Xerox Holdings Corporation (XRX) Earnings Call Transcript & Summary

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Thank you for joining us on this webcast to review the announced formation of Xerox' software business, CareAR and ServiceNow's investment in this business. Hosting this webcast is John Visentin, Vice Chairman and Chief Executive Officer. He's joined by Steve Bandrowczak, Xerox' President and Chief Operations Officer and Chairman of CareAR; and Xavier Heiss, Chief Financial Officer. During this webcast, Xerox' executives will refer to slides that are available on the web at www.xerox.com/investor. 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 as a result of a number of factors, including those described in the materials we made available in connection with today's announcement and those that we, from time to time, include in our filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. This time, I'd like to turn the webcast over to Mr. Visentin.

Good morning, and thank you for joining our call. Earlier this year, we announced we are standing up 3 new businesses: Software, Innovation and Xerox Financial Services. In each of these areas, we see attractive market opportunities and by creating separate businesses with their own management teams, we can pursue each opportunity with a greater focus and provide better visibility for our shareholders. These opportunities stem from our decision to prioritize investments in innovation and the standing up of new businesses will help us monetize these investments. For example, earlier this year, we formed Eloque, a joint venture with VicTrack, a state-owned enterprise in Victoria, Australia to commercialize PARC-developed IoT technology that monitors the structural health of bridges and other critical infrastructure assets. Our announcement today reflects further progress towards our commitment to stand up new businesses and monetize our investments in innovation. Today, we are announcing the formation of our software business, CareAR, a Xerox company. We are consolidating CareAR, Inc., which we acquired last year with other Xerox software assets, DocuShare and XMPie, all under the CareAR banner. Through the combination of these assets and the use of artificial intelligence developed at PARC, CareAR will pioneer a new category of service delivery software and help to find the standard for excellence in Service Experience Management for companies, employees and customers. We are also announcing an investment in CareAR by ServiceNow, a digital workflow leader, of $10 million and a $700 million post-money valuation. This investment serves as an endorsement of Xerox' innovation and technology within the Service Experience Management field. CareAR is a leading integrated augmented reality solution on ServiceNow's Field Service and Customer Service Management platforms. With ServiceNow's support and the strength of our technology and management team, we expect to capitalize on the Service Experience Management market opportunity, which we estimate will grow to an $80 billion market over the coming years. I have asked Steve Bandrowczak, Xerox' President and Chief Operating Officer, to also serve as Chairman of CareAR. I'll turn the call over to Steve to describe CareAR's business in further detail. But before I do, I'd like to play a video, illustrating CareAR's value proposition. [Presentation]

Thank you, John. CareAR is an augmented reality, visual support platform that helps organizations digitally transform their support experience. The backbone of this platform is the augmented reality technology Xerox acquired through its acquisition of CareAR, Inc. at the end of last year. As an early customer of CareAR, we instantly recognize the potential for this technology to disrupt the service delivery ecosystem. We also knew we could accelerate CareAR's development by integrating it with existing Xerox technology assets to create a software platform that will not only disrupt, but revolutionize the service experience. We have combined CareAR's augmented reality service capabilities with DocuShare's content management system, XMPie's customer content creation tools and Xerox PARC artificial intelligence engine, all under the CareAR banner. Together, these assets create the industry's first end-to-end Service Experience Management platform. CareAR empowers support workforces with the visual tools and accesses to data that are needed to consistently deliver high-quality service experience for employees and end customers, all while lowering the operating cost and greenhouse gas emissions of service providers. Our platform is designed to be industry agnostic and integrates seamlessly with leading service integrators and workflow solutions such as ServiceNow. All service-intensive industries aim to simultaneously increase worker productivity and customer satisfaction. Often times, there is a trade-off. But by combining the capabilities of 2 established and rapidly growing software platform markets, customer experience and service experience, we are defining a new category of service delivery software called Service Experience Management, which can improve service delivery outcomes and create favorable customer experience. We expect this marketplace will grow to a total addressable market, or TAM, of $80 billion by 2028, a 14% annual CAGR from 2020 levels. Driving that TAM are a number of secular challenges, including a rapidly aging workforce. According to a survey conducted by Service Council, workforce and talent issues primarily attributed to a retiring workforce, was cited as 2 of the top business challenges faced by large service organizations. Over time, an acceleration in workforce retirement will result in systematic brain drain of institutionalized knowledge at service organizations. As workers retire, newly hired employees lose out on the apprenticeship-based training that has sustained service businesses for decades. As a result, employers are investing in technology and workflow solutions that can replicate the knowledge transfer of the apprenticeship model while minimizing the disruption caused by a reduction in the experience level of a service workforce. CareAR can solve both problems by leveraging and optimizing seasoned employee's time and allowing inexperienced workers to draw on a repository of knowledge curated by CareAR's predictive AI capabilities. For example, CareAR is designed to help employees replicate the knowledge of an employee with 30 years experience, using an employee who has only been on the job for 30 days. CareAR's augmented reality capabilities are also more intuitive to a digitally native workforce and training manuals, handbooks and even one-on-one instructions. Tomorrow's workforce is accustomed to training methods centered around digital platforms. CareAR's organically intuitive interface and interactive 3D visual training allows for instructional content delivery that is more aligned to the learning styles of digitally native workers, which will become increasingly important as workplace technology continues to advance. Last, CareAR support service employers sustainability and social responsibility efforts, which are increasingly the focus of Board of Directors, customers, investors and employees. CareAR facilitates remote, preventative and maintenance-based actions, thereby reducing initial and follow-on technician dispatches. Lower dispatches results in fewer truck rolls, thereby lowering carbon emissions for service organizations. From a worker safety perspective, fewer dispatches enhance contact avoidance during the pandemic and a better informed employees makes for a safer workforce. CareAR adoption will be driven by its ability to improve service companies' bottom line through cost savings, operational efficiencies and enhanced customer satisfaction. CareAR's ease of use and expert level instruction leads to fewer first-time defects and fewer defects leads to fewer follow-on visits. A more effective workforce and lower equipment downtime drives increased productivity, profitability and customer satisfaction. And for consumer-facing organizations, better service leads to better Net Promoter Scores, which ultimately drive more business. We've only just begun our journey down a long road of product enhancements. Today, our product allows service technicians to tap into knowledge of more experienced technicians through live AR-assisted instructions. Going forward, we will leverage the data storage capabilities of DocuShare, PARC's AI and XMPie's customer content creation tools to deliver contextually relevant instructions, thereby significantly expanding the scalability of the platform's use. Eventually, CareAR will draw on the collective experiences of its users and store product information to surface key insights, replicating the real-time knowledge of an experienced technician with artificial intelligence. We are confident in CareAR's value proposition because we are a customer. In fact, we were the first customer. Like many of Xerox' innovations eventually brought to markets such as our suite of robotic process automation tools, CareAR's value proposition was forged at Xerox. Specifically, CareAR is being used by thousands of technicians deployed as part of our managed print service operations. The feedback from our agents and our customers has been positive, and the CareAR solution is expected to result in a solid return on investment. We have already signed contracts and pilots with some of the largest and most respected service organizations in the world, including Marriott and Verizon, among others. Our go-to-market strategy for this platform will leverage our relationship with ServiceNow as well as integrations with some of the largest strategic partners and resellers within the ServiceNow ecosystem, such as Accenture, Deloitte, HCL and TCS. We'll also continue to sell our software products through Xerox expansive network of direct enterprise and SMB channels. We expect the ServiceNow relationship to enhance CareAR's access to thousands of global enterprise customers. And as the leading certified and integrated AR solution with ServiceNow's Field Service and Customer Service Management platforms, we are well positioned to drive adoption among ServiceNow's client base. We also add value to the ServiceNow workflow by housing key elements of CareAR client service interactions within ServiceNow platform. As a result, information is captured and retained for compliance purposes and future references. I'll now hand the call over to Xavier, who will provide high-level financial details and perspectives on CareAR's valuation.

Thank you, Steve. We are formally announcing the creation of CareAR as a standalone entity within the Xerox family. Despite having only recently purchased CareAR software business, CareAR already has impressive scales with more than 11,000 active customers and 550,000 active user, including existing relationship and contract associated with DocuShare and XMPie. We expect the combination of our unique service experience offering, seasoned management team and integrations with workflow platforms like ServiceNow and other system integration partner will drive significant growth over time. To provide a measure of size on near-term growth of the CareAR business, we expect to generate at least $40 million of revenue in 2021 and at least $70 million of revenue in 2022. Gross margin for the software business is roughly 70%, and CareAR is expected to be close to breakeven on an EBITDA basis in 2022. We expect both growth on EBITDA margin to improve as the business scales. CareAR received a $700 million post-money valuation following a $10 million equity investment from ServiceNow. We have always funded this business organically and did not need ServiceNow's investment to fund CareAR's operation. Rather, we believe the investment more closely aligns our interest and through closer integration with ServiceNow Field and Customer Service Management workflow unlocks new business opportunities. A $700 million valuation imply a high single, low double-digit revenue multiple on estimated [ 2022 ] revenue. As you can see on Slide 10, compared to other high-growth software businesses, CareAR imply a multiple of 10 times as room to expand as we gain scale and traction within the large and growing Service Experience Management market. Today's announcement is just the beginning for our software business. We look forward to providing regular update on the evolution of this business as well as more granularity around specific market opportunities at our Investor Day in November. I now turn it back to John for closing comments.

Thank you, Xavier. In summary, the formation of CareAR is fully aligned with Xerox' announced strategy to create shareholder value by standing up strategic and innovative businesses. We have combined our existing software and AI assets with recently acquired CareAR to create a business that will define the $80 billion Service Experience Management market and is valued today at $700 million. Through our enhanced relationship with ServiceNow, our differentiated offering and the experience of our management team, we are confident this business will grow as customers realize the benefits of the CareAR platform just as we have at Xerox.