 million in Q3 declined 1% year over a year in actual currency or 2% in constant currency.

So declining equipment towards new reflects cable demand conditions offset by the effect of EMEA backlog reductions in the prior year.

Consistent with recent quarter.

Revenue trends outpaced equipment insertion activity due to favorable product and geographic mix as well as higher prices.

Steven Bandrowczak: To recap, we are confident in our ability to successfully execute this reinvention. Project ONIT has instilled in this company a culture of continuous operating improvement. Our management team is more than capable of delivering a transformation of this magnitude and our brand, client relationships and history of innovation give us the right to play and win in digital and managed IT services. Reinvention will not only improve Xerox profitability, but reposition the company for long-term sustainable growth. And with strong free cash flow supporting our dividend, investors will be rewarded as the strategy progresses.

Was particularly true with our suite product, which <unk> unfavorable geographic mix affecting the prior year due to backlog reduction in EMEA.

Three April integration were lower again this quarter due to the ongoing normalization of work from home trends.

Wholesale revenue of $1 3 billion declined 9% in constant currency year over year on 7% in actual currency.

As Nookie wholesale declines were mainly driven by a reduction in cyclical transactional items, most notably a significant decline in low margin paper sales on lower IP endpoint device.

Device placements.

Xavier Heiss: I will now hand over to Xavier.

<unk> Centrum knew was Charles are impacted by determination of Fujian royalties on the effect of specific strategic action rich treasure, keeping low wealth financing on pumps.

Xavier Heiss: Thank you, Steve, on good morning everyone. As Steve mentioned, we deliver another quarter of growth in adjusted operating income on income margin, despite a decline in revenue, evidencing our ability to manage profitability amid fluctuation in revenue. So year-over-year decline in revenue this quarter was driven mainly by decline in transactional, non-contractual post-cels for new components. Equipment for new decline modestly, relative to the prior year, you enlarge part to a reduction in equipment backlogs in the prior year quarter.

Revenues from contract to our print on digital services declined slightly as digital and managed it services revenue growth was offset by declining print services for prediction clients, which have generally been more affected by macroeconomic pressure.

Clients geographically most region declining next year and on constant currency.

So a decline in EMEA was more pronounced given the substantial reduction in EMEA backlog in the prior year quarter on a weakening macro economic outlook.

Xavier Heiss: Turning to profitability. We deliver a first consecutive quarter or year-over-year improvement in growth on operating profit margin. Both margin improve 60 basis point over the prior year quarter, mainly due to the benefit associated with pricing increases on cost efficiency actions, partially offset by your 50 basis point Edwin from the termination of 3G royalties. Increases in product cost were more than offset by improvement in supply generated expense on pricing actions. Adjusted operating margin of 4.1% increased 40 basis point year over a year, as the effect of lower revenue on growth profit, along with higher compensation on bad debt expenses, were offset by close to 100 basis points of improvement from ongoing operating efficiencies on pricing actions.

<unk> an increase in equipment revenue was more than offset by declining <unk> revenue due in part to lower <unk> of the aforementioned cyclical transactional items, let's now review cash flow.

Free cash flow was $112 million in Q3 higher by $130 million year over year.

Operating cash flow was under 24 million in Q3 compared to a use of $8 million in Q3 2022.

Improvements were mainly driven by a net source of cash associated with financing asset on an improvement in working capital.

Finance asset activity was a source of cash this quarter of $51 million compared to a use of cash of $54 million in the prior year, reflecting the benefit of our <unk> program with hps, partially offset by a year or recognition.

Xavier Heiss: Adjusted other expenses net were 29 million lower year over a year due to higher gains from the sets of known core business asset on lower known financing interest expense. Adjusted tax rate was 7.3% compared to 42.1% in the same quarter last year, largely due to the tax benefit associated with the release of uncertain tax positions on the remuragement of different tax assets in the current year period, as well as the non-recurring unfavorable effect of changes in certain tax addictions in the prior year period.

Working capital was a source of cash of $27 million written team in a $41 million year over year increase in cash driven mainly by a reduction in inventory.

Investing activity were a source of cash of 25 million compare to a use of cash of 33 million in the prior year due to higher proceeds from sale of non core business asset in the current quarter under prior year acquisition of inspire.

Financing activity consumed $94 million of cash this quarter, which includes a payment of around $60 million of secured debt on dividend totaling $43 million.

Xavier Heiss: Adjusted EPS of 46 cents in the soft quarter was 27 cents a year than the prior year, driven by an increase in the sale of known core business asset on the lower tax rate. Get PPS of 28 cents was $2.76 a year than the prior year, mainly due to an after tax known cash good with impairment chart of $395 million or $2.54 share in the prior year. There were no EPS impacts this quarter associated with the recent repurchase of share from Cal ICANN on affiliates.

In addition, we secured a 555 million bridge loan facility. So proceeds of which were used to repurchase share from Carl Icahn on affiliates. This facility is expected to be replaced in the new Tam with an alternative debt instrument turning to segment Peter.

Origination volume grew 9% year over year.

Captive product origination were up 24%, while non captive channel origination, which includes third party dealers on Luna Xerox vendor fell 8% a reflection of the recent change and fit our strategy to a retail needs focus towards captive only financing solutions.

Xavier Heiss: Let me know review revenue on cash flow in more details. Turning to revenue equipment sales of $300 on 86 million in 2-3 decline 1% year over a year in actual currency or 2% in constant currency. The decline in equipment review reflects cable demand conditions offset by the effect of EME backlog reductions in the prior year, and Xavier. Consistent with recent quarter, revenue trend outpace equipment insertion activity, due to favorable products on geographic mix as well as higher prices.

As expected Peter Finance receivable were down roughly 4% sequentially in actual currency, reflecting the run off of existing films richly reward on hps funding of more than 50% of Q3 originations.

As a result of the change in future strategy, we expect each finance receivables balance to decline on normalized closer to $1 billion by 2027 Pizza revenue was flat year over year. In Q3 has a higher commission from the sense of finance receivable asset were offset by lower finance income on.

Xavier Heiss: This was particularly true with our H3 product, which experienced unfavorable geographic mix effect in the prior year, due to backlog reduction in EME. And 3A4 installation will lower again this quarter, due to the ongoing normalization of work from home trends. Post-self revenue of 1.3 billion declined 9% in constant current year over a year on 7% in actual currency. As noted, post-self decline were mainly driven by reduction in cyclical, transactional items, most notably a significant decline in low margin paper sales on lower IT and point device placement.

Ftes associated with a decline in fetal finance receivable asset base.

Segment profit for fetal was $4 million of 2 million year over year, primarily due to lower bad debt expense on lower intercompany commissions.

<unk> indicated we expect further improvement to bad debt expense going forward as our finance receivable book decline.

Print on those are revenue fell 6% year over year in Q3, primarily to lower post sales revenue.

Xavier Heiss: Post-self revenue was further impacted by the termination of foodie royalties on the effect of specific strategic action, which resulted in lower financing on-park revenue. Revenue from contractual print on digital services declined slightly, as digital on managed IT services revenue growth was offset by decline in print services for production clients, which have generally been more affected by macroeconomic pressure than office clients. Geographically, both region declined in actual non-constant current year. The decline in EME was more pronounced given the substantial reduction in EME backlog in the prior year quarter on a weakening macroeconomic algorithm.

Print on those our segment profit improved by around 2% versus the prior year quarter, resulting in a 30 basis point expansion in segment profit margin year over year, driven by the benefit of price and cost actions, partially offset by lower revenue.

Turning to capital structure.

We ended Q3 with approximately $620 million of cash cash equivalents unrestricted cash.

Roughly $2 5 billion of the remaining $3 6 billion of our outstanding debt to book, our finance asset with a remaining debt of around the $1 1 billion attributable to the non leasing business.

Total debt consists of senior unsecured bonds finance asset securitization, So bridge loan associated with our Q3 share repurchase.

Xavier Heiss: In the Americas, an increase in equipment review was more than offset by decline in post-self revenue due in part to lower sets of the aforementioned cyclical, transactional items. Let's now review cash flow. Three cash flow was underton 12 million in Q3, higher by underton 30 million year over a year. Operating cash flow was underton 24 million in Q3 compared to a use of 8 million in Q3 2022. Improvement were mainly driven by a net source of cash associated with financing asset on an improvement in working capital.

On borrowing under our asset backed credit facility.

We maintain a balanced bond maturity ladder, although over the next few years.

Finally, I will address guidance our outlook for full year revenue remained unchanged at flat to down low single digit at constant currency.

We continue to see momentum in demand for our product and services, particularly in GM Murray cows onto our faster growing digital services.

Xavier Heiss: Financial asset activity was a source of cash this quarter of 51 million compared to a use of cash of 54 million in the prior year, reflecting the benefit of our forward flow program with HPS, partially offset by higher origination. Working capital was a source of cash of 27 million, resulting in a 41 million year over a year increasing cash, even mainly by a reduction in inventory. Investing activity was a source of cash of 25 million compared to a use of cash of 33 million in the prior year due to higher proceeds from cell of non-core business asset in the current quarter on the prior year acquisition of Go Inspire.

In the past three months, we have seen a softening of demand for print services on equipment in our European market, reflecting a weakening macroeconomic condition.

As a result, we now expect full year revenue to come in at the lower end of our guided range.

As a reminder, we face a difficult equipment revenue compare in Q4 due to a significant reduction in backlog in the prior year.

<unk>, we expect some of the headwinds affecting post central review in Q3, 2% in Q4, despite a slight reduction to our revenue outlook, we maintain our guidance for full year adjusted operating margin of five 5% to 6% due to the successful implementation of ongoing cost efficiency program on the other you don't sell through.

Xavier Heiss: Financial activity consumed 94 million of cash is quarter, which includes the payment of around 60 million of secured debt on dividend totaling 43 million. In addition, we secured a 555 million bridge loan facility, the proceed of which were used to work purchase shares from Heiss Facility is expected to be replaced in the new term with an alternative depth instrument.

Or unprofitable revenue opportunities.

Q4 operating margin is expected to improve sequentially, but will be lower year over year as margins in the prior year benefited from an unusually high mix of highly profitable.

<unk> equipment in store.

As noted by Steve We expect significant improvement in operating income margin in future years as we.

Xavier Heiss: Turning to segment, Peter's organization volume grew 9% year over year. Captive product originations were up 24% while non-captive channel originations, which include third-party dealers on non-Zerox vendor, cell 8%, a reflection of the recent change in fitter strategy to return its focus toward captive only financial solutions. As expected, fitter finance receivable were up down roughly 4% secondally in actual currency, reflecting the runoff of existing firearms receivable on HPS funding of more than 50% of fitter 2-3 originations.

Progress along our reinvention finally, we maintain our free cash flow guidance of at least $600 million.

In summary, we remain on track to deliver our full year guidance as we balance of dynamic microeconomic backdrop, we did a rigorous approach to managing operating costs.

So run work is being laid for a multiyear improvement in profit on revenue mix, including a return to double digit operating profit margin. So details of which we would share in the coming year.

We'll now open the line for Q&A.

Certainly one moment, ladies and gentlemen for your first question.

Xavier Heiss: As a result of the trend in fitter strategy, we expect its financial receiver balance to decline on normalized closer to 1 billion by 2027. Fitter review was flat year over year in Q3, as higher commission from the sets of finance receivable assets were offset by lower finance income on other fees associated with the decline in fitter finance receivable asset base. Segment profit for fitter was 4 million, up to 2 million year over year, primarily due to lower budget expense on lower income company commissions.

And our first question comes from the line of <unk> from loop capital. Your question. Please.

Hey, good morning, guys and thanks for taking the question I guess, there is a bunch of near term and bigger picture stuff.

Sort of get into.

I guess I'll start with bigger picture.

Just with regards to reinvention can can you talk to.

Any degree to which you are getting a bit about I guess I'll call. It like a running start.

Xavier Heiss: As previously indicated, we expect further improvement to bad debt expense going forward as our finance receivable book declines. Fitter another revenue fell 6% year over year in Q3, primarily due lower post self-review. Fitter another segment profit improved by around 2% versus prior year quarter, resulting in a 30 basis point expansion in segment profit margin year over year, driven by the benefit of price and cost actions partially offset by lower revenue.

To the <unk>.

The revenue component reinvention that Steve I think you've kind of afraid through the software software and services enabled by software and services lag.

So what.

What's going on there already that we may not be super aware of.

That.

That might.

Lend itself to reinvention.

And then I know you talked about May.

Making comments.

In the future about what potential looks like for can you give us any sense of.

Xavier Heiss: Turning to capital structure, we ended Q3 with approximately 620 million of cash cash equivalence on restricted cash. Roughly 2.5 billion of the remaining 3.6 billion of our outstanding debt support of our finance asset with the remaining debt of around 1.1 billion attributable to the non-leasing business. Total debt consists of senior on secure bonds, finance asset securitization, the bridge loan associated with the Q3 share repurchase, on borrowing under our asset back credit facility. We maintain a balanced bond maturity ladder over the next few years.

Yes, they would hit the.

The Rev growth rate.

The areas of the services market and software market.

The Tam I guess.

It looks like today, so you get a sense of what you guys are achieving again from a pan perspective.

I guess I'll start with yes.

Yeah, Great question. So let me make a couple of comments. So first of all from a reinvention standpoint really looking at a comprehensive and structural simplification of our business, but strategically repositioned as Cowen quote what does that mean, we're looking at focus areas around geographic optimization, where we can think of.

About how we sell direct versus indirect use a partner led distribution models and subscale areas focusing on simplification of both our product offering and pricing, which will generate more revenue and generate more demand in those areas as we accelerate that and then operating efficiency is really looking at our business end to end.

Xavier Heiss: Finally, our address guidance. Our outlook for full year revenue remained unchanged at flat to down, low single digit at constant currency. We continue to see momentum in demand for our product on services, particularly in the Americas, on for our faster growing digital services. However, in the past three months, we have seen a mild softening of demand for print services on equipment in our European market, reflecting weakening macroeconomic conditions. As a result, we now expect full year revenue to come in at the lower end of our guided range.

From order to cash to hire to retire all across our entire business and really thinking about both simplification as well as enabling technology in each one of those processes. You've heard me talk about where we've embedded AI and augment reality and we're seeing significant not only in terms of productivity, but differentiation.

Xavier Heiss: As a reminder, we face a difficult equipment for new compare in Q4 due to a significant reduction in backlog in the prior year. Further, we expect some of the headwind affecting post-self review in Q3 to persist in Q4. Despite a slight reduction to our revenue outlook, we maintain our guidance for full year adjusted operating margin of 5.5 to 6 percent due to the successful implementation of ongoing cost efficiency program on the other events of low or unprofitable revenue opportunity.

And our service model and our service offerings as we go forward. So I set that as the foundation right and from a high level delivering double digit operating income margins getting back to that we thought it's really important that we have to go drive and we get back to double digit operating income margin of $300 million of operating income by 2020.

What are we already started and what do you see in terms of the run rate in some of the acceleration going into 2024, we've obviously been working on and I've talked about this for a while now how do we expand our wallet share inside of our existing clients with new products and services It services digital services.

Xavier Heiss: Q4 operating margin is expected to improve, secondly, but will be lower year-over-year as margins in the prior year are benefited from an unusual high mix of highly profitable S3 equipment installed. As noted by Steve, we expect significant improvement in operating in emerging in future years as we progress along our reinvention.

And we talked about client success really focusing on how do we drive outcomes for our clients in many areas that we see in terms of verticals that need productivity helped significantly specifically in areas like we see in healthcare, we see in education, we see inside of law firms and driving very specific.

Xavier Heiss: Finally, we maintain our free cash flow guidance of at least 600 million. In summary, we remain on track to deliver our full-year guidance as we balance a dynamic micro-economic backdrop with a rigorous approach to managing operating costs.

Solutions, we are seeing direct results of that strategy and our renewals when we talked about it we are seeing our new rate revenue renewal rate over 100% now what does that mean that means that as we're seeing some of the secular decline in some of our clients in terms of renewals will now topping it up with new products and services.

Xavier Heiss: The one work is being laid for multi-year improvement in profit on what new mix, including a return to double digit operating profit margin, the detail of which we would share in the coming year.

That are very specifically led and driven by client success either in it services and auto what endpoints are talking about services like <unk> and security as well as digital services, which help them with productivity. So that's given us a both a run rate improvement in terms of our revenue and growing inside of existing accounts.

Operator: We'll now open the line for Q&A. Certainly, one moment, ladies and gentlemen, if you're first question.

Ananda Baruah: And our first question comes from the line of Ananda Baruah from Loop Capital. Your question, please. Hey, good morning, guys. And thanks for taking the question. So, I guess there's a bunch of near-term and bigger picture stuff that sort of get into, I guess I'll start with bigger picture just with regards to reinvention. Can you talk to any degree to which you're getting a bit of, I guess I'll call it like a running start into the revenue component and reinvention.

And it's also given us a running start in productivity in areas like supply chain areas like service delivery areas like our ordering process in order to cash process Saba ended the comments Jeff.

Ananda Baruah: Steve, I think you kind of referred to it as software services enabled or software services led. What's going on there already that we may not be super aware of, you know, that might sort of lend itself to reinvention. And then I know you talked about making comments in the future about what rev potential looks like, but can you give us any comments? So, you know, maybe we'd like to, the rev growth rates of the areas of the services market and software market, you know, the TAM, I guess, looks like today. So, at least, we get a sense of what you guys are shooting against from a TAM perspective. I guess I'll start with that. Thanks.

Ireland just to comment on the revenue side on the revenue shift we are expecting here. So we know what our trend on print to print business is still a strong business for us generates lots of margin on profit on cash share at the same time, you know that we have started as a foundation on longer than looking at San Francis on digital.

<unk> Sir.

The market growth of the company's largest is large patterns in this market <unk> above 600 billion due two thirds, having seasons Orange a 70 billion on when we look at the data from this market. We are between 5% to 10% growth. So at yesterday, what we are planning to do with re intervention is to drive the revenue shape from a printer.

Our print centric company into a company, where print would still be present, but also targeting higher.

Ongoing market that will give a revenue improved the revenue trajectory of the company.

Number one on the upfront.

Thats all really helpful context.

Appreciate all of that that's Super helpful. And then I guess as a quick follow up.

The.

Steven Bandrowczak: Yeah, great question. So, let me make a couple of comments. So, first of all, from a reinvention standpoint, really looking at a comprehensive and structural simplification of our business, right? With strategically reposition as going forward, what does that mean? We're looking at focus areas around geographic optimization, where we can think about how we sell direct versus indirect use a partner led distribution models in sub-scale areas, focusing on simplification of both our product offering and pricing, which will generate more revenue and generate more demand in those areas as we accelerate that.

Sort of the revenue environment for the September quarter that you guys talked about sounds like Europe may have been a little softer than you thought it was going into the quarter you are not the first ones that we.

Tried that problem.

That seems to be kind of foundational.

Anything anything other than Europe .

It was softer than anticipated.

During the quarter and I guess.

Sort of any meaningful leverage impacts you got from the software revenue you guys drew drew grew margin 40 basis points year over year, but I guess would it have been stronger year over year growth.

Steven Bandrowczak: And then operating efficiencies, really looking at our business end-to-end from order to cash to, you know, hire to retire all across our entire business. And really thinking about both simplification as well as enabling technology in each one of those processes. You've heard me talk about where we've embedded AI and augmented reality. And we're seeing significant, not only in terms of productivity, but differentiation in our service model and our service offerings we go forward.

<unk> growth.

Our expansion if not for up for the softer revenue. Thanks.

No no no right on that.

If youll comment.

So Europe has been.

So little bit worth of what we were thinking here.

At the same time on you know that since we have implemented coordinate only DNA tandem within the company. We have created one quarter flexible cost base, although we have been as well being able to adjust some of the cost but also of being selective in the type of revenue. We are targeting there I'll give you. An example, we saw.

Steven Bandrowczak: So, I sent that as the foundation, right? And from a high level, right, delivering double-digit operating income margins, getting back to that. We thought it's really important that we have to go drive and we get back to double-digit operating income margins, about 300 million of operating income by 2026. What have we already started? And what do you see in terms of the run rate and some of the acceleration going into 2024?

Hilton erosion on margin all know our cored up non cyclical.

Contractual type of business simpler any company's paper and those are when you pinpoint solution in.

Steven Bandrowczak: We've obviously been working on and I've talked about this for a while now. How do we expand our wallet share inside of our existing clients with new products and services, IT services, digital services? And we talked about client success, really focusing on how do we drive outcomes for our clients in many areas that we see in terms of verticals that need productivity help significantly, specifically in areas like we see in healthcare, we see in education, we see inside of law firms, and driving very specific solutions.

It services, we are looking at Brexit and going after.

Or like a revenue only with no profitability has generated this team.

Is driven by a very balanced execution mindset model zero, although we have a disciplined driving our investment on our revenue call based on the street retail.

The higher ROIC.

ROIC project so pay.

Paper icon quoted here because the paper market is very different to what it was before on wellness willing as an example to grow after a paper deal with no margin.

Steven Bandrowczak: We are seeing direct results of that strategy in our renewals. And we talked about it, we're seeing our new revenue, renewal rate, over 100% now. What does that mean? That means that as we're seeing some of the sector with the client and some of our clients in terms of renewals, we're now topping it up with new products and services that are very specifically led and driven by client success, either in IT services.

That's great.

Great context, thanks, a lot guys I appreciate it. Thank you. Thank you Fernando.

Thank you one moment for our next question.

And our next question comes from the line of Erik Woodring from Morgan Stanley . Your question. Please.

Steven Bandrowczak: And I'm not talking about endpoints, I'm talking about services like RPA and security, as well as digital services, which help them with productivity. So that's given us a both a run rate improvement in terms of revenue and growing inside of those existing accounts. And it's also given us a running start in productivity in areas like supply chain, areas like service delivery, areas like our ordering process and order the cash process. Subway, any other comments?

Hi, guys. This is my on for Eric Thanks for having me.

Maybe first question for Steve can you talk a little bit about the change in strategy with fed all early earlier. This year, we were talking about expanding the portfolio tomorrow third parties, but now its reverting back to kind of a captive financing solution. So my first question is how that impacts your receivable factoring program and such.

Ken.

It was once the thought that you could sell the federal business, but given it is now becoming a captive financing business that seems less likely is that crack that fit all likely no longer be for sale. Thank you and I have a follow up.

Xavier Heiss: Yeah, just to comment on the you know the revenue side, on the revenue shift we are expecting here. So we know you know they're trying to print business, they're still a strong business for us, generate a lot of margin on profit on cash share. At the same time, you know that we have started the foundation on the developing IT services on digital services. The market growth or the time is large, this is large time since this market IT service is about 600 billion digital services in the range of 70 billion.

Yes, So let me see.

I think in previous calls with the changing.

Interest rate environment. It was no longer palatable for us to leverage our balance sheet and the leasing business and we changed the strategy mid to late last year.

Xavier Heiss: And when we look at the data from this market, we are between 5 to 10 percent growth. So at the end of the day, what we are planning to do with reinvention is to drive the revenue shift from a print only or print and click company into a company where print will still be present, but also targeting higher time on growing market that will give you know the revenue or improve the revenue trajectory of the company, not relying on the own print.

And we were no longer going to use <unk> balance sheet for this business and we will then look for other sources of capital to help us with that business. However, it was extremely important that it is a big component of driving our value in the field that we have the ability to be able to do leasing and bundle pricing in the field with leasing and so we turned to hps.

And peak and we're being and using them strategically so that we don't leverage our balance sheet Youre absolutely right.

Two years ago, we were trying to target growing that business and potentially would have been in operation that potentially would have been up for sale. We have reversed that it is now going back to an internal captive business and we're not expanding beyond just supporting our business savvy.

Xavier Heiss: That's all really helpful context. I appreciate all of that. That's super helpful. And then I guess as a quick follow up, you know, the sort of the revenue environment from the September quarter that you guys talked about, sounds like Europe may have been a little softer than your father was going into the quarter. You're not the first ones that we've heard that from. So that seems to be kind of foundational. You know, anything other than Europe that was softer than anticipated that you saw during the quarter.

Xavier Heiss: And I guess it's sort of any meaningful leverage impact you got from from the softer revenue. You guys grew, grew, grew margin 40 basis points here every year, but I guess wouldn't have been stronger year-to-year growth, margin growth, or expansion. It's not for the softer revenue. Thanks. So that's the scenario. Yeah, no, no, I don't know that you comment off, you know, fair here. So Europe has been a little bit worse at what we were thinking here.

You said it does tapes that are on there.

Okay. So that we have <unk> to make it.

Enough for such support our business further.

We're looking at it as a pure separated business here.

As Steve mentioned at Atlanta, our voluntary to current.

Interest rates on their hormone it'll make us more.

More than two years ago, making this decision here.

The end of the day, if I look at the current free cash flow being generated on that maybe you spotted when we I commented what will be the benefit of this transaction until 2027 were expecting.

Finance receivable balance to decrease up to $1 billion on if you look at the current situation to six LNP going down there. This will be over time free cash flow being generated supporting on driving.

Case for all sorts of Reinventions that where do you think at this time. So at the end of the day a good decision was made two years ago. This decision is helping US currently from a balance sheet point of view on do we have kept this ability to be captive on develop our business without hurting it.

Xavier Heiss: However, at the same time, on you know that since we have implemented on it, on it, DNA still within the company, we have created what we call flexible cosplays. And we've been as well being able to adjust some of the cost, but also being selective in the type of new we are targeting there. I give you an example. We saw certain erosion on margin on I call that non cyclical, not contract contractual type of business.

Got it thank you.

Maybe Joseph we take a step back printing is circularly declining market and while I realize that you're leaning into digital service to try and offset some of those pressures. This business is still overwhelmingly focus, but there's a huge tam in Asia, that's untapped for Xerox.

Xavier Heiss: Simple example is paper. Another one is end point solution in IT services. We are not interested in going after, you know, like revenue only with no profitability. As you know it, this team is driven by a very balanced execution mindset model there. And we have a discipline on the driving our investment on our what you call based on the street return. I have a hair or I see a photo. So paper, I can quote it here because the paper market is very different to what it was before and we're not willing as an example to go after a paper deal with no margin here. That's great. Great context. Thanks a lot guys. Appreciate it. Thank you.

Operator: One moment for our next question.

With no licensing restrictions in place now so why not go after the Asia market and what are the barriers to entry there.

And I think there's a couple of different things first of all I've stated a couple of times I think we can grow in our existing accounts with our existing Tam today, both in the EMEA region and here in the <unk>.

Americas region, and so we've got a tremendous amount of opportunity to grow and just execute on what we already have today. If you take a look at our share there is a significant share growth opportunity even inside of print and I believe our services differentiation and a product differentiation. If we execute we can actually grow Tam to go expand into Asia into us.

The markets you have to go build the supply chain. We've got to go build that go to market you've got to go build a logistics infrastructure in and around spare parts. It's a significant capital outlay to go expand in those margins. Even if you go with partner led strategy you still have significant cash and capital outlay, we believe that the focus that we have.

Erik Woodring: And our next question comes from the line of Eric Woodring from Morgan Stanley. Your question, please. Hi guys. This is my own for Eric. Thanks for having me. Maybe a first question for Steve. Can you talk a little bit about the change in strategy with fiddle earlier this earlier this year we were talking about expanding the portfolio to more third parties. But now it's reverting back to kind of a cap to financing solution.

Erik Woodring: So my first question is how that impacts your receivable factoring program. And second, there was once a thought that you could sell the fiddle business. But given it's now becoming a cap to financing business that seems less likely. Is that correct? That fiddle would likely no longer be for sale? Thank you. And I will follow up. Yeah, so let me and I stated it. I think in previous calls with the changing, and Interest Rate Environment.

On the capital that we already have we can expand and grow operating margin as we've shared with you a significantly faster if we do it in the Americas, and EMEA and not expand into that region.

Got it thank you.

Q1 moment for our next question.

And our next question comes from the line of semi Chatterji from Jpmorgan. Your question. Please.

Hi, good morning, and thanks for taking my questions I guess, if I can start on project reinvention.

Erik Woodring: It was no longer a palatable for us to leverage our balance sheet in the leasing business, and we changed the strategy mid to late last year, and we were no long going to use Xerox balance sheet for this business, and we were going to look for other sources of capital to help us with that business. However, it was extremely important that it is a big component of driving our value in the field, that we have the ability to be able to do leasing and bundle pricing in the field with leasing, and so we turned to HBS and peak, and we are being and using them strategically so that we don't leverage our balance sheet.

Can you.

Just help us understand when youre thinking about $300 million of improvement there.

How should we think about impact on profitability of a sale or essentially benefit to cost of goods sold or gross profit relative to how much of this is improvement on opex and any thoughts around how long. These changes on the go to market take for you and how sort of the timing of these three of the $300 million should we be expecting in terms of.

The linearity of the <unk>.

Movement through the next couple of three years, Thank you and I have a follow up thank you.

Yeah. Thanks, Amit Thanks for asking a question on the re intervention because this is where you're doing the strategic movement for the company. We're pleased to unveil more.

Erik Woodring: You're absolutely right. Two years ago, we were trying to target growing that business, and potentially it would have been an operation that potentially would have been out for sale. We have reversed that. It is now going back to an internal captive business, and we're not expanding beyond just supporting our business, Xavier. You said it, Steve, there on the Maya Delta focus that we have there is to make it an offer that supports our business rather than looking at it as a pure separated business here.

On this strategy here so from a profit point of view as we mentioned it we are expecting roughly <unk>.

<unk> operating margins that we have on profitability until 2026, so it will be like a.

Three <unk> that will continue beyond 2026, but we wanted to plant a seed don't give you a number. So you can I would say model look at the trajectory of profitability here, we're expecting the vast majority of the benefit to be in Opex.

Erik Woodring: As Steve mentioned it as well. Our balance sheet, current interest rate environment, make us more than two years ago, making these decisions here. At the end of the day, if I look at the current free cash flow being generated, maybe you spotted when I commented what will be the benefit of this transaction. Until of 2027, we are expecting the financial receivable balance to decrease up to 1 billion. If you look at the current situation, to point frankly, going down there, this will be over time free cash flow being generated, supporting on driving, the case for also the reinvention that we are building at this time.

It will be in cost of goods sold but it will be mainly in opex. Because this is where we're going to rewire, Ontario needs a company on look at the not only like the key function of some of the functions like a go to market you have heard about our geos simplification at the end of the day what does your simplification is again back to this concept.

Our balanced execution on very disciplined way of looking at the high <unk> is where should we be present. It does not mean, leaving geographies there, but what is the best go to market model, which would add in all the countries that were present here representing here. So opex will be a key driver out there obviously.

Erik Woodring: At the end of the day, the good decision was made two years ago. This decision is helping us currently from the balance sheet point of view. We have kept this ability to be captive on the level of our business without hurting it. Got it. Thank you.

<unk>, we're expecting combined with the benefit of return free cash flow go up significantly as we mentioned at Azuela. We are expecting this initiative to be self funded so we are not expecting to have Rick.

Steven Bandrowczak: Maybe just if we take a step back, printing is a secularly declining market. While I realize that you are leading into IT digital service to try and offset some of those pressures, this business is still overwhelmingly print focused. There is a huge tam and Asia that's untapped for Xerox with no licensing restrictions in place now. Why not go after the Asia market and what are the barriers to entry there? I think there are a couple of different things.

There are more than it was a company here.

We have just completed the transaction with Carl Icahn, we are always.

Opportunistic when we are looking at.

Creative on value accretive acquisition at the same time, we have a journey on a trajectory which is model now that we create.

Profit improvement on a $300 million operating profit that we mentioned earlier.

Steven Bandrowczak: First of all, I have stated a couple of times. I think we can grow in our existing account with our existing tam today, both in the Amir region and here in the Americas region. We have a tremendous amount of opportunity to grow and just execute on what we already have today. If you take a look at our share, there is a significant share growth opportunity, even inside a print. I believe our service is differentiation and our product differentiation.

Got it got it and for my follow up you did mentioned the weakness youre seeing in the transactional business and I think particularly in EMEA is what youre, calling out just wanted to understand.

And the nature of what are you hearing from your customers is it really a budget conservation and pushing some of those sales out to next year or are they rethinking sort of their installed base or something else more on a more structural basis.

The devices are printer front any insights there. Please thank you.

Steven Bandrowczak: If we execute, we can actually go tam. To go expand into Asia and to other markets, you have to go build a supply chain. You've got to go build a go to market. You've got to go build a logistics infrastructure in around spare parts. It's a significant capital outlay to go expand in those margins. Even if you go with partner led strategy, you still have significant cash and capital outlay. We believe that the focus that we have on the capital that we already have, we could expand and grow operating margins. We share with you significantly faster if we do it in the Americas and not expand into that region. Thank you. One moment for our next question.

Yes, let me start and so you think about the headwinds that we're seeing macro headwinds around inflation around interest rates around labor and so what we're hearing from our clients and aligns really well with our strategy and that is we've got to drive their success through our solutions and products and services and Thats why I talk about weak.

Could expand in existing clients today, and that's why we're seeing our renewal rate higher so things like robotics as a service things like digital workflow in terms of driving productivity inside a very specific verticals. So where we are aligning what we hear from our clients number. One is they are looking for help to be able to offset some of these macro too.

Trends and drive more productivity, helping them with the challenges around labor, helping them with the challenge around higher cost of capital things like as a service and subscription model all of those are actually playing very well into new products and services that we can bring into our clients to help them offset some of the challenges Debbie yes.

Samik Chatterjee: And our next question comes from the line of Samik Chatterjee from JP Morgan. Your question please. Hi, good morning and thanks for taking my questions.

Samik Chatterjee: I guess if I can start on project reinvention, can you just help us understand when you're thinking about 300 million of improvement there, how should we think about impact on profitability of a sale or essentially benefit to cost of goods sold or gross profit rate of two? How much of this is improvement on OPEX? And any thoughts on how long these changes on the go-to market take for you and how the timing of these 300 million should we be expecting in terms of the linearity of the improvement through the next couple of three years? Thank you. And I'll follow. Thank you. Thanks, Samik.

The.

Okay.

Your point 70 care from a macro point of view for Europe .

One quoting it there a little bit of softening is not.

Sure.

Of course that the decline.

More really more than what we were expecting but we have seen a softening there what we have seen as well.

I mentioned the paper business the paper business.

To clarify this is not a significant business from several accessories like very low single digit number in revenue, but compared to last year, whereas newspaper business.

Xavier Heiss: Thanks for asking a question on reinvention because this is really a strategic movement for the company and we are pleased to unveil more on this strategy here. So, from the profit point of view as we mentioned it, we are expecting roughly to deliver, you know, like the operating margins that we have on profitability until 2026. So, it will be like a three years journey that will continue beyond 2026. But we want it to plant a seed and give you numbers so you can, I would say, model on the look at the trajectory of the profitability here.

We certainly have some scarcity of paper, we have been able to benefit from later this year is not as good on we see more flow of agent Paypal continental market, putting pressure on prices there.

The older element, we are monitoring currently is on the.

Prediction business he's business obviously.

He is a highly connected to updated GDP evolution on the trend on the market, but also on the access to capital for our <unk>.

In prediction customer on what we have seen recently is a little bit due to interest rates, increasing a little bit more scarcity on.

Xavier Heiss: We're expecting the vast majority of the benefit to be in OPEX and some of it will be in cost of goods sold but it will be mainly in OPEX because this is where we will rewire entirely the company and look at not only, you know, like the key function or, you know, some of the function like go-to-market, you have heard about geosimplification. At the moment, what does geosimplification is again, back to this concept of balance execution on very disciplined way of looking at high air air is where should we be present.

The ability also to capacities at this customer have to invest into equipment.

Any concerns at this stage, but it is something that we're monitoring.

We'll provide updates during the quarter all of this everything that I'm describing here is included in our revenue guidance. Although we also expect that.

We will be able to deliver the profitability on free cash flow guidance.

We have maintained compared to prior year quarter.

Xavier Heiss: It does not mean leaving geographies here. But what is the best go-to-market model we should have in all the countries that were present here. So, OPEX will be a key director. Obviously, we're expecting combined with the benefit of free gas flow to go significantly. As we mentioned it as well, we are expecting this initiative to be self-funded. So, we are not expecting, you know, to leverage, you know, further or more, you know, the company here, as, you know, it will just complete the transaction with car like that.

Got it thank.

Thank you.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Steve.

For any further remarks.

Thank you for listening to our earnings conference call. This morning balanced execution of our strategic priorities has resulted in a simplified more profitable Xerox and reinvention as the next step along our journey towards sustainable improvement in profits and revenue, we look forward to sharing our progress along that journey and few.

Xavier Heiss: We are always, you know, opportunistic when we are looking at a creative, on value, a creative, you know, acquisition. But at the same time, we have a journey on the trajectory, which is model now that will create, you know, this profiting improvement on the 300 million operating profits that we mentioned here.

Each of quarters.

Wonderful day.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Alright.

Xavier Heiss: And for my follow-up, you did mention the weakness you're seeing in the transactional business. And I think particularly in EMEA is what you're calling out. I just want to understand the nature of what you're hearing from your customers. Is it really a budget consideration and pushing some of those sales out to next year or are they rethinking sort of their install base or something else on a more structural basis on the devices or printer front and any insights there please?

[music].

Hum.

Yes.

Okay.

Xavier Heiss: Thank you. Yeah, let me start and so you think about the headwinds that we see in macro headwinds around inflation, around interest rates, around labor. And so what we hear from our clients in the line is really well with our strategy and that is we've got to drive their success through our solutions and products and services. And that's why I talk about we could expand and exist in clients today and that's why we're seeing our new rate higher.

Yes.

Okay.

Hmm.

Okay.

Yes.

Okay.

Yes.

Xavier Heiss: So things like robotics is a service, things like digital workflow in terms of driving productivity inside a very specific vertical. So where we are aligning what we hear from our clients number one is they're looking to help to be able to offset some of these macro trends and drive more productivity, helping them with the challenges around labor, helping them with the challenges around higher cost the capital, things like as a service and subscription model, all of those are actually playing very well into new products and services that we can bring into our clients to help them offset some of the challenges, Xavier.

Okay.

Xavier Heiss: Yes, on the, you know, back to you also to your point, somebody here, from a macro point of view, so Europe, we are not the only one quoting it there, a little bit of sustenance is he's not, you know, I call that the food decline or, you know, more, more, really more than what we're expecting, but we've seen the softening there. What we've seen as well, you know, I mentioned the paper business, the paper business just also to clarify, this is not a significant business for the Rocks, this is like a very low single digit number in revenue, but compared to last year, where this paper business, with certainly some scarcity of paper, we have been able to benefit from it there.

Xavier Heiss: This year is not as good on, we see more flow of Asian paper of content in the market, putting pressure on prices there. The other element we are monitoring currently is on the IAM production business. This business, you know, obviously is highly connected to the GDP evolution on the trend on the market here, but also on the access to capital for our IAM production customer. And what we have seen recently is a little bit due to interest rate increasing, a little bit more scarcity on, you know, the ability or the capacities that this customer have to invest in this equipment.

[music].

Xavier Heiss: Not highly concerned at this state, but this is something that we are monitoring, and we will provide updates during the quarter. All of these, everything that I'm describing here is included in our new guidance, and we also expect that, you know, we will be able to deliver the profitability and free cash flow guidance that we have maintained compared to prior work. Thank you. Thank you, sir. Thank you.

Yeah.

Yes.

Okay.

Operator: This does include the question and answer session of Paris program. I'd like to hand the program back to Steve for any further remarks. Thank you for listening to our earnings conference call this morning. Balanced execution about strategic priorities has resulted in a simplified, more profitable Xerox. And reinvention is the next step along our journey towards sustainable improvement in profits and revenue. We look forward to sharing our progress along that journey in future quarters. Have a wonderful day. Thank you, ladies and gentlemen for your participation in today's conference. This does include the program. You may now disconnect. Good day.

Yes.

Thanks.

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Pressing star one one again at this time I would like to turn the meeting over to Mr. David <unk>, Vice President of Investor Relations. Please go ahead Sir.

Good morning, everyone I am David <unk>, Vice President and head of Investor Relations at Xerox Holdings Corporation.

Welcome to the Xerox Holdings Corporation third quarter 2023 earnings release Conference call hosted by Steve <unk>, Chief Executive Officer.

He is joined by <unk> Executive Vice President and Chief Financial Officer.

At the request of Xerox Holdings Corporation today's conference call is being recorded.

Other recording and or rebroadcast of this call are prohibited without the express permission of Xerox.

During this call Xerox executives will refer to slides that are available on the web at www Dot Xerox Dot com slash investor.

Make comments that contain forward looking statements, which by their nature address matters that are in the future and uncertain.

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

At this time I'd like to turn the meeting over to Mr. <unk> <unk>.

<unk> for a peaceful resolution.

In Q3, the successful execution of our strategic priorities resulted in another quarter of growth in adjusted operating income EPS and free cash flow.

Summarizing results for the quarter revenue of 1.65 billion declined five 7% in actual currency and seven 4% in constant currency.

Adjusted EPS was <unk> 46 cents.

27, <unk> higher year over year.

Free cash flow was $112 million compared to a use of $18 million in the prior year quarter and.

And adjusted operating margin of four 1% was higher year over year by 40 basis points.

While I am never pleased to report a decline in revenue. This quarter's top line results were largely anticipated the.

Despite a reduction in revenue in Q3, we once again grew operating income and operating income margin on a year over year basis. This growth is due to reduction in costs associated with recent business simplification efforts, our ability to offset product cost increases with higher prices.

And the purpose or avoidance of revenue opportunity is bearing low levels of profitability.

As I will discuss we expect the continued simplification of our business to drive substantial incremental improvement in profit margin and profit levels over the next few years.

Free cash flow improved $130 million year over year in Q3, and as the increased by more than $330 million year to date.

Operator: Welcome to the Xerox Holdings Corporation, 3rd quarter of 2023 earnings release conference call. After the presentation, there will be a question and answer session to ask your questions at that time. Please press star 11 at any time during this call. You can withdraw your question by simply pressing star 11 again.

As always we remain focused on our three strategic priorities client success profitability and shareholder returns.

Client success is a strategic imperative for Xerox, our ability to solve clients' most challenging workplace productivity needs and offset the effects of rising inflation labor constraints and the higher cost of capital with productivity enhancing solutions helps us not only gain market share in <unk>.

David Beckel: At this time, I would like to turn the meeting over to Mr. David Beckel, vice president of investor relations. Please go ahead, sir. Good morning, everyone. I'm David Beckel, vice president and head of investor relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation, 3rd quarter 2023 earnings release conference call hosted by Steve Bandrowczak, chief executive officer. He joined by Xavier Heiss, executive vice president and chief financial officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded.

But expand client wallet share through incremental services.

This quarter Xerox was recognized as a leader in IDC market Scapes worldwide print transformation vendor assessment for our breath of transformative workplace technology solutions, both related to and adjacent to print.

David Beckel: Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www. Xerox.com slash investor. We'll make comments that contain foreign looking statements which by their nature address matters that are in the future and uncertain. Actual future financial results may be materially different than those expressed herein.

Our advanced solutions provide us a distinct advantage as we compete for new and renewal business.

This quarter and year to date service signings grew double digits in constant currency led by growth in digital services.

Increasingly digital services, such as advanced customer engagement and intelligent document processing are replacing traditional print demand as contracts with existing clients renew.

Steven Bandrowczak: At this time, I'd like to turn the meeting over to Mr. Bandrowczak. Good morning, and thank you for joining our Q3 2023 earnings call. Before I get to this quarter's results, I would like to start today's call by acknowledging the tragic events unfolding in the Middle East. Our thoughts and prayers are with the victims and their families, which include our local employees, clients and partners. We are all hoping for a peaceful resolution.

Steven Bandrowczak: In Q3, the successful execution of our strategic priorities resulted in another quarter of growth in adjusted operating income, EPS and pre-cast flow. Summarizing results for the quarter revenue of 1.65 billion declined, 5.7% in actual currency and 7.4% in constant currency. Adjusted EPS was 46 cents, 27 cents higher year over year. Pre-cast flow was 112 million compared to a use of 18 million in the prior year quarter. An adjusted operating margin of 4.1% was higher year over year by 40 basis points.

Moving to profitability in Q3, we took additional actions to simplify our operations and improve the efficiency of our cost structure.

In August we sold our <unk> print business Allen additive solutions to AMETEK and in September we announced the expansion of our relationship with peak solutions.

The affiliate of Hps investment partners to include the provision of leasing services to <unk> network of independent dealers.

Both actions improved our flexibility about cost base, while enabling greater focus on our core capabilities in and around print digital and services.

Finally shareholder returns.

Steven Bandrowczak: While I'm never pleased to report a decline in revenue, this quarter's top line results were largely anticipated. The decline in revenue reflects a relatively stable demand environment for our products and services offset by declines in certain cyclical low margin, post sale revenue categories, as well as declines and revenues associated with strategic actions put in place to simplify our business. Despite a reduction in revenue in Q3, we once again grew operating income and operating income margin on a year over year basis.

<unk> weeks ago, we repurchased roughly 34 million shares previously owned by Carl Icahn and affiliates, resulting in a reduction of our share count of around 22%.

Decision to repurchase the shares was consistent with the capital allocation and shareholder returns philosophy, which is to deploy cash in areas, providing the highest return for shareholders Matt.

Management and the board of Directors believe this transaction will create substantial value for shareholders over time as the reduction of shares allows equity holders greater participation in the expected earnings growth associated with our transformation, which I will discuss shortly.

Steven Bandrowczak: This growth is due to reduction in costs associated with recent business simplification efforts. Our ability to offset product costs increases with higher prices and the purposeful avoidance of revenue opportunities bearing low levels of profitability. As I will discuss, we expect the continued simplification of our business to drive substantial, incremental improvement in profit margin and profit levels over the next few years. Freed cash flow improved 130 million year-over-year in Q3 and has increased by more than 330 million year-to-date.

The transaction is expected to be EPS accretive, while preventing the type of market overhang normally associated with an open market disposal of significant equity states out.

Three strategic priorities have been instrumental in laying the groundwork for our direction moving forward.

On our Q2 call. We provided examples of the ways in which we are simplifying our business to refocus on our core operations of print digital and ICT services.

Steven Bandrowczak: Growth in free cash flow was due in part to a change in fiddle strategy and its approach to funding new originations which we expect will generate meaningful amounts of incremental free cash flow for many years to come. As always, we remain focused on our three strategic priorities, client success, profitability and shareholder returns. Client success is a strategic imperative for Xerox, our ability to solve clients' most challenging workplace productivity needs, and offset the effects of rising inflation, labor constraints, and higher costs of capital with productivity enhancing solutions.

Those actions were critical enablers of an even more significant transformation of our business.

We refer to as reinvention.

First let me define what reinvention means to Xerox Green.

Steven Bandrowczak: Helps us not only gain market share and print, but expand client-while-a-chair through incremental services. This quarter Xerox was recognized as a leader in IDC market scapes worldwide print transformation vendor assessment for our breadth of transformative workplace technology solutions both related to and adjacent to print. Our advanced solutions provide us a distinct advantage as we compete for new and renewal business. This quarter and year-to-date service signing screwed double digits in constant currency led by growth in digital services, increasingly digital services such as advanced customer engagement and intelligent document processing are replacing traditional print demand as contracts with existing clients for new. Year-to-date, the revenue replacement rate for a majority of renewed service contract is 100% or higher despite the ongoing consolidation of print demand as companies adapt to more permanent hybrid workplace arrangements.

<unk> the secular headwinds associated with traditional print.

Reinvention does not mean, we're abandoning our core <unk> business, which we expect to continue generating strong profits and cash flow for many years reinvention means building new capabilities on top of a solid print core.

Management and the board believes the most direct and probable path to sustainable growth and profit free cash flow and shareholder returns requires a structural redesign of our operations combined with selected reinvestment in capability is essential to addressing clients most challenging work.

Place productivity needs.

Workplace has evolved and Xerox is evolving with it to ensure we power the productive workplace of today and tomorrow.

The ultimate goal of reinvention is to facilitate Xerox shifts from a leader in print technology to an unparalleled technology and service provider.

Steven Bandrowczak: Moving to profitability, in Q3 we took additional actions to simplify our operations and improve the efficiency of our cost structure. In August, we sold out 3D print business, LM additive solutions to add a tech and in September, we announced the expansion of our relationship with peak solutions and affiliate of HBS investment partners to include the provision of leasing services to fiddle network of independent dealers. Both actions improve the flexibility of our cost based while enabling greater focus on our core capabilities in and around print, digital and IT services.

This optimization of our go to market approach is expected to result in lower revenue initially, but provide a stronger and more profitable foundation from which to grow revenue going forward.

Steven Bandrowczak: Finally, shareholder returns a few weeks ago we repurchased a roughly 34 million shares previously owned by call icon and affiliates resulting in a reduction of our share count of around 22%. The decision to repurchase these shares was consistent with the capital allocation and shareholder return philosophy which is to deploy cash in areas providing the highest return for shareholder. Management and the Board of Directors believe this transactional creates substantial value for shareholders over time as the reduction of shares allows equity holders greater participation in the expected earnings growth associated with our transformation, which I will discuss shortly. The transaction is expected to be EPS accretive while preventing the type of market overhang normally associated with an open market disposal of significant equity states.

Business support functions and the supply chain.

While the reinvention is expected to result in a more profitable and streamlined organization. It is not simply a cost cutting program.

Really important if not more so is <unk> ability to transition over time to become a services led software enabled provider of advanced workplace solutions.

Steven Bandrowczak: Our three strategic priorities have been instrumental in laying the groundwork for our direction moving forward. On our Q2 call, we provided examples of the ways in which we are simplifying our business to refocus on our core operations of print, digital and IT services. Those actions were critical enablers of an even more significant transformation of our business. For the past year, with the help of outside experts, we have analyzed our business model, competitive strengths and market opportunities to define an optimal strategic path.

A transition of this magnitude requires select investment in organic and inorganic growth opportunities.

These investments are expected to be self funded and we'll target opportunities to grow our share of wallet in print and print services as well as high growth adjacent markets, where we have a clear path to win such as managed services for small and midsized clients.

Steven Bandrowczak: And today, we are sharing with investors the preliminary framework for a multi-year strategic transformation plan, which we refer to as reinvention. First, let me define what reinvention means to Xerox. Reinvention is a comprehensive and operational simplification of our business, resulting in a strategic repositioning of the company to take advantage of favorable macro trends, including the digitalization of document workflows associated with the power of AI while managing the circular headwinds associated with traditional print.

And digital services.

In total reinvention is expected to generate substantial improvement in operating income and income margin over the next few years.

By 2026, we expect to deliver an improvement to 2023 adjusted operating income of at least $300 million, resulting in a return to double digit adjusted operating income margins.

Importantly, this improvement is inclusive of investments in growth, which are expected to drive a more diversified revenue mix with greater exposure to markets with high rates of growth.

Steven Bandrowczak: Reinvention does not mean we are abandoning our core print business, which we expect to continue generating strong profits and cash flow for many years. Reinvention means building new capabilities on top of a solid print core. Management and the board believe the most direct and probable path to sustainable growth in profit, free cash flow and shareholder returns requires a structural redesign of our operations. Combined with selected reinvestment and capability is essential to addressing clients most challenging workplace productivity needs.

We will provide more specifics and the phasing of operating income improvements as specific actions are taken in future quarters.

To recap we are confident in our ability to successfully execute this reinvention project own. It has instilled in this company a culture of continuous operating improvement.

Steven Bandrowczak: The workplace has evolved and Xerox is evolving with it to ensure we power the productive workplace of today and tomorrow. The ultimate goal of reinvention is to facilitate Xerox shift from a leader in print technology to an unparalleled technology and service provider.

Reinvention will not only improve xerox profitability, but reposition the company for long term sustainable growth.

And with strong free cash flows supporting our dividend investors will be rewarded as the strategy progresses.

I will now hand over to Xavier <unk>.

Thank you, Steve and good morning, everyone as Steve mentioned, we delivered another quarter of growth in adjusted operating income and income margin. Despite a decline in revenue. If you don't see our ability to manage profitability amid fluctuation in revenue.

Steven Bandrowczak: There are three primary components of the reinvention. First is a geographic optimization which entails taking a more selective approach to direct operations in certain markets and when appropriate shifting to a partner led distribution model. This optimization of our go-to-market approach is expected to result in lower revenue initially but provide a stronger and more profitable foundation from which to grow revenue going forward. Second, is the optimization of our product offering and pricing models.

So year over year decline in revenue this quarter was driven mainly by declines in transactional non contractual post sales revenue components equipment revenue declined modestly relative to the prior year due in large part to a reduction in equipment backlog in the prior year quarter turning to profitability.

We deliver our fourth consecutive quarter of year over year improvement in gross and operating profit margin.

Steven Bandrowczak: Through the reinvention, we will streamline our product offerings to maximize profitability and allow greater internal focus on the delivery of products and services that address the evolving needs of a hybrid workplace. We will introduce a more consumer-like, touchless experience to improve client satisfaction and we will simplify our pricing models to deliver faster and more effective decisioning when pursuing new and renewal business. The optimization of our geographic footprint, product offerings and pricing models will in turn enable an end-to-end organizational and structural simplification of our business, unlocking the third component of the reinvention, operating efficiencies across IT, business support functions and the supply chain.

Increases in product costs were more than offset by improvement in supply chain related expense on pricing actions.

Adjusted operating margin of four 1% increased 40 basis points year over year as the effects of lower revenue and gross profit along with higher compensation on bad debt expenses were offset by close to 400 basis points of improvement from ongoing operating efficiencies and pricing actions.

Adjusted other expenses net were 29 million lower year over year due to higher gains from the sense of noncore business asset on low well known financing interest expense.

Steven Bandrowczak: While the reinvention is expected to result in a more profitable and streamlined organization, it is not simply a cost-cutting program. Equally important, if not more so, is Xerox ability to transition over time to become a services-led software-enabled provider of advanced workplace solutions. A transition of this magnitude requires select investment in organic and in organic growth opportunities. These investments are expected to be self-funded and will target opportunities to grow a share of wallet in print and print services as well as high growth adjacent markets where we have a clear path to win, such as managed IT services for small and mid-sized clients and digital services.

Adjusted tax rate was seven 3% compared to 42, 1% in the same quarter last year, largely due to the tax benefit associated with the release of uncertain tax positions on the remeasurement of deferred tax assets in the current year period.

As well as a nonrecurring unfavorable effect of changes in certain tax elections in the prior year period.

Adjusted EPS of <unk> 46 cents in the third quarter was 27% a year and the prior year driven by an increase in the sale of non core business asset on the lower tax rate.

GAAP EPS of <unk> 28 was $2 76, a year under prior year, mainly due to an after tax noncash goodwill impairment charge of $395 million or $2 54 per share in the prior year.

Steven Bandrowczak: In total, reinvention is expected to generate substantial improvement in operating income and income margin over the next few years. By 2026, we expect to deliver an improvement to 2023 adjusted operating income at at least 300 million, resulting in return to double-digit adjusted operating income margins. Importantly, this improvement is inclusive of investments in growth which are expected to drive a more diversified revenue mix with greater exposure to markets with high rates of growth.

Well no EPS impact this quarter associated with our recent repurchase of shares from Carl Icahn on Ips.

<unk> revenue on cash flow in more detail.

Turning to revenue equipment sales of $386 million in Q3 declined 1% year over year in actual currency or 2% in constant currency.

The decline in equipment towards new reflects cable demand conditions offset by the effect of EMEA backlog reductions in the prior year.

Consistent with recent quarter.

Steven Bandrowczak: We will provide more specifics and the phasing of operating income improvements as specific actions are taken in future quarters. To recap, we are confident in our ability to successfully execute this reinvention. Project ONIT has instilled in this company a culture of continuous operating improvements. Our management team is more than capable of delivering a transformation of this magnitude and our brand, client relationships and history of innovation give us the right to play and win in digital and managed IT services. Reinvention will not only improve Xerox profitability but reposition the company for long-term sustainable growth and with strong free cash flow supporting our dividend, investors will be rewarded as the strategy progresses.

Revenue trend outpace equipment and settlement activity due to favorable product and geographic mix as well as higher prices.

Was particularly true with our <unk> product, which experienced unfavorable geographic mix effects in the prior year due to backlog reduction in EMEA.

Three April installation were lower again this quarter due to the ongoing normalization of work from home trends.

Wholesale revenue of $1 3 billion declined 9% in constant currency year over year on 7% in actual currency.

As noted posted declines were mainly driven by a reduction in cyclical transactional items, most notably a significant decline in low margin paper sales on lower IP and Couldnt device placements.

Xavier Heiss: I will now hand over to Xavier. Thank you, Steve, on good morning, everyone. I'll Steve mentioned, we deliver another quarter of growth in adjusted operating income on income margin, despite a decline in revenue, evidencing our ability to manage profitability amid fluctuation in revenue. So, year over year, decline in revenue this quarter was driven mainly by decline in transactional, non-contractual, post-sense for new components. Equipment for new decline modestly relative to the prior year, you in large part to a reduction in equipment backlog in the prior year quarter.

Well central New was further impacted by determination of Fuji royalties on the effect of specific strategic action rich treasure, keeping lower financing on Park Avenue.

Revenues from contractual print on digital services declined slightly as digital and managed it services revenue growth was offset by declining clean services for production clients, which have generally been more affected by macroeconomic pressure.

Clients geographically most region declining nocturnal in constant currency so.

The decline in EMEA was more pronounced given the substantial reduction in EMEA backlog in the prior year quarter on a weakening macro economic outlook.

Xavier Heiss: Turning to profitability. We deliver a first consecutive quarter or year over year improvement in growth on operating profit margin. Growth margin improved 60 basis point over the prior year quarter, mainly due to the benefit associated with pricing increases on cost efficiency actions, partially offset by your 50 basis point edwin from the termination of FUG royalties. Increases in product cost were more than offset by improvement in supply generated expense on pricing actions.

In January caused an increase in equipment revenue was more than offset by declining <unk> revenue due in part to lower sales of the aforementioned cyclical transactional items, let's now review cash flow.

Free cash flow was $112 million in Q3 higher by $130 million year over year.

Operating cash flow was under $24 million in Q3 compared to a use of $8 million in Q3 2022.

Xavier Heiss: Adjusted operating margin of 4.1% increased 40 basis point year over year, as the effect of lower revenue on growth profit along with higher compensation on bad debt expenses were offset by close to 400 basis point of improvement from ongoing operating efficiencies on pricing actions. Adjusted other expenses net were 29 million lower year over year, due to higher gains from the sets of known core business asset on lower known financing interest expense.

Improvements were mainly driven by a net source of cash associated with financing asset on an improvement in working capital.

<unk> finance asset activity was a source of cash this quarter of $51 million compared to a use of cash of $54 million in the prior year, reflecting the benefit of our fourth row program with hps, partially offset by higher origination.

Working capital was a source of cash of 27 million, resulting in a $41 million year over year increase in cash driven mainly by a reduction in inventory.

Xavier Heiss: Adjusted tax rate was 7.3% compared to 42.1% in the same quarter last year, largely due to the tax benefit associated with the release of uncertain tax positions on the remurgeonment of different tax assets in the current year period, as well as the non-recurring unfavorable effect of changes in certain tax addictions in the prior year period. Adjusted EPS of 46 cent in the software was 27 cent higher than the prior year, given by an increase in the sale of known core business asset on the lower tax rate.

Investing activity were a source of cash of 25 million compared to a use of cash of $33 million of prior year due to higher proceeds from sale of non core business asset in the current quarter under prior year acquisition of inspire.

Financing activity consumed $94 million of cash this quarter.

Which includes a payment of around $60 million of secured debt on dividend totaling $43 million.

In addition, we secured a 555 million bridge loan facility. The proceeds of which were used to repurchase share from Carl Icahn on affiliates. This facility is expected to be replaced in the new Tam with an alternative.

Xavier Heiss: The EPS of 28 cent was $2.76 a year than the prior year, mainly due to an after-off tax known cash good with impairment charge of $395 million or $2.54 per share in the prior year. There were no EPS impacts this quarter associated with the recent repurchase of share from Cal ICANN on affiliates.

<unk>.

Turning to segment.

Peter low origination volume grew 9% year over year.

<unk> product origination were up 24%, while non captive channel origination, which includes third party dealers on Luna Xerox vendor fell 8%.

Xavier Heiss: Let me now review revenue on cash flow in more details. Turning to revenue, equipment sales of 386 million in 2-3 decline 1% year over a year in actual currency or 2% in constant currency. The decline in equipment for new reflects cable demand conditions offset by the effect of EME backlog reductions in the prior year. Consistent with recent quarter revenue trend outpace equipment insertion activity due to favorable product on geographic mix as well as annual price.

A reflection of the recent changes fit our strategy to a retail needs focus towards captive only financing solutions.

As expected Peter Finance receivable were down roughly 4% sequentially in actual currency, reflecting the run off of existing films richly reward on hps funding of more than 50% of Q3 originations.

As a result of the change in future strategy, we expect each finance receivables balance to decline on normalized closer to $1 billion by 2027.

Xavier Heiss: This was particularly true with our H3 product, which experienced unfavorable geographic mix effect in the prior year, due to backlog reduction in EME, and 3A4 installation will lower again this quarter, due to the ongoing normalization of work from home trends. In addition, post-cell decline were mainly driven by reduction in cyclical, transactional items, most notably a significant decline in low margin paper sales on lower IT and point device placement. Post-cell for new was further impacted by the termination of foodie royalties on the effect of specific strategic action, which resulted in lower financing on powerful new.

<unk> revenue was flat year over year in Q3 as higher commission from the sense of finance receivable asset were offset by lower finance income on all the ftes associated with a decline in fetal finance receivable asset base.

<unk> profit for fetal was $4 million up $2 million year over year, primarily due to lower bad debt expense on lower intercompany commissions.

As previously indicated we expect further improvement to bad debt expense going forward as our finance receivable book decline.

Print on those are revenue fell 6% year over year in Q3, primarily to lower post sales revenue.

Print on those our segment profit improved by around 2% versus the prior year quarter, Rachel King in a 30 basis point expansion in segment profit margin year over year, driven by the benefit of price and cost actions, partially offset by lower revenue.

Xavier Heiss: Revenues from contractual print on digital services declined slightly, as digital on managed IT services revenue growth was upset by decline in print services for production clients, which have generally been more affected by macro economic pressure than office clients. Geographically, both region declined in actual non-constant currency. The decline in EME was more pronounced given the substantial reduction in EME backlog in the prior year quarter on a weakening macro economic algorithm.

Turning to capital structure.

We ended Q3 with approximately $620 million of cash cash equivalents unrestricted cash.

Roughly $2 5 billion of the remaining $3 6 billion of our outstanding debt support our finance asset with a remaining debt of around $1 1 billion attributable to the non leasing business.

Total debt consists of senior unsecured bonds.

Xavier Heiss: In the Americas, an increase in equipment review was more than upset by decline in post-cells revenue, due in part to lower sales of the aforementioned cyclical, transactional items. Let's now review cash flow. Three cash flow was under 1012 million in Q3, higher by 130 million year over a year. Operating cash flow was under 24 million in Q3 compared to a use of 8 million in Q3 2022. Improvement were mainly driven by a net source of cash associated with financing asset on an improvement in working capital.

Finance asset securitization, so bridge loan associated with our Q3 share repurchase on borrowing under our asset backed credit facility.

We maintain a balanced bond maturity ladder, although over the next few years.

Finally, I would address guidance our outlook for full year revenue remained unchanged at flat to down low single digit at constant currency.

We continue to see momentum in demand for our product and services, particularly in GM or breakout on for our faster growing digital services.

Xavier Heiss: Finance asset activity was a source of cash this quarter of 51 million compared to use of cash of 54 million in the prior year, reflecting the benefit of our forward flow program with HPS, partially offset by higher origination. Working capital was a source of cash of 27 million, written team in a 41 million year over a year, increasing cash, even mainly by a reduction in inventory. Investing activity was a source of cash of 25 million compared to a use of cash of 33 million in the prior year, due to higher profit from sell of non-core business asset in the current quarter on the prior year acquisition of Go Inspire.

Ever in the past three months, we have seen a mild softening of demand for print services on equipment in our European market, reflecting a weakening macroeconomic condition.

As a result, we now expect full year revenue to come in at the lower end of our guided range. As a reminder, we face a difficult equipment revenue compare in Q4 due to a significant reduction in backlog in the prior year.

Further we expect some of the headwinds affecting post sell for you in Q3, 2% in Q4, despite a slight reduction to our revenue outlook, we maintain our guidance for full year adjusted operating margin of five 5% to 6% due to the successful implementation of ongoing cost efficiency programs on Diablo you don't sell below.

Xavier Heiss: Finance activity consumed 94 million of cash is quarter, which includes the payment of around 60 million of secured that on dividend totaling 43 million. In addition, we secured a 555 million bridge loan facility, the proceed of which were used to work purchase share from Carl I can on affiliates.

<unk> or unprofitable revenue opportunities.

Q4 operating margin is expected to improve sequentially, but will be lower year over year as margins in the prior year benefited from an unusual mix of highly profitable <unk> equipment in store.

Xavier Heiss: His facility is expected to be replaced in the new term with an alternative debt instrument turning to segment. Federal registration volume grew 9% year over year. Captive product origination were up 24% while non-captive channel origination, which include third-party dealers on non-zerox vendor, cell 8%, a reflection of the recent change in fetal strategy to return its focus toward captive-only financing solutions. As expected, fetal finance receivable were down roughly 4% secondally in actual currency, reflecting the runoff of existing firearms receivable on HPS funding of more than 50% of fetal 2-3 originations.

As noted by Steve We expect significant improvement in operating income margin in future years, as we progress along our reinvention finally, we maintain our free cash flow guidance of at least $600 million.

In summary, we remain on track to deliver our full year guidance as we balance of dynamic microeconomic backdrop with a rigorous approach to managing operating costs.

So one work is being laid for a multiyear improvement in profit on revenue mix, including a return to double digit operating profit margin. So details of which we would share in the coming year.

We'll now open the line for Q&A.

Certainly one moment, ladies and gentlemen for your first question.

Xavier Heiss: As a result of the change in fetal strategy, we expect its financial receivable balance to decline on normalize closer to 1 billion by 2027. Feature of new was flat year over a year in Q3 as higher commission from the cells of finance receivable asset were offset by lower finance income on other fees associated with the decline in fetal finance receivable asset base. Segment profit for fetal was 4 million up to 2 million year over a year, primarily due to lower budget expense on lower income company commissions.

And our first question comes from the line of <unk> from loop capital. Your question. Please.

Hey, good morning, guys and thanks for taking the questions I.

I guess, there is a bunch of near term and bigger picture stuff.

Sort of get into.

I guess I'll start with bigger take care.

Just with regards to reinvention can can you talk to.

Any degree to which you are getting a bit about I guess I'll call. It like a running start into the <unk>.

Xavier Heiss: As previously indicated, we expect further improvement to budget expense going forward as our finance receivable book class. Print on other revenue fell 6% year over a year in Q3, primarily due lower post-cells revenue. Print on other segment profit improved by around 2% versus prior year quarter, resulting in a 30 basis point expansion in segment profit margin year over a year, driven by the benefit of price and cost actions partially offset by lower revenue.

The revenue component and reinvention.

Steve I think you've kind of refrigerated software suffering services enabled by software and services led.

So what what.

Going on there already that we may not be super aware of.

Then.

That might sort of lend.

Lend itself to reinvention.

And then I know you talked about making carnage.

In the future about what potential looks like but can you give us any sense of.

Xavier Heiss: Turning to capital structure, we ended Q3 with approximately 620 million of cash cash equivalent on restricted cash. Roughly 2.5 billion of the remaining 3.6 billion of our outstanding debt support of our finance asset, with the remaining debt of around 1.1 billion attributable to the non-leasing business. Total debt consists of senior on secure bonds, finance asset securitization, so bridge loan associated with the Q3 share repurchase, on borrowing under our asset back credit facility. We maintained a balanced bond maturity ladder over the next few years.

They would like.

The Rev growth rate of the of the areas of the services market and software market.

The Tam I guess.

It looks like today or at least we get a sense of what you guys are achieving again from a pan perspective.

I guess I'll start with <unk>.

Yeah, Great question. So let me make a couple of comments. So first of all from a reinvention standpoint really looking at a comprehensive and structural simplification of our business right with strategically reposition is going forward. What does that mean, we're looking at focus areas around geographic optimization, where we can think about how.

Xavier Heiss: Finally, I will address guidance. Our outlook for full year revenue remained unchanged at flat to down low single-digit at constant currency. We continue to see momentum in demand for our product on services, particularly in the America's on for our faster growing digital services. However, in the past three months, we have seen the mild softening of demand for print services on equipment in our European market, reflecting weakening macroeconomic condition. As a result, we now expect full year revenue to come in at the lower end of our guided range.

We sell direct versus indirect use a partner led distribution models and subscale areas focusing on simplification of both our product offering and pricing, which will generate more revenue and generate more demand in those areas as we accelerate that and then operating efficiencies really looking at our business end to end from <unk>.

Order to cash to hire to retire all across our entire business and really thinking about both simplification as well as enabling technology in each one of those processes. You've heard me talk about where we've embedded AI and augment reality and we're seeing significant not only in terms of productivity, but differentiation in our <unk>.

Xavier Heiss: As a reminder, we face a difficult equipment for new compare in Q4 due to a significant reduction in backlog in the prior year. Further, we expect some of the Edwin effective post-self review in Q3 to persist in Q4. Despite a slight reduction to our overall revenue outlook, we maintain our guidance for full year adjusted operating margin of 5.5 to 6% due to the successful implementation of ongoing cost efficiency on the other events of low or unprofitable revenue opportunity.

Service model and our service offerings as we go forward. So I said that as the foundation right and from a high level delivering double digit operating income margins getting back to that with what is really important that we have to go drive and we get back to double digit operating income margins and obviously, we talked about $300 million of operating income by 2000.

26, what have we already started and what do you see in terms of the run rate in some of the acceleration going into 2024, we've obviously been working on and I've talked about this for a while now how do we expand our wallet share inside of our existing clients with new products and services It services digital services.

Xavier Heiss: In summary, we remain on track to deliver our full-year guidance as we balance a dynamic microeconomic backdrop with a rigorous approach to managing operating costs. The one work is being laid for multi-year improvement in profit on what new mix, including a return to double digit operating profit margin, the detail of which we would share in the coming year.

<unk> solutions, we are seeing direct results of that strategy and our renewals when we talked about it we are seeing our new rate revenue renewal rate over 100% now what does that mean that means that as we're seeing some of the secular decline in some of our clients in terms of renewals. We're now tapping it up with new products and serve.

Offices that are very specifically led and driven by client success either in it services and auto what endpoints are talking about services like <unk> and security as well as digital services, which help them with productivity. So that's given us a both a run rate improvement in terms of our revenue and growing inside of <unk>.

Operator: We now open the line for Q&A. Certainly one moment, ladies and gentlemen, if you're first question.

Ananda Baruah: And our first question comes from the line of Ananda Baruah from Loop Capital. Your question please. Hey, good morning, guys. And thanks for taking the question. So I guess there's a bunch of near-term and bigger picture stuff that sort of get into, I guess I'll start with bigger picture just with regards to reinvention. Can you talk to any degree to which you're getting a bit of I guess I'll call it like a running start into the revenue component and reinvention.

<unk> and it's also given us a running start and productivity in areas like supply chain areas like service delivery areas like our ordering process in order to cash process survey and other comments just iron under just to comment on the revenue side on the revenue shift we are expecting here. So we know you know is our trend on <unk>.

Ananda Baruah: Steve, I think you kind of referred to it as software services enabled or software services led. What's going on there already that we may not be super aware of that might sort of lend itself to reinvention. And then I know you talked about making comments in the future about what rev potential looks like, but can you give us any sense of maybe what the rev growth rates of the areas of the services market and software market, you know, the TAM I guess looks like today. So at least we get a sense of what you guys are shooting against from a TAM perspective. I guess I'll start with that. Thanks.

<unk> business is still a strong business for us generates a lot of margin on profit on cash share at the same time, you know that we have started a foundation along the developing ITC emphasis on digital services Sir.

The market growth of the company's largest is large patterns in this market <unk> above 600 billion digital services into a range of 70 billion on when we look at the data from this market. We are between 5% to 10% growth. So at the end of the day, what we are planning to do with re intervention is to drive the revenue shape from a print on.

Our print centric company into a company where print would still be present, but also we're targeting higher.

Ongoing market that will give a revenue improve the revenue trajectory of the company.

Number one are you on the upfront.

Thats all really helpful context.

Appreciate all of that that's Super helpful. And then I guess as a quick follow up.

Steven Bandrowczak: Yeah, great question. So let me make a couple comments. So first of all, from a reinvention standpoint, really looking at a comprehensive and structural simplification of our business, right? What's strategically reposition as going forward? What does that mean? We're looking at focus areas around geographic optimization, where we can think about how we sell direct versus indirect use a partner led distribution models in sub-scale areas. Focusing on simplification of both our product offering and pricing, which will generate more revenue and generate more demand in those areas as we accelerate that.

The.

Sort of the revenue environment for the September quarter that you guys talked about sounds like Europe may have been a little softer than you thought otherwise going into the quarter you are not the first ones that we.

Tried that problem.

That seems to be kind of a foundational.

Anything anything other than Europe .

It was softer than anticipated.

During the quarter and I guess.

Sort of any meaningful leverage impacts you got from the software revenue you guys drew drew grew margin 40 basis points year over year, but I guess would it had been stronger a year over year growth.

Steven Bandrowczak: And then operating efficiencies really looking at our business end to end from order to cash to, you know, higher to retire, all across our entire business and really thinking about both simplification as well as enabling technology in each one of those processes. You've heard me talk about where we've embedded AI and augmented reality. And we're seeing significant not only in terms of productivity, but differentiation in our service model and our service offerings we go forward.

<unk> growth.

Air expansions, if not for up for the softer revenue thanks to that decision.

No no no right on that.

Youll come out of.

So Europe has been solid.

A little bit with what we're thinking here a waiver at the same time on you know that since we have implemented coordinate only DNA change within the company. We have created what we call a flexible cost base, although we have been as well being able to adjust some of the costs, but also of being selective in the type of revenue.

Steven Bandrowczak: So I sent that as the foundation, right? And from a high level, right, delivering double digit operating income margins, getting back to that, we thought it was really important that we have to go drive and we get back to double digit operating income margins. And obviously we talked about 300 million of operating income by 2026. What have we already started? And what do you see in terms of the run rate and some of the acceleration going into 2024?

We are targeting there I'll give you. An example, we saw certain erosion on margin all know our cored up non cyclical.

Contractual type of business simpler example, paper and those are my knees pinpoint solution in.

Steven Bandrowczak: We've obviously been working on it. I've talked about this for a while now. How do we expand our wallet share inside of our existing clients with new products and services, IT services, digital services? And we talked about client success really focusing on how do we drive outcomes for our clients in many areas that we see in terms of verticals that need productivity help significantly, specifically in areas like we see in healthcare, we see in education, we see inside of law firms and driving very specific solutions.

It services, we are looking prescient in going after.

<unk> revenue only with no profitability as this team.

Is driven by a very balanced execution mindset model zero, although we have a disciplined mondo driving our investment on our revenue call based on the street retail.

The IAA or ICT project so paper.

Paper I can quote it here because the paper market is very different to what it was before on Walnut willing has an example to go after a paper deal with no margin.

That's great.

Great context, thanks, a lot guys I appreciate it. Thank you. Thank you Ananda.

Thank you one moment for our next question.

And our next question comes from the line of Erik Woodring from Morgan Stanley . Your question. Please.

Hi, guys. This is my on for Eric Thanks for having me.

Maybe first question for Steve can you talk a little bit about the change in strategy with fed all early earlier. This year, we were talking about expanding the portfolio tomorrow third parties, but now its reverting back to kind of a captive financing solution for my first question is how that impacts your receivable factoring program and such.

Steven Bandrowczak: So that's given us a both a run rate improvement in terms of revenue and growing inside those existing accounts. And it's also given us a running start in productivity in areas like supply chain, areas like service delivery, areas like our ordering process and order the cash process. So are there any other comments? Yeah, just I am on that. Just to comment on the, you know, the revenue side, on the revenue shift we are expecting here.

There was once the thought that you could sell the federal business, but given it is now becoming a captive financing business that seems less likely is that crack that at all.

Steven Bandrowczak: So we know, you know, they're trying to print business, it's still a strong business for us, generate a lot of margin on profit on cash share. At the same time, you know that we have started the foundation on the developing IT services on digital services there. The market growth, also the term is large. This is large terms in this market. IT services are both 600 billion digital services in the range of 70 billion.

<unk> no longer be for sale. Thank you and I have a follow up.

Yes, So let me and I stated I think in previous calls with the changing.

Interest rate environment. It was no longer palatable for us to leverage our balance sheet and the leasing business and we changed the strategy mid to late last year.

Steven Bandrowczak: And when we look at the data from this market, we are between 5 to 10 percent growth. So at the end of the day, what we are planning to do with reinvention is to drive the revenue shift from a print only or print centric company into a company where print will still be present but also targeting higher time on growing market that will give, you know, the revenue or info, the revenue trajectory of the company, not relying on the own print.

And we were no longer going to use your balance sheet for this business and we will then look for other sources of capital to help us with that business. However, it was extremely important that it is a big component of driving our value in the field that we have the ability to be able to do leasing and bundle pricing in the field with leasing and so we turn to <unk>.

And peak and we're being and using them strategically so that we don't leverage our balance sheet Youre absolutely right.

Steven Bandrowczak: That's all a really helpful context. I appreciate all of that. That's super helpful. And then I guess as a quick follow-up, you know, the sort of the revenue environment from the September quarter that you guys talked about, sounds like Europe may have been a little softer than you thought it was going into the quarter. You're not the first ones that we've heard that from. So that seems to be kind of foundational.

Steven Bandrowczak: Anything other than Europe that was softer than anticipated that you saw during the quarter. And I guess it's sort of any meaningful leverage impact you got from the softer revenue. You guys grew, grew margin 40 basis points here every year. But I guess what it has been stronger year-to-year growth, margin growth, or expansion is not for the softer revenue. Thanks. So that's the scenario. Yeah, no, no, I don't know if you comment off, you know, fair here.

You said it does stay as they are on them.

So it's a focus that we have <unk> to make it.

Enough for such support our business further and.

We're looking at it as a pure separated business here.

You've mentioned it as well our balance sheet our current.

Interest write downs.

Make us.

<unk> had two years ago, making this decision here.

At the end of the day, if I look at so carbon free cash flow being generated on that maybe you expected. When we I commented what will be the benefit of this transaction until 2027 were expecting.

Finance receivable balance to decrease up to $1 billion on if you look at the current situation to six until you're going down there. This will be over time free cash flow being generated supporting on driving.

Steven Bandrowczak: So Europe has been a little bit worse at what we were thinking here. However, at the same time, on you know that since we have implemented on it, only DNA still within the company, we have created what we call flexible cosplays. And we have been as well being able to adjust some of the cost, but also being selective in the type of renew we are targeting there. I give you an example.

<unk> for all sorts of Reinventions that we're building at this time so at the end of the day a good decision was made two years ago. This decision is helping US currently from a balance sheet point of view on do we have kept this ability to be captive on develop our business without hurting it.

Got it thank you.

So maybe Joseph we take a step back printing is circularly declining market and while I realize that you're leaning into digital service to try and offset some of those pressures. This business is still overwhelmingly focus, but there's a huge tam in Asia, that's untapped for Xerox.

Steven Bandrowczak: We saw certain erosion on margin on a call that non-cyclical, not contractual type of business. Simple example is paper. Another one is end point solution in IT services. We are not interested in going after, you know, like revenue only with no profitability as you know it. This team is driven by a very balanced execution mindset model there. And we have a discipline on the driving our investment on our what you call based on the street return.

Licensing restrictions in place now.

Why not go after the Asia market and what are the barriers to entry there.

Steven Bandrowczak: So paper, I can quote it here because the paper market is very different to what it was before on where not willing as an example to go after a paper deal with no margin here. That's great. Great context. Thanks a lot guys. Appreciate it. Thank you.

Operator: Thank you one moment for our next question.

Other markets you have to go build the supply chain. We've got to go build that go to market you've got to go build a logistics infrastructure in and around spare parts. It's a significant capital outlay to go expand in those margins. Even if you go with partner led strategy you still have significant cash and capital outlay, we believe that the focus that.

Erik Woodring: And our next question comes from the line of Eric Woodring from Morgan Stanley your question please. Hi guys, this is my on for Eric. Thanks for having me.

Steven Bandrowczak: Maybe a first question for Steve. Can you talk a little bit about the change in strategy with fiddle earlier this year we were talking about expanding the portfolio to more third parties. But now it's reverting back to kind of a cap to financing solution. So my first question is how that impacts your receivable factoring program. And second, there was once a thought that you could sell the fiddle business but given it's now becoming a cap to financing business that seems less likely.

Steven Bandrowczak: Is that correct that fiddle would likely no longer be for sale? Thank you and I will follow up. Yeah, so let me and I stated it I think in previous calls with the changing, and Interest Rate Environment. It was no longer a palatable for us to leverage our balance sheet in the leasing business, and we changed the strategy mid to late last year, and we were no long going to use Xerox balance sheet for this business, and we were going to look for the sources of capital to help us with that business.

We have on the capital that we already have we can expand and grow operating margin as we've shared with you a significantly faster if we do it in the Americas, and EMEA and not expand into that region.

Got it thank you.

Q1 moment for our next question.

And our next question comes from the line of semi Chatterji from Jpmorgan. Your question. Please.

Hi, good morning, and thanks for taking my questions.

If I can start on project reinvention.

Can you.

Just help us understand when youre thinking about $300 million of improvement there.

Steven Bandrowczak: However, it was extremely important that it is a big component of driving our value in the field that we have the ability to be able to do leasing and bundle pricing in the field with leasing, and so we turned to HBS and peak and we are being and using them strategically so that we don't leverage our balance sheet. You're absolutely right. Two years ago, we were trying to target growing that business, and potentially it would have been an operation that potentially would have been out for sale.

The linearity of the <unk>.

Improvement through the next couple of three years, Thank you and I have a follow up thank you.

Yeah, Thanks, Amit and thanks for asking a question on the re intervention because this is really a strategic movement for the company, we're pleased to unveil more.

On this strategy here so from a profit point of view as we mentioned it we are expecting roughly equal dalbar.

Steven Bandrowczak: We have reversed that. It is now going back to an internal captive business, and we're not expanding beyond just supporting our business, Xavier. You said it, Steve, there on the my other focus that we have there is to make it an offer that supports our business rather than looking at it as a pure separated business here. Steve mentioned it as well. Our balance sheet, current interest rate environment, you also go making these decisions here.

<unk>.

<unk> margins that we have on profitability until 2026, so it will be like a three year journey that will continue beyond 2026, but we wanted to plant a seed don't give you a number. So you can I would say model on their look at the trajectory of profitability here, we're expecting the vast majority of the benefit to be.

In Opex.

Some of it will be in cost of goods sold but it will be mainly in opex. Because this is where we will not be wire on priority as a company on look at not only like the key function or some of the functions like a go to market you have heard about our geos simplification at the M&A what does Dr. Simplification is again back to this concept.

Steven Bandrowczak: At the end of the day, if I look at the current free cash flow being generated, maybe you spot it when I commented what will be the benefit of this transaction. Until 2027, we are expecting the finance receivable balance to decrease up to 1 billion. If you look at the current situation to point it currently going down there, this will be over time free cash flow being generated, supporting on driving the case for also the reinvention that we are building at this time.

Our balanced execution on very disciplined way of looking at <unk> is that where should we be present, it does not mean, leaving geographies there.

The best go to market model, which would add in all the countries that were present here representing here. So opex will be a key driver out there. Obviously, we are expecting combined with the benefit of it our free cash flow to go up significantly as we mentioned it as well we are expecting this initiative to be self funded.

Steven Bandrowczak: At the end of the day, the good decision was made two years ago. This decision is helping us currently from a balance sheet point of view, and we have kept this ability to be captive on develop our business without hurting it. Got it. Thank you.

Steven Bandrowczak: So maybe just if we take a step back, printing is a secularly declining market. And while I realize that you are leading into IT digital service to try and offset some of those pressures, this business is still overwhelmingly print focused, but there is a huge tam and Asia that's untapped for Xerox with no licensing restrictions in place now. So why not go after the Asia market? And what are kind of the barriers to entry there?

So we are not expecting to have Rick further I'm oriented as a company here.

As you know and we have just completed transaction with Carl Icahn, we are always.

Opportunistic when we are looking at term accretive on value accretive acquisition at the same time, we have a journey on a trajectory which is model now that we create this credit.

Profit improvement on a $300 million operating profit that we mentioned earlier.

Steven Bandrowczak: I think of the couple of different things. First of all, I've stated a couple of times I think we can grow in our existing account with our existing tam today, both in the Amir region and here in the Americas region. So we've got a tremendous amount of opportunity to grow and just execute on what we already have today. If you take a look at our share, there's a significant share of growth opportunity, even inside a print.

Got it got it and for my follow up you did mentioned the weakness youre seeing in the transactional business and I think particularly in EMEA is what youre, calling out just wanted to understand the nature of what are you hearing from your customers is it really a budget consideration and pushing some of those sales out to next year or are they rethinking sort of their installed base or something else.

On a more structural basis on.

Steven Bandrowczak: And I believe our service is differentiation and our product differentiation, if we execute, we can actually go tam. To go expand into Asia and to other markets, you have to go build a supply chain, you've got to go build a go to market, you've got to go build a logistics infrastructure in and around spare parts. It's a significant capital outlay to go expand in those margins. Even if you go with partner led strategy, you still have significant cash and capital outlay.

The devices are printer front any insights there. Please thank you.

Yes, let me start and so you think about the headwinds that we're seeing macro headwinds around inflation around interest rates around labor and so what we hear from our clients and aligns really well with our strategy and that is we've got to drive their success through our solutions and products and services and that's why I talk about <unk>.

Could expand in existing clients today, and that's why we're seeing our renewal rate higher so things like robotics as a service things like digital workflow in terms of driving productivity inside a very specific vertical so where we are aligning what we hear from our clients number. One is they are looking for help to be able to offset some of these macro.

Steven Bandrowczak: We believe that the focus that we have on the capital that we already have, we could expand and grow operating margins. We've shared with you significantly faster if we do it in the Americas and Namia and not expand into that region. Thank you.

Operator: One moment for our next question.

Trends and drive more productivity, helping them with the challenges around labor, helping them with the challenge about higher cost of capital being bike as a service and subscription model all of those are actually playing very well into new products and services that we can bring into our clients to help them offset some of the challenges Debbie yes.

Samik Chatterjee: And our next question comes from the line of Samik Chatterjee from JP Morgan. Your question, please. Hi, good morning and thanks for taking my questions.

Samik Chatterjee: I guess if I can start on project reinvention, can you just help us understand when you're thinking about 300 million of improvement there? How should we think about impact on profitability of a sale or essentially benefit to cost of goods sold or gross profit rate of two? How much of this is improvement on OPEX? And any thoughts on how long these changes on the go-to market take for you and how the timing of these 300 million should be expecting in terms of the linearity of the improvement through the next couple of three years?

On the.

But <unk> so to your point some of the care from a macro point of view for Europe . We are not the only one quoting it there a little bit of softening is not.

Sure.

I suppose that the decline.

More and more really more than what we were expecting but we have seen a softening there what we have seen azuela.

I mentioned the paper business. The paper business. Just also to clarify this is not a significant business from several accessories like very low single digit number in revenue as compared to last year, whereas this paper business.

Samik Chatterjee: Thank you. And I will follow. Thank you. Yes, thanks, Samik. Thanks for asking a question on reinvention because this is really a strategic movement for the company and we are pleased to unveil more on this strategy here. So from a profit point of view as we mentioned it, we are expecting roughly to draw, you know, like the operating margins that we have on profitability until 2026. So it will be like a three years journey that will continue beyond 2026 but we want it, you know, to plant a seed and give you, you know, numbers so you can, I would say, model on the look at the trajectory of the profitability here.

Based upon the year some scarcity of paper, we have been able to benefit from later this year is not the US go down we see more flow of Asian, Paypal continental market, putting pressure on prices there.

The other element we are monitoring currently is on the high end.

Prediction business <unk> business.

Obviously.

Is highly connected to updated GDP evolution on the trend on their market share, but also access to.

Capital for our high end.

<unk> production customer on what we have seen recently is a little bit due to interest rates, increasing a little bit more scarcity on.

Samik Chatterjee: We're expecting, you know, the vast majority of the benefit to be in OPEX and some of it will be in cost of goods sold but it will be mainly in OPEX because this is where we will rewire entirely the company and look at the, not only, you know, like the key function or, you know, some of the function like a go-to-market, you have heard about the geosimplification. At the end of the day, what does geosimplification is again, back to this concept of a balance execution on very disciplined way of looking at high air air is where should we be present.

The ability also to capacities at this customer have to invest in this equipment.

Any concern at this stage, but it is something that we're monitoring there we'll provide updates during the quarter. All of this everything that I'm describing here is included in our revenue guidance. Although we also expect that.

We will be able to deliver the profitability on free cash flow guidance.

We have maintained compared to prior quarter.

Samik Chatterjee: It does not mean leaving geographies here but what is the best go-to-market model we should have in all the countries that were present here. So OPEX will be a key director there and obviously we're expecting combined with the benefit of Fitor Freecastlow to go up significantly. As we mentioned it as well, we are expecting this initiative to be self-funded so we are not expecting, you know, to leverage, you know, further or more, you know, the company here, as, you know, it, we've just completed the transaction with Kallikan.

Got it alright, thank you.

Thank you.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Steve.

For any further remarks.

Samik Chatterjee: We are always, you know, opportunistic when we are looking at the accretive on value, accretive, you know, accretion but at the same time we have a journey on the trajectory which is model now that we create, you know, this profit improvement on the 300 million operating profits that we mentioned here. Got it, got it.

Two quarters.

Wonderful day.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Xavier Heiss: And for my follow-up, you did mention the weakness you're seeing in the transaction business and I think particularly in EMEA is what you're calling out. I just want to understand the nature of what you're hearing from your customers. Is it really a budget consideration and pushing some of those sales out to next year or are they rethinking sort of their install base or something else on a more structural basis on the devices or printer front, any insights there please?

Xavier Heiss: Thank you. Yeah, let me start. And so you think about the headwinds that we see in macro headwinds around inflation, around interest rates, around labor. And so what we hear from our clients and aligns really well with our strategy. And that is we've got to drive their success through our solutions and products and services. And that's why I talk about we could expand and existing clients today. And that's why we're seeing our new rate higher.

Xavier Heiss: So things like robotics as a service, things like digital workflow in terms of driving productivity inside a very specific vertical. So where we are aligning what we hear from our clients number one is they're looking to help to be able to offset some of these macro trends and drive more productivity, helping them with the challenges around labor, helping them with the challenges around higher cost the capital things like as a service and subscription model, all of those are actually playing very well into new products and services that we can bring into our clients to help them offset some of the challenges, Xavier.

Xavier Heiss: Yeah, it's on the, you know, back to your point, Stanley K, from the macro point of view, so Europe, we are not the only one quoting it there, a little bit of sustenance is he's not, you know, I call that the food decline or, you know, more, more, really more than what we're expecting, but we've seen the softening there. What we've seen as well, you know, I mentioned the paper of business, the paper of business just was for to clarify, this is not a significant business for the rock, this is like a very low single digit number in revenue, but compared to last year, where this paper business, we certainly, some scarcity of paper, we have been able to benefit from it there, this year is not as good as we see more flow of Asian paper of content in the market, putting pressure on prices there.

Xavier Heiss: The other element we are monitoring currently is on the IM production business. This business, you know, obviously, is highly connected to the GDP evolution on the trend on the market here, but also on the access to capital for our IM production customer. And what we have seen recently is a little bit due to interest rate increasing, a little bit more scarcity on the ability or the capacities that this customer have to invest in this equipment.

Xavier Heiss: Not highly concerned at this stage, but this is something that we are monitoring on the will provide updates during the quarter. All of this, everything that I'm describing here is included in our new guidance, and we also expect that, you know, we will be able to deliver the profitability on free cash flow guidance, so that we have maintained compared to prior work. Thank you. Thank you, sir. Thank you. This does include the question and answer session of Paris program.

Steven Bandrowczak: I'd like to hand the program back to Steve for any further remarks. Thank you for listening to our earnings conference call this morning. Balanced execution about strategic priorities has resulted in a simplified, more profitable Xerox, and reinvention is the next step along our journey towards sustainable improvement in profits and revenue. We look forward to sharing our progress along that journey in future quarters. Have a wonderful day. Thank you ladies and gentlemen for your participation in today's conference. This does include the program. You may now disconnect. Good day.

Q3 2023 Xerox Holdings Corp Earnings Call

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