Xerox : Q2 2024 Xerox Holdings Corporation Earnings Conference Call Presentation

Published: 2024-07-25 14:24:09 ET XRX

Earnings Presentation

Q2 2024 Results

July 25, 2024

Q2 2024 Key Financial Measures

Revenue ($B)

$1.75$1.58

Adj1 Operating Margin

6.1%

5.4%

Free Cash Flow1 ($M)

$115

$88

2023

2024

2023

2024

2024 % Change: (10.0)% @ AC, (9.6)% @ CC1

Operating

2023

2024

Cash Flow

$95

$123

Revenue Trend ($M)

$2,000 $1,500 $1,000 $500

Q2 23

Q3 23

Q4 23

Q1 24

Q2 24

Post Sale Revenue

Equipment Sale Revenue

Adj1 Earnings Per Share

$0.44

$0.29

2023

2024

GAAP (Loss) Earnings

Per Share2

$(0.41)

$0.11

Shareholder Returns ($M)

$43

$34

1 Adjusted measures, Free Cash Flow and Constant Currency (CC): see Non-GAAP Financial Measures. 2 Q2 2023 GAAP loss per share includes the net after-tax PARC donation charge of $92 million ($132 million pre-tax), or $0.58 per share.

Strategic Priorities for 2024

Strengthen Core Businesses

Structural Cost Improvements

Balanced Capital Allocation

4 1 Free Cash Flow: see Non-GAAP Financial Measures

Reinvention: Financial Algorithm

Savings Unlocks and Q2 Progress

Geographic Simplification

Offering Simplification

Operating Model Simplification

Geographic and offering simplification will result in short-term reductions in revenue and gross profit as actions are implemented. Gross profit reductions are expected to be more than offset by associated reductions in overhead expenses over time.

Estimated Gross Cost Savings

>$700M

Identified Savings*

*Expected savings through 2026 identified as of Q2 2024, inclusive of more than $100 million of savings realized in 2023.

Estimated Revenue Mix Shift

20232026/2027

Drivers of Digital & IT Services Revenue

Expected >$300 million in adjusted1 operating income improvement

1 Adjusted measures: see Non-GAAP Financial Measures.

Frequently Asked Questions

Demand

Update

Did you experience any lingering effects of disruption in Q2 associated with the organizational model changes made in Q1?

We are confident any disruption to sales associated with the recent change in operating model was transitory and confined to Q1. Our sales organization has adapted well to the new operating model, and the benefits of closer integration between sales, marketing, product development and delivery teams are materializing in financial results. Equipment order momentum continued in Q2, driving an improved trajectory in equipment revenue, even after adjusting for fluctuations in backlog and Reinvention impacts, and supplies revenue grew in Q2 and year-to-date. We expect favorable equipment order and pipeline trends, along with ongoing improvements in sales operations, new product launches and neutral backlog compares, to contribute to revenue growth in the second half of the year.

Revenue

Guidance

To what extent was the reduction in revenue guidance attributable to underlying demand versus other strategic factors?

We lowered revenue guidance from a range of -3% to -5% in constant currency1, to -5% to -6% in constant currency1. The entirety of the reduction in revenue guidance is attributable to intentional reductions in non-strategic revenue, including incremental geographic simplification actions, the decision to exit the manufacturing of certain Production Print equipment and lower-than-expected revenue from financing income and low-margin IT hardware endpoint devices. The full-year outlook for Core revenue, which excludes the impact of backlog fluctuations, reductions in non-strategic revenue and other Reinvention impacts, is unchanged at roughly flat y/y.

Adj. Operating

Income and

Cash Flow

Outlook

What factors drove the reduction in adjusted1 operating income margin and free cash flow1 guidance?

We lowered adjusted1 operating income guidance by 100 basis points, from at least 7.5% to at least 6.5%. The reduction primarily reflects the effects of lowered revenue guidance, including incremental Reinvention impacts, as well as higher-than-expected freight and product costs. Over the course of Reinvention, reductions in non-strategic revenues, such as those associated with geographic simplification, are expected to improve total profitability and margin. However, the reductions in overhead costs associated with many geographic simplification actions implemented in 2024 will not be realized in the current year, delaying the net savings benefits associated with these actions to 2025. Free cash flow1 was lowered from at least $600 million to at least $550 million, reflecting the after-tax reduction in adjusted1 operating income guidance.

What gives you continued confidence in your ability to grow adjusted1 operating income > $300 million by the end of 2026?

Reinvention

We remain confident in our ability to improve adjusted1 operating income by at least $300 million from 2023 levels by the end of 2026, despite a

reduction in the profit outlook for 2024. In Q2, we enhanced the management operating systems responsible for operationalizing reductions in

Financial

costs through Reinvention. Through rigorous analysis, Xerox's Reinvention Office has identified more than $700 million of gross cost savings

Targets

initiatives to-date. Based on savings identifications and process improvements made thus far, we expect to deliver the three-year adjusted1

operating income target even after accounting for the shift in certain markets from direct to indirect distribution, a narrowed Production equipment

focus, the potential for erosion in our Core print business and ongoing reinvestment in our growth businesses.

6 1 Adjusted measures, Free Cash Flow and Constant Currency (CC): see Non-GAAP Financial Measures.

Financial Results Summary

(in millions, except per share data)

B/(W)

% Change

P&L Measures

Q2 2024

YOY

Revenue

$ 1,578

$ (176)

(10.0)% AC

(9.6)% CC1

Operating Income -

(22)

(21)%

Adjusted1

Other Expenses, net

(13)

(76)%

- Adjusted1

Net Income²

Net Income -

(31)

(43)%

Adjusted1

GAAP Earnings per

0.11

0.52

Share²

Earnings per Share -

0.29

(0.15)

(34)%

Adjusted1

P&L Ratios

Q2 2024

B/(W) YOY

Gross Margin -

33.5%

(50) bps

Adjusted1

RD&E %

3.2%

0 bps

SAG %

24.9%

(20) bps

Operating Margin -

5.4%

(70) bps

Adjusted1

Tax Rate - Adjusted1

25.5%

(550) bps

1 Adjusted Measures and Constant Currency (CC): see Non-GAAP Financial Measures. Q2 2024 adjusted tax rate increase reflects the redetermination of certain unrecognized tax 7 positions. 2 Q2 2023 GAAP (Loss) per share included the net after-tax PARC donation charge of $92 million ($132 million pre-tax), or $0.58 per share.

Revenue

% Change YOY

(in millions)

% Total

CC1

2024

Equipment

$356

23%

(15.2)%

(14.9)%

Post Sale

$1,222

77%

(8.4)%

(7.9)%

Total Revenue

$1,578

100%

(10.0)%

(9.6)%

Impacts to YOY change in Total Revenue:

Fluctuations in backlog

~3.0%

Reductions in non-strategic revenue

~2.0%

Other Reinvention actions

~1.5%

1 Constant Currency (CC): see Non-GAAP Financial Measures

Quarterly Revenue Trend ($B)

$1.75

$1.65

$1.77

$1.50

$1.58

Q2 23

Q3 23

Q4 23

Q1 24

Q2 24

Q2 Installs & CC¹ Equipment Revenue B/(W) YOY

Total

CC1 Equipment

Color

B&W

Installs

Revenue

Entry

(13)%

(9)%

(10)%

(11)%

Mid-Range

(12)%

(29)%

(17)%

(13)%

High-End

(22)%

(24)%

(23)%

(27)%

Total

(12)%

(11)%

(12)%

(15)%

Impact of PY reduction in back log, geographic

simplification & other strategic actions

~(14)%

Cash Flow

(in millions)

Q2 2024

Q2 2023

Pre-tax Income (Loss)

$25

($89)

Non-CashAdd-Backs1

123

119

Restructuring Payments

(31)

(8)

Pension Contributions

(27)

(15)

Working Capital, net2

(133)

(248)

Change in Finance Assets3

161

210

PARC Donation

132

Other4

(6)

Cash provided by Operations

123

Cash used in Investing

(2)

(5)

Cash used in Financing

(336)

(220)

Ending Cash, Cash Equivalents and Restricted Cash5

551

569

Free Cash Flow6

115

Segment Results

Revenue and Profit

Q2 2024

B/(W) YoY

Print &

Intersegment

Print &

(in millions)

Other

XFS1

Eliminations2

Total Xerox

Other

XFS1

Total Xerox

Total Revenue

1,508

(19)

1,578

Total Revenue

(10)%

(12)%

(10)%

Segment Profit

(24)%

(21)%

Segment Margin3

5.4%

4.5%

5.4%

Segment Margin (bps)3

(110)

(70)

Financing Assets and Debt

(in billions)

Q2 2024

Q1 2024

Equipment on Operating Leases

0.25

0.26

XFS Finance Receivables

2.06

2.26

Total Finance Assets

2.31

2.52

Financing Allocated Debt

2.02

2.20

Xerox Financial Services (XFS): Key Performance Indicators

Note: 1 Xerox Financial Services (XFS) (formerly FITTLE). 2 Reflects revenue, primarily commissions and other payments, made by the XFS segment to the Print and Other segment, for the

10 lease of Xerox equipment placements. 3 Segment margin based on external revenue only.

Disclaimer

Xerox Holdings Corporation published this content on 25 July 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 July 2024 18:23:07 UTC.