Xerox Holdings Corporation (XRX) Earnings Call Transcript & Summary

Hi. Good afternoon. I'm Samik Chatterjee. I cover the hardware companies at JPMorgan. For the next session, we are hosting Xerox. We have the pleasure of hosting Steven Bandrowczak, who's the CEO; as well as Xavier Heiss, who is the CFO of the company. Thank you both for being here and attending the conference.

We're starting off most of our sessions with sort of getting almost like a sentiment or a temperature check with the companies about various things. So I'll start you off with 3 sort of common questions we're asking. The first one, obviously, macro is a big discussion point at this time of the year. And as you look to the remainder of the year, where do you see the biggest macro risk to your business?

Yes. I think a couple of things. First of all, we are very pleased that our demand remains resilient to the economy today. And that's mostly because of the services and the products that we provide to our customers and our clients going forward. A little bit different than traditionally in the IT hardware area where endpoint and capital investments is driven by where our company is. We are providing services and solutions and have been incredibly resilient in terms of our ability to drive value. The other thing is that we have the opportunity in the current macro trends, whether it's around inflationary pressures, labor pressures, what companies are seeing in terms of challenges in capital, we can bring significant solutions to drive client success and very specific solutions around driving productivity. So we've been pretty resilient to the macro trend that's out there. I've been very pleased with where we are and what we can do to help our customers in these macro trends that are out there.

Okay. Okay. In terms of the macro trends, and I think we've seen sort of 2 ways it's played out. One is there were certain hardware categories that had a lot of pull forward of demand due to the -- sort of the -- during the pandemic years. And there's more of a digestion in some cases, inventory, in some cases, just the demand sort of coming through a normal digestion due to a replacement cycle having been pulled forward, or just a more real demand slowdown from their customers. As you think about the business, do you have visibility into any of the underlying drivers if you sort of do see more macro deterioration from here on? Is it going to be more sort of worse because of the pull forward of demand? Or is it more just sort of think of the macro, in general, being a bit worse and the demand slows down, but you really don't have much inventory to really work through.

Look, I think if you focus on our Business as a Service and driving client success and driving outcomes in and around service, we focus on how do we help our clients drive productivity, drive activity. And so I think about services and specifically, digital services, you think about workflow services, we have the ability to help our clients drive productivity. So in actually, the macro environment that we're seeing today and the challenges that we're seeing in our clients, we have the opportunity to help them and bring new products and services in existing clients that we're in today. And so if you think about workflow and the ability to drive productivity through workflow in and around our ecosystem, which happens to be our end devices, we have an opportunity to actually increase and expand our business in these accounts by helping them with the macro trends that are out there today.

Okay. Okay. And maybe this almost lends itself to the next question I'm asking most companies is, how does AI impact your business? How does it sort of lend itself to your business? And it seems like what you're doing on the services side exactly sort of goes into playing right into the hands of what AI can leverage or expand further on, but maybe just flesh that out a bit more how you're thinking about the impact. You...

Yes. Look, I think the AI and the whole ChatGPT question that's out there is a perfect opportunity for Xerox. So let me talk, first of all, internally today, how we're thinking we're using AI. So very specifically, redefining how we think about service and service delivery, using augmented virtual reality, using IoT and augmented data, and then using artificial intelligence to help with try to drive a customer set outcome. So think about -- historically, we would have a printer that would have an error, they'd call, help us. We've logged a ticket today. We see that error that's in a data lake. That error goes into a central location. Artificial intelligence picks up that particular error brings it to my client success team gives them the top 3 ways to solve that error. And then I send you a text, which allows me to do an augmented virtual reality where I can do customers self-serve. That impacts 2 things. One, it reduces the number of truck rolls that I have, and it increases my customer sat because I've got them up and running faster. I also use AI in my HR processes. I use it in my finance processes. We use it in supply chain, think about supply chain today. And so internally, we have been using and driving AI internally. We now can take those same solutions and now bring it to our mid-market customers, right? So every one of our mid-market customers are thinking about how they drive productivity. And one of the things you need to think about in terms of AI, underlining is data. Where is data? Pages that are scanned, page that are printed, word documents, PDF documents, files that have voice and have video in it, Xerox has been driving and orchestrating all that data for years to drive workplace productivity. AI is a natural extension where we can help our clients use and take advantage of AI to drive productivity on top of the data and their processes that we've already been involved in. So we think it's a great opportunity for us to grow and have further service and further penetration inside of our client accounts.

Okay. Okay. No -- thanks for that. And let me sort of pivot to the more company-specific questions. And -- the first one was going to be more in terms of your role as a CEO. And you took over less than a year ago, if I remember it right. Maybe delve into some of the more material strategic decisions that you've taken sense then and sort of more in some cases, deviating from maybe where the company was headed in the past.

Yes, a couple of things. First of all, I want to get clients focused and client outcome focused, meaning that we had to shift the company and really think about client outcomes. What that means is how do we drive, create products, create solutions that drives client outcome. AI is a perfect example of that, where we can use AI, we can use RPA robotics, and really drive client output and client outcomes. What does that mean? I'm helping clients to improve their revenue, improve their cash flow, improve their productivity. So that's the first major pivot that we had. And that includes not only services but software and products around our ecosystem that we play in today. Second thing is we went and hired a new President and Chief Operating Officer to really focus on simplification of our business and driving more technology into our business. We talked about what we did in service. How do I reinvent the service industry, specifically starting with Xerox and then helping our clients think about service industry. We get questions all the time about what -- and how do we impact green initiatives, right? And you think about reducing truck rolls, remote solve, that is all leading into how do we help improve the climate and help our customers and our partners improve their green initiative. Last one is we made a big shift with PARC. And you may have seen a recent announcement that PARC is now being donated to SRI, 2 great research institutes. And one of the things that I wanted to do is I wanted to preserve all the great attributes of PARC and the contribution that PARC has made to not only in Xerox, but other industries and other companies, we've solved some of the world's biggest challenges in PARC. We wanted to preserve that and keep that. However, we also wanted to make sure that Xerox had the opportunity to take advantage of what was in PARC looking at future technologies, having the ability to take those technologies and bring them into our products and services in the future. So not only did we preserve PARC with the donation to SRI, we improved the doubling of the 2 organizations coming together in terms of research. But more importantly, we have preserved optionality for Xerox to see those few technologies and then bring them into products and services. So those are the big shifts that we've made since I've been CEO.

Okay. Maybe since we're on the topic of PARC, I think the decision to donate it and combine it with SRI sort of screens as limiting some of the downside and improves your own profitability while I think the general perception is going to be that you're sort of sacrificing some of the upside on potential revenues that can come through the innovation at that facility. How do you sort of step -- how do you encourage investors to look at it in terms of how you're preserving the upside there?

Look, I would say just the opposite. We have the ability to be able to take the things that PARC and SRI are now developing, bring it into our products and services and drive revenue, just like we've always done, and have the ability to not spend and not use our capital for research into things that may or may not become products in the future, right? So I have the balance and the beauty of continuing research with PARC and SRI going together for things that upgrade for not only other companies and the economies in the world in general. But more importantly, I got the optionality to see when they have particular problems that they've solved and they want to productize it. They can come to Xerox. We can work together and we can take that and bring it to market. So I've got the best of both worlds where we continued future research, expanded research without using my capital and then having the ability to be able to take the great work that they're doing when it pertains to either IT services or AI or digital services or office productivity, we can take those capabilities and bring them inside of Xerox, codevelop together, turn them into a product, and I can bring them into a revenue stream. So we didn't see any downside by the transaction.

Yes. Got it. I'm still going to go back to sort of your tenure over the last year. And outside of the strategic decisions that we talked about, sort of in that over that last year, what have been sort of the learnings from that, the key challenges that you may be ran into compared to sort of when you started versus some of the things that maybe even helped out compared to your expectation? Or [indiscernible]...

I think, on the upside and the pleasant side is client centricity has allowed us to change the conversation and start the conversations much different than we've ever done before. And I think some of the macro trends has helped. So for example, we can now start conversations in and around green initiatives, how we help our clients with green initiatives and how we can impact their SEC filings and what they're trying to do with the green initiatives. Second, ChatGPT and AI are big, big topics that are inside of every company today. And we're educating our clients to say, without data, AI is not -- has no value. ChatGPT has no value, right? And you think about the billions of pages and billions of images that come through our infrastructure on an annualized basis, what is all that? All that's data, all that significant value that we can bring insight to our clients. So if you think about things like law firms, right, contracts and law firms, you now have the ability to bring AI, now have the ability to bring Robotics as a Service. And you can dramatically add new value and insight to those documents and those data. Some is physically on paper where you can scan it and put it in the cloud. Some of it is already in word and PDF documents. We have the ability to orchestrate all of that and then bring value on top of it. So AI trends, ChatGPT trends is our friend. The other thing is the hybrid workforce. Think about the hybrid workforce that happened. We got the hybrid workforce, and then we've got distributed in terms of where people actually work from. The reality is, after COVID, we didn't materially change the workflow and the tools that people have other than looking at a Zoom or looking at Teams. Well, now you think about teleworkers, you think about telemedicine, you think about all the different things, distant learning, you think about churches and synagogues and mosques. And now you have some in-person sessions, some remote sessions in churches. We play in that space. We can print things for the pews that are in churches, but we also can help them with online services, online donations. And so we have been able to change the workplace over the last -- as long as we've been in existence, we've drive productivity in the workplace. The new hybrid environment gives us a great opportunity to actually drive more productivity. Then you add AI and ChatGPT and the struggles that customers are trying to figure out how do we use this? How do we take advantage of it? What a great way in which Xerox is already using it. We bring those examples. For example, we do about 7 million transactions on RPA every month, 7 million. And so when I go to my midsized customers, they have enterprise challenges without enterprise capabilities. We developed managed print services years ago. Why did we do that? Because a customer wanted a printer, wanted supplies, but they just wanted to print. That's all they cared about. So with Xerox you take care of all that, and you charge me by the click. Think about that in Robotics as a Service. I don't have to have and buy a UiPath or a Microsoft. I don't have to have skills in that space. I don't need to know the process. I can come in, Xerox can come in. I already know your process. I'm already trusted. Why is that important that I'm trusted? Because I'm already in there behind their firewall. I am already embedded in their IT infrastructure, their security infrastructure. What have we been doing for years, securing data? Redacting data? Having the ability to do workflow around data and making sure that it's in safe hands? Same thing with AI. Same thing with robotics in the future. So we can bring these products and services that we're using internally. And I like to think about bringing enterprise-grade solutions to mid-market customers that have enterprise problems. Ransomware has no discrimination between the size of the client, whether it's a church, university or it's a large corporation like JP or the Xerox, we have IT organizations that can do that. Mid-market companies and clients do not. And so we get a chance to bring that as a service to those clients and get a chance to give them enterprise-grade solutions in that space.

Okay. Okay. Got it. One of the key themes for you in the recent years has been the return of -- return to office for employees that's helped on the momentum in the print services side. In the latest quarter, though, when I look sort of towards that sort of 1 quarter review, the post-sale revenue grew about 0.5% in constant currency. So it does sort of hint there's something limiting that even as employees are coming back to office? Like, how do you sort of play the theme overall of employees coming back and yet you sort of have very modest growth or limited growth on that front?

Yes. Great questions, Samik, here. The key point here is this quarter on -- quarter 4 was in a similar vein as well the last 5 quarter have seen the resiliency of the Xerox business model. Resiliency based not only on print, but what we call contracted revenue stream there. Roughly 2/3 of Xerox revenue is contracted upfront, on our ability to offset some of the print dynamic, usual print dynamics there with 2 elements here. One, everything Steve described before, digital services, IT services, how we leverage our existing relationship with customer and offset some of the dynamics in print. The second point is with price increases that we have enacted in the prior quarter. Since 2021 there, we are seeing now the benefit of this price increase, supporting the revenue stream there. So this gives us a good confident in this 2/3 -- this part of the revenue stream here for the rest of the year and how the balance between the equipment, transactional revenue and the rest of the revenue will go through.

Okay. Okay. On the equipment side, the more transactional, I guess, revenue, you have benefited from backlog that you've been sort of working down slowly over the last few quarters. When you think about backlog normalizing, I think, you've said by the end of 2Q, why shouldn't we expect a period of below normal demand for equipment as sort of -- again, if you go back and say, okay, equipment demand has been helped by pull forward of demand to some extent, why should we think there's a period of below normal demand sort of evening it out?

Yes. So the first key important element there, the demand is still there. Steve mentioned it on the demand for our equipment, A3 and A4 equipment is still very strong there. So we've seen quite a good demand on the equipment side. The backlog is just a timing of the revenue. as we commented during Q1 earnings, we plan to normalize the backlog during Q2. And we always have a backlog. The value we have given is in the range of $100 million to $225 million. And we expect this to normalize and not disclose any more in quarter 3, quarter 4 backlog because it will be like BAU here. So the true compare will start after this year. And then over time, that mean it will be year-over-year like a normal compare here. But what we are pleased with is to still see the demand, specifically the A3, as I already said, this is the product range that attracts the highest margin and the mix helped the overall margin improvement, gross margin improvement for the company.

Okay. I mean, it does sort of raise the question, though, you outlined services being really resilient post sale, you have contractual revenue, pricing is coming through. Everything sort of sounds like it should be flat to up and yet your full year guidance is for flat to down. How do we match that up?

So it's quite simple there. When we did the guidance at the beginning of the year, we wanted -- so I've got David Beckel being here representing IR. I will say that we were looking at this being conservative, I will say the macro on the amount specifically around the second part of the year was quite uncertain. I mean, we were discussing this morning with certain investor, the debt ceiling story did not exist when we issued the guidance there. Will that happen? Will that impact us? We don't believe so. But we have been taken into account, not the debt ceiling, but some macro trend within this year. We had a good start. Quarter 1 was a good leading indicator into the year. Quarter 2 so far, we are seeing like good signs. I mean, May will close soon. So we will see for the rest of the quarter, the cycle in the quarter is like the last month is quite important for us. But I will say we're going to look after quarter 2 earnings and see what would be the guidance revenue that we will provide.