Xerox (XRX) Ursula M. Burns on Q1 2016 Results – Earnings Call Transcript

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Xerox Corp. (NYSE:XRX)

Q1 2016 Earnings Call

April 25, 2016 10:00 am ET

Executives

Ursula M. Burns – Chairman & Chief Executive Officer

Leslie F. Varon – Interim Chief Financial Officer, Vice President, Investor Relations

Jennifer Horsley – Director-Investor Relations

Analysts

Tien-tsin Huang – JPMorgan Securities LLC

Ananda P. Baruah – Brean Capital LLC

George K. F. Tong – Piper Jaffray & Co. (Broker)

Shannon S. Cross – Cross Research LLC

Steven Schneiderman – BMO Capital Markets (United States)

James Friedman – Susquehanna Financial Group LLLP

Brian L. Essex – Morgan Stanley & Co. LLC

Matthew Cabral – Goldman Sachs & Co.

James Dickey Suva – Citigroup Global Markets, Inc. (Broker)

Operator

Good morning, and welcome to the Xerox Corporation First-Quarter 2016 Earnings Release Conference Call hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Leslie Varon, Vice President and Interim Chief Financial Officer.

During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investors. At the request of Xerox Corporation, today’s conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. After the presentation there will be a question-and-answer session. During this conference call, Xerox executives will make comments that contain forward-looking statements which by their nature address matters that are in the future and are in certain. Actual future financial results may be materially different than those expressed herein. At this time, I’d like to turn the meeting over to Ms. Burns. Ms. Burns, you may begin.

Ursula M. Burns – Chairman & Chief Executive Officer

twitterdontleaveGood morning, and thank you for joining us. I am pleased to report that at the end of the first quarter, we are on track to deliver on our three commitments for the year. Meeting our guidance, reaching the first year target for our strategic transformation program and completing our separation into two companies.

I will begin with an update on our progress on the new path forward for Xerox. Before turning to first-quarter results.

In January, we announced plans to separate into two independent publicly traded companies. One comprising our Document Technology and Document Outsourcing businesses and the other our Business Process Outsourcing business. Both will be Fortune 500 scale companies that are leaders in their respective industries.

Further demonstrating our commitment to driving shareholder value, we concurrently announced a strategic transformation program to deliver $2.4 billion in cumulative savings over three years which includes both ongoing and incremental initiatives to enhance productivity and efficiency. We are looking at all aspects of our business to make them more agile and competitive and expect to achieve $700 million in annualized savings this year.

Together, these actions will create two focused companies that have strategies, talent and the organizational and capital structures needed to compete in their markets. We are making progress on both of these initiatives and I am confident that we are making the right steps to best position each company for the future.

We’ve had positive feedback on our plans. Over the last few months we’ve been talking to employees, clients and partners regularly about the benefits of the separation and what it means to them. Our clients see the benefits of increased focus and responsiveness to the market. In fact, I met with the executive teams of two major clients in the past couple of weeks, both in the top 75 of the Fortune 500 and both express their positive view.

And our employees tell us they are excited to be part of the journey and to work for companies that are innovative and leading their industries. During the last three months, we have made substantial progress in building strong operational and financial foundations for both companies.

We formed a program management office or PMO that is driving the separation and strategic transformation initiatives. Reporting to an Executive Steering Committee that I lead. The PMO working with the business teams is designing operating models and organizational structures, is also responsible for structuring the separation transaction and designing the optimal capital and legal structures.

We are also taking a close look at the business strategies for both Document Technology and BPO to ensure they are fully optimized. We have identified a number of ways to sharpen each business strategy and improve execution. We are completing this analysis and will develop detailed action plans to capture the highest value opportunities. Some of that implementation will begin this year with more to come post separation.

Many of you have asked about milestone decisions regarding leadership and financials. These are critical decisions that require a thoughtful process. While I can’t answer all of your questions at this stage, I can share a few insights on where we stand.

With regard to the leadership of the two companies, our searches are well underway and we have high quality candidates for each key executive role. While the timing for completing the hiring process for very senior roles is difficult to predict, we are targeting to fill the top roles by midyear. In addition to the management teams, we are reviewing candidates to fill the additional board seats created as a result of the separation.

On financials, the big milestone is the filing of our initial Form 10 Registration Statement with the SEC. We are on track to do that in July in line with our goal of completing the separation by year end. We’ve decided that the optimal way to execute the separation is through a tax-free spinoff of our BPO business. The Form 10 will describe the transaction in detail and provide more information on the BPO company.

We have also quantified the cost associated with the separation in the first year of the strategic transformation program. We expect to incur one time separation cost of $200 million to $250 million and restructuring costs of $300 million. Leslie will provide further details on this shortly.

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So all in all, very good progress on these initiatives. We are on track to launch two companies at year end that will have the right strategies, the right structures and the right leaders.

With that said, I want to emphasize that we are managing these programs to ensure our executives team and employees remain focused on serving our clients with excellence and delivering our 2016 plans. So let’s talk about how we are doing on that front.

In the first quarter of 2016, we delivered adjusted EPS of $0.22 within our guidance range. GAAP EPS from continuing operations was $0.03. Total revenue of $4.3 billion was down 4% or 3% in constant currency. Reflecting growth in our Document Outsourcing and BPO businesses, offset by continued revenue pressures in our Document Technology segment.

Operating margin of 7.2% declined 130 basis points year-over-year. In Services revenue growth improved and margin increased modestly compared to last year. Document Technology revenue continues to be impacted by the weakness in developing markets. And currency negatively impacted Doc Tech margin. As a result of these factors, we have accelerated our cost reduction initiatives resulting in a sizable restructuring charge. We expect to realize the benefits of these actions beginning in the second quarter.

During the quarter, we also continued to strengthen our portfolio with new products and offerings that showcase our innovation. Here are a few examples. In the healthcare market, we launched Xerox Health Outcome Solutions, a full lifecycle population health management solution designed to help providers adapt to value-based contracts.

The centers for Medicare and Medicaid services have set a requirement that by 2018 50% of all payments must be value-based, meaning providers are compensated for healthy outcomes rather than each service provided. According to a survey that we sponsored, healthcare providers and payers need to significantly accelerate their efforts to adapt to this standard, so we see a big opportunity for this product.

Our transportation team introduced the Go Denver and Go LA mobile apps to help residents and tourists make transportation choices more easily and effectively. Commuters in Denver and Los Angeles can use Xerox powered apps to search for the cheapest, fastest and most sustainable ways to move around these cities.

We expanded the capabilities of our ConnectKey platform targeting the large office market. This new and refreshed collection of apps and tools boosts workplace productivity by tightly integrating our 14 ConnectKey i-Series multifunction devices with cloud-hosted services and mobile communications technologies.

It is innovations like these that enable us to maintain our number one market share position in MPS.

And for our graphics communications customers, we introduced two new next-generation inkjet presses: the Xerox Brenva HD Production Inkjet Press and the Xerox Trivor 2400 Inkjet Press. These represent the first of a new series of innovative inkjet products that will enhance our high-end printing offerings; we look forward to ramping up sales later this year.

Looking to cash flow, we used $25 million in our cash from operations, which is in line with seasonality, and ended the quarter with a healthy cash balance of $1.2 billion. Bottom line, we met our guidance and are confident that we’re taking the right steps to achieve full-year objectives.

Some of our underlying results were mixed and we are pulling all levers within our control to successfully navigate in a challenging market environment and best position our businesses for the future.

I will turn it to Leslie, who will provide more detail on our financial results and 2016 guidance.

Leslie F. Varon – Interim Chief Financial Officer, Vice President, Investor Relations

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Thanks, Ursula, and good morning, everyone. I’ll start by walking through the income statement and then discuss guidance, before handing it back to Ursula to wrap up. Before I get started, I’ll remind you that the information I’m sharing reflects the reporting revisions we announced last quarter.

Total revenue of $4.3 billion and adjusted earnings of $0.22 were within our expectations. Services delivered modest profit growth, while Document Technology declined due to revenue and transaction currency headwinds and cost reduction timing.

Revenues in the quarter was down 4% in actual currency and 3% at constant currency, an improvement from the 5% constant currency decline in quarter four.

Services top-line was up 2% at constant currency with growth in both Document Outsourcing and BPO. Document Technology declined 9% at constant currency and drove the overall revenue decline. I’ll speak more about both segments in a moment.

Gross margin of 30.3% was down 130 basis points year-over-year, driven by declines in Document Technology and a greater mix of Services, which structurally has a lower gross margin. RD&E was lower by $8 million year-over-year and SAG was down $35 million or 4%. Good expense reductions in absolute terms, but not sufficient to offset gross margin declines resulting in operating margin of 7.2%, down 130 basis points year-over-year and an 18% operating profit decline.

Adjusted other net expense was higher by $8 million year-over-year, driven by higher litigation reserves, while equity income of $37 million in the quarter was up $3 million year-over-year.

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