Managed services News
Xerox CEO After Tough Q3: ‘We See Resiliency In Demand For Our Products’
Joseph F. Kovar
‘The reduction to 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,’ says Xerox CEO Steven Bandrowczak.
Xerox’s new CEO promises that his company has the technology and capability to regain growth after a quarter characterized by a tough macroeconomic environment and the start of a recovery from supply chain issues.
Steven Bandrowczak, who in August became Xerox CEO after the unexpected death in June of the company’s previous CEO John Visentin, highlighted the prospects for the company to financial analysts during its third fiscal quarter 2022 financial conference call.
Bandrowczak, speaking as the head of Xerox Tuesday during his first financial conference call, told financial analysts that he has since August met with dozens of clients and thousands of employees in more than 20 different cities worldwide to understand what they expect from Xerox and what they think will help the company improve its business.
[Related: Xerox President: There’s A $300M Backlog We Can’t Ship Because Of Product Shortages]
“It was clear that Xerox’s brand and legacy are meaningful, and we have earned our clients’ trust over time,” he said. “And 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.”
Xerox can do all that with an increased focus going forward on client solutions rather than specific product offerings which Bandrowczak said can maximize the company’s relevancy and share of wallet with existing clients.”
That includes the ability to build new solutions for clients that leverage Xerox’s institutional knowledge of client processes and integrate leading technologies such as AI, augmented reality, robotic process automation, and machine learning, he said
“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,” he said. “You will hear more from me in 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 further embedding our offerings into our clients‘ end-to-end processes.
The global macroeconomic outlook has become increasingly somber over the past three months, Bandrowczak said.
“The current outlook notwithstanding, we believe our prospects for continued revenue growth are strong,” he said. “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, Bandrowczak said, the adverse impact from Western European currency on Xerox’s full-year revenue is now forecast to be significantly larger than initially expected, and so Xerox is lowering its revenue guidance for the full fiscal year from at least $7.1 billion to a range of $7 billion to $7.1 billion in actual currency. The company is also reducing its fiscal 2022 free cash flow guidance from at least $400 million to at least $125 million, he said.
“The reduction to 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,” he said. “Most of the reduction in free cash flow guidance, however, is a function of 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.”
However, Bandrowczak said, Xerox expects operating margins to improve going forward as supply chain conditions ease and previously enacted pricing actions are realized, making the company’s fiscal 2022 free cash flow performance an anomaly and not a trend.
Bandrowczak said that despite his recent appointment as CEO, Xerox in the near term remains focused on the execution of its print and services strategy and improving operating efficiencies amid a challenging macro backdrop.
As in the past, the successful execution of Xerox’s strategy rests on four strategic priorities, including optimizing operations, driving revenue, monetizing innovation, and focusing on free cash flow, Bandrowczak said.
Optimizing operations has taken on a new level of importance in light of the current macroeconomic environment, he said.
Xerox remains on track to achieve its targeted fiscal 2022 gross cost savings of $450 million from Project Own It, which is an enterprise-wide transformation that is aimed at helping Xerox reduce costs to free up capital for investments. That target was designed to completely offset the effects of inflation for the year, but inflationary pressure in the last couple months outpaced the company’s initial expectations, he said.
Xerox looks to gain share in print and managed print services by improving the customer experience to meet clients‘ most pressing needs. To that end, the company in the fourth fiscal quarter will launch the Xerox Customer Experience App, which Bandrowczak said will help clients streamline product installations, better monitor supplies, and help self-troubleshoot its A4 products.
Xerox also expects to improve its IT services traction in newer markets such as Canada thanks to its recent acquisition of Powerland and by improving the collaboration with our existing print and managed print services salesforce. The company in the third quarter also expanded its automation presence in the retail, sports and entertainment, and manufacturing verticals, he said.
Xerox Digital Services also recently launched an intelligent document processing platform which leverages AI, machine learning, object content recognition, and natural language tools to automate document and data processing, and is expected to help clients recognize a variety of languages, classify documents, and validate customer identities without human intervention, Bandrowczak said.
At the same time, Xerox is streamlining its innovation portfolio by closing its Eloque joint venture fiber optic sensing technology, scaling back its 3D print operations, and reevaluating its research priorities at Xerox PARC, he said.
Xerox has also spun out its Novelty industrial predictive maintenance business and its Mojave energy-efficient HVAC (heating, ventilation, and air conditioning) businesses, which leverage Xerox PARC technology, as separate independent businesses to help preserve free cash flow while maintaining the opportunity to realize value from their future success, he said.
Xerox continues to invest in commercialization of its FITTLE equipment financing business and CareAR remote support business, Bandrowczak said.
“FITTLE made significant progress this quarter in its effort to diversify its lending operations away from captive sources towards new customer and product lines,” he said. “Non-captive originations grew 33 percent, including a more than 150 percent increase in originations for third-party equipment and services. CareAR completed a soft launch of Experience Builder, an intuitive, no-code tool kit, which allows users to quickly self-publish instructional content at scale.”
For its fiscal third quarter 2022, which ended September 30, Xerox reported revenue of $1.75 billion, down about 0.4 percent from the $1.76 billion the company reported for fiscal third quarter 2021.
This included equipment sales of $384 million, up 0.8 percent; post-sale revenue of $1.22 billion, up 0.9 percent; and intersegment net revenue of $37 million, down 19.6 percent.
Post-sale revenue includes IT services, including revenue from the recent Powerland acquisition, along with maintenance and outsourcing services, all of which grew during the quarter over last year, said Xavier Heiss, Xerox executive vice president and chief financial officer. It was partially offset by a drop in financing revenue related the availability of Xerox products, Heiss said.
Intersegment net revenue includes commissions and other payments made by Xerox’s FITTLE financing segment to the print and other segment for the lease of Xerox equipment placements.
For the quarter, Xerox reported a GAAP net loss of $382 million or $2.48 per share, down significantly from the net income of $84 million or 48 cents per share the company reported last year.
On a non-GAAP basis, Xerox reported net income of $33 million or 19 cents per share, down from the $90 million or 48 cents per share it reported last year.
Revenue missed analyst expectations by $10 million, and earnings per share by 21 cents, according to Seeking Alpha.
Xerox shares fell slightly over 14 percent to $13.68 after investors digested the company’s downward adjustments in fiscal year 2022 full-year financials.