Good morning, and welcome to the Xerox Holdings Corporation First Quarter 2020 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Bill Osbourn, Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investors. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. After the presentation, there will be a question-and-answer session. [Operator Instructions] During this conference call, 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. At this time, I would like to turn the meeting over to Mr. Visentin. Mr. Visentin, you may begin.

Good morning and thank you for joining our Q1 2020 earnings call. I hope everyone is safe and healthy. This is an unprecedented time for individuals, businesses and governments around the world. None of us have lived through a global health crisis of this proportion. So we are learning fast, adapting and making decisions in the best interest of all our stakeholders including employees, customers, partners, shareholders and society. While we saw an immediate impact to our business due to the rapid implementation of lockdown measures globally, the disciplined approach we implemented over the last two years provides a foundation to move quickly to preserve cash, continue operations, provide support to our many clients on the front line and apply our manufacturing and R&D expertise to help save lives. I'm incredibly proud of the Xerox team's dedication and ingenuity during this extraordinary time. For the first quarter, we generated $173 million of operating cash flow from continuing operations, a decrease of $49 million from a year ago. Free cash flow was $150 million, down $57 million year-over-year. Adjusted operating margin was 4.7%, down 630 basis points year-over-year. First quarter revenue declined 13.9% in constant currency year-over-year. GAAP loss from continuing operations was minus $0.03 per share, down $0.37 year-over-year, and adjusted earnings per share were $0.21, down $0.45 year-over-year. These numbers are a direct reflection of the impact COVID-19 had on our business in the first quarter. All but two countries where Xerox operates experienced a full or partial lockdown in the first quarter. The absence of people from the office resulted in an approximately 50% decline in page volumes in March, which impacts our variable rate contracts. Delayed installations, whether because an office was closed or limiting vendors on site, lowered equipment sales revenue by approximately $100 million in the quarter. And the financial impact this global health crisis is projected to have on global GDP and our leasing portfolio required us to increase our bad debt reserve by approximately $60 million. As a result, we are withdrawing our 2020 financial guidance. While we have modeled and are prepared for a range of potential outcomes, we don't believe it is prudent to make assumptions given the number of unknowns related to the duration and magnitude of the disruption caused by COVID-19. We have been actively managing this crisis from early in the year. In February, our focus was on supply chain and ensuring we had what we needed to deliver for our customers, and we did. By early March, we had asked our employees to work from home where possible, in many cases, before governments had required it. The health and safety of our employees come first. We also shifted the team's focus to those on the front lines, both supporting clients that rely on us in times of need and with new health care initiatives that address gaps in what is needed to treat the sick and stay safe. While there are some positive trends emerging in the fight against COVID-19, there remain important questions about how and when economies and businesses around the world will reopen while keeping their people safe. We are working closely with other companies, government leaders and healthcare professionals to implement new work guidelines in line with recommendations. In the meantime, our four strategic initiatives remain at the core of how we operate. We have continued our intense focus on managing cash while streamlining our operations to do better for us and our clients. We are investing in innovation and continuing to examine M&A opportunities that strengthen us for the long term. We are better positioned to handle this crisis today because of the discipline and work we did over the last two years. Let's walk through each of the four areas. Project Own It, our enterprise-wide transformation initiative to optimize our operations has instilled discipline across the company that enabled us to take swift action in response to the COVID-19 pandemic.

Thank you, John. Before I start the review of our financial results, I'll take a few minutes to discuss the financial impact of the COVID-19 pandemic on our first quarter results. Until the late February timeframe, we expected to deliver results in line with our plan. But as the global economic disruption caused by the pandemic worsened, like many other companies, our business slowed. The lockdown of businesses resulted in delays in equipment installations and purchase decisions. And the variable components of post-sale revenue, such as managed print services agreements where revenue is based upon the number of page clicks, declined. The third month of any quarter is typically our strongest, when the largest proportion of equipment is sold and profit is recorded. Therefore, our first quarter was significantly impacted by the ramping of office closures in March, which limited our ability to deliver and install equipment. Further, as more businesses required employees to work from home, the use of Xerox equipment declined, impacting our post-sale revenue. Most of our customer relationships are contractual, with contract terms that typically include a fixed as well as a variable component linked to print volume, and the percentage of fixed versus variable component varies by channel and geography. As a result, COVID-19 had a greater impact on equipment sales in Q1, as deliveries and installs which would have occurred late in the quarter were unable to be completed, while the decline in post-sale revenue was somewhat contained due to our contractual business.

Thank you, Bill. Today none of us have a crystal ball to predict what will happen next. However, it's our responsibility to think about the full range of outcomes and how to prepare ourselves, our businesses, and our people for any outcome. As part of that work, we are focused on how many will work from home and for how long, a question we need to answer for our employees and for our clients. It's important to remember that working from home is not a new concept. Many companies have implemented flexible policies over the last 10 to 20 years, and many in recent years also asked employees to return to the office to speed decision-making and foster collaboration. I can tell you this: In all the conversations I'm having with CEOs, government officials, and others, the prevailing question isn't whether to return to the office, it's when. That said, the next pressing issue businesses are dealing with is ensuring their employees can be productive and secure when they are working from home. How can we help manage their workflows? How do we protect our clients' distributed network of systems from hackers? In this environment, clients are increasingly looking to extend the digital enterprise to the home and back, so information flows quickly and securely to the right people at the right time.

Thanks John. Before we get to the Q&A with John and Bill, I will point out that we have in the appendix to our materials additional supplemental reconciliation and posted on our Xerox Investor Relations website a full set of earnings materials. Operator, please open the line for questions now.

Thank you. Good morning. First question, Bill, you mentioned that your services contracts, the mix of fixed versus variable differs by channel and geography. But if you average it across the business can you give us any sense for what the variable element is as a mix of the services business? Then I have a follow-up.

Sure, hi Katy. So, yes, the first thing to point out is to remind everyone that over 80% of our revenues are contractual in nature and involve multiyear contracts. But as you state, there are components within the contracts that are fixed and those that are more variable in nature. And as I noted in my prepared remarks, it does vary by the way you go to market and by geography. For example, in EMEA, it tends to be more variable in the post-sale in the SMB part, especially in the U.S., which tends to be more fixed. On an overall perspective, if you look to our components of post-sale, it's been around 50% of fixed and 50% variable. But that can change depending on where revenue is coming from as I said SMB in the U.S. has a higher percentage of fixed versus variable than others.

Thank you, Katy.

Thank you very much. I know you guys aren't giving explicit guidance. But I was hoping you could just walk through your free cash flow dynamics a little bit, in particular, how we should think about the flow-through of lower net income versus potentially offsets like working capital, the inflow from financing receivables, just across the balance of the year?

Hey Matt, it's Bill. So, obviously, lower net income will continue to be a negative into Q2 just as if it was in Q1. We do expect similar dynamics on working capital in regards to receivables due to lower revenues being a source. We hope to manage our inventories better. It was unexpected what happened at the end of Q1 which resulted in a higher level of inventories than expected. We expected those inventories to be sold which as I noted on the prepared remarks delayed about $100 million in ESR that we still expect to occur just later in the year when businesses reopen. And then we, as I noted, continue to manage payables closely in relation to actual purchases ensuring there's nothing discretionary that doesn't need to be bought, then managing the timing of those payables. So we expect that to be a source.

Thank you very much. John you mentioned, you're doing now disposable ventilators and hospital-grade sanitizers, which is great for everybody, including first responders and citizens widely. When you think about though for shareholders, can you talk a little bit about are the profitability of these kind of at your normal corporate average or do they take an investment a few phases to get going? And then the concern is in six months from now is there going to just be an oversupply of such materials?

Jim, yes. Look first and foremost what we did is, we launched these initiatives to address the needs of patients and frontline health workers. So saving lives was extremely important. That said, we took a disciplined approach on what we can manufacture, what's the minimal CapEx required, ensuring that we don't have inventory that's left over should the needs decline, whether it's in ventilators, hand sanitizers. And we also looked at masks at one point and I think -- and we did quite a bit on masks. So we didn't do this only for financial gain. This is really contributing against the pandemic. But I would tell you that our focus is we'll manufacture it as long as required. And when it's -- and if it's not required then we can stop it quite quickly.

Yes, Jim. Minimal upfront investments on these initiatives and as John said, we're not going to build up a lot of inventory unless we're certain that the demand and the sales will be there.

Thank you very much. I wanted to ask about what you've seen so far in the month of April. And specifically, I'm just curious if the conversations that your salespeople are having with new customers have changed now that some of the states and some of the countries, certainly in Europe are starting to look at opening up. So has there been any shift in tone or interest in sort of restarting at this point? And then I have a follow-up. Thank you.

Shannon, it's Bill. So the page volume declines we saw starting in March, obviously, continued into April, not giving specific numbers. But, as I mentioned before, we are expecting Q2 to be worse than Q1. Interestingly from a sales perspective, as we mentioned on the call, renewals we have the highest rate of renewal in Q1 in over two years. And new business signings, although down slightly, still at a very low rate and then actually a very good quarter in Q1. The sales process is still ongoing, especially in the large enterprise area in terms of getting deals negotiated. The issue is recognizing the revenue and getting the installs associated with those deals.

Yes, Shannon, yes, one of the things we're working with the clients and implemented for some clients is, we've got a unique suite of software and service and apps that really allows us to get the desktop experience for our clients and workplace from home and beyond. Security becomes absolutely key for them. So we have offerings, whether it's IT services for remote workers, a digital hub and cloud trend, our virtual print management services and I can go on and on. And what we've done is, we, with examples, whether it's a large hospital where we're helping them with the whole register of daily health and availability of their thousands of essential employees to assure business continuity, we're working with different banks where we've launched programs that allow them to equip their critical staff, not just with printers but multifunction devices. The key is security. The biggest concern right now with everyone working from home is security and workflow documentation and the workflow that goes back and forth. It's not just 'I need to print this', it's how do I keep it secure. Our offerings using XMPie and DocuShare Flex are allowing us to help these clients through it.

Hi, thanks. This is Paul Chung on for Coster. Thanks for taking my question. So, if you could kind of expand on a -- as it looks like you plan to offer kind of a broader range of solutions, IT services, to your customers like a VAR distributor. Is this capability client-device only, or do you intend to offer a range of on-prem and cloud-based enterprise infrastructure solutions?

I'm not sure I understood. But I can say the offerings that we just described that we're putting in place, is we're looking to also offer it in a cloud-based solution and offering it for our clients and for our partners. Some we're implementing as we speak.

Hi. Good morning, guys. Thanks for all the detail and hope that you guys have been doing well. Appreciate the question. Is there anything from -- Bill, from sort of sensitivity perspective with regards to revenue and operating margin that you can provide to us, just as we think about 2Q going into Q3 and even into Q4 that we could use as a guide rail as we do our work? And then anything else in that regard.

Yes. As I said in the prepared remarks, our Q1 operating margin -- our gross margin was down due to the loss of both ESR, but also the higher-margin post-sale. Operating margin in Q1 though, in particular, was hit by the $60 million bad debt charge. Obviously, there will be true-ups to that as we update our estimates. But the initial impact was likely to be the greatest charge in Q1. So you wouldn't expect that to repeat at the same magnitude in future quarters. With that said, you have the post-sale having more of an impact starting in Q2 versus Q1 where it tailed off in March. You're having it for the full quarter. And post-sale tends to be higher margin versus ESR, so you'd expect to have a greater negative impact in Q2 than in Q1 for that. So I would look at it that you don't have the repeat of the bad debt charge to quite the magnitude you had in Q1, but you also have a greater negative impact of post-sales being impacted for the full quarter versus what happened in Q1.

Okay. Thank you, Tim. Well, this isn't the year we planned for. This is the one we have. I'm really proud of this team. We moved quickly to help ensure that Xerox and its stakeholders will come out of this crisis in a position of strength. So thank you and be safe and be well.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.