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Edited Transcript of XRX earnings conference call or presentation 25-Apr-19 12:00pm GMT

Q1 2019 Xerox Corp Earnings Call

NORWALK Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Xerox Corp earnings conference call or presentation Thursday, April 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Giovanni G. Visentin

Xerox Corporation - Vice Chairman & CEO

* Jennifer Horsley

Xerox Corporation - VP of IR

* William F. Osbourn

Xerox Corporation - Executive VP & CFO

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Conference Call Participants

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* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Jim Suva

Citigroup Inc, Research Division - Director

* Kathryn Lynn Huberty

Morgan Stanley, Research Division - MD and Research Analyst

* Matthew Normand Cabral

Crédit Suisse AG, Research Division - Research Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Xerox Corporation First Quarter 2019 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Bill Osbourn, Chief Financial Officer.

During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. 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 express permission of Xerox. After the presentation, there will be a question-and-answer session. (Operator Instructions)

During this call, Xerox executives 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.

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [2]

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Good morning, and thank you for joining our Q1 2019 earnings call. Today, I'm going to give you a progress report on how we are executing on our strategy, starting with our financial highlights.

Our transformation initiatives are yielding results which give us confidence to raise our full year earnings guidance despite revenue declines. We are investing in our core business as well as new technologies that create value for our stakeholders and position Xerox for the long-term growth.

Overall, we saw improvements in margin. Operating cash flow and earnings per share as compared to the prior year period. Adjusted operating margin was 11.3%, up 140 basis points year-over-year. Margin expansion contributed to us delivering adjusted earnings per share of $0.91, up $0.23 or 34% year-over-year. We generated $226 million of operating cash flow, an increase of $10 million from a year ago. Free cash flow was $211 million, up $13 million year-over-year.

While we drove improvements in these 3 key measures, revenue in the first quarter was down 7% at constant currency year-over-year. As a result, we are increasing investments in near-term revenue-directed initiatives which we expect to see benefits from as we move through the balance of 2019. The anticipated benefits of these investments, together with the relative stability of our underlying page volume trend, gives us confidence to maintain our revenue guidance of approximately 5% down for the year at constant currency. Given our results in the first quarter, we are raising our guidance for full year adjusted EPS from $3.70 to $3.80 per share to $3.80 to $3.95 per share.

At our Investor Day in February, we discussed the key drivers of Project Own It, our enterprise-wide initiative to simplify and streamline our operations and instill a culture of continuous improvement. This year, we expect Project Own It to deliver at least $640 million in growth savings and the results already delivered by Project Own It enable us to increase EPS guidance for the year while also increasing investments in our business.

In the first quarter, we accelerated building a more efficient shared services operation which we anticipate will deliver at least $90 million in savings this year while making it easier for clients to do business with us. We also began standing up an automation Center of Excellence and implementing rule-based robotic process automation across many of our repeatable work streams such as invoice processing. By automating invoice processing, we increase accuracy, reduce processing time and improve client satisfaction, all while reducing costs.

The rationalization of our real estate portfolio is another area where we made significant progress. We consolidated 83% of our targeted sites, which enables employees to colocate and increase collaboration while we reduce our costs. Lastly, we're starting to see benefits of work we put in with our suppliers to increase the velocity of our supply chain and improve pricing. As for revenue, it will take time to change our trajectory and we took that into account when we developed our plan for the year and provided our full year guidance.

In the first quarter, 2 factors primarily led to a larger decline in revenue despite relative stability in underlying page volume trends. The first was timing of both equipment, sales revenue and transactional postsales revenue. Second, we saw a slowdown in some areas impacted by changes made to the business. We implemented several key actions under Project Own It in Q4 2018 and early Q1 2019, and we don't want to minimize the risk of disruption that change brings, but in each case, we chose to implement these actions now because we know that they are best for Xerox in the long term. And we already have plans in action in investments under way to help ensure the disruption is temporary.

We are seeing growth trends in certain key areas. Clients are signaling that they believe in our strategy, products and services by rewarding us with renewals and some large competitive win-backs. These trends, together with our revenue-directed investments and the relative stability of our underlying page volume trend, gives us confidence to maintain our guidance of approximately 5% down for the year at constant currency.

Our entry-level category expanded and we are starting to see traction with our A4s. To help support growing both our A4 and A3 placements, we are investing in programs that target competitive equipment and expand our distribution channels.

In the high-end category, we are now nearly flat with continued momentum from the Iridesse Production Press. The Iridesse is the only digital press that can print up to 6 colors in one single pass with excellent accuracy and the ability to embellish with decorative inks like gold, silver, clear and white. Iridesse performed well in Q1 and continues to attract new customers and knock out competition with its strong value proposition while also protecting our critical machines in the field.

In the first quarter, 40% of our placements came from competitive trade-ins and new business. Within services and software, we are investing in our portfolio of next-generation offerings and we are seeing momentum. We have secured several multimillion-dollar, multiyear deals and key renewals with clients such as Delta Air Lines and Morrisons, one of the largest retailers in the U.K. Services and software is an area where we expect to see additional improvement throughout 2019.

We're investing in our expanded portfolio of services and software solutions in health care, insurance, public sector and retail as well as across industry solutions such as accounts payable and campaigns on demand. We are leveraging our core competencies and intellectual property to diversify revenue mix, move into adjacent markets and offer end-to-end solutions.

For instance, our intelligent workplace services elevates traditional Managed Print Services, an offering Xerox pioneered and continues to maintain its leadership position in. With intelligent workplace services, we have added advanced analytics and security features to create this next-generation offering which adds further differentiation and value for our clients.

Two additional areas where we are investing include growing our direct sales force and expanding our channel business. Next month, we will bring partners together for our first-ever global partner summit to introduce them to our new product portfolio and road map. We have made progress on our innovation road map, which includes 4 focus areas: 3D printing and digital manufacturing, digital packaging and print, sensors and services for the IoT and AI workflow assistance.

Vader Systems, the liquid metal jet 3D printer manufacturer we recently acquired, has now been integrated into our R&D organization. By pairing our expertise with Vader's IP, we are looking to apply this technology to a broader set of materials while lowering the run rate costs for our clients.

Next month, we will be exhibiting our 3D capabilities for the first time at RAPID + TCT, one of the largest additive manufacturing trade shows in North America. We are actively identifying strategic partnerships and additional early customer adopters for our additive manufacturing initiatives.

Similarly, beta testing has expanded for our SaaS-based AI workflow assistance that supports knowledge workers with offering proposals and other business development documents. We are now testing it within Xerox and at a few small and midsized clients and Fortune 500 companies. There is strong potential for this technology to disrupt the RFP process, an area where companies spend an estimated $60 billion annually.

Our innovation efforts aren't just about investing in these longer-term opportunities. We are also investing in and advancing our core printer business. In Graphic Communications, we revealed the Xerox Rialto 900 MP inkjet press, a roll-to-cut-sheet platform designed to deliver maximum productivity per square meter. This new model increases output by 33%. The Rialto 900 MP will be available in Q3 2019 globally.

In Workplace Solutions, we enabled mobile on the go print services with the Xerox instant print kiosk. What's unique about our kiosk is that it offers an array of self-served document processing capabilities with the ability to charge on a per job basis, providing our clients an additional opportunity to drive revenue.

Cybersecurity is a central challenge for our clients. At our Security Summit held in Washington, we announced that Xerox AltaLink MFPs are now embedded with security technologies that can detect and neutralize cyber threats instantaneously. This kind of rapid response is critical when seconds mean the difference between an effective threat response and a compromising breach.

These are types of security features that have helped us stand apart from our competition and have earned us recognition from industry analysts like IDC. We continue to take a disciplined approach to investing in innovation to ensure we leverage our capital efficiently.

Operating cash flow in the first quarter was $226 million, an increase of $10 million year-over-year. And free cash flow in the first quarter was $211 million, up $13 million year-over-year. We repurchased $103 million of our shares, distributed $62 million in dividends and repaid $406 million in debt in the quarter. As a result, we ended the quarter with $723 million of cash on the balance sheet.

Before wrapping up, I want to directly address some of the most frequent questions we get. We are seeking shareholder approval of a holding company reorganization at our Annual Meeting scheduled for May 21. This is a common structure used by technology companies to gain more flexibility to structure long-term investments. It does not change our business operations or our overall strategy and its adoption is not related to or in contemplation of any specific transaction or opportunity.

We are also evaluating strategic alternatives for our leasing business. We said all along that this is a good business, but it may not be the most efficient use of our balance sheet. It is possible that there may be no transaction. We are committed to maintaining a strong balance sheet and ensuring our clients continue to have excellent service.

With strong margins and EPS expansion driven by Project Own It, we are increasing investments in our business beyond the $0.32 of EPS we originally forecasted for the year with a continued emphasis on revenue-related investments. We expect to see the benefits of these revenue-related investments through the balance of 2019 and into 2020.

Now I would like to hand it over to Bill to cover our financial results in detail.

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [3]

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Thank you, John. As John reviewed, we saw good progress on cost and productivity from Project Own It that drove margin improvement which, coupled with higher equity income and lower shares, resulted in strong adjusted earnings expansion of 34% and enables us to raise our full year adjusted earnings guidance to $3.80 to $3.95 from a range of $3.70 to $3.80. This result also demonstrates the current positive earnings expansion setup that we have while we build the foundation to turn around revenue.

I will now review in more detail the income statement. In total, revenue declined 7% at constant currency and 9.4% at actual currency. This below-trend performance was largely driven by 2 factors: lower transactional revenues and a decrease in activity in certain areas as we implemented some of our transformational actions. I'll cover these factors in more detail when I review revenue. However, it is important to note that we saw relative stability in underlying page volume trends and anticipate revenue rates of decline will improve each quarter as we move through 2019.

Turning to profitability. Adjusted operating margin of 11.3% improved 140 basis points year-over-year and drove $7 million in operating profit growth as the decline in revenue was more than offset by Project Own It-driven improvement in gross margin of 50 basis points and in SAG, as a percentage of revenue, of 100 basis points.

RD&E was 4.2% of revenue which was 10 basis points higher year-over-year due to the lower revenue as well as reductions in sustaining engineering that were partially offset by investments within our research centers and incubation programs in support of our growth initiatives.

Below operating profit, adjusted equity income of $57 million increased $46 million year-over-year from onetime adjustments in the prior year as well as benefits to Fuji Xerox from the recent cost actions.

Adjusted other expenses net of $26 million was $21 million worse year-over-year, driven by lower gains on asset sales while the adjusted tax rate of 26% decreased 2.3 points year-over-year. Overall, adjusted EPS of $0.91 was up $0.23 from the first quarter of 2018.

On a GAAP basis, we had $0.55 of earnings per share, which was up $0.47 from the first quarter of 2018. The largest drivers of the difference between GAAP and adjusted were transaction costs in the prior year of $38 million associated with the terminated Fuji transaction and a $35 million credit in 2019 associated with the U.S. tax act.

The difference between GAAP and adjusted EPS also includes our normal adjustments around restructuring and related costs, including those for Fuji Xerox, nonservice retirement-related costs and amortization of intangible assets.

To quickly touch on restructuring and related costs. In Q1, we had $112 million of charges, in line with our plan. In addition to normal course restructuring, this amount included $50 million of asset impairment and other facility-related charges as we consolidate and decommission facilities as well as $38 million related to severance costs that we are contractually required to pay on employees transferred as part of the shared services arrangement we recently entered into with HCL. We continue to expect approximately $225 million of restructuring and related costs for the full year.

Before moving on to our discussion of cash flows, I wanted to cover one other guidance update. We believe our stock at these levels represents a good value and return on investment. Accordingly, we are increasing our full year expectations for share repurchase to at least $600 million from at least $300 million, with the expectation that the incremental repurchases will be weighted toward the latter part of the year.

Moving now to cash flow. Operating cash flow was a source of $226 million, up $10 million year-over-year; and free cash flow was $211 million, up $13 million. This represents a good start to the year in what historically is our seasonally lowest cash flow quarter and puts us on track to deliver our full year operating cash flow guidance of $1.15 billion to $1.25 billion and free cash flow guidance of $1.0 billion to $1.1 billion.

Key cash flow drivers in Q1 included: a higher use of cash from accrued compensation, $73 million in Q1 '19 versus $32 million in Q1 '18 as we moved the timing of the payment of 2018 annual bonuses into Q1 this year; a use of cash within working capital of $45 million and as the decrease in cash flow from accounts payable due to the timing of supplier and vendor payments as well as lower spending more than offset a lower use or improvement in inventory; restructuring payments of $33 million and defined pension plan contributions of $34 million, both were lower year-over-year driven in part by changes to our policies and benefits. Finance assets were a source of $110 million, reflecting both seasonality, was a source of $93 million in 2018 as well as lower originations and the move we have seen over time of sales to channels with lower internal financing penetration.

CapEx in the quarter was a use of $15 million, which is modestly under the $18 million in 2018. We continue to expect approximately $150 million of CapEx for the full year. Lastly, within financing cash flows, we returned $165 million or 78% of free cash flow to shareholders through $62 million in dividends and $103 million in share repurchase, representing 3.3 million shares at an average price of $31.05 per share.

If we turn to the next slide, I will review in more detail the revenue dynamics in the quarter. As referenced earlier, first quarter revenue declined 9.4% or 7% in constant currency and included a negative 1 point impact from the OEM business that has been running off the loss of a large customer. This negative impact will decrease to only about 0.5 points starting in Q2. Overall, the revenue decline was below our full year expectations of down approximately 5% in constant currency, driven by 2 unique factors. First, timing within transactional revenue streams both ESR and within post sale. And second, a slowdown in some areas where we made organizational or coverage changes. Looking forward, we expect the rate of decline to improve each quarter sequentially on a year-over-year basis, getting us in the range of an approximate 5% decline in constant currency for the full year, currency impact to lessen during the year but still slightly more than 1% negative full year impact. This improvement comes from moving beyond some of the Q1 headwinds as well as from expectations that benefits will begin to build from investments we are making to drive revenue. Our Q1 profitability allows us to increase our planned revenue investments through the year.

Turning for a closer look at revenue streams, starting with equipment. Although down 10.2% or 7.6% in constant currency, results were actually mixed. Entry once again showed growth and was up 3.2% at constant currency, driven by indirect channels. High-end improved from recent trends and was relatively flat year-over-year at constant currency with positive mix dynamics driven by strong sales of the Iridesse production press as well as good activity in the high-end ink jet, driven by our Brenva Press.

Offsetting these positives were declines in midrange, which was down 7.2% at constant currency as we saw a slowdown in sales in some areas as we implemented organizational changes and where within XBS, we transitioned a significant number of accounts from U.S. enterprise.

Postsale in the quarter was down 9.2% or 6.8% at constant currency. This was off trend of down 5% to 5.5% at constant currency. However, I would like to highlight that the underlying page volume trends, while still declining, were broadly stable which gives us confidence that Q2 should begin to show improvement. Within Q1, results were softer in the 2 areas we highlighted. First, in the more transactional postsale streams, declines were higher driven by lower unbundled sales of paper and supplies in developing market regions following a strong Q4. And within XBS, the timing of larger third-party IP hardware sales. In XBS, we have direct line of sight to a significant third-party IP hardware deal already for Q2.

The secondary related to a slowdown in areas where we had organizational changes. For instance, there were higher declines in the accounts recently transferred to XBS so as to gain better coverage alignment and where new account management is still ramping up.

To close out our revenue discussion. Services, which we previously termed Management Document Services, or MDS, comprised 39% of revenue and declined 2.9% at constant currency. We continue to see growth in SMB services, which comprised approximately 29% of services revenue. However, results here were also impacted by the factors mentioned earlier. Overall, we expect improvement in services as we gain traction from the recently announced new offerings and coverage investments and recover from lower signings in prior periods.

So to reiterate, we expect improving trends and revenue, however, as we indicated last quarter, we have realistic expectations around the path to improvement and our earnings and cash flow guidance in 2019 do not rely on better revenue trends as was demonstrated with the adjusted EPS guidance increase we announced today.

Shifting now from revenue to profitability and earnings. Adjusted operating margin of 11.3% increased 140 basis points year-over-year, while adjusted EPS of $0.91 increased $0.23 or 34% year-over-year which represented our strongest EPS growth in some time. Both very positive results that point to the progress we are making in transforming our operations. Looking at the drivers year-over-year. The adjusted operating margin expansion of 140 basis points more than offset the impact of the revenue declines and resulted in $7 million growth in adjusted operating profit.

Within our operations, as John covered, we are seeing the flow-through benefits of Project Own It. These actions span the enterprise and we are confident in achieving at least $640 million in savings we targeted, with the large majority of those savings coming from actions that have already been put in motion. This also puts us on track to deliver our guidance of 100 to 150 basis points improvement in adjusted operating margin for the full year.

Overall, our operating results, coupled with the growth in equity income and lower shares, drove our strong earnings. So very positive results on profitability and earnings, which we expect will continue. Although I should note that we don't anticipate equity income to provide as much of a benefit in Q2 given the seasonality of Fuji Xerox this fiscal year, where our Q2 is their Q1.

I will now finish up with a discussion on capital structure. We ended the first quarter with $4.8 billion of debt and $723 million of cash on the balance sheet. We break down debt between financing and core by first calculating the financing debt by applying a 7:1 leverage to our financing assets, financing receivables and equipment on operating leases with the remaining debt assumed to be in support of the core business. In Q1, this calculation resulted in assumed financing debt of $3.3 billion and core debt of $1.5 billion.

As the debt ladder reflects, we repaid our March senior note and have one December maturity of approximately $600 million. Our core net debt was $700 million as of the end of Q1, which was consistent with our 2018 ending core net debt. Our core leverage at the end of the quarter was less than 2x free cash flow and thus, we do not see any immediate requirement to reduce our core net debt levels. We have access to a number of capital sources as well as ample liquidity to handle upcoming maturities.

Another important element of our capital structure is our pension, assets and liabilities. As of December 31, 2018, our net unfunded position was $1.2 billion which compared to $1.4 billion as of the end of 2017 and $2.2 billion as of the end of 2016. And it included approximately $775 million of unfunded pension liabilities, which, by design, do not get funded.

From a funding perspective, we continue to expect contributions of approximately $140 million in 2019 and believe we are well positioned to have a stable level of pension contributions over time. We know there are questions around what our capital structure could look like if we have a transaction for our leasing business. And while it is premature for us to provide any specifics, we remain committed to maintaining a strong balance sheet, which is important to our business.

I will now hand it back over to John to summarize before we move on to Q&A.

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [4]

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Thanks, Bill. Last quarter, we said we were executing against our strategic initiatives which would position us to accelerate our transformation in 2019. With our first quarter results, we are now in that position. Our brand, our people, the investments we're making and the improvement to operation that come from Project Own It, gives us confidence to raise our adjusted EPS guidance and maintain our revenue guidance for the year.

We will now open the line for questions. Jennifer?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Matt Cabral with Crédit Suisse.

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Matthew Normand Cabral, Crédit Suisse AG, Research Division - Research Analyst [2]

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Bill, just wanted to start off. Wondering if you could help us bridge the EPS guidance just between expected underlying operational improvement for the balance of the year versus the Q1 upside that you saw particularly given the contribution from Fuji Xerox. And I know previously, you hadn't included share repurchases in your full year expectations, just curious if that's part of the increase as well.

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [3]

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Matt, thanks. So a few points. First of all, as John and I stated on the call, we're very pleased with the progress of Project Own It and what that's doing for us from a performance -- operational performance perspective. And just if you look at the first quarter, we were up 140 basis points in adjusted operating margin year-over-year. So obviously, we're comfortable with reiterating our guidance of 100 to 150 basis points.

But with that said, we also said in the prepared remarks that we are -- we had planned for investments during the year. We said during the Investor Day and during fourth quarter earnings call, $0.32. And we're continuing with those and we're looking to, based on Q1 results, to increase those throughout the year. So it's -- the components are, you hit on them a little bit, from the share repurchase, the original guidance assumed more towards the latter part of the year. As you saw, we repurchased a little over $100 million in Q1. And so that will have more of an impact than was originally anticipated.

And then we added the additional $300 million, which will be, as we go throughout the year, we'll have to work through the first remaining $200 million, the first $300 million. And then the second $300 million will be in the latter part of the year. So both those will be positives. And as I mentioned in the comments also, the Fuji Xerox we expect to be less of a year-over-year favorable effect. They had some onetime accounting items in the prior year. But it really is a combination of the timing of the share repurchases and the benefits from Project Own It.

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Matthew Normand Cabral, Crédit Suisse AG, Research Division - Research Analyst [4]

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Got it. And then on postsale, you spent some time on this in the prepared remarks. But just wondering if you could live a little bit deeper into what's driving some of the weakness that you're seeing. And just help us understand the initiatives you have in place to drive improvement and how we should think about the trajectory of postsale for the balance of the year?

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [5]

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Yes. So in postsale, a lot of our postsale is bundled. As we've talked about, over 80% of our postsale is related to bundled contracts. And we saw the underlying page volumes being consistent with prior quarters, which drives a lot of that bundled postsale. But there is a portion that is more transactional in nature and can be lumpy, specifically unbundled supplies in the developing markets, we had a strong Q4 and it was not as strong as in Q1. We do expect -- that is a timing issue and we do expect to see that come back.

Another part of the postsale that is more transactional in nature is paper. It's not a high-margin area, but it's in the developing markets. We still sell paper in particular in Mexico was down year-over-year. That may not come back as much, but it is a low-margin item. And then the other item to call out from a transactional perspective in postsale is the IT hardware reselling, which several of our XBS cores do. And that can be lumpy and year-over-year there, that was a decline in Q1, but we do have sight -- line of sight to a specific transaction in Q2 and Q3 that will improve that.

But overall, as I said in my comments that we look throughout the year, we're confident based upon our updated forecast that the revenue constant currency decline, the Q1 7% will be the worst and it will be improving throughout the remainder of the year. Sequentially, each quarter will be better than the next.

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Jennifer Horsley, Xerox Corporation - VP of IR [6]

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Thanks, Matt.

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Operator [7]

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Our next question will come from the line of Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [8]

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I'm going to start with revenue, but before, I'll say congrats on a solid start to the year. So John and Bill, you sound pretty confident that you have your arms around sort of what led us to revenue weakness in the areas in which they were softer during the March quarter. Can you just speak a little bit more specifically to what gives you confidence that have your arms around that? And then if you could also just give a little bit more detail into the areas in which -- the specific areas into which you're increasing the revenue investment. And then I have a follow-up.

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [9]

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Ananda, look, I would say if we think of what we've done in the last 3, 4 months, is we've implemented changes. We reduced layers, we increased spend. We reconfigured our go-to-market. We split the MO between the Americas. We transferred 28,000 accounts from U.S. Enterprise to XBS. We consolidated our real estate. So if you think of everything we talked about, we optimized our workforce, and while we don't ever want to minimize the risk of disruption that's created by all these changes.

But in each case, we made these changes because we know what's best for Xerox in the long term. I personally met with over 300 of our managers, and I can tell you that while there was some disruption, they're all excited about the future, because we're investing in the long term. You've heard me talk a little bit about the areas we're investing in, which is in the services, the software, our equipment, our security, the summit we've had and in the future in innovation. So while we knew that this was going to cause some disruption in execution in the early part of the year, it still gives us confidence to increase EPS for the year and it gives us confidence to -- for our guidance, our 5% guidance for the year so...

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [10]

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Yes. Ananda, I would just say and you just infer. Some specifics, and some of these are programs that we already had in place in our $0.32 and we're just expanding upon them and putting dollars behind them in some of our additional programs. But we are building on our supplies management team to increase the tax rate to supplies, to additional supplies management sales folks.

As John mentioned, in the software sales area, we're adding a significant number of sales specialists just to deal with software sales that we didn't have before. We have specific targeted programs in the A4 and A3 area, specific targeted marketing programs in those areas. And in the e-commerce area, we're expanding what we're doing there. And we have an SMB attack plan. There's a lot of different initiatives. The dollars are going into those initiatives that we talked about originally, the $0.32 of EPS we're reinvesting, and we're expanding upon those investments as we move throughout this year as the Q1 results allow us to do.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [11]

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That's really helpful context, both you guys. I appreciate that a lot. Quick follow-up, just on the leasing business exploration, can you share a little bit about the dimensions upon which you're evaluating it? Is it just straight return on capital? Or are there some more subjective dimensions as well?

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [12]

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Yes, Ananda. There's a few things we're looking at. One thing is -- and I know we've talked about this and I brought it up in prior discussion that from a balance sheet perspective, you just look at our leverage in the optics of net debt that is supported by these financing assets, I think it's -- we get screened out by certain investors because of that. So that's one thing that you look at. If you look at our peers, most of our peers and competitors do not have an internal financing business anymore.

We also look at it from a simplicity perspective. Is this a core competency that we need to have internally versus externally? And actually, we'll look at it and say, are we -- do we believe we're getting the right value for it in any transaction? And that clearly will be evaluated. But you look at just the optics of how it impacts our balance sheet and whether this needs to be a key competency that we have internally within the company.

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Jennifer Horsley, Xerox Corporation - VP of IR [13]

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Thanks, Ananda.

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Operator [14]

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Our next question will come from Jim Suva with Citigroup

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Jim Suva, Citigroup Inc, Research Division - Director [15]

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One clarification question, pretty easy, probably more for CFO, more of a strategy question for CEO John. On the financial question, am I correct that in your prior guidance for the full year, you did not include any stock buyback and now you are? Or am I just hearing things a little confused today?

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [16]

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Go ahead, Jim. You can ask us both questions.

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Jim Suva, Citigroup Inc, Research Division - Director [17]

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And then the strategy question was, the expense side, looks like the Own it is having a pretty good material impact and creating great traction. But what are some examples of some revenue items you're doing different that Xerox potentially could improve upon? Because in the past, it seems like the story has been again and again about revenues not coming in where you want and we're already starting off the year that way, and it looks like the back half of the year will have to see a hockey stick improvement?

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [18]

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Yes, Jim. So first of all, regarding the EPS guidance that we laid out that we're going to do at least $300 million of share repurchase at the Q4 call and then on the Investor Day. But we specifically said that as far as our guidance for the year, that, that was weighted towards the back half of the year, or the latter part of the year would have limited impact to the guidance numbers that we were providing. To the extent that was moved up to earlier in the year, which we've been doing, as is demonstrated by the $100 million or so repurchase in Q1, that obviously would have an increasing impact on our EPS.

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [19]

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And Jim, we're doing a lot. So I talked a little bit about what we've done in terms of reducing layers, moving organization, simplifying our business. And specifically what we've done is while all the organization has gone on in the last quarter, we've also invested in areas. So in competitive win-back programs, we've invested heavily in sales organization, in tools, in offerings. If you think of the offerings that we've announced, whether it is our security offerings, whether it is our services offerings that we're focused on, all of that is going on in the last month and ready for prime time and all our teams are being trained and ready to go on that.

And we're starting to see some positives out of it. I would tell you that, yes, while first quarter -- back to first quarter, I never take disruption lightly, but we knew -- we made the decision that we were going to do a lot of these changes early. The teams, we've got great teams, great leadership teams that I've personally met with that have accepted these changes. Now we're off and running. So we're confident in maintaining our 5% guidance.

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Jennifer Horsley, Xerox Corporation - VP of IR [20]

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Thanks, Jim.

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Operator [21]

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Our next question will come from the line of Paul Coster with JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [22]

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(inaudible) these organizational changes might be (inaudible) North America (inaudible) difference between the 2 regions? Is that the case? And is restructuring -- I mean, is the change in the sales team now done such that you can get to this 5% trajectory over the course of the year?

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [23]

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Paul, we got the second half of your question. The first part, you were...

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [24]

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Yes, you'll have to go back. We were having a bad connection on the first part. I think it was something about organizational changes in the Americas, et cetera.

But the second part, regarding the disruption and -- one key point to look at in thinking about the degree, we did know that we were doing a lot of new things. There were things we had to do from a restructuring perspective. And we said, let's get what we can get done as soon as possible. And if you just look at our restructuring dollars spent in Q1 as a percent of the full year, that's kind of an indicator that we're targeting still the $225 million or so of full year restructuring.

We did $112 million in Q1. So the biggest part of the disruption, we do believe, is now and is behind us. It's Q4, Q1. There's changes still clearly to be made, we'll be working on them throughout the year, but we do believe that the biggest part of the disruption was -- has occurred already.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [25]

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Okay. Well, you did a great job of interpreting my garbled commentary there. But the other part was really the difference between Europe and North America. It looks like the disruption had been greater in North America than in Europe. Is Europe yet to come?

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [26]

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Well, I would say that Europe went through changes over the last year. And if you think of what we've done, is we've taken areas from Europe and transferred it to North America like Lat Am. But having spoken to the leaders, and I'll be in Europe in the following month or so, and having spoken with all the leaders, everybody's excited about the changes we're making and excited about moving forward. So...

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [27]

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Okay. And one last question. You've chosen to use some of your cash for repurchasing shares instead of making tuck-in acquisitions that might accelerate the turnaround in revenues. Can you just comment on that, John?

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [28]

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Yes, I -- look, we're not going to -- we're never going to comment on the potential targets. But we're focused on building a deep M&A pipeline that will support our revenue road map. But that pipeline will include tuck-in acquisitions that will help us grow our SMB market and also acquisitions like we just did in innovation like Vader, a small 3D metal print company that I spoke about earlier. But in each case, Paul, we're going to take a disciplined approach on the investments that will drive the highest IRR, so. But yes, we're focused on that.

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [29]

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Yes, and just to remind you, if you look at our full year capital allocation, there was a significant unallocated $450 million to $550 million. The incremental $300 million share repurchase still leaves for the tuck-ins. As John mentioned, we evaluate those on a case-by-case basis and what type of IRR they're providing us.

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Jennifer Horsley, Xerox Corporation - VP of IR [30]

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Thanks, Paul.

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Operator [31]

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Our next question will come from the line of Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [32]

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I just wanted to go back to the question about acquisitions. And I'm just curious, I mean, ASI is in a go-shop right now. Clearly, from our knowledge of the industry, it would make a lot of sense to layer on. I realize you're focused on share repurchase and you've got a strong dividend, but how -- I think, John, how do you think about if you're going to get to flat revenue in a couple of years and then some growth, is that something you can do with the existing technologies you have? Whether it's at PARC or within -- in Xerox? Or is it something where you really think you might need to have a bit bigger of an acquisition?

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [33]

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Yes, Shannon, I would reiterate what we said at the investor conference, where we're going to focus on innovation. And we've decided what the 4 areas of innovation are. And then even inside of the areas that we're in today, we'll look at areas like 3D and digital packaging and how do we disrupt it both in a Xerox inside attitude or in us disrupting the whole industry. On M&A and or potential targets, we're not going to comment publicly on it. But like I said earlier, we're taking a disciplined approach and the investment needs to drive IRR for us and for the strength of Xerox in the future.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [34]

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Okay. And then I just -- because, obviously, there's been a number of -- a lot of discussion around the leasing business and potential for what might happen to the proceeds, can you just define for investors what a strong balance sheet means to you? I think you gave some metrics at the Analyst Day, but if you can say at this point where you're at in terms of your definition of the strong balance sheet.

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [35]

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Yes. Shannon, so a couple of things. First of all, and I stated this before many times on these calls, that we believe that we're -- currently our balance sheet is investment-grade. We were downgraded towards the end of the year not because of the state of our balance sheet, but because of a requirement of top line being at least flat to growth. But we currently believe we're investment-grade. We have a goal of getting back as a company to investment-grade.

Our historical actions have been those of supporting a strong balance sheet. We paid down debt over time. We funded our pension plan. And so -- and it's important to us just from whether it's attracting or retaining significant customers, whether they're in the government or elsewhere, to have a strong balance sheet. I'm not going to put a specific number on it, but just know that we believe we're currently investment-grade quality balance sheet, although we were downgraded obviously below that because of our top line performance. So we have a goal of getting back there.

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Jennifer Horsley, Xerox Corporation - VP of IR [36]

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Thanks, Shannon. Operator, we have time for one last question.

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Operator [37]

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Our last question will come from the line of Katy Huberty with Morgan Stanley.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [38]

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As you pointed out, supplies revenue was particularly weak this quarter despite a fairly constructive business environment and stable page volume trends. Some of your competitors have also seen weakness in supplies. So 'wondering whether you think that third-party competition is an issue at all in the business. And if not, if you can talk a bit more about what you think drove the pull-in of transactional deals into the fourth quarter?

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [39]

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Yes. So thanks, Katy. So you kind of hit on a lot of points there, but from a supplies perspective, the majority or most of ours, and we believe that this differentiates us from a lot of our competitors, are bundled to contracts, tied to underlying page volumes, et cetera, and we've seen stability, although declining, but at consistent rates in those page volumes in recent periods. And it was more the lumpiness of specifically the unbundled supply is a smaller portion for us than a lot of our peers in the developing markets.

There are -- from time to time, there are incentives to pull things to make sales in certain periods and Q4 was strong in supplies. It was up a couple of percent in the unbundled supplies area in Q4. And just looking at the timing of those sales going forward, we believe that they will be coming back in future quarters.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [40]

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Okay. And then just as a follow-up. If I assume $100 million a quarter of share buyback in the first half, $200 million a quarter in the back half, it could be anywhere from $0.10 to $0.15 of EPS impact for the full year versus not assuming much last quarter. Is that a fair characteristic of how much you've added to the EPS outlook from share buyback?

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William F. Osbourn, Xerox Corporation - Executive VP & CFO [41]

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So share repurchase is a part of the guidance and the increase, and also the expanding of the range sort of goes to the timing of the share repurchase, where we're in a $0.10 range to $0.15 range. But naturally, you would get to the -- the earlier you purchase, the higher -- the later it would be over. For that range, we're assuming that the 300 -- the incremental $300 million would be more in the latter part of the year.

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Jennifer Horsley, Xerox Corporation - VP of IR [42]

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Thanks, Katy. John, anything to wrap up?

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Giovanni G. Visentin, Xerox Corporation - Vice Chairman & CEO [43]

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Thank you very much. Our transformation initiatives are yielding results, giving us confidence to raise our full year earnings guidance while maintaining revenue guidance for the year. Thank you all for joining us today.

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Operator [44]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude today's program and we may all disconnect. Everybody, have a wonderful day.