Xerox Holdings Corporation (XRX) Earnings Call Transcript & Summary

Good afternoon. I'm Samik Chatterjee and I cover hardware and networking companies at JPMorgan. For the next fireside chat, we have the pleasure of hosting the Xerox management team. With me are Steven Bandrowczak, who is the CEO; John Bruno, who will join us shortly, who's the President and CEO; and Xavier, who's the Chief Financial Officer. Thank you all for taking the time to attend the conference, and thank you to the audience as well.

Steve, John, I guess what we are asking most of our companies to start with is a bit more of a forward-looking view into the next 12 months. Given the end markets that you serve, if you have to outline how those end markets would look 12 months from today? How would you sort of answer that question, either you can sort of go by geography or customer cohorts that you classify your customers internally, like which you really want to handle that? But I just want to get a better view of how you're thinking the next 12 months pan out from end-market perspective.

I think if you break it down into our clients in very specific segments. So our largest population in terms of driving revenue and profitability is in the mid-market space. And what we're seeing is in the mid-market space, significant challenges and headwinds around inflation, labor and cost of capital. For us, it's all about how do we help them with those headwinds that they're seeing so very specifically in digital and IT services helping our clients drive productivity. And we think it's a great opportunity for us to actually grow our business in those segments over the next 12 months. So for us, it's how do we do more digital services, how do we do more IT services as we are solving an end client challenge around the headwinds that they're seeing. It also gives us a great opportunity to be a lot more strategic in these clients. So if you think about hospitals today, you think about law firms today or education, they are all being challenged with how do I deal with artificial intelligence, how do I drive more productivity with less people, how do I deal with cost of capital going up. And so what we've been building is products and services as a service, so they don't have to invest capital. They don't have to have labor. They don't have to have people and taking advantage of things like AI and robotics process automation, because we're already in there, because they already trust us, we are solving that problem and actually expanding on top of the service that we have. So we're excited about IT and digital services. Our core business in print, we see pretty much flat to slightly down. But even there, we've got a great opportunity to take share and grow our business through taking share in an industry that is declining, you have an opportunity to take share if you bring more value-added services. So Xavier and I have been talking about at the end of each quarter now, our overall revenue renewal rate has been renewed up over 100%. Why is that happening? Not because our renewal is the same value for less, what we're seeing is we're actually adding products and services on top of existing contracts as we renew. And that's good news for us. That means we're new digital signings, new IT service signings, and that's what we're most optimistic about. So for us, over the next 12 quarters -- in the next 12 months, it's all about how do we help our client success help them with their headwinds and then grow our business that way.

Okay. Great. So we'll definitely maybe get into some of the AI drivers for your products and services. But maybe before we get to that, help us think about, and we are asking all of our companies to sort of share what they're doing on this front as well is how are you adopting AI internally? How does that help you improve your own productivity before you improve customers' productivity?

Yes. We're looking in 3 areas. So first of all, internally, if you think about today in specifically service delivery and technicians, we have a tremendous people that are in the field that are servicing equipment. We have an aging workforce. We have a workforce that it's hard to recruit for. So we created technology, we call it AI for SD, AI for service delivery, where we're using AI to help instruct the field on what are the likely ways of solving a particular fault or a particular problem. The other thing we're doing is we're actually taking those faults in the field, sending them to a central location up in St. John's, where we have a client center. When that fall comes in, we automatically take that particular fault, run artificial intelligence against it, understand the likely 3 ways of fixing that fault, we then send a text to a client where they open it up, and we have an augmented virtual reality session, where they can self solve as an end customer, that particular problem. We're getting 50% resolution rate on those calls. So think about it for a second, instead of me having to go and dispatch technicians, 50% of those calls are both client self serve and 95-plus percent satisfaction rate. So that's an example where we're using AI. We're using AI in our supply-demand process. We're using it inside of predicting when boards are going to fail and when we're going to see fails on products. We get inside of our processes on supply chain, trying to predict when things and products won't get to an end client. So internally, we're using AI significantly. We're also using it from a ChatGPT standpoint, thinking about how do you respond to inbound channels, how do you respond to inbound techs, voice files? How do you respond to e-mails? We now can use that technology to respond automatically based on client's segment in terms of they sent us a note and saying, "Hey, where is my particular supply", pretty easy to respond, check the order, send it. But if they said,"Hey, we've been waiting 4 weeks and my supply is not here." You know the sentiment of that e-mail requires it to go automatically to an agent, they want to live voice. So we use an AI internally, also now putting it actually inside of our products, right, to help predict what's going on with our products, utilization, product failure, et cetera and then really now helping our clients externally on how can they use it inside their businesses to drive productivity.

Sticking to productivity, but more specific to project reinvention that you've talked about, which is much bigger than just sort of looking at it as a cost-cutting exercise. When you think about sort of tangible improvements, we should be looking forward to from that project, how would you outline that as we go through the next 3 years, you do this transformation through project reinvention outside of just the financial sort of impact on the numbers? How should we think of the broader sort of changes in the company on account [indiscernible]?

Yes. So I think of the reinvention of what we're trying to drive is really a 12-quarter program, right, on really doing 3 fundamental things. First of all, simplifying our business significantly in everything we do. Over the years, you build a tremendous amount of infrastructure, a repetitive things across geographies, across locations, simplifying it. We created something called Global Business Services, where we're putting all of our processes, all of our systems under 1 team. And they're now creating end-to-end simplification of our business. But more importantly, when you simplify, you take the complexity out, but you can also add technology to actually speed up that simplification, speed up then in process. So you think about adding RPA or AI on top of a process. Second is geo simplification, right? We're looking at where do we go direct, where do we go with our partners indirect or hybrid. That allows us to do a couple of things. One, as we move more towards a partner-led geography go-to-market motion, that allows us to reduce heavy infrastructure, whether it's network infrastructure, finance infrastructure, whatever it may be in a country, then we think about product simplification, right, where we have a significant amount of product complexity, again, reducing the product complexity, reducing the number of products that we have, simplifying and driving velocity. What should we be seeing? One, more productivity and more cost efficiency; two, you should see from a client experience, easy to do business with and within our employees will see it be able to do their job easier. And then from a partner standpoint, clearly, we're building and making sure that we enable partners to do and have interactions with Xerox much more easier than they had. So velocity from a client standpoint, velocity from a partner standpoint and then certainly easy to do business with and within.

Got it. Got it. So there's -- when you laid out project reinvention, I think some of the investor pushback to this was that Xerox has in the past taken similar cost actions, particularly, I think this was more a reference to the headcount reduction that you had around that time. And yet, the secular declines in revenue have limited progress on margins and what would be really different this time around? Any thoughts on that? How this [indiscernible] compares to previous action?

Yes, we're going to get into the elevator logistics business at Xerox and try and schedule -- my sincere apologies, everybody, I was literally stuck upstairs for like 15 minutes trying to get an elevator to come downstairs. So I apologize for joining in progress. But it's a great question. I'll pick up where Steve left off. So I'm John Bruno, President and Chief Operating Officer of the company. I've spent the large amount of time on the structural redesign of the business from top to bottom, go to market, who the economic buyer is, how do they buy from us and all of those types of things. So to your point, relative to headcount reductions and margin and how are we looking at this, the structure redesign or the dismantling business that was built around a structure for a fit for purpose for previous years, is what we've attacked and what we're in total bringing forward and readdressing inside the company with regard to the -- into the reinvention. So it goes to -- in our print business, especially in the SMB space, a lot of them are looking for ancillary and incremental services that we currently provide beyond print like IT services, we're making investments in that space. We've done a significant amount of structural simplification around spans, layers, decision-making processes, how things get done inside the company. Those were the types of investments we made in and across this area. I just wanted to kind of pick up where Steve left off, because that's been it where Project Own It previously, the company took a lot of cost out, but it didn't change the structure of the business. It didn't change the way we routed to market. It didn't look at a global partner program or simplifying for consistency across countries and geographies or align where we should be partner first or we should be direct led. This has been all the work that we're doing here. This is much different now with that in place. You can now do a lot of things behind the scenes, middle office, back office type systems integration that would always be restricted or objections from the business, because they have a very consistent way of doing things for a long period of time, you can't disrupt, but you can disrupt it if you redesign it from an organizational design perspective, top down, bottoms up, but aligned around what the economic buyer, who that is, how they want to purchase from you, what routes to market. So this is very different in that regard, because it has been a completely organizational-driven change to the business, not a cost-cutting exercise.

And if you remember, Project Own It, it was we were going to drive cost out to create cash to consolidate the industry, right? We think about the HP consolidation. That consolidation was going to be our redesign of the business through the integration. Well, that didn't happen. So now we have to do it differently, post COVID, post the supply chain challenges and all the things we had. We now put the same type of process in place, but we've got to do it internally, and we've got to redesign ourselves as opposed to consolidation.

Got it. Okay. So you talked about -- you referred to this, which is the geographic reorganization where you go Partner First versus direct. Maybe just walk us through the decision-making process there? How do you work out which sort of geographies makes to go partner first, which geographies make sense to do it direct? What are the challenges you are facing as you going through that exercise? How -- just walk us through that.

Sure. Sure. So I'm sure want to lean in a little bit on this one. But it goes back to the point that I was making earlier around who's the economic buyer, how do they purchase from us today, how do they want to buy from us going forward. And so you can think about and where we have the greatest concentration, the Canada, U.S., France, the U.K., et cetera, these countries, we have a very comprehensive set of solutions that our clients buy across the spectrum of what we sell. Print, managed print service, IT services, digital services and then where the penetration is less, but we have partners that can actually fulfill some of those solutions with either things that they develop organically, that's another tier. So you can kind of think about it direct full-service Xerox. Then you can think partner-assisted where they're taking more of the lead with some of the ancillary services, and we're part of the overall solution. And then completely partner-led, where we're more transfer pricing of products and equipment into what it is that they're delivering to the end customer. We may or may not still provide service and support depending upon penetration. So it really comes down to the capabilities within the geography of our partner ecosystem. But when I walked in, Steve was talking a lot about the mix shift, because the mix shift is not only geographies, which we serve direct, partner-assisted or they partner led. And then what are the offerings, how do we simplify those inside that space. And then the mix shift of how much print, how much IT service, digital service. That combination of those 3 elements allows us to dictate, which are the right partners, which are the right geographies, which are the right countries for that model. So it's purely based on adoption and ability to execute, speed and things that the clients are looking for. So it's very much a client back into Xerox approach.

The other thing on the geo simplification is we are actually getting smaller to go faster, trying if you think about rolling out digital and IT services across 60 countries versus 10 or 8 or whatever that may be, you can go a lot faster and they have a lot more velocity. And so where we think we have a unique advantage on the go-to-market in our mid-market space and the relationships that we have and the right to play in that space. We can't do that in 60 countries, right? Some of our other partners may have a better relationship in that space. And therefore, the geography mix makes it a lot more sense, but it really is consciously so we can go faster in building those other services.

I want to go back to core print, which you mentioned, you said flat to slightly down. But generally on your earnings calls, you've talked about flat underlying trends for the core business, while the revenue decline is more coming from the one-off comps that you had from last year includes backlog, some of the paper. Just walk us through what's driving the confidence in those flat underlying trends? We haven't seen those historically sort of play out for the last few years. So now that you look at it, why should investors feel confident that there's a flat underlying trend below the numbers?

Let me take it from a market standpoint, and then maybe Xavier take into the numbers a little bit. I think about the physical to digital world and digital to physical. And what we're seeing is even though we're seeing digitalization, digitalization is happening in the contents of document flows. So you think about patient administration, patient discharge. Think about what happens in a CVS today where you're going, you have an online app, but you also go and you got a physical interaction. And so what we're seeing is a significant physical to digital, digital to physical. For example, I was in Germany with a partner over the weekend or last week, and they're now taking artificial intelligence. You can send them a picture, you can send them the top 3 things that your child likes to do and out comes a literally a book, which is a super hero of your child in all different things. So they're creating new print examples, you think about what's happening inside of hospitals today and the way in which you admit a patient, how paper-intensive is that? You think about what's happening in insurance claims, how paper-intensive is that? Think about what's happening with shipments in Amazon on time, everything you get has a label and is printed. My point is we're seeing different physical types of print, different types of prints, but we're also looking at this ecosystem of digital, physical, physical to digital. And the more we can provide value-added services in that, the more we protect our core, the more we can take share from our competitors, but more importantly, we become more relevant in that space. So I think when you think about print, you think about 8.5 by 11, you're just thinking of a traditional piece of paper, reality is there's significant shifts and significant physical to digital where we're playing.

Just double kicking as well on print. There is a misperception around print. I'm sure if I'm asking you what is a print revenue trajectory. You could have, I call that nightmare scenario, no one is printing anymore. This is not what we observed. This is not as well what IDC, which is tracking from a [indiscernible] point of view, is forecasting. So CAGR expected on the overall print market is minus 1% for the next 3 years. So print is not dead. But print, this is not entirely Xerox. So we are shifting and we have currently around 90% of our revenue, which is print, 10% IT and digital services. Over time, this percentage will change on the overall reinvention strategy is focused on driving this revenue shift there, but also ensuring that we can invest in this new opportunity of IT and digital services. So we can offset the secular revenue decline there. Another thing if you look at our number, since COVID our -- if you exclude what I call one-off type of revenue items, Russia, okay? We have had to exit Russia like a lot of companies there. Paper, we were in the paper business. We said, is it critical for us? Not really, we exit. IT endpoint, low entry low-margin devices, not critical for us. So when you exclude these items and you look during the last 4 years, what was [indiscernible] trajectory, flattish. On what we are forecasting for this year is a minus 3% to minus 5%. This is a guidance. If you exclude 100 basis points of one-off items, including the one I mentioned to this here, we will be in a slight growth to slow decline there. So don't look at print only being like a secular decline, we can't do anything, print is still a juicy business, generate a lot of cash and help us investing on creating the future of business stream of the company.