Welcome to the Xerox Holdings Corporation Third Quarter 2022 Earnings Release Conference Call. After the presentation, there will be a question-and-answer session. At this time, I'd like to turn the program over to Mr. David Beckel, Vice President and Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Third Quarter 2022 Earnings Release Conference Call, hosted by Steven Bandrowczak, Chief Executive Officer. He is joined by Xavier Heiss, Executive Vice President and Chief Financial Officer. 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. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. And we'll 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'd like to turn the meeting over to Mr. Bandrowczak.

Good morning and thank you for joining our Q3 2022 earnings call. I want to begin by saying how honored I am to lead this great company and team of people as we embark on Xerox's next phase of growth. Since being named Xerox's permanent CEO in August, I have spent a large portion of my time with our stakeholders, employees, clients, partners, and investors. On a recent international road trip, I spoke with dozens of clients and thousands of employees in more than 20 different cities. The goal for my meetings with clients was to hear about their current needs, what they expect from Xerox, and what we can do to improve our business. It was clear that the Xerox brand and legacy are meaningful, and we have earned our clients' trust over time. From that position of trust, clients are asking us to do more to help them streamline, optimize, and improve the overall productivity of their information workflows. We have the solutions today to help them do just that, including solutions like Workflow Central and the digital mailroom, to name a few. By focusing more on client solutions rather than product offerings, I believe we can maximize our relevancy and share of wallet with existing clients. We also have the reputation and credibility, the right to win, to build new solutions for our clients that leverage our institutional knowledge of client processes and integrate leading technologies such as AI, AR, RPA, and machine learning. These new solutions can provide intelligence, value-added services, and automation to workflows we already process for our clients, as well as new workflows we can and will process in the future. You will hear more from me in the coming quarters about how we plan to become a more customer-centric business, one that is capable of expanding and capturing more of the addressable market within our existing client base by embedding our offerings into our clients' end-to-end processes. Summarizing results for the quarter: Revenue of $1.75 billion grew 4.7% in constant currency and declined 0.4% in actual currency. Adjusted EPS was $0.19, $0.29 lower year-over-year. Free cash flow was a use of $18 million compared to a source of $81 million in the prior year; an adjusted operating margin of 3.7% was lower year-over-year by 50 basis points. Revenue growth this quarter accelerated in constant currency, reflecting strength in demand for our products and services amid an increasingly challenging macroeconomic environment. Equipment revenue grew 6.7% in constant currency or 0.8% in actual currency, marking the first quarter of equipment revenue growth since supply chain constraints began last year. As expected, backlog declined slightly sequentially, reflecting sustained order flows offset by a gradual but lower-than-expected easing of supply chain constraints. Post-sale revenue increased 4.1% in constant currency and decreased 0.7% in actual currency. Post-sale growth was driven by another strong quarter for consumables, such as paper and supplies. Growth in consumables reflects the early benefit of recent pricing actions, and for supplies, an ongoing gradual recovery in print-related activity. Page volume continued to closely correlate with return-to-work trends. Post-sale revenue also benefited from strong growth in IT and digital services, including contributions from recent acquisitions. Adjusted operating margin declined slightly year-over-year but improved sequentially, reflecting the benefits of price and cost actions taken year-to-date. Improvement was slower than expected, however, due to persistent high rates of inflation across our cost base, an unfavorable geographic mix in equipment sales, and a slower-than-expected easing of supply chain constraints. Xavier will discuss our outlook for profitability in more detail. The global macroeconomic outlook has become increasingly somber over the past three months. The current outlook notwithstanding, we believe our prospects for continued revenue growth are strong. We see resiliency in demand for our products, particularly our A3 devices. We have a sizable and healthy backlog, and we have visibility into the realization of benefits from recent pricing actions. However, the adverse effects of Western European currency on full-year revenue are now forecasted to be significantly larger than expected. Therefore, we are lowering our revenue guidance for the year from at least $7.1 billion to a range of $7 billion to $7.1 billion in actual currency. While our revenue outlook declined only slightly, we are lowering our 2022 free cash flow guidance from at least $400 million to at least $125 million, both of which exclude a $41 million one-time product supply termination payment. The reduction in our outlook is in part due to persistently high rates of inflation across our cost base and slower-than-expected supply chain improvements, both of which are expected to inhibit margin improvements this year relative to our expectations. Most of the reduction in free cash flow guidance, however, is a function of a larger-than-expected use of working capital, which has no earnings impact, including our decision to utilize more capital to fund FITTLE's origination and operating lease growth. We continue to expect operating margins to improve going forward as supply chain conditions ease and previously enacted pricing actions are realized. When combined with additional plans to streamline our operations, we believe our 2022 free cash flow performance will be an anomaly and not a trend. I am often asked by investors if we are planning a significant strategic shift now that I have been made permanent CEO. I alluded to some of our longer-term strategic plans a few moments ago. But in the near term, we remain focused on the execution of our print and services strategy and improving operating efficiencies amid a challenging macro backdrop. As in the past, the successful execution of our strategy rests on four strategic priorities: optimize operations, drive revenue, monetize innovation, and focus on free cash flow. Operational efficiencies and flexibilities have taken on a new level of importance in light of the current macroeconomic environment. We remain on track to achieve our targeted $450 million of gross cost savings from Project Own It in 2022. Our target was designed to completely offset the effects of inflation for the year, but in the past few months, inflationary pressure has outpaced our initial expectations. With less than three months remaining in the fiscal year, we will not be amending our savings target for 2022. We will provide an update on the 2023 savings target when a full-year guidance is provided next quarter. Along with this update, we will provide additional details about changes to our business structure that are expected to drive greater operating efficiency and enable further penetration of services with existing clients. Our print and services products continued to resonate strongly in the marketplace as we deliver the most advanced services and solutions portfolio for our clients. I am pleased to announce that we grew our leading share in managed print services in 2021 per IDC's recent MarketScape report. In further support of our leading position in managed print, Ducera recently named Xerox as a leader in managed print services in its 2022 Landscape Report. According to Ducera, Xerox maintained the highest position over all other vendors in the market in both strategic vision and depth of service offerings. To ensure we continue gaining share in print and managed print services, we are focused on consistently improving the customer experience to meet clients' most pressing needs. To that end, in Q4, we will be launching the Xerox Customer Experience App, which will help our clients streamline the installation of our products, better monitor supplies, and help clients self-troubleshoot our A4 products. In IT Services, we are seeing traction in newer markets like Canada as we realize synergistic benefits from the recent acquisition of Powerland, and greater collaboration with our existing print and managed print services Salesforce. Our robotics process automation offering once again grew signings double digits quarter-over-quarter. In Q3, Xerox Automation expanded its presence to retail, sports and entertainment, and manufacturing verticals. In Digital Services, our recently acquired Go Inspire business won a breakthrough with Data award from Data IQ for its partnership with the U.K. home goods company, Lakeland. Go Inspire uses Lakeland's customer data to deliver a hyper-personalized experience for each of its members, resulting in a strong uptick in revenue and triple-digit return on investments. Xerox Digital Services recently launched an intelligent document processing platform, which leverages AI, ML, object content recognition, and natural language tools to automate document and data processing. Born from our legacy of innovation and service excellence in this domain, the platform will help our clients recognize a variety of languages, classify documents, and validate customer identities without human intervention, providing significant time and cost savings. We see the evidence of value being delivered through our integrated solution offerings each quarter. For example, this quarter, we assisted a European commercial banking client with a digital transformation project in which our devices were used to digitize document workflows and improve the client's onboarding process. For a large Brazilian insurance client, we added services to help them automate invoicing and medical claims reimbursement, improving processing time from days to hours and reducing manual processing performed from 150 employees down to 40. Moving forward, we will enable more of these types of success stories as we place a greater focus on holistic client solutions rather than discrete product offerings. Regarding our newer businesses, we are adjusting our approach to capital allocation in response to changes in the macroeconomic environment. As a result, we have taken recent actions to streamline our innovation portfolio by closing Eloque, scaling back our 3D print operations, and reevaluating research priorities at PARC. Separately, we continue to see promise from Novelty, an industrial predictive maintenance company created at PARC, and Mojave, an energy-efficient HVAC business leveraging PARC technology. We recently spun both companies out as separate independent businesses, with Xerox continuing to hold a minority share. These actions will help us preserve free cash flow while maintaining the opportunity to realize value from their future success. Meanwhile, we continue to invest in the commercialization of FITTLE and CareAR, both of which are executing on their strategic plans. FITTLE made significant progress this quarter in its effort to diversify its lending operations away from captive sources towards new customer and product lines. Non-captive originations grew 33%, including a more than 150% increase in originations for third-party equipment and services. CareAR completed a soft launch of Experience Builder, an intuitive, no-code tool kit that allows users to quickly self-publish instructional content at scale. We believe the experience builder toolkit will provide a unique point of differentiation for CareAR and further its leading position in the rapidly growing service experience management market. At Xerox, we are accelerating our own use of CareAR as a means of improving operating efficiencies and client service. Our remote resolution rate is better by 9% when CareAR is used, which greatly improves equipment availability and avoids sending technicians on-site. CareAR helped Xerox reduce site visits by more than 21,000 in just one year, saving more than 269,000 metric tons of CO2 as a result. Among our technicians using the product, calls escalated to higher-level reps are resolved an average of one business day sooner. We expect further efficiencies and progress towards our sustainability goals as we more fully introduce the platform to more of our clients. Free cash flow was a use of cash of $18 million in the quarter. In the first nine months of the year, free cash flow has been a use of $66 million or $25 million excluding a one-time contract termination payment of $41 million in Q2. To be clear, our cash flow generation year-to-date has fallen well below our expectations due to our strategic decision to invest in FITTLE's growth, a slower-than-expected improvement in supply chain conditions, and persistent inflation. I do want to emphasize that free cash flow remains a key tenet of our strategic priorities and an enabler of our future growth. We expect a significant improvement in free cash flow next year as supply chain conditions improve further and the benefits of additional price and cost actions are realized. To recap, the current macroeconomic environment presents risks to all businesses, but I see far more opportunity in the coming quarters and years for Xerox. I see opportunities to expand our penetration of existing products within clients, as we are doing with managed print, IT, and digital services. And I see opportunities to expand our total addressable market with clients by leveraging our unique position as a trusted partner to deliver value-added digital solutions to our clients' workflow processes. In the near term, we remain laser-focused on profitability and free cash flow generation. I will now hand over to Xavier.

Thank you, Steve, and good morning, everyone. As Steve noted, third quarter results reflect continued strength in demand for our products and services. We saw an acceleration of revenue growth in constant currency and delivered the highest rate of constant currency growth in over a year. Currencies, notably the euro and British pound, negatively impacted revenue by more than 500 basis points this quarter. Equipment revenue grew for the first time since Q2 2021 in both actual and constant currency, driven by healthy demand and modest improvements in product availability. Equipment backlog of $429 million declined slightly quarter-over-quarter but remains well above historical levels as improvements in supply chain conditions did not materialize to the extent expected. We continue to expect backlog to decline in Q4 and throughout 2023 as supply chain conditions ease. Our sales revenue grew again in constant currency due to strong growth in consumables, such as paper and supplies and IT and digital services, including benefits from recent acquisitions. Consistent with prior quarters, we continue to see a strong correlation between return-to-office trends on page volumes. We are encouraged to see another quarter of page volume improvement relative to 2019 levels. However, page volumes are recovering slower than we expected, as employers' efforts to bring employees back to offices have been slow to gain momentum. Turning to profitability, profits were lower year-over-year due to a slight decline in revenue at actual currency, the effect of persistent high inflation on the cost of goods sold, and the slower-than-expected improvement in supply chain conditions, which negatively impacted product geographic mix. These factors, along with the release of bad debt reserves in the prior year, drove adjusted operating income margin lower on a year-over-year basis. However, adjusted operating margin improved 170 basis points sequentially due to benefits associated with pricing and cost reduction actions. We expect operating margin to improve sequentially in Q4 but at a slower pace than previously communicated, as I will discuss later. Gross margin declined 60 basis points in the third quarter. Constraints on the availability of equipment and product cost inflation, net of lower logistical costs contributed the majority of the decline. Favorable currency, pricing, and restructuring benefits were offset by lower benefits of government subsidies in the prior year and other non-product-related operating costs. More specifically, supply chain constraints adversely affected the geographic mix of equipment installed in Q3. We expect gross margin to improve significantly in Q4 as geographic and product mix improve, the higher portion of contractual price increases are realized, and we see further benefit from improvements in supply chain costs. Adjusted operating margin of 3.7% decreased 50 basis points year-over-year, reflecting lower gross profit, higher bad debt expenses, and inflation-related operating cost increases, partially offset by lower R&D spending on project Own It savings. Specifically, supply chain disruption and higher product costs accounted for 60 basis points of the decline in operating margin. Higher bad debt expense associated with government subsidies benefits in the prior year accounted for another 110 basis points of the decline. Offsetting this impact are benefits from pricing and the recent cost reduction actions noted above. SG&A expenses of $418 million increased by $5 million year-over-year. The year-over-year increase was largely driven by an increase in bad debt expense of $11 million, reflecting a release of bad debt expenses reserved in the prior year, as well as labor inflation and the effects of acquisitions and benefits from temporary government subsidies in the prior year. These increases were partially offset by currency benefits on savings from Project Own It. SG&A expense declined sequentially by $20 million, excluding the one-time accelerated share-based compensation expense recognized in Q2 due to Project Own It, offset by the effect of acquisition on investment in new businesses. R&D&E was $73 million in the quarter, or 4.2% of revenue, which was a decrease of 50 basis points as a percentage of revenue year-over-year. The reduction was driven by lower spending for print and the suspension or deferral of innovation projects. Other expenses net were $34 million higher year-over-year. The increase was mainly driven by lower sales of non-core business assets, an increase in non-service retirement-related interest costs due to a higher discount rate and higher litigation expenses. The third quarter adjusted tax rate was 32.1% compared to minus 3.5% last year. The increase was largely due to changes in elections made to certain tax positions for recently filed returns, as well as prior year non-recurring tax benefits from tax return filing positions on the re-measurement of deferred tax assets. Adjusted EPS of $0.19 in the third quarter was $0.29 lower than in the prior year. This decline was driven by a year-over-year reduction in adjusted operating income, lower sales of non-core business assets, and a higher tax rate, offset by a lower share count. GAAP loss per share of $2.48 was $2.96 lower year-over-year due to an after-tax non-cash goodwill impairment charge of $395 million, or $2.54, alongside an increase in adjusted items, including higher non-service retirement-related and restructuring costs. The goodwill impairment charge reflects a revaluation associated with macroeconomic uncertainty, as well as a higher discount rate being applied to our forecast. Turning to revenue, demand for our products and services was strong in Q3, but total revenue fell slightly below our expectations due to significant euro and British pound weakness. Despite adverse currency movement, Equipment revenue was at its highest level since supply chain constraints began last year. Post-sales revenue grew mid-single digits on a constant currency basis for the second straight quarter, inclusive of the benefits of acquisitions. While we are observing increased caution from some of our customers, the underlying drivers of demand and revenue growth for our business remain healthy. Equipment orders continue to benefit from years of underinvestment in print hardware. Growth in supplies revenue reflects improvement in print activity, while managed print, IT, and digital services revenue are also growing, and we are realizing the early benefits of recent price increases. Equipment sales of $390 million in Q3 grew 6.7% year-over-year in constant currency or 0.8% in actual currency. Constant currency growth was driven by strength in EMEA. The geographic disparity of revenue growth between regions this quarter reflects the availability of equipment more than demand trends, which remain resilient in both regions, particularly for A3 equipment. We received more equipment specific to European markets than expected, which negatively affected gross margin as the achieved selling prices are lower in EMEA. Installations were down year-over-year across all categories of black and white machines, but higher year-over-year for all categories of color machines. This reflects our prioritization of installations for higher-value color equipment. Margin benefits associated with an improvement in the mix of color devices were offset by geographic mix on the installation of equipment from our backlog that does not yet reflect recent price increases. We expect a more favorable geographic channel and product mix in Q4. Post-sales revenue of $1.36 billion grew 4.1% in constant currency year-over-year and fell 0.7% in actual currency. Post-sales growth in constant currency was driven by IT services, which includes revenue associated with the recent acquisition of Powerland in Canada and growth in sole supplies and paper. Maintenance and outsourcing services revenue growth accelerated this quarter in constant currency due to recent pricing actions and the acquisition of Go Inspire. These improvements were partially offset by lower financing revenue, which was impacted by Xerox product availability. Let's now review cash flow. Free cash flow was a use of $18 million in Q3, and was lower year-over-year by $99 million, driven by a $60 million increase in the use of working capital and an incremental $46 million of capital used to finance origination on operating lease growth at FITTLE. Operating cash flow was a use of cash of $8 million in Q3 compared to a source of cash of $100 million in the prior year. Working capital was a use of cash of $14 million this quarter, $60 million higher than the prior year, driven by the late receipt of product in the quarter and an increase in inventory in anticipation of higher Q4 revenues. Additionally, cash used to fund an increase in finance receivables and operating lease was $54 million in the quarter compared to a use of funds of $8 million in the prior year, reflecting FITTLE portfolio growth strategy. Investing activities were a use of cash of $33 million compared to a source of cash of $18 million in the prior year, due in large part to $41 million of cash used to acquire businesses and lower proceeds from the sales of non-core business assets, partially offset by lower CapEx. CapEx of $10 million was $9 million lower year-over-year, mainly supporting our investment in IT infrastructure. Financing activity consumed $168 million of cash this quarter, driven by a net reduction in securitized debt. During the quarter, we paid dividends totaling $43 million and did not repurchase any shares. We remain committed to returning at least 50% of our free cash flow back to shareholders. We expect to exceed this amount based on year-to-date share repurchases and our annualized dividend. Turning back to profitability, adjusted operating income margin improved sequentially this quarter but at a slower pace than expected due to the effects of supply constraints, geographic mix, and the impact of higher-than-expected inflation across our cost structure. We remain on target to deliver $150 million of gross cost savings this year through Project Own It, but high levels of inflation have caused a rise in operating costs above the level expected when we increased our savings target to $450 million in Q1. Further, supply chain conditions are improving, but not at the pace we anticipated as recently as last quarter. We expect adjusted operating margin to improve again in Q4, as product supply constraints ease, and we realize the benefits of incremental pricing benefits and more profitable geographic mix and cost actions. However, we no longer expect our full-year operating income margin to exceed prior-year levels. We are not providing an update to our 2023 margin outlook today, but I will provide some perspective. Profitability improvement is the most important mid-term priority for our management team. We expect adjusted operating margin to improve in Q4 and continue into 2023. Specifically, price increases and cost actions taken this year will have trailing compounding benefits for 2023, and incrementally, if revenue continues to grow, as we expect it will. Further aiding our profitability next year are the actions we have taken to reduce our spend on innovation projects with longer periods of realized benefits. We will provide more detail on expected 2023 savings from adjusting spending on new businesses when we provide 2023 guidance next quarter. Finally, we remain diligent in our approach to managing our overall cost structure. Project Own It will have delivered more than $2.2 billion of savings since 2018 by the end of this year. As we have noted in prior calls, Own It is as much about generating operating efficiencies as it is about cost cutting. We have additional capacity to do both in the coming year. As Steve noted, we are currently undergoing a detailed strategic review of our business structure, the result of which is expected to yield significant savings and enable greater sales. We expect the combination of margin improvement from better supply chain conditions, price and cost actions already executed, along with future profit-enhancing actions, will drive operating margin in 2023 closer to the level indicated at our February 2022 Investor Day. Turning to segments, FITTLE revenue declined 12.3% in Q3, mainly due to a reduction in operating lease revenue reflecting lower Xerox equipment in store due to product constraints. Segment profit fell $16 million or 67% due to lower profit from operating leases and higher bad debt expenses, including a reserve release of approximately $14 million in 2021, which were only partially offset by lower intersegment commissions due to lower originations. Segment margin was 5.4% compared to 14.3% a year ago. Year-to-date, FITTLE margin of 9.3% remained above our full-year estimate of 8% to 9%. We continue to expect FITTLE margin to fall in that range for the full year as Xerox lease volume picks up, driving an increase in intersegment commission. In Q3, FITTLE's finance assets were stable at constant currency quarter-over-quarter. FITTLE origination volume grew 6% year-over-year. Non-captive channel originations, which include third-party dealers and non-Xerox vendors, grew 33% year-over-year due to growth in new dealer relationships and third-party equipment origination volumes. This growth was partially offset by a decline in captive product origination of 11%, which was negatively affected by Xerox product availability. Print and other revenue grew slightly in Q3 in actual currency. Print and other segment profit grew 14% year-over-year, with a 50-basis-point expansion in segment profit margin, despite being negatively impacted by the ongoing effect of supply chain constraints and inflation. Turning to capital structure. We ended Q3 with a neutral net core cash position. $2.7 billion of the $3.7 billion of our outstanding debt is allocated to support the FITTLE lease portfolio. The remaining debt of around $1 billion is attributable to the core business. Debt consists of senior unsecured bond and finance asset securitization. We have a balanced bond maturity ladder with no unsecured maturity for the remainder of the year. As a reminder, we plan to refinance the entirety of our 2023 obligation with additional securitized receivable financing. The vast majority of our debt carries a fixed rate. As a result, we do not expect material near-term profitability or free cash flow headwinds associated with rising interest rates. Finally, I will address guidance. We lowered our revenue guidance from at least $7.1 billion to a range of $7 billion to $7.1 billion in actual currency, largely due to adverse currency movement and, to a lesser extent, slower-than-expected easing of supply chain constraints. Since we last gave guidance, currency fluctuations have caused a $70 million headwind to our revenue outlook in actual currency. Our constant currency outlook for full-year revenue growth is largely unchanged, as we maintain a sizable backlog and have good visibility to Q4 product shipment. We lowered our free cash flow guidance for the year from at least $400 million to at least $125 million. As noted on previous calls, our guidance was predicated on the easing of supply chain conditions and an expected level of paid volume improvement. While we have experienced improvement on both fronts and continue to expect further improvement going forward, the improvement realized to date is lower than our initial expectations. More than $150 million of the decrease in free cash flow guidance reflects a greater-than-expected use of working capital to fund origination growth at FITTLE and for inventory, which was a larger-than-expected use of cash in Q3 due to late delivery of equipment. Neither of these had any impact on profitability, and our investment in the FITTLE portfolio is expected to produce double-digit margins and returns on investment over time. The remainder of the reduction in free cash flow guidance reflects a lower operating profit outlook for the second half of the year due to slower-than-expected improvement in supply constraints, page volume trends, and stronger-than-expected inflation across our cost base, the effects of which we expect will normalize in 2023. Similar to my comments on margin, I want to be clear that we are in no way satisfied with this year's expected free cash flow result. Our team is working tirelessly to improve margin and working capital efficiency, and we expect significantly stronger free cash flow results in the years ahead, due in part to improvement in supply chain conditions and a lessening of inflationary pressure on our cost base in combination with additional strategic actions. Our expectation is that free cash flow will more than adequately cover our dividend of $1 a share, which we have every intention of maintaining. We'll now open the line for Q&A.

And our first question comes from the line of Ananda Baruah from Loop Capital. Your question, please.

Thank you for the question and for the valuable details. I appreciate it. My main focus is on the revenue, which has remained strong. Can you share any insights on the customer context that might be helpful? Specifically, I'd like to know how much of the revenue you've generated comes from backlog versus new organic demand as you progress. Additionally, without providing specific guidance for '23, what can you share about your expectations regarding how the macro environment is affecting your customer base and demand? Thank you.

Thanks, Ananda. So as we noticed, our demand for products and services remains very, I would say, resilient. The macro environment is challenging. But, at the same time, what we have seen is the demand for our product remains strong. Our backlog moderately reduced. It was only 8%. As we mentioned in Q2, we are expecting the backlog to tail and reduce around Q3 and Q4. We have still seen a high demand for products, all product ranges, and specifically a suite. What we see from the macro is that we are not pursuing a reduction in IT investments related to our products. Our products support the resolution of how our customers are currently looking at addressing some of the challenges they have, specifically around workflow solutions, everything related to digital services, where we have a set of solutions that address some of the challenges. So, in a nutshell, we don't see demand decrease. The backlog is steady. We are expecting to absorb some of the backlog as well in Q4. The challenges we faced during the quarter were mainly related to supply chain and inflation pressure.

And then I would say the other thing is...

Yes, go ahead, Steve.

The other thing I would say is on productivity. Customers are facing the same headwinds that everybody else is with the macro side, and our products and services are really helping to drive productivity inside of their infrastructure. So, we see strong demand where we've got clients that are trying to deal with inflationary costs as we are, and our products help significantly there.

And Steve, thanks for that. And Xavier, I believe you may have mentioned you expect you guys expect to grow in 2023? Is that accurate? And I guess what underpins that? Was it really just sort of the stuff you talked to just a moment ago? Or is there anything incremental to that?

Yes. I would say, I will give you two data points. First data point is on equipment revenue. Equipment revenue, the backlog still remains strong. We have $429 million of backlog. It was down only 8% during Q3. If you compare this backlog to the total equipment revenue we typically generate, it's close to 1/4 of the full-year revenue. So still a strong backlog here. I will call that a healthy backlog. More than 50% of this backlog is less than 90 days old. This does not mean that this backlog is aging. We do not see cancellations of the oldest from customers. So this is healthy, with customers clearly waiting for supply chain challenges to be fixed there. Regarding post-sales, both on equipment and post-sale, since Q2 2021, this was the first time where we started to face some of the supply chain challenges. But equipment revenue and post-sales have both grown in constant currency since more than a year, which is a good indication that we saw the gradual recovery of paid volume, but we also saw other revenue streams in post-sales taking shape and generating additional revenue here. We mentioned that IT services were growing, the supply business was growing. When you compare to 2019, post-sales revenue is now at 80% of where we were in 2019. If you take all these components into your project, we expect revenue to grow next year; sales will be a key driver, but IT services and other revenue streams in post-sales will drive the growth.

Thank you. One moment, and our next question comes from the line of Erik Woodring from Morgan Stanley. Your question, please.

This is Maya Neuman on for Erik Woodring. Thank you for taking my question. Maybe just to start, you highlighted that project deployments are taking a little bit longer and that page volume commitments are slower. When did you see this behavior start to change? And how should we think about what linearity looks like in the quarter?

Yes. These two indications address one question we often receive regarding how you see the post-sales revenue stream going there. As I mentioned, post-sales had growth in the quarter and was at constant currency growth of 4.1%. So still a healthy stream. However, we have noticed that in some cases, customers are taking longer to deploy certain projects. This could be related to the return to the office, but also, budget decisions that they are making. This delay in projects does not mean we are losing revenue, as these customers are currently using our solutions. This is an expansion of the current contract up to the next contract. Commenting on the page volume, we have seen in Q3 over Q2, a sequential growth increase in page volume. We are not yet at 80% in some of our geographies compared to 2019, but it's a gradual recovery. To be transparent here, in our expectations, we were expecting a higher recovery during this quarter, but this just reflects some of the challenges many firms are currently facing in bringing employees back to the office. However, despite this, we still see growth quarter-over-quarter, showing a sequential improvement, and the correlation that we flagged in the past between return-to-office and page volume.

Great. Thank you. And so just a follow-up question. Can you provide a little more color on what exactly the goodwill impairment charge relates to? And then, yes, I'll let you go. Thank you.

Okay. No, it's very simple and technical. Every year, we conduct an assessment of our goodwill. The goodwill is mainly related to prior goodwill being booked on acquisition. You have mainly two components when you make this adjustment. One key component is the interest rate assumption that you have when you build the case; the discount rate and how you calculate the WACC. The vast majority of the significant chunk of this goodwill impairment is driven by this due to the current macro environment. The second element is related to how we look at our forecast based on adjustments. This is one of the components that help us assess how the goodwill should be sustained in the future. I want to reiterate this point: this is a non-cash item, and you have noticed this is treated below the line. This is something that we do every year. I am uncertain that this is a challenge other companies are facing as well.

Thank you. One moment for our next question, and our next question comes from the line of Samik Chatterjee from JPMorgan. Your question, please.

I wanted to go back to the comment about page volumes again. I think I heard you say page volume recovery has been slower than expected. Can you dig into that a bit more? Is that driven by less return to the office? Or has printing behavior changed even as employees have come back? As you're starting to see some budget considerations from your customers, why isn't that more of where we would expect your customers to take certain budget decisions or priorities based on the page volumes that you're seeing? Why shouldn't we think of that in terms of 2023? I have a follow-up, please.

Thank you, Samik. The main point we observe is that the return to the office has been slower than what we expected. When employees are in the office, and you remember, we commented on this during the prior quarter, we see employees using devices to print, even if they are on a working pattern of three days out of five. This could mean about 60% of our page volume. We are getting closer to this number. Some geographies are already above 80%, but we are not there in every area. So this is a gradual improvement, but we do not observe a significant shift or changes in the printing patterns of our employees. Another point is, we still have strong demand around our managed print solutions related to working from home or when a company wants to support remote work. The demand we have seen for A4 solutions was quite strong this quarter. Finally, I would like to add that page volume is one indicator, but another metric is how the devices have been used by our customers. We launched earlier this year a suite of software called Workflow Central that customers are using, which can do a lot beyond just printing; they can do translation, reduction, or conversion to audio. This quarter, we have seen sales of this solution for workers who are either working from home or in the office rising significantly, and it is very close to the sales we see for the products. This is encouraging because page volume is an indicator, but we also see other revenue streams around multifunction devices.

Got it. For my follow-up, can you ask on the cash flow? The change in guidance here from $400 million to $125 million for the year; can you outline how much of that is related to inventory and supply challenges, which is more one-off versus underlying profitability? Also, you had updated us that you spent about $250 million in cash investments annually; just update us on what that expectation is going forward?

Yes. To simplify it, the reduction between $425 million to $125 million is mainly related to working capital. One item of working capital, as you described, is more of a one-off, related to inventory, specifically due to late arrivals of products in Q3, which is good news because it will help us deliver a strong Q4 from an ESI point of view. The second part of this working capital, which I call good collateral, relates to cash used to fund FITTLE growth. FITTLE is a business where you borrow money, then sell this money back to customers as part of our financing arrangement with customers. The fact that FITTLE is growing is positive because it means that the FITTLE portfolio has now stabilized and is on a path to reverse a downward trend. This indicates that FITTLE is able to grow outside of Xerox, generating origination new businesses with non-Xerox equipment. The working capital difference across free cash flow guidance is around $150 million of decline, and the remainder, approximately $125 million, is mainly related to profitability and beyond profitability. This relates to supply chain challenges we faced and the fact that the mix of products we are receiving and the inflation we see have affected our trajectory this year. However, we expect sequential improvement in margin and free cash flow in Q4 and 2023.

Thank you. One moment for our next question, and our next question comes from the line of Shannon Cross from Credit Suisse. Your question, please.

I was wondering if we could step back and talk about growth businesses that were a focus during the Analyst Day but are obviously not working out or costing too much. Can you talk about what you think will be the drivers of growth going forward? Since there was so much focus on 3D printing, the Bridge business, and the HVAC business? How should we think about the value or track the minority ownership that you retained in those businesses?

Shannon, it's Steve. Thank you for the question. When you think about macroeconomic conditions, the cost of capital and valuations of high-growth businesses have evolved since Investor Day. Current opportunities favor investments in our businesses over investments in long-deep tech technology. Some of these early-stage technologies require longer lead times and significant capital, so we've reevaluated how we deploy capital. We closed Eloque, scaled back 3D operations, but importantly, we've ensured that two businesses, specifically NAVI and our HVAC business, Mojave, have been spun out, and they will receive cash investments to see that growth. We have a minority position in those, which are two good assets that we see have growth potential, but we didn't want to use our cash for long-term return on those investments. We've reallocated our capital towards digital services, IT services, and all the things in front of us that we think can grow our revenue near term.

Okay, so how much percentage do you retain in the two spun-out businesses?

It's a minority position, and we don't disclose the specific details here.

Okay. So there's no way to get a valuation on that just so we can watch how it goes? And then I guess, thinking about Project Own It, can you provide some more details on exactly what you're going to do to change costs? Are you looking at massively shrinking your technicians or going more to inside sales? How should we think about how you're going to morph this, given the end market dynamics as well as macro challenges?

Yes, I think there are a couple of things there, Shannon. First, there’s a large opportunity in our supply chain in terms of looking at what we do with our inventory and our inventory locations, where we can significantly optimize using technology and artificial intelligence. As you look at our go-to-market opportunities, we can penetrate existing clients further by expanding our products and services inside our current client base, thus growing the total addressable market (TAM) with our clients. We’re also focusing on optimizing our service delivery by using technology like CareAR and artificial intelligence to do more remote solving and reduce the need for truck rolls, meaning second calls to our customers. We will look at a variety of other ways within our portfolio to optimize costs, including SG&A, how we go to market, and so forth. There are lots of opportunities to drive supply chain improvements, optimize field service, and improve our go-to-market strategy as part of Project Own It. We'll provide more details at the end of Q4.

My final question is on cash flow. I know you're confident in driving higher cash flow numbers, but I'm just trying to understand how you can maintain your current dividend and what you're doing considering you're going to have some payments in December on the debt side? Can you let us know what's the minimum level of cash that you need to run the business?

Shannon, we have no issue paying the dividend and maintaining it. In terms of debt, we need to pay $650 million in March 2023. As part of the covenant, the revolver covenant that we have, $350 million will be paid in December and will be entirely funded by securitization. So we have no concerns on this point. Regarding free cash flow, the vast majority of the Q3 use of free cash flow was related to growth at FITTLE; that is a positive thing. On the other side, we expect the inventory situation to reverse. Historically, Q4 is our strongest quarter, and we still have a backlog of $420 million. So, we should have a strong Q4 from a near-term perspective that will help with the ESI inventory and reduce inventory down.

And our final question for today comes from the line of Jim Suva from Citi. Your question, please.

Can you help me better understand how to bridge with more investment in FITTLE? You're reducing your sales outlook; is it your customers asking you to finance more, the cost of capital, or are you building or expanding something within FITTLE? It seems a bit interesting given that if sales are challenged and you have a more cautious outlook on macro concerns.

Yes. Jim, I'll take a step back to describe the FITTLE strategy. Historically, FITTLE has been a captive operation, meaning it was correlated with Xerox equipment revenue. When Xerox equipment revenue was up, the originations were up, and vice versa. For the past two years since we reinvigorated FITTLE, we have expanded beyond captive operations. The FITTLE management team has developed capabilities well beyond pure Xerox products, and they have been seeing growth outside of Xerox. The growth we are seeing in Q3 and expect to see is from these non-captive origination sources. This is a good thing as it indicates that FITTLE's business involves generating a strong return in the future and helps to maintain good relationships with our partners and resellers.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steve Bandrowczak for any further remarks.

Thank you for listening to our earnings conference call this morning. The past few years have tested the resolve of our people. I am one to lead this company that is filled with great people who have proven time and again their ability to overcome incredible challenges. When I meet with our clients and our employees, I am filled with optimism about Xerox's ability to do more with our clients and about the team we have in place to deliver more value to our key stakeholders, including shareholders, clients, partners, and employees. Thank you for listening to this call, and have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.