Xerox Holdings Corporation (XRX) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Xerox Corporation Third Quarter 2013 Earnings Release Conference Call, hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Kathy Mikells, 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 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. Before we review the third quarter, I'd like to take a moment to remind everyone that earlier this week marked the 75th anniversary of the invention of xerography. Back then, the vision was to make work simpler by automating the copying process. Since then, simplifying the way work gets done has influenced the development of our products and more recently, the expansion of our Business Process services. We've remained true to that purpose. And today, we ensure that our strategy is linked to that original vision. It's key for moving Xerox into the next 75 years. So let's review the strategy. The first plank is to shift our business more to services, while enhancing our services offerings and improving our profitability. Services revenue now represents 56% of our total revenue, up from 51% in 2012, so we've passed the tipping point on revenue but still have work to do on margin. To this end, we continue to focus on improving our cost structure, while maintaining investments in particular areas where we see opportunities, such as health care. Secondly, we are focused on maintaining our leadership in Document Technology and effectively managing this profitable business with strong cash characteristics. The past 2 quarters, we've shown good progress. This quarter, we saw revenue decline stabilize and very good profitability and continue our market share leadership with #1 equipment share revenue. Delivering on these strategies will enable us to deliver consistent earnings expansion and strong cash flow, which we are committed to deploy in a balanced way that will enhance shareholder value. During Q3, we successfully delivered on our objectives. And although we still have work to do, I believe that we are moving in the right direction. So here's a closer look at our Q3 results. We reported adjusted EPS of $0.26, GAAP EPS of $0.22, which includes $0.04 related to the amortization of intangibles. Total revenue was flat year-over-year, down 1% in constant currency. We continue to see growth in Services, which was up 3% in this quarter, although it is flattening a bit as we lap a ramp of large ITO contracts and inorganic contributions. Services operating margin was 9.9%. And although an improvement year-over-year, it's an area where we need to make more structural progress. Our renewal rate in BPO and ITO is at the high end of our range, with continued positive pipeline growth and solid new business signings, which positions us well for the future. In Document Technology, revenue stabilized with positive results in Global Imaging and the high-end business, offsetting weakness in developing markets and Europe. Segment margins were above the high end of our range, reflecting both continued cost and expense management, as well as the onetime benefit from our finance receivables sale. In total, margin was a solid 9.4% and up 50 basis points year-over-year. Good progress, but we have more work to do, and we have several initiatives underway that will deliver, over time, margin improvement. Cash from operations was very strong this quarter, and we're on track to deliver at the higher end of the full year operating cash flow range and to exceed our threshold share repurchase targets. So all up, all in, we had good results in Q3. As we look to Q4, we face greater challenges, where our revenue and operating profits will face some headwinds, so we remain well positioned in our markets and confident in our ability to expand earnings over time. With that, let me turn it over to Kathy, then I'll wrap up and we'll open this call to your questions.

Thanks, Ursula, and good morning, everyone. Overall, we had a solid quarter. One key highlight this quarter was that we saw operating profit growth from both our Services and Technology segments. We also continued to see positive trends in leading indicators and strong cash flow. Let's start with a look at overall earnings. Revenue was flat year-over-year but down 1% at constant currency, with Services growth of 3% and Document Technology decline of 4% or 5% at constant currency. We experienced a slowing in Services growth, which was expected and stabilization in Document Technology decline. Gross margin of 31.5% was flat year-over-year despite the fact that the relative growth of our Services segment naturally pressures gross margin. RD&E and SAG were both lower year-over-year, benefiting from our ongoing productivity initiatives, as well as the greater mix of Services. Operating margin was 9.4%. Flat gross margin and expense line performance resulted in a 50 basis point margin expansion year-over-year, driving operating profit growth of 5%. There were specific dynamics in Services and Document Technology that contributed to this positive performance. I'll cover that in more detail when I get to the individual segment slides. Adjusted other net of $79 million was flat year-over-year, with the benefits of a building sale offsetting higher restructuring in the quarter. And equity income of $43 million was a modest contributor year-over-year, reflecting continued solid performance trends in Fuji Xerox. Our adjusted tax rate came in at 28%, about 4 percentage points higher year-over-year. Adjusted EPS of $0.26 was up $0.01 from 2012 and at the high end of our guidance range of $0.24 to $0.26. Clearly, this is 1 blueprint for the type of operating results we want to see going forward over the long term, recognizing that we have to overcome some near-term headwinds to consistently get there. As we move into the segment performance slides, I'll run through the drivers of the third quarter results, as well as what we're expecting in Q4. Turning first to Services. Services revenue growth was 3% overall, with BPO up 1%, Document Outsourcing up 5% and ITO up 8%. Growth rates are playing out as expected, with Document Outsourcing showing stable mid-single-digit growth, ITO growth beginning to taper and BPO growth being somewhat pressured as we begin to lose organic contributions and continue to absorb the headwind from the runoff of the student loan business. Looking to Q4, we expect these dynamics to continue, with Services growth closer to flat as we hit our most challenging compare on student loans, ITO growth further decelerates and we lose inorganic revenue contribution. Additionally, we anticipate some increased volume pressure in wireless customer care. As we look to 2014, we expect growth will begin to pick up again, driven by favorable signings and renewals, a strong new business pipeline and a richer and more mature pool of acquisition prospects. Shifting to profitability. Segment margin was 9.9% in the third quarter, up 50 basis points year-over-year, driven by margin gains in Document Outsourcing, an easier compare given the prior year government contract write-offs in BPO, and savings from cost actions. Partially offsetting these positives were margin pressure from a less rich mix, as we've grown ITO and absorb the impact of the student loan runoff. We've also seen increased expenses associated with the rollout of our new Medicaid platform and health care exchange operation. We're very pleased with the successful implementations of these platforms with Alaska's Medicaid Management Information System and Nevada's health insurance exchange both launched successfully this past quarter. As with many large new programs, there's an initial period of higher costs during rollout, including noncash amortization of the platforms. We continue to be excited about these long-term health care-related opportunities and expect to gain scale and experience efficiencies over time. Looking to the fourth quarter, we expect margin pressures to continue, with the year-over-year student loan compare being the most challenging of the year, resulting in about a $20 million decline in operating profit from that business unit. As a result, we expect Services margins will decline from the relatively strong 11.2% from the fourth quarter 2012 to about 10%, with full year Services margins a bit lower than 10%. So while we're seeing positive trends in key performance indicators, we're in a transition period where we're pressured by line of business mix and investments. At our November investor conference, we'll walk through in detail the Services business' dynamics and actions that we're taking to drive sustainable margin improvement. I'll now turn to Document Technology. Revenue in Document Technology was down 4% or 5% at constant currency this quarter, which was in line with the second quarter as the trajectory of the business stabilized. Equipment sale revenue year-over-year was up 1% for the total company and down 3% within Document Technology, reflecting continued good success from our recently launched products in mid-range and high-end. Within mid-range, we continue to see good activity across the ConnectKey platform. High-end also experienced good growth in both entry and production color, and we continue to feel good about the improving trends and our position in this segment. Finally in entry, once again, color A4 MFPs had good growth. But in total, entry continues to be down, driven by weaker results in developing markets. Overall, Document Technology margin was very strong at 12.1%, up 130 basis points year-over-year and above our target range of 9% to 11%. On an absolute basis, this quarter's finance receivables sale resulted in a $25 million gain, boosting margin by about 100 basis points. However, the benefit year-over-year was negligible, as we had a similar gain in the prior year period. Contributing to the year-over-year improvement were cost and efficiency savings and a modest currency benefit from the weak yen. Looking towards the fourth quarter, we expect Document Technology revenue growth down mid-single digits, generally consistent with the third quarter performance but with a bit more pressure in developing markets. In terms of margins, we expect they will be down versus the very strong 12.3% from the fourth quarter of 2012 but at the higher end of our 9% to 11% target range. This incorporates lower finance receivable gains, as well as higher pension settlement activity and associated costs, as retirees seek to cash in their benefit before a higher discount rate goes into effect next year. So overall, good performance in Document Technology. With that, I'd like to turn to cash flow. Cash flow from operations was strong, with $960 million in the third quarter and $1.4 billion year-to-date through September. Free cash flow was similarly strong at $860 million in the third quarter and $1.1 billion through the first 3 quarters. While there are some timing differences coming into play year-over-year, one of the drivers of our improved performance is better contribution to cash flows from Services, which reflects improvements in working capital. Looking specifically at the third quarter, the improvements in operating cash flow year-over-year was driven primarily by accounts receivable, which was a source of about $85 million this quarter versus a use of $319 million last year. The drivers of this improved contribution were improved DSO and a higher level of factoring versus prior year. Finance receivables, although not much of a swing factor year-over-year, probably deserves further explanation. It was a source of a little more than $400 million this past quarter and in the third quarter of 2012, with both periods benefiting from a finance receivables sale. Looking to the fourth quarter, we're planning another finance receivables sale, but it will be approximately $150 million or so less than the one that we did in the fourth quarter of 2012. Considering the smaller-sized sale and the lower collections due to past sales, we anticipate finance receivables will likely be a modest source of cash in the fourth quarter, which compares to a $260 million worth of cash in the fourth quarter of 2012. Overall, we expect the fourth quarter operating cash flow to be close to $1 billion, which is lower than our traditional seasonality, due to the expected lower contribution from finance receivables, as well as working capital timing, which has been more smoothed out this year. Given the strong cash flow through September, we expect to end the year towards the higher end of our $2.1 billion to $2.4 billion range. Moving down the cash flow report. Investing cash flows were an $82 million use in the quarter. We spent $102 million on CapEx; had proceeds of $41 million from asset sales, primarily the sale of our Dallas facility; and we spent $24 million on acquisitions. Cash from financing was a use of $870 million and included the retirement of our $600 million senior note in September. Also included was $77 million of common dividends and $162 million that were spent in share repurchases. Moving to the next slide, I'll walk through our capital structure and capital allocation plan. We ended the quarter with $7.5 billion in debt, which is $600 million lower than the June ending balance, driven by the senior note repayment, a portion of which we intend on refinancing. Applying the 7:1 leverage on financing assets, our allocated financing debt is $4.5 billion, leaving core debt of $3 billion. Our financing debt continues to decline, driven by finance receivables sales and lower originations. Our strong year-to-date cash flow and expectation to be toward the higher end of our free cash flow guidance of $1.6 billion to $1.9 billion provides more flexibility with our capital allocation plan. On share repurchase, given the positive cash flow trends, we expect that repurchases will be at least a couple of hundred million dollars above our $400 million minimum guidance. On acquisitions, year-to-date, we've spent about $160 million relative to our full year guidance of between $300 million to $500 million. The slower pace of Services acquisitions has put a damper on Services revenue growth. But as I mentioned earlier, I continue to feel good about the quality and progression of the deals that are in our pipeline. And finally, dividends will use about $300 million of cash, which factors in our Q1 dividend increase to $0.0575 per share a quarter. So in summary, a good quarter. Document Technology has stabilized despite some weakening in developing markets but will face a difficult margin compare in Q4. Services continues to face headwinds that will knock down growth and margin in Q4 but the underlying metrics remain positive, and we continue to work hard at improving our cost structure. As a result, we expect that fourth quarter total company revenue will be down a couple of percentage points year-over-year and operating margin will be lower than our prior year 10.6%, yielding an expected earnings per share of $0.28 to $0.30 for the quarter, bringing our full year EPS guidance to the low end of the range. Our guidance includes approximately $0.02 of restructuring, as well as $0.02 negative impact from the higher noncash pension settlements that I highlighted earlier. Cash flow has been very strong, and we're on track to meet our capital allocation objectives, with an opportunity to do more in share repurchases. And with that, I'll turn it back to you, Ursula.

So thanks, Kathy, and here's a quick wrap-up. Overall, the fundamentals of our business are strong. In Q3, we overcame headwinds in Services to deliver Services profit growth. We saw a stabilization in Document Technology, margins in line with expectations and strong cash flow. That said, Q4 will be a more challenging quarter. We'll face more difficult compares and continue to absorb health care sector investments, while not fully realizing the benefits of our longer-term margin initiatives. For our fourth quarter, we expect, as Kathy said, adjusted EPS of $0.28 to $0.30. This includes approximately $0.02 of restructuring and $0.02 from higher pension settlement expenses. And we are narrowing our full year adjusted EPS to $1.08 to $1.10. Throughout 2013, we've navigated the headwinds of negative Services mix, a slowdown in developing markets and continued weakness in Europe, while continuing to make investments in areas of opportunities such as health care. We have delivered at the high end of our range over the last 3 quarters and with strong cash flow. In spite of this, Q4 is anticipated to be a weaker quarter but I'm confident that we are taking the actions to position us better for the future. And we look forward to sharing them with you at our Investor Conference on November 12. Before we open it up to questions, let me turn it over to Jim Lesko, who's the Head of Investor Relations.

Thanks, Ursula. Joining Ursula and Kathy today is Lynn Blodgett, Head of Xerox Services business. Also, let me point out that we have several supplemental slides at the end of our deck. They provide more financial details to today's -- 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.

I had a question on the Services business. Specifically looking at the operating margin, which obviously is below 10%, with only about 1% of growth in BPO. Can you talk more about what you're doing specifically from a restructuring standpoint, what kind of changes you're making, perhaps in how you're selling or where you're selling, balancing the mix? Just how are you going to -- how you're working on improving that. And then I have a follow-up.

Sure. So a couple of different things. First, I'll speak to restructuring in the quarter. We had about $0.02 of restructuring costs, Shannon. About 40% of the restructuring costs were for the Services segment. I'd say the biggest piece of restructuring that we're doing within Services is continuing to move our mix, right-shoring more offshore. And we've talked about that previously. I'd say we're making progress there but certainly looking to accelerate that progress, which will continue to have some level of restructuring costs associated with it. In terms of the overall mix of the business, part of what we've talked about is we've had negative mix kind of headwinds recently. We've obviously seen, over the past several quarters, the fact that ITO has tended to grow at a faster pace than BPO, and ITO has a lower margin overall than BPO. And so that's been giving us a negative mix. More recently, the additional negative mix that we're seeing is just the runoff of the student loan business. So from a top line perspective, as I look out to the fourth quarter, that pressures top line by about 1.5 percentage point. And from a margin perspective, that's worth 60 to 70 basis point pressure in the fourth quarter year-over-year. So that's some of the mix elements that we're seeing that are causing pressure. But as I look out forward beyond that, I continue to point to just overall strong signings, really strong renewals, strong new business pipelines. So year-to-date, Services -- our signings are up 30%. And within BPO year-to-date, signings are up 40%. And new business only within BPO on a year-to-date basis is up 8%. So I think we've got really strong fundamental trends. So as we look towards 2014, I'd expect to see, overall, our growth rate pick up and our mix start to improve, as we'll begin to lap things like the student loan runoff.

Okay. And then just again on Services, perhaps I don't know if, Kathy or Ursula, you want to talk about or whoever wants to talk about it, the health care opportunity, with $2 billion of revenue from health care services and the ACA starting in January. Can you help to provide some color as to how we should think about benefit from this in terms of both the revenue? And then obviously, this quarter, we were hit by the startup in Nevada in that. So how do we sort of balance thinking about benefits from the ACA as we look at 2014?

Yes. So within BPO, health care is our fastest-growing area, and we're clearly benefiting from our #1 position in MMIS. So on the Medicare side, we're very strong. We were incredibly pleased that we've been actually standing up the new MMIS systems successfully. I think if you look in the newspapers recently, if there's one thing that's clear, standing up these systems is not particularly easy. And so while it's certainly come with a little bit higher cost that's pressuring margins, we continue to look at our overall position in health care and feel very good about the fact that we're participating across a number of different sectors. We obviously have a very strong position in MMIS in state and local government. We clearly have a strong payer position on the private side, as well as within our support that we provide to hospitals. So we continue to look at the changes that are occurring in health care generally, in part driven by the Affordable Care Act, and view it as just a really great opportunity. And the really nice thing about platforms is while -- when you're putting a new one in place, you clearly go through some of the pain of standing it up for the first time. This becomes a pretty replicable process for us. And so we certainly think, over time, we're going to get scale and experience gains in that area. So we're really excited about these opportunities. And while I mentioned Nevada specifically as a health care insurance exchange that we helped to stand up, we're also behind the scenes, participating in at least a handful of others and we're gaining more experience. And so as more states look to put these in place, we view that as an area of incremental growth going forward. So we continue to be really bullish about this.

I was going to add something, but there's nothing else to add. Kathy said it all.

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

I want to talk about cash flow. You guys mentioned several times in the pre [ph] that cash flow was really strong. And I just wanted to challenge that a bit. I mean, without factoring in selling finance receivables, it looks to my math that cash flow is going to be much closer to $1 billion this year than something at $2.4 billion. I mean, I cover a lot of other companies. We never include factoring in their cash flow and we exclude factoring from finance receivables, and then you factor in the accounts receivable line. And that's not very well understood. And it would seem to me that once we get done with this factoring, then cash flow normalizes in like a $1 billion range, and that's below EPS. And it says something about the earnings quality as well. And I mean, how am I wrong on this? I don't count factoring. I mean, that's like a onetime gain, and it's flowing to the P&L as well. I just -- I don't really agree with this, and I want you to deconstruct it and explain how real cash flow is not really just $1 billion.

Yes. So I'm very happy to talk about this. So with respect to factoring, all the company factors in the very near-term receivables, and it's been a practice that the company has been doing for a very long period of time. So it really has absolutely no impact on the company's core operating cash flow performance. So all we're factoring is near term, call it, within the next 60 days. It's a very efficient program that we have, and so the costs associated with doing that are de minimis. We view it as a very economic...

Okay. The finance receivables, $850 million this year, and you just can't do that forever. I mean, you take out the $850 million from the $2.4 billion, and my math is still pretty close.

Yes. Can you kind of give me a second to walk through my explanation because I'm going to go back to start with? I think your math is completely wrong. So with respect to factoring, again, it causes absolutely no plus or minus to operating cash flow. All we're factoring is the very near-term receivables, and we're doing it because it's a very efficient form of, I'll call it, near-term financing for us with de minimis cost. If you look at what's going on year-over-year, we have a much smoother pattern of working capital this year. And so we're seeing some year-over-year changes, and that's just because we've got a much smoother pattern. I'm then going to turn to just financing receivables sales. So we did last year finance receivables sales. We're going to do about the same amount this year. That's just a movement in terms of timing, right? And overall, this year relative to last year, it's actually going to be a modest headwind as opposed to a gain year-over-year. By doing those finance receivables sales, we actually kind of trigger a need to pay down debt because our finance receivables actually get a much higher leverage factor. And so it really isn't anything that ultimately changes our overall cash profile. And I guess, if I get down to sort of the nuts and bolts at least of what some of our investors, I think, are focused on, which is capital allocation and how much excess capital we have to deploy against things like share repurchases, as I look out to 2014, while we may have some year-over-year differences in terms of the level of finance receivables sales the company may do, I think we're going to have a very consistent and balanced approach in terms of overall capital allocation continuing to look to do a meaningful amount of share repurchases.

Okay. Well, I think that you might want to change that definition to cash flow x financing, so we can look at it apples-to-apples. And I don't think everybody understands it. I really don't because when you put it in above the line, it makes it seem like it's real cash flow. And it's just a very unique way of portraying it, and I would highly suggest that. And I appreciate the answer.

Yes. And certainly, I think our disclosures on this have been very fulsome. And if you don't get the math right, I certainly encourage you to talk to our IR group after the call because I think...

No, I think I get the math right. I think I get the math right.

Your next question comes from the line of George Tong with Piper Jaffray.

Services signings this -- for the past 12 months was up about 9% but fell 7% in the quarter due to the timing of contracts eligible for renewal. How does the renewal pipeline look like going forward? Do you have more contracts coming up for renewal in the coming quarters that can help drive improved performance in Services bookings?

The renewal pipeline tends to be -- it will be a little bit lumpy just based on the exact timing of a particular contract, and then 3 or 4 years later when it comes up to renewal. But in general, the renewal rates pretty much average across the average contract life. And right now, we're somewhere between 3 and 4 years. And you're going to see a little bit of lumpiness from 1 quarter to the next. But overall, if you look at a year -- the cumulation of a year, it's going to be pretty consistent.

Okay, that's helpful. And as a follow-up, the upcoming fourth quarter does pose some particularly challenging revenue and margin comps and operating environment. Could you talk about how we should think about, from a Services perspective, revenue growth in 2014, factoring in the headwinds from the student loan processing business and your ramping businesses with the Affordable Care Act? And how we should think about margins going forward, if we can continue to expect a step-up in margins, acknowledging that 2013 will be somewhat a flat to slightly down with the Services margins?

Yes. And so I'm going to talk a little bit about what we're seeing in the fourth quarter, and then I'd say, at a high-level expectations for 2014. But we're going to talk a lot more in detail at our investor conference for 2014. So if you just look at what we're expecting, we're seeing in the fourth quarter, clearly, the runoff of the student loan business is giving us a big headwind on revenue, with that basically worth about 1.5 points of headwind on revenue growth in the fourth quarter. Acquisitions have historically been kind of a 2% to 3% revenue growth driver for us. And so if I look at the fourth quarter in the prior year period, 2012, it was worth about 2 points of growth, and it's going to be worth about nothing in the fourth quarter of this year. And so that's a near-term headwind. But certainly as I look out to 2014, we would expect that we'd actually have more acquisitions, and therefore, more growth coming from that area. And on student loan, obviously, we're seeing the biggest impact in the fourth quarter. And so as we head into next year, that impact will be kind of early on a headwind for us. And then as we get towards the end of next year, we'll start to lap that. As you mentioned, in your first question, I mean, overall, we've continued to have really strong signings and renewal and new business. And so as I look out into 2014, the year may start a little bit slower, but we certainly expect that new business and acquisitions will help us to then pick up overall growth.

That's helpful. And how would you think about the margin cadence playing out?

Yes. So in terms of the overall margin cadence, as I look forward, the impact year-over-year from the student loan business runoff actually abates a little bit next year in terms of margins. So this year, it's worth, on a full year basis, about 35 basis points of margin headwind. Next year, that's probably closer to 25 basis points of margin headwind. I think really importantly, while we're starting to see some positive pick-up in terms of offshoring, that obviously takes a little bit of planning and timing to implement, and we'd expect a lot more gains from that as we head into next year. So I think those are some of the gives and takes. And then in terms of overall mix, typically, acquisitions are margin accretive to us. We're obviously looking to acquire things that have significant synergies associated with them, and we tend to target businesses that would be margin accretive. And the ITO growth slowing, that also just will help us from an overall mix perspective on margins. So hopefully, that gives you a little bit on the puts and takes. And obviously, this is an area of a whole lot of focus on from our part, and I think we're going to see progress.

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

I wanted to just ask about Services, please. And if I think about your calendar year EPS guidance, the pension expense wasn't in there. So it looks to me like you're taking down guidance by about $0.02 or $0.01 to $0.02, and yet the printing side of the business outperformed. So it really seems like the variance was on the Services side. And so if I think about it, it raises the problem from investor's perspective of consistency of execution, which in my mind comes back to leadership. So I'm really trying to understand what changed to cause you to take your calendar year guidance lower. And specifically student loan was known. You've talked about that since the March quarter. So was it the magnitude of the student loan? What -- or was it the ramp down of BPO. Because as part of this whole, I think, disappointment in the Services side of the business -- in addition, the signings were relatively weak for the quarter. So if you could just really address what was the disappointment from 91 days ago when you gave guidance on the Services side of the business?

So a couple of things I'd say just in terms of new pieces of information. So a, we had certainly expected that we were going to have more from acquisitions in the fourth quarter. And so while the pipeline looks rich, I think deals are maturing. We had hoped we'd be able to close things sooner than is occurring. And so that's, I'd say, a near-term headwind, but certainly one as we look out to 2014 that we don't expect is going to continue to occur. The other thing I mentioned is on the one hand, we, I think, did a terrific job in terms of standing up MMIS systems and the Nevada health insurance exchange. That has caused some near-term pressure. I mean, those things are not easy to stand up, and so we're making more investments there. Those are a couple of things. I also mentioned in my prepared remarks that we're seeing a little bit of volume decline on the telecom side. And so we had a major telecom customer that got acquired by another company. And as a result of that acquisition, they're taking a little different approach. We're seeing some volume decline. So those are specifically the things I'd say if I backed up 90 days that I didn't have completely in view. And I'd also say that as I look at all of those things and I look forward into 2014 and beyond, I view them as transitionary and temporary factors.

And Keith, as far as leadership goes, we have an experienced team. We bring in on a regular basis new executives into the fold that could help us to refine our implementation and refine our approach to the business, and we're doing that every month, every day. We have 2 new executives that are particularly promising. I won't say their names because then they'll believe they're promising as well. But -- so I think that we actually have -- I have a very, very good view on weaknesses and strengths of our Services leadership team. And where we have weaknesses, we try to augment it or -- and move forward. So I am actually confident in our Services leadership.

And then the last -- sorry, the one more thing I wanted to add is you mentioned kind of weak signings in the quarter. We already mentioned that on the renewals. We just had not many renewal opportunities in the quarter. And so renewals were light just because we didn't have many opportunities. But year-to-date, overall Services signings are up 30% and BPO signings are up 40%. So I think the underlying trajectory there is very positive.

Okay. For my follow-up then, could you just talk a little bit about what investors should anticipate directionally or any kind of dimensions with Q4 signings? So if you have some idea how signings look for the year.

Yes. We expect Q4 signings are going to be modestly positive year-over-year.

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

Digging into the Affordable Care Act a bit more, can you remind us of your exposure here across Xerox and help us quantify it a bit better? Because we obviously get a lot of questions on this. And I'm trying to deconstruct your comments a bit. Is 2014 a year where you really start to see the steady state net benefits from this exposure?

Yes. I mean, overall, our health care business, kind of across our health care business, is about $2.5 billion in revenue, just to give you an overall sizing. As we look forward, it is one of the fastest-growing areas that we have within BPO, and we expect that to continue to take place. We've always been and are #1 in terms of MMIS. As we look at the opportunity of standing up the Nevada health insurance exchange, I think that's an area where as states look to move from the federal system and implement their own exchanges, that's a great area of growth and participation for us. We also participate in private exchanges. So as companies look to move to, I'll call it, more of a defined contribution approach to how they support health care for their employees and trying to give their employees then a lot more freedom of choice for what they choose to then purchase. We're also participating in that market, and I think that's clearly another area of growth. And some of the things we bring to the table there is both our ability to stand up for somebody, I'll call it, a portal for employees to come to and choose, an ability to kind of go in and look at their employees' demographics and actually choose providers then that will kind of go into that network that are a good fit for their employee base. And then we put all of the support around that as well. So I think those are a couple of different areas where we have really good growth opportunities. And we continue to be really bullish. I mean, we participate, really, across this industry. We come at it from a bunch of different ways. That gives us a lot of insight. I think we've been in this business for a long period of time. We've got a lot of expertise that we bring to the table, and we think it's going to be a very good area for us for years to come.

And one of the things that the previous questioner asked is something important to note. As Kathy said, we participate across the board. If you look at our pipeline, our signings, our pipeline, if you look at the percentage of our BPO and ITO business that is actually focused on health care, it's all positive signs, which is good. We kind of surround this from government payer, provider, employer. It's a good participation. It's hard to do. It's hard to stand them up. I'm very pleased that we've actually been able to stand up exchanges and an MMIS system actually operating, taking customers' calls, et cetera, et cetera. It cost a little bit more than we thought. It would cost -- and that's one of the pressures that we saw in the third and we'll see a little bit in fourth. But we have done it now. And so the bulk of the investment won't have to change. We have to modify for every engagement a little bit of the system, but not as big a modification as before. And that's one of the things that we are learning. I think other people are learning it as well. So I'm actually pleased with health care. It's a big piece of our business, and I think we have some proof points that will show it will be good on a go-forward business as well.

If I could just have one follow-up, another area of Services. Looking at Document Outsourcing, you guys have had a leadership position here in the past. But the competition is getting pretty intense, and we're seeing some pretty good numbers from some of your smaller competitors, suggesting they're starting to gain share at a fairly rapid clip. Given that this is such an important part of the Services business but also an important secular counter to what's going on in the Technology business over time, can you talk about how you're looking at your market share momentum here and what you could possibly do to -- to reaccelerate it from here?

I'm just going to start and then I'll have Kathy answer some of the details. We are extremely pleased with Document Outsourcing. The last 3 quarters, last 2 in particular, it actually outperformed even our expectations. The external market actually sees us as a market leader, independent assessors do. And our growth would dictate that we're a market leader as well. And I don't think that your statement that competitors are gaining share at a pretty rapid clip is actually true vis-a-vis us. Actually it's not so at all. So...

Yes, I think importantly, right, we're the folks who invented Managed Print Services. As a result, we've been in this business for a longer period of time. I think we're much more evolved. And we have a bigger base of business that we're growing off of. So rather than having a business that's in its relative infancy, where kind of in the beginning, you get really big growth rates because you're growing off a very small base. We have a much more sizable business here to start with, and we've been very pleased with our growth rate. One of the things Ursula just mentioned in terms of third parties taking a look at our offering and putting us against our competitors and really feeling like we're incredibly strong positioned, recently, Gartner came out with a study showing us that in their metric [ph] quadrant, which is where this Managed Print Services Document Outsourcing resides, that we actually gained some distance on our competitors recently. And so that's in part because we have a very fulsome vision and really, really good execution in this area. And as we look at, I'll say, the synergies between our Services business and our Document Technology business, this is really one area where we're continuing to evolve, right, into workflow from our Document Technology side of the business through Managed Print Services and Document Outsourcing. And that's a natural adjacency then over to our Services business, right, where we have Business Process Outsourcing. So that's where those 2 businesses meet. We've been at this for a long period of time. We've got deep vertical expertise. We feel great about this area of our business.

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

I wanted to ask a couple of follow-up questions on topics that were covered earlier, specifically around the margin impact from renewals and new business signings. How did those 2 factors come into play as we think about 2014 margins in Services?

In this area, I would say it's normal course of business. We always know as we renew business that we're typically giving some level of discount. It isn't as if the pressure that we're seeing is any more or less than -- we always understand that, as we're heading into this business. It's all about we stand up new business, we get more productive and efficient over the course of the contract period, preparing for the fact that we're going to have a price decrease as we renew that business. So there's nothing new or different in that.

When I listen to the puts and takes around Services margins heading into next year, it sounds like there's a lot more puts than takes. So maybe can you clarify, do you think margins will be flat or up or down in Services in 2014?

Certainly, I would say with regard to the fourth quarter of this year, I'd agree there's more puts than takes, which is why we're expecting to see a year-over-year margin decline. We're going to talk more about 2014 at our Investor Conference, but I would not at all conclude that we'd see more puts than takes as we head into 2014. And I'd specifically refer to a big opportunity that we have, which is to shift more of our labor mix offshore, right? So that's a very big opportunity for us and an opportunity that, from an execution basis, is a bit still in its infancy today, takes some planning, takes some time to implement, but it's certainly something that we're looking to do in a very aggressive way and in a way that we think will be impactful in 2014. Another thing I would just point to that we're doing, where we get secondary benefit from more offshoring, is we entered into a strategic relationship with Cognizant, who helps us on platform development implementation. And it's kind of a secondary way for us to get a little bit more offshoring exposure because they obviously bring a lot of that to the table, as well as great expertise that's helping us to successfully stand up some of these new platforms.

So just so we're not confused on the puts and takes because I'm a little bit confused on which one is the put and which one is the take or what you mean by it. I think just so that we're clear on the call, I would expect we'll get into significantly more detail on this in November at the investor conference. But we expect not margin expansion, margin improvement to be in the range of 10% to 12% in 2014. I don't know if you'd consider that a put or a take, but that's what we expect to be.

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

And a lot of the questions have been focused on the Services, which I think is very warranted, given what the stock is reacting in the big change there. So I'm going to again focus on that because I think that's the real struggle. I understand how you're talking about the trailing 12 months of Services, but this quarter, the signings took a real big decline year-over-year and quarter-over-quarter, and the profitability for both this quarter and outlook appears to be materially below your expectations, now dipping below 10% compared to, you said, 10% to 12% in the lower end of the range of that just a few months ago. So can you give us one more try of clarity of how we can get assurance that this isn't a perpetual trend? And shouldn't it then just rebound pretty remarkably for signings in Q4, if you talked about timing? Or was it just the first half of the year where it was unsustainably too high?

Okay, I'll take a couple of different pieces of it, and if I don't touch on them all, please come back with your follow-up because you had a couple of different things. So a, year-over-year growth in signings for the quarter was down 7%. It was down because we did not have as rich, as high volume renewal opportunity in the quarter. On a year-to-date basis, Services signings are up 30%. Okay, so quarter-to-quarter, sometimes, we have a big renewal opportunity; sometimes, we have a smaller renewal opportunity. This particular quarter, we had a smaller renewal opportunity. But year-to-date, our signings overall are up. If we look overall at some of the pressure we're seeing in margin, I'd start with this quarter's margin was 9.9%. We said we expect it to be at the low end of the range of 10% to 12%. That's 10 basis points below the target. Overall for the full year, we said we think we're going to be a little bit lower than 10%, again, a little bit lower. We're now kind of cutting hairs a little bit. But on a year-to-date basis, our margin is 10 -- I'm sorry, 9.8% in Services. So our margin is a little bit lower. We're not talking leaps and bounds here. We're talking a little bit of margin pressure. And as we look towards 2014, as Ursula just mentioned, we're expecting we're going to see margin expansion. Some of the margin pressure that we're seeing are from factors that their nature is they're going to be short term, and we will start to lap them in 2014. The runoff of the student loan business overall is clearly one of those factors. The fact that we haven't had any contribution from acquisitions, which are typically margin accretive, are another one of those factors. We've had a little more pressure on margins as we have stood up some of these new platforms. That's not unusual, but these things are now going to become for us repeatable processes, right? We will get better because of experience and we'll get better because of scale. So as I look forward into 2014, I think we've got great opportunities in the health care sector. Overall, our year-to-date signings growth has been really positive. The weak quarter of signings is really just because we didn't have a big renewal opportunity. So overall, I think the underlying factors here continue to be really solid, and we're looking forward to margin expansion and our growth rate picking up next year.

Great. And as a quick follow-up, so with that expansion next year, I assume that also includes the additional cost of ramps, the additional cost of Affordable Health Care Act that's coming in, and so we are not looking at setting up for 10% to 12% range for expansion. And then coming back with a justification 3 or 6 months down the road of additional costs of ramping. I want to make sure you have involved some ramping costs in that.

Yes. In a normal quarter, George -- I mean, Jim, we would actually -- if there was ups or downs, I mean, we basically would just cover those in our -- in the range that we have. So for '14, I would expect that we would do that like we do anything. We have some volumes up, we have volumes down, we have start-up costs up, et cetera. This fourth quarter -- this quarter, we actually came in pretty close. I mean, it's, as Kathy said, very, very narrow differences. We came in pretty close to where we expected to come out in margin, in revenue, in earnings, actually a little bit higher in earnings. Fourth quarter, we see headwinds, temporary headwinds. And then in '14, we expect to actually just be in a regular roll, like we are in most of the quarters in '13. And it's important, Jim, as well that you understand the signings dynamic. We've had a couple of quarters since we've brought ACS and gotten deeper into the Services business. We've had quarters where we had low renewals, and we've been trying to be very clear about how to actually look at those. And when you have a low renewal volume, they do have an impact because of the way that we calculate this or the industry calculates this. It has an impact on the signings number. And that's one of the reasons why it's important to not just look at the quarter, which we actually do focus on, but to look at all of the signings for the quarter, the new business signings for the quarter, the renewals that are available and the renewal rate. And so we try to give you all of that data. Signings, renewals, new business, et cetera, should not be a concern. All of the numbers look good from a go-forward basis, from a revenue perspective in Services across all of the businesses.

Your next question comes from the line of Mark Moskowitz with JPMorgan. Mark A. Moskowitz - JP Morgan Chase & Co, Research Division: First, I want to second -- Ben's motion regarding more transparent or cleaner cash flow reporting. I think just given investors are really focused on that dynamic. As far as my questions, kind of along that same line of thought. Kathy, can you just remind us in terms of what your priority is with the Services business going forward? Is it top line growth? Or is it Services margin? Because I think -- I'm just trying to figure out how you really jump start the Services revenue growth profile going forward. Is it going to really be about acquisitions? And if it is going to be acquisitions, doesn't that kind of steal from capital allocation in terms of stock buyback, which has been a big part of investor psychology right now?

Yes. So the focus is profit expansion, and I say that's the focus across our entire business. In terms of how we get to profit expansion, I do think that we have a very good opportunity in getting to profit expansion in the Services business by growth, as well as by margin expansion. So there, I expect to actually see both things occur. With respect to acquisitions, we've been light on acquisitions. The reason I've been talking about the fact that acquisition is a factor because it historically accounted for 2 to 3 points of revenue growth within Xerox business services. And right now, we're not getting any revenue growth or profit growth, for that matter, from acquisition. But I don't expect it at all to take away from our balanced approach in terms of capital allocation.

Your next question comes from Kulbinder Garcha with Crédit Suisse.

If Kulbinder is not able to pick up, I think we are close to our end time. So I think we should say that's all we have for questions today. And Ursula, do you have anything else you'd like to wrap up with?

Yes. So thanks, Jim. We covered a lot of ground this morning. So let me bring it up a couple of levels. Q3 results and our continued focus on squarely and effectively implementing a sound and consistent strategy, which is to be Services-led and to grow, profitable leadership from our Document Technology business, cash generating annuity-based business model, to deliver consistent EPS expansion and financial strength to invest in building value for Xerox and in building value for you. That's our focus. I'm confident that we'll deliver, and hope that you can join us or listen in to our Investor Conference on November 12.

Thanks, Ursula. That concludes our call today. If you have any further questions, please contact me or any member of the Investor Relations team. Thanks so much.

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