Xerox Holdings Corporation (XRX) Q3 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Xerox Corporation Third Quarter 2015 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 the expressed permission of Xerox. After the presentation, there will be a question-and-answer session. [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 our call. Today, we reported our third quarter results and provided an update on the fourth quarter and full year outlook. During this call, we will update you on our strategy, provide details on our third quarter results, and share the actions that we are taking to improve our business. So, let me begin with a look at our priorities. In Services, our goal is to lead an attractive segment of the business services market and throughout the year, we have taken steps to strengthen this business, including acquisitions to build our commercial healthcare offerings and the divestiture of ITO. As we announced two weeks ago, we are also taking action to improve our future financial performance and significantly reduce the volatility of our results with the update to our government healthcare business strategy. With these strategy changes to our government healthcare business, we are more clearly focused on the most profitable segments of our Services business. In Document Technology, our efforts are focused on continuing to lead the market. We maintained our number one market share position in equipment sales revenue for the 23rd straight quarter, closing in on 6 years, a solid record of leadership and we are seeing good demand from small and midsized businesses, an important growth segment through Global Imaging Systems and with the growth of our partner print solutions sold through our channels. Also in the third quarter, we launched our new communication platform, Work Can Work Better and we are pleased with the reactions so far. Our new advertising and digital content highlight how we are enabling businesses and governments to achieve better results by helping them work better. For our shareholders, we have returned more than 50% of our free cash flow to them over the last four years and we are on track to do even more this year. Through September, we completed $1.3 billion in share repurchases, achieving our full year expectations. Although we have already taken steps to accelerate cost reductions and prioritize investments to drive improved revenue, productivity and margins, we announced today that the Xerox Board of Directors have authorized a comprehensive review of structural options for the company’s business portfolio and capital allocation with the goal of enhancing shareholder value. Now, let’s look at the third quarter performance. During the third quarter, we delivered adjusted earnings per share of $0.24, that’s in line with our guidance, which excludes $0.05 related to the amortization of intangibles and $0.23 from the previously announced health enterprise charge. Because the circumstances in health enterprise are unique, I will speak to our adjusted results in the quarter, which better reflects our underlying operating performance. Total adjusted revenue was $4.4 billion, down 4% in constant currency. On an adjusted basis, Services revenue was consistent with the same period last year and we delivered sequential improvement in our Services margin. Document outsourcing continues to perform well overall and BPO was down 1%, which was consistent with previous quarters. There are a few highlights in Services that I would like to share. Acquisitions remain a key aspect of our portfolio management strategy. And in the third quarter, we acquired RSA Medical and iPas, expanding our suite of healthcare related offerings. Our new go-to-market teams are establishing leadership roles in their industries. As examples, our retail team convened top clients and thought leaders at Xerox Retail Industry Summit, and Xerox Analytics were demonstrated at the grand opening of MCV, the University of Michigan’s one-of-a-kind test site for connected and automated vehicles and a number of services offerings received external recognition. We retained the top position in Quocirca’s managed print services market landscape report for the sixth consecutive year. And for the third year running, Everest Group rated Xerox as a leading service provider for contact center outsourcing BPO. Now, moving on to Document Technology, Document Technology revenue was down 9% in constant currency, which is lower than we had expected and mostly was driven by increased pressures in developing markets. Excluding the impact of the developing markets the revenue trends in Document Technology remains stable. Document Technology margin of 12.8% was strong and within our guidance range of 11% to 13%. Some additional Doc Tech highlights, we are seeing the benefit of recent product launches with strong demand for our new entry production color devices and we showcased the best of team Xerox at Graph Expo, the largest U.S. tradeshow for the graphic communications market, including two new Xerox digital production color presses, the Xerox iGen 5 press and the Xerox Rialto 900 inkjet press. We also rolled out FreeFlow core cloud, which is the latest release in our leading Workflow Automation portfolio. In total, the company generated operating cash flow of $271 million and we returned $774 million to shareholders through dividends and share repurchases. Then now I will turn it over to Kathy to provide more details on the quarter. I will be back later to share fourth quarter guidance and wrap up. Kathy?

Thanks, Ursula and good morning everyone. I will start with an overview of our financial performance before moving into a more detailed discussion of the segment. As announced two weeks ago, this quarter we reported a pre-tax charge of $389 million or $241 million after tax, reflecting that we no longer expect to fully complete the health enterprise platform projects in California and in Montana. This decision will improve Xerox’s future financial performance as these implementations were generating losses and will remove an element of risk and volatility in the business. Accordingly, I will provide results and growth rates, adjusting for the charge to give better visibility to the underlying business performance in the quarter. Our bottom line results were within our third quarter guidance with revenues a bit softer and profitability generally in line with our expectations. Total revenue in the quarter was down 7% at actual currency and 4% at constant currency. Services was flat at constant currency as growth in document outsourcing offset a 1% decline in BPO. Document Technology declined 9% at constant currency and was impacted by increasing weakness in developing markets. Gross margin of 30.9% was down 130 basis points year-over-year, driven by a lower technology equipment gross margin as well as the greater mix of services, which carries the lower margin. RD&E was slightly lower year-over-year. SAG in absolute dollars was down 9%. SAG as a percent of revenue was better by 40 basis points helped by currency and on our ongoing productivity initiatives as well as lower compensation and benefit expense. Our third quarter operating margin of 8.7% decreased 90 basis points year-over-year and operating profit declined 16%. Over 40% of the operating profit decline was driven by currency and developing markets. Moving down the income statement, adjusted other net expense was $8 million lower year-over-year driven by lower restructuring costs. Equity income was $40 million in the quarter, down $4 million year-over-year, driven in part by the continued impact of negative translation currency. Our third quarter adjusted tax rate of 24.6% was at the low end of our guidance range of 25% to 27%. Our third quarter adjusted EPS was at the top of our guidance range at $0.24. I will now move on to discuss our operational performance in Services. Services revenue declined 3% and was flat at constant currency. BPO was down 1%, consistent with the second quarter, reflecting the headwind from last year’s larger contract losses, lower inorganic contribution as well as lower new contract ramp from softer signings in previous quarters. Good growth continues in document outsourcing up 3%, driven by strong Xerox Partner print services growth as well as good equipment revenue growth in enterprise accounts from recent strong signings. Total signings in the quarter were down 7%, but are up 5% on a trailing 12-month basis. New business signings were down 9% year-over-year as growth in document outsourcing was more than offset by declines in BPO. Our go-to-market investments and move to industry business groups are beginning to result in good growth and shorter sales cycle offerings such as customer care, but we have yet to see a pickup in higher value longer sales cycle offerings. Our renewal rate in the quarter was 89%, which was at the high end of our target range of the 85% to 90% and reflects continued overall good customer retention. Turning to margin, segment margin was 8.1%, in line with our expectations for sequential improvement from 7.5% in the second quarter. Margin was down 100 basis points year-over-year, reflecting investments in resources and in our new Services operating model, negative business mix within BPO as well as higher overhead as we work to lean out cost following the ITO divestiture. We continue to expect productivity from operational initiatives and our recent restructuring to yield increasing benefits in the fourth quarter. I will now turn to Document Technology. Document Technology revenue in the quarter was down 9% at constant currency. Developing market weakness, including negative currency accelerated in the third quarter contributing more than one-third of the constant currency revenue decline. Also contributing to the decline in the third quarter was high end revenue. After good equipment growth in the second quarter, high end was weaker in the third quarter, reflecting in part timing of product launches, including our recently announced iGen 5, which had helped us drive improvement in the fourth quarter. From a total printing perspective, combining Document Technology with document outsourcing, revenue has been fairly stable, down 5% in the third quarter and down 4% year-to-date at constant currency. Turning to activity, we saw a strong growth in entry A4 color, driven by new products, relatively stable results in mid-range, but weaker installs and mix of products in high end. Document Technology margin of 12.8% was down year-over-year, but within our full year guidance of 11% to 13%. Year-over-year drivers include negative equipment mix given better A4 results and the anticipated higher pension expense, partially offset by lower compensation and benefit expense. We continued to actively manage our cost base to ensure alignment to revenue trends. So in closing, Doc Tech revenues were slightly lower than expected, but profitability remained strong. Turning now to cash, cash flow from operations was $271 million in the quarter, which was lower than prior year cash flow of $595 million. The decline year-over-year reflects lower profits in Document Technology with the two largest drivers being continued negative currency impact and developing market’s weakness, lower profits in Services driven by margin decline as well as the expected loss of cash flow from the ITO business following the divestiture. Additionally, working capital was the use of cash due to timing of vendor payments as well as lower demand and timing of shipments impacting inventory. The health enterprise charge in the third quarter had a negligible impact on cash in the period and we anticipate the approximate $225 million of cash outflows will be spread over time. Moving down the cash flow statement, investing cash flows were $206 million use, driven by $65 million spent on CapEx and $153 million on acquisition. Cash flow from financing was an $888 million used which included $691 million spent on share repurchases and $90 million used for preferred and common stock dividend. And our cash balance at the end of the quarter was just over $800 million. So cash flow in the third quarter was impacted by lower operating profit as well as working capital timing. Now I will review our capital structure. We ended the third quarter with $7.6 billion in debt. Applying seven to one leverage on customer financing assets, our allocated financing debt at the end of the third quarter was $3.9 billion, leaving core debt of $3.7 billion. In the fourth quarter, we are now anticipating an additional $200 million debt reduction, which will bring our year end debt level to approximately $7.4 billion, a $350 million debt reduction for the year. This reduction will help to offset the impact to our credit metrics from lower earnings and the reduction in our financing assets. Overall, we continue to manage our capital structure to maintain credit metrics consistent with our investment grade rating. I will now hand it back to Ursula to discuss capital allocation and guidance.

With less than a quarter left in the year, we can be more definitive on our remaining uses of capital. As Kathy just mentioned, we have spent about $200 million on acquisitions year-to-date and we don’t anticipate closing any large acquisitions before year end. We now expect to deploy an additional $200 million of capital towards debt reduction. We will spend $300 million on dividends. And lastly on share repurchase, we receive – we reached our full year target of $1.3 billion in quarter three, this represents 115 million share reduction – reduction in shares year-to-date and a 10% reduction of our share count this year. I will now discuss guidance. Starting with revenue, we expect improvement in the four quarter, but considering current trends we now expect full year revenue will be down approximately 3% at a constant currency, in line with year-to-date results with Services flat to up 1%, and Document Technology down 6% to 7%. From a margin perspective in Doc Tech, we expect continued strong margins with quarter four and full year margins in the middle of our full year range of 11% to 13%. In Services, we anticipate sequential improvement and for margins to be approximately 9% in quarter four. So we are making progress in Services, but we do not expect to get to 8.5% margin for the full year. And for earnings, we expect quarter four adjusted EPS to be between $0.28 to $0.30 and for the full year we anticipate being at the low end of our previously guided range of $0.95 to $1.01. Lastly, we expect free cash flow in the range of $1.3 billion to $1.4 billion with modestly lower operating cash flow of between $1.6 billion to $1.7 billion and CapEx that is now also expected to be lower. So in summary, for the third quarter we achieved adjusted earnings in line with our guidance, but we will – we have come through the 9-month point and we are not satisfied with our performance. We are sharpening our focus on execution across the enterprise. We continue to lead an aggressive agenda to strengthen our offering portfolio and target segments where we are best positioned to compete and differentiate. And across both services and technology we are prioritizing investments, taking actions to improve revenue and margin and managing cost in Doc Tech to maintain our profitability. And as previously mentioned we are reviewing structural options for the company’s business portfolio on capital allocation with the goal of enhancing shareholder value. As we undertake this activity, we are focused on the execution of our strategy and remaining fully committed to our customers, partners, suppliers and employees and to delivering strong financial results. Finally, before we go to Q&A as you know this is Kathy Mikells last earnings calls. I would like to thank Kathy for her financial leadership and contributions to Xerox during her time with us. Leslie Varon will be stepping in as the interim CFO, a position that she has held previously. Leslie has deep experience and great connections throughout the business, so I know we won’t miss a beat on – with this transition. With that, let me turn it over to Jennifer.

Thanks Ursula. Joining Ursula and Kathy today is Bob Zapfel, Head of our Services business, as well as Jeff Jacobson, Head of Technology. Also, let me point out that we have supplemental slides at the end of our deck. They provide more financial detail to support today’s presentation and complement our prepared remarks. For the Q&A I would ask participants to limit follow-ons and multi-part questions so that we can get to everyone. At the end of our Q&A session, I will turn it back to Ursula for closing comments. Operator, please open the line for questions now.

Thank you. [Operator Instructions] Our first question comes from the line of Shannon Cross from Cross Research.

Thank you very much. Ursula, can you talk a bit – your Services and Doc Tech business have been under pressure for some time. So, I am curious as to what specifically is behind the decision to look at structural options. And as Chairman and CEO, can you talk a bit about what types of actions you would say would constitute a structural option?

Thank you, Shannon, for the question. The Board and the management, we look at the business portfolio at the company strategy on a continuous basis. We consider a range of opportunities regarding new business and the operations and it’s always focused on increasing shareholder value. So, this type of activity, for example, led us to look at ITO and to divest of that and to take a fundamental change in our government healthcare strategy, particularly around health enterprise. So, the structural options that we are looking at, is both portfolio and capital allocation options and it’s at an early stage. So, I really can’t get into more details about that – about what is happening, because we haven’t really progressed it that far.

And I guess what made the change like in your minds looking at how the business is – what made it happen or be announced at this quarter versus prior? Is there anything significant that changed or how did this sort of come about?

Yes, I think that the Board decided – and I am a member of the Board, obviously, the Chairman of the Board, we decided to make it public. We decided, as a group, to make it public. I think that the review process though is an important thing to keep in mind. It is a fairly broad-based review. It is not – one of the things that we have not – we are not currently considering is the sale of the company, but all other options are – will be looked at as we progress through this review. We are not going to actually speak a lot about timing of it. We are not going to make a lot more public statements about it. So, I understand that there is a lot of questions, but we have to kind of go through the process and we have to go through the process before we can say anything more.

Okay, thank you. And then just one other question, you have taken down 2015 cash flow guidance a bit given some of the pressures in emerging markets in that, how are you thinking about 2016 as we look forward? Sort of just maybe even if you can’t give us specific high level puts and takes on how we should think about cash flow?

Let me start with the top line. Let me start with revenue and then I will turn it over to Kathy and myself to talk about cash flow. I think that we will see continued pressure in developing markets. I don’t expect to see any turnaround there and maybe even a little bit more headwind than we have seen so far there. Doc Tech margins, we expect them to remain strong. We are going to do a whole review of what’s happening in 2016 at our fourth quarter earnings call in January. So, these are just high level comments. Why don’t you go into cash?

Sure. And so other things I would just point to, currency has been a huge headwind for the company this year. If we had to call currency today, which by the way, we don’t, but if we had to call it today, we would call it looking fairly neutral in 2016. Another driver overall of cash flow is pension and our approach there really hasn’t changed. So, I wouldn’t expect any kind of big changes year-over-year in terms of what we are trying to do in pension. And then obviously one of the big things that we have got to continue to execute on is just managing working capital. That was a particular headwind for us in this quarter and something that we would expect actually we would improve on as we get through our fourth quarter and something we will be very mindful of as we look forward to 2016. And then the last thing I would mention, Shannon, is we sold these pieces of our financing portfolio in 2012 and 2013. The impact of that diminishes over time. And so that gives us a little bit of a natural uplift in ‘16.

One last point, on the health enterprise charges that we took for ‘16 – actually for the fourth quarter and ‘16 we will have a little bit of headwind in revenue the first half of ‘16. It will reduce our volatility, which is one of the things that we really suffered from in 2015. So, that’s the good news there and we should be able to see some improved profitability as these contracts were at a loss. That’s the other thing we can see in ‘16.

Thanks, Shannon. Operator, next question.

Thank you. And our next question comes from the line of George Tong from Piper Jaffray.

Thanks. Good morning. First off, Kathy, we wish you well in your new endeavors.

Thanks very much.

I guess, Ursula, can you discuss whether you see strategic value in having the services business together with the Document Technology business?

The answer is that our – my position on that hasn’t changed to date. And that’s the strategy that we are executing on, which is, yes, we do see to-date strategic value in having these two businesses together. As you go through the review, that’s one of the things that we will validate.

Got it. And Bob, in the government healthcare space, can you give us an update on New Hampshire, Alaska, North Dakota and New York and what implementation milestones and costs might be coming up?

Sure. So, the first three, New Hampshire, Alaska, and now North Dakota are all live. We went live in North Dakota, two weeks ago, early October. So, they are in operate mode, so we would not expect them to have new development expenses where we have had the unpredictability that been an issue in both California and Montana has been on new system build as opposed to operate. In New York, we are building the new system. As you will remember, the big difference with New York was it was bid after the move to – after the move to the system. We are already implemented in New Hampshire. So, we were not building from scratch. They were buying something that the health enterprise platform that we had built and we are still in the front end of that development, but optimistic that we will be able to drive that within the cost that we have modeled.

Great, thank you.

Thanks, George. Operator, next question.

Thank you. Our next question comes from the line of Tien-tsin Huang from JPMorgan.

Great, thank you. Kathy, I also want to wish you the best in the next gig. I just want to I guess, Ursula, just obviously lots going on with the CFO transition and then you mentioned the review in the capital allocation and portfolio retrenching in government as well. I think you said you don’t have a timetable, but I am curious how do you expect to – I guess, address and update us on some of these big items?

Yes, I think that any normal operational item, we will update you on quarter calls like we generally do. As far as the portfolio – business portfolio and capital allocation review that we don’t intend to give updates to the process. So, we are not even sure. We are not even assuring that there will be any outcome of that process that’s something that will make public. So, I think what we have to do is when we are ready to speak to you about it, if and when we will speak you about it business update, normal business and operational updates you will get – you get through interactions with us on a normal basis.

And then timetable on the CFO transitioning, yes?

As far as the CFO transition goes, it’s always unfortunate to see a CFO leave, particularly someone with the quality and caliber of Kathy. So, we are wishing her well as you guys do, but we are disappointed in that transition. The good news is that I have a compatriot who has been with me for – has been with me in this company for 30 years or more who has done this acting CFO thing once before. The community knows her outside the company. The community knows her and loves her inside the company. So, I don’t expect miss a beat at all.

Great. Thanks, Tien-tsin. Next question please.

Thank you. And our next question comes from the line of Keith Bachman from Bank of Montreal.

Hi. I also want to start at the strategic level. If I think back about what’s happened this year, the buyback has been call it over $1.3 billion and the M&A has been a couple of $100 million. And so the portfolio has actually decreased or it really hasn’t increased through M&A and the company has been buying back aggressively on stock. And I am just wondering how you are thinking about that as you look forward. In other words, the stock really hasn’t done much. It’s down a little bit this year, down actually a decent amount, yet you have been buying back and really haven’t added to the Services portfolio. I am not suggesting that you go out and buy aggressively at any price, but the capital allocation strategy combined with weak markets really hasn’t seem to create value. And I am just wondering how you are positioning that as part of your strategic decision making process here as you look out over the next couple of months?

Yes. I think that for the remainder of this year as I said in my remarks, we don’t expect to actually to complete any significant M&A at all. So I think where we are on M&A is where we are and we have already met – reached the share repurchase hurdle that we had set for the full year. So I think that both share repurchase and acquisitions, M&As kind of done for the year or maybe a little bit more.

Yes. I am thinking about more over the next 6 months to 12 months?

Yes. So let me go forward, I just wanted state that. Thank you, Keith. On a go forward basis, our strategy remains to return at least 50% of our available cash to shareholders and we will continue to do that through share repurchase and through dividends in 2016 as the current plans. We will update you more on that in the fourth quarter earnings in January. And as far as M&A, it’s one of the integral pieces of the expansion of our Services business. And so we will continue to look for accretive tuck-in acquisitions in Services, particularly around the areas where we see differentiation and strength in transportation and commercial healthcare, these areas. So we will continue to look for M&A in 2016 and we will continue our return to shareholders strategy in 2016. If anything changes from that, we will update you when appropriate.

Okay. If I could just sneak in a follow-up then, as you think about strategic alternatives on the printing side of the business, is there more that could be done and more could have many definitions, but associated with your partner in Japan, Fuji to leverage that relationship?

I think that as we look at structural options for the company’s business portfolio and capital allocation, we will look at all available levers there. I am sure the company will do that – the Board will do that.

Okay. Thank you. Best of luck.

Operator, next question.

Thank you. Our next question comes from the line of Brian Essex from Morgan Stanley.

Good morning and thank you for taking the question. I was wondering if I could pose a question to Bob. I guess given the recent announcement that you are deciding to shorten the contract implementation dates for both California, Montana, I was wondering if you could maybe highlight a little bit what to expect on the margin front and how much shorter those contracts could potentially be. And I guess what I am getting at is realizing that you have an operational overhang as you are implementing those contracts, might we see a little bit better margins sooner and what might that timeframe be once those contract implementation processes end?

Yes. Look, if I can all start first by explaining kind of where we are in both California and Montana and then I will try to be on point with the question. So really in both states, we and they, this was a mutual process, looked ahead and said, given everything that it changed in terms of what they would want and where we were on the development that there was still a long way to go and it was better to kind of call inaudible [ph] than continue to kind of develop the systems. So what – and they and we were with those and for us to stay in a substantive long-term role as a fiscal agent operator, which is the primary component of our operating revenue in both states. Now, what that will mean to us going forward is we will have as Ursula briefly mentioned, we will have some revenue pressure. It’s about a point on the Services segment revenue dynamics for the next three quarters. And it was also roughly a point – not quite, but roughly a point last quarter. So that’s a little bit of downside. The upside is that we had been very unpredictable. As you know, our Services margins have not been – we have not been as consistent as we need to be because we have been recognizing more costs to development would kind of hit the period I&E because of percentage of completion accounting. So because of the change that we have made with them, we expect to take that unpredictability out of our model. And we should have year-to-year improvements in 2016 because we were losing money, but we are not already laying out next year’s segment model until the January earnings call. So sorry about the long answer, but hopefully that’s…

Okay. No, that’s very helpful. And so if I were to take California and Montana contracts, is there any way to outline the revised timeline for those contracts, it sounds like California ending after stage two, is that relatively close. And then Montana, I know that was a pretty far away completion timeframe?

Both of them from a – again, separate the new system development from the ongoing operations. The ongoing operations, we expect to have for an extended period. The new system development in both cases will be inside 12 months and maybe inside a much shorter period of time.

Right. And the financial implications of that, Brian is that have been comprehended in the charge that we took in a couple of weeks ago. So we are – we have kind of captured towards the best of our ability and knowledge of the financials, including the balance sheet impacts. We did that in – a couple of weeks ago. And we will then implement that – the end of that, those development activities with the states in the next couple of quarters or so. Yes.

Right.

Thanks Brian. Operator, next question.

Thank you. And our next question comes from the line of Jim Suva from Citigroup.

Thanks very much. I have two questions and I will just mention them at the same time. So first of all, on the announcement you made about the Board of Directors of authorizing review, can you confirm that it’s just your Board of Directors internal doing it or did you hire somebody external or plan to external. And the reason why I ask this isn’t the Board of Directors supposed to always review the company’s business and capital allocation. And so if it’s internal, you kind of really wonder what type of meaning this information is. Second question is – the follow-up is, during this review process, does your stock buyback or capital allocation, you put on hold until you get the conclusion of it? Thank you very much.

As far as your first statement about the Board’s interaction with strategy development etcetera, etcetera. You are correct that this is a continuous activity with the Board. This is – they have talked – we have talked about it all the time with the Board, our strategy and as well as our operations. This – we have told you that what we are doing here is we are looking at structural options for the business portfolio and capital allocation is something that they always do. We have just decided to announce this to you this time and we are not disclosing any advisors with you, if we have advisors of who they are.

Great. Thanks Jim. Operator, next question.

Thank you. And our next question comes from the line of Ananda Baruah from Brean Capital.

Hi guys. Thank you for taking the question and Kathy, good luck in your future endeavors. I guess, really I have a question and a quick follow-up. Really for Ursula and Bob, I guess in the context of how you talked about your capital allocation going forward, but given also the new context about looking at strategic options. Philosophically, how do guys think about doing not tuck-ins, but larger Services deals. And it sounds like you are going to have the $700 million left over after capital allocation of generative cash annually to do deals, I don’t know that that could get you without levering up something significant. But clearly, there is some sort of intent behind making this announcement the way that you guys have announced it. So, I’d love to just get your thoughts on philosophically your view on making the larger services deals. And then really, I would love to get your broader take on did you really what you think that actually is necessary given the fragmented nature for the BPO market, I will actually just leave it there. That will be my question. Thanks.

Okay, great. By the way, I didn’t answer the second part of Jim’s question, which is basically the first part of your question, so sorry, Jim and Ananda I will capture that. Our capital for this year, we have essentially completed our share repurchase activities. We have – as I said earlier and we are still active in the market in M&A, but we have a pipeline and that pipeline doesn’t lead to anything significant for the remainder of this year. So, from a capital allocation on those two items, I think that we are really pretty much settled. CapEx, we talked about the fact that it’s coming in a little bit lighter that will help us – we are focused on remaining investment grade that’s one of the things that you know that we think that we need for both our services and tech business and we will continue to make sure that we manage our capital to assure that we fall inside there. That’s one. Second is the fragmented nature of the services market and our, therefore, M&A activities for the future. I mean one of the things that we will continue to need to do in the services business is to consolidate some of this fragmentation, particularly in areas that we have strength and I would suspect – I would plan to and you should expect that we will continue to do that type of activity as we go forward in the business as usual kind of a manner. I didn’t quite get to the $700 million that you got to, because we haven’t quite done 2016 yet, which I think is what you were looking towards when you were making those numbers those projections, Ananda, but as I said earlier, I don’t think that we see in the business as usual, a lot of change in returning value to shareholders to an M&A structure that continues to strengthen our services business and to a debt structure that allows us to remain capital investment grade. So, those are the three kind of tenants that we are sitting on right now and that’s why I intend to come out as well. We will see if there is anything that changes as we go forward. We will tell you about it, but it won’t be before January – the January call. I hope I answered everything that you had. It was kind of a long question. I hope I got all of it.

It was. But that was very helpful, Ursula. I guess just one quick follow-up is, do you think you can accomplish the kind of I guess consolidation in those key BPO areas that you want to continuing with sort of the small tuck-in approach as opposed to stepping into doing some larger deals and getting some bigger scales? That will be it. Thanks.

Yes, I think – it’s something that – it’s a great question, Ananda and it’s one that it’s going to be hard to answer, not for any reason except that we have been trying to do the small tuck-ins and we find some good ones and they come when they come. We compete for them and we win some. You saw iPas and RSA this last quarter and we will continue to try to push on that area. We still have the same disciplined approach. We have a great kind of re-op in that approach with the hiring of a great executive who is kind of M&A expert. So, we will continue to look at that type of M&A for sure. And then when we look in that type of M&A, if we find something that’s even more exciting, we are not going to close our eyes to it, but that’s not – we are not looking for massive companies to buy. We are trying to actually stay in the ranges that we have been talking about, little bit bigger than small, but definitely smaller than large.

And trying to stay where we are really looking at the places where we think we are advantaged, so that we are not looking broadly across the whole BPO portfolio. But on a select set of areas where we think we can even further differentiate the firm for our clients.

One of the areas that we didn’t get into at all, but I think it’s good to bring up now is that we are heavily concentrated. We have a heavy concentration and strength in customer care and in call center operations. And we have a problem right now with the business mix. It’s one of the challenges that we had in the third quarter and that we are working hard to try to overcome as we go forward. As we mix more towards customer care it’s a lower margin business. We are trying to mix up towards more – towards higher margin, more innovative solutions while we try to actually innovate in customer care. So, the reason why I bring it up is our M&A strategy is going to be towards these types of areas where the margins are stronger, where we don’t continue to – where we want to stay leader in our customer care. We don’t want to walk away from that business. But we just are not selling enough of the higher margin businesses – business areas and that’s one of the things that we have to fix and we haven’t quite cracked that nut yet. So, we are going to continue to acquire in those areas, so that we can actually move away from the more commodity-based customer care implementations.

Thanks, Ananda. Operator, I think we have time for one last question.

Thank you. And our final question for today comes from the line of Kulbinder Garcha from Credit Suisse. Mr. Garcha, your line is open. Could you check your mute button please? He has not responded.

Alright. So, that’s it. We will wrap up. Thanks for your interest. Ursula, anything more to wrap up.

Yes. I just want to close with a thank you for listening. And while the third quarter adjusted earnings were in line with our expectations, we know that we have a lot of work to do. I talked about some of the areas, mix is one. We have to make sure we manage our cash well for the remainder of the year and we will be focused on that. So, thank you for joining our call today.

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