Q2 2019 Earnings Call

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Good morning, and welcome to the Xerox Corporation second quarter 2019 earnings release Conference call hosted by Josh Byzantine Vice Chairman and Chief Executive Officer.

He is joined by Bill Osbourn, Chief Financial Officer.

During this call Xerox executives will refer to slides that are available on the web at www Dot Xerox stock comp Fourq slash investor at the request of Xerox Corporation. Today's conference call is being recorded other recording and or Rebroadcasting of this call are prohibited without the express permission of Xerox.

After the presentation, there will be a question and answer session to ask your questions at that time. Please press star one at any time. During this call you can withdraw your question by pressing the pound key during this conference call Xerox executives will make comments that contain forward looking statements, which by their nature address matters that are in the future and are uncertain.

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

At this time I would like to turn the meeting over to Mr. Byzantine Mr. Byzantine you may begin.

Good morning, and thank you for joining our Q2 2019 earnings call.

This quarter, we delivered improvements in earnings per share adjusted operating margin and free cash flow largely underpinned by our enterprise wide transformation initiative project own it.

These results have enabled us to increase planned investments for the second half of the year to advance our revenue roadmap.

We expect to see returns from these investments over the near term.

But in light of the performance in the first half.

We believe it is more prudent to adjust our full year revenue guidance down to approximately 6% at constant currency.

While maintaining all of our other full year guidance measures.

Adjusted operating margin for the quarter was 12.7% up 170 basis points year over year.

Margin expansion contributed to adjusted EPS of 99 cents in the quarter up 19 cents or approximately 24% year over year.

We are pleased with our cash performance, we generated $313 million of operating cash flow in the quarter, an increase of $78 million from a year ago.

Free cash flow in the quarter was $297 million up $94 million year over year.

While we continue to see improvements in these three key areas revenue for the quarter was down 7.2% at constant currency year over year.

Results were due to weaker economic conditions in western Europe , and certain developing markets and continued operational impacts in the United States, we identified last quarter, albeit improving as the quarter went on.

Our strong margin expansion year to date has allowed us to increase the level of investments we plan for the year from approximately 32 cents of EPS to approximately 40 cents of EPS.

These increased investments will primarily be in support of revenue generating initiatives.

With anticipated annual gross savings of at least $640 million project ownership is offsetting some of the impact of revenue declines.

This initiative is helping us to simplify our business drive a culture of continuous improvement and free up capital to reinvest in the business.

Planning has begun for 2020 programs that will continue this focus.

We are on schedule with transitioning our shared services operations to a managed service provider, which will reduce costs and make it easier to do business with Xerox.

With a large scale transformation like this we anticipated there will be some impact on operations, but we remain focused on responding to and mitigating risks associated with this transition.

We are on track to stand up our automation center of excellence to leverage robots to streamline repetitive tasks such as responding to break fist request via the call Center.

Today, we have 150 Bucks and have plans to add more by year end.

One other key component of project on it is rationalizing our supply chain.

Our supply chain operation to become more efficient and inventory levels have improved but theres more work, we can do here.

We are making several upfront investments to grow our market and wallet share in large accounts and within the small to mid size business market.

We see a significant opportunity for ITC services within the SMB space.

Today, three of our Xerox business solution cores offer IP services to clients such as the 10th largest school district in the United States.

With the competition fragmented and often regional xps is well positioned to capitalize on this growing market.

We are ramping up our operations and capabilities to expand ITC services to about a third of our xps cars by the end of the year and we will roll it out to the rest of the cars and Europe in 2020.

This month, we started working with American express to market to their small business card members through the Amex offers program and other channels to further increase our penetration of the SMB market.

This multi month multichannel digital program focuses on increasing business owners awareness of dark you share exemplify, our connectkey apps and workplace Multifunction printers.

In June we announced a multi part agreement with HP, which opens up additional revenue opportunities and new routes to market.

Starting in 2020, HP will make dark you share flex xerox's cloud based content management platform available on Pcs and tablets sold to Smbs in the United States. Another component of this agreement will allow us to source toner, which will add volume to our toner plant.

Growing our software and services business is key to reversing our revenue trajectory for the long term.

And we are gaining traction with several new clients, such as Morgan Stanley and Motorola with additional major deals in the pipeline.

With Morgan Stanley we offer the bank a unique value proposition to help drive the digital transformation with intelligent workplace services.

Which adventures traditional managed print services with a suite of tools, including analytics Digitization and connect key technologies that boost efficiency security and productivity.

As the only OEM provider with fed ramp authorization zebra continues to lead the industry in security.

This differentiator is a driver of new opportunities, particularly with public clients like the county of San Diego and Commonwealth of Massachusetts.

This momentum with the public sectors carrying over into the third quarter with large contract renewals, which clients such as the state of Texas already secured.

This quarter, we announced several new products that increase our ability to capture incremental volume and expand our presence in the emerging markets.

We launched an embellishment kit for our high end Athree products in EMEA.

What is unique about this technology is we can turn to a standard office printer into a device that can print materials with metallic's similar to the more advanced era. This it allows us to offer this technology at an aggressive price point.

We have a big installed base, which allows us to up sell our clients and drive incremental volume.

This add on kit allows them to charge a significant premium over traditional print.

We will continue to leverage our first mover advantage on other surrounding products in the coming quarters.

Last week, we introduced a new suite of black and White Multifunction printers, which features similar to our high end office devices.

These products enhance small office mobility without compromising image quality security or the user experience.

We continue to lead in market share and the high end production category. The momentum we built with year that production press and brand HD production Inkjet press carried through from the first quarter, enabling us to remain nearly flat for the quarter.

Cut sheet production inkjet remains an attractive category for us.

At the end of June we announced our newest inkjet press, the bulk terminal HF, which replaces the brand.

We engineer and manufacture this press from end to end.

Our bulk terminal, we believe leapfrog the competition.

It is half the size uses half the power consumption and significantly reduces clients' total cost of ownership.

It also is the first press and its clients to leverage automated intelligence and deliver true HD image quality.

We remain focused on our innovations for the future, which includes three D printing and digital manufacturing digital packaging and Trent.

Sensor and services for the identity and AI workflow assistance.

Some of our innovations such as iron T. sensors have moved into demonstration phase.

We started working with con Edison to pilot using our fiber optic sensors on Transformers in Queens, New York. These centres allow companies to monitor assets and determine maintenance needs, reducing the need for costly physical site inspections.

We are testing similar technology on bridges with Vick track the owner of the Victorian Government rail transport land in Australia.

With infrastructure deteriorating across significant regions of the world. We are looking at ways to scale. This technology and use it on critical assets. We are now working to identify and prioritize high value target applications with the broader strategy and building our focus business cases to define the areas, where we will target aiotv sensors that deliver transformative data insights.

Our heightened focus on cash is driving results free cash flow in the second quarter was $297 million up $94 million year over year.

Our June year to date free cash flow was $508 million, an increase of $107 million from the prior year.

We repurchased 197 million of our shares in the quarter and distributed 60 million in dividends.

Year to date, we have repurchased 300 million of our shares consistent with our plan for the first half.

We expect to repurchase at least 600 million of our shares for the full year with the remaining share repurchases to be weighted towards the end of the year.

Over the last year, we have strengthened our balance sheet, which enables us to look at additional M&A opportunities.

While we don't comment publicly about potential targets, we have a broad M&A pipeline that is designed to support our strategic initiatives that pipeline includes tuck in acquisitions to help us penetrate further into the growing SMB market like the two multi brand dealer acquisitions, we announced last month.

We also are continuing to evaluate strategic alternatives for our leasing business.

We said all along that this is a good and an important part of our business and there may be no change. However, we are evaluating options to make even better use of our balance sheet.

We are taking our time to get this right for us for a business and for our clients now I'd like to hand, it over to bill to cover our financial results in detail.

Thanks, John .

Looking at our financial results, we continue to see improvements in adjusted operating margin free cash flow and earnings per share margin improvement reflects the progress for project only initiatives that are now mature programs delivering the results we expected.

Combining adjusted operating margin improvement with benefits from higher equity income and lower shares resulted in strong adjusted earnings per share expansion up 24% year over year.

While revenue for the quarter was below expectations as John discussed given our first half results. We are adding to planned investments. This year from the initial plan 32 cents in EPS to approximately 40 cents. The majority of these additional investments are targeted to improve our revenue trajectory for the balance of 2019 and beyond.

Importantly, we are maintaining our full year adjusted EPS guidance at $3.80 to $3 or 95 cents in annual free cash flow of 1 billion to 1.1 billion. Although we now expect full year revenue to be down in the range of approximately 6% at constant currency.

Let me emphasize that we remain focused and committed to transforming the business and are making investments for the long term, while sustaining a profitable business in the near term.

I will now review the income statement in more detail.

Total revenue declined 7.2% in constant currency and 8.8% at actual currency.

The constant currency decline was in line with what we experienced in the prior quarter, but as mentioned was below our expectations.

We saw areas to performed well such as high end color systems fueled by continued demand for our year to date production press and areas, where our new revenue initiatives are starting to gain traction such as in our software and services business and our win rate for new business signings improved in the quarter.

However, we did see continued impact from the ongoing organizational changes as a part of project only transformation actions, which we discussed last quarter as well as some weakness in EMEA in certain developing markets I'll discuss revenue in more detail in a moment.

Turning to profitability adjusted operating margin of 12.7% improved 170 basis points year over year.

And drove 14 million in adjusted operating profit growth as the decline in revenue was more than offset by benefits from project to own it and other investments as well as higher prior year, one time costs associated with the termination of an IP project and the accelerated depreciation associated with the exit of a surplus real estate facility.

Gross margin at 39.2% declined 70 basis points year over year with approximately half of the decline attributed to transaction currency and the remainder due to lower mid range equipment sales as well as targeted price actions on certain large multi year contracts were initial years are less profitable.

These impacts were partially offset by cost productivity project only drove a 130 of the 220 basis points improvement in ESG in a year over year, while the aforementioned prior year onetime cost contributed to 90 basis points of improvement.

R&D was 3.8% of revenue, which was 20 basis points lower year over year.

The decline was partially due to timing of projects that are expected to ramp later this year.

Below operating profit equity income of $34 million increased $15 million year over year, primarily reflecting benefits to Fuji Xerox from restructuring actions other expenses net of $38 million was $1 million better than the prior year, primarily as a result of $15 million of lower pension expense in 2019, and our retiree health plans, which was offset by the impact of a $16 million gain on an asset sale in the prior year.

The lower pension expense was excluded from adjusted EPS performance and the prior year asset sale gain was included in adjusted EPS.

Overall adjusted EPS of 99 cents was up 19 cents from the second quarter of 2018 due to improved operations share buybacks higher equity income and a lower tax rate GAAP EPS of 77 cents was 35 cents or 83% higher compared to the second quarter of 2018, reflecting the higher adjusted EPS as well as lower transaction related costs in 2018.

We adjust GAAP EPS for restructuring and related costs, including restructuring related to Fuji Xerox amortization of intangible assets transaction costs and related costs associated with the terminated Fuji transaction non service retirement related costs and the tax on as these adjustments.

In Q2, we reported $37 million of restructuring and related costs, bringing the first half total to $149 million and we continue to expect approximately $225 million our restructuring charges for the full year.

Moving now to slide seven which is our cash flow.

Last quarter I told you that we got off to a good start in cash and I'm again, very pleased with our strong cash performance this quarter.

We generated $313 million of operating cash in the quarter, which is up $78 million year over year and free cash flow was $297 million up $94 million.

Key cash flow drivers in Q2 included a lower use of cash from accrued compensation $11 million in Q2 2019 versus $69 million in Q2 2018.

As we move the timing of our payment of the 2018 annual bonuses in Q1. This year, whereas this was in Q2 event last year.

And $18 million source of cash from working capital, reflecting lower use of cash in inventories, which more than offset the decrease in cash flow from accounts receivable.

Lower inventories reflect lower sales volumes and improved inventory management and the decrease in cash from accounts receivable is due to timing of collections.

Contributions to defined pension plans of $36 million was nearly flat year over year, and we had a higher use of cash from restructuring related payments, including $48 million of restructuring related payments reported in other current and long term liabilities, which were primarily related to severance payments associated with the shared services arrangement recently entered into with Hcl.

Restructuring and related payments were $70 million in the quarter or $32 million higher year over year.

We continue to expect approximately $200 million of restructuring related payments in the full year.

Through the first half of 2019, we generated $539 million of operating cash flow and $508 million of free cash flow.

Capex of $31 million through June is lower than initially anticipated and is likely to be less than a $150 million originally guided for the full year. Accordingly, we are likely to be at the higher end of our free cash flow range of $1.0 billion to $1.1 billion full year.

Lastly, within financing cash flows we returned $257 million to shareholders in the second quarter, consisting of $60 million in dividends and $197 million in share repurchases. During the first half, we returned $423 million to shareholders, including $300 million of share repurchases and we expect repurchased a total of at least $600 million of shares in 2019.

Important to note that we expect the incremental $300 million of share repurchases to be weighted towards the end of year in line with our free cash flow generation.

We ended the quarter with $776 million of cash, which reflects the use of cash in Q1 to repay approximately $400 million in bonds.

Let's turn now to slide eight and I'll review, the second quarter revenue dynamics in more detail.

Second quarter revenue declined 8.8% or 7.2% in constant currency and included a negative 0.6 point impact from the OEM business.

Results reflect continued impact from the operational changes as well as weaker macroeconomic conditions in Europe in certain developing markets.

Looking at details this quarter I'll start with equipment, which was down 10.2% or 9% at constant currency.

The decline was driven by lower sales of our entry and mid range products, which are the product categories. Most impacted by the organizational changes, particularly in our Xps organization.

As we discussed last quarter, we took actions in late 2018 and in Q1 2019 to make the organization more agile and better fit to serve the SMB market, both our current customers and the market opportunity to expanded SMB, while the actions continue to negatively impact Q2 revenue. We are seeing some stabilization in the operations evidenced by improvement in the rate of revenue decline in the latter part of the quarter.

In addition, weaker economic conditions in EMEA in certain developing markets impacted sales of mid range devices in those regions, where we experienced delays in large deal closings.

In high end, we saw continued demand for our year to date production press and higher installs of our Brenda inkjet cut sheet system.

We very recently announced a new system for the inkjet cut sheet space. The Bowl Toro HF Inkjet press that has already been well received and we expect it to be a tailwind as we move through the second half of this year.

The growth in these areas, partially offset the declines in black and white installs, which is consistent with market trends as well as the pressure on Iran.

Wholesale revenue declined 6.6% in constant currency, which was a slight improvement over the rate of decline in Q1 within wholesale we saw the contractual component declining on trend and similar to the rate of the decline in Q1, reflecting the impact of lower page volumes prior quarters equipment sales declines and a higher mix of lower usage products.

We also saw transactional supplies revenues declining at a rate similar to last quarter, the higher than the trend in the prior year.

The declines were mostly in our developing market regions and in our indirect channels in the us and reflect the lower page volume trends as well as the timing of sales within our two tier distribution channel.

Services revenue, which is included as a part of both equipment sale and post sale revenue streams declined 4.1% at constant currency and is impacted by the factors mentioned above we expect improvement in services as we continue to invest in coverage and new offerings.

To wrap up on revenue it is important to understand why the second half performance will improve.

As I mentioned earlier the rate of decline improved in the latter part of the quarter and we expect this trend to continue as we make progress toward fully stabilizing the business. Following the implementation of important strategic initiatives to transform the company for the long term also within EMEA. We expect certain deals that were delayed in Q2 will be finalized within the second half of this year.

In high end production, we have continued demand for our year to date production press and just launched a new press the Bell Toro HF.

We also expect OEM will be less of a drag for the second half of the year at around a half a point.

Importantly, we are making investments in future revenue.

John reviewed several of the investment areas and highlighted partnerships new products and programs that underpin the path to improve our revenue in the second half and beyond.

Turning to slide nine as mentioned earlier adjusted operating margin of 12.7% increased 170 basis points year over year, while adjusted EPS of 99 cents increased 19 cents or 24% year over year. Another strong quarter. This positive trend reflects the progress of project owner programs, which are on track to deliver $640 million of savings in 2019 and to deliver our guidance of 100 to 150 basis point improvement in adjusted operating margin for the full year.

And planning has already begun for 2020 programs. So we'll continue to focus on delivering growth.

For the quarter, our operating results coupled with the growth in equity income and lower shares drove strong earnings. We do not expect equity income will be as favorable year over year in the second half compared to the first half due to accounting adjustment charges at Fuji Xerox in Q1 2018.

We are pleased with the trend in profitability and earnings, which we expect will continue as we see continued flow through from project own it and benefits from the investments we are making on the topline.

Last I will review our capital structure.

We ended the second quarter and $4.8 billion of debt, which is down approximately $400 million compared to year end as we repaid a march bond maturity with cash.

And we had $712 million of cash on the balance sheet at quarter end.

We break down debt between financing and core by first calculating the financing debt by applying a seven to one leverage to our financing assets financing receivables and equipment on operating leases with the remaining debt assumed to be in support of our core business.

In Q2. This calculation resulted in assumed financing debt of $3.3 billion and core debt of $1.5 billion.

Our core net debt was approximately $700 million as of the end of Q2, which was consistent with our 2018 ending core net debt.

Our core leverage at the end of the quarter was less than two times annual free cash flow and thus, we do not see any immediate requirement to reduce our core net debt levels.

As a debt latter reflects we have a December bond maturity of approximately $600 million, we have access to capital sources as well as sufficient liquidity to handle upcoming debt maturities.

Another important element of our capital structure is our pension assets and liabilities.

As of December 31, 2018, our net unfunded position was $1.2 billion, which compared to $1.4 billion as of the end of 2017 and $2.2 billion as of the end of 2016.

And includes approximately $775 million of unfunded pension liabilities, which by design do not get funded.

From a funding perspective, we continue to expect contributions of approximately $140 million in 2019, and believe we are well positioned to have a stable level of pension contributions overtime.

Last I just wanted to briefly talk to our leasing business. This is a good business xerox's finance customers for decades, but as a part of our transformational programs. We are evaluating every part of the business to ensure we are maximizing value for our shareholders. At this time, we are still evaluating options for our customer leasing business and it is premature for us to provide any specifics or speculate on how it will impact our balance sheet.

We remain committed to maintaining a strong balance sheet, which is important to our business I will now hand, it back to John to summarize before we moved here today.

Thanks, Bill in summary, we see strong signs that our long term strategy is gaining traction and that the hard work of many people across our company is paying off.

Xerox is getting stronger and more focused on developing and delivering the technology the businesses large and small will need for years to come we will now open the line for questions and.

Thanks, John before we get to the queue any with John and Bill I will point out that we have in the appendix to our materials additional supplemental reconciliation.

And posted on our Xerox Investor Relations website, a full set of earnings materials.

Operator, please open the line for questions now.

Thank you ladies and gentlemen at this time, if you would like to ask a question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered I wish to move yourself from the queue simply press the pound key and our first question will come flashing and cross of Cross Research. Your line is now open.

Thank you very much.

So I guess I, just want to understand a bit more about what's going on on the topline.

What you saw towards the end of the quarter. How quickly you think some of these the incremental investments you're making will start to run through the model.

Hi, guys because at some point, obviously, you know you can't you can't sort of offset the top line declines with all the cost cuts so.

When you look out a year or two do you still feel comfortable with what you laid out at the analyst day.

I don't know John if you could just sort of talk to.

Your thoughts on the topline.

Yes, Hi, Shannon, we're still focused on the trajectory that we laid out in February and if you think of the revenue side were doing a lot of things whether its expansion in channels I talked about what we're doing with American express even with HP. Both on the dark you show side. Some of the large accounts. We've done we're building a more e-commerce capabilities, we're hiring software sales specialists some of its tactical we're expanding on our servicing and services and these investments while we're putting them in place now some of these will take time like we had discussed back in February but it will provide topline benefits.

Near the end of 19, but also we're expecting the returns to come in 20 and 21 on these.

Yes, just to add on sand.

The investment Sean mentioned, we will see in certain of those some impact in the second half you a lot more in in 2020 beyond led some other thing specifically related to the second half we brought it up on the call can't emphasize enough the rate of improvement. We saw later in the quarter in particular, and xps and the rate of decline and the.

Lessening of the impact of just all the transition that we've gone through.

In the company in connection with project owned it so that that is key and we saw that improvement coming later in the quarter in particular in June we expect that to continue and that gives us confidence and improvement in the second half there were some certain large deals that were delayed in EMEA that we expect to close.

In the in the second half demonstrable impact and then we expect the continued strong.

Demand for on year events, and just launched del Toro to help and then finally, the OEM business I know we've talked about and are on board has been it is lessening the impact in the first quarter and first half.

And Matt, 0.87%, we expect that to be closer to about half a point. So there are various things that give us the confidence in the improvement in the second half revenue trajectory as well as.

The investments we're making.

In the revenues area starting to have some impact in the second half.

Okay. So all of that as you started to see us as the quarter has your July Thirtyth said through the first month of the quarter, you're feeling comfortable.

Yes, Okay and then just.

Curious John you had mentioned.

In the top you think initially on leasing to make better use of the balance sheet.

So im curious what you mean by that I understand you're not going to talk a lot about the leasing business because you're still.

Analyzing what to do there, but what kind of use are you thinking about it.

Obviously acquisition or sorry share repurchase and dividends have been a big focus.

Hi, how are you thinking going forward. Thank you.

Yeah. So John you know, we're not going to comment publicly on.

On it but what I would say is we're focused on also on M&A pipeline, that's going to support our strategic initiatives and we've done a few tuck ins Weve also done the acquisition of either on a threed metal printers and in each case, we're going we're just going to take a disciplined approach that will drive the highest that's.

Again, we're not going to comment on X Ray we're not we cannot provide details on what that would look like because we havent set a deadline for making a final determination. It's an important decision and we're taking a methodology to approach those focused on doing the appropriate amount of due diligence on it so.

And.

And just to reiterate I mean, it is premature there may or may not be.

Leasing transaction.

Use of proceeds.

A key question if there were to be one that would be addressed.

Appropriately, but we are committed as we said in prepared remarks to maintaining a strong balance sheet for the company it's important for us.

In in our growth plans from a topline perspective.

Great. Thank you very much.

Thanks Shannon.

Thank you and our next question will come from the line of Matt Cabral with Credit Suisse. Your line is now open.

Yes. Thank you.

Just on the partnership you announced with HP in the quarter wondering if you could talk a little bit more about how the agreement came to be just what you see as the biggest benefit and just how we should think about the ramp of the relationship from here.

Oh, Yeah I would look this is a multifaceted arrangement.

And it's really going as it helps us on loan growth opportunities. So if you think of what we're doing we're diversifying our supply chain.

We will source the following the entry three products from HP, we're adding volume to our toner operations, which we have.

We're broadening our IP portfolio, because we will become a specialist in hps partner for this program and we're expanding our software presence, where they will make Doc you share flex our cloud enabled content available for all their SMB Pcs. So we're looking at this as a new channel of opportunity for revenue, while diversifying our supply chain I wouldn't read and I wouldn't read more than that into it. It's really just the partnership that made sense for us and makes sense for HP.

Got it and then.

On free cash flows you're up about a 100 million through the first half of the year versus last year I think even at the high end, though you are still guiding for less than that on a full year basis. Just wondering if you could help us think through that the cadence of cash flow in the second half and just why we shouldn't expect the pace of year over year improvement to continue.

Yes, Matt Hey, it's bill so.

As you are well aware that our strongest cash flow.

Quarter of the year is.

Is the fourth quarter.

So we are expecting the strongest can't slow in that quarter and with that said.

When you're comparing were similar in line last year and cash flows that we guided to you know the one to 1.1.

Billion this year similar to the price of $1.1 billion last year, the second half of last year.

Did have some unusual.

Cash flows they came back in related to the Fuji Xerox transaction. So you don't have.

It makes it a little bit tougher compare.

Year over year.

But we're also it goes back to.

The investments, we're talking about making in the company and we want to do it right and.

Let those investments not only cause in exit that we talked about the 32 being up to find some 40 cents.

Also theres cash associated with those investments and overall as we said, we're comfortable with reiterating our guidance and given the capex rate of spend.

Being towards the higher end of the range.

Thank you.

Thanks, Matt.

Thank you. Our next question will come from the line of an Anda by Rudolph with loop capital. Your line is now open.

Hi, Good morning, you guys, Hey, I appreciate all the all the detail.

That's really helpful.

So appreciate that.

A few if I could just starting out with just kind of as I joined as Dan mentioned that I understand the mechanics.

So the eight cents of incremental investment into sales initiatives.

Is it the straightforward to saying that eight cents. It comes Adam what whatever EPS would have been.

And so thats the right way to think about it and then I have a couple of questions on just how to think about the second half of the year as well.

Yes, typically historically lets say September quarter.

Then a little bit softer.

Thank you the last couple of years.

You guys are seeing.

Relative to last year.

The last couple of years.

Actually seeing improvements Q over Q EPS. So how would you like us to think about September this year, maybe this quarter.

Number one in light of some of the dynamics. The last couple of years and then and then also in light on that.

The eight cents that that you're incrementally spending.

And I have a couple of follow ups. Thanks.

Yes.

And on to its bill so.

Yes, we are very pleased with clearly the Q2 and the year to date.

Adjusted EPS.

Performance, especially on a year over year basis with that said, we were holding our guidance at 380 Threeninety fine.

We don't give specific quarterly guidance on adjusted EPS, We know Theres no consensus numbers out there and this compares favourably.

To that but the thing is is and the reason why we didn't we havent upped the full year guidance is specifically for once you mentioned to certain extent that we do plan on reinvesting some of these savings that we've been able to achieve for project own it and the Overachievement in EPS in the first half we plan on investing smartly.

We'll do it in a smart way and various new revenue generating investments in the in the second half and.

Q3, Q4, typically Q4 is the strongest quarter of the year is your.

Familiar with but we don't really give quarter to quarter.

EPS guidance, but full year, we're still very comfortable with on a range of three to 395.

And I just wouldn't want people to that.

The balance of the off to take this offline with you than myself, but I feel like.

I feel like right now.

We can all be September quarter, it could be like a 10 cents range you know that people get said that five cents down from the 99 to five cents.

And.

When one consensus whenever I mean, I think whenever shipping we'd like to get.

I could see it intellectually people et cetera anywhere in that range I think well see that any other factors. We mentioned people didnt go through and calculate what the impact of the share repurchases.

Our on our EPS going forward, we said the incremental share repurchase $300 million is weighted towards the latter part of the year. So won't have much of an impact on this year.

Nor.

Q3.

And you'll start also lapping the share repurchases that started in the second half.

Last year.

Okay. Let me just ask a quick follow up here.

And on your leasing business context, guys to what extent.

Are you also take into consideration what the impact.

Two.

Yes on simplifying the story is what multiple to the stock could be if you were to do something I just love to get your view on that and then to the extent you are considering.

Yes, those types of things how are you going about actually.

So the.

Gathering the information to you.

Yes, incineration lets it wont.

Yes, I think we said when we were considering your optionality with the leasing business, there's nothing definitive but there are a couple of factors at least one is simplifying our businesses is a core area, we need to be and to operate and it has been a good area and we may still continue staying in this business, but is it something that you know that we have to have as a.

The document technology company clearly many of our peers did not do this in house. So that's something we're looking at but the other thing you bring up is that we do believe that the debt associated with this said often from an investment thesis perspective, we'll get screened out because of that debt related to the leasing business and that is a consideration in whether we would do leasing transaction or not.

Got it okay, okay, great. Thanks, a lot.

Thanks Alan.

Thank you. Our next question will come from Jim Suva with Citigroup. Your line is how open.

Thank you very much John Bill.

The question I had was regarding incremental.

Investment that you're doing it sounds like it's going into your sales force. Your sales channel. Your go to market strategy or something like that can you help us understand like maybe some.

Specifics on where these incremental investments is going because we had a very good grasp on the earnings level cost synergies in reducing costs, but the story of Xerox fee revenue challenged there's been a persistent theme under several.

Management's tenure, so can you help us understand what specifically from these options are so we can have a little more confidence.

And the ability to.

Including the sales trajectory. Thank you.

Yeah. So.

Jim Good morning, Jim I would say that first of all it's the investments we're making in different aspects. So if you think of what we announced whether it's with American express or HP are our focus on channels. Our focus on new types of channels to get to our clients. Those are all investments, we're making now that will bring benefit in the future and some of these that we're talking about we're not expecting a lot of revenue and 19, but helps us with the growth. So it's really part of our driving revenue that we we talked about even back in February we are improving in our core technology business. Our offerings you heard some of them that we just came out with and more to come our direct sales coverage, yes, we're adding specialists not only not only in the sales force, but we're also adding specialists that can help us continue to grow some of our areas in software and services.

We talked about our channels SMB is a big play for us not only in the US but also in Europe and in other areas. We're looking at to innovation and new business in M&A in the innovation pipeline, we're starting to move the innovation pipeline that we've talked about and we gave an example of one of the first ones. We're looking at which is a sense, where electronics and were seeing how and what are the business cases to possibly get this to commercialize now that we've had and implemented in a few pilot clients. If youd like on a few of our clients and how do we go about bringing that in all of that pigs.

Now investments to assure that in the future. We can go get the revenue trajectory that says that said you know that's why we're confident in keeping or maintaining.

Our guidance, but at the same time, we thought it'd just be prudent to bring revenue guidance down it's not easy it's not short term, it's not going to happen in a quarter, but we want to see improvements in all these areas as we move forward.

Yes, just one little bit more detail I mean, some of the investments I mean, we are hiring.

Individuals in the software sales area specialists to help us grow our software sales revenue, our expanding R&D services offerings, we had a few quarters within our xps operations that were already selling this we're going to be expanding it over the second half of the year over a third of our approximately a third of our xps operations, there is cost and getting people trained and hiring people onto them.

Offer those services. So there are real costs being incurred as we ramp up and the other area and other areas specifically.

That we've actually built up in the first half and peoples on is the transactional supplies area. We have a transactional supplies group focusing on getting better attach rate attachment rates on the unbundled.

Contracts and we've invested in personnel in in that area also.

Great. Thanks.

Could we can.

Great. Thanks, Jim.

Thank you. Our next question will come from Paul Coster with JP Morgan. Your line is now open.

Hi, Thanks. This is Paul Chung on for Coster, Thanks for taking our questions. So.

First off just on midrange declines can you give us a sense of.

What you think demand and sales would have been.

Kind of excluding some of the impacts from.

Some of the sales transition in or changes.

I know you had a tough comp there but.

How is your market share held up okay.

Just your sense of overall industry house, there on the mid range would be helpful.

Yes, Hey, Paul it's bill.

No the largest impact on mid range really came from we talked about the xps area.

Year over year.

And they did have a strong.

Q2.

Last year.

So it was a tough compare with is that it's hard to say what it would have been exactly without deal versus the installs being down.

12%, but certainly.

I think.

So without any impact we would have expected to be in.

More in the mid single digits.

Down at worst but.

We clearly saw improvement.

In xps.

In June we expect that to continue.

And they are one of the key drivers of mid range. You also have some of the deals over in Europe that were delayed but we expect to close into the second half that will also help improve the mid range area.

Got you and then just a follow up on the.

Post sales revenue kind of given your.

Equipment sales declined kind of accelerated.

In the first half, we just kind of if you will obviously impacting your overall installed base, but.

What are the levers you can kind of pull to stem some of the pressure on those sales.

And then kind of any update on some of those.

Growth initiatives, you kind of presented at analyst day any.

Anything becoming more material. Thank you.

Yes.

You'll win win.

I'm from a post sale perspective in the causes of what happened in the second quarter I think of it really in two parts first of all does the transactional.

Part of post sales you know supply the unbundled supplies paper some of the IP services sales and we did see.

You know weaker.

Revenues in the transactional side in particular the indirect.

Sales channels in the U.S and EMEA and in certain of developing markets, where and we saw a slowdown due to economic uncertainties.

In the contractual side.

The service rental other outsourcing a lot of it was dependent on page volume clicks et cetera, we saw a similar rate of decline.

To Q1, which was.

Above the 2018 pace, but it's still was similar to Q1 and there are several factors, which we've discussed in the past attributed this were slower machines and field higher mix of lower usage products.

Lower enterprise signings in recent quarters and we're attacking this specifically is a part of our strategy, but we know that this area is in something that turns around.

Quickly, but it is an area that we're attacking and specifically when you're looking at wholesale and why we believe we can do better in the second half than the first half.

I talked about earlier the investments we made in the supplies area. We have a specific group that is looking that is working to get higher attach rates on the unbundled.

Contracts and there are certain things in the post sale there is.

IP services contracts said, we can look to that are happening in Q3 and into Q4 that give us confidence.

In.

In an improvement in the greater decline in the second half versus the first half.

Okay, Great I think we have time for one last question.

Yes, ma'am, our last question will come fly to Katy Huberty with Morgan Stanley . Your line is now open.

Yes. Thank you what did you bake into the second half outlook as it relates to the weakening macro data data points. It sounds like there were some sales cycle delays and into Q that that clearly could continue into the back half so will you.

Are able to close the deals that delayed there there could be continued delays in threeq and fourq here. So just wondering.

It does your outlook of bake that in or do you need a stable macro demand environment to hit that second half outlook.

Yeah, Hey, it is bill I'd say there there's two main things one thing and probably though the largest things it gives us the confidence for the second half is the the trend at Xps that we saw in the latter part of Q2 and I'm just what xps has been able to achieve historically and we know the changes that we've made from project owner perspective are you know good for the company for the long term and still adjusting to those changes in the short term had some impact and we're confident that xps can get back to.

Levels of recent quarters prior to the first two quarters of this year as far as the delayed deals. There is some you know we are expecting some of those to close in the second half it will have some favorable impact obviously the bigger.

Impact is really coming from the better responsiveness to the to the organizational impacts of 'em project on it on the export side.

And as you look into 2020, the $450 million of incremental savings that you've earmarked where do those savings come from relative to the 640 million in 2019.

Yeah, Katy it's a little bit we showed some of it in when we did the February analyst day, but if you think about it we have more work we can do on the supply chain side on our infrastructure, we're investing not only in robot for investing in cloud enabled solutions. So there's a lot of the.

Back office, if you'd like that we have more investments to do that take time. Some of these take time and then there's always optimization that we continue to do so.

It's still in the same areas.

Great. Thank you.

Great. Thank you Katy that's all the time, we have for questions today, and we really appreciate the interest of everyone who participated John meeting to wrap up yes, just I just want to say thank you to everybody. Our transformation continues to drive improvements in NPS.

Operating margin and free cash flow investments, we are making in our business is setting us to improve our revenue trajectory, which gives us confidence in our ability to return Xerox to growth over the long term.

Thank you again for joining us today.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and we may all disconnect everybody have a wonderful day.