Xerox Holdings Corporation (XRX) Earnings Call Transcript & Summary

So good morning, everyone. My name is Paul Coster. I cover IT hardware and alternative energy for JPMorgan along with Paul Chung and Mark Strouse. And it is May 24, 2021, and it's the 45th, I believe, of JPMorgan TMC conference. I think I've done nearly half of them. And so I'm going to -- we're opening proceedings with this team with Xerox. And I'm very pleased to welcome John Visentin, CEO of Xerox Holdings Corp; and Xavier Heiss, the CFO. Good morning, gentlemen.

Good morning.

Good morning.

Thank you for having us.

Thank you for joining us. And before we start, a very brief comment on safe harbor matter. During this meeting, Xerox executives may make forward-looking statements, and these are all subject to the normal disclaimers that you can see on the firm's various documents. So please read them if you're interested. And that I hope it's underlying that matter. So we open proceedings today though with something much more exciting than that, and it's a video from Xerox. So roll them, right? [ Presentation]

So you've entered a very significant joint venture with the Victorian government in Australia, Eloque. Can you tell us more about it, please?

Yes. Well, if you step back to when I got here 3 years ago, we talked a lot about having innovation, having IP but never bring it to the point of monetization. And that's what we had in part. And as we looked at the different areas we focused on. One of the things, and you've heard Naresh say that at the end, that we've asked our scientists is when we are creating solutions, how does this affect humanity, how does this affect -- how does this have a lasting effect on what's going on. So Eloque is a great example where we partnered with VicTrack, and we created Eloque because of their domain expertise with our IP. And the focus is really how do we focus on the critical infrastructure we're starting with bridges and how do we assure ourselves that we could help governments understand which and when are these bridges and where are they in the spectrum of being dangerous or being involved in structural issues. There are 1.8 million bridges that are over 50 years old. In May alone, we've had 3 or 4, and you've seen them, the public -- 3 or 4 disasters happen where bridges have fallen and have cost life. And where -- and what we're doing and we're partnering with the Victoria government is we have a way with our sensors to put our sensors on these bridges so that we can help accurately monitor the health of it. But we do in a way that's efficient, less expensive and it's easy. We don't need to drill holes in bridges to put our sensors in. We can put that fiber you saw below it. And the Victorian government has committed to $50 million of doing the bridges in their priorities first. We're going to work with VicTrack. We created Eloque so that now we can go, frankly, around the world to talk about this issue of infrastructure. From there, we'll grow it to other areas, shipping. We can think of other areas where the sensor technology comes in. But as we think of innovation, that's what we're focused on. And this is exciting times for us because we have pilots going on, and we're seeing the fruits of what we're doing. So that's why we announced it.

So the JV is just specific to Australia or to Victoria, but the technology can put everywhere. Is that correct?

Yes. The technology is going to be offered everywhere. So this is going to be like our sensor technology with our analytics, our AI. There's a domain expertise that VicTrack is bringing to Eloque, but Eloque's mission is going to be to offer this globally. And there's conversations that are going on, as you can imagine, in different countries that we see because it is a huge issue for countries right now.

So is this a strategic initiative? Or are you depicting it as an example of strategic initiatives?

No, this is a strategic initiative. This is one of when -- Paul, when you and I spoke 3 years ago, we said we're going to start monetizing our innovation because we've been innovating for 50 years, but we never brought it to the end stages, and we had those discussions and we want to monetize the innovation. And this is the first example of hopefully many we will see when we're looking to monetize it, do we go at it alone? Do we go at it with a partnership? In this case, the domain expertise that we got from VicTrack to put that together with our IP and understanding of how we go about to the bridges was more important to us than having at it alone. And we'll look at all options in each and every one of our innovations.

When you said the domain expertise isn't just confined to bridges, it's other infrastructure and shipping, I think you mentioned. Can you just elaborate a little bit? Because it sounds very exciting.

Yes. So as an example, we have a contract with DARPA, the Ocean of Things, where we will be putting sensors in the oceans, which is the majority of our earth is with water, so that we can get a better understanding with the defense -- a better understanding of what's going on in the oceans in terms of everything from climate to what's there and all that. That partnership that we're doing with DARPA and that we have can lead to some commercial partnerships over time, where you can think of the fisheries department, you can think of supply chain on which lanes to use to go through the ocean having these sensors in place. We're at the beginning stages of that one. So we announced our partnership with DARPA, and now we're focused on what the next steps are there. So what we're doing now is we're taking our technologies, IoT, if I use IoT as an example, and we're saying, what are the areas that we think we can go after that make a difference that is -- that has a competitive advantage, no one really can do it the way we can do it and how do we take full advantage of the science that we have. And you can see us going towards other areas like think of generators and utilities, what's going on in utility, sensors in manufacturing plants, we're using today in our own plants. When we do our ink manufacturing, we do all our toner, we're able to do predictive maintenance. We're testing our predictive maintenance infrastructure. And that's -- we named it [ Notivity ] but it's -- that's what we're using. And say now in manufacturing plants, if we find a way that we can do predictive maintenance that tells you when maintenance should be done ahead of time in these areas that can save you not only time, money, supply chain and the whole focus around it. So that's just our IoT division, but we're excited. So this Eloque announcement is the first of, like I said, hopefully, many you will see in how we're thinking of doing. And it's not your grandfather's Xerox anymore is what I'm trying...

No, no. It's not at all. You're so [ hard charging ] and creative, and it's kind of a little -- this is quite surprising. And I'm wondering how long was this in gestation because you're kind of giving us clue of other things that are coming down the pipeline. And I'm wondering how long we'll have to wait before we see those. Is this...

Some of it's there -- and some of it's there today. And what we're trying to do is, as we announce them, what I always tell the team is we have to earn it. And as we announce them, we're going to announce them with something concrete. So like if I think of -- and I'll get to ElemX in a second. When we announced our 3D product in ElemX, we didn't just announce a product. What we did is we announced a partnership with the Naval Post Academy. And we're like going 3 months into this, and you can see the reports of the Naval Post Academy. But how do we create a product in 3D that is going to disrupt the supply chain market, not another 3D prototype? How do you take off-the-shelf aluminum? How do you use the off-the-shelf aluminum so you can create product that does not need all the end of your typical 3D products, that does not need to have the whole processing of metal powders and all that, yes, does not need to be in a clean room? So how do we take that product and bring that to the next level? So we announced that. And we have a partner with it. So what we're trying to do is earn it. And then what we're trying to do is as we get to Analyst Day is, frankly, to give you and shareholders more information. So we've said we're going to stand up PARC. I'll get to this after. But we said we're going to stand up PARC. And in PARC, you'll see the metrics and information that we're using to monetize our innovation. And we'll have the discussion on cash flow, revenue clients, but we're also going to be talking about TRLs. Where are you in terms of your developments? And a TRL 8 means, something like an Eloque, where we're at that stage. In cleantech, we're going to talk about cleantech, where we are and where the prototype is going to be and what the next stages of it is. And that's the whole idea of when we step back and said we want to stand up the businesses. It's, frankly, to give more information to the shareholders, to The Street, to the investors, to you. And we've had these discussions, Paul, saying we -- I don't have anything besides you telling us what's going on in here, so that you can evaluate Xerox for the sum of its parts. And I'm not going to decide what that's worth. That's going to be up to the shareholders. It's going to be up to all of the world and all that. But that's the goal as we are at a stage now 3 years into it that we can now start talking to you. Our XFS business, best-kept secret in the industry. Our XS business, we pretty much kept XFS internally. And it literally followed what happens with our printers. XFS goes up and down in originations, and it slowly went down over the years. But we've just unleashed it with an organization. We put in a leader -- call it a leader, and the mission is grow originations. Now growing originations plays a little bit with cash flow. And we need to like, again, show what a leasing business looks like globally. We signed our first partnership with an OEM supplier. So we have a competitor that is now going to be using our leasing business. And what we're realizing, and stop me whenever you want, but what we're realizing is as we look at our strategy, we have our core business, we're investing. We believe that business should consolidate over time. We just believe there's a lot of competitors out there. But we've also seen, even in the IT world, there's different ways of consolidating. If we could have offerings such as our leasing business, do leasing for other OEM suppliers, whether in our space or not, that's an advantage to both us and them because they don't have that capability. We are investing in our services organization. We -- our services organization, we're using bots. We're using our software CareAR. We're like trying to -- we're eating our own cooking. And what we're doing is we're creating a mechanism in our services organization that if we can service our product, why can't we service others? We just signed an OEM that we're going to be servicing their products as well as ours. And you'll do it all the right way with the right label and all that. So we're standing here and we're saying we're investing in our product. We said we're going to monetize innovation, and that's where we're heading with the organization. COVID hit us, and it is what it is, and we did everything in our efforts to protect our employees. Now we did a lot of things to protect our people. We went into the ventilator business. We didn't do that for profit. In fact, we just shipped 30,000 ventilators to India. And we all know what's going on in India, and we just shipped 30,000 ventilators. I got an e-mail from one of the Ministers thanking us this morning to try to help save lives. And I think that's the key here. As we look at Xerox Holdings, I joke with my team, I said, this is not your grandfather -- I know it's a bad analogy, but not your grandfather's Xerox anymore, it isn't. Our vision has always been: monetize innovation, drive revenue, focus on cash. And you saw last year, in probably worst of time, still deliver positive free cash flow because that's ingrained in the team from top to bottom, saying, without cash, you can't do anything else we want to do. And we're not going to stand around using excuses. So sorry for a long-winded answer, but it's exciting.

No, no. It's excellent. You've touched on so many things. I just sort of go back to one of them, which is that -- so you have -- I mean, you've reached into your deep heritage here, and you're unveiling all of this fabulous technology and applying it in the real world. And it sounds like you're going to be sharing all of this in a much more meaningful way with investors moving forward. One of the most meaningful ways, of course, is going to be to demonstrate the revenue attached to these new initiatives. So let's take Eloque, now I know how to pronounce it. What's the business model associated with that? And how -- give us some sense as how that evolves.

The business model is -- again, we know there's 1.8 million bridges out there. We know that as you go country by country, you need to have the conversations with the government, having lived it with the Victoria government. And again, that helps us with the domain expertise going to the Commonwealth countries, going through the U.S., talking to the different areas. Infrastructure is a big issue. We also know that once you have the conversations, the commitment and they see the value to it, it always starts with pilots. So we're head focused right now on getting as many pilots. And in any one of these businesses, even our software business, any one of these businesses as you're showing innovative technologies, pilots become key. And how do we get them? So we got Victoria government to say we're going to commit $50 million. Yes, we'll have revenue plans and we'll show the revenue and the potential of the revenue. But the focus right now is to continue to develop and install our solution inside of Victoria as we're having conversations with countries to go into the next stage of pilots.

Is the plans get paid on a continuing recurring revenue base?

Yes. Sorry, yes. So there is the initial fee, and then there's the recurring SaaS fee for all the analytics, the data that we offer. That's how...

Once it's deployed on infrastructure, I assume it stays there forever, right? That's the whole point.

Well, that's the whole point, stay there forever. And it's easy -- and nothing is easy to install, but the fact that you don't have to go on bridges, set them down, drill holes in. Like you can literally put that wire you saw . That's why we showed the video and put it in and get the information you need back. But yes, that's how we're looking at it.

Okay. So I want to go back to your comments about -- you've been at Xerox for 3 years. You -- it's been an amazing 3 years really. I just want -- so you were handed this legacy business that everyone knows what that business is. And your thesis was that the industry needs to consolidate. But whilst that is going on, you're looking at all of these other options, all of this fabulous technology inside Xerox and unleashing it and building on the positive momentum you have there. Going back to that legacy business, though -- I wouldn't call it legacy business, the old Xerox core business, your thesis remains that the industry should consolidate. Is that a correct statement?

My thesis, just having been in the IT industry, it should consolidate. Whether it does or not, there's always logic to consolidation. It's more than just synergies. It's also top line customer access. If you start looking at our competitors, everyone has some uniqueness. I'm strong in A4, I'm strong in consumer, I'm strong in retail. I don't have a direct sales force. I have a direct sales force in SMB. So as we think of consolidation, you start looking at all these areas, strong in services, MPS. We don't have MPS. We outsource all of that. So yes, our belief is the industry should consolidate. What I -- what we're looking at is we're not going to wait for the industry to consolidate because that could take time just given who the competitors are. And we've lived what we've lived a year ago, and then COVID hit all of us. So we are where we are with that. So we don't spend time focusing on it. But what we said was we have some state-of-the-art offering. There are technical services with the investments we made using PARC and others inside of AR, augmented reality. We're using robots and bots in terms of information. We think this could be a competitive offering for other manufacturers out there, whether in our industry or not. Because as you start having augmented reality and you start having content where you're using video and AI, and we know that the technical force -- technical sales force out there that does servicing is aging and the population behind it is not there. Information and AI is going to become more and more important. That's where our software business comes in. So that's what we're creating with our software business. And customer 1 of that software business is Xerox. And Xerox has now been working at it, and we've seen the productivity and the savings in it. And we're now going forward with getting more and more pilots and customers in that area. And you'll hear more about our software business as time goes on, on what we're doing in terms of partnerships and how we're heading there. But -- so I look at the industry. And should we consolidate? My opinion, yes. I think there'd be a lot of synergies in consolidating both top and bottom line. But you can't wait for it. You've got to just move on and say how do I go and expand the business that we have at hand. So we know what we're playing with.

Well, I was surprised this morning, I revisited your XFS business to just sort of reacquaint myself with the scale. It's a big business, the financing business. You've got $3.4 billion in assets. You've got 700,000 leases, 150,000 customers. It's a big business, but you're not satisfied. You're moving -- this is another example of you sort of kind of being creative. You've decided to move beyond your core domain, right?

Yes. Part of standing up the businesses is focus. And what we found in our XFS business, as large as it was is we weren't taking full advantage of what we do and how well we do it. Now we have one of the lowest bad debt ratios, and Xavi can take you through the details later. But we have a system where, even during COVID, our bad debt ratio was really low. And our question was why can't we offer these services not only to ourselves, to dealers, to competitive dealers to different -- in different industries. Like if we have the system, we have the way of doing it, why don't we do it in a normal way? Keeping it all together always had the balances of, well, what's -- how do you evaluate XFS. Because as you grow, is that a cash flow drain? Or what does it mean? Like what does it mean, cash flow versus debt? How do you securitize the debt? You securitize the debt, you get an outcome at the end, there's a profit in the middle. None of that -- no one sees. We see it internally and say, "This is crazy. It's the best kept -- it's one of our best kept secrets." We're going to separate it. We're going to have it focused. So now I have a leader, and she is focused on growing XFS inside and outside of Xerox.

I just want to make sure, you've got great relationships. You clearly have a very good credit underwriting process. And you have the systems in place and, obviously, the access to the financing industry to do it. Are those the core competencies that differentiate you?

And we now have also a team that is a team that has access and focus on outside possibilities or clients. And -- but yes, those are things -- that's our differentiation, speed. We're investing there as well. I'm not -- I'll never say our systems are perfect. None of our systems are perfect. There's always a lot of work to be done. But we've been investing in them. We're investing in bots and AI in that area, too, so how do we go faster and more efficient with our clients. But yes, we see that as a competitive advantage.

Just going back to ElemX, the 3D printing solution in aluminium, for a moment, or aluminum depending you're from. Tell us a little bit about how that's different again from other 3D printing solutions?

So what's different about our product is that one of the areas in 3D printing -- and let's not talk prototype, just production. One of the areas of production is that metal powders to create your production part. First of all, it's never fully the metal that you're using. There has to be other components that go into it. Secondly, it's expensive and it takes more time to actually create that product because, at the end of the product, there's a whole process that goes into -- and I'll never pretend to be the expert in this, but just there's a whole process that needs to be done to get to a final product. So an ending product, finishing. What we created is a printer, and we started with the first aluminum, that basically takes aluminum off the shelf. So whatever aluminum is, if your product is 4041, we created the aluminum. So we may recall, we acquired an IP called Vader 2, 3 years ago -- no, that's not true, a year, 1.5 years ago, roughly. But basically, what this does is it takes off-the-shelf aluminum. And we're able to liquefy the aluminum, heat it up, liquefy it, and then in droplets create the part. Not in a clean room, not in a hazmat area because there's no powders that can possibly explode. And as we look at the first aluminum, we're looking at products that you can create with that aluminum. And then we have a road map that says, well, this aluminum, 6061, is there's even more supply chain products out there. And that becomes important because the industry we're focused on is contract manufacturing, heavy equipment, automotive. That's a $13 billion market in supply chain, and that's growing at 17%. Now we just came out with that in December. Our first client, the Naval Post Academy, is key because they're helping us develop a second product and the third product because they could see a possibility where they could have an ElemX printer in each and every one of their naval ships globally because one of their big issues is always getting supplies into the naval ships and naval commands. The whole logistics of naval is if you have a printer that can actually create parts for you on the ship, then you have a whole supply chain disruption going on. That's why we're looking at aerospace, automotive. What I've asked the team is don't just create me a prototype, like how do we disrupt the industry. Now we've got to earn it because as you go to clients, enable with the first one, first thing they're going to want to do is put it in their lab, test it, play with it, then say, where does it fit in my supply chain. So all this takes time. And when we look at other 3D manufacturers and we see our competitive advantage, we know it'll take time, but we know we're heading in the right direction with it.

John, we've got questions piling up here. So I'm going to rattle through some quick ones here. You obviously suffered from the pandemic, your office on-prem business last year. We're going back to work now, vaccine's working out. What's the latest there?

Yes. Well, we're pretty much -- we're following the rules. So personally, we're following, first being -- we're following the rules in every country, every city where we're all going back to work. Our belief is, as we go back to work, our print goes up, right? So you have -- we have our print and we have what we call post-sales, that will go. We've seen proof points in different areas. Israel is one where we saw proof points where post-sales came close to 90% for what 2019 numbers look like. We're analyzing areas like even in the U.S., Texas and Florida, and watching it slowly go up. So our belief is that we are -- that, that will go up. But we're not waiting for that. We're not planning as if it's going to 90% because, again, what we tell our teams is we don't want to plan for something that what's really out of our control is when everyone goes back to the office. I can tell you, 3 months ago, we had a conversation with me and the CEO or even maybe as late as December or January. We would have said, "Oh, no one's going back to the office before September, October or December." Now you've seen the shift. Now you've seen -- we have a lot of CEOs saying that productivity is not where it needs to be, and you're seeing the shift. And I think even in your company, you're accelerating your process of getting back in.

So you're seeing a recovery, it sounds like, we've seen the evidence of it. There's many publicized global supply chain constraints at the moment and component shortages. Is that going to impede you in any way?

We're studying it. Everything from freight and delivery costs going up to shortages in resin and shortages in some chips. So will it affect us short term? No, but we're studying it. We're studying to see what our options are. But yes, we're -- it's something we are carefully looking at, like everyone.

Quick question. When you talk about -- this is from one of our clients. When you talked about standing up businesses, what does that actually mean?

That means that, over time, we stand them up and you'll see the financials of that division. Software division, the XFS division, PARC, you'll see the financials. You'll see the revenue, you'll see the cash flow, you'll see the metrics behind it. You'll see how we're looking at the metrics, how the industry looks at metrics so that you'll have a clear understanding of here's where Xerox Holding -- here's what Xerox Holding delivers, but here's where it's coming from.

Okay. Got it. Do you plan to reenter the APAC region once your trademark deal with Fuji expires in 2023?

We're studying on what's the best approach to enter it. We don't have a plan today to enter it. I wouldn't -- but we're studying.

Okay. Got you. And then the guidance that you've issued for the year, $7.2 billion or better in revenues, just a recovery. And I imagine that's both print, but also post-sales business and $500 million in free cash flow. I mean we have to commend you through thick and thin, you've managed to stay focused on cash flow generated. What is the intent in terms of the $500 million-plus of free cash flow? I saw today you announced the dividend. So that's one element to it.

Yes. Our capital allocation policy doesn't change. One thing we wanted to be clear through all of the pandemic is our capital allocation policy does not change. And you saw that we announced again the dividend this quarter. And that's our focus going forward is delivering as much free cash flow as possible. And given what we know, that's why we wanted to give a base that we'll deliver at least $500 million. That's what we're focused on.

So let me conclude with the question regarding -- I think you've already sort of planted the seed here. But 5 years from now, assuming that there's no strategic M&A, which is transformative, and that sounds like it's always going to be a possibility, correct? What are you going to look like? What is Xerox going to be?

I think what Xerox is going to look like is it's going to continue to dominate the print business, whatever size of that print business can be. We'll always focus on the cash flow. We're going to continue to monetize innovation. And you'll see in 5 -- hopefully less than or 5 years from now, you'll see all the different areas of monetization we're focusing on and what that's going to look like. And we're going to continue to drive revenue in different areas. We didn't speak about our ITS business, which is growing even during the pandemic. So that's where I see Xerox. I joke when I say it's not your grandfather's Xerox. But it's really that. It's like it's -- you never lose sight of what it is. You continue to gain share. We tell the team we continue to invest in our print business. We focus on MPS, our digital services around it. But that's not enough. We're not going to just stay there. We've got all these other areas we're standing up that hopefully you will see the growth and you'll see us continue to execute on that.

When is the Analyst Day event?

It's -- we've said second half. So we're looking -- we don't have a date yet, but we're looking at a few dates. Probably -- and my guess is probably in either late third quarter or early fourth quarter, but we'll look at it. We're trying to get a date.

Looks like it's an important moment in Xerox history.

Yes. Yes. I think 3 years ago, it was important to unveil was going on. And we're looking forward to give you as much information on what we're doing. Because at the end of the day, we all have a job to do, and you need to see what we see and why we're excited. And we don't get excited that easily because we're all focused on execution.

John Visentin, CEO of Xerox, thank you so much for participating...

Thank you.

JPMorgan TMC conference. Thank you.

Thank you, Paul. Have a good day.

Bye-bye.