Xerox Holdings Corp. Q3 FY2024 earnings call

• Reinvention is a multi-year journey to streamline operations and benefit from print, digital, and IT services trends. Progress includes moderating revenue declines, improved adjusted operating income and margin, and over 100% free cash flow conversion. However, equipment sales fell short due to product launch delays and sales force productivity issues.
• Strategic priorities: Stronger core with sales organization realignment and improved net promoter score in Americas. Services metrics: large client revenue retention above 100%, digital/managed IT services grew double digits. Cost improvements: Operating expense down over $50 million year-over-year in Q3. Acquisition of ITsavvy expands IT service offerings, expected to drive growth and ~$15 million in cost synergies.
• Operational actions: Geographic simplification with transition of countries to indirect distribution. Offering simplification with streamlined product offerings like updated printers. Operating model simplification with global business service organization driving efficiencies.

In Q3, XFS revenue was down ~10% year-over-year due to lower finance income and order fee revenue, partially offset by higher commissions from selling finance receivable assets. XFS segment profit increased by $9 million. Print and other revenue fell roughly 7% year-over-year, with segment profit increasing around 5%. Equipment sales were $339 million, declining ~12% in actual and constant currency. Process revenue was $1.2 billion, down ~6% in actual and constant currency, with digital or managed IT services revenue growing double digits. Core business revenue excluding backlog fluctuations and reinvention impacts declined low single digits, consistent with prior quarter.

• Revenue: 2024 revenue decline expected around 10% in constant currency, down from prior 5%-6% guidance. 2025 expected to return to growth with ITsavvy acquisition, new product launches, and improved sales productivity.
• Adjusted operating income margin: 2024 expected ~5%, down from prior 6.5% outlook. 2025 expected growth supported by revenue growth and additional gross cost savings.
• Free cash flow: 2024 guidance reduced to $450 million-$500 million from prior at least $550 million, reflecting reduced adjusted operating income guidance.

• Product launch delays: Caused by global launch issues and lower than expected sales force productivity improvement.
• Hurricane Helene and competitive activity: Impacted equipment sales due to timing of Hurricane Helene and increasing competition in certain markets.
• Macro market demand: Potentially softer, though cited as having minimal impact on the flattening sales efficiency progression.

Q: Ananda Baruah from Loop Capital asked about product delays and sales productivity dynamics. What caused product delays and sales productivity issues, and what's being done to prevent recurrence?

A: Steve Bandrowczak and John Bruno discussed product transition planning issues and sales force realignment challenges. Product delays were due to global launch planning and execution issues. Sales productivity was affected by sales headcount changes and forecasting accuracy. Steps are being taken to optimize go-to-market areas and improve sales force efficiency.

Q: Erik Woodring from Morgan Stanley asked about confidence in 2025 growth and the accretion from the ITsavvy acquisition. How is ITsavvy expected to be accretive?

A: Xavier Heiss explained that ITsavvy is a ~$440M-$450M revenue LTM company with ~$30M EBITDA. Expected $15M in cost synergies, and the business model's EBITDA margin above 9% will drive immediate accretion to earnings per share and free cash flow.