Welcome to the Xerox Holdings Corporation's Fourth Quarter 2023 Earnings Release Conference Call. After the presentation, there will be a question-and-answer session. At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President 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 Fourth Quarter 2023 Earnings Release Conference Call, hosted by Steve Bandrowczak, Chief Executive Officer. He is joined by John Bruno, President and Chief Operating Officer; and 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 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'd like to turn the meeting over to Mr. Bandrowczak.

Good morning, and thank you for joining our Q4 2023 earnings call. I'd like to start by commending the Xerox team for delivering strong growth in full-year adjusted operating income, EPS, and free cash flow, amid a challenging and uneven macroeconomic environment. We achieved 2023 adjusted operating income margin and free cash flow guidance, despite slightly weaker than expected macro conditions in the second half of the year. Our ability to overcome top-line headwinds and meet full-year profit and cash flow targets is a testament to this company's culture of operating discipline, which has been forged and strengthened in recent years through operational and macroeconomic challenges. Summarizing the results for the year: Revenue of $6.89 billion declined 3.1% in actual currency and 3.3% in constant currency. Our corporate, digital, and IT service businesses performed much better than this top-line result would suggest, however. As Xavier will describe later in the call, revenue declined less than 1% in 2023 after adjusting for the effects of backlog reductions in the current and prior year, structural simplification efforts, and the intentional de-emphasis of certain non-strategic businesses. Adjusted EPS was $1.82, $0.70 higher year-over-year. Free cash flow was $649 million, an increase of $547 million over 2022. And adjusted operating margin of 5.6% was higher year-over-year by 170 basis points within our guidance range. 2023 was a pivotal year for Xerox and marked the first full-year of a multi-year strategy to reposition our businesses for long-term sustainable growth in revenue and profits, which we call our reinvention. We took structural and foundational actions to improve our core business and simplify operations, resulting in greater operational focus and a clear path for more transformative reinvention actions this year and beyond. All the while, we delivered key accomplishments towards the strategic priorities set out at the beginning of 2023, which provided momentum for our reinvention in 2024. Starting with client success, client success is and always will be a point of competitive differentiation for Xerox and is foundational to maintaining a strong and stable print business. Since accepting the CEO position in August of 2022, I directed my team to put more emphasis on client outcomes and solutions-based products and services that address the productivity challenges of a hybrid workplace. A rigorous focus on positive client outcomes solidifies our position as a trusted advisor as clients build workplace technology solutions for the future. And improves the predictability and repeatability of our business and expands total addressable markets by ensuring we remain responsive to and take advantage of evolving market trends. Last year we took actions to enable complete operational focus on the delivery of positive client outcomes in our core print, digital, and IT service businesses. We divested PARC, Xerox Research Center of Canada, and Elem, our 3D printing business. We signed partnerships with Peak Solution, an affiliate of HPS Investment Partners, allowing FITTLE to focus exclusively on financial solutions that support the sales of Xerox equipment and services. We also reduced our presence in certain non-strategic markets with lower levels of profitability, such as paper and certain types of IT hardware. In 2023, an enhanced focus on client success delivered the intended results, proving client centricity can drive revenue stability, even in secularly challenged industries like print. Xerox Net Promoter Score improved. We grew our share of equipment sales in the markets in which we compete, and we achieved revenue renewal rates above 100% across large account contract renewals, evidencing our ability to sell new print and digital services that more than offset reductions in traditional print spend. Moving to profitability. Transformation of the scope and scale contemplated by our reinvention requires a strong base of profits and margin profile from which to build. In 2023, we improved adjusted operating profit by more than $100 million and adjusted profit margin by 170 basis points year-over-year. Improvements stem from structural cost reduction efforts, pricing discipline, ongoing operational efficiencies, and deliberate reduction in non-strategic revenue with low levels of profitability. These actions and the restructuring announced earlier this month put us firmly on the path to returning Xerox to double-digit profitability by 2026, while improving our capacity for tactical reinvestment in growth areas. Finally, shareholder returns. It is important to our board and management team that investors are rewarded while accompanying Xerox on its reinvention. In 2023, we achieved our shareholder return policy while reducing total debt more than $600 million of free cash flow, when combined with excess cash on our balance sheet, was used to pay our $1 per share dividend, lower our debt balance by approximately $450 million, and reduce our share count by more than 20%. We will build on these achievements as our priorities evolved in 2024, year two of our reinvention. Our first priority of 2024 is the continued strengthening of our core print, digital, and IT service businesses. These businesses form the bedrock of our strategic repositioning from which new capabilities and our client-centric mindset will be leveraged to drive incremental service opportunities and revenue diversification. Earlier this month, we announced a significant reorganization of our businesses, including the adoption of a business unit rather than a geographic-led operating model along with a greater focus on a partner-led distribution. These changes are expected to both strengthen our core business and position us to capture new ancillary revenue opportunities over time. John Bruno, our President and COO, will provide more details on the operating changes.

Thank you, Steve, and good morning everyone. I appreciate the opportunity to speak to you today and provide more context around our multi-year reinvention journey. At its core, reinvention is about operationalizing a balanced strategy to improve our legacy business and build a foundation to address adjacent opportunities with existing and new clients. These adjacent market opportunities are available to Xerox today, but they require enhancements to our client coverage model and our service offerings. By the market, I'm predominantly referring to the mid-market, where digital IT services remain underutilized by our clients. There is opportunity for Xerox to improve client penetration of digital and IT services within this market, and this assertion is validated through primary and secondary research as part of our reinvention planning. Critical to more fully addressing these market opportunities is a core business that is stable, fit for purpose in today's market environment, and capable of meeting the evolved needs of our clients. We understand the dynamics of the markets we're in. And to win in a challenged market like print, we must be more competitive, easier to do business with, and relevant to our clients as their needs evolve. As such, our reinvention is aimed at addressing the complexity of our business that was built over time and for a different time. In its place, we are designing a simpler, more operationally efficient organization to address our clients' most important hybrid workplace challenges now and into the future. I have been part of similar transformation efforts with other large companies which, like Xerox, have a strong heritage. Pattern recognition tells me Xerox has what we need to successfully modernize and transform this business. In my first year, I've experienced very little resistance or lack of desire to change. Our people are eager to embrace and direct change, and they're asking for it. And that's a great place to be as the work to reinvent any company is complex and requires tenacity and discipline. As Steve noted, 2023 was a foundational year for Xerox. We narrowed our focus and removed competing priorities to reduce our operating costs and organizational complexity. We set up a strategic program management office comprised of 16 work streams with more than 200 initiatives. This team designed, defined, and are currently executing organizational and business operating system simplification spanning from reductions of legal entities, ERPs, payroll, and invoice systems to just name a few examples. 2024 marks the second year of our journey. The focus this year is building on the structural and foundational changes made in ‘23 with an improved operating model. Earlier this month, we announced a new organizational structure that merges sales regions, flattens layers of management, streamlines our global offering teams, and collapses our go-to-market offering and delivery teams all to one business unit. We moved from a geography to a business unit-led operating model to align our groups responsible for our print, digital, and IT service businesses from product development to sales and services, as one team to empower fewer leaders with the information they require to improve decision rights and be more agile. We formed a new organization, Global Business Services or GBS, that will drive enterprise efficiencies and productivity gains by centrally coordinating internal processes, leveraging shared capabilities, and platforms. The formation of GBS goes well beyond previous cost efficiency efforts at Xerox. It involves an end-to-end redesign of our operations to enable touchless internal and external customer experiences. GBS will leverage the success we achieve from Project Own It and embed leading technologies to drive continuous innovation. We see GBS as a key enabler of long-term sustainable profit improvement. In 2024, we will selectively optimize our geographic distribution to improve regional profitability and reach, as well as narrow offerings where we lack sufficient competitive differentiation to generate required rates of return on invested capital. These strategic actions will have a negative effect on revenue initially, but are expected to generate improvements in total operating profit. The overhead costs currently in place to support these geographies and offerings more than outweigh potential reductions in revenue and associated gross profits. In summary, the reorganization announced earlier this month is a key enabler of expected profit improvement in 2024. Progress toward our three-year operating income target of $300 million above 2023 levels will be driven by three concurrent efforts. The first, operating model simplification throughout the reinvention journey with continuous savings initiatives led by GBS. The second is geographic and offering simplification efforts that are going to continue into 2026 with net savings being generated from the replacement of direct operations in certain geographies with more efficient partner-led solutions and lower costs associated with a more simplified product portfolio. And finally, taxable investments and partnerships to grow our digital and IT services business will provide a more favorable revenue mix and profit profile through 2026 and beyond. I look forward to keeping you updated along our journey as our reinvention delivers improved financial results and shareholder returns. I'll now hand the call over to Xavier.

Thank you, John. And good morning, everyone. As Steve mentioned, important steps were taken in 2023 to simplify our business and improve Xerox's balance sheet and profit profile. For the year, we delivered strong growth in earnings per share and free cash flow, despite a modest decline in revenue, reflecting the successful implementation of a more flexible cost structure and rigorous operating discipline. Additional structural efficiencies enabled by our reorganization are expected to drive further profit improvement in 2024, our second full year of reinvention. In Q4, revenue, margin, and profit declined year-over-year due mainly to a significant reduction of equipment backlog in the prior year quarter. Revenue growth was further affected by the intentional reduction of certain non-strategic revenue. Excluding this factor, revenue would have increased low-single digits year-over-year. Turning to profitability, gross margin declined 130 basis points over the prior year quarter, due mainly to lower activity, higher product cost, and the termination of the Fuji royalty, partially offset by strategic pricing action, lower freight cost, and the benefit of structural cost reductions. Adjusted operating margin of 5.4% declined 380 basis points year-over-year, due to lower revenue on gross profit on higher compensation expense, partially offset by the benefit of pricing on structural simplification efforts. Adjusted other expenses net were $45 million higher year-over-year due to lower sales of non-core business assets and an increase in non-financing interest expense. Adjusted tax rate was 15.2%, compared to 21.9% last year. The decrease was largely due to the benefit associated with a change to deferred tax asset valuation allowances on redetermination of certain unrecognized tax positions. Adjusted EPS of $0.43 in the fourth quarter was $0.46 lower than the prior year, driven by lower operating income on higher other expenses net, partially offset by the benefit of lower shares. GAAP loss per share of $0.50 was $1.24 lower than the prior year. This includes a $78 million after-tax restructuring charge associated with the recently announced workforce reduction or $0.62 per share. Let me now review revenue and cash flow in more detail. Starting with revenue, equipment sales of $458 million in Q4 declined 17.3% year-over-year in actual currency or 18.3% in constant currency. The prior year effect of backlog reduction drove more than 25 percentage points of the year-over-year decline. Underlying demand for our equipment remains stable, and order activity is gaining momentum as backlog on macroeconomic conditions stabilize. Total equipment revenue outpaced installation activity due to favorable product mix. Installations of high-end color equipment, which were less affected by prior year backlog reductions, increased year-over-year while entry on mid offerings declined. Declines in entry reflect prior year reduction to backlog on current year constraint, while declines in mid primarily reflect prior year reduction to backlog. Post sales revenue of $1.3 billion declined 5.8% in actual currency year-over-year and 7.5% in constant currency, excluding the effect of non-strategic and lower margin paper and IT endpoint device placement which we plan to continue to reduce over time, as well as the exit of Russia, the termination of the Fuji royalty, and the absence of PARC revenue. Post sales revenue declined only modestly geographically. Geographically, both regions declined in actual and constant currency. Given the significance of certain non-strategic items on our revenue trajectory in recent quarters and for the full year, I will provide additional commentary to help clarify the underlying revenue trends associated with our core businesses. For Q4, the prior year reduction in equipment backlog contributed around 690 basis points to the year-over-year decline in total revenue. Lower sales of non-strategic paper and IT endpoint devices contributed around 160 basis points to the decline, and the effect of lower Fuji royalty revenue on strategic action taken to simplify our business contributed around 190 basis points to the decline. When these combined effects are removed, revenue from our core businesses grew low-single digits this quarter, reflecting stable demand and growth in Digital and IT services, partially offset by decline in printed page volumes. For the year, this same item in the aggregate contributed around 230 basis points to the year-over-year decline in revenue. Therefore, core business revenue for the year would have declined a little less than 1%. Let's now review cash flow. Free cash flow was $379 million in Q4, higher by $211 million year-over-year. Operating cash flow was $389 million in Q4, compared to $186 million in Q4 2022. Improvements were mainly driven by a net source of cash associated with a reduction in financing receivable and improvement in working capital. Finance assets were a source of cash this quarter of $92 million, compared to a use of cash of $169 million in the prior year, reflecting the benefit of our forward flow program with HPS and lower origination as expected. Working capital was a source of cash of $115 million, resulting in a $42 million year-over-year increase in cash driven mainly by a reduction in inventory. Investing activities were a use of cash of $8 million, compared to a source of cash of $17 million in the prior year due to lower proceeds from the sales of non-core business assets, partially offset by lower CapEx. Financing activity consumed $383 million of cash this quarter, which includes a payment of around $300 million of secured debt and dividends totaling $34 million. During the quarter, we repaid a bridge loan with proceeds from the issuance of a term loan credit facility. Turning to segments, FITTLE origination volume declined 25% year-over-year, reflecting FITTLE's change in strategy to return its focus toward captive-only financing solutions. Captive product origination was up 2%. FITTLE finance receivable balance declined around 3% sequentially in actual currency, reflecting a run-off of existing finance receivable on HPS funding of FITTLE's origination. As previously highlighted, we expect our finance receivable balance to decline and normalize closer to $1 billion by 2027. FITTLE revenue was down slightly year-over-year in Q4 due to lower finance income on other fees associated with the decline in FITTLE finance receivable balance, partially offset by higher commission from the sales of finance receivable assets. Segment profit for FITTLE was $7 million, up $6 million year-over-year, mainly due to lower bad debt expenses and lower intercompany commissions. Print and other revenue fell 9.5% year-over-year in Q4 due to lower equipment and post-sales revenue, reflecting the effect of prior year backlog reduction and declines in non-strategic items mentioned in my prior comments. Print and other segment profit declined 50% versus the prior year quarter, resulting in a 430 basis point reduction in segment profit margin year-over-year driven by lower revenue, partially offset by structural cost efficiencies and pricing actions. Turning to capital structure, we ended Q4 with $617 million in cash and cash equivalents, unrestricted cash. Around $2.4 billion of the remaining $3.3 billion of our outstanding debt supports our finance assets, with the remaining debt of around $900 million attributable to the non-leasing business. Total debt consists of senior unsecured bonds, finance asset secured borrowings, and the new term loan. We maintain a balanced bond maturity ladder over the next few years. Finally, I will address guidance. For revenue, we expect a decline of 3% to 5% in constant currency in 2024. Included in this guidance are the effects of prior year backlog reduction and headwinds associated with the de-emphasis of certain non-strategic businesses, all of which are unrelated to the performance of our core print and services businesses. More specifically, the reduction of backlog in 2023 is expected to contribute around 200 basis points to the year-over-year decline in revenue, with another 200 basis points attributable to the decline of certain non-strategic revenue, including lower sales of paper. Excluding the cumulative effect of these items, core business revenue is expected to be roughly flat year-over-year, reflecting stable print demand, growth in digital and IT services, and neutral macroeconomic conditions. As future strategic actions involving product or geographic simplification are decided, we will update guidance and the respective effect of these actions accordingly. In terms of quarterly cadence, the headwinds previously noted, particularly the year-over-year effect of backlog reduction, are expected to affect revenue growth more significantly in the first and second quarters of the year. Q1 revenue is expected to decline at a rate between that of Q3 and Q4 2023, with sequential improvement in year-over-year revenue trajectory expected throughout the year. We expect 2024 adjusting operating income margin to be at least 7.5%, an improvement of at least 190 basis points year-over-year, resulting in the realization of more than a third of the expected $300 million improvement in operating profit above 2023 levels expected from reinvention through 2026. The increase in profit and profit margin in 2024 will mainly be driven by structural simplification actions enabled by our reorganization including the effect of the workforce reduction decision announced on January 3. Operating margin will be lowest in Q1 due to seasonal factors and the timing of structural cost reductions throughout 2024. We are expecting slight improvement in Q1 operating margin from Q4, 2023 levels with more significant improvements throughout the year. To be clear, our ability to achieve profit guidance is not predicated on revenue growth, as the expected savings associated with our reorganization far outweigh the reduction in profit associated with lower non-strategic revenue. Free cash flow is expected to be at least $600 million in 2024. Free cash flow will once again benefit from a reduction in our finance receivable balance. Improvements in cash flow from underlying operations are expected to be offset by one-time restructuring payment, higher cash taxes, and an increase in pension contributions. We plan to pay our $1 share dividend on outstanding debt obligations as they come due. Excess free cash flow is expected to be deployed opportunistically according to expected rate of return on investment, including opportunities to strategically reinvest in the business and acquisitions. In summary, we enter 2024 on solid footing, with stable demand for our products and services, momentum in orders, and signing a simplified operating structure and clear line of sight to savings that will enable another year of meaningful improvement in operating profit.

Certainly. One moment for our first question. And our first question comes from the line of Ananda Baruah from Loop Capital. Your question please.

Hey. Thanks guys for taking the questions. I guess a couple, if I could, the headwinds to revenue that you guys pointed out on the call and you kind of quantified in the deck as well. And I think they impacted last quarter as well. What's a good way to think about how those roll off as we move through the year? And I guess at what point in time do you expect them to be fully rolled off and for the reported revenue to kind of be sort of apples-to-apples? And then I have a quick follow-up.

Hi, Ananda. Xavier speaking here. So, phasing of the headwinds that we have, they are different by nature here. But the main one, as you mentioned it. So if you look at next year, our forecast here is minus 3% to minus 5%. And we said we have around 400 basis points that are, I would say, are normal by nature. They do not impact the core business here. So, the first one is a backlog. The backlog is 200 basis points out of the 400 basis points impact. The backlog, we expect at the end of the comparison of backlog to end at the end of quarter two, 2024. So quarter three and quarter four should be normal compare because last year in 2023, we still have the impact of flushing the backlog. The other items 200 basis points items that we have there will phase out during the year. There are some items related to, we mentioned paper sales, IT endpoints, they will stay within the year there. But the Fuji royalty, for example, is an item that will end at the end of Q1, but they are less important in nature. The largest one is the backlog, and the backlog is end of quarter two.

That's super helpful. And then just sort of like a sanity check here. It looks like this is easy math to do, but it looks like you're forecasting our profit to be up year-over-year and maybe nicely up. I'm getting like $90 million, $80 million to $100 million or something like that, depending on what revenue you use. Is that an accurate assessment?

Yes, annualized it is even higher. So the operating margin this year is 5.6%. After last year it was 3.9%. So quite a nice progression that we have done in operating profit. And for next year, we are forecasting, guiding at least 7.5%. So this is a 190 basis point progress here that we are doing in operating margin in absolute value, we are speaking about more than $100 million after this year which has also been in operating income, adjusted operating income of more than $100 million as well. So, nice momentum that we are building. And the other point I want to flag that is the dependency of delivering this operating profit or operating margin improvement is not entirely driven by revenue, we have given our revenue guidance, you understand the one-off impact there. But a lot of the actions that are supporting the operating profit, operating margin improvement are already actions that we have in play.

That's super helpful, because let me dovetail that into one last one. Can you remind us of the $300 million that you have for the 2026 goal, incremental OP income? How much of that is revenue driven versus things that are completely under the company's control? And that's it from me. Thanks.

So, one of the things we did, as you remember, we announced very strategic structural changes and the launch of the reinvention, which drives an end-to-end simplification, reduces costs, strengthens our core business, and ensures we have the flexibility to adapt whether revenue increases or decreases. So two pieces of it. One reinvention will drive simplification. We talked about GBS and what we're doing there to drive our overall margins and drive improvements to our business. Second, we're going to take strategic actions in our geographies and our products. So the whole $300 million of operating profit, independent of what happens with the revenue, so that we can adjust up and adjust down based on whatever decisions we make on non-strategic revenue.

I understand. So, Steve, any additional revenue generated would be on top of the $300 million. Is that correct?

It should. We are very strategically targeting higher revenue that has higher profitability and by default, you're absolutely right. If we increase our revenue, we should increase our profitability.

Okay, great. Thanks, guys. I appreciate it.

Thank you. One moment for our next question. And our next question comes from the line of Samik Chatterjee from J.P. Morgan. Your question please.

Yes. Hi. Thanks for taking my questions. I guess if I can start with a clarification on your revenue guide for 2024, you're guiding to flat when we ex-out the backlog and exit from certain non-strategic businesses. How do I keep that in context of what you're referring to here for Q4, which is a mild softening in demand in the European markets? How are you sort of thinking about or baking in the macro impact you've seen in Q4 into your 2024 outlook? And have a follow-up. Thank you.

Yes, let me take the start of that, and then turn over for Xavier for numbers. We took a look at Q4 and we saw strong signings in our services business and grew that, and that backlog looked extremely strong. We also see strengthening in our core business in the areas that we play today. So a combination of increased orders, backlog, and our service. And the other piece that Xavier mentioned was in our signings, we're signing now at over 100% on revenue renewal in our core contracts and our services business. So those give us good foundation for growth and stability as we go forward.

Yes. Steve, I will add as well. So those are the macro conditions that we were observing, specifically in Europe: quarter three, a little bit smoother in quarter four. We see a little bit of easing specifically around the interest rate on both sides of what we found here. So this gives us a little bit of confidence on this revenue side. But the important thing, Samik, is when you look at the revenue, normalized revenue, as you mentioned it here, this is flat to minus 1% this is what the industry is seeing here. When we look also at the trend of return to office page volume and cut, we have also indicated that is telling us that the numbers that we put on paper here can be sustained.

Got it. Okay, for my second question on cash flow, you reported $649 million in 2023, showing an improvement in operating income of around $100 million. Additionally, the HPS transaction is continuing to generate cash. Could you clarify this further, particularly regarding the restructuring component? Also, why isn't the cash flow guidance for 2024 a bit higher? Thank you.

Yes, Samik, that's a good question. So free cash flow, we said at least $600 million at this stage of the year. The improvement in operating cash flow, which is directly related to the improvement of the operating income. We are still expecting our conversion rate from operating income or adjusted operating income to free cash flow being 70% to 80% range, which is what we are used to produce there. But for this year, as you mentioned it, we have a restructuring provision. Restructuring provision from a cash point of view has an impact of around $140 million. Then we have also an additional contribution in pension that you do in the U.S. and due to the profitability as well, additional cash tax is there. So when you net all of this, it gives us this number of around $600 million over time. We will provide more visibility quarter-by-quarter on how this trend is going.

Okay, great. Thank you. Thanks for taking my questions.

Thank you, Samik.

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

Thank you for taking my questions. I have a couple as well. Steve, to start, could you provide some insight into the renewal rates for large customers? Specifically, what percentage of your services or contracts do these large customers account for? Additionally, how do we assess the renewal rates for smaller customers, considering you have a significant number of SMB customers? What do the renewal rates look like for that group? I’m also curious about the significance of large enterprises compared to the SMB segment. Lastly, I have a follow-up question. Thank you.

Yes, thanks Erik, I appreciate it. So it's roughly about one-third of our overall revenue. And so what we're seeing there is the opportunity to really embed IT and digital services on top of our core services contracts. As we start to see, and we're seeing renewals come up year-over-year, we put a big focus on client centricity. And what that means is how do we help our clients drive productivity, how do we help them solve some of the biggest challenges they have. So if you think about headwinds, whether it's around use of capital, whether it's around labor pressure, whether it's around pressure on profitability, we continue to bring products and solutions that help them to offset that, and that's why we've been successful in our renewal rates up. Same thing applies to our SMB businesses, right? When we look at our SMB, it's probably even more of an opportunity. We see significant SMB has the same enterprise challenges with profitability due to increases of, whether it's labor costs, whether it's pressure on capital, whether it's pressure on overall increases in costs, they're looking to us to help to offset. So we continually bring solutions. We talked about some of these last quarter on some of the vertical solutions that we're really focusing on. How do we help inside of healthcare? How do we help inside of universities, law firms, etc. And so as we look at those renewal rates, we continue to bring solutions on top of it, and we've been very successful. And I've made the statement a couple of times now that we have a great opportunity to expand in existing accounts with products and services that we already have. Better stated, the TAM for us is beyond just the core that everybody sees as our core business. We need to execute and grow inside of our client accounts with products and services that we already have. And we’re seeing evidence of that with new signings.

Okay, super. Thank you. Very helpful, Steve. Xavier, if I maybe turn to you, can you maybe help us all better understand the trajectory of gross margins relative to OpEx in 2022 to kind of land at that 7.5% operating margin target?

Yes, Erik, you have the overall understanding. We are anticipating a slight increase in gross margin. This is due to the various actions we have implemented, which have facilitated several pricing strategies that have contributed to margin growth this year, and we expect this to continue next year. Additionally, we are discontinuing or scaling back on some low-profit revenue sources, such as paper and IT endpoint solutions, which carry lower margins. We are compensating for this reduction in revenue with other revenue streams that have higher profitability. Operational expenses are definitely an area for improvement, and you have already seen progress in that area this year. Looking at SRI specifically with the PARC donations we've made, there's been a significant year-over-year improvement, reducing our RD&E expenses related to PARC by over 100 basis points. When considering the trajectory we expect on SAG with the restructuring, this will be the primary factor driving the improvement in our operating margin, particularly the adjusted operating margin year-over-year. The 190 basis point improvement is based on actions we've either announced or implemented last year, which will benefit us going forward. The main takeaway here is that our reliance on revenue growth is less critical than our ability to execute cost-reduction actions.

Yes, Erik. The other thing I'd like to add, because we always get the question, you did the big actions with Own-It, now you're doing reinvention. And so in the beginning of the year, we really looked at all of our end-to-end cost structures, whether it was finance, whether it's SG&A, what we did with sales coverage, etc. And when you look at that against industry benchmarking, look at that against opportunity to where we can drive this company, that's where we're confident. We still got a lot of work to do to simplify this business. Whether it's around the number of systems we have, number of processes we have, the variations in different ways in which we do business. So when we look at it from a pure benchmark standpoint against other companies and industries, we've got a lot of opportunity ahead of us. Obviously, we got to execute. We'll execute that through the next 24 to 36 months, but there's still a lot of room for us. And that's really where we put GBS in place. GBS is really focused, our Global Business Services, is really focused on looking at each and every one of those end-to-end processes, looking at the cost that we're using and that we're expending in each one of those processes. How do we simplify it? And then think about how do we automate and how do we drive technology. We see AI, we see chat-GPT, RPA, robotics process automation, and the simplification of our business as a significant opportunity to grow those margins in the future, independent of their revenue line staying flat or a slight decline. So we're very, very optimistic that we can execute and we can drive and we've got a lot of room in our cost basis to make this company a lot more efficient.

Super. Thank you for that incremental color, and Xavier at the beginning for that. Maybe one last quick question, and that was on capital allocation. Obviously, we didn't really hear about buybacks, and so just want to make sure I kind of understood those priorities right and that we should not be thinking about any buybacks being done in 2024? And then that's it from me. Thank you.

You are correct.

Okay. Thank you so much.

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

Thank you for listening to our earnings conference call this morning. We are firmly on our path of Reinvention. Our focus in this second year of our reinvention is to strengthen our core businesses, further reduce structural cost through reorganizations, and allocate the more than $600 million of free cash flow we expect to generate in 2024 in a way that optimizes total shareholder returns. We have a clear line of sight to targeted profit improvements in 2024 and are laser-focused on ensuring we exceed our three-year goal of at least $300 million of adjusted operating income profit improvement above the 2023, 2024 levels by 2026. Thank you for listening and have a great day.