Earnings Call Transcript - XRX Q3 2021

Operator, Operator

Welcome to the Xerox Holdings Corporation Third Quarter 2021 earnings release conference call. After the introductory remarks, there will be a question-and-answer session. At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

David Beckel, Vice President and Head of Investor Relations

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 2021 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, 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 express 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 would like to turn the meeting over to Mr. Visentin. Mr. Visentin, you may begin.

John Visentin, Vice Chairman and Chief Executive Officer

Good morning, and thank you for joining our Q3 2021 earnings call. I hope everyone is safe and healthy. Revenue this quarter of $1.76 billion was essentially flat with the prior year's third quarter, despite a challenging operating environment. Adjusted EPS of $0.48 was flat year-over-year, and we generated free cash flow of $81 million, down slightly from $88 million in the prior year. Adjusted operating margin of 4.2% was lower year-over-year by 320 basis points. This quarter's results were negatively affected by two significant secular challenges: a deterioration of global supply chain conditions and the Delta variant. As the third quarter progressed, the challenging supply chain conditions we highlighted on our Q2 earnings call deteriorated further. Specifically, raw material and component shortages limited the availability of certain of our products and supplies, particularly our A3 devices. Transportation constraints extended delivery times by weeks and drove unit shipping costs multiples higher than normal levels. And when our products arrive, labor shortages further delayed delivery times. These challenges accounted for two-thirds of the year-over-year decline in this quarter's gross margin and caused equipment revenue to fall short of our expectations. Demand for our products remained strong, resulting in further growth of our backlog of equipment and third-party hardware to $265 million, which is approximately 90% higher year-over-year and more than 20% higher than the prior quarter. Our backlog also has a larger proportion of high-margin A3 devices relative to the previous periods. Post-sale revenue grew 1.7% year-over-year, but fell below our expectations as the Delta variant disrupted many companies' plans to return workers to the office. We expect vaccination rates will improve as governments encouraged companies to implement vaccination mandates. And we continue to see a strong correlation between vaccination rates, a return of employees to the workplace, page volumes, and importantly, post-sale revenue, which carries a higher margin than equipment revenue. And we are seeing improvements across each of these metrics. For example, September was the second highest month since the pandemic began in terms of page volumes and services and outsourcing revenue, which are two of the largest components of post-sale revenue, and the components that are most closely tied to page volumes. Based on what we know today, we expect supply chain challenges to continue during the fourth quarter and through the first half of 2022. We continue to expect the return of workers to the workplace, but our expectations for a broader return has been pushed from Q4 into 2022. For these reasons, we are reducing our revenue guidance for the year to $7.1 billion in actual currency, or $7 billion in constant currency. Importantly, we are reaffirming our guidance for free cash flow of at least $500 million. Our focus on cash generation gives us the confidence to maintain cash flow guidance, in spite of the top-line headwinds we face, all while continuing to invest in our strategic growth initiatives. Throughout these challenges, we have been guided by our four strategic initiatives: optimize operations, drive revenue, invest in and monetize innovation, and focus on cash flow. In Q3, we made progress across each of these initiatives. Project Own It has made our organization more agile and efficient. That agility was demonstrated this quarter as our operational team responded to unprecedented levels of disruption and uncertainty across our global supply chain. Our team responded quickly and is working diligently to mitigate the adverse effects of the supply chain disruptions on our business. For example, we are working to accommodate a wider array of products and materials, pre-purchase components and freight, and selectively increase pricing to offset higher costs. And we are doing everything we can to minimize disruptions to our clients' operations. We cannot control the pace of supply chain normalization or office re-openings. But we are driving revenue growth in areas we can control. In our core print business, we gained share of total print devices again in Q2, from the most recent reports from IDC, marking the fourth consecutive quarter of annualized market share gains. Growth in market share is a key pillar of our strategy in print, and is being driven by the quality of our products and our ability to provide secure, connected workflow solutions that our clients need across their multi-function printer fleets. Complementing our leading position equipment, our suite of digital solutions is resonating with clients who are increasingly digitizing document workflows and adapting to a hybrid work environment. Global signings for our capture and content services, which help clients extract, categorize, and automate document routing, such as our Digital Mailroom offering, increased 67% year-over-year in Q3. Our subscription-based workflow central platform allows clients to manage document workflow from any device, including PCs, tablets, and smartphones, with the enhanced security and functionality clients expect from our leading multifunction printers. Our products and solutions are evolving to enable productivity from whatever our clients' employees choose to work. Our IT Services business grew double-digits this quarter. Despite a year-over-year increase in our backlog of third-party equipment, within IT Services, RPA continues to gain traction. We now have 500 internal bots performing 4 million transactions per quarter. These transactions create a platform and set of use cases for us to deploy externally, and in the third quarter, we deployed bots to support our Lexmark Managed Services integration and enabled document classification and posting for our SMB clients. We continue to invest in the expansion of our IT services footprint to deliver a wider set of services to new and future SMB clients. Earlier this month, we acquired Competitive Computing, or C2, a leading IT services business based in Vermont. C2 provides us with access to a broader set of clients and capabilities that we can leverage throughout our IT services business. A key strategic focus in 2021 has been the standing up of the three new businesses, software innovation and XFS. This quarter we made progress towards our goal of standing up these businesses and monetizing our investments in innovation. In early September, we announced the formation of our software business, CareAR, a Xerox Company. CareAR is the industry's first service experienced management platform. And we believe it will transform service and customer experiences with live, visual augmented reality, and artificial intelligent driven interactions, instruction, and insights. CareAR solves a number of critical secular challenges facing field service management, including a systematic loss of institutionalized knowledge due to the accelerated workplace retirement, and the need to be more eco-friendly. CareAR solves both challenges by enabling field workers with access to live and eventually AI-driven expertise. And it reduces field service visits by more frequently fixing problems the first time around. We estimate the total addressable market for CareAR will grow to $80 billion by 2028. We also announced that ServiceNow, a leader in digital workflows, invested $10 million in CareAR at a post-money valuation of $700 million. This investment serves as an endorsement of CareAR's technology and will support its growth, as CareAR is a leading certified and integrated AR solution within ServiceNow's field service and customer service management platform. In the third quarter, we expanded the go-to-market reach for CareAR by adding 15 resellers and forming a partnership with L&T Technology Services, or LTTS, a leading industrial manufacturing and engineering services company. With LTTS, we will develop joint solutions across a range of industries, including discrete manufacturing, truck and off-highway vehicle maintenance, and oil and gas. Momentum in new client signings and pipeline growth gives us the confidence to reaffirm our expectation of CareAR generating at least $40 million of revenue in 2021 and at least $70 million of revenue in 2022. At PARC, we made advancements across our three primary innovation pillars: Internet of Things, 3D printing, and Clean Tech. In IoT, we continue to deploy LOQs, bridge sensor technology in Australia. The data being gathered by these sensors allows asset owners and operators to monitor the health of critical infrastructure assets in real-time, which is particularly useful after the events such as the recent 5.9 magnitude earthquake that hit Melbourne, Australia, in late September. Our technology deployed in Longwood, Victoria allowed immediate assessment of the strain caused by the earthquake, resulting in the decision that the bridge was safe to operate without needing to wait for a manual inspection. Our technology helps bridge operators optimize maintenance schedules, limiting expensive field service visits, and ultimately lowering the carbon footprint associated with infrastructure maintenance activities. We estimate the total addressable market of LOQs technology offering is $9 billion, and we are currently in conversation with multiple transportation authorities around the world about deploying our technology. In 3D printing, early feedback of our liquid metal printer LMX has been positive, resulting in a healthy pipeline in our target verticals of manufacturing and defense. We are working to add additional materials which will expand our addressable use cases. In Clean Tech, we are optimizing the performance of the alpha prototype for our energy-efficient air conditioning technology. This will inform the design of our beta prototype, which we plan to complete by the end of 2022. This technology can help reduce energy consumption in air conditioners by up to 80%. We look forward to sharing more about this groundbreaking technology in the coming quarters. Our work in Clean Tech is just one example of how we are working to reduce our impact on the environment. In our recently published 2021 global corporate social responsibility report, we announced a roadmap to reach net zero by 2040. At XFS, originations grew approximately 10% year-over-year. We further expanded XFS penetration within XPS and began offering leasing solutions for IT services. The quality of our book of loans remains high, with provisions below 1.5% despite the ongoing pandemic. During the quarter, we generated $81 million of free cash flow, only a slight decline from the prior year levels, despite the effects of supply chain constraints on our operating profit. Our focus on free cash flow has served us well, and we have delivered positive free cash flow every quarter during the pandemic. And that focus gives us the confidence to reaffirm our guidance of at least $500 million of free cash flow this year, despite the reduction to our revenue outlook and while continuing to invest in our strategic growth initiatives. That focus, along with our strong balance sheet, also gave us the confidence to request that our board authorize a new $500 million share repurchase program. We will opportunistically buy back shares and remain committed to returning at least 50% of free cash flow to investors while continuing to invest in innovation and pursue value-accretive M&A. Before I hand it over to Xavier, I would like to emphasize a few points. The third quarter presented us with an unprecedented level of supply chain disruption and further delays in companies' plans to reopen offices. I would like to commend our team for its resiliency while facing these challenges. Revenue and margins have fallen below our expectations for the year, but demand for our products and services remains strong, our backlog is growing, and our new business remains on track to deliver future growth and strategic optionality for Xerox. Through it all, our focus on delivering cash flow has not changed and the buyback authorization allows us to deploy that cash in a highly accretive manner. We also continue to look at M&A transactions, both small and large that are accretive to our business. I will now hand it over to Xavier to cover our financial results in detail.

Xavier Heiss, Chief Financial Officer

Thank you, John, and good morning, everyone. As John noted, significant disruption to global supply chains and delays in the return of workers to the workplace negatively affected our financial results in Q3. Despite these challenges, our revenues were essentially flat year-over-year as gradual improvements in page volumes on IT services, growth in post-sale revenue offset lower equipment sales, which were negatively affected by component shortages and logistic constraints that impacted our costs and capacity. However, underlying demand for our equipment remained strong as evidenced by our growing backlog, which is almost two times higher than normal level. Higher supply chain costs, a less profitable mix of equipment sales, and lower margins on post-sales revenue drove our profitability lower year-over-year. Gross margin declined from year prior by 40 basis points, with roughly 219 basis points of the decline attributable to supply chain costs and capacity restrictions, including significantly higher freight and shipping costs and constrained availability of higher margin equipment. 60 basis points of the decline relate to investment to support future growth. The remainder of the decline reflects lower government subsidies, net of Project Own It settings and lower royalty from Fujifilm business innovation. We expect supply chain pressures on gross margins to dissipate over time as supply chains normalize, but this pressure will likely continue to weigh on gross margin in Q4 into the first half of 2022. Adjusted operating margin of 4.2% decreased 320 basis points year-over-year, reflecting lower gross profit, lower government subsidies, and higher R&D investments to support our targeted growth areas. Indeed, we maintain this investment despite the unfavorable operating environment. These headwinds were partially offset by lower bad debt expense and savings from Project Own It. SG&A expenses of $413 million decreased $31 million year-over-year, primarily driven by savings from Project Own It and lower bad debt expenses. Savings were partially offset by lower government subsidies and investments in new businesses. R&D expenses were $82 million in the quarter, or 4.7% of revenue, which was an increase of 40 basis points as a percentage of revenue year-over-year. This reflects increased investment in PARC Innovation Towers. Other expense metrics were net $18 million lower year-over-year, primarily driven by higher gains on asset sales, a reduction in non-service one-time and related costs, and lower net interest expense. The second-quarter adjusted tax rate was negative 3.5% compared to 21.1% last year. The 24.6% year-over-year decrease reflects a non-recurring change to our tax positions on re-measurement of deferred tax assets. Adjusted EPS of $0.48 in the third quarter was flat compared to the same quarter last year. A year-over-year reduction in pre-tax income was offset by lower taxes on a reduced share count. GAAP EPS of $0.48 was $0.07 higher year-over-year due to a decrease in adjusted items, including lower year-over-year non-service retirement-related costs and lower restructuring charges. Turning to revenue, supply chain disruption obscured underlying strengths in our business, as evidenced by our growing backlog and post-sales revenue, both of which grew sequentially and year-over-year. Demand for our equipment remains strong, but in the time since our Q2 earnings call, a challenging supply chain environment deteriorated further causing shortages in products and logistic delays. As a result, our backlog expanded in the quarter to $265 million, almost two times normal levels. Equipment sales of $387 million in Q3 decreased 7.6% year-over-year, or 8.4% in constant currency, primarily due to supply chain disruption, specifically component shortages and logistic capacity constraints, which affected the Americas region more than EMEA. In EMEA, equipment sales grew year-over-year, led by our strategic positions in developing markets. At the product level, supply chain constraints most negatively affected the installation of our higher-priced color equipment, causing a negative mix effect on equipment for new business. The negative mix effect was partially offset by lower installation of A4 black-and-white equipment, which faced difficult comparisons against last year's work-from-home demand. Post-sales revenue of $1.4 billion increased 1.7% year-over-year, or 0.5% in constant currency. We continue to see strong correlations between vaccination rates, workplace attendance, and page volumes. Page volumes increased sequentially this quarter, but at a slower pace than we expected due to the Delta variant. Nonetheless, we are seeing a pickup in page volume as workplaces gradually reopen and schools welcome back students. As John mentioned, September was one of the highest months for page volumes since the beginning of the pandemic. Additionally, page volumes correlate well to services and outsourcing revenue, both of which are key components of our post-sales revenues. We continue to expect gradual improvement in post-sales revenue as employees return to the workplace. Post-sales revenue also included unbundled supplies, which grew significantly due to rising page volumes and, to a lesser extent, rebates. IT services sales, which are included in other sales, also grew this quarter. New business signings for our services business grew in the quarter, as did our win rate on services revenue in the SMB space year-over-year. Next, turning to cash flow, we generated $81 million of free cash flow in Q3, down from $88 million in the prior year. Our strong focus on cash flow resulted in only a mild decline year-over-year, despite lower gross profit and an increase in investments in targeted growth areas. We generated $100 million of operating cash flow in the quarter compared to $106 million in the prior year, as working capital improvements offset lower profit. Working capital was a source of cash this quarter of $46 million, reflecting year-over-year improvements in inventory, accounts payable, and accounts receivable. Investing activities were a source of cash of $18 million due to asset sales of $38 million, partially offset by Capex of $19 million. Capex primarily supports our strategic growth program and investments in IT infrastructure. Financing activity consumed $46 million of cash. Net proceeds from additional debt contributed $76 million of cash, reflecting new securitization proceeds of $175 million, partially offset by prior securitization repayments. We expect to complete additional securitization in support of XFS in Q4. Net proceeds from debt were offset by $87 million of share repurchases and $49 million in dividends, resulting in a total return of cash to shareholders this quarter of $136 million—approximately 70% of Q3 free cash flow. The $87 million of share repurchase in the quarter completed our remaining share repurchase authorization of $500 million. As a result, a new share repurchase authorization of $500 million was requested and approved by our board, and will be used to opportunistically repurchase shares. Next, looking at profitability. On our second-quarter earnings call, we expected supply chain disruption to continue into Q3. But the magnitude of the impact on our business was greater than anticipated. The deterioration in supply chain conditions and delays in the return of workers to the workplace accounted for nearly the entirety of the year-over-year decline in adjusted operating income margin. Lower royalty revenue and savings from government assistance programs were largely offset by lower bad debt expenses and savings from Project Own It. We are actively working to mitigate the incremental costs associated with supply chain disruptions, but we do expect these costs to weigh on profitability again in Q4 and into the first half of 2022. The ultimate duration of supply chain costs and capacity constraints, and the period of time for which it will affect our profitability remains uncertain. However, costs associated with Project Own It, improvements in productivity, the clearing of our backlog, and the growth of our newer businesses are expected to positively contribute to operating profit going forward. Turning to Xerox Financial Services, XFS grew origination almost 10% year-over-year, driven by growth in origination activities. Our global finance assets of $3.3 billion in Q3 were down slightly compared to Q2 due to equipment availability constraints, which reduced equipment sales and associated new lease originations and loan repayments. Next, I will comment on our capital structure. We ended September with a net cash position of around $900 million, slightly below Q2 levels. Of the $4.3 billion of our outstanding debt, $2.9 billion is allocated to and supports the XFS lease portfolio. The remaining debt of around $1.4 billion is attributable to the core business. Debt mainly consists of senior, unsecured bonds and finance asset securitizations. We have a balanced bond maturity ladder with no bonds maturing in 2021 and $300 million maturing in 2022. Year-to-date, we have returned approximately $650 million of cash back to shareholders or around 170% of free cash flow, which contributed to the $400 million decrease in net cash since the end of 2020. Finally, I will address our revised guidance. Q3 presented our business with a number of unexpected challenges, including a rapidly deteriorating global supply chain and the prolonged impact of the Delta variant. Product shortages, shipment delays, and cost increases, along with the delay of the return of workers to the workplace resulted in a lower level of Q3 revenue than we expected just one quarter ago. Given the continued uncertainty associated with global supply chains and the delay in many companies' plans to return to workplaces until 2022, we are lowering our revenue guidance to $7.1 billion in actual currency, or $7 billion in constant currency. However, our focus on cash gives us confidence to reaffirm our free cash flow guidance of at least $500 million while continuing to invest in our targeted growth initiatives. We have also decided to postpone our Investor Day to February of next year, at which point we will be in a better position to provide 2022 guidance along with our long-term financial projections. We also look forward to sharing additional financial details about our new businesses at that time, which we believe will be more meaningful within the context of our 2022 guidance. I will now hand it over to John.

John Visentin, Vice Chairman and Chief Executive Officer

Thank you, Xavier. Operator, can you please open the lines for questions?

Operator, Operator

Certainly. Our first question comes from the line of Katy Huberty from Morgan Stanley. Your question, please.

Katy Huberty, Analyst

Yes, thanks. Good morning. How much of the $200 million lower revenue guide at constant currency is a function of the backlog build versus the slower recovery in page volumes? And just connected to that, how much do you expect backlog to build in the fourth quarter? Then I have a follow-up.

Xavier Heiss, Chief Financial Officer

Hi, Katy. Good morning. This is Xavier here. Regarding backlog going into the year, the $200 million revised guidance there, the vast majority of this is relative to equipment. The equipment backlog that we face here. As we put it here, we ended with $265 million of backlog, which is close to 59% of the total revenue for Q3. We expect this backlog to grow based on the supplies outlook we have for Q4 at this date.

Katy Huberty, Analyst

Okay. So backlog grew about $50 million sequentially in the September quarter; if most of that $200 million guide down is related to backlog build, that would imply that you would expect even more backlog build in the 4th quarter. Is that the way to think about it?

Xavier Heiss, Chief Financial Officer

This is correct, Katy.

Katy Huberty, Analyst

Okay. I know it's early, but do you have any initial thoughts on how you are considering Fiscal '22 regarding the increased supply chain costs and their revenue impact in the first half of the year? Does this suggest that we might see flat performance or even pressure on EPS and free cash flow compared to 2021, or is it too soon to make that determination?

Xavier Heiss, Chief Financial Officer

Katy, as we indicated during the call here, we expect the supply chain issues to carry on and to have some impact during the first half. During Q3, we have been surprised by the size of the supply chain issues. As we commented here, it is mainly related to some material shortages. But also the fact that the chips on the products are becoming a challenge this year. We put in place a lot of efforts, including redesigning some of our products, but it will take time to recover. What I want to point out is that this is not only the scarcity of certain components, but also the overall supply chain. You have heard that challenges many companies are facing with shipment and also up to the delivery to the end customer. So we expect some of these issues to stay into the first half of 2022. Our backlog is strong evidence that our customers are still renewing their equipment. Also, as we mentioned during our comments, we grew market share. So we're still growing market share. We did it in Q1, we did it in Q2 as well. The orders that we are receiving from our customers evidence that there is still strong demand. So we will manage this; it's a little bit early to provide concrete guidance. As we mentioned, we will have a face-to-face Investor Day in February, where we will be able to provide you more information.

Katy Huberty, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Ananda Baruah from Loop Capital. Your question, please.

Ananda Baruah, Analyst

Thank you for taking my question. I apologize if this has already been covered; I have a few calls and an event happening this morning. I would like to know what you are seeing in terms of demand and revenue, and if you have received any additional feedback from your enterprise customers as we progress through the quarter that might differ from what you have previously communicated. Thank you.

John Visentin, Vice Chairman and Chief Executive Officer

Ananda, what we've been seeing is demand is strong, and the other thing that we've noticed is return to the office has slowed down from what we anticipated. So we're anticipating more early next year for a full return to the office. Because of the Delta variant, many of the corporations we've spoken to have delayed their openings or slowed them down. But demand for our product is strong. And again, with the supply chain constraints, that's become an issue for us.

Ananda Baruah, Analyst

I appreciate the context, John. Let me ask a follow-up regarding your discussions with enterprise customers. From their perspective, have you noticed any changes in their long-term intentions regarding returning to the office or how they plan to use your products within those strategies?

John Visentin, Vice Chairman and Chief Executive Officer

No, we haven't seen a change from what we've expressed in the past. They're focused on bringing their employees back to the office in a safe manner and they're using our products for productivity and security. In some cases, with our software, to utilize a hybrid environment where employees work from home, but not really much of a change there. I think what slowed that down was the Delta variant and everybody is being careful about getting their employees back safely to the office.

Ananda Baruah, Analyst

Very good; I appreciate it.

Xavier Heiss, Chief Financial Officer

We have seen as well on our global document solution businesses some good traction on offerings enabling work from home and work in the office. As an example in capture and content services, we've seen significant double-digit growth of signings, which shows that enterprises are supporting these types of offerings, but also willing to enable this.

Ananda Baruah, Analyst

That's helpful. Thank you, guys. I appreciate it.

Operator, Operator

Thank you. Next question comes from the line of Samik Chatterjee from JPMorgan. Your question, please.

Angela Zhang, Analyst

Hi. Good morning. This is Angela Zhang asking on behalf of Samik Chatterjee. Thank you for my question. My first question is about HP's recent Investor Day where they indicated a low to mid-single-digit decline in supplies next year, which I found interesting. Are you noticing similar trends, considering you are also predicting a stronger return to the office in 2022? I have a follow-up as well.

Xavier Heiss, Chief Financial Officer

Yes. Good morning. As you know, our business model is slightly different from the one that HP had. We are less dependent on what we call supplies or consumable out model. Our model is based on subscription, and we do not see this trend. Our trend is mainly related to page volume and how customers are using our equipment—not only for printing but also to drive the workflows that our equipment enhance. If you want a data point or proof point of what we're facing, we saw some increase in quarter three of what we call sole supplies from our offerings. We are positive about seeing a gradual recovery of page volume over time.

Angela Zhang, Analyst

Great. Thank you. And then for my follow-up. Just thinking about your product mix on A3 versus A4 printers, it seems like for the industry view that A4 will become more popular over time as offices migrate towards smaller printers spread out more evenly. Are you seeing a shift in strategy towards A4 printers? And if so, will that result in a structural margin decline?

John Visentin, Vice Chairman and Chief Executive Officer

If we look at our third quarter, our backlog for A3 went up from Q2. We're gaining market share, and then, we're seeing a strong demand in the A3. We've also gained market share in the A4 market.

Angela Zhang, Analyst

Great. Thank you so much.

Operator, Operator

Thank you. Our next question comes from the line of Shannon Cross from Cross Research.

Shannon Cross, Analyst

Thank you very much. I was wondering about the pricing environment, both on the short and long term for hardware as well as pages. Obviously, given all the supply chain challenges, certain other industries have been able to raise prices. I know inkjet printers for instance, there's less promotion, so I'm curious what you're doing there. And then we talked to Cannon and they're thinking long-term that they're going to see some price pressure on pages. So I'm just curious how you think this plays out both in the next few quarters and then maybe long term? And then I have a follow-up.

Xavier Heiss, Chief Financial Officer

Thank you, Shannon. Good morning. You asked a good question here. What we see on pricing is mainly related to the supply-demand dynamic here, is the ability to raise prices. This is something we've started executing. We started executing already in Q2 to reflect some of the costs we are facing, specifically on supply chain and some of the raw material costs. Regarding page volume or price per page—it’s our usual business negotiations. We have not seen increased competition on this. As you know, we are quite stringent in managing pricing and also protecting our annuity volumes.

Shannon Cross, Analyst

Okay. And then SG&A is at the lowest level that I have in my model, even after incorporating the 14 million, it's going back split and then I'm assuming pre-split, Xerox is a bigger company back then. How much further can you cut SG&A? What did you take down? How much of SG&A is one-time versus recurring in nature? Just trying to understand given the gross margin pressure you're facing, how much flexibility you have in some of your other expense lines? Thank you.

Xavier Heiss, Chief Financial Officer

Yes, Shannon. On SG&A, we quoted only one factor that I highlighted, which is related to our reduced expenses. By the way, that's good news, which shows that the business is recovering compared to last year or two years ago when we started the impact of COVID-19. For the rest, we have Project Own It in place. Project Own It is much more than a pure cost-cutting activity. It's also ingrained in the DNA of the company on how we adjust our cost base based on the environment. So flexibility exists within the cost base, and we can reflect some of the gross profit and gross margin declines that we have in our fixed cost base as well.

Shannon Cross, Analyst

Do you think you can get down below $400 million?

Xavier Heiss, Chief Financial Officer

It's a little bit early here, Shannon, because we're going through our planning cycle. But clearly, Project Own It is not only SG&A; it is the entire cost base of the company. We look at any opportunity we can have here. You know that we have had the benefit of government subsidies. These government subsidies are indications, and you can see that in our cost base, specifically in G&A. We are able to offset this via cost actions that we're taking to flexibilize the cost base.

Shannon Cross, Analyst

Okay. Thank you.

Xavier Heiss, Chief Financial Officer

Thank you, Shannon.

Operator, Operator

Thank you. Our next question comes from the line of Jim Suva from Citi. Your question, please.

Jim Suva, Analyst

Thank you for being so open and transparent about the outlook being down a little bit. Can you help us understand if you fully believe or can you tell if this supply chain issue is driven or if it's actually structurally that people are printing less? And how should we think about that if it's the case or not the case? Thank you.

John Visentin, Vice Chairman and Chief Executive Officer

Jim, we've seen a strong demand for our products, and in fact, you saw in the third quarter that our backlog increased again to record levels. So we are seeing the demand. We're increasing market share; even in September, there's a direct correlation between vaccination and going back to the office and volumes. We saw an uptick in September. So our belief is that going back to the office is a matter of when, not if. The delays have happened for safety of employees, but that's how we're seeing it right now.

Jim Suva, Analyst

Great. Thank you so much for the details.

Operator, Operator

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

John Visentin, Vice Chairman and Chief Executive Officer

Thank you. Look, we cannot predict with precision when supply chains will return to normal, but we expect they will normalize over time. We also believe a broader return of employees to the workplace is a matter of when, not if, and that in-office work will be different. However, we are prepared to meet workers' evolving print and document management needs. Be safe and be well.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Good day.