Good morning and welcome to the Xerox Corporation Fourth Quarter 2016 Earnings Release Conference Call hosted by Jeff Jacobson, Chief Executive Officer. He is joined by Bill Osbourn, Chief Financial Officer. During this call, Xerox executives will refer to slides that are on the Web at www.xerox.com/investor. At the request of Xerox Corporation, today's conference call is being recorded. Other recordings and/or rebroadcasting of this call are prohibited without the express permission of Xerox. [Operator Instructions] Xerox's reported results for the fourth quarter and full year 2016 reflect only the continuing operations of Xerox. The financial results for the BPO business, once the information has been finalized, will be reported in discontinued operations in Xerox's 2016 Form 10-K report and will not be discussed during this call. 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 Mr. Jacobson. Mr. Jacobson, you may begin.

Good morning, and welcome to Xerox's fourth quarter 2016 earnings conference call. During today's call we will provide an update on our financial progress in the fourth quarter as well as our expectations for 2017. On January 1, Xerox began a new chapter, building on our heritage of innovation and customer centricity while evolving to meet the changing dynamics of the market and the workplace. The new Xerox will capitalize on our market leadership positions and innovation capability to deliver more value to our customers and drive revenue improvements over time. The 35,000 plus member of team Xerox are excited about the opportunities ahead of us. Our customers are welcoming and encouraged by our renewed focus on what we do best, helping them communicate and work more effectively. I feel really good about our business, our strategy, our leadership team and how we are positioned for the future. We have a strong attractive business model. We participate in an $85 billion market and have leadership positions in key segments. Our business is 75% post-sale based, which provides great stability. We have loyal and long-standing relationships with our current customers and we are adding to our client roster as we cultivate relationships with new customers. We continue to be relentless on cost and productivity initiatives and we are very good at operating this business. From 2013 through 2015, we delivered $300 million to $350 million of productivity each year. With our strategic transformation program we are driving for more transformative change that will bring even greater productivity and we are on track to deliver an annual average of at least $500 million of cost savings from 2016 to 2018. We are disciplined in our approach and our ability to deliver productivity will mitigate the impact of revenue declines until we change…

Thanks, Jeff for the introduction. Glad to be here and excited to join Xerox at this time where there is such great opportunity before us. To me it's simple, we have a strong market position and brand, margins support of investment room from our strategic transformation, along with strategies with reasonable expectations to improve the revenue trajectory over time, which are supported by our announced product launch. In the same breath, I would say we have got lots of work to do to execute on the plan and build a track record of consistent delivery. I have been extremely pleased to find such a strong finance and accounting team here at Xerox and which meshes well with my background, which is rooted in public accounting. Together my team and I, are committed to driving continued financial rigor and clarity in reporting. Before I walk through the Q4 numbers, it's important to mention, again, that Conduent financials are not included in our continuing operations results. And as stated earlier, their results will be included in our discontinued operations when we file our 10-K at the end of February. So I do not plan to comment on Conduent results. So let's get started. Our adjusted results, as a reminder, exclude from an EPS perspective the following. Non-service retirement related cost, as these obligations are predominantly legacy in nature and the cost can be significantly impacted by changes in debt and equity markets. So non-operational in nature. Restructuring and related costs, as these had significant variability and are reflective of future operating performance as they are expected to yield future benefits. And lastly, amortization of intangibles, as these are non-cash and associated with past acquisition activity. Revenue of over $2.7 billion, as Jeff described, was down 7.2% in actual currency and 5% in…

Thank you, Bill. We are a new Xerox, a company that is building on its long history of improving the way work gets done. We will bring the best of the legacy Xerox and combine it with a focused streamlined and simplified organization that more easily adapts to meet the needs of today's markets while delivering solid returns to our shareholders. In 2016, we laid the foundation for the future, the launch of our strategic transformation program will support strong cash generation, margin expansion and the ability to reinvest in the business. We defined our strategy and have solid plans in place to capture opportunity in our strategic growth areas to change the trajectory of the company's top line and outperform the market over time. 2017 is all about execution. My team and I are singularly focused on the operational performance of the business to ensure we successfully execute upon our strategy and deliver on our commitments to our customers, our employees and our shareholders. We will now open the line for questions. Jennifer?

Thanks, Jeff. Before we get to your questions for Jeff and Bill, let me point out that we have a number of supplemental slides at the end of our deck which provide more financial details to support today's presentation and complement our prepared remarks. For the Q&A, I would ask participants to limit follow on and multipart questions so we can get to everyone. At the end of our Q&A session, I will turn it back to Jeff for closing comments. Operator, please open the line for questions now.

[Operator Instructions] Our first question comes from the line of Matt Cabral from Goldman Sachs. Your line is now open.

So on the equipment revenue, you touched on this a little bit in the prepared remarks, but it looks like the pace of decline accelerated to end the year. So I was wondering if you could just touch upon your view on the health of the industry at large and how much of the slowdown you think was Xerox related, given some of the upcoming product launches versus more of a market wide slowdown that we are going through? And then kind of related to that, I noticed in the press release that you called out Europe as being particularly weak. Just wondering if you could expand a little bit on what you are seeing there.

Hey, Matt, how are you? This is Jeff. Thanks for the question. So as Bill alluded to in his remarks and you mentioned in terms of versus full year, our North America business was stable. The trends are very stable. Developing markets actually improved versus the trend and we did have a worsening in Europe. As a matter of fact it was probably -- you know where they were low single digits, they went to above the average in decline. And it was really due to a few things. The entry mid-sector was lower really due to the advent of the new products we have. If you think about our European business, just a little less than 50% of the European business is our channel business, so they are preparing their supply chain right now for the new products coming in. So that was part of it. Also if you were to go to last year in Europe, at the high end we had the iGen 5 introduction in the second half of the year. Europe did a really great job with that if you go back to Q4 of 2015. They had a very tough compare there. So we think it was that. The market overall has been relatively stable. You know certainly in North America it's been stable. Developing markets, as I mentioned, relatively stable. We think in Europe, Brexit, we hear a little about some of the uncertainty there. So that’s been part of the causal. But where we think that we are going to see the benefits now as we start rolling out the new products and almost all of them will be in our supply chain in the second quarter of the year, which will start benefiting us in the second half of the year. We think we will start seeing stabilization in there for sure.

Got it. And then on the cost transformation program, obviously you are only a year into the plan but you are already executing above the targets that you have laid out. Could you just talk about the levers that you have to potentially deliver savings beyond the $1.5 billion plan that is in place through 2018? And just thinking more philosophically about your approach, if you were to see some upside in your cost savings targets, how are you viewing the tradeoff between using those to accelerate some of the reinvestments that you've talked about, versus dropping those through to the bottom line and starting to show some operating leverage in the model?

Yes. I will hit the cost transformation first and then hand it over to Jeff about, thoughts about additional cash available for other investments. As we said in our prepared comments, we are very pleased with what our results were for 2016, exceeding the $500 million, achieving $550 million where we have targeted $600 million. Despite overachieving last year we still believe we can do $600 million for this year. The levers, we described the various areas but one of the levers is clearly restructuring and we are purposely timing a significant part of our restructuring, $125 million of our planned $225 million for the full year in the first quarter, so we get more the benefits within the year. So we said we are very committed. Very pleased about our results and still believe we can achieve $600 million in 2017.

Yes. And Matt, just to supplement it. We do have a very diligent process. We guided that we thought we would get $500 million in gross productivity in '16. We were very aggressive. We are able to pull some things earlier which got us to the $550 million. We are still sticking to the $600 million. And in terms of how we are going to use it, one of the things I want to emphasize is we have a very strong return of capital strategy and every free dollar of free cash flow we have fights for the best return on investment. A big part of this strategy we have to remember as we rolled out on our investor conference is that these cost productivity programs, we want some to the bottom line. We want margin expansion but it's also all about how do we change the revenue trajectory. We are not pleased where we were at 3.9% and 4.6% and then last year 4.3%. This year you heard our guidance for the year but it's all about '18 and beyond, how do we begin to change our revenue trajectory.

Thank you. Our next question comes from the line of Kulbinder Garcha of Credit Suisse. Your line is now open.

Just a couple of clarifications. On the revenue decline this year, you are saying mid single digits and then the currency impact is about 2 points. So when I think of that, I think you're guiding for maybe a 7% revenue decline on a reported basis. Is that what we are thinking about now? And the reason why I mention is, I think previously you said the revenue decline would be comparable in 2017 to what you saw in '16? So has there been any change in your visibility, your view, on revenues for '17 over the last couple of months since the analyst meeting? That's my first question. And then also linked to that, it sounds like revenue year-over-year declines are worse in the first half and they get better as we get through the end of the year. And the final question I have is just on cost reduction. You keep saying that you're going to do more than $1.5 billion long-term in this program, in the strategic transformation program. Can you give us -- is there a point at which you will maybe inform us how much more it is going to be and is it going to be materially more? Is it maybe $100 million or $200 million only? So if you can give us some sense in terms of how much more, given as you go through this, how much more you could potentially save? Thanks.

Yes. This is Bill. You were breaking up slightly but I think we pretty much got your three questions. First of all regarding the revenue guidance, down mid-single digits. As background, there is lots of detailed analysis and build up in coming to that. But when I take a step back and think about it at a high level in giving that guidance, the company historically has hadn't a great track record meeting its constant currency revenue guidance. You also factor in the Q4 that we are down 5% on a constant currency basis and that in 2017 the expectation is with the new product launches in the second quarter towards the latter part of the first half of the year that the improvement, relatively speaking, will be more in the backend of 2017. So that combined with, specifically I mentioned in my prepared comments two parts of our business. The OEM business and CMS that have been declining in recent years at a much higher rate than the overall company as a whole but even our accelerating year-over-year they really add about 60 basis points in additional decline. So that 4.3% you are looking at last year is relatively speaking you are starting like 4.9%. All those things factor together. Like I said, there is a lot of detailed analysis also that underlies it, get it to mid-single digits as far as revenue guidance in constant currency, with improvements in the latter half of the year versus the first half. Which I think answers your second question, your first half versus second half. And, yes, we would expect better improvements or lesser declines in the second half versus the first half as a result of the new product launch. As far as the cost reduction of a billion...

Yes. And Kulbinder, if I can, this is Jeff. I just want to supplement Bill also. One thing when you look at our revenue model is you know as well as anyone, 75% of our revenue is annuity. It's been fairly stable at declines of about 3%. One of the advantages we have of that 75% of annuity, about 62% of it are bundled contracts which is different from a lot of the industry. So we have a lot of stability from that standpoint. We certainly don’t rest upon it. So the real key for us is, changing the trajectory in the equipment sale revenue because if we can start showing improvements there, getting more machines in the field, burning more pages, that will help the annuity even more but obviously they will bring down the drag of the equipment sale revenue. With regard to the costing, we don’t want to give 2018 guidance on cost. What we said at the investor conference, we would be at $1.5 billion plus. We feel very good that we got to $550 million. We feel equally as good that we are guiding to six. It's not in the bank yet. We have to drive it very hard, it's a lot of heavy lifting. But when we achieve that and if we can achieve that, let's call it a $1.150 billion, then we would be able to update our guidance as we get to 2018.

Thank you. Our next question comes from the line of Shannon Cross of Cross Research. Your line is now open.

I have two questions. The first is just, Jeff, can you talk a bit about how you're thinking about accelerating growth or improving what is going on within the document outsourcing business? If you can talk about specifics, how -- I don't know, maybe some of the weaker signings carrying forward right now. But, just, there was a mention I think in the script about walking away for some lower profit deals. So are you seeing more pricing pressure in this segment? Just any color you can give would be great. Thanks.

Yes, sure. Thanks, Shannon. So the comment about walking away from low pricing deals is probably more in Europe where there were a couple of very large deals where we just said from a margin standpoint, not something as a leader we really wanted to participate in. When I look overall at our document outsourcing businesses, you know we are very well positioned here as the industry leader from a market share standpoint. If you took number two and three, they just about equal our market share. Our pipeline actually is up. So the way I look at it, I said, our growth was 1% in Q4, it was up 2% for the year. Our signings for the full year were down 5%. The renewals were up double digits. It was the new business signings that were down. Well, we are going to attack that and let me also add, in terms of the new business signings being down, if you think about it, we are really just reporting new business signings in the enterprise. For our Xerox partner print services, we don’t report the signings there. So in the enterprise it's a $6 billion managed print services market, growing about 2%. We have just a little under a 50% share there. So we would expect to see somewhat of a little slowing in new signings there. But to counter that, what we are doing is, the new product launch will help us a lot. And let me touch on the new products, why will that help us. We have always been the leader in A3. A4 from a cost standpoint we perhaps were not as competitive as we could have been or should have been. From a functionality standpoint, these new products will have a tablet based user interface. They will be mobile enabled. Cloud-connect, app-centric with benchmark security which is so important to the market today. And there will be fleet coherency between A4 and A3. So we think with those new products and we are going to hire what we call new logo or new business hunters, who will do nothing but focus on that percentage of the business in the enterprise we don’t have. And then if I just factor over to document outsourcing where we have even a better opportunity for growth in the SMB market of managed print services. That’s a $7 billion market growing at 7% and our share is under 10% there. So if I just compare and contrast the shares we have in the enterprise versus the SMB, again with a focus on the M and we start putting a focus there and we did grow it 12%. That’s where we are looking for the growth opportunity.

Okay, thank you. And then if you can talk a little bit about how you think about use of cash, and it was covered in the script to some extent but I am just curious. As you are sitting six months from now or nine months from now and you have got a pile of cash, how are you thinking about it in terms of internal investment versus acquisition? Are there areas where you think you should be developing things internally and leveraging Xerox PARC versus opportunities to go out and buy and then, obviously, balancing that against share repurchase which I understand is on the table this year, but then also debt pay down? You are going to end up with some cash. You clearly will have cash next year net of the return program you've put in place. So how do you as the CEO sort of balance these opportunities?

Perfect, Shannon. Thank you. So let me address and Bill could certainly supplement it. But we distinctly in purpose -- we are very purposeful for saying the 145 to 345. I wanted to keep and the team wanted to keep our powder dry right now. Yes, I don’t think it's any secret when you look at the percentage of cash we generated in this side of the house over the years that in a two division structure, some of that certainly went over to the services side of the house. And what we did is we had a strategy to manage our business certainly for margin, for cash. We will continue to do that. We will always do it. And we will be prudent and judicious with any investments we make. But we are going to look at investments to accelerate the trajectory in the top line. And, again, revenue is very hard as we all know. These things won't come quickly but we are going to line it to the growth strategy, Shannon. So what can we do in document outsourcing? In the professional services, what can we do in workflow automation? In the SMB channel, obviously we have had great success with global imaging. We will continue to do that. We will look at some of the same things in Europe. In the production side, from an inkjet standpoint, we know we have some work to do there and we will continue to make investments there. And as you saw in our recent Brother Dominic commercial about set the page free, the technology today is not just about printing on paper but what can we do in packaging, what could we do from a technology standpoint. Printing on plastics, printed electronics. So we are going through that internal debate of what perhaps could we commercialize ourselves, which will obviously take more time. What could we do at partnerships or what could we potentially do in M&A. So that’s the way we are looking at it.

Thank you. Our next question comes from the line of Paul Coster of JPMorgan. Your line is now open.

I will build a little bit on the questions that Shannon just asked. First of all with the dividend. Should we think of it as contingent on the cash flow each year or are you in a position to commit to dividend growth knowing that once pension fund payments are out of the way, you will be in a much more robust position from a free cash flow perspective?

Yes. I mean as we said in our prepared comments, as Jeff just went through, clearly return of capital is an important priority. Whether from share repurchases and from a dividend perspective and you know as we said at the investor conference, over time on an annual basis, we would expect to be returning in one form or another, greater than 50%. As far as committing to dividend growth versus share repurchases, right now in the future we are not going to give guidance on that. But just know that we are committed as a company to returning on an annual basis greater than 50%.

Yes. And, again, as I said before, we do have a strong return of capital strategy and every dollar fights for the ROI and is compared against the return on capital.

Got it, okay. And then on the acquisition front. Can you just talk to us a little bit about the philosophy, both in sense of accretion, market share gain, growth trajectory, what criteria are you using, please?

You know a couple of things, just to supplement what Jeff was saying earlier. First of all, our acquisitions will be in areas that we are clearly experienced with, that are close to our knitting. Areas that we understand. And one of those areas historically has been in the GIS or global imaging services area, where we buy multi-branded resellers and essentially convert them over to more of a mono-branded reseller being Xerox. And historically we have had very good returns in that. We have paid a multiple in the range of one times revenue and we look, to the extent that they are the right opportunities in doing those type of acquisitions in 2017 and beyond, not only in the U.S. but internationally. And then as far as other types of acquisitions, whether more in the workflow automation, whether software technology types. We will probably pay a higher multiple just depending upon the specifics of the potential deal.

And Paul, we are looking for things that will get us into those market where perhaps we can't address well today. So if you were to just look at production color, we would say it's $5 billion market growing at 5%. That is a market that is probably 12-13 times there that’s called commercial offset print and packaging. Where if we can have technologies or get into that space, that would help us a great deal.

Thank you. Our next question comes from the line of Jim Suva of Citigroup. Your line is now open.

Thank you very much and thanks so much for the details. On your annual EPS guidance, this is you guys first opportunity to really come out and set a watermark and set your goals and lay it out. Yet I think one would be remiss if they don't realize the political and economic environment the past 30 to 60 days has been probably more uncertain than ever. So for your guidance, does it incorporate a risk adjusted weight of all that or is it a stretch EPS goal? Is it conservative? How should we think about that, as it's really you guys are setting up your reputation at risk here? Is it conservative? Is it prudent? Is it a risk? Is it how you see things, because we're just trying to figure out how your company is guiding versus the old Xerox?

Yes, this is Bill. I will start with that question. And as you know, we gave a lot of detail in the prepared remarks and everything but from a high level, what I think about is we came in at $0.88 on an adjusted EPS for 2016. When you factor in known differences upfront, whether the lower interest expenses, the higher effective tax rate, more current foreign currency headwinds, you effectively have a net $0.10 of off that $0.88, you are starting at $0.78. And then you look through just the various cost transformation initiatives to help fund potential future growth and based upon our detailed analysis, we believe that gets us the $0.02 to an additional $0.10 upside which gets you to an $0.80 to $0.88. So at a high level that’s what we think about and we think it's appropriate and reasonable guidance range based upon what we know at this time. With that said, just as I said in the prepared comments about Q1, being 20% typically but a little bit negative impact at this year by foreign currency and the timing of the product launch. The full year guidance is also dependent on a successful product launch both from a timing perspective and customer demand. But based upon everything we know now and our detailed analysis, we believe it's a reasonable range.

Yes. And Jim, our leadership philosophy is if something were to get worse in the external markets, we are just going to do more and just go with the productivity even harder to make up for it. You know when we started the year, we looked at the guidance originally months ago, we didn’t know we were going to have $120 million of the currency headwinds and that’s why you are seeing the productivity initiatives so high.

Our next question comes from the line of George Tong of Piper Jaffray. Your line is now open.

Going back to the transformation savings program, can you outline what the sources of upside were in your savings of $550 million in the year compared to your $500 million target? And how your views on 2017 savings have changed at the increment, acknowledging that you are for now sticking to your original $600 million savings target?

I am sorry, George, we missed the last part. Could you repeat that, please, we just want to make sure we heard you right.

Yes. Just how your views on your 2017 savings have changed at the increment.

You know, it comes from a lot of different factors. But as I said, one of the big things is that we are clearly, first of all, last year the whole program started in the February timeframe. We have the benefit of being up and running and starting as of the beginning, you will be at the full year. But we also purposely are front-ending a lot of our restructuring initiatives and expect to get benefits within the year from a lot of that. So that will have an incremental impact, that alone.

Yes. And, again, when you look at the de-layering of the organization, we have gone from about 11 layers down to 7 layers. If you look at the things we have been doing at technical service, those things are starting to hit now. Obviously, as we discussed, we have $225 million restructuring. We are going to do a lot of that in the first quarter, 125 with the 225. So as Bill mentioned, yes, we have a head start versus last year. We have got runway. We have got wraparound benefits from 2016 flowing into 2017 and, George, we are hitting it pretty hard.

Thanks. That's helpful. And for your upcoming product launch, can you elaborate on your 2017 and 2018 timeline in terms of the cadence of when those products will come out and what the margin mix impact could be, based on your mix of new products in entry, mid and the high end?

Yes. So the vast majority, almost all of them George, should be in by the into hour supply chain, I am going to underline into our supply chain, by the end of the first half of the year. Then they obviously will start flowing into our resellers supply chains and to the direct users in the second half of the year and that’s why Bill commented, we will see the equipment sales revenue benefits year-over-year in the second half and the flow through of the post-sales in 2018. From a margin standpoint, as we all know in this industry, A4, obviously you mix down the entire industry when you sell the A4. You lose money on the hardware, you make money in the post sale. We have contemplated that mix in terms of what we are doing from a strategic transformation on the cost side to offset that. Additionally, as we are selling more into the SMB markets, we would expect the margins there to be healthier than they would be in the enterprise. So net net, we should be okay, and we have contemplated that in our guidance.

Thank you. Our next question comes from the line of Mark Moskowitz of Barclays. Your line is now open.

I appreciate the details and the crisp messaging today. Two questions, if I could real quickly here. Can you remind us how we should think about the strategic growth initiatives in terms of how they compare to your legacy business from a cash flow perspective? Do you get better cash attach for these new initiatives or you have to sell more installs? And then, secondly is more tactical. The conservatism around the first half of the year, I know you're not giving explicit guidance, but your guidance you did provide around the contribution for earnings for the first quarter. Is that related to conservatism just post-split? I know it is two different companies, but HP Inc. kind of hit an air pocket when they misread the channel replenishment post their split a year and a half or so ago. Is there any sort of dynamic you're trying to brace for there or is it just more of the aforementioned factors surrounding the high end versus low end and the new product launches? Thank you.

Yes. I will address the second part of the question regarding conservatism. The comments regarding Q1 and the relative history being about 20% of the total and the headwinds are what we are seeing is our best estimate right now. I think your question is getting to is there any distractions as a result of the recent split. And really we don’t see any, we are not factoring any of that in really as far as the first quarter. It's really just what we are seeing as far as our build up and what sort of headwinds we see.

Yes. And Mark, we don’t envision the margins or the cash being any different than our strategic growth areas. If you look at them, it's managed print services and workflow automation where we have been operating the business for a long time. Production color, where we are a leader, and certainly in the A4 MFPs, those will be going into the channel where we have been working with and as we said, the margins in the SMB business to some extent should be better than they are in the enterprise. So net-net, we should be okay.

Thanks, Mark. That’s all the time we have for questions today. Thank you for your interest. Jeff, anything more to wrap up?

Thanks, Jennifer, and thank you all for your questions. As I said earlier, we are a new Xerox and we really are excited about the opportunities ahead of us. We have a well defined strategy to pursue the growth areas of the market while we continue to advance our strategic transformation program. This combination will provide the headroom we need to enhance margins as we invest for growth to change our trajectory of our revenue. Our team is very focused and we are confident in our ability to meet our commitments. We look forward to updating you on our progress and I want to thank you all for joining our call today.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect.