Q4 2023 Xerox Holdings Corp Earnings Call
Okay.
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.
Turning the meeting over to Mr. David <unk>, Vice President of Investor Relations. Please go ahead, Sir good.
Steve <unk>: Good 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 <unk>, Chief Executive Officer. He is joined by John Bruno President and Chief operating officer, and that'd be a highest executive.
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, 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.
John Bruno: <unk>.
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: Xavier 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.
Xavier Smith: Adjusted EPS was $1 80, 270 cents higher year over year free cash flow was $649 million, an increase of $547 million over 2022.
<unk> adjusted operating margin of five 6% was higher year over year by 170 basis points within our guidance range.
Xavier Smith: 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.
Xavier Smith: Which we call our reinvention.
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.
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.
Xavier Smith: 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 our 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 divested Park Xerox Research Center of Canada, and <unk>, our three D printing business we.
John Bruno: 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.
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 and the markets in which we compete.
John Bruno: 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.
Moving to profitability.
Inspiration 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 by 170 basis points year over.
John Bruno: Per 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.
These actions in 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.
Xavier Smith: 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.
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%.
John Bruno: We will build on these achievements as our priorities evolved in 2020 for year two of our reinvention.
John Bruno: Our first priority of 2024 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.
John Bruno: 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.
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.
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 Bruno: Newly formed global business service organization, or GBS, which John will further described will catalyze these expected organizational savings in 2024.
John Bruno: <unk> 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.
<unk>.
John Bruno: 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.
Xavier Smith: In 2020 for free cash flow is expected to be used to pay a one dollar per share dividend and reduce leverage.
Xavier Smith: 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.
Xavier Smith: Each of these three priorities puts us on the path towards achieving our long term reinvention goals.
Xavier Smith: 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: Steve and good morning, everyone.
John Bruno: I appreciate the opportunity to speak.
John Bruno: Day, and provide more context around our multiyear reinvention journey.
John Bruno: 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 the market and predominantly referring to the mid market, where digital services remain underutilized by our clients.
John Bruno: There is 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 evolving needs of our clients. We understand the dynamics of the markets, we're in and to win in the sexually challenged market like print, we must be more competitive easier to do business.
Xavier Smith: With and relevant to our clients as their needs evolve.
As such our reinvention is aimed at addressing the complexity of our business that was built over time.
Xavier Smith: 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.
Pattern recognition tells me Xerox has what we need to successfully modernize and transform this business 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 that's a great place to be is to work to reinvent any company is complex and require.
John Bruno: <unk> tenacity and discipline.
Steve: As Steve noted 2023 was a foundational year for Xerox and narrowed our focus and removes competing priorities to reduce our operating costs and organizational complexity.
Set up a strategic program management office comprised of 16 work streams appointed 200 initiatives.
John Bruno: His team designed defined 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: Our 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 and 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: Sure.
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 at Xerox and involves an end to end redesign of our operations to enable touchless internal and external customer experiences GB.
John Bruno: GBS will leverage the success, we achieved from project own it and embed leading technologies to drive continuous innovation, we see <unk> as 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.
Overhead cost currently in place to support these geographies and offerings more than outweigh potential reductions in revenue and associated gross profits.
John Bruno: 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.
John Bruno: First up.
John Bruno: Operating model simplification throughout the reinvention journey with continuous savings initiatives led by in 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.
And finally <unk>.
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.
John Bruno: 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>.
John: 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 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.
Charles: Additionally, structural efficiencies enabled by our reorganization expecting 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.
Charles: Revenue growth was further affected by the intentional reduction of certain non strategic revenue.
Charles: Excluding this factor revenue would have increased low single digit year over year.
Charles: Turning to profitability.
Charles: Gross margin declined 130 basis points over the prior year quarter, due mainly to lower activity higher product cost on determination of Fuji royalties, partially offset by strategic pricing actions lower freight costs and the benefit of structural cost reductions adjusted.
John Bruno: Adjusted operating margin of five 4% declined 380 basis points year over year due to lower revenue on gross profit on how your compensation expense, partially offset by the benefit of pricing on structural simplification effort.
Adjusted other expenses net were $45 million higher year over year due to lower sales of noncore 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 certain unrecognized tax position.
John Bruno: Adjusted EPS of 43% in the fourth quarter was 46 central lower than the prior year driven by lower operating income on higher Oreo expenses net partially offset by the benefit of lower shale gas.
John Bruno: GAAP loss per share of <unk> 50 was $1 24 lower than the prior year. This includes a $78 million after tax restructuring charge associated with our recently announced workforce reduction or 62 cents per share. Let me now review revenue when cash flow in more detail.
Xavier Smith: Starting with revenue equipment sales of $458 million in Q4 declined 17, 3% year over year in that too or currency or 18, 3% in constant currency.
Xavier Smith: So prior year effect of backlog reduction drove more than 25% point of the year over year decline.
Xavier Smith: Caroline demand for equipment remains stable on order activity is gaining momentum as backlog on macroeconomic conditions stabilize.
Xavier Smith: 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 meat offerings declined.
Xavier Smith: Declines in 10 treat reflect prior year redemption to backlog concurrent year constrained while declines in mid primarily reflect prior year reduction to backlog.
Xavier Smith: Post sale revenue of $1 3 billion declined five 8% in actual currency year over year on seven 5% in constant currency.
Xavier Smith: 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. So termination of the Fuji royalty <unk> absence of bulk revenue post central new declined only modestly geographically both region declined.
Xavier Smith: Actual and constant currency.
Xavier Smith: Given the significance of certain non strategic item on our revenue trajectory in recent quarters controls or full year I will provide additional commentary to help clarify the underlying revenue trends associated with our core businesses.
Xavier Smith: For Q4, so prior year reduction in equipment backlog contributed around 690 basis points to year over year decline in total revenue.
Xavier Smith: Lower 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.
Xavier Smith: When this combined effect are removed revenue from our core business. Each grew low single digit this quarter, reflecting stable demand on growth in digital on the <unk>.
Xavier Smith: Services, partially offset by decline in printed page volumes.
Xavier Smith: For the year.
Xavier Smith: Semi taming the 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%.
Xavier Smith: Let's now review cash flow.
Free cash flow was 379 million in Q4 higher by $211 million year over year.
Xavier Smith: Operating cash flow was 389 million in Q4 compared to 186 million in Q4 2022 improved.
Xavier Smith: The improvements were mainly driven by a net source of cash associated with a reduction in financing receivable an improvement in working capital.
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.
Xavier Smith: Expect it.
Xavier Smith: Working capital was a source of cash of $115 million, Richard thinking of 42 million year over year, increasing cash driven mainly by a reduction in inventory.
Richard Thinking: 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 sets of noncore business asset, partially offset by lower capex.
John Bruno: Financing 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 the term loan credit facility.
John Bruno: Turning to segments.
Total origination volume declined 25% year over year, reflecting fetal change in strategy to return it focus toward captive only financing solutions.
John Bruno: <unk> 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.
John Bruno: As previously highlighted we expect our finance receivable balance to decline on normalized closer to $1 billion by 2027.
John Bruno: Peter 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 our finance receivable asset.
Peter Revenue: <unk> profit for Peter was $7 million up $6 million year over year, mainly due to lower bad debt expenses on lower intercompany commissions.
Peter Revenue: Print on order revenue fell 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: <unk> 430 basis point reduction in segment profit margin year over year, driven by lower revenue, partially offset by structural cost efficiencies on pricing actions.
Turning to capital structure, we ended Q4 with $617 million of cash cash equivalents unrestricted cash.
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 on the new term loan.
John Bruno: We maintained a balance of bond maturity ladder over the next few years.
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 the reduction of backlog in 2023 is expected to contribute around 200 basis points to the year over year decline in revenue with another 200 basis points attributable to the decline of certain nonstrategic revenue, including lower sales of paper.
John Bruno: Excluding the commutative effect of this item core business revenue is expected to be roughly flat year over year, reflecting stable print demand growth in digital services on neutral macroeconomic condition.
John Bruno: As fitness strategic action involving product or geographic simplification are decided we will update guidance on the arithmetic effect of these actions accordingly.
John Bruno: In terms of quarterly cadence he headwinds previously noted, particularly easier 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: <unk> in the realization of more than the sales of the expecting $300 million improvement in operating profit both 2023 level expected from re intervention through 2026.
John Bruno: The increase in profit on profit margin in 2024 will mainly be driven by strict towards simplification actions enabled by our reorganization, including the effect of the workforce reduction decision announced on January seven.
John Bruno: Operating margin will be lowest in Q1 due to seasonal factor on the timing of structural cost reductions throughout 2024.
John Bruno: We are expecting slight improvement in Q1 operating margin from Q4 2023 level with more significant improvements throughout the year to.
John Bruno: 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 a reduction in profit associated with lower non strategic revenue.
John Bruno: Pre cash flow is expected to be at least $600 million in 2024.
John Bruno: 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.
John Bruno: We plan to pay our $1 share dividend on outstanding debt obligations as they come due.
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.
Invest in the business on 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.
Ananda Baruah: Hey, Yeah, Thanks, guys figure out for taking the questions.
Ananda Baruah: I guess a couple if I could.
Ananda Baruah: The headwinds to revenue that you guys point out play out on the call and you sort of quantified in the deck as well.
Ananda Baruah: Hey, Dan impacting last quarter as well.
Dan Impacting: What's the good way to think about how those 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 sort of apt apples to apples.
Dan Impacting: And I know that.
Dan Impacting: Yes.
Dan Impacting: Okay, Hi, Doug speaking here so yes.
Doug: So the phasing of the edge wins that we have there are different channel by nature here, but the main one is you mentioned I think if you look at.
Doug: Next year, our forecast here is.
Doug: Minus three to minus five although we say the web around four basis points at all I would say.
Doug: No more by nature, you'll stay good luck impact your core business here. So first one is a backup so backlog is 210 basis point out of the basis point impact. So backlog, we expect to see 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: All other items.
Doug: Oh sure.
Doug: The basis point item that we observed with phase out during the year. So also by demonstrated tool we mentioned Paypal says endpoint they will stay.
Doug: We think that you guys are at the <unk>. For example is a nighttime that will end at the end of Q1. So they are less important in nature. The largest one is the backlog and the backlog is at the end of <unk>.
John Bruno: That's super helpful.
John Bruno: And then just.
John Bruno: Just sort of like a sanity check here it looks like.
John Bruno: This is easy.
John Bruno: It looks like Youre forecasting a profit to be up year over year.
John Bruno: And Navy nicely as I'm getting like 90.
$80 million to $100 million or something like that depending on what revenue is.
John Bruno: Does that is that accurate and accurate is that correct.
John Bruno: Yes, yes.
John Bruno: <unk> operating margin. This share is $5 six after last year. It was four 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 in absolute.
John Bruno: But youll, we're speaking about a more of an off.
<unk> this year, which has also been an operating income adjusted operating income of more than under figure. That's why it's so a nice momentum that we're building on the point I want to flag that these are the dependency of delivering this operating profit operating margin improvement is not entirely driven by what we have.
John Bruno: Given our revenue guidance you held the pumps are one off impacts here, but a lot of the action.
Ananda Baruah: Reporting 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: And that's.
John Bruno: Thats Super helpful.
John Bruno: When they dovetail that into one last one can you remind us.
John Bruno: Of the $300 million that you have for the 2026 call incremental I think.
John Bruno: How much of that is.
John Bruno: As revenue drag in <unk>.
Versus things that are completely under the company's control and then that's it for me. Thanks.
John Bruno: So.
John Bruno: So it's not on 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 core.
John Bruno: 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.
Steve: We're going to take strategic actions in our geographies and our 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.
Yeah, Steve so any.
Steve: Any incremental revenue driven would be an addition.
Steve: The $300 million.
Is that accurate.
Steve: 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.
Steve: Okay, great. Thanks, guys I appreciate it.
Steve: Thank you one moment for our next question.
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 nonstrategic businesses, how do I keep that in context of what you are referring to here for <unk>, which is a milestone.
Samik Chatterjee: <unk> in <unk>.
Samik Chatterjee: And the European markets.
Samik Chatterjee: Are you sort of thinking about baking in the macro impact you've seen in <unk> into your 2020 for outlook.
Samik Chatterjee: And I have a follow up thank you.
Samik Chatterjee: Yes, let me take a start at that and then turnover.
Samik Chatterjee: Numbers that we took a look at Q4 and we saw strong signings in our services business and.
And grow that in that backlog look extremely strong we also see strengthening in our core business.
The areas that we play today, so a combination of increase in orders backlog and our service and the other piece that David mentioned was and 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.
Samik Chatterjee: Yes, Steve I will add as well so those are macro conditions that will helps having specific as 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.
Flat to minus 1%. This is what the industry is seeing here.
Steve: We look also at the trend of a return to our face page volume looks like we've got the web also indicator that is telling us.
John Bruno: The number that's out there we put on paper can be sustained.
John Bruno: Got it got it okay and so does my.
John Bruno: Second one on cash flow you did $649 million in 2023.
John Bruno: Operating income improvement of 100 million or so and then you have.
John Bruno: The HPA transaction can you just sort of accrue some cash so maybe help us with the walk there and particularly what's the restructuring piece in there as well and why isn't the gastro guidance a bit more with hydro. Thank you for 'twenty 'twenty four I mean.
Yes that makes sense.
John Bruno: 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 important months alright.
John Bruno: And 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 restructuring provision from a cash point of view as an impact of around 114.
Then we have also an additional contribution.
John Bruno: In pensions at work to do in the U S on the profitability as well additional cash tax sale. So when you net all of these states gave us this number of around 600 that overtime, we ended up in a provider.
John Bruno: More variability 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 Steve maybe if we just start.
Erik Woodring: For 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: 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.
Eric Schmidt: We drive productivity, how do we help them solve some of the biggest challenges. 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 OSA.
<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 Schmidt: 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.
Erik Woodring: 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 the core that everybody sees as the 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.
Erik Woodring: Okay Super. Thank you. Thank you very helpful. Steve.
Steve: Sorry, if I may return to you can you can you maybe help us all better understand maybe the trajectory of gross margins relative to Opex in 2020 for it to kind of land at that seven 5% operating margin target.
Steve: And I just ask because depending on how we think about gross margins. We're looking at as a percentage of revenue fairly significant reduction in Opex I understand.
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: Really just wanted to better understand how to think through some of those dynamics.
And how much you might be reinvesting on the other end. So just all of that collectively if you could help us understand that for next year for this year 2020.
Eric Schmidt: Eric It.
Eric Schmidt: You've got the big picture here, so what we are expecting a slight expansion of the.
Eric Schmidt: Gross margin.
This is just to I would say by <unk> actions that were put in place.
We have supported.
Eric Schmidt: Enable a lot of pricing action that they have driven some margin expansion this year, but next year as well, where we'll have some.
Eric Schmidt: 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.
Eric Schmidt: Although we are offsetting this margin of this revenue our revenue a reduction by year.
Peter Revenue: Type of processes training with a higher profitability.
Peter Revenue: Opex is clearly the area with improvement on you have already been able to.
Peter Revenue: Okay. 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 a <unk> amount that we had related to bulk buys more than 100 basis points here.
Peter Revenue: When you look at.
Peter Revenue: Or is there a trajectory we would have on side with.
Peter Revenue: Restructuring here and this is this would be the main driver of.
Peter Revenue: Operating margin.
Peter Revenue: Operating margin improved much of every year, so 190 basis points.
Based on action that we have already announced.
Peter Revenue: Announced on.
Eric Schmidt: Actually 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 across sections, Eric the other thing I'd like to add it because we always get the question did the big ACA.
Erik Woodring: With <unk> 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, where we did with sales coverage et cetera, and when you look at that against industry benchmark and look at that against opportunities, where we can drive this company, that's where we're confident we still got a lot of work.
Eric Schmidt: 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'll execute that through the next.
Eric Schmidt: 24 to 36 months, but theres still a lot of room for us and Thats really where we put GBS in place GBS is really focused 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.
Eric Schmidt: <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.
Peter Revenue: 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 in our cost basis to make this company a lot more efficient.
Super. Thank you. Thank you for that incremental color and somebody at the beginning for us.
John Bruno: Maybe one last quick question and that was on capital allocation obviously.
John Bruno: We didn't really hear about buybacks and so.
John Bruno: Just wanted to make sure I kind of understood those priorities right and that we should not be thinking about any buybacks.
John Bruno: <unk> done in 2024, and then that's it for me. Thank you.
John Bruno: You are correct.
John Bruno: Thank you so much.
John Bruno: Thank you.
Speaker Change: Does conclude the question and answer session of today's program I'd like to hand, the program back to Steve Anderson for any further remarks.
Speaker Change: 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.
Steve Anderson: 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.
Steve Anderson: Thank you for listening and have a great day.
Steve Anderson: Yes.
Steve Anderson: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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