Q4 2023 Xerox Holdings Corp Earnings Call

January 25, 2024

Welcome to the Xerox Holdings Corporation's fourth quarter 2023 earnings release conference call. After the presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. If your question has been answered and you'd like to remove yourself from the queue.

Simply press 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.

Morning, everyone I'm, David Duckworth, Vice President and head of Investor Relations at Xerox Holdings Corporation and welcome to the Xerox Holdings Corporation fourth quarter 2023 earnings release Conference call hosted by Steve Bender, Jack Chief Executive Officer. He is joined by John Bruno President and Chief operating Officer and W. A highest executive vice.

John Bruno: President and Chief Financial Officer.

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

John Bruno: Other recording <unk> or rebroadcast of this call are prohibited without the express permission of Xerox.

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

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

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

John Bruno: Good morning.

John Bruno: And thank you for joining our Q4 2023 earnings call I'd like to start by commending the Xerox team for delivering strong growth in full year, adjusted operating income EPS and free cash flow amid a challenging and uneven macroeconomic environment.

John Bruno: We achieved 2023, adjusted operating income margin and free cash flow guidance, despite slightly weaker than expected macro conditions in the second half of the year.

John Bruno: Our ability to overcome topline headwinds and meet full year profit and cash flow targets as a testament to this company's culture of operating discipline, which has been forged and strengthened in recent years through operational and macroeconomic challenges.

John Bruno: Summarizing our results for the year revenue of $6 89 billion declined three 1% in actual currency and three 3% in constant currency.

John Bruno: Our core print digital and service businesses performed much better than this topline result would suggest however.

John Bruno: As <unk> will describe later in the call revenue declined less than 1% in 2023 after adjusting for the effects of backlog reductions in the current and prior year structural simplification efforts and the intentional de emphasis of certain non strategic businesses.

John Bruno: Adjusted EPS was $1 82 to <unk> 70 cents higher year over year.

John Bruno: Free cash flow was $649 million, an increase of $547 million over 2022, and adjusted operating margin of five 6% was higher year over year by 170 basis points within our guidance range.

2023 was a pivotal year for Xerox and marked the first full year of our multiyear strategy to reposition our businesses for long term sustainable growth in revenue and profits, which we call our reinvention.

John Bruno: We took structure and foundational actions to improve our core business and simplify operations, resulting in greater operational focus and a clear path for more transformative reinvention actions this year and beyond.

John Bruno: All the while we delivered key accomplishments towards the strategic priorities set out at the beginning of 2023, which provided momentum for our reinvention in 2024.

Starting with client success client success is and always will be a point of competitive differentiation for Xerox and is foundational to maintaining a strong and stable print business.

John Bruno: Since except in the CEO position in August of 2022, I directed my team to put more emphasis on client outcomes and solutions based products and services that address the productivity challenges of a hybrid workplace.

John Bruno: A rigorous focus on positive client outcomes solidifies our position as a trusted adviser as clients build workplace technology solutions for the future.

John Bruno: It improves the predictability and repeatability of our business and expand the total addressable market by ensuring we remain responsive to and take advantage of evolving market trends.

John Bruno: Last year, we took actions to enable complete operational focus on the delivery of positive client outcomes and our core print digital and service businesses we.

John Bruno: We divested Park Xerox Research Center of Canada, and <unk>, our three D printing business.

We signed partnerships with peak solution, an affiliate of Hps investment partners, allowing fiddle to focus exclusively on financial solutions that support the sales of Xerox equipment and services.

John Bruno: We also reduced our presence in certain non strategic markets with lower levels of profitability, such as paper and certain types of hardware.

John Bruno: In 2023 and enhanced focus on client success delivered the intended results proving client Centricity can drive revenue stability, even in secondly challenged industries like print Xerox net promoter score improved we grew our share of equipment sales in the markets in which we compete.

And we achieved revenue renewal rates above 100% across large account contract renewals evidenced in our ability to sell new print and digital services that more than offset reduction in traditional print spend.

John Bruno: Moving to profitability transformation of the scope and scale contemplated by our reinvention requires a strong base of profits and margin profile from which to build in 2023, we improved adjusted operating profit by more than $100 million and adjusted profit margin.

John Bruno: By 170 basis points year over year.

John Bruno: Improvement stemmed from structural cost reduction efforts pricing discipline and ongoing operational efficiencies and deliberate reduction in non strategic revenue with low levels of profitability.

John Bruno: These actions and the restructuring announced early this month put us firmly on the path to returning Xerox to double digit profitability by 2026, while improving our capacity for tactical reinvestment in growth areas.

John Bruno: Finally shareholder returns it.

It is important to our board and management team that investors are rewarded while accompanying xerox on its reinvention.

John Bruno: In 2023, we achieved our shareholder return policy, while reducing total debt.

John Bruno: The $600 million of free cash flow when combined with excess cash on our balance sheet was used to pay out $1 per share dividend lower our debt balance by approximately $450 million and reduce our share count by more than 20%.

We will build on these achievements as our priorities evolved in 2020 for year two of our reinvention.

Our first priority of 'twenty 'twenty four is the continued strengthening of our core print digital and service businesses. These businesses form the bedrock of our strategic repositioning from which new capabilities and our client centric mindset will be leveraged to drive incremental.

Service opportunities and revenue diversification.

John Bruno: Earlier this month, we announced a significant reorganization of our businesses, including the adoption of a business unit rather than a geographic led operating model along with a greater focus on our partner led distribution.

John Bruno: These changes are expected to both strengthen our core business and position us to capture new ancillary revenue opportunities over time.

John Bruno: John Bruno our President and COO, who will provide more details on the operating changes.

John Bruno: In short <unk>.

John Bruno: Business unit lead operating model Sharpens, our client centric mentality by more closely aligning Xerox products and services with the economic buyers of today's hybrid workplace.

John Bruno: And with the establishment of our global partner ecosystem, we will pursue new partner relationships to expand the reach of our core businesses.

John Bruno: Stronger end market alignment and partner reach is expected to further improve equipment market share and print digital and it service penetration rates with existing and prospective clients, resulting in new client wins and higher rates of revenue as contracts renew.

John Bruno: Our second priority is the successful implementation of structural cost improvements associated with our reorganization.

John Bruno: Which build on efficiencies and improvements put in place in 2023 and are expected to drive profits meaningfully higher again in 2024.

John Bruno: We announced last quarter that reinvention is expected to deliver $300 million of net adjusted operating income improvements above the 2023 levels through 2026, we expect to achieve more than one third of that improvement in 2024 due in large part to organizational cost.

John Bruno: Savings associated with the reorganization announcement earlier this month.

John: Newly formed global business service organization, or GBS, which John will further described will catalyze these expected organizational savings in 2024.

John Bruno: And 2024, we expect GBS to be an engine for continuous cost improvement and improved client satisfaction. As this group works to embed advanced technologies like machine learning and AI into key internal processes, making it easier to do business with and within Xerox.

John: <unk>.

John: This year, we also began a more comprehensive optimization of our geographic footprint and product offerings. The savings of which are expected to further augment those associated with the recently announced restructuring program.

John Bruno: Finally capital allocations as I mentioned management and the Xerox Board of directors believe it is important to directly reward shareholders as we execute our reinvention.

John Bruno: In 2020 for free cash flow is expected to be used to pay a one dollar per share dividend and reduce leverage.

John Bruno: Excess free cash flow is expected to be used to tactically invest in projects or acquisitions with high rates of expected returns on invested capital.

John Bruno: Each of these three priorities puts us on the path towards achieving our long term reinvention goals.

John Bruno: I'll now hand, the call over to John Bruno to provide more details on our recent organization announcements and our reinvention roadmap.

John Bruno: You, Steve and good morning, everyone.

John Bruno: I appreciate the opportunity to speak to you today and provide more context around our multiyear reinvention journey.

At its core reinvention is about operationalized, a balanced strategy to improve our legacy business and build a foundation to address adjacent opportunities with existing and new clients.

John Bruno: These adjacent market opportunities are available to Xerox today, but they require enhancements to our client coverage model and our service offerings by.

John Bruno: By the market and predominantly referring to the mid market, where digital services remain underutilized by our clients.

John Bruno: There's opportunity for Xerox to improve client penetration of digital and it services within this market and assertion be validated through primary and secondary research as part of our reinvention planning.

John Bruno: Critical to more fully addressing these market opportunities is a core business that is stable fit for purpose in today's market environment and capable of meeting the needs of our clients. We understand the dynamics of the markets. We're in and to win in this secondly challenged market like print, we must be more competitive easier to do business.

John Bruno: With and relevant to our clients as their needs evolve.

John Bruno: As such our reinvention is aimed at addressing the complexity of our business that was built over time.

John Bruno: And for a different time in its place we are designing a simpler more operationally efficient organization to address our clients' most important hybrid workplace challenges now and into the future.

John Bruno: I have been part of similar transformation efforts with other large companies, which like Xerox have strong heritage.

John Bruno: Recognition tells me Xerox has what we need to successfully modernize and transform this business.

John Bruno: In my first year, I've experienced very little resistance or lack of desire to change our people are eager to embrace and direct change and they are asking for it and that's a great place to be is the work to reinvent any company is complex and requires tenacity and discipline.

As Steve noted 2023 was a foundational year for Xerox, we narrowed our focus and removes competing priorities to reduce our operating costs and organizational complexity. We set up a strategic program management office comprised of 16 work streams appointed 200 initiatives. This team design.

John Bruno: Fine and are currently executing organizational and business operating system simplification spanning from reductions of legal entities Erp's payroll and invoice systems to just name a few examples.

John Bruno: 2024 marks the second year of our journey.

John Bruno: Focus this year is building on the structural and foundational changes made in 2003 with an improved operating model.

John Bruno: Earlier this month, we announced a new organizational structure that merchant sales regions flattens layers of management streamlines, our global offering teams and collapses, our go to market offering and delivery teams all to one business unit.

John Bruno: We moved from a geography to business unit lead operating model to align our group's responsible for our print digital service businesses from product development to sales and services as one team to empower fewer leaders with the information they require to improve decision rights and be more agile.

John Bruno: We formed a new organization global business services, or GBS that will drive enterprise wide efficiencies and productivity gains by essentially coordinating internal processes leveraging shared capabilities and flat.

John Bruno: The formation of GBS goes well beyond previous cost efficiency efforts in <unk> and <unk> into and redesign of our operations to enable touchless internal and external customer experiences GBS will leverage the success, we achieved from project own it and embed leading technologies to drive continuous innovation.

John Bruno: <unk> is a key enabler of long term sustainable profit improvement.

John Bruno: In 2024, we will selectively optimize our geographic distribution to improve regional profitability and reach as well as narrow offerings, where we lack sufficient competitive differentiation to generate required rates of return on invested capital.

John Bruno: These strategic actions will have a negative effect on revenue initially but are expected to generate improvements in total operating profit.

John Bruno: Overhead cost currently in place to support these geographies and offerings more than outweigh potential reductions in revenue and associated gross profits.

In summary, the reorganization announced earlier this month as a key enabler of expected profit improvement in 2024.

John Bruno: Progress toward our three year operating income target of $300 million above 2023 levels will be driven by three concurrent efforts the first.

John Bruno: Operating model simplification throughout the reinvention journey with continuous savings initiatives led by GBS.

John Bruno: Second is geographic and offering simplification efforts and theyre going to continue into 2026 with net savings being generated from the replacement of direct operations in certain geographies with more efficient partner led solutions and lower cost associated with a more simplified product portfolio.

John Bruno: And finally.

John Bruno: Our investments in partnerships to grow our digital services business will provide a more favorable revenue mix and profit profile through 2026 and beyond.

I look forward to keeping you updated along our journey as a reinvention deliveries improved financial results and shareholder returns I'll now hand, the call over to <unk>.

Thank you John and good morning, everyone as Steve mentioned important steps, we have taken in 2023 to simplify our business an improved <unk> balance sheet on profit profile.

John Bruno: For the year, we delivered strong growth in earnings per share and free cash flow. Despite the modest decline in revenue, reflecting the successful implementation of a more flexible cost structure on rigorous operating discipline.

John Bruno: Structural efficiencies enabled by our reorganization and expect it to drive Charles our profit improvement in 2024, our second full year of reinvention.

In Q4 revenue margin and profit declined year over year, due mainly to a significant reduction of equipment backlog in the prior year quarter.

John Bruno: Growth was further affected by the intentional reduction of certain non strategic revenue.

John Bruno: Excluding this factor revenue would have increased low single digit year over year.

John Bruno: Turning to profitability.

John Bruno: Gross margin declined 130 basis points over the prior year quarter, due mainly to lower activity higher product costs on determination of Fuji royalties, partially offset by strategic pricing actions lower freight costs and the benefit of structural cost reductions.

John Bruno: Adjusted operating margin of five 4% declined 380 basis points year over year due to lower revenue on gross profit on higher compensation expense, partially offset by the benefit of pricing on structural simplification effort.

John Bruno: Adjusted <unk> expenses net were $45 million higher year over year due to lower sales of non core business asset on an increase in non financing interest expense.

John Bruno: Our adjusted tax rate was 15, 2% compared to 21, 9% last year. The decrease was largely due to the benefit associated with change to deferred tax asset valuation allowances on the redetermination of settling and recognized tax position.

John Bruno: Adjusted EPS of 43% in the fourth quarter was 46 central Oregon to prior year, driven by lower operating income on higher order expenses net partially offset by the benefit of lower shares.

John Bruno: GAAP loss per share of <unk> 50 was $1 24 lower than the prior year.

John Bruno: Syncrude was $78 million after tax restructuring charge associated with our recently announced workforce reduction or 62 cents per share let me now review.

John Bruno: Revenue and cash flow in more detail.

John Bruno: Starting with revenue equipment sales of $458 million in Q4 declined 17, 3% year over year in two or currency or 18, 3% in constant currency.

John Bruno: So prior year effect of backlog reduction drove more than 25% point of the year over year decline.

John Bruno: Caroline demand for equipment remains stable on order activity is gaining momentum as backlog on macroeconomic conditions stabilize.

John Bruno: Total equipment revenue outpaced installation activity due to favorable product mix installations of high end color equipment, which we are less affected by prior year backlog reductions increase year over year, while entry on media offerings decline declines.

John Bruno: Declines in and treat reflect prior year redemption to backlog on current year constrained while declines in mid primarily reflect prior year redemption to backlog.

<unk> revenue of $1 3 billion declined five 8% industrial currency year over year on seven 5% in constant currency.

John Bruno: Excluding the effect of non strategic lower margin paper on the endpoint device placement, which we plan to continue to reduce overtime as well as the exit of Russia. The termination of the Fuji royalty <unk> absence of bulk revenue post central new declined only modestly.

John Bruno: Geographically, both region declining actual and constant currency.

John Bruno: Given the significance of certain non strategic item on our revenue trajectory in recent quarters controls or full year.

John Bruno: We'll provide additional commentary to add clarifies the underlying revenue trends associated with our core businesses for Q4. So prior year reduction in equipment backlog contributed around 690 basis points year over year decline in total revenue.

John Bruno: Our central Nonstrategic paper on endpoint devices contributed around 160 basis points was a decline on the effect of lower Fuji royalty revenue on strategic actions taken to simplify our business contributed to around 190 basis points of the decline.

When these combined effects are removed revenue from our core business grew low single digit this quarter, reflecting stable demand on growth in digital and services.

John Bruno: Services, partially offset by decline in printed page volumes.

John Bruno: For the year. This termite damage aggregate contributed around 230 basis points to the year over year decline in revenue. Therefore core business revenue for the year would have declined a little less than 1%.

John Bruno: Let's now review cash flow.

John Bruno: Free cash flow was 379 million in Q4 higher by $211 million year over year.

John Bruno: Operating cash flow was $389 million in Q4 compared to $186 million in Q4 2022.

John Bruno: The improvements were mainly driven by a net source of cash associated with a reduction in financing receivable an improvement in working capital.

John Bruno: Finance assets were a source of cash this quarter of $92 million compared to a use of cash of $169 million in the prior year, reflecting the benefit of our forward flow program with hps on lower origination.

Expect it.

John Bruno: Working capital was a source of cash of 115 million, resulting in a 42 million year over year, increasing cash driven mainly by a reduction in inventory.

John Bruno: Investing activities were a use of cash of $8 million compared to a source of cash of $17 million in the prior year due to lower proceeds from the sale of noncore business asset, partially offset by lower capex.

John Bruno: Dancing activity consumed $383 million of cash this quarter, which includes a payment of around $300 million of secured debt on dividend totaling $34 million.

John Bruno: During the quarter, we repaid a bridge loan with proceeds from the insurance of her term loan credit facility.

Peter: Turning to segments Peter.

John Bruno: Peter low origination volume declined 25% year over year, reflecting fetal change in strategy to return it focus toward captive only financing solutions.

Captive product origination were up 2% fetal finance receivable balance declined around 3% sequentially in actual currency, reflecting the run off of existing finance receivable on hps funding of fetal origination as previously highlighted we expect our finance receivables balance to decline.

On normalized closer up to $1 billion by 2020 to him.

John Bruno: <unk> revenue was down slightly year over year in Q4 due to lower finance income on all their fees associated with the decline in Quito finance receivable balance partially offset by higher commission from the sales of finance receivable assets.

John Bruno: Segment profit for Peter was $7 million up $6 million year over year, mainly due to lower bad debt expenses on lower intercompany commissions.

John Bruno: Print on order revenue fail, a nine 5% year over year in Q4 due to lower equipment on post sales revenue, reflecting the effect of prior year backlog reduction on declines in non strategic items mentioned in my prior comments print on the wholesale segment profit declined 50% versus the prior year quarter.

John Bruno: Resulting in a 430 basis point reduction in segment profit margin year over year, driven by lower revenue, partially offset by stricter cost efficiencies on pricing actions.

John Bruno: Turning to capital structure, we ended Q4 with $617 million of cash cash equivalents unrestricted cash around.

John Bruno: Around $2 4 billion of the remaining $3 3 billion of our outstanding debt. She brought our finance asset with the remaining debt of around 900 million attributable to the non leasing business.

John Bruno: Total debt consists of senior unsecured bonds finance asset secured borrowing under new term road.

John Bruno: We maintained a balance of bond maturity ladder over the next few years.

John Bruno: Finally, I will address guidance for.

John Bruno: For revenue, we expect a decline of 3% to 5% in constant currency. In 2024 included in this guidance are the effect of prior year backlog of rejection on headwind associated with the DN series of certain non strategic businesses all of which are unrelated to the performance of our core print on services businesses.

John Bruno: Most specifically so reduction of backlog in 2023 is expected to contribute around 200 basis points to the year over year declining revenue with another 200 basis points attributable to the decline of certain nonstrategic revenue, including lower sales of paper.

John Bruno: Excluding that community the effect of this item core business revenue is expected to be roughly flat year over year.

John Bruno: Affecting stable print demand growth in digital Nike services on neutral macroeconomic condition.

John Bruno: As fitness strategic action involving product or geographic simplification are decided we will update guidance on the respective effect of these actions accordingly.

John Bruno: In terms of quarterly cadence he headwinds previously noted, particularly as a year over year effect of backlog reduction expected to affect revenue growth most significantly in the first and second quarter of the year.

John Bruno: Q1 revenue is expected to decline at a rate between that of Q3 on Q4 2023 with sequential improvement in year over year revenue trajectory expected throughout the year.

John Bruno: We expect 2024, adjusting operating income margin to be at least seven 5% an improvement of at least 190 basis points year over year.

John Bruno: Richard King in the realization of more than the sales of the expecting $300 million improvement in operating profit both 2023 level expected from Reinventions through 2026.

Richard King: The increase in profit on profit margin in 2024 will mainly be driven by strict towards simplification action enabled by our reorganization, including the effect of the workforce reduction decision announced on January seven.

Richard King: Our operating margin will be lowest in Q1 due to seasonal factor on the timing of structural cost reductions throughout 2024.

Richard King: We are expecting slight improvement in Q1 operating margin from Q4 2023 level with more significant improvements throughout the year.

Richard King: To be clear our ability to achieve profit guidance is not predicated on revenue growth as the expected savings associated with our reorganization far outweigh so reduction in profit associated with lower non strategic revenue.

Richard King: Free cash flow is expected to be at least $600 million in 2024.

Free cash flow will once again benefited from a reduction in our finance receivables balance improvement in cash flow from underlying operations expect it to be offset by onetime restructuring payment higher cash taxes on an increase in pension contribution.

Richard King: We plan to pay our $1 share dividend on the outstanding debt obligation at zircon view.

John Bruno: Excess free cash flow is expected to be deployed opportunistically. According to expecting to rate of return on investment including opportunity to strategically reinvest in the business and acquisition.

John Bruno: In summary, we enter 2024 on solid footing with stable demand for our products and services momentum in orders on signing a simplified operating structure on clear line of sight to savings that will enable who knows a year of meaningful improvement in operating profit.

John Bruno: We will now open the line for Q&A.

John Bruno: Yes.

Certainly one moment for our first question.

John Bruno: And our first question.

John Bruno: Comes from the line of Ananda Baruah from loop capital Your question. Please.

Speaker Change: Hey, Yeah, Thanks, guys for taking the question.

Speaker Change: I guess a couple if I could.

Speaker Change: The headwinds to revenue that you guys point out play out on the call and you sort of quantified in the deck as well.

Speaker Change: I think the impacting last quarter as well.

Speaker Change: Let the good way to think about how those roll off as we move through the year and I guess at what point in time do you expect them to be fully rolled up and further reported revenues entitled the.

Speaker Change: Apples to apples.

Speaker Change: Okay.

Speaker Change: Okay, Hi, Doug speaking here so yes.

Doug: Phasing of the edge wins that we have there are different channel by nature here, but the main one that you mentioned so if you look at.

Doug: Next year, our forecast here is minus three to minus 5%, although we say the web around fraud. It on basis point at all I would say.

Doug: No.

No more by nature, you'll stay do not impact core business here. So first one is a backup so backlog is up 200 basis point out of default the basis point impact. So backlog, we expect the end of the compare of backlog to end.

Doug: End of quarter, two 2024, so quarter, three and quarter four should be normal compare because last year in 2023, we see the X gene backstopped rushing to backlog.

Doug: Item.

Doug: 200 <unk>.

John Bruno: Basis points item that we observed with phase out during the year. So also on my demonstrated tool we mentioned Paypal says endpoint they will stay.

John Bruno: Yes, Eric <unk> for example is an item that will end at the end of Q1. So they are less important in nature. The largest one is the backlog and the backlog.

John Bruno: Correct.

Eric <unk>: That's super helpful.

Eric <unk>: And then just.

Eric <unk>: Just sort of like a sanity check here and it looks like.

Eric <unk>: It looks like Youre forecasting a profit to be up year over year.

Eric <unk>: And Navy nicely as I'm getting like 98.

$80 million to $100 million or something like that depending on what revenue is.

Eric <unk>: Is that is that accurate is that an accurate assessment.

Eric <unk>: Yes, yes.

Richard King: <unk> operating margin. This share is $5 six after last year. It was $3 nine so quite a nice progression that we have done in operating profit on for next year. We are forecasting guiding at least seven five. So this is under the 90 basis point progress here that we're doing on operating margin.

John Bruno: Absolutely, but youll were speaking of bolt on more than a million off till this year, which has also been an operating income adjusted operating income of more than a figure thats why its so a nice momentum that we're building on that they also point out onto flagged out. These the dependency of delivering this operating profit operating margin improvement.

John Bruno: He is not primarily driven by revenue we have.

John Bruno: Given our revenue guidance you know that's not a one off impact here, but a lot of the actions that are supporting our operating profit operating margin improvement are already actions that we have in play one is paying is the actions that we have announced at the beginning of January we changed our large restructuring actions that were started now.

John Bruno: Okay.

John Bruno: That's super helpful.

John Bruno: Let me dovetail that into one last one can you remind us.

John Bruno: Of the $300 million that you have for the 2026 gall incremental op income.

John Bruno: Is that.

John Bruno: <unk> is revenue driven versus things that are completely under the company's control and then that's it from me. Thanks.

John Bruno: So.

Richard King: So it's not in one of the things Steve one of the things we did as you remember we announced the very very strategic structural changes and the launch of the reinvention and the combination of which drives an end to end simplification drives cost out and has a very strategic strengthening about <unk>.

Steve: Our business and make sure that we have the flexibility to adjust with the revenue goes up our revenue goes down so two pieces of it one reinvention will drive simplification, we've talked about GBS and what we're doing there to drive our overall margins and drive improvements of our business.

We're going to take strategic actions in our geographies in all products. So the whole $300 million of operating profit independent of what happens to revenue. So that we can adjust up and down based on whatever decisions, we make on non strategic revenue.

John Bruno: I got it says DSO.

John Bruno: Any incremental revenue driven would be an addition.

John Bruno: The $300 million.

John Bruno: Is that accurate.

Richard King: Yes, it should but we are very strategically targeting higher revenue that has higher profitability and by default you're absolutely right. We increased our revenue we should increase our profitability.

Richard King: Okay, great. Thanks, guys I appreciate it.

Richard King: Thank you one moment for our next question.

Richard King: Yes.

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

Samik Chatterjee: Hi, Thanks for taking my questions I guess, if I can start with a clarification on your revenue guide for 2024, Youre guiding to flat when we ex out the backlog and the exit from certain non strategic businesses.

Samik Chatterjee: Keep that in context of what you are referring to Q4, <unk>, which is a mild softening in.

Samik Chatterjee: <unk> in the European market.

Samik Chatterjee: Or are you sort of thinking about baking in the macro impact you've seen in <unk> into your 2020 for outlook and I have a follow up thank you.

John Bruno: Yes, let me say that start at that and then turnover.

John Bruno: We took a look at Q4 and we saw strong signings in our services business and.

John Bruno: And grow that in that backlog look extremely strong we also see strengthening in our core business.

John Bruno: The areas that we play today, so a combination of increase in orders backlog and our service and the other piece that you mentioned was in our signings were signing now with over 100% on revenue renewal in our core contracts in our services business to those gives us good foundation for growth and stability as we go forward.

Savi, yes.

Steve I will add is why we chose as a macro conditions that we were observing specifically Europe quarter sway a little bit.

Steve: During the quarter four we see a little bit of easing specifically around the interest rate on both sides of the oshea on air. So it gave us a little bit of confidence on those is from new sites, but the impact on <unk>. When you look at those are up during normalized revenue as you mentioned it here at St.

John Bruno: Flat to minus 1%. This is what the industry is seeing here.

John Bruno: We look also at the trend of a return to a phase page volume on cycle has got to weigh up also indicator that is telling us.

John Bruno: The number that's out there we put on paper can be sustained.

Got it got it okay and so do my second one on cash flow you did $649 million in 2023.

John Bruno: Operating income improvement of $100 million also and then you have.

John Bruno: The HPA transaction can you just sort of accrue some cash so maybe help us with the walked in and particularly what's the restructuring piece in there as well and why isn't the gastro guidance a bit more bit Tyler. Thank you for 'twenty 'twenty four I mean.

John Bruno: Yes that makes sense.

John Bruno: A good question so free cash flow, we said at least 600 at this stage of the year.

John Bruno: Improvement in operating cash flow, which is directly related to the improvement of operating income we are still expecting our conversion rate from the operating income our adjusted operating income to free cash flow opinions 70, 80% range, which is what we are used to produce there, but therefore this year as you mentioned it we have a restructuring provision.

John Bruno: Restructuring provision from a cash point of view as an impact of around $140 million. Then we have also an additional contribution.

John Bruno: In pensions that we have to do in the U S on the Jacobs, our profitability as well additional cash tax sale. So when you net all of these states give us this number of around 600 that overtime, we ended up in a provider.

John Bruno: More visibility quarter by quarter on how this trend is going.

John Bruno: Okay, great. Thank you thanks for taking my questions.

John Bruno: Thank you.

John Bruno: Thank you one moment for our next question.

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

Erik Woodring: Hey, guys. Thank you for taking my questions I have a few as well.

Erik Woodring: Steve maybe if we just start.

Color on the renewal rates for large customers.

Erik Woodring: Can you maybe just help us understand what percentage of I don't know, how you would frame it services contracts.

Erik Woodring: Those large customers represent and then how to think about the rest of those cohorts. The same metric for smaller smaller customers. I believe you have a fairly long tail of SMB customers. So how do renewal rates look for that cohort and how do I think about the importance of the large enterprise versus versus kind of SMB customer site and then I have a.

Erik Woodring: A follow up please thank you.

Eric <unk>: Yeah. Thanks, Eric I appreciate it so it's roughly about one third of our overall revenue and so what we're seeing there is the opportunity to really embed it in digital services on top of our core services contracts as we start to see and we're seeing renewals come up year over year, we put a big focus on client Centricity and what that means is how do we help our client.

We drive productivity, how do we help them solve some of the biggest challenge that they have so if you think about headwinds whether it's around use of capital whether it's around labor pressure, whether it's around pressure on profitability. We continue to bring products and solutions that helps them to offset that and that's why we've been successful in our renewal rates up same thing applies in OS.

Eric: <unk> businesses right when we look at our SMB, it's probably even more of an opportunity. We see significant SMB has the same enterprise challenges with profitability due to increase of whether it's labor costs, whether it's pressure on capital whether it's pressure on overall increase in costs, they're looking to us to help to offer.

Eric: So we continually bring solutions, we talked about some of these last quarter on some of the vertical solutions that were really focusing on how do we help inside of health care. How do we help inside of University law firms et cetera, and so as we look at those renewal rates, we continue to bring solutions on top of it and we've been very successful and have made the statement.

John Bruno: Times now that we have a great opportunity to expand in existing accounts with products and services that we already have better stated the Tam for US is beyond just core that everybody sees as our core business, we need to execute and grow inside about client accounts with products and services that we already have and we're seeing evidence of that with new signings.

John Bruno: <unk>.

John Bruno: Okay Super. Thank you. Thank you very helpful. Steve.

Steve: Sorry, if I may be trying to can you can you maybe help us all better understand maybe the trajectory of gross margins relative to Opex in 2024 to kind of land at that seven 5% operating margin target.

Steve: Can I just ask because.

Steve: Pending on how we think about gross margins, we're looking at it as a percentage of revenue fairly significant reduction in Opex I understand you do it.

Steve: You announced the riff on January 2nd.

Steve: But it would imply revenue as a percentage of Opex that is that is quite low and so.

Steve: Just wanted to better understand how to think through some of those dynamics.

Steve: And how much you might be reinvesting on the other end. So just just all of that collectively if you could help us understand that for next year or this year 2020.

Steve: Yes, Eric it Youll get there.

Steve: Big victory here, so what we are expecting a slight expansion of.

Steve: Gross margin.

This is just to I would say by <unk> actions that were put in place.

Steve: We have supported.

Steve: Enable a lot of pricing action that they have driven some margin expansion this year, but next year as well we would have some.

Steve: The expansion of gross margin, although also as we mentioned it we are exiting or reducing some low profitability revenue. We mentioned paper I mentioned also <unk> endpoint solution with lower margin.

Steve: Although we are offsetting this margin or this revenue our revenue a reduction by year.

John Bruno: Our type of processes training with a higher profitability.

John Bruno: Opex is clearly the area with improvement on you have already been able to.

John Bruno: Measure rate this year, if you look at the <unk>, specifically with a box donations that we have done it is a significant improvement year over year on <unk> any amount that we had related to bulk buys more than 100 basis points here when.

John Bruno: When you look at.

John Bruno: Our trajectory, we would have on side with.

Restructuring here and this is this would be the main driver of.

John Bruno: Operating margin.

John Bruno: Operating margin improved much of every year, so 190 basis points.

John Bruno: Based on action that we have already announced.

Announced on.

John Bruno: As shown in our actions that were taken last year on the backend of last year, where we would see a benefit on the forceful. So key point the key point beyond my message here is that the dependency on the revenue trajectory. It is less than on us executing our cost actions Eric the other thing I'd like to add it because we always get the question did the big ACA.

John Bruno: <unk> with own it now you're doing reinvention and so in the beginning of the year, we really looked at all of our end to end cost structure those finance, whether it's SG&A, what we did with sales coverage et cetera, and when you look at that against industry benchmark and look at that against opportunities to where we can drive this company, that's where we're confident we still got a lot of work.

Erik Woodring: To do to simplify this business, whether it's around the number of systems. We have number of processes. We have the variations in different ways in which we do business. So when we look at it just from a pure benchmark standpoint against other companies and industries. We've got a lot of opportunity ahead of US obviously, we've got to execute we will execute that through the next.

Erik Woodring: 24 to 36 months, but there is still a lot of room for us and Thats really where we put GBS implies GBS is really focused on our global business services is really focus on looking at each and every one of those end to end processes looking at the cost that we're using in that we're expanding in each one of those processes, how do we see.

Erik Woodring: <unk> and then think about how do we automate and how do we drive technology, we see AI, we see Chad GBT RPI robotics process automation and the simplification of our business as a significant opportunity to grow those margins in the future.

Erik Woodring: Independent of the revenue line, staying flat or a slight decline. So we're very very optimistic that we can execute and we can drive and we've got a lot of room at our cost basis to make this company a lot more efficient.

Erik Woodring: Super. Thank you. Thank you for that incremental color and some of you at the beginning for us.

Erik Woodring: Maybe one last quick question and that was on capital allocation obviously.

Erik Woodring: We didn't really hear about buybacks and so.

Erik Woodring: Just wanted to make sure I kind of understood those priorities right and that we should not be thinking about any buybacks.

<unk> done in 2024, and then that's it for me. Thank you.

Erik Woodring: You are correct.

Erik Woodring: Thank you so much.

Erik Woodring: Thank you.

Erik Woodring: This concludes the question and answer session of today's program I'd like to hand, the program back to Steve Anderson for any further remarks.

Erik Woodring: Thank you for listening to our earnings conference call. This morning, we are firmly on a path of reinvention I'll focus in this second year of our reinvention is to strengthen our core businesses further reduced structural costs through reorganizations and allocate the more than $600 million of free cash flow, we expect to generate in 2020.

Steven Milunovich: For in a way that Optimizes total shareholder returns, we have clear line of sight to targeted profit improvements in 2024 and are laser focused on ensuring we exceed our three year goal of at least $300 million of adjusted operating income profit improvement above the $23 24 levels by 2020.

Steven Milunovich: Thank you for listening and have a great day.

Steven Milunovich: Yes.

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

Okay.