Q3 2024 Xerox Holdings Corp Earnings Call
The
Speaker Change: The capacity by and welcome to Zerox Holdings Corporation's third quarter earnings conference call at this time, while participants are in listen only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered, and you'd like to remove yourself from the QS and press star 1-1 again. As a reminder, today's program is being recorded and now I'd like to introduce your host today's program, Mr. David Beckel, and Vice President, and some Vest Relations.
Speaker Change: please go ahead sir.
Speaker Change: Good morning everyone, I'm David Beckel, Vice President and Head of Investor Relations at Zerox Holding Scorperation
Speaker Change: Welcome to the Zerox Holings Corporation, third quarter, 2024 earnings release conference call hosted by Steve Bandrowczak, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer in Dweyhe High's Executive Vice President and Chief Financial Officer.
Speaker Change: At the request of Zeerach's Holy Scorporation, today's conference call is being recorded. Other recording and or re-broadcasting of this call are prohibited without the express permission of Zeerach's.
Speaker Change: During this call, Zerox executives will refer to slides that are available on the web at www.Zerox.com-investor and will make comments that contain forward-looking statements which by their nature address matters that are in the future and uncertain.
Speaker Change: Actual future financial results may be materially different than those expressed herein.
Speaker Change: At this time I like to turn the meeting over to Mr. Bandrowczak.
Mr. Bandrowczak: Good morning and thank you for joining our Q3 2020 4 earnings call.
Mr. Bandrowczak: The benefits of reinvention of driving improved financial results albeit at a slower hasten expected.
Mr. Bandrowczak: Positive Pro-points from the quarter include a second consecutive period of moderating revenue declines.
Mr. Bandrowczak: Year-over-year improvements in adjusted operating income and income margin and more than 100% free cash flow conversion from adjusted operating income.
Mr. Bandrowczak: Further, the pending acquisition of IT Savvy is expected to improve on mix of revenue, from complimentary value-ad businesses, with higher underlining rates of revenue growth.
Mr. Bandrowczak: summarizing results for the quarter.
Mr. Bandrowczak: Revenue of 1.5 billion decreased 7.5% in actual currency and 7.3% in constant currency.
Mr. Bandrowczak: Excluding the impact of year-over-year fluctuations in backlog and reductions in non-strategic revenue associated with the reinvention, core business revenue declined low single digits and at a pace consistent with the prior quarter.
Mr. Bandrowczak: The Just-it EPS was 25 cents
Mr. Bandrowczak: 21 cents lower year over year, due primarily to the one-time sale of non-core business assets in the prior year quarter.
Mr. Bandrowczak: Free Casual was a hundred and seven million, 5 million lower year over year, and the just an operating margin of 5.2% was higher year over year by 110 basis points, reflecting the benefits of organizational simplification.
Mr. Bandrowczak: The reinvention of Xero Act is difficult but necessary.
Mr. Bandrowczak: Reinvention is a multi-year journey to sustainably streamlined operations while positioning the company to benefit from favorable long-term trends within print, digital and IT services.
Mr. Bandrowczak: Progress has been steady and confirmatory of our original thesis, but the financial proof points of the strategy success are not unfolding in a linear fashion.
Mr. Bandrowczak: This quarter, print equipment cells fell below expectation due to delays in global launch of two new products and lower than expected improvements in cells for productivity.
Mr. Bandrowczak: Tactical challenges associated with the timing of Hurricane Helene and increase in competitive activity in certain markets also contributed to the shortfall.
Mr. Bandrowczak: We have analyzed the factors that contributed to the product launch delays and our competent those factors will be resolved as we recalibate global product launch plans.
Mr. Bandrowczak: and Despite lower productivity improvement than expected in Q3, we are confident on going sales efficiency and effective as programs will drive productively sustainably higher in 2025 and beyond.
Mr. Bandrowczak: Shaw Falls and equipment sales masked the breath of reinvention progress made today. Much of which is expected to reveal itself in our newty revenue streams and a sustainably low cost-based overtime.
Mr. Bandrowczak: In quarter three we made progress along each of our strategic priorities, in furtherance of our long-term reinventing goals.
Mr. Bandrowczak: Stunning with the Strong of Core.
Mr. Bandrowczak: A key ten in the reinvention is closer alignment between our organization and the economic buyers of our products and services.
Mr. Bandrowczak: We realized early in our reinvention that a refined sales coverage model and investment in client perception and sales force productivity were required to more efficiently and effectively serve clients. Needs in a rapidly evolving print and workplace services landscape.
Mr. Bandrowczak: to
Mr. Bandrowczak: The realignment of our sales organization has not been as smooth as we would like, but we are seeing encouraging signs that a leaner, more focused sales team can deliver improved client outcomes and more efficiently than in the past.
Mr. Bandrowczak: While sales productivity fell short of our expectation in Q3, it has improved year-to-date to a greater end-market focus and a reduction in administrative burden.
Mr. Bandrowczak: We expect the cumulative effect of productivity actions taken to date, future scale efficiencies, including additional capacity in our dedicated virtual sales center and other initiatives designed to foster incremental client interactions.
Mr. Bandrowczak: Will drive sales productivity higher than Q3 levels in Q4 and into 2025.
Mr. Bandrowczak: Net Promotus score, a key barometer of client perception has improved 11 points this year in the Americas.
Mr. Bandrowczak: through increased client engagement and integrated sales and marketing outreach.
Mr. Bandrowczak: The increase of flex improves client satisfaction and a brand consideration with we expect.
Mr. Bandrowczak: will drive an increase in purchase and tent from clients that understand and appreciate our position in the market as a leading provider of print, digital and IT workflow efficiency solutions.
Mr. Bandrowczak: We see evidence of the strength of our value proposition with clients most prominently in our services metrics.
Mr. Bandrowczak: In the last 12 months, our revenue retention rate for large client renewals remained above 100% meaning on average, clients are buying more print and digital solutions for us when renewing long-term service contracts.
Mr. Bandrowczak: I'll portfolio of digital and managed IT services continues to resume it strongly with clients.
Mr. Bandrowczak: In Q3, Digital Services, new business signings were up double digits.
Mr. Bandrowczak: with Renewal Rates of Bug Plan and Digital and Managed IT Services revenue also grew double digits reflecting sustained signings growth in the current and prior periods.
Mr. Bandrowczak: and the pending acquisition of IT Saviets expected to drive growth as we leverage and improve expanded portfolio of IT services to grow penetration with existing clients.
Mr. Bandrowczak: Moving to Cost Improvements.
Mr. Bandrowczak: Operating expense decreased more than 50 million year over year in Q3 and 125 million year today.
Mr. Bandrowczak: Reflecting the benefits of strategic actions taking in the prior year, current year reductions in headcount associated with the structural reorganization of our business, and ongoing operating efficiencies driven by our global business service organization.
Mr. Bandrowczak: Certain reinvention actions taken this year have resulted in reduction of revenue. For example...
Mr. Bandrowczak: The transition from direct to indirect distribution in certain markets as is the case with geographic simplification.
Mr. Bandrowczak: One measures taken to simplify our offerings as was the case without decision to exit the manufacturing of certain production equipment.
Speaker Change: I want to hear what these actions are about. The level of operating expense that previously supported those activities by a greater amount than the associated reductions in gross profit.
Speaker Change: While still early, we are beginning to see the thesis playout in our financial results.
Speaker Change: At a total company level adjusted operating income improved this quarter despite a reduction in revenue.
Speaker Change: We expect this trend to continue in quarter four.
Speaker Change: In few two years we expect our pipeline of more than 400 million of gross cost savings that have either been action but not yet realized the results.
Speaker Change: or have been identified for future implementation to support operating income growth.
Speaker Change: Finally, Balance Capital Allocation
Speaker Change: This quarter we generated more than 100 million of free cash flow, including the benefits of reduction in finance receivables, walking the fourth consecutive quarter of more than 100% free cash flow conversion from adjusted operating income.
Speaker Change: We continue to make progress, so I'll send finance for Steven Wolf funding agreements outside the US.
Speaker Change: including a recently signed agreement to sell future finance, receivable originations in Canada to the lag, land and financial services Canada Inc.
Speaker Change: Bound Sheet Health improved again this quarter as we reduce a debt balance quarter of a quarter
Speaker Change: The Penden Acquisition of IT Saviour will be funded in part with debt, but is expected to be leveraged neutral in a little more than a year and deliver a return on capital, well and access of our weighted average cost of capital.
Speaker Change: I will now hand the call over to John Bruno.
Speaker Change: and Steve noted this quarter of equipment sales felt short of expectations for two main reasons.
John Bruno: We had higher expectations of global product launches that were impacted by core product transition planning and execution.
John Bruno: Through our post-mortem, we're taking deliberate steps to optimize price and marketing programs by specific auto-market areas, to ensure improved demand to supply chain readiness that will complement market-specific launches.
John Bruno: We also had higher expectations of ourselves, productivity initiatives in Q3, given the improvement we realized in Q2 after the Q1 organization changes.
John Bruno: We were essentially flat border on a quarter on activity basis and that was not sufficient to offset the reduction in sales head count.
John Bruno: We have analyzed these points of friction from lead generation, close to order and order to install. We've aligned process improvement teams and we are course-correcting these areas of underperformance.
John Bruno: We are seeing the positive impact of that work. I'll be at more slowly than originally for casting.
John Bruno: While productivity is installed in Q3, we do expect these operational process improvements to drive sales, productivity higher than Q4 and into 2025.
John Bruno: We make no excuses for our underperformance in equipment sales and these operational misses overshadow broader strategic improvements elsewhere. On balance, I'd like to highlight other strategic areas of re-invention where we are seeing the forecast results of our efforts.
John Bruno: Starting with geographic simplification.
John Bruno: This quarter we transitioned to additional countries, Hungary and Bulgaria, from a direct to an indirect distribution model. We also signed an agreement to sell our paper business in Nia to a leading global paper supplier and talis.
John Bruno: These transaction and others, expecting quarter four, allows to provide partners in a media with the product and services clients demand most and with greater operating efficiency.
John Bruno: Moving to offering simplification with the recent launches of our 843-100 series and refreshes of our 8-3-all-to-link and crime-link products. We are streamlining our off-grid as in the office and light production categories.
John Bruno: For example, the update is 300 series prints are shared at common engine with our 400 series, reducing spare parts used by 20%.
John Bruno: Software enhancements included with the updated ultiline products eliminate the need for physical installations hits and simplify the installation process.
John Bruno: and our new crime-like machines offer wider range of engine speeds, features and capabilities, improving competitiveness and marketability.
John Bruno: The consolidated configurations and enhanced capabilities of these respective products make them more competitive and improve order and inventory management as well as marketing efficiency.
John Bruno: Additionally, we continue to refine our production for an equipment portfolio.
John Bruno: We've engaged with leading print engine manufacturers to broaden our production print ecosystem. And this quarterly announced our planned collaboration with Techville Software to integrate their digital embellishment technology for our clients.
John Bruno: We anticipate revealing more partnerships within the production print segment in the coming year, as we invest in a platform featuring services, leds and soft-for-nabled products.
John Bruno: For example, our type-lining clues, cloud host diversions of free flow core to include an AI framework for work for automation, application expansions into adjacencies like packaging and labels, as well as fast-based offerings.
John Bruno: and finally operating model simplification.
John Bruno: Our Global Business Service Organization or GBS is performing as intended and finding ways to leverage a simpler operating model to drive long-term enterprise-wide efficiencies. A key drive for long-term re-invention savings will be the optimization of our technology and support infrastructure.
John Bruno: Last quarter of the scientific agreements with multiple technology partners to transform our operations with a technology-led process improvements.
John Bruno: and building on that announcement, this quarter GBS Restructure and Agreement with the Key Business Process Health Sourcing Partner, creating a mutually beneficial incentive structure to save costs through operating efficiencies.
John Bruno: This new service structure is expected to yield a double-digit improvement in contracted rates and will serve as a blueprint for driving sustainable organizational savings.
John Bruno: Collectively, these savings are expected to draw more than 700 million of cumulative grocery invention savings over the next few years. Putting us on a path to achieve double digit adjusted operating income margins over the course of our reinvention.
John Bruno: We will continue to exercise balance execution in the implementation of these initiatives to minimize operational disruption.
John Bruno: and finally revenue mix. Beyond cost reduction, equally important tended to have our re-invention as an improved revenue mix that enables better client outcomes.
John Bruno: 2-9-2 weeks ago we announced the acquisition of IT savvy.
John Bruno: The acquisition of IT-7 expands our portfolio of IT service offerings and our addressable market coverage.
John Bruno: With IT savvy, we acquire an accomplished management team with a demonstrated ability to deliver positive results through a suite of lifecycle deployment and managed services across IT infrastructure failures of hosting network insecurity, collaboration and the high report place.
John Bruno: We expect the leverage this platform and increase scale to drive increased penetration of IP services across apply base who increasingly look to zerox to provide these types of solutions.
John Bruno: The acquisition will be funded with cash on hand and a combination of solid notes. We expect to quickly realize more than 15 million of cost synergies as we consolidate IT service operations and adopt IT savvy operating platform.
John Bruno: Along with revenue synergies from expanded client penetration.
John Bruno: We expect an enhanced IT services offering. This will improve client satisfaction and stability in our corporate business as clients are able to realize more value from services partner that can be a one-stop shop for their most critical print and IT infrastructure needs.
Speaker Change: The acquisition is expected to be immediately agreed at the earnings for share, at the cash folks and we look forward to welcoming the IT Savi team to zero off to the end of this year. I'll now hand the call over to Zobin.
Zobin: Thank you, John, on Good Morning, everyone. In Q3, total revenue declined 7.5% in Actual Currency, on 7.3% in Constant Currency, on a year of a year basis.
Speaker Change: Steve described equipment for using quarter-fair short of expectations.
Speaker Change: Oever, the projectory of poster for you improved as expected, reflecting growth in digital on managed IT services.
Speaker Change: Turning to profitability.
Speaker Change: Ross margin was flat year over a year as higher freight cost, unfavorable equipment mixed on lower print volumes, were offset by the beneficial impact of reinventions savings on favorable currency effect.
Speaker Change: A justi-doporty margin of 5.2% was under 10 basis on higher year or year. You principally to reinvent generated cross-reduction on lower incentive compensation expense.
Speaker Change: Partially offset by the effect of lower revenue on Gross Profit.
Speaker Change: Total operating expenses in Q3 declined 53 million year over year, or more than 10% reflecting at count on all zero non-labor expense reduction associated with recent re-invention action.
Speaker Change: I just did other expenses, net with 55 million higher year over a year due to a increase in non-finance interest expense, reflecting higher interest rate on a lower portion of debt allocated to our financing business.
Speaker Change: The increase also reflected gain on the sense of known core business asset recorded in the prior year.
Speaker Change: I just did tax rate of 27.7% compared to 7.2% in the same quarter last year
Speaker Change: The Incredion Rate reflects non-wakering tax benefit associated with uncertain tax position on the establishment of a valuation allowance against the current year-to-fair tax asset.
Speaker Change: A just TVPS of 25 cents was 21 cents lower than the prior year
Speaker Change: As a benefit of Iyer adjusted operating income on the lower fiat count.
Speaker Change: We are more than upset by I-U-L non-financing interest expense, I-U-Tax rate on the prior year again, on self of known core business asset.
Speaker Change: Gap lost per share of $9.71, included in the NAFKER tax, NONKER's goodwill impairment charge.
Speaker Change: of approximately $1 billion, or $8.16 per share, on a chart to tax expense related to the establishment of evaluation allowance of $161 million or $1.29.
Speaker Change: Regarding the goodwill impairment, it was determined following a sustained period in which our market value fell below book value, that the fair value of our print on all their segment are fallen below carrying value.
Speaker Change: The variation of the ones whose establishments differ at the text that are not expected to be realized in certain international law issues.
Speaker Change: Let me know review, review on cashier in more detail.
Speaker Change: Starting with revenue. Q3 equipment sales of 339 million declined around 12% in actual and constant currency.
Speaker Change: The effect of backlog fluctuations in the current and prior year on reinvention action accounted for around 400 basis points of the decline.
Speaker Change: Lower-than-expected improvements in salesforce productivity, delays in the timing of installation associated with Hurricane Ellen, unfavorable mix on the large production equipment sales in the prior year.
Speaker Change: Total equipment activity increased 17% year-over-year, due largely to entry-level equipment.
Speaker Change: Entry revenue declined despite higher installation due to an increase in the mix of low-end black-and-white multifunction printers.
Speaker Change: Mid-range installations were slightly lower year-over-year, but revenue declined faster than installations due to unfavorable A3 product family mix.
Speaker Change: High-end revenue decline reflects the ongoing evolution of our production print portfolio on offering rationalization action taken this year.
Speaker Change: Post-sales revenue of $1.2 billion declined mainly 6% in actual and constant currency, a roughly 200 basis points sequential improvement.
Speaker Change: Post-sales revenue declined 2% in actual currency, reflecting lower activity, partially offset by double-digit growth in digital and managed IT services revenue, as well as higher services prices.
Speaker Change: Consistent with past quarter, I will provide additional commentary to help clarify underlying trends in our core businesses, which includes the effect of backlog fluctuations on reinvention action.
Speaker Change: For Q3, lower cells of non-strategic paper, IT endpoint device and decline in finance revenue, reflecting the change in our finance reservoir strategy, contributed around 200 basis points to the decline.
Speaker Change: Other strategic actions taken to simplify our business and improve profitability, including geographic and offering simplification, contributed around 200 basis points to the decline.
Speaker Change: Finally, the effect of equipment backlog fluctuations in the current and prior year quarters contributed less than 100 basis points to the year-over-year decline in total revenue.
Speaker Change: When these impacts are removed, total revenue declines low single digits in actual currency consistent with the prior quarter.
Speaker Change: Let's now review Cash Flow.
Speaker Change: Pre-cash flow was $107 million, lower by $5 million year-over-year.
Speaker Change: Operating cash flow was $116 million, $8 million lower than the prior year quarter, due to lower contribution from working capital on higher pensions payment, partially offset by higher adjusted operating income on cash from finance receivable.
Speaker Change: Investing activities were a use of cash of 7 million compared to a source of cash of 25 million in the prior year, largely reflecting a prior year's sales of non-core business assets.
Speaker Change: Financing activity consumed 74 million this quarter reflecting 42 million of net debt repayment on dividend of 36 million.
Speaker Change: Turning to segment.
Speaker Change: In Q3, XFS revenue was down around 10% year-over-year due to lower finance income on other fee revenue associated with the decline in our finance receivable balance.
Speaker Change: Partially upset by higher commission from the sales of finance-reservable assets in line with our forward flow strategy.
Speaker Change: XFS finance receivable balance declined roughly 3% sequentially on 23% year-over-year in actual currency, mainly due to XFS' change in strategy to return its focus to captive-only financing solutions.
Speaker Change: Q3 XFS segment profit increased by 9 million as a reduction in bad debt expense on lower operating expenses more than offset reductions in gross profit associated with lower revenue.
Speaker Change: Print-on-order revenue fell roughly 7%, and segment profit increased by around 5% for the reasons previously mentioned.
Speaker Change: focusing on capital structure.
Speaker Change: We ended Q3 with 590 million of cash, cash equivalents and restricted cash.
Speaker Change: Around $2 billion of the remaining $3.3 billion of outstanding debt supports our finance assets, with the remaining debt of $1.3 billion attributable to the non-financing business.
Speaker Change: I now provide an update on re-invention settings.
Speaker Change: Since the prior quarter, we have operationalized an additional $20 million of savings, much of which will be realized in 2025.
Speaker Change: We maintain a pipeline of more than 400 million of gross cost savings that are expected to be realized by 2026, with around 125 million related to actions already implemented or expected to be implemented in the near term.
Speaker Change: Finally, I will address guidance for the remainder of the year and comment on expectations for 2025.
Speaker Change: All 2024 commentaries exclude the effect of the pending acquisition of IT savings.
Speaker Change: For revenue, we now expect a decline of around 10% in constant currency versus a decline of 5 to 6% in constant currency previously.
Speaker Change: Around 75 basis points of the decrease in guidance is attributable to incremental effect associated with intentional reduction in non-strategic revenue.
Speaker Change: The remainder of the decline reflects the delayed launch of two new products on lower than expected self-force productivity improvements.
Speaker Change: Full-year revenue guidelines now include around 625 basis points of effect from non-recurring headwinds associated with backlog fluctuations in the prior year and current year, reduction in non-strategic revenue, and other reinvention actions.
Speaker Change: For the year, so roughly 4% of expected year-over-year decline in core business revenue indicates a mid-single-digit decline in normalized equipment sales and a low to mid-single-digit decline in normalized post-sales revenue.
Speaker Change: We expect a return to revenue growth in 2025, supported by the inclusion of revenue associated with a pending acquisition of IT savings, new product launches, improved sales productivity, and growth in digital and IT services.
Speaker Change: Inorganic revenue benefits from ITCV are expected to more than offset reduction in revenue associated with ongoing reinvention action, as the impact of strategic reduction in revenue are expected to be lower in 2025 than they were in 2024.
Speaker Change: Unknown.
Speaker Change: For full year adjusted operating income margin, we now expect a margin of around 5% versus our prior outlook of at least 6.5%.
Speaker Change: Reflecting the effect of gross profit decline associated with a reduction in our equipment revenue outlook and, to a lesser extent, delays in the implementation of certain cost reduction initiatives to 2025.
Speaker Change: Due to lower than expected revenue in 2024, we no longer expect to grow adjusted operating income $300 million above 2023 level by 2026.
Speaker Change: However, we continue to expect growth in adjusted operating income on a return to double-digit adjusted operating income margin over the course of our reinvention.
John Bruno: Unknown Executive, John Bruno
John Bruno: In 2025, we expect growth in adjusted operating income or margin, supported by a return to revenue growth on the benefit of additional growth cost savings associated with cost reduction action implemented in 2024 or expected to be implemented in 2025.
John Bruno: Finally, full year free cash flow guidance was reduced from at least $550 million to a range of $450 to $500 million, reflecting the previously noted reduction in adjusted operating income guidance.
John Bruno: In summary, 2024 has presented unexpected challenges.
John Bruno: However, in Q3, we grew adjusted operating income on margin year over year, despite a reduction in revenue, a trend we expect to continue as we implement further reinvention action aimed at simplifying our organization on driving closer alignment to the economic buyers of our products and services.
John Bruno: We'll now open the line for Q&A.
Speaker Change: Certainly, and our first question for today comes from the line of Ananda Paruha from Loop Capital. Your question please.
Ananda Paruha: Yeah, hey guys, good morning. And thanks for taking the question. Um, I guess I guess
Ananda Paruha: Two, if I could.
Ananda Paruha: on the product. The first is on the product delay and on the sales productivity.
Ananda Paruha: dynamics that you guys talk to and you did give a lot of good context around it. I guess the question is...
Ananda Paruha: Can you if you if you mentioned I missed it like specifically on the product delay, what was it that you guys
Ananda Paruha: saw as occurring.
Ananda Paruha: and I guess, you know, sort of in that context, you know, what, what did you learn that can have, that can sort of have, have, you know, sort of these dynamics not pop up again.
Ananda Paruha: And then I guess also on the sales productivity, any greater specificity around what actually occurred that surprised you guys, that sort of led to the diminished sales productivity. And then I have a quick follow up as well, thanks.
Speaker Change: Hey Ananda, Steve, thank you for the question.
Speaker Change: I'll turn it over to John in a minute for some specifics, but I just want to remind you, look, the reinvention is a multi-year journey.
Speaker Change: And inside that multi-year journey, the ultimate strategy is to get to sustainable revenue growth and get to double-digit operating income.
Speaker Change: As part of that, we've made some progress in each of the areas. If you think about what we're trying to do in our revenue mix, IT Savvy gives us a great platform for seeing IT services growth over the next couple of years.
Speaker Change: We also saw good impact of operating expense reduction quarter over quarter and year over year. My point is that inside of reinvention we have multiple work streams.
Speaker Change: Some of which will exceed, some of which will be set back, but we will ultimately get to our end goal.
Speaker Change: specifically to the product launch and to revenue in terms of productivity, we made very large organizational changes at the end of Q1.
Speaker Change: Very specifically, we aligned almost 6,500 new jobs in terms of new alignment, and we had a very large reduction in our workforce, which is basically the premise of what caused the reduction.
Speaker Change: We saw quarter-over-quarter productivity improvement from Q1 to Q2 and from Q2 to Q3.
Speaker Change: John, I'll decode what you want to get. Sure.
Speaker Change: Ananda, let me go start with the product transition issue. First, it's a forecasting issue more than anything else. When we look at carried inventory of predecessor products, the timing of the release of new products and the forecasting of that mix, there's there's a lot of intricacies between the demand to supply signaling.
Speaker Change: We had higher expectations that we were going to flush through the older product and then the timing of the release of the new product, not only to our direct business, but also into the channels.
Speaker Change: As that started to get subsequently through the quarter, we would have a decision to make and the decision clearly what we don't want to do is leave a lot of working capital and inventory behind. We want to sell through and make those transitions.
Speaker Change: That is a skill and something that we typically do as a company better than we perform, and a lot of that is attributed to the points that Steve has made. We just did not have a really good sense.
Speaker Change: of the timing of each of those issues and it left us with a little bit of time towards the end of the court to actually make the effective change.
Speaker Change: At the start of the quarter, we were more bullish that in the last six weeks, we would have a higher ramp than we actually received. And so that really comes down to the transition period between the demand to supply signaling.
Speaker Change: And then I think Steve addressed the issue on Salesforce productivity. Coming out of, we look at it from a quota bearing sales headcount perspective.
Speaker Change: We were down double digits in the number of sellers year on year coming into the year, and we've settled that down with new territory assignments, new remapping, new account coverage, and all of that.
Speaker Change: Things come in. That really also comes down to the forecasting and the timing and the knowledge of your clients. And a lot of that we saw which was a more aggressive view of where we thought equipment sales revenue would be at the start of the quarter and then at the quarter continue to progress. Yes.
Speaker Change: We were taking a lot more of our upside and replacing it with some of the forecasts at the beginning of the year, which is a good thing on balance.
Speaker Change: But when you're as close to the pain as we are, you just need a few misses here and there and it's the difference between tens of millions of dollars and nothing more on that when you really come down to it on a quarterly basis.
Speaker Change: So really what gives me the confidence is, is when I look at that, you know, we had, we did not have a good Q1, as you know, Q2, we had a much better productivity basis from an activity level. When I looked at Q3, I had expectations that Q3 was going to build off of Q2, and it was essentially flat over Q2. And so we dissected the programs necessarily to what caused that flatness. We certainly didn't go down, but it kind of gives me confidence that we've stabilized. So now it's all about the incremental activities that we're doing around the sales force, demand generation, and all the forecasting accuracy that gives us the confidence that we're moving forward.
Speaker Change: Yeah, I know that. I also would like, yep, I know that. I also would like to...
Speaker Change: Yeah, we're all jumping on this one. Yeah, sorry, just also to re-entrust one point.
Speaker Change: So you know that our revenue is made of ESA, which is roughly 25% of the total revenue. 75% is coming from post sales.
Speaker Change: So when you look at during this year the ESL revenue trajectory from a growth point of view, quarter over quarter, sequential growth, the trajectory has improved. Despite the challenges that John and Steve have articulated in Q3, it was still an improvement versus what we have seen in Q1 and Q2. On the post-sales revenue, we're also pleased to see that the post-sales revenue stream, despite and related to all the reinvention activities that we are driving, is improving quarter over quarter. So the key message behind this is the reinvention play is at play currently. On the way of delivering, specifically on the post-sales line, the nature of the equipment revenue is that it could be cyclical. And here we have an example and we face it during quarters.
Speaker Change: That's that's all super useful context and I really appreciate it. So just quick follow-up to that and then I'll see you before Any any sense of sort of macro or the general market demand backdrop?
Speaker Change: was a bit softer and if that was also a contributor to the sort of, John, the flattening Q over Q and sort of efficiency progression, sales capacity progression.
Speaker Change: Yeah, no, that would be minimal. I would say minimal. Most of it is just execution issues. It's about the same. I'd love to blame the macro. It's about the same.
Speaker Change: Got it. Thanks, guys.
Speaker Change: Thank you. And our next question comes from the line of Eric Wittring from Morgan Stanley. Your question, please.
Eric Wittring: Great. Thanks so much for taking my questions this morning. I have two, if I may. Maybe just to start, Steve, you know, if we step back, you guys are doing a lot, right? You're exiting businesses, you're changing the delivery model in several regions.
Eric Wittring: You're reducing headcount, you're launching new products, you're acquiring new businesses. And then this is all happening at the same time while your end markets do face demand headwinds. And, you know, that's tough. And I credit you for taking all these actions. But as I think about kind of your preliminary comments on 2025, you know, you're setting an expectation for revenue growth, operating income growth and margin expansion. And I'm just wondering why, you know, you think that is the right expectation to set today, given everything that's happened in the background and obviously given some of the challenges that you run into this year, which some, you know, you could theoretically face next year as you continue to go through this reinvention. So just maybe the question is, amidst all of these
Speaker Change: Unknown Equipment Transfer, Unknown Manufacturer, Smarter Municipality Contact Us FB
Speaker Change: Thank you.
Speaker Change: Thanks for the question. I'm going to give you a couple of things. First of all, it's the management team that's done it over and over through the history of our careers. We've got pattern recognition that the things that we've put in place, we can see the future. Things you can't see internally that we see around the program execution, around the signs of what we're building and how we're executing.
Speaker Change: Overall, if you think about the reinvention, very similar to Own It, by the way, where we had, you know, 10, 11 work streams.
Speaker Change: You see seven or eight, they're going to exceed three or four, they're going to under exceed expectations, but overall, you deliver the end results.
Speaker Change: And so what we're seeing is the strategical things that we're doing go back to you know What we did with our free cash flow what we did with park all these things are very specific to set up
Speaker Change: The Strategic Long-Term Revenue Growth and get us to the operating income that we desire.
Speaker Change: As we look at each of the work streams, we're seeing it on the expense line, the cost coming out, you see it definitively, you see on the acquisition, working that in the background to be able to acquire IT Savvy.
Speaker Change: You see what we're doing in terms of dramatically changing our sales coverage and what that's doing in terms of building new pipelines, building new customers.
Speaker Change: taking a three-year program and then looking at it in an isolated quarter, but I can see the long-term returns over the next couple of years and what we're trying to do, the evidence and the things that we're trying to do, and more importantly, the pattern recognition of everything we've done across our careers that says we're on the right track.
Speaker Change: Thank you. Thank you.
Speaker Change: Okay, super. Thank you, Steve. And then maybe just as a quick follow up, or just point of clarification. So you guys have adjusted EBITDA margins close to 9%. I believe that just with the disclosures that you provided on IT Savvy, EBITDA margins are around 7%. So you guys talked about this asset being dilute, excuse me, accretive immediately. Can you just help us understand some of the math that you're getting to that accretion in terms of the revenue synergies? I know you allude to some cost synergies, but if you could just kind of in totality help us understand the assumptions around this being accretive, that would be super helpful. Thank you.
Speaker Change: Yeah, Eric, I will give you some insight on the ITCV, you know, the size of the acquisitions of revenue, and also the expected synergy here. So if you remember in the press release, we mentioned on the we mentioned it in the earnings call as well. There is a company which is around 400 upon 40-50 million revenue LTM on around 30 million EBITDA as they are currently here, we're expecting to deliver around 15 million of synergy here. So when you include this here, then you will see you know what type of EBITDA they can bring on the EBITDA margin versus revenue, which will be above, you know, like 9% here. So it will become accretive immediately versus our current number.
Speaker Change: They are also, from a pure free cash flow point of view, they will be accretive to us there, and obviously EPS will follow directly here. The point I want to flag there, from a gross margin point of view, so business model is different, less gross margin, but also less OPEX.
Speaker Change: So at the end of the day, EBITDA is a matrix to look at. Bottom line, this is what we will see. And it will drive an improvement in our financial that we will capture immediately. So starting as soon as this transaction is closed, which we are expecting to happen quite soon.
Speaker Change: And Xavier, maybe just one final point of clarification, as we incorporate as we incorporate IT Savvy into the model, is that I assume flows through services, maintenance and rentals line, just as we think about our model, I just want to make sure we're kind of incorporating that correctly. Thanks.
Speaker Change: Yeah, we will distribute it in the same way we do it today. So there is an element of hardware, which is going in a different line, but the bulk of the revenue here, David on the team, the IR team can help you, you know, with this one on how we will do the pro forma. But it is very similar to the way we will do it.
Speaker Change: As you know it as well, next year we are planning to have a segment reporting. And this is an important point because at the end of the day, ITCV is just a proof point that our reinvention strategy is at play. With ITCV, this IT or digital services here for the total company will become 15%. So we will move, we'll jump by 5%. Currently, this is 10%. We have an additional 5%. And you remember the trajectories that we have guided for is that during the reinvention program, we want to achieve 20% of revenue which are not print related. And this is literally the first step in this direction, significant step here.
Speaker Change: Awesome. Thank you so much.
Speaker Change: Unknown Speaker
Speaker Change: Once again, ladies and gentlemen, that's star 11 to ask a question.
Speaker Change: As it appears that we don't have any further questions in the queue at this time.
Speaker Change: I'd like to hand the program back to Steve Bandrewczak for any further remarks.
Steve Bandrewczak: Thank you. Recapping today's call, equipment sales fell short of our expectation this quarter and for the year, but we are confident we have identified and addressed the factors that contributed to these shortfalls. We expected an improved equipment revenue trajectory and the pending acquisition of IT Savvy to drive a return to revenue growth in 2025.
Steve Bandrewczak: This quarter reminds us no single performance indicator or quarterly results defines our reinvention.
Steve Bandrewczak: Consistent progress in operating efficiencies, client perception, services signings, and expected Salesforce productivity gains gives us confidence we are on the path to enabling long-term profitable growth through reinvention. Thank you very much for attending this call.
Speaker Change: 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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Speaker Change: Steven Beckel, Steven Bandrowczak, Xavier Heiss, Unknown Executive, John Bruno
Speaker Change: Thank you for standing by, and welcome to Xerox Holdings Corporation's third quarter earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Xavier Heiss.
Speaker Change: Mr. David Beckel, Vice President of Investor Relations, please go ahead, sir.
Speaker Change: Good morning everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation.
David Beckel: Welcome to the Xerox Holdings Corporation third quarter 2024 earnings release conference call hosted by Steve Bandrowczak, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer, and Xavier Heiss, Executive Vice President and Chief Financial Officer.
David Beckel: At the request of 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.
David Beckel: During this call Xerox executives will refer to slides that are available on the web at www.xerox.com slash investor and will make comments that contain forward-looking statements which by their nature address matters that are in the future and uncertain.
David Beckel: Actual future financial results may be materially different than those expressed herein.
Speaker Change: At this time, I'd like to turn the meeting over to Mr. Bandrowczak.
Mr. Bandrowczak: Good morning, and thank you for joining our Q3 2024 earnings call.
Mr. Bandrowczak: The benefits of reinvention are driving improved financial results, albeit at a slower pace than expected.
Mr. Bandrowczak: Positive proof points from the quarter include a second consecutive period of moderating revenue declines
Mr. Bandrowczak: Year-over-Year Improvements in Adjusted Operating Income and Income Margin and More than 100% Free Cash Flow Conversion from Adjusted Operating Income.
Mr. Bandrowczak: Further, the pending acquisition of IT Savvy is expected to improve our mix of revenue from complementary value-add businesses with higher underlining rates of revenue growth.
Mr. Bandrowczak: Summarizing results for the quarter.
Mr. Bandrowczak: Excluding the impact of year-over-year fluctuations in backlog and reductions in non-strategic revenue associated with the reinvention, core business revenue declined low single digits and at a pace consistent with the prior quarter.
Mr. Bandrowczak: Adjusted EPS was 25 cents, 21 cents lower year-over-year due primarily to the one-time sale of non-core business assets in the prior year quarter.
Mr. Bandrowczak: Free cash flow was $107 million.
Mr. Bandrowczak: 5 million lower year-over-year and adjusted operating margin of 5.2% was higher year-over-year by 110 basis points, reflecting the benefits of organizational simplification.
Mr. Bandrowczak: The reinvention of Xerox is difficult, but necessary.
Mr. Bandrowczak: Reinvention is a multi-year journey to sustainably streamline operations while positioning the company to benefit from favorable long-term trends within print, digital, and IT services.
Mr. Bandrowczak: This quarter, print equipment sales fell below expectations due to delays in global launch of two new products and lower-than-expected improvements in Salesforce productivity.
Mr. Bandrowczak: Tactical challenges associated with the timing of Hurricane Helene and increase in competitive activity in certain markets also contributed to the shortfall.
Mr. Bandrowczak: We have analyzed the factors that contributed to the product launch delays and are confident dose factors will be resolved as we recalibrate global product launch plans.
Mr. Bandrowczak: And despite lower productivity improvement than expected in Q3, we are confident ongoing sales efficiency and effectiveness programs will drive productivity sustainably higher in 2025 and beyond.
Mr. Bandrowczak: Shortfalls in equipment sales mask the breadth of reinvention progress made today, much of which is expected to reveal itself in our annuity revenue streams at a sustainably lower cost base over time.
Mr. Bandrowczak: In quarter three we made progress along each of our strategic priorities in furtherance of our long-term reinvention goals.
Mr. Bandrowczak: Starting with the stronger core.
Mr. Bandrowczak: A key tenet of reinvention is closer alignment between our organization and the economic buyers of our products and services.
Mr. Bandrowczak: We realized early in our reinvention that a refined sales coverage model and investment in client perception and Salesforce productivity were required to more efficiently and effectively serve clients' needs in a rapidly evolving print and workplace services landscape.
Mr. Bandrowczak: The realignment of our sales organization has not been as smooth as we would like, but we are seeing encouraging signs that a leaner, more focused sales team can deliver improved client outcomes and more efficiently than in the past.
Mr. Bandrowczak: While sales productivity fell short of our expectation in Q3, it has improved year-to-date through a greater end market focus and a reduction in administrative burden.
Mr. Bandrowczak: We expect the cumulative effect of productivity actions taken to date
Mr. Bandrowczak: Future scale efficiencies, including additional capacity in our dedicated virtual sales center, and other initiatives designed to foster incremental client interactions,
Mr. Bandrowczak: will drive sales productivity higher than Q3 levels in Q4 and into 2025.
Mr. Bandrowczak: through increased client engagement and integrated sales and marketing outreach.
Mr. Bandrowczak: The increase reflects improved client satisfaction and a brand consideration which we expect will drive an increase in purchase intent from clients that understand and appreciate our position in the market as a leading provider of print, digital, and IT workflow efficiency solutions.
Mr. Bandrowczak: We see evidence of the strength of our value proposition with clients most prominently in our services metrics.
Mr. Bandrowczak: In the last 12 months, our revenue retention rate for large client renewals remained above 100 percent, meaning, on average, clients are buying more print and digital solutions from us when renewing long-term service contracts.
Mr. Bandrowczak: In Q3, digital services new business signings were up double digits.
Mr. Bandrowczak: with renewal rates above plan and digital and managed IT services revenue also grew double digits, reflecting sustained signings growth in the current and prior periods.
Mr. Bandrowczak: And the pending acquisition of IT Savvy is expected to drive growth as we leverage an improved, expanded portfolio of IT services to grow penetration with existing clients.
Mr. Bandrowczak: Moving to Cost Improvements
Mr. Bandrowczak: Operating expense decreased more than 50 million year-over-year in Q3 and 125 million year-to-date.
Mr. Bandrowczak: Reflecting the benefits of strategic actions taken in the prior year, current year reductions in headcount associated with the structural reorganization of our business, and ongoing operating efficiencies driven by our global business service organization.
Mr. Bandrowczak: Certain reinvention actions taken this year have resulted in reduction of revenue. For example,
Mr. Bandrowczak: The transition from direct to indirect distribution in certain markets, as is the case with geographic simplification.
Mr. Bandrowczak: All measures taken to simplify our offerings, as was the case with our decision to exit the manufacturing of certain production equipment.
Mr. Bandrowczak: Our intent with these actions is to reduce the level of operating expense that previously supported those activities by a greater amount than the associated reductions in gross profit.
Mr. Bandrowczak: At a total company level, adjusted operating income improved this quarter despite a reduction in revenue.
Mr. Bandrowczak: We expect this trend to continue in quarter four.
Mr. Bandrowczak: In future years, we expect our pipeline of more than 400 million of gross cost savings that have either been actioned but not yet realized in results or have been identified for future implementation to support operating income growth.
Mr. Bandrowczak: Finally, balanced capital allocation.
Mr. Bandrowczak: This quarter we generated more than 100 million of free cash flow, including the benefits of reduction in finance receivables, marking the fourth consecutive quarter of more than 100% free cash flow conversion from adjusted operating income.
Mr. Bandrowczak: We continue to make progress sourcing finance receivable funding agreements outside the U.S.
Mr. Bandrowczak: including a recently signed agreement to sell future finance receivable originations in Canada to DeLag Landon Financial Services Canada Inc.
Mr. Bandrowczak: Balance sheet health improved again this quarter as we reduce our debt balance quarter over quarter.
Mr. Bandrowczak: Dependent acquisition of IT Savvy will be funded in part with debt but is expected to be leveraged neutral in a little more than a year and deliver a return on capital well in access of our weighted average cost of capital.
Speaker Change: I will now hand the call over to John Bruno.
John Bruno: We had higher expectations of global product launches that were impacted by poor product transition planning and execution.
John Bruno: Through our postmortem, we're taking deliberate steps to optimize price and marketing programs by specific go-to-market areas to ensure improved demand-to-supply chain readiness that will complement market-specific launches.
John Bruno: We were essentially flat quarter on quarter on activity basis, and that was not sufficient to offset the reduction in sales headcount.
John Bruno: We have analyzed these points of friction from lead generation, quote to order, and order to install. We've aligned process improvement teams and we are course correcting these areas of underperformance.
John Bruno: We are seeing the positive impact of that work, albeit more slowly than originally forecasted.
John Bruno: While productivity stalled in Q3, we do expect these operational process improvements to drive sales productivity higher in Q4 and into 2025.
John Bruno: We make no excuses for our underperformance in equipment sales, and these operational misses overshadow broader strategic improvements elsewhere. On balance, I'd like to highlight other strategic areas of reinvention where we are seeing the forecasted results of our efforts.
John Bruno: https://www.kenhub.com
John Bruno: Starting with geographic simplification.
John Bruno: This quarter we transition two additional countries, Hungary and Bulgaria, from a direct to an indirect distribution model.
John Bruno: We also signed an agreement to sell our paper business in EMEA to a leading global paper supplier, Intalas. These transactions and others, expected in Q4, allow us to provide partners in EMEA with the products and services clients demand most, and with greater operating efficiency.
John Bruno: https://www.youtube.com.au
John Bruno: Moving to offering simplification, with the recent launches of our A4300 series and refreshes of our A3 AltaLink and PrimeLink products, we are streamlining our offerings in the office and light production categories.
John Bruno: Software enhancements included with the updated Ultralink products eliminate the need for physical installation kits and simplify the installation process.
John Bruno: And our new Primelink machines offer a wider range of engine speeds, features, and capabilities, improving competitiveness and marketability.
John Bruno: The consolidated configurations and enhanced capabilities of these respective products make them more competitive and improve order and inventory management as well as marketing efficiency.
John Bruno: Additionally, we continue to refine our production print equipment portfolio. We've engaged with leading print engine manufacturers to broaden our production print ecosystem. And this quarter, we announced our planned collaboration with Tactical Software to integrate their digital embellishment technology for our clients.
John Bruno: We anticipate revealing more partnerships within the production print segment in the coming year as we invest in a platform featuring services-led and software-enabled products.
John Bruno: For example, our pipeline includes cloud-hosted versions of FreeFlow Core to include an AI framework for workflow automation, application expansions into adjacencies like packaging and labels, as well as SaaS-based offerings.
John Bruno: And finally, operating model simplification.
John Bruno: Our Global Business Service Organization, or GBS, is performing as intended and finding ways to leverage a simpler operating model to drive long-term, enterprise-wide efficiencies. A key drive for long-term reinvention savings will be the optimization of our technology and support infrastructure.
John Bruno: The last quarter, we signed agreements with multiple technology partners to transform our operations with technology-led process improvements.
John Bruno: And building on that announcement, this quarter GVS restructured an agreement with a key business process outsourcing partner, creating a mutually beneficial incentive structure to save costs through operating efficiencies.
John Bruno: This new service structure is expected to yield a double-digit improvement in contracted rates and will serve as a blueprint for driving sustainable organizational savings.
John Bruno: Collectively, these savings are expected to drive more than $700 million of cumulative gross reinvention savings over the next few years, putting us on a path to achieve double-digit adjusted operating income margins over the course of our reinvention.
John Bruno: We will continue to exercise balanced execution in the implementation of these initiatives to minimize operational disruption.
John Bruno: And finally, revenue mix. Beyond cost reduction, an equally important tenet of our reinvention is an improved revenue mix that enables better client outcomes.
John Bruno: To that end, two weeks ago, we announced the acquisition of IT Savvy.
John Bruno: The acquisition of IT Savvy expands our portfolio of IT service offerings and our addressable market coverage.
John Bruno: The acquisition will be funded with cash on hand and a combination of seller notes. We expect to quickly realize more than 15 million of cost synergies as we consolidate IT service operations and adopt IT Savvy's operating platform.
John Bruno: Along with revenue synergies from expanded client penetration, we expect an enhanced IT services offering. This will improve client satisfaction and stability in our core print business as clients are able to realize more value from services partner that can be a one-stop shop for their most critical print and IT infrastructure needs.
Speaker Change: The acquisition is expected to be immediately accreted to earnings per share and free cash flow, and we look forward to welcoming the IT-savvy team to Xerox at the end of this year. I'll now hand the call over to Xavier.
Xavier Heiss: Thank you John and good morning everyone. In Q3, total revenue declined 7.5% in actual currency and 7.3% in constant currency on a year-over-year basis.
Speaker Change: As Steve described, equipment review this quarter fell short of expectations.
Speaker Change: However, the trajectory of post-sales revenue improved, as expected, reflecting growth in digital unmanaged IT services.
Speaker Change: Turning to Profitability
Speaker Change: Growth margin was flat year over year, as higher freight costs, unfavorable equipment mix on lower print volumes, were offset by the beneficial impact of reinvention savings on favorable currency effect.
Speaker Change: Adjusted operating margin of 5.2% was 110 basis points higher year over year due principally to reinvention related cost reduction on lower incentive compensation expense.
Speaker Change: Total operating expenses in Q3 declined $53 million year-over-year, or more than 10%, reflecting headcount on other non-labor expense reduction associated with recent reinvention action.
Speaker Change: Adjusted other expenses met were 55 million higher year over year due to an increase in non-finance interest expense reflecting higher interest rate on a lower portion of debt allocated to our financing business.
Speaker Change: The increase also reflects a gain on the sales of non-core business assets recorded in the prior year.
Speaker Change: Adjusted tax rate of 27.7% compared to 7.2% in the same quarter last year.
Speaker Change: The increasing rate reflects non-recurring tax benefit associated with uncertain tax position on the establishment of a valuation allowance against the current Europe-deferred tax asset.
Speaker Change: Adjusted EPS of $0.25 was $0.21 lower than the prior year, as the benefits of higher adjusted operating income on a lower share count were more than offset by higher non-financing interest expense, a higher tax rate on the prior year gain on sales of non-core business assets.
Speaker Change: Gap loss per share of $9.71 included an after-tax, non-cash, goodwill impairment charge.
Speaker Change: of approximately $1 billion, or $8.16 per share.
Speaker Change: on a charge to tax expense related to the establishment of a valuation allowance of $161,000,000 or $1.29.
Speaker Change: Regarding the goodwill impairment, it was determined, following a sustained period in which our market value fell below book value, that the fair value of our print and author segment has fallen below carrying value.
Speaker Change: The Valuation Allowance was established against deferred tax assets that are not expected to be realized in certain international jurisdictions.
Speaker Change: Let me now review cash flow in more detail.
Speaker Change: Starting with revenue. Q3 equipment sales of 339 million declined around 12% in actual and constant currency.
Speaker Change: The effect of backlog fluctuations in the current and prior year on reinvention action accounted for around 400 basis points of the decline.
Speaker Change: So, the remainder of the decline mainly reflects the delayed global launch of two new products, lower than expected improvement in self-worth productivity, delays in the timing of installation associated with Hurricane Ellen.
Speaker Change: Unfavorable mix on a large production equipment sales in the prior year.
Speaker Change: Total equipment activity increased 17% year-over-year, due largely to entry-level equipment.
Speaker Change: Entry revenue declined despite higher installation due to an increase in the mix of low-end black-and-white multifunction printers.
Speaker Change: Mid-range installations were slightly lower year-over-year, but revenue declined faster than installations due to unfavorable A3 product family mix.
Speaker Change: IN revenue decline reflects the ongoing evolution of our production print portfolio on offering rationalization action taken this year.
Speaker Change: Post-sales revenue of $1.2 billion declined mainly 6% in actual and constant currency, a roughly 200 basis points sequential improvement.
Speaker Change: Post-sales revenue declined 2% in actual currency, reflecting lower activity, partially offset by double-digit growth in digital and managed IT services revenue, as well as higher services prices.
Speaker Change: Consistent with past quarter, I will provide additional commentary to help clarify underlying trends in our core businesses, which includes the effect of backlog fluctuations on reinvention action.
Speaker Change: For Q3, lower cells of non-strategic paper, IT endpoint device and decline in finance revenue, reflecting the change in our finance reservoir strategy, contributed around 200 basis points to the decline.
Speaker Change: Other strategic actions taken to simplify our business and improve profitability, including geographic and offering simplification, contributed around 200 basis points to the decline.
Speaker Change: Finally, the effect of equipment backlog fluctuations in the current and prior year quarters contributed less than 100 basis points to the year-over-year decline in total revenue.
Speaker Change: When these impacts are removed, total revenue declines low single digits in actual currency consistent with the prior quarter.
Speaker Change: Let's now review Cash Flow.
Speaker Change: Pre-cash flow was $107 million, lower by $5 million year-over-year.
Speaker Change: Operating cash flow was $116 million, $8 million lower than the prior year quarter due to lower contribution from working capital on higher pension payments, partially offset by higher adjusted operating income on cash from finance receivables.
John Bruno: Unknown Executive, John Bruno
John Bruno: Investing activities were a use of cash of 7 million compared to a source of cash of 25 million in the prior year, largely reflecting a prior year's sales of non-core business assets.
John Bruno: Financing activity consumed $74 million this quarter, reflecting $42 million of net debt repayment on dividend of $36 million.
John Bruno: Turning to segment.
John Bruno: In Q3, XFS revenue was down around 10% year-over-year due to lower finance income on other fee revenue associated with a decline in our finance receivable balance, partially offset by higher commission from the sales of finance receivable assets in line with our forward flow strategy.
John Bruno: XFS finance receivable balance declined roughly 3% sequentially on 23% year-over-year in actual currency, mainly due to XFS' change in strategy to return its focus to captive-only financing solutions.
John Bruno: Q3 XFS segment profit increased by $9 million as a reduction in bad debt expense on lower operating expenses more than offset reductions in gross profit associated with lower revenue.
John Bruno: Print-on-author revenue fell roughly 7%, and segment profit increased by around 5% for the reasons previously mentioned.
John Bruno: focusing on capital structure.
John Bruno: We ended Q3 with 590 million of cash, cash equivalents and restricted cash.
John Bruno: Around $2 billion of the remaining $3.3 billion of outstanding debt support our finance assets, with the remaining debt of $1.3 billion attributable to the non-financing business.
John Bruno: I now provide an update on re-invention settings.
John Bruno: For 2024, we expect to realize close to 200 million of incremental growth cost savings.
John Bruno: Since the prior quarter, we have operationalized an additional $20 million of savings, much of which will be realized in 2025.
John Bruno: We maintain a pipeline of more than 400 million of gross cost savings that are expected to be realized by 2026, with around 125 million related to actions already implemented or expected to be implemented in the near term.
John Bruno: Finally, I will address guidance for the remainder of the year and comment on expectations for 2025.
John Bruno: All 2024 commentaries exclude the effect of the pending acquisition of ITCV.
John Bruno: For revenue, we now expect a decline of around 10% in constant currency versus a decline of 5 to 6% in constant currency previously.
John Bruno: Around 75 basis points of the decrease in guidance is attributable to incremental effects associated with intentional reduction in non-strategic revenue.
John Bruno: The remainder of the decline reflects the delayed launch of two new products on lower than expected self-force productivity improvements.
John Bruno: Full-year revenue guidelines now include around 625 basis points of effect from non-recurring headwinds associated with backlog fluctuations in the prior year and current year, reduction in non-strategic revenue, and other reinvention actions.
John Bruno: For the year, the roughly 4% of expected year-over-year decline in core business revenue indicates a mid-single-digit decline in normalized equipment sales and a low-to-mid-single-digit decline in normalized post-sales revenue.
John Bruno: We expect a return to revenue growth in 2025, supported by the inclusion of revenue associated with a pending acquisition of IT savings, new product launches, improved sales productivity, and growth in digital and IT services.
John Bruno: Inorganic revenue benefits from ITCV are expected to more than offset reduction in revenue associated with ongoing reinvention action, as the impact of strategic reduction in revenue are expected to be lower in 2025 than they were in 2024.
John Bruno: For full year adjusted operating income margin, we now expect a margin of around 5% versus our prior outlook of at least 6.5%.
John Bruno: Reflecting the effect of gross profit decline associated with a reduction in our equipment revenue outlook and, to a lesser extent, delays in the implementation of certain cost reduction initiatives to 2025.
John Bruno: Due to lower than expected revenue in 2024, we no longer expect to grow adjusted operating income $300 million above 2023 level by 2026.
John Bruno: However, we continue to expect growth in adjusted operating income on a return to double-digit adjusted operating income margin over the course of our reinvention.
John Bruno: In 2025, we expect growth in adjusted operating income or margin supported by a return to revenue growth on the benefit of additional growth cost savings associated with cost reduction action implemented in 2024 or expected to be implemented in 2025.
John Bruno: Finally, full year free cash flow guidance was reduced from at least $550 million to a range of $450 to $500 million, reflecting the previously noted reduction in adjusted operating income guidance.
John Bruno: In summary, 2024 has presented unexpected challenges.
John Bruno: However, in Q3, we grew adjusted operating income on margin year-over-year despite a reduction in revenue.
John Bruno: A trend we expect to continue as we implement further reinvention action aimed at simplifying our organization on driving closer alignment to the economic bias of our products and services.
John Bruno: We'll now open the line for Q&A.
Speaker Change: Certainly, and our first question for today comes from the line of Ananda Bharuha from Loop Capital. Your question please.
Ananda Bharuha: Yeah, hey guys, good morning and thanks for taking the question. Um, I guess, I guess, too, if I could...
Ananda Bharuha: on the product. The first is on the product delay and on the sales productivity.
Speaker Change: Unknown Speaker ...dynamics that you guys talk to, and you did give a lot of good context around it. I guess the question is ...
Speaker Change: Can you if you if you mentioned I missed it like specifically on the product delay, what was it that you guys
Speaker Change: saw as occurring.
Speaker Change: And I guess, you know, sort of in that context, you know, what did you learn that can have, that can sort of have, have a, you know, sort of these dynamics not pop up again. And then I guess also on the sales productivity, any greater specificity around, you know, what actually occurred that surprised you guys?
Speaker Change: that sort of led to the diminished sales productivity. And I have a quick follow up as well, thanks.
Steve Bandrewczak: Hey, and I'm just Steve. Thank you for the question
Speaker Change: and I'll turn it over to John in a minute for some specifics, but I just want to remind you, look, the reinvention is a multi-year journey.
Speaker Change: and inside that multi-year journey the ultimate strategy is to get to sustainable revenue growth and get to double-digit operating income.
Speaker Change: As part of that, we've made some progress in each of the areas. If you think about what we're trying to do in our revenue mix, IT Savvy gives us a great platform for seeing IT services growth over the next couple of years. We also saw good impact of operating expense reduction, quarter over quarter, and year over year. My point is that inside a reinvention, we have multiple work streams.
Speaker Change: which will exceed, some of which will be set back, but we will ultimately get to our end goal.
Speaker Change: specifically to the product launch and to revenue in terms of productivity, we made very large organizational changes at the end of Q1, very specifically realigned almost 6,500 new jobs in terms of new alignment, and we had a very large reduction in our workforce, which is basically the premise of what caused the reduction.
Speaker Change: We saw quarter over quarter productivity improvement from Q1 to Q2 and from Q2 to Q3.
John Bruno: John, other call you want to give? Sure. Ananda, let me go start with the product transition issue first. It's a forecasting issue more than anything else. When we look at carried inventory of predecessor products, the timing of the release of new products, and the forecasting of that mix, there's a lot of intricacies between the demand to supply signaling.
John Bruno: We had higher expectations that we were going to flush through the older product and then the timing of the release of the new product not only to our direct business but also into the channels.
John Bruno: As that started to get subsequently through the quarter, we would have a decision to make and the decision clearly what we don't want to do is leave a lot of working capital and inventory behind. We want to sell through and make those transitions.
John Bruno: That is a skill and something that we typically do as a company better than we perform, and a lot of that is attributed to the points that Steve has made. We just did not have a really good sense.
John Bruno: of the timing of each of those issues and it left us with a little bit of time towards the end of the court to actually make the effective change.
John Bruno: At the start of the quarter, we were more bullish that in the last six weeks, we would have a higher ramp than we actually received. And so that really comes down to the transition period between the demand to supply signaling. And then I think Steve addressed the issue on Salesforce productivity. You know, coming out of, we look at it from a quarter bearing sales headcount perspective.
John Bruno: And, you know, we were down double digits in the number of sellers year on year coming into the year. And we've settled that down with new territory assignments, new remapping, new account coverage and all of that. And as all of these...
Speaker Change: Unknown Speaker That really also comes down to the forecasting and the timing and the knowledge of your clients. And a lot of that we saw, which was a more aggressive view of where we thought equipment sales revenue would be at the start of the quarter, and then as the quarter continued to progress.
Speaker Change: We were taking a lot more of our upside and replacing it with some of the forecasts at the beginning of the year Which is a good thing on balance
Speaker Change: But when you're as close to the pain as we are, you just need a few misses here and there and it's the difference between tens of millions of dollars and nothing more on that when you really come down to it on a quarterly basis.
Speaker Change: So really what gives me the confidence is, is when I look at that, you know, we had, we did not have a good Q1, as you know, Q2, we had a much better productivity basis from an activity level. When I looked at Q3, I had expectations that Q3 was going to build off of Q2, and it was essentially flat over Q2. And so we dissected the programs necessarily to what caused that flatness, we certainly didn't go down, but it kind of gives me confidence that we've stabilized. So now it's all about the incremental activities that we're doing around the sales force, demand generation, and all the forecasting accuracy that gives us the confidence that we're moving forward.
Speaker Change: Yeah, I know that. I also would like, yep, I know that. I also would like to...
Speaker Change: So you know that our revenue is made of ESA, which is roughly 25% of the total revenue. 75% is coming from post-sales.
Speaker Change: So when you look at during this year the ESL revenue trajectory from a growth point of view, quarter over quarter, sequential growth, the trajectory has improved. Despite the challenges that John and Steve have articulated in Q3, it was still an improvement versus what we have seen in Q1 and Q2. On the post-sales revenue, we're also pleased to see that the post-sales revenue stream, despite and related to all the reinvention activities that we are driving, is improving quarter over quarter. So the key message behind this is the reinvention play is at play currently, and we are delivering specifically on the post-sales line. The nature of the equipment revenue is that it could be cyclical, and here we have an example and we face it during quarters.
Speaker Change: That's that's all super useful context and I really appreciate it. So just quick follow-up to that and then I'll see you before. Any any sense of sort of macro or the general market demand backdrop?
Speaker Change: Yeah, no, that would be minimal. I would say minimal, mostly just execution issues. About the same. I'd love to blame the macro. It was, it's about the same.
Speaker Change: Got it. Thanks guys.
Speaker Change: Thank you. And our next question comes from the line of Eric Wittring from Morgan Stanley. Your question, please.
Eric Wittring: Great, thanks so much for taking my questions this morning. I have two if I may. Maybe just to start, Steve, you know if we step back, you guys are doing a lot, right? You're exiting businesses, you're changing the delivery model in several regions.
Eric Wittring: You're reducing headcount, you're launching new products, you're acquiring new businesses, and this is all happening at the same time while your end markets do face demand headwinds. And, you know, that's tough. And I credit you for taking all these actions. But as I think about kind of your preliminary comments on 2025, you know, you're setting an expectation for revenue growth, operating income growth and margin expansion. And I'm just wondering why, you know, you think that is the right expectation to set today, given everything that's happened in the background and obviously given some of the challenges that you run into this year, which some, you know, you could theoretically face next year as you continue to go through this reinvention. So just maybe the question is, amidst all of these
John Bruno: Unknown Executive, John Bruno
John Bruno: So thanks for the question. I'll give you a couple of things. First of all, it's the management team that's done it over and over through the history of our careers. We've got pattern recognition that the things that we've put in place, we can see the future. Things you can't see internally that we see around the program execution, around the signs of what we're building and how we're executing. So
John Bruno: Overall, if you think about the reinvention, very similar to Onyx, by the way, where we had, you know, 10, 11 work streams.
John Bruno: You see seven or eight, they're going to exceed three or four, they're going to under exceed expectations, but overall, you deliver the end results.
John Bruno: And so what we're seeing is the strategical things that we're doing go back to you know What we did with our free cash flow what we did with park all these things are very specific to set up
John Bruno: The Strategic Long-Term Revenue Growth, and get us to the operating income that we desire.
John Bruno: As we look at each of the work streams, we're seeing it on the expense line, the cost coming out, you see it definitively, you see on the acquisition, working that in the background to be able to acquire IT Savvy.
John Bruno: You see what we're doing in terms of dramatically changing our sales coverage and what that's doing in terms of, you know, building new pipeline, building new customers. And so I'm confident that what we're doing is working. It's not linear and it's not straight. That's the challenge with trying to do this, taking a three-year program and then looking at it in an isolated quarter. But I can see the long-term returns over the next couple of years and what we're trying to do, the evidence and the things that we're trying to do, and more importantly, the pattern recognition of everything we've done across our careers that says we're on the right track.
John Bruno: https://www.youtube.com
Speaker Change: Okay, super. Thank you, Steve. And then maybe just as a quick follow up, or just point of clarification. So you guys have adjusted EBITDA margins close to 9%. I believe that just with the disclosures that you provided on IT Savvy, EBITDA margins are around 7%. So you guys talked about this asset being dilute, excuse me, accretive immediately. Can you just help us understand some of the math that you're getting to that accretion in terms of either revenue synergies, I know you allude to some cost synergies, but if you could just kind of in totality, help us understand the assumptions around this being accretive, that would be super helpful. Thank you.
Speaker Change: Yeah, Eric, I will give you some insight on the ITCV, you know, the size of the acquisitions of revenue, and also the expected synergy here. So if you remember, in the press release, we mentioned on the we mentioned it in the earnings call as well. There is a company which is around 400 on 40-50 million revenue LTM on around 30 million EBITDA as they are currently here. We're expecting to deliver around 15 million of synergy here. So when you include this year, then you will see you know what type of EBITDA they can bring on the EBITDA margin versus the revenue, which will be above, you know, like 9% here. So it will become accretive immediately versus our current number. They are also from a pure free cash flow point of view, they will be accretive to us.
Speaker Change: here, and obviously EPS will follow directly here. So a point I want to flag there from a gross margin point of view, so business model is different, less gross margin, but also less OPEX.
Speaker Change: So at the end of the day, EBITDA is a matrix to look at. Bottom line, this is what we will see. And it will drive an improvement in our financial that we will capture immediately. So starting as soon as this transaction is closed, which we are expecting to happen quite soon.
Speaker Change: And Xavier, maybe just one final point of clarification. As we incorporate IT Savvy into the model, is that, I assume, flows through services, maintenance, and rentals line, just as we think about our model? I just want to make sure we're kind of incorporating that correctly. Thanks.
Xavier Heiss: Yeah, we will distribute it in the same way we do it today. So there is an element of hardware, which is going in a different line, but the bulk of the revenue here, David on the team, the IR team, can help you, you know, with this one on how we will do the pro forma. But it is very similar to the way we will do it. As you know it as well. Next year, we are planning to have a segment reporting. And this is an important point, because at the end of the day, ITCD is just a proof point that our reinvention strategy is at play. With ITCD, this IT or digital services here for the total company will become 15%. So we will move, we'll jump by 5%. Currently, this is 10%. We have an additional 5%. And you remember the trajectory that we have guided for.
Xavier Heiss: is that during the re-invention program, we want to achieve 20% of review, which are not print related. And this is literally a first step in this direction, significant step here.
Speaker Change: Awesome. Thank you so much.
Speaker Change: Once again, ladies and gentlemen, that's star 11 to ask a question.
Speaker Change: It's a pleasure to be here. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker Change: Thank you for watching. See you next time.
Speaker Change: As it appears that we don't have any further questions in the queue at this time, I'd like to hand the program back to Steve Bandrowczak for any further remarks.
Steve Bandrowczak: Thank you. Recapping today's call, equipment sales fell short of our expectation this quarter and for the year, but we are confident we have identified and addressed the factors that contributed to these shortfalls.
Steve Bandrowczak: We expected an improved equipment revenue trajectory and the pending acquisition of IT Savvy to drive a return to revenue growth in 2025.
Steve Bandrowczak: This quarter reminds us no single performance indicator or quarterly results defines our reinvention.
Steve Bandrowczak: Consistent progress in operating efficiencies, client perception, services signings, and expected Salesforce productivity gains gives us confidence we are on the path to enabling long-term profitable growth through reinvention. Thank you very much for attending this call.
Speaker Change: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.