Xerox Holdings Corporation (XRX) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Xerox Corporation Fourth Quarter 2011 Earnings Release Conference Call hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Luca Maestri, Executive Vice President and 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 expressed permission of Xerox. [Operator Instructions] 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 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 Ms. Burns. Ms. Burns, you may begin.

Good morning, and thanks for joining us today. We'll get started on Slide 3 with a review of the strategic imperatives that define our business and align with our financial performance. First, accelerating our Services business. We're operating in a market that is rich with opportunity, especially as more and more enterprises and governments seek efficient and productive ways to manage their operations. We're taking full advantage of our experience and expertise by diversifying our offerings, aggressively pursuing opportunities in key growth areas like e-discovery, HR outsourcing, customer care, transportation and health care and expanding globally. During the first year of this -- during the first half of this year, revenue from Services grew 8% in constant currency, tracking very well with our expectations. Second is maintaining our leadership in Technology. We're continuing to take a disciplined and practical approach to managing our Technology business for a sustained benefit to our bottom line. That means providing the industry's best technology, delivered through a cash-generating business model and focusing on building our business in color, SMB and across developing markets. During the first half of this year, installs of Xerox products were up 5% and in particular, our color MIF, that's machines in the field, was up 14%. Install and MIF growth is a good indication of future annuity revenue, reflecting our continued market share leadership and, in particular, the share that we're taking from competitors. Third, we're driving operational excellence across our enterprise. This means adjusting our cost model so that we're competitively advantaged and have the financial flexibility to adapt to changing marketplace needs while scaling in key growth areas. Operating expenses are down, which is indicative of our disciplined approach to managing our cost base. And in Services, we delivered sequential improvement in operating margins. By executing well on the first 3 priorities, we are very focused on the fourth, which is creating value for our shareholders, doing so by delivering solid earnings and allocating capital in the areas of acquisitions, dividends and share repurchase. The economic uncertainty has created more pressure especially in Europe, and especially impacting our Technology business. We benefit from offering a diverse portfolio that allows us to aggressively pursue areas of higher growth and to manage for improved profitability in more mature markets. The quarterly numbers give one picture, but I'm just as closely managing the progress that we're making to be increasingly differentiated and advantaged in the marketplace. We're winning customers' trust and helping them simplify how work gets done in ways that may surprise you. Please turn to Slide 4 for some examples of what I mean. Key to our Services growth is investing in those markets where we already have respected expertise and where we see potential for market expansion. The discovery process for the legal industry is a great example. It's a complex area and one that can be incredibly costly if left to more manual processes. We've built a competency in e-discovery through advanced software tools and services, and we just strengthened our advantage through the acquisition of Lateral Data. Its software helps firms and helps legal departments manage the entire discovery life cycle in simple and affordable ways. We're also taking this customized approach to the mobile phone market by acquiring U.K.-based WDS, which provides technical support to the world's largest wireless telecommunications brands. Through its proprietary cloud-based platform, WDS analyzes millions of technical support interactions across thousands of mobile devices. It then uses this data to help clients adjust any systematic problems, all real-time, fast and in productive ways. Productivity is also the benefit of advancing Technology and Services for health care. While the headlines this past month were all about what's next for the Affordable Care Act, we were already moving far ahead through our established relationship with health care payers, providers and government agencies. This includes Q2 announcements for developing Nevada's Health Information Exchange and enhancing New Mexico's Medicaid reimbursement services, to create a cloud-based portal that gives Florida business owners more health insurance choices, as well as being selected as the BPO provider for NIH. Xerox is exceptionally well positioned as a trusted provider for the business of health care. That's a quick glimpse of the stories behind the numbers. And we'll share more with you each quarter. And hopefully, they help to reframe your perception of Xerox to showcase the amazing opportunity that's in front of us and to better explain the evolving nature of our business mix and model. So now let's look at how this translates into our financial results. Turn to Slide 5. I'll provide a top-level review, then Luca will take you through the detail. And I'll close with our expectations for quarter 3, and then we'll take your questions. In the second quarter, we delivered adjusted EPS of $0.26. On a GAAP basis, earnings were $0.22 per share. This includes $0.04 related to the amortization of intangibles. Earnings are in line with our expectations and reflect the investments that we're making to grow our business. Total revenue of $5.5 billion was down 1% and up 1% in constant currency. Demand for our industry-leading Managed Print Services led to a 6% increase in revenue from Document Outsourcing. ITO revenue was up 9%, a significant improvement from prior quarters. And revenue from Business Process Outsourcing grew 8%. Revenue from our Technology business declined 4%. This was impacted by the continued weak macroeconomic environment and by clients increasingly shifting to Xerox's Managed Print Services, which is reported in our Services segment. I remain quite pleased with our across-the-board progress in Services and the benefit that it brings to our top line. Strong revenue from Services, our growth driver today and in the future, gives us financial flexibility and helps minimize the impact from our slowing Technology business. We continue to make the appropriate investments in our Services business, which includes incurring startup costs to ramp new contracts. So as a result and as expected, we're facing near-term pressure on margins. But also as expected, we made sequential improvements in quarter 2. Operating margin of 9.7% was down 0 year-over-year and up 1.2 points from quarter 1. And that was driven by a 1.3 point sequential improvement from our Services business. Q2 gross margin of 32% was down 1.4 points, improving 1 point from quarter 1. This is in the range of our expectations for the first half of the year, and we balanced our investments by continuing to improve RD&E and SAG, which is now at 19.4% of revenue. We generated $228 million in cash from operations, again in line with expectations and reflecting the need to make higher cash pension contributions during the first half of the year. We remain confident in our ability to generate $2 billion to $2.3 billion in full year operating cash. And we are continuing to use available cash for acquisitions and share repurchases. Please turn to Slide 6 for a closer look at our top line results. The metrics of these charts tell 2 different but key messages. First, reiterating the importance of Services in the total picture of our business. A year ago, the revenue coming from Services and Technology were about -- were evenly split. Now Services makes up 51% of the total, up from 48% a year ago. Second, a reminder of the significance of our annuity-driven business model. As you see here, 85% of our revenue is annuity, and it's up 2% in quarter 2. We remain focused on increasing profitable annuity-based revenue across our portfolio. We manage our services business for growth, building our pipeline, increasing signings of multiyear contracts and investing in acquisitions to strengthen our competencies. In addition to winning major BPO and ITO deals, we continue to lead with our Managed Print Services, which are in demand as enterprises look for ways to operate more efficient workplaces. For example, we recently signed a 6-year MPS contract with Boeing to consolidate its printers, copiers and fax machines and to implement a global printing framework based on price, energy, efficiency and ink use. We also strengthened our annuity stream through the installs of Xerox equipment. Our approach is to lead in color, so Xerox ink is being used to generate color pages printed in workplaces and print shops of any size. During the quarter, our color MIF was up 14%. Equipment sales revenue was down 6% in constant currency. And this is where we're seeing the largest impact from economic weakness, especially in Europe. In fact, 2/3 of the equipment sales revenue decline came from Europe. Equipment sales revenue was the most -- has the most volatility in our business right now, and it represents just 15% of our total revenue. We're managing it by being very disciplined with our cost base while expanding distribution to capture the opportunities in SMB and developing markets. In summary, we're clear-minded about the dynamics of our 2 businesses based on market opportunity and the macro environment. And we're managing our operations to align with the changing nature of both. In Services, again, our emphasis is on growth and making the investments to scale so that we can serve our clients in diverse, reliable and efficient ways anywhere around the world. And in Technology, we're sharply focused on streamlining the cost base. Our emphasis is on nurturing our resilient business model in ways that maintain market leadership while generating cash and supporting our bottom line. Considering the economic uncertainty, we now expect that revenue from technology will continue to be weak. As a result, we are revising our full year earnings expectations. They're based on continued strong year-over-year revenue growth from Services, lower revenue from Technology and the ongoing benefit from operational efficiencies. So let me turn it over to Luca. And I'll be back to wrap up and open the call to your questions. So Luca?

Thank you, Ursula, and good morning, everyone. Overall, I believe we performed well in a weak economic environment to deliver 1% constant currency revenue growth and EPS within our guidance. Services, as expected, has strong growth, and we are confident this will continue for the balance of the year. Technology revenue improved sequentially, down 4% year-over-year versus down 5% in Q1 at constant currency. But this was helped by an easier compare. And we expect equipment revenue will continue to be pressured, given the challenging macro conditions. We were pleased with the margin performance despite being down from last year. Sequentially, gross margin improved 100 basis points to 32% and operating margin improved 120 basis points to 9.7%. Year-over-year, gross margin was down 140 basis points driven by Services and mix. Like Technology, gross margin was actually 20 basis points better. The drivers of the decline are generally consistent with what we saw in Q1. Services margin saw good sequential improvement, but as anticipated, we had margin compression due to new contract ramp-up costs. And this remains the largest driver of year-over-year margin decline. Also the increasing services mix continues to impact gross margin, but is fairly neutral to operating margin. The gross margin on our Services business is 1/2 that of our Technology segment, so the strong growth in Services has direct impact on overall gross margin. We again saw good progress in expense efficiencies with SG&A improvement of 50 basis points. As a result, operating margin was down 70 basis points year-over-year. We continue to expect operating margin to show year-over-year improvement by Q4. Restructuring of $29 million was $38 million higher year-over-year and it is important to note it is fully reflected in our adjusted results. Tax rate of 22.4% was lower than prior year. The EPS impact from higher restructuring and lower tax rate offset each other on a year-over-year basis. Adjusted EPS of $0.26 was down $0.01 from 2011, with the only adjustment to reported EPS being the amortization of intangibles. Moving on to segment performance. Let me start with Services. Services revenue was up 7% in Q2. The growth rate was somewhat lower than Q1, driven by BPO. This reflected some timing of revenues and some lower volumes in areas such as transportation and customer care. ITO showed good revenue acceleration and was up 9%. New contracts signed in recent quarters are now beginning to ramp. And we have about 3 points of growth related to intercompany services as this business is taking over more of our own IT infrastructure. We, of course, eliminate this intercompany growth within total Services. Also Document Outsourcing continues to show a good pace of growth, up 6% at constant currency. Given the neutral economic environment, we believe this overall performance confirms the strength of our diversified Services portfolio. We expect growth in Q3 will be in line or better than Q2. It is worth noting that the Q2 growth was almost entirely organic. But clearly, we will continue to support Services growth with tuck-in acquisitions, the latest examples being the WDS and Lateral Data acquisitions that Ursula just highlighted. Signings in Q2 were lower year-over-year and down 1% on a trailing 12-month basis. The year-over-year decline is caused by less renewal potential this year despite a strong 89% renewal rate for the combined BPO and ITO business. New business signings on a trailing 12-month basis are up 13% and continue to drive our revenue performance. Services margin of 10.6%, while down year-over-year, showed a 130 basis point sequential improvement. We continue to expect that by Q4, Services margin will show year-over-year improvement and will be within our 11% to 13% target range for Services. Let's now turn to the Technology segment. Technology revenue was down 4% and document-related revenues, which includes Document Outsourcing, were down 2% at constant currency. Despite the sequential improvement in Technology revenue, it is fair to say we saw increased pressure on our results from the macro environment. Equipment, in particular, was lower than anticipated, driven by weakness in Europe and the continued success of our partner print services offering, which results in some revenue shifting from Technology to Services. The sequential improvement in revenue was driven by unbundled supplies, which was up 5% versus down 7% in Q1. Unbundled supplies represent a little less than 20% of our Technology revenues and is predominantly aligned with entry products. It can be volatile, given channel inventory dynamics, which is what we saw in Q1 and in Q2. Looking at product [ph] segments. Part of the weakness in equipment revenue was mix. We saw a rebound in entry, thanks to the new products and OEM sales. High-end showed very strong color install growth, but this was driven primarily by the entry production products. And mid-range was impacted by the migration into Managed Print Services. We are planning for equipment revenue to continue to be weak in Q3, and therefore for total revenue declines to be down mid-single-digits for Technology. Segment margin of 11.3% was down slightly from 2011 but reflected continued cost and expense control and was above our 9% to 11% target range for Technology. There are obviously a number of different dynamics at play in the market. And as we move to the key metrics slide, I would like to give some additional insight into how we view and how we're managing our different businesses. Let's look first at Services. The company has gone through a transformation over the past 2 years, with Services now accounting for over 51% of total revenues. And we clearly expect this trend to continue. A few important points to make regarding our position in Services and future expectations. We are a leader in a number of very attractive and growing Services segments, including health care, both government and commercial; commercial BPO areas, such as human resource, outsourcing and transaction processing; as well as transportation. We have strength in 3 very important capability areas: ITO, customer care and document management, which we leverage across all of our lines of business. And we have a tremendous opportunity to increase our capabilities, leverage innovation to build greater differentiation and expand globally. This should lead to greater operating leverage and value add, which will improve not only revenue but margins over time. Services will be the growth driver for the company and also will make us a more valued partner to our entire customer base. In terms of Technology, I want to address how we're managing the continued impact of a weak macro environment. First, we have been gaining market share for several quarters, and we do not have significant exposure in some of the areas of greatest secular pressure such as consumer and single-function devices. For instance, when you look at the metrics on this slide, they're generally stable and in some cases positive. Second, we continue to selectively invest in areas where we see the greatest growth opportunities such as small- and medium-sized business, Managed Print Services and color. And third, we have realized sooner than many, that there are specific areas of secular pressure such as transaction state [ph] in printing that impact us. As a result, since the end of 2008, we have proactively worked to make our business more annuity-based, our cost base more flexible and our investments more focused. Our document-related business remains attractive. It has a very large annuity stream and good cash dynamics, limited capital requirements and committed revenue streams. We are the global market leader, have great technology and strong customer relationships, and we can leverage these characteristics to strengthen our Services business further. If we now turn to the next slide, I will take a moment to review Q2 cash flow. Cash from Operations was a source of $228 million, which compares to a source of $347 million in 2011. Through the first half, cash flow was $213 million versus $317 million in 2011. This is fully in line with our expectations as the driver of the year-over-year decrease is the timing of pension contributions. Cash contributions through our global pension plans in Q2 were $158 million, which was $80 million higher than 2011. We now expect second half contributions of approximately $150 million versus $303 million last year. We spent $115 million on CapEx, which is consistent with our annual forecast of around $500 million, and we decreased debt by $455 million. Dividends paid was $63 million, and we repurchased $306 million of stock. This was an acceleration compared to our original plan, and we continue to plan to repurchase between $900 million and $1.1 billion for the year, weighted towards the end of the year. Finally, we remain on track for $2 billion to $2.3 billion of operating cash flow for the year. Let us turn to the next slide to review our capital structure. Our Q2 ending debt balance decreased to $9.2 billion. In May, we retired $1.1 billion in senior notes, which was the only term debt coming due this year. From a maturity standpoint, we maintain a well-balanced debt ladder, with just about $1 billion coming due annually. During the course of the year, our debt balance may change moderately, given timing of cash flows, but we continue to plan for $8.6 billion for year-end debt. The vast majority of our debt is in support of our financing of customer leases. Of the $9.2 billion debt balance, $5.6 billion can be associated with the financing of Xerox equipment for our customers. The finance that is calculated assuming a 7:1 leverage of our finance assets of $6.4 billion. These finance assets represent committed revenue streams from our customers. In Q2, as I said, we made good progress on share repurchase, $306 million or 41 million shares. We have said all along that our repurchases will be back half-weighted, given timing of cash flows, but we are maximizing what we can do in the near term, given the share price opportunity. In summary, we continue to be focused on growing and improving the profitability of our Services business while maintaining our profitable leadership in Technology. We are seeing the impact of macro weakness, but believe we are well positioned to have steady revenues and profits through this time. In terms of capital allocation, we remain committed to using our strong cash flow to return value to shareholders through share repurchase, dividends and accretive tuck-in acquisitions. With that, I will hand it back to Ursula.

Thanks, Luca. Let me quickly wrap up so that we can get to your questions. Our results in the second quarter reflect consistent progress. Growth in Services, increase in annuity revenue, a steady pace of increasing installs and color MIF, sequential margin improvement in Services, disciplined cost management and on-track performance with cash generation and capital allocation all delivered to build value for our stakeholders and more value in our business. Our guidance on cash remains unchanged, and we remain committed to investing in share repurchase throughout the year. For the third quarter, we expect adjusted earnings of $0.24 to $0.26 per share, and we now expect full year adjusted EPS of $1.07 to $1.12, which comprehends the continued revenue weakness that we're expecting from our Technology business. With that, I thank you again for joining us today. And as we get to your questions, I know that you want to dive deeper into trends, especially in our Services business. So we have in the room with us today Lynn Blodgett, who's the President of our Xerox Services business. Now let's open it up to your questions, and I'll field them and ask either Lynn or Luca to chime in as well.

[Operator Instructions] Your first question comes from the line of Shannon Cross with Cross Research.

I guess, the first question, Ursula, is can you talk a little bit about what you're seeing in terms of the pressure on the Technology side, whether you'd see if this is a cyclical issue, clearly, Europe is weak from an economic standpoint, or more of a secular trend? I think you've talked about it some in the past. So I'm curious if you've seen any changes in maybe the rate of decline on the secular side. Just any clarity you can give us there would be helpful.

It's a good question, I think, one that many people have, so we're going to spend a little bit of time talking our way through this. First, let me start with secular -- the secular trends that we're seeing in the marketplace. We see a growth in color almost across-the-board, so mid-range, high-end places that we participate. We see that in color MIF increasing and color pages increasing. We see a shift, a decided shift, towards Managed Print Services away from single-function devices. We don't have a very large business in single-function devices, black and white, or color at the low end. And we took advantage of this lack of participation by driving -- by starting and then driving a Managed Print Services business. More and more customers are pushing towards Managed Print Services. There is no doubt about it. All of our competitors are now engaged in Managed Print Services. We have been engaged for a long time, and we're leading. That's the second secular trend. We see growth in small- and mid-sized businesses everywhere around the world, U.S. and in developing economies particularly. We see a move away from, which we've seen for quite a few years now, high-end black-and-white transactional pages. That move is continuing and has not slowed down. It's -- the momentum is there and we have recognized that and baked that into our business model and our guidance on a go-forward basis. We have not seen a slowdown or a shift in those secular trends at all. If you look at the macro environment, and then I'll bring it altogether, we have seen a considered slowing of business in Europe. We saw this a little bit later than most. But in the first -- and in the first quarter, we definitely started to see the pickup. We have seen acceleration of that softness in the second quarter, towards the end of the second quarter. That's the reason why we've adjusted our guidance downwards. We're now assuming and planning for mid-single-digit declines in equipment revenue in the Technology segment. This is revenue in Technology segment. This is a big change from where we were in the first quarter. We were thinking that we could hold that to flat to low single-digits. Now I think that's not a realistic expectation. So secular trends haven't changed. I mean, we haven't seen a change. If you look at North America and DMO, we still see pickup in color, move to MPS, a slowdown in high-end black-and-white printing, a pickup of SMB businesses. So that's still there. And on a macro side, we are definitely seeing a weak Europe. I hope that answered it.

Yes. No, that was helpful. My next question is for Lynn actually or Ursula, or whoever wants to take it. Can you talk a bit about what's going on in the health care side in your Services business. Opportunities, challenges, given Obamacare and all that sort of developing right now?

I'll have Lynn take it. We are pleased, really pleased and very excited about health care. But I'll have Lynn dive into it. It's a real winner for us. Lynn?

Shannon, as you know, we are very well positioned in all of the aspects of health care. Our health care business has grown and is now a significant part of the overall portfolio. And we have Services in the private sector, both in the payer and the provider side and on the government side. And so this -- the whole effort around Affordable Care is something that we feel we're very well positioned for, as well as just the continued evolution on the private side. So we feel very, very good about our position in health care.

But can you give us some idea of how big it is?

It's right now about $2 billion of the portfolio, so about 10% of the overall portfolio, and it's growing nicely.

And that $2 billion is just for the health care provision in BPO and ITO. We have obviously in our Technology side, we have support of the health care as well. But for the Services business, BPO and ITO, we are definitely a leader here. We also have just recently won some new business throughout the States, and you'll be seeing that in the next quarter.

Great. And then my follow-up question for Luca, we've been hearing more about sort of questions about the leasing business, your thoughts on how big of a leasing business you need to maintain, given your mix to a -- or your migration to Services. So can you talk a little bit about how you think about the leasing business strategically?

Well, the leasing business is directly related to our equipment revenue. We support our customers by financing those leases. 85% of all the equipment that we sell is financed by ourselves to our customers. You would see that the size of the portfolio has come down a bit, in line with the decline in equipment revenue. It is really a part and parcel of our go-to-market strategy. It is a great differentiator for us in the marketplace, particularly at times when credit becomes difficult. So it's a business that we like because it's very profitable and it's very much bundled together with the rest of the Technology business. It will follow -- in terms of the sizing, it will follow very much the progression in our Technology revenue and particularly equipment revenue.

Is this something that you need to keep in the same size you have? Or is it something where you can look for partners,though [ph] over time?

Well, again, it's a profitable business. Of course, if we can find more efficient ways to run it, we will do so. At this point, again, it's a very profitable business, and that's the way we're keeping it right now.

Your next question comes from the line of Ben Reitzes with Barclays Capital.

I wanted to ask you if we should be concerned about Services bookings down 26% in the quarter after being down 27% year-over-year the prior quarter on some pretty easy compares and the dropoff in the renewal rate.

So Ben, let me start with the renewal rate. Renewal rate was excellent during the second quarter, we're at 89% with the top of our range of 85% to 90%. The drop in bookings, very much driven by less renewal potential. Less renewal potential is not necessarily bad. It means that we got long-term contracts. And in this given quarter, we didn't have much link [ph] to renew. And as you know, renewing contracts tends to bring some compression in margins. If you look at our new business signings and you look at it on a trailing 12-month basis, actually we're up 13%, very good. And by the way, we have seen some level of delays in decision-making during the quarter, particularly in Document Outsourcing. Our pipeline is now -- has now grown 10% in the quarter. So new business signings up 13%, pipeline up 10%. So we are not concerned about the progression of signings.

One of the other things, Ben, this issue of renewal, it's a kind of an interesting metric because it actually is better for us. If you consider the risk that's associated with renewals, and as Luca said, with margin compression, the fact that we don't have much up for renewal is a good thing and we renewed a high percentage of that. So we feel very good about renewals and we're glad there wasn't a lot up for grabs.

Okay. Yes. With regard to the Technology segment, if you could just kind of talk a little bit more about your positioning. What we're seeing is a rapid dropoff in a lot of the entry level in the inkjet -- some of the inkjet areas for certain players. And I was just wondering if you could talk about your relative positioning among the segments. You tend to call an entry level at a higher level than some of the others. And if you could just talk about your relative positioning there and by the segment and what kind of deceleration you're expecting.

Right. So there's 2 ways to look at this. First is on the traditional single-function low end, either consumer or very small business, very, very small business market. We are a de minimis player in that portion of the market. We serve those customers through resellers. Any resellers who are interested in taking our products and moving it, we're a very, very small player there. The next segment is a little bit higher up in the SMB place and primarily color and multifunction devices, A4 configuration but some small A3 as well. If you look at our install growth across entry, we've grown installs in all of those places and even in the very, very small color printers, A4 color and A4 Mono. But we are relatively small in this segment and serve it through resellers. The way we participate here is through MPS. And MPS does 2 things for us. One, we can deliver some of our technology into a client's account, SMB and large customers as well. But we also, through our success in MPS, take over pages in clients' accounts that are not done on our technology today. So what we are seeing is definitely a softening of the market potential for the small devices, particularly single-function devices. And we participate in that, not by bringing new technology only but by bringing new offer called MPS. I hope that answered it.

Yes. And could you just clarify how -- what kind of growth rate now you expect at the high end, considering I think it has a disproportionate share of the EBIT in the segment?

Yes. We still -- we expect to continue to grow color, high-end color, mid- to high and high-end color installs and activity and revenue, particularly in color. And we expect to continue to see weakness or declines, revenue declines in our high-end black-and-white business. There's no doubt about either those things. Luca -- you want to say something Luca? Because I think that, that's -- yes, so the trends haven't changed. I mean, we're shifting towards color. We're still moving some pages down from offset to color, driven by applications. That's why we're seeing even in weak economic environment some buoyancy in color, the color metrics, and we are definitely continuing to see the move from black-and-white in the high-end.

Your next question comes from the line of Keith Bachman with BMO Capital Markets.

I'd like to extend Ben's question for a second if I could. On bookings, A, what are you anticipating for the next couple of quarters? The compares certainly don't get any easier. And then part -- well, I'll save part B of that question. But if you could just go over A for a second.

We anticipate a sequential progression in signings. We know we signed a lot during the course of the second half of last year. But clearly, we expect the signings acceleration as we get into Q3.

The pipeline is growing. The pipeline is strong and is growing. It's growing 10% and is growing across the 3 lines of business and in subsegments of the business, so we're not seeing a concentration of pipeline at all and we're seeing expansion in just about all over the line. So we do expect this, as Luca said, for signings to continue to be strong.

Okay. But if I extend that for a second, let's presume for the year because right now, you are down 26% year-over-year first half. So let's say you're down 20% to 25% for the year on your bookings. With that as an assumption, will you still be able to grow Services, say, in the mid-single-digits to high single-digits as you look out over calendar year '13?

Yes. I think that the signings rate that you're looking at is a little bit misleading because of the renewals. And again, if we don't have the challenge of renewing something, that's better than it coming up for renewal because we don't have a reprice and that is skewing the number. As Luca said, we definitely have a difficult compare in the second half. But we expect bookings, new business bookings, which are the things that -- new business bookings and renewal rate are the 2 things -- not renewal volume but renewal rate, are the things that drive growth. And because those are improving, we feel comfortable in maintaining the growth rates.

Okay. Let me ask another on Services. Ursula, for you, the tuck-in acquisitions is identified as being $300 million to $400 million for the full year. Is that a run rate we should be thinking about even as we look at CY '13?

We haven't given a lot of guidance on CY '13. But I would say that acquisitions across-the-board in both Services -- across-the-board in Services and in Distribution, a little bit less there, are part of the business model for our business. And so tuck-in acquisitions is something that you should continue to see, particularly in Services, for the foreseeable future.

Okay. I'm going to ask one more, then I'll cede the floor. For Lynn, if I could, Lynn, could you just describe how your direct level reports have changed in the last year as the business has changed? And what I'm interested in is the influx of, say, Xerox people or even adding to third parties from Accentures to the IBMs of the world that would help in the consulting side of the business or ITO areas.

Well, I think that we have a very good mix, particularly in my direct report of people who have experience from the private sector and the public sector. We have continued to, over the last year, to align the chief -- the operating officers on a more vertical basis, so we have a commercial health care person, a government health care person and so on. So we think that improves the focus and the subject matter expertise. And we've had nice movement of people from the traditional ACS side of the business over into the Xerox ranks and vice versa. So my chief financial officer, for example, is directly from Xerox and has been a tremendous addition to us. And we continue to look outside. We try to promote from within as much as we can. But we also know that it's -- that you have to have a healthy mix of new talent. A lot of our new talent comes via acquisition. And that's probably the biggest force of influx of new talent. But we, because of each competitor that we have, go through cycles. And when one is having difficulties, we try to take advantage of that and hire talent from those people.

Your next question comes from the line of Ananda Baruah with Brean Murray. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: I guess, the first one is for Luca. Luca, can you walk through how much wiggle room, I guess, through the cash flow dynamics for a CFO? And I know you sound like you said you came in line with what you were expecting this quarter. I think it was a little bit lighter than what most folks were expecting. So can you talk through sort of the wiggle room in the reiteration of the guidance for the second half of the year? Sort of, I guess, how comfortable are you now with that guidance, because you didn't lower it, but you're lowering overall P&L guidance, and maybe what some of the influences are in there? And are there any tailwinds that we should be thinking of?

Sure. And let me start with that, with the issue of guidance. So we're still comfortable with the $2 billion to $2.3 billion even though we've taken earnings down. When you look at our reduction of guidance in EPS, when you do the math, it translates to approximately $100 million of pretax cash earnings. So that obviously, that's a headwind. What offsets that is the fact that a portion of the reduction comes from equipment. And so also our leasing business will reduce, our leasing receivables will come down, and that will give us a partial offset in cash. And then the other tailwind that we have is that we now expect our pension contributions to be about $50 million lower than we were forecasting previously because of this recent pension funding legislation that was passed at the end of June. So that's why we end up with a similar cash flow as prior quarter. When we look at it in progression, first half versus second half, again, we have delivered exactly the same level of cash flow in 2012 first half versus the first 6 months of 2011, when you exclude the different timing of the pension contributions. So as we look ahead and we know how much cash we have delivered last year, again, we think we can be well within the range. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Awesome. And I guess, for probably for sort of for Luca and for Lynn, on the Services operating margin expectations for the second half of the year, how does the macro softness -- or does macro softness influence what you guys are expecting from the Services side through the year? Then I have a follow-up to that as well.

Yes. In general, Services is much more resilient to the macro, but there are areas of our Services business that -- and we've seen it already in Q2 where, for example, transportation or customer care, that you end up getting lower volumes with lower levels of activity. But as we look at our progression, we said it before, we expect that by Q4, we will be within our target range, 11% to 13% for our Services operating margins. And we were pleased with the progress that we made in Q2. We expect Q3 to be more or less in that ballpark that we've seen for Q2. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: And Luca -- it's just a follow-up on that. I mean, are the operating margins in Services, have they been tracking relative to your expectations? And do you have any -- is there anything that can possibly offset some of the lower volumes like lower unemployment claims or something like that?

Of course, we have such a diversified portfolio that you always get some offset. But again in Q2, we -- our operating margin in Services was slightly ahead of our expectations.

Your next question comes from the line of Bill Shope with Goldman Sachs.

I have a question on the supplies revenue growth. You had mentioned that it was partially driven by timing of purchases for channel partners. Could you dig into that a bit more and help us understand how much of an impact that had on growth? And then off of that, how should we think about the growth pattern as a result of that in the third and fourth quarters? And then I guess, finally on that, how should we think about macro risks to supplies consumption in coming quarters, given that I think some of your competitors are starting to see some consumption pressure as a result of the macro environment?

Yes. So let me start with Q1 and Q2. There were inventory dynamics in Q1. They were kind of negative, so we were down 7%. In Q2, the positive 5%, Bill, is a combination of an easier compare because of the Japan situation last year. And I would say it was about 50-50, some of it was the reversal of some of this inventory dynamics, some of it was the easier compare. As we look at the second half of the year, we expect some slight decline. So when you look at the full year for supplies, down slightly for the full year, which is exactly what we said last time around. And of course, some of it is around macro weakness.

And you asked about the supply consumption and what -- how they tie to macro. Remember that these supplies that we're reporting here is not all of the supplies that we actually sell in our business. Most of the supplies are bundled in our contracts. This is about 20% of the supplies, and as Luca said, is volatile given our channel partners buying at certain times versus pricing, et cetera, and their cash flow needs. But on the major portion of our business, the supplies are trending towards the macro environment, which is a move towards color, a move towards MPS. So all of the things -- and a move away from black-and-white at the high-end. That is in the business model and incorporated in how our supplies are being consumed.

Okay. That's helpful. And then one more question. There's been quite a bit of variability on share count estimates for you guys, particularly as folks try to fine-tune the timing of the buybacks. Just so we're all level set, can you help us understand how you're thinking about the diluted share count dynamic in the third and fourth quarter and as we exit the year?

Yes. So Bill, we provided on Page 20 of our deck, we provided you with the fully diluted shares as of June 30, right? That we are at 1,366 million. And then you need to think about it in terms of the different dynamics. We're going to be buying back shares throughout that quarter, I would say relatively consistently. And we will be issuing some minor amounts for stock compensation plans. And then you need to do the average of the 3 months. And then you'll come out with an -- weighted average shares for adjusted EPS for Q3. And then you take whatever is the ending point and that would be your starting point for Q4. I hope it's clear enough. But clearly, we can give you much more detail, if you want, separately.

Well, I guess, just to clarify the variability, particularly is on the fourth quarter. Some folks have a pretty significant decline in the share count because of buyback assumptions. So specifically if you could help us understand how we should think about that sequential move with the back-end-loaded nature of your buyback.

No. Right. You're not going to see it. You're not going to see the full impact, right, because it's going to be a weighted average of the 3 months of Q4. So for the purposes of EPS, it's obviously a limited impact. You will have the full effect only starting in January of 2013.

Your next question comes from the line of Mark Moskowitz with JPMorgan. Mark A Moskowitz - JP Morgan Chase & Co, Research Division: First question is more high-level. Just curious here, Ursula or Lynn, if you're starting to see some folks pull forward purchases because they're worried about decreased purchasing power owing to currency fluctuations down the road. So are you worried that maybe the forward quarters are maybe being mortgaged here in the very near term because of some currency issues?

Not at all. We are not seeing -- that dynamic is an interesting one that you just said. We're not seeing that. We see a healthy mix of people telling us that they're going to wait, people buying now and people -- we don't see a lot of people saying, "Please, I want to buy earlier." We're seeing a normal business mix here, particularly on the Services side. On the Technology side, what we are seeing is people saying, "For any large equipment purchase, let me think about it a little bit more." And for -- and therefore, sweating their assets a little bit more. And therefore, what we see, equipment sales revenue softness with that. That's primarily happening in Europe, but we're also seeing in the United States a mix down. So people are buying, particularly in color, for example, they're -- our color install growth and activity growth was at the lower end of the high segment of that market. And so you see a huge activity growth, but it doesn't always translate to revenue because the number of devices -- the sizes of the devices are smaller. But we're not seeing people move forward stuff and therefore putting pressure on our go-forward. Mark A Moskowitz - JP Morgan Chase & Co, Research Division: Okay. And then the other question here, either for Luca or Lynn, just kind of curious here in terms of the Services business. You're definitely signaling, it appears, that the gross margin improvement in Services are sustainable. And I'm trying to figure out how that impacts the cash flow. Are we getting to the point now where you're going to finally see later this year and early 2013 that positive inflection point, where the start-up costs of a lot of these Services engagements starts to fade, and thereby you start having better gross margin but also better cash flow? And is that supporting the cash flow reiteration for 2012?

So first of all, on gross margins. And I think you're asking about operating margins on the Services side as well, right? Let me repeat, we expect to see -- to come out of 2012 at an operating margin level for Services which is better than 2011. And obviously, we believe that, that will carry forward in 2013 and give us some tailwind. Regarding capital use and the ramp-up of these contracts, clearly, the investments that we've made for the contracts that we're ramping up are declining because we've now ramped up these contracts. But we want to continue to grow this business. And depending on the profile of the contracts that we're going to be signing, there's going to be capital requirements. And certainly, we're not going to shy away from growing the Services business because it requires some capital investment upfront. From an operating cash flow perspective, I'll just repeat what I just said before. We are comfortable with our guidance. And it includes the type of investments that we need to make for the Services business. This year, in general, the Services business has fewer megadeals than we've seen in 2010 and 2011. These megadeals typically requires additional capital. So when you do a compare year-over-year, there's less use of capital on the Services side for new contracts.

Your next question comes from the line of Chris Whitmore with Deutsche Bank.

I wanted to ask about the competitive environment on both the Technology business and the Services business. Ursula, on Technology, in your prepared remarks, you indicated you're gaining some market share, so I was hoping to flush that out a little bit. Where are you seeing market share gains, against which competitors and in which segments? And then secondly, as it relates to Services and the deferral of activity that you referenced, are you likewise seeing an increasing competitive environment or pricing environment on those new contracts?

Okay. I will take the share, and then I'll have Lynn chime in on the pricing environment of Services. So on competitive environment in Technology, we are absolutely gaining share, publicly reported, externally reported positioning, we gained share in all -- we've gained share in all segments of the business in North America and in developing markets. And it's kind of hard to tell what's exactly happening in Europe. It seems like we're gaining share there as well, but we also have some share weakness in certain segments. So potentially, yes, we're gaining share.

If I can just interject on -- just trying to help you, Ursula, that's all. In terms of the deferral of opportunities that was just alluded to, that, first of all, is not substantial and it's not driven by a change in competition. It has much more to do with people just being a little more cautious in their decisioning process. We're always asked about the change in competition or are we seeing a significant shift from one competitor to another. Because we're in so many different markets, we deal with competitors, a very wide set of competitors. And in general, we haven't seen any sort of a material shift in the competitive landscape.

Let me go back to Technology, I'm not choking anymore. So as I said, we are gaining share particularly in the United States and in key markets in developing markets. We are gaining in most segments. And the competitors that we're taking from are other traditional competitors. I mean, there is Ricoh, who has some challenges that they're working their way through in 2012. There's HP, there's -- I mean, normal places, different competitors, different segments. The most competitive segment right now is the high end of the color printing business. It's probably the most competitive segment, and we're holding our own there, and in certain places, winning share.

My follow-up is around R&D and your commitment to R&D. On a year-on-year basis, R&D is down 8%, on a 2-year basis, it's down 17%. Is this level of R&D sustainable over time? And can you continue to cut R&D and remain competitive in both Tech and Tech Services?

Important to keep in mind that when you look at our R&D number, they're only a fraction of what we spend, right? Our R&D activities are coordinated with Fuji Xerox in Japan. And when you combine the R&D spend of the 2 companies, you actually conclude that our R&D investment in Technology is very healthy. There are some areas of R&D, particularly the noncore areas, where obviously, we're looking for cost efficiencies and we look for outsourcing opportunity in that space. But those are again, I repeat, the noncore portions of R&D. We feel very well -- very good about our product development capabilities, as is reflected in the fact that we've been gaining market share for several quarters.

And innovation in Services shows up in a shift that we're making in our core R&D that you see reported. But also other innovation in Services happens in a way that doesn't come out, it's almost in the operating expense line of the business. So we're very focused on R&D, on innovation, very focused on innovation. We are coordinating with Fuji Xerox and we are absolutely not stepping away from being a market leader in all of the areas that we said were focus for us. That's Services, all lines, small- and medium-sized business, so we have a lot of efforts there, color for sure and MPS, spending a lot of money in those areas. And we'll continue on a go-forward basis.

Your final question comes from the line of Alban Gashi with Credit Suisse. Alban Gashi - Crédit Suisse AG, Research Division: I guess, my question is as the Technology business comes down throughout the year, given the equipment downturn, how does that impact the Technology margins as you get higher supply side? And then just a quick follow-up for Lynn on Services.

No. Obviously, without a doubt -- and that is the reason why we've reduced guidance on EPS. Without a doubt, a slowdown in equipment and a slowdown in Technology revenue, in general, has an impact on margins, so we're going to see some lower margins on the Technology side. The way we deal with it is the way we've been dealing with it for many years, which is really relentless focus on cost management and trying to grow those areas of the business that provide some growth opportunity. But that's fundamentally, Alban, the reason why we've taken EPS down. Alban Gashi - Crédit Suisse AG, Research Division: Okay. And then I guess, Lynn, on the Services margin. As you get back into your target range of 11% to 13%, can you put into context some of the drivers of between the mega contracts maturing, overall operational improvements, and then just revenue growth and mix, sort of ranking them?

Well, I think that the biggest contributor would be the ramping of the megadeals. But as Luca said, we haven't had as many megadeals this year as last year so that in and of itself should provide us some relief. But we also want to continue. We never want to shy away from an opportunity that has a reasonable return associated with it because of the start-up expense. And so we're -- we think it will come from the lower megadeals, where as we implement, we improve operational efficiency. So you have that investment that happens when you're starting up, and then you have a natural improvement in productivity just as the contract matures so that will also contribute. But we hope that our bookings will continue strong, and so that will counterbalance that to a certain extent. Alban Gashi - Crédit Suisse AG, Research Division: And I guess, just as a quick follow-up to that. As you end the year in the fourth quarter, you said you expected to be higher year-over-year than the fourth quarter of last year. But I guess, where are you expected to be within the 11% to 13% range?

Within that range. Alban Gashi - Crédit Suisse AG, Research Division: Lower, higher end?

Yes. Solidly within the range.

Solidly within the range. And we'll give you more -- we have an investor conference in November, and we'll be able to give you more detail about the Services business and the progression that we're making there, which is very strong, very good on just about every operational line. And the Technology business, where we still have a very strong position, we'll be able to lay out in more detail what we expect for 2013 and beyond at the investor conference. So thanks for your time and for your interest and please enjoy the weekend. Thank you.

This does conclude today's conference call. You may now disconnect.