Xerox Holdings Corporation (XRX) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Xerox Corporation First Quarter 2013 Earnings Release Conference Call, hosted by Ursula Burns, Chairman of the Board and Chief Executive 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 express 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. During the first quarter, we delivered results in our Services business that align with our growth strategy and our expectations. However, we fell short in our Document Technology business, which put pressure on our overall results. We'll talk today about the consistent trends that we see in our business, with Services becoming a larger part of our total revenue, now at 55% and fueling our annuity base, which is now 86% of total revenue. And we'll discuss the consistent trends that we're seeing in the marketplace, which require fast implementation of business model changes. We remain focused on earnings expansion and generating strong cash flow, and we remain committed to our full year expectations on both. And here is a closer look at Q1 results. We reported adjusted EPS of $0.27. This includes a $0.02 benefit from the reduction of a litigation reserve. As a result, earnings were above our guidance. In Services, we delivered 4% revenue growth, along with a stable segment margin and a 64% increase in the TCV of signings to $3.7 billion. Again, the results in our Services business were as expected for the first quarter, with signings coming in better than expectations and margins slightly lower. We're making steady progress on managing the cost base to improve the profitability of the Services business as we continue to ramp for growth -- for more growth. In Document Technology, revenue was down 9% and segment margin declined 1.7 points. Q1 performance was weaker than expected due to timing issues with our recent ConnectKey launch of mid-range products, as well as continued tough market conditions. I'll provide more detail in a moment but want to assure you that we understand the issues and are taking immediate actions to address them, including plans to reinvest our earnings upside in Q1 to accelerate restructuring activities in Q2. During Q1, we used $87 million in operating cash. That's in line with normal seasonality and reflects a temporary increase in inventory. On the next slide, we'll take a closer look at the income statement. Total revenue of $5.4 billion was down 3%, reflecting growth in Services and weaker-than-expected revenue in Document Technology. Based on our product backlog and steady growth in Services, I am confident top line results will improve throughout the year. During Q1, lower revenue put pressure on margin. As a result, operating margin of 7.4% was down 1.1 points from last year. And here's what contributed to the margin decline in the quarter. First, as with any major product launch, we made investment -- incremental SAG investments in Q1 to support the ConnectKey announcement, invested in sales training, channel outreach and marketing. We planned for the initial revenue benefit from the launch to offset the incremental costs. But the revenue ramp got off to a slower start, and total Q1 Document Technology revenue declined more than our expectations. So the revenue shortfall resulted in SAG at a higher percent of revenue. Some of this will self correct as revenue picks up both for ConnectKey and in our production color business. But as I mentioned, we'll implement a higher level of cost actions in Q2. Second, Services is a larger part of our total revenue. As a result, margin is impacted by higher growth in lower-margin businesses such as IT Outsourcing and Transactional BPO. In Q1, our adjusted Other was $12 million. That's down $67 million due to the litigation reserve reduction and lower restructuring. Equity income of $47 million grew $7 million, driven by profit growth of -- at Fuji Xerox, and the adjusted tax rate was 22%. This includes a benefit from the Taxpayer Relief Act. Adjusted EPS of $0.27 was $0.04 higher than 2012. I remain confident that we'll deliver solid earnings growth in 2013, benefiting from our cost actions, share repurchase, portfolio expansion and Services growth. On Slide 6, we'll review our Services segment. The 4% revenue increase in Services reflects steady growth in BPO, which was up 3%; ITO, which was up 13%; and Document Outsourcing, up 1%. And here's a closer look at each of these areas. Business Process Outsourcing represents more than 60% of our total Services revenue. We are benefiting from strong growth in transactional processing and state government services. This was partially offset by volume declines in other areas. We're quite pleased with the organic growth in BPO and had less contribution from acquisitions in this space. Keep in mind that in Q1 of last year, BPO increased 13%, giving us a tough year-over-year compare. I'm also pleased with the solid performance in IT Outsourcing. It's the benefit of megadeals that we signed in 2011. In Document Outsourcing, growth was lower in the quarter, a slower start to the year than we expected. But signings for new Managed Print Services and renewals were quite strong and will flow through to improve revenue later in the year. As a matter of fact, total signings were our good story across the board. They were up 64% year-over-year. Renewals were particularly strong as well this quarter. The renewal potential and the high success rate is reflected in our 89% win rate. New business annual recurring revenue was up 8% year-over-year. The pipeline is up 5%, a steady growth even with strong signings. Segment margins of 9.3% was flat. We offset negative mix and pricing with cost reductions. In quarter 2, we have a tough compare from last year's 10.6% margin, but we'll continue to press for efficiency while never compromising on client satisfaction. So we expect Q2 segment margin around 10%, reflecting strength in BPO and ITO and a lower margin from Document Outsourcing. And for the full year, we continue to expect to be in the 10% to 12% range, with modest year-over-year improvement. So Services in summary, revenue metrics trending well and margin holding ground, delivering solid performance as expected. I'll turn to Slide 7 for a review of our Document Technology business. In Document Technology, we expected a revenue decline of mid-single digits. During Q1, revenue came in lower at a 9% decline, driven by a 12% decline in equipment sales. In reviewing the results, here's where we saw the shortfall in revenue, which created pressure on segment margin, and here's why we're confident that the results will improve going forward. First, lower-than-expected performance from Europe and some spot weakness in developing markets resulted in lower post-sale revenue. We continue to have our eyes wide open to the macro trends. That's why we're scaling investments in higher growth areas, not only in outsourcing services but also in color printing and expanding distribution to small and mid-sized businesses. Install rates are good indicators of our progress in these areas. A4 color MFDs, up 16%; and high-end color, up 44%. Second, in February, we announced ConnectKey. It's a software system embedded in 16 new Xerox multifunction printers, some of which began shipping in Q1 and many that are shipping now in Q2. This is a significant launch for our mid-range business. As I said, the install ramp started a bit later than expected. It has since picked up, and we now have a healthy backlog that will serve us well during the year. For the balance of 2013, here's what will contribute to revenue improvement: a full launch of ConnectKey; new high-end color systems, including advanced iGen presses and the addition of Impika inkjet printers; and expanded coverage of SMB through our global imaging distributors and through additional indirect channel partners. These are all profitable growth drivers to help offset uncertainty related to macro conditions. Again, focusing on the cost base continues to be a priority. We're making progress in taking costs out of a legacy infrastructure, but we need to accelerate this progress especially in Europe. Considering our expectations for improving equipment revenue and the competitive price environment, Q2 segment margin will be somewhat lower year-over-year, but sequential improvements from Q1. Slide 8 is a look at cash flow in the quarter. Cash from operations in Q1 is in line with seasonality. The $87 million use of cash is a bit weaker than in 2012, but that's largely due to a temporary increase in inventory. Accounts receivable was less of a cash use in the quarter due to lower reliance on factoring in Q4. In line with our expectations, finance receivables was less of a source of cash. Also, as anticipated, cash contributions to our global pension plan was lower year-over-year by $34 million, and this reflects our expected full year decline of $150 million. Moving down to investing. We spent $107 million on CapEx and $58 million on dividends. And as we announced in February, our quarterly dividend will increase by 35%, effective with dividends payable in April. Cash from financing was a much smaller source of cash. And last year, we went to market in Q1 to pre-fund a May note. This year, we have a smaller note coming due in May of $400 million. We plan to retire this note in line with our debt reduction guidance. And as a result, debt of $8.5 billion was lower year-over-year by $1.1 billion and flat to year end. And $4.9 billion of our debt is associated with our financing business. We did a nominal amount of share repurchase in Q1, driven by our cash flow timing. We continue to plan on repurchasing at least $400 million in shares this year weighted towards the second half, in line with cash flow. And we continue to expect $2.1 billion to $2.4 billion in cash with no change to capital allocation plans. So let's turn to Slide 9 for a wrap up and then we'll take your questions. So in summary, I call our performance mixed in the quarter. Again, I am pleased with Services, and we're seeing improving trends, especially in reducing the cost base, delivering stable segment margins and growing signings. These results are strategically important to the transformation of our company. But I'm disappointed in the slow start to the year in the Document Technology business. I also believe that we understand the issues in our control and that we are taking the right actions to make progress from here. Our product innovation brings differentiated value, investing in areas of growth like in Services, high-end color and in SMB distribution. And we're divesting in lower growth, non-core areas like our North American paper business. Our pricing is competitive, and we continue to take cost actions to maximize profit. Across our entire business, we'll continue to rationalize our portfolio and restructure our cost base to create a leaner and more flexible business model. So for the full year, we expect total revenue to come in at the low end of our flat to 2% range. Our full year guidance for earnings, for cash flow and capital allocations remain unchanged. For the second quarter, we expect adjusted EPS of $0.23 to $0.25. Again, we plan to increase restructuring activities in Q2. Approximately $0.02 of restructuring is comprehended in our second quarter guidance. Expected first half results will keep us on track to meet our full year guidance of adjusted EPS of $1.09 to $1.15. With improving margins, cost controls and steady growth, we'll consistently expand earnings and generate strong cash. We'll continue to take a balanced approach to our capital allocation, which creates value for our shareholders. That's a good place for me to end. Before we open it up to questions, let me turn it over to Jim Lesko, Head of Investor Relations. Jim?

Thanks, Ursula. Joining Ursula today is Lynn Blodgett, Head of Xerox Services; and Armando Zagalo de Lima, Head of our Document Technology business. Also, let me point out that we have several supplemental slides at the end of our deck. They provide more financial detail to support today's presentation and complement our prepared remarks. [Operator Instructions] At the end of our Q&A session, I'll turn it back to Ursula for closing comments. Operator, please open the line for questions now.

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

This is a question for Ursula and Lynn. I'm not sure who wants to take it. But looking at the Services business, you'd anticipated some improvement, and it was obviously flat year-over-year. You're accelerating restructuring throughout the business, I believe. So how do we sort of think about what's going on, underlying in the Services business? And how do we think about the growth that you have in terms of signings if that might impact your ability to see substantial -- or some improvement in margin as we go through the year, just if you guys can sort of take that and better frame what you're seeing in Services right now?

Thank you, Shannon. I'll take it and maybe turn it over to Lynn in a little while if I don't get to all of the points. First of all, we're very pleased with the performance of Services in the first quarter. Our signings -- our revenue growth at 4% was as expected, without a big contribution from inorganic -- from acquisitions. Our margins were essentially in line with what we expected. We expected a little bit of improvement, maybe 10 basis points or so, but we came in strong. And our signings, renewal rate, new business rate were all very, very, very strong. The predictions that we have for second quarter, the outlook that we have for second quarter is continued expansion in margin on a sequential basis. We have a tough compare in quarter 2, so it will be down a little year-over-year in quarter 2. Sequential expansion and then throughout the year continued expansion. We expect to end the year in the 10% to 12% range, up a little bit on a year-over-year basis. So I think that if you look at our -- the underlying of our business, the cost actions that we're taking, the management focus that we have on good mix of business and new business and the look for continued acquisitions, you should be fairly confident in how we'll -- how the Services business will play out in 2013.

The other thing, Shannon, I think, is that in our cost restructuring that we talked about last quarter, we saw the flow-through of that. It was north of $30 million. We did have the runoff of our -- we've started to see the runoff of our student loan business, which is very high margin. It's a very mature contract. And so that had an impact, but our cost restructuring of the fourth quarter offset the discounts that we have expected and the runoff. The other thing that we're doing to -- that gives us confidence about the ongoing margins and our ability to grow them is that we have a -- our restructuring and our basic shift of our cost model is -- we're just kind of getting underway with that. And we saw -- we did some things in the fourth quarter. We have a program now called Project Compete, that is our effort to move work -- more work to low-cost domestic locations and to low-cost offshore locations. And that's underway, and it's going to run through right now clear through '14 and probably beyond that. So we still have an awful lot of high-cost labor in our model, and we're working to reduce that. And I think that's our -- probably the main thing that gives me the confidence that we can increase margins.

Great. And then my second question is just -- Ursula, can you talk about what you're seeing from an economic standpoint, both perhaps in the enterprise, as well as SMB and geographically? Because we've heard from obviously several companies so far, and it's clearly not a robust market environment out there. But I'm curious as to what you're seeing in your verticals and just whatever you can provide to us.

Macro and fiscal uncertainty definitely continued in Q1. We saw that in our Document Technology business primarily. From a geographic perspective, Europe remains weak. And in the first quarter, it had its -- some shocks that weakened it even further. And we did see a slowdown, a bit of slowdown in some developing market economies. We're hoping that, that doesn't stay for a long time. But our business model is fairly resilient in the developing market, which is good. We have a very flexible cost base there, so we can actually adjust our infrastructure cost to whatever revenue comes in. U.S. remains stable but weak. I mean, we have not seen a pickup in the U.S. Sequestration didn't hurt us a whole lot. It didn't help us. It made decision-making -- it continued to keep decision-making slow. So what I would say is overall, we have a status quo weak environment around the globe with -- whenever there's a little bit of a shock, we see a little bit of a shock in people's outlooks. But nothing too significantly worse than we saw in the first -- in the fourth quarter.

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

Wanted to -- I wanted to ask about technology. One of the -- I wanted to hash out the end. You probably get a profit benefit that's either coming, or you saw a little bit, but then it also -- the last time this happened, I don't know, 12, 13 years ago where the yen weakened quite a bit, Canon cut price quite a bit and took a lot of share. And I was wondering if that has started and what you think the pricing environment will be throughout the year, given the weak yen?

Yes. Let me start with the yen and the impact on our business and then I'll go into pricing a little bit. So the yen weakening overall is a positive for us. But as you know, we actually have 2 hedges there. We -- one, we have currency sharing with Fuji Xerox, and second is that we hedge the yen on a forward basis. We did -- we were fairly aggressive in hedging in the fourth quarter, in the second half of 2012 as we saw the yen continuing to weak. So we don't benefit as much from the yen weakening immediately as other -- as the yen would -- as you would expect from the yen, because we do have these 2 mechanisms to help offset those major moves. The benefit in the first half was less than -- was kind of nominal. It'll be more in the second half. It'll be probably -- total around $50 million in the year, back end loaded for us if the yen stays where it was at the end of the year. As it weakens further, obviously, more benefit. We'll continue to hedge in the currency share. So as far as pricing goes, we have seen a little bit of a move up in pricing aggressiveness. So we generally are, and have been over time, in this 5% to 10% range. This is primarily in Document Technology, obviously, and primarily on recruitment because the post-sale contracts are locked in for longer periods of time. And we are seeing activity at the higher end of this 5% to 10% range. And we are being aggressive. I mean, so -- especially as we launch ConnectKey, which gives us a set of offers that allows us to be aggressive in the marketplace, a new set of offerings. We're matching price as we have to, to win back share that we lost when we didn't have the products in the second half of 2012. So pricing at the higher end of the 5% to 10% range, and we're being aggressive to make sure that we stay competitive.

Okay. And then could you just elaborate a little more on the government in particular? What -- I mean, in the last question, you mentioned some of it, but what is the latest in terms of government as a percent of sales? And what -- and the difference that you're seeing in Services, in particular, between state and local and federal and how it impacts your business? And in particular, if you could touch on whether you expect things to get better this quarter in that vertical, maybe if -- somehow?

Yes. So we are not heavily exposed to the federal government. We have a small portion of our revenue, 5% or so, in federal government. More heavily concentrated in state government, 20% -- 15%, 20% in state government. What we've seen -- and so I'm speaking about state government here, not too much about federal government because it's kind of de minimis for us, as I've said. State government, we are seeing some good news, particularly in health care. We have a strong position, as you know, in MMIS around the United States, and California is our big contract. New Hampshire just went live. We're doing well there. Decision-making -- so health care is a big segment for us. We do well there, and our profitability is improving in that segment actually very, very well. So I'm very -- I'm bullish about health care -- government health care services. What we are seeing though, is that any new decisions -- any decision in the government takes a little bit longer. A lot more discussions, a lot more engagement, a lot more senior-level engagement with state officials and by us. So myself, Lynn, our CFO, are engaged in these kinds of discussions with state officials. The good news is that they do eventually come and we win our fair share. So slow reaction time, slow decision-making progress, but our concentration is good. And we are -- our major concentration is in health care. We also have a transportation business that's clearly government-based as well, and we do well there. So I don't know if Lynn wants to say anything else.

I just -- I was going to add the comment about transportation, that we saw good signings, and we manage it separately. But as Ursula said, it's part of our -- most of them are government entities. So we saw good signings there and just agree with what Ursula said.

Your next question comes from the line of Ananda Baruah with Brean Capital.

Two if I could. Did I hear correctly that the technology operating margins are expected to be sort of in the 10% to 10.5% range for the June quarter? I just wanted to get a clarification on that.

Yes. You heard that correctly. As you know, last year, for the full year, our operating margins were north of 11%. And we -- which is above the range that we have. And we guided to somewhere around 10% to 11% margins for the second quarter -- operating margins for the second quarter. So expansion over the first quarter, pretty significant, below last year and in line with what we would expect.

Got it. So it sounds like overall, operating margins are expected to be right back on track once we get to the second -- during the June quarter? They should be back on track there?

Yes. Yes.

And then I guess my follow-up is will you guys -- the strength in signings for the March quarter, I mean, for the March quarter, how is that relative to your expectations? And what's best for us to think about with regards to how timing of those signings, turning in -- sort of converting into revenue? And does it change your, I guess, your revenue run rate in any particular way?

Well, I think that -- first of all, the -- part of the good news of not having a lot of megadeals is that smaller deals are easier to ramp. And so we expect to see impact from the signings probably a little quicker than if we'd -- we've said many times, if we sign a big Medicaid deal, they take a long time to ramp, and these deals are typically -- that we've signed in the last quarter are a little bit smaller. So we do expect to see the flow-through on that. It's going to be -- still take some time. So that's why we're predicting that our revenue growth will pick up more in the second half than in the second quarter.

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

I have 2 also, the first is on Services and the second is on Technology. The first on Services, I'd like for you to address, if I could, Ursula, I think your characterization of the Services performance was generous. The signings were great, particularly in BPO, but the margins and revenue continue a string of disappointments. It wasn't communicated to investors that margins would be flat in the first quarter. Margins would improve, and yet, once again, they came in flattish even with the help of restructuring. You are guiding the margins of, I think, 10% in the June quarter. That's down on a year-over-year basis, but a tough comp. Your guidance for the year is 10% to 12%, but I think at the low end is, I think, how you'd characterize it. What are the consequences for continuing a -- to having a year of -- if, in fact, you've -- the margins fall short on Services, what are the consequences of another year of disappointment on margins?

So Keith, we expect that we'll have margin improvement throughout the year. We'll fall in the 10% -- the 10% to 12% range and have margin improvement on a year-over-year basis in 2013. I -- my characterization was just a characterization. I don't know generous or not. I think that we came in where we expected in revenue. We came in ahead of where we expected in signings, in renewal rate. And in mix of business, we were fairly solid. As far as margins for the quarter, what we ended up producing, which was flat on a year-over-year basis, was slightly lower than we expected, driven primarily by the fact that we actually had great signings and had some compensation payouts that we had to make for those great signings. But I think that if you look at the business on a go-forward basis, looked at signings with the new business rate that we have, with the renewal rate that we have, et cetera, et cetera, that as the year continues, we'll meet expectations that we laid out. We also did a fair amount of restructuring, as Lynn said. That restructuring did come to the bottom line and allowed us to actually deliver the flat margins. I think that we were fairly well contained in Services in this first quarter, and we will be for the rest of the year as well.

All right. Well, before I ask my second question, I just want to stress, Ursula, I think clearing 10% this year in Services margin is incredibly important for the trajectory of the stock, and another year of disappointments will be just that.

We would agree with you on that. We expect to be in the range of 10% to 12%, and that means that we have to clear 10% to be in the range of 10% to 12%. And Keith, I think you know that we actually manage this and track it. We have a restructuring program, a signings program, a mix of business programs. We're trying to acquire in the right areas. We're a little light on acquisitions this quarter, expect to pick those up as we go along. We don't acquire willy-nilly. We try to do it in a very disciplined way. And so I think that the business is actually running pretty much in line with the way that I would expect it to run.

All right. Just to mention then my second question on Technologies, is there a way to think about -- with the product introductions, it feels like it shifted perhaps some revenues from March to June. Is there any way to think about that in terms of dimensions? I know you mentioned backlog was up. I just wanted to see if you could provide any color on -- or quantification on how much backlog or how much do you think was perhaps shifted from March to June in the Technology segment because of those product introductions? And should we be thinking about any of that for the June quarter with -- it might get further shifted to September?

Thank you, Keith. I don't -- we expect to capture a lot of the miss in the first quarter -- in the second quarter, but it'll continue to flow through in the rest of the year as well. Our backlog was up around 25%, which is significant in the quarter, and we saw in the second quarter. So, so far, in April, we saw installs up and activity up. So that backlog is not just sitting on the books, it's being fulfilled in the quarter. So I think that -- I'm fairly confident that we will -- that we are fulfilling the promise of ConnectKey, which is to move our activity up. One of the things I want to actually make sure that is clear, we actually predict this business to be down mid-single digits, the Document Technology business. We are very, very -- our eyes are wide open to what's happening in the marketplace, so we're not delusional about the progress here. We're investing in areas that grow, and we're trying to take our costs down in areas that are not growing and are moving away. So we're investing in Document Outsourcing, we're investing in low-end distribution, we're investing in color across the board and in high end color in particular. And as we do that -- ConnectKey is one of the key elements there. We were a little slow off the launch of ConnectKey, even though we invested in SAG, we invested in marketing, we invested in the areas that we should. I'm fairly confident that quarter 2 -- very confident that quarter 2 will deliver back to the mid-single-digit revenue declines and get our ratios better in line and, therefore, our operating margin better in line. One of the key points here as well is if you look at gross margin, our gross margin in Technology was flat, which is harder to move. It turns out it's harder to improve your gross margin than it is to improve your operating margin in Technology because our operating margin is around investment that we make on an active basis, if you know what I mean. We just make them. So I'm actually feeling pretty good about Document Technology in quarter 2. I was very disappointed in quarter 1.

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

I have a question on the Services segment as well. Last quarter, you had mentioned that some renewals slipped into Q1. Can you talk about how that impacted the renewal rate and how we should, off of that, think about the renewal rate heading into Q2 and for the remainder of the year?

Yes. Lynn will take it.

Great. The -- yes, had some deals that moved our renewal universe, if you want to think of it that way in Q1 was quite large. And we've had a very, very good success rate. We're up about -- I think, about 40 bps in terms of renewal rate quarter-over-quarter. And that has a dramatic impact. A renewal is as good as a booking and -- or in some ways, better. So we are optimistic that our renewal rate in the second quarter will continue to be within our range, and we think we'll actually have very strong renewals this quarter.

And if you look at the mix of the business, Bill, it's also good for us. We talked about this -- I don't know if we talked about it in signings, but if you look at our signings number -- this is off of renewals and into signings, but also in renewals. BPO, very, very strong across the board in just -- on every metric that we have. And BPO is -- has better margins than ITO. So BPO for the first quarter and for 2013 should be strong. Document Outsourcing was also very, very good. ITO, we're benefiting from 2011 signings turning into revenue today. So revenue growth is very good. The mix of business for Services is looking good. I mean, it's coming out the way that we planned for it to come out, or we would like for it to come out on a go-forward basis. So good BPO; good signings in Document Outsourcing, which helps us to offset this low Document Outsourcing revenue. So that's really good. And ITO, delivering on all the -- all of the signings that we had from 2011. So looking pretty good.

If I could, just one more on Services. Can you comment on -- you had a big signings quarter. Can you comment on the average contract length for the Services deals you had this quarter, given that obviously, last year, you had a pretty significant shortening of contract length? And obviously, that has implications down the road for profits. So could you comment on whether that trend has continued and how you're thinking about that as you look at your signings pipeline for this year?

Lynn will take it.

Yes. As you have guessed, our average contract term was shorter in the first quarter. Last year, we were at about 4 years. This quarter, we were closer to 3. And that's reflected in the fact that we have a lot of BPO signings, not much in terms of ITO -- ITO tend to be longer contracts -- and deals that were a little bit smaller. So we -- but we have a good renewal rate, and so we're confident in terms of the long-term growth.

By the way, the shorter contract length contributes to -- if they were longer, the TCV would be even higher, which is an interesting thing. One of the things that Lynn mentioned, he said more contracts. We have 38% more deals signed in this -- giving us that $3.7 billion. It's actually an amazing thing and a positive thing in that, as Lynn said, big deals are longer to stand up to shorter deals, and the smaller deals and shorter deals are a little bit easy to stand up. So we should be able to see the revenue flow through these starting in the second half.

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

Ursula, in your prepared remarks, it sounded like you're shaving the low end of the expected revenue targets for the year, closer to flat versus slight growth. Was the primary change there related to the outlook for the Technology business? And if so, is it largely the pricing dynamic, or is it the revenue timing of the mid-range refresh?

Yes. So the -- we did say lower end of the range, and it is all from the Document Technology business. And it's a mix of both things that we're seeing. One is we expect that the revenue from the product refresh will come in, will start to come in. That's not going to be the biggest -- it'll contribute a little bit. And the other piece of -- the other contribution is from what we're seeing in Europe and the slowdown in DMO that's creating a post-sale -- a usage lower -- lower usage, and that one is harder to kind of outrun. In addition, we are light on acquisitions. And acquisitions -- we're going to make acquisitions in second quarter and beyond, but the timing of those acquisitions will make it hard to have. The revenue flow through will have a big impact. So 3 areas: one is acquisitions; second is some slow start to the Document Technology, but not that much there; and then page volumes and pricing and that whole mixed environment, particularly in Europe and in DMO.

Yes. I wanted to ask specifically around -- maybe to get some more color around that post-sale line, it was a bit weaker than I expected. What were the primary drivers there? Was it primarily just straight usage? Are you seeing any kind of changes of pricing around the back end of these deals?

Yes. So the way that -- well, back ended deal pricing, specifically, no. But what we're seeing is the mix of 3 things coming together that gets to a lower post-sale. One is usage down. What we're selling, the mix is lower. So not that the price of any individual device is lower, but people are buying more lower end things. So mixed a little bit lower, which gets you lower page volumes, lower price per page on lower devices. And we're participating in some segments, just back to the second one, particularly in high end color. We're participating in -- we're participating more in the lower end of high end color devices. And so it's a combination of low economic activity in DMO and in Europe, mix and mix-driven low page volumes and mix-driven lower price. But we're not seeing a change in the pricing of a deal, if you know what I mean. If you put an iGen, we're not seeing a change in the pricing of an iGen deal.

And then last one for me, just finally on the pricing environment. Does the more competitive pricing environment impact your overall revenue outlook for the year? Or is it relatively small in the scheme of things?

Yes, I think it's relatively small in the scheme of things. Most of it is in Document Technology, and most of it is in equipment sale, which is like 10% to 15% of our total revenue. So it's not -- I mean, something that we have to overcome, but it's not going to be a significant mover at all. We would be more concerned -- or I know it would be more of an issue if post-sale prices across the board went down, but that's very, very hard to do. Very hard to do.

Your next question comes from the line of Jim Suva with Citigroup.

Notably, the signings numbers were super impressive. But I also want to take a bigger-picture look at this, and the prior quarter was weaker than expected. So maybe if you can, Ursula, from a longer-term strategic CEO perspective, kind of help us kind of smooth it out a little bit to say -- is there a certain run rate that you want these signings to come in at, to continue to grow your business organically? Because I imagine there is some rolling off all the time, some coming on? And how we should look about that? And then this quarter, was it truly kind of off the charts? Or was some of that pushed to deferred from the December quarter? And then in lieu of that, with sequester, were there some actually that didn't close, that may close into the June quarter?

So signings, one of the things that we learned early on, came over when we got into Document Outsourcing, but even more when we brought ACS and got BPO and ITO in, signings are lumpy, Jim. I mean, there is not a predictable nature to signings, particularly as we participate in the full mix of small to large deals, which we do. So I -- unfortunately, I can't give you an "Expect x." They are lumpy. Do not underestimate or dampen too much the signings that we did in the first quarter. They were very, very good, even with the move of some deals from quarter 4 to quarter 1. 64% increase is real -- is a real increase. The number of deals, just the number of transactions, was significantly bigger than we would than would naturally happen. So the quarter was a really good quarter in signings, no -- not just because we moved, et cetera. And sequestration, we really haven't seen a specific -- so we didn't see specific line items stop or specific deals stop. What sequestration does is it just puts a damp rag over everything from a time perspective. So that's – and that's -- but we're kind of used to that now. We didn't see a deal stop because something got de-funded. Not at all. But we did see a lot of slowness in decision making. And we expect good signings again in quarter 2, as Lynn said. So we do not expect quarter 1, quarter 3 -- quarter 4, 1 and 2 to kind of average out to be an okay set of quarters. We expect -- we had reasonable -- in quarter 4, a little bit light. Very, very good in quarter 1, heavy, and we'll have a very good quarter in quarter 2 in signings as well.

Your next question comes from the line of Kulbinder Garcha with Credit Suisse. Kulbinder Garcha - Crédit Suisse AG, Research Division: I just have a question on restructuring and the cost basis. There's been a lot of mention on things potentially being accelerated, so I just want to kind of frame the question in terms of –- for Ursula, I guess, between, let's say, 2012, the end of the year and the end of this year on a run rate basis, all to 2014, how do you want to describe it? Can you speak about how much cost you're trying to take out of the business? Can you put a dollar number on that? And then also, in the event that the Services margins may not come through, or the Technology business doesn't come through, can you speak about the flexibility you have to further become aggressive on the cost base? Give me some examples maybe for where you could actually accelerate savings.

So in 2012, we took about $150 million of restructuring charges, primarily in Document Technology. And towards the end of the year, as you know, we did a restructuring in Services. And in the quarter –- and that flowed through to about $50 million to $60 million worth of savings in the first quarter of the year. And we expected the savings for the full year to be north of $200 million, $225 million. For 2013, we expect a similar level of restructuring in 2013 to 2012. What we've done in quarter 2 is accelerate some of that restructuring into the quarter, and that will be primarily, again, in Document Technology. We're going to take a bigger focus on Europe. Europe is, as you know, difficult. You may not know, but Europe is difficult to restructure in. The paybacks are very long. It's a challenging environment. But we're going to go after it with full force in quarter 2 and see what we can do in quarter 2 in European restructuring. And the rest of that, a smaller amount of it, will be the continued restructuring and continued movement of labor in Services that Lynn spoke about. So about the same year-over-year, a step up in quarter 2. That step up will allow us to continue to meet the first half earnings and assure that we'll meet the full year earnings expectations that we laid out. And we're going to focus on Europe and Document Technology. Kulbinder Garcha - Crédit Suisse AG, Research Division: So that I've got that right -- so that's $150 million of restructuring probably this year, and hopefully, like $200 million -- that results, let's say, going into ’14 and on a full year basis, $200 million of potential savings. Am I understanding that right?

Correct. I think I answered all your questions, I think.

Your next question comes from the line of Mark Moskowitz with JPMorgan. Mark A. Moskowitz - JP Morgan Chase & Co, Research Division: The first question, Ursula, is around the Services business. You're entering the fourth year now with the ACS services piece as part of your company. I’m just kind of curious, if we exclude the Document Outsourcing, so the 27% or so of Services as Document Outsourcing, it would put your ACS-related services around 40% of total company revenue. Is that kind of how you, Lynn and Tom, kind of think about where you want that mix? Is it kind of over, under where you were targeting, say, a few years ago? How should we think about that mix right now?

Yes, it's a great question, actually. We expect a little bit more. We expect a little bit higher mix at this point in BPO and ITO. And the biggest gap that we have is in acquisitions. And that gap, the acquisition gap, is one that we're working really hard to remedy. But the organic growth in Services is coming in actually this year, ahead of where we expected it to be, tail end of ’12 and first quarter. And what we need to do is -- another point or 2 from acquisition revenue would be good. And as far as the Document Outsourcing business, it’s definitely a lumpy business. It comes and it goes and right now, we have lot of signs that'll translate into revenue in the tail end. So I'm actually pretty okay with Document Outsourcing. And organic growth in Services, I'm good with as well. Mark A. Moskowitz - JP Morgan Chase & Co, Research Division: Okay. Just as a follow-up, so you said the -- where you could have a remedy is more on the acquisition side? Where could those remedies lie? I mean, can you give us a sense of what we could look to over the next 12 to 18 months as far as some of those remedies?

Yes. So here are the priorities that we have now. The thing about acquisition is that you have to find a candidate that you -- which we find a lot of, but we have to actually like the candidate and have a reasonable value match between the seller and the buyer. You know all this. Here's the focus areas that -- we're going to continue on capabilities, particularly in what is called outside big data, but I call it in data analytics or whatever to actually enable more business in our in situ business -- lines of business today. That’s one area that you'll see. The second area that you'll see is we're going to continue to double down and triple down in health care. Some of that is big data, but also in ways to mass market -- path to market in healthcare. And the third will be international acquisitions across the board in our Services business. Our international operations are growing, but I want them to grow even faster. And what it allows us to do is get revenue, but also get talents that can be sitting internationally as well, which is something that we need to actually accelerate. So it will be in those 3 areas. Mark A. Moskowitz - JP Morgan Chase & Co, Research Division: Okay. And my second question is around cash flow. Just kind of curious -- just given you are kind of entering years 2 and 3, or at least the more mature parts of these Services cycles that you signed on a few years ago after you acquired ACS, can we see a situation where later this year -- maybe your total revenue actually could be flattish to even down, but you could have some accretive benefits from some of these Services deals. So we could actually see cash flow actually improve more than expected. I mean, are we getting to that positive inflection point from a cash flow perspective?

Yes, I think some and some, but I don't think you'll see the revenue come down based on the signings. Right? If you look at the signings and if we operate when we operate the contracts, as they say, I don't think you'll see revenue coming down. You will see -- you could see strength in cash based on how effectively we bring those contracts and all other contracts that we have to maturity. So you could have some benefit in cash. I don't think that you'll see a negative in revenue. Right? Megadeals have -- the megadeals that we've signed have a cash -- as they mature, they have a cash benefit. Right? So the most famous megadeal is California. Right? And as California's maturing -- thank God -- and is doing fairly well -- I'm not going to say very well because very well always jinxes me -- it's doing well. And so as that matures, of course cash becomes easier to get out of the megadeals. But I don't think revenue will be down. I think cash has some opportunity and -- yes.

And your final question comes from the line of George Tong with Piper Jaffray.

I wanted to get some color on your Services pipeline. Could you tell us where you're seeing the greatest activity? What you're seeing in terms of mix and whether you're seeing any megadeals potentially come up?

Yes. we are on – the main areas that we're seeing activity are transportations, health care, our financial services, customer care and in our government space. As Ursula said, we're seeing good growth in government health care, and we continue to see a good pipeline there. We're seeing a few more deals that are larger in size, but not as many as we've had historically. That's why I think it's important that we demonstrate that we can execute on these smaller contracts. The number of deals that we did is up significantly, and -- so I don’t think we should count on a huge influx of megadeals. But we do believe that we’ll have continued strong signings growth through the year.

And this -- Armando will speak about Document Outsourcing.

Yes. So megadeals in quarter one were 30% of total, what I think helps the quick turnaround to revenue. So we don’t have –- we have 70% of our deals that are not megadeals. Industry-wise, I give you a perspective about 2012. So public sector was our major industry with 18 megadeals in 2012; financial services, 16; manufacturing, 10; health care, 8. Quarter 1 was a little bit different. 3 deals -- megadeals in education, 3 in manufacturing, and 1 in health care.

So I think that from the 2, you'll see that we have –- we participate in a broad set of industries, and we are seeing the benefit of historic megadeals. But today, now more -- just across the board, good activity from many different-sized firms and many different-sized engagements, and that’s actually very good.

And then as a follow-up question, what percentage of your first quarter signings came from renewals that slipped from 2012? And are there any renewals slipping into the second quarter that could help drive second quarter’s bookings growth?

Yes. There's always -- as Ursula said earlier, the bookings tend to be lumpy, and there are always things at the end of one quarter that tend to slip to the next. I think that if I had to put a percentage on it, I would put it at about 10%, maybe 15%. And we had deals -- a couple of deals actually that we expected to close the last day of the quarter. It didn't close, and we've signed those already. So -- but that's kind of normal.

Thanks, George. Okay, that's all the time we have for questions today. Thanks for your interest. And Ursula, anything more to wrap up?

Yes. Thanks, Jim. I'd be remiss if I didn't mention that Kathy Mikells will join us on May 2 as our new CFO. She brings to Xerox extensive financial experience and a broad business acumen in both services and technology. And Kathy plans to reach out to our investment community almost immediately after she arrives. We covered a lot of ground today, so let me bring it up a couple of levels. Our strategy is consistent: services-led growth, profitable leadership from Document Technology, cash-generating annuity-based business model, consistent earnings expansion and financial strength to invest in building value for Xerox and building value for you. It's is up to us to execute effectively, and I remain confident that we will.

Thanks, Ursula. That concludes our call today. If you have any further questions, please feel free to contact me or any member of our investor relations team. Thank you.

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