Good morning, and welcome to the Xerox Corporation's Second Quarter 2017 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 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. 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 second quarter 2017 earnings conference call. During today's call, we will provide an update on the quarter as well as our expectations for full-year 2017. In the second quarter, we delivered earnings, operating margin and cash flow that were all in line with our expectations. Additionally, with the progress we are making on the roll out of our ConnectKey products, we are better positioned to capitalize on the strategic growth areas in the market. With two quarters behind us, we continue to be on track to deliver on our full-year commitments. Let me walk you through an overview of our second quarter financial results. Second quarter GAAP EPS was $0.63 and adjusted EPS was $0.87, which reflects our one-for-four reverse stock split effective June 14, 2017. Revenue of $2.57 billion was down 8.1% year-over-year or 6.4% on a constant-currency basis, driven by equipment revenue. We had anticipated lighter second quarter equipment revenue given the timing of the new product launch, but it was softer-than-expected as we saw some delays transitioning to the new products. This also affected our Managed Document Services business, where sales cycles are longer and all the Q2 declines were driven by the equipment shortfall. The transition to the new products impacted our overall revenue by about 1 point. We expect to see new equipment flowing through as we move through quarter three and building more strongly in the fourth quarter and into 2018. Post sale revenue was 79% of total revenue and declined 5.7% with 3.9% at constant currency, consistent with the first quarter and in line with our expectations. We expect continued stable post sale revenue with improvements coming over time as equipment revenue improves and placements grow. Adjusted operating margin was 13.3%, an improvement of 40 basis points…

Thanks, Jeff, and good morning everyone. I will start on slide 6 with an overview of our financial performance. Overall, I would characterize Q2 as demonstrating operational progress, realized expanding margins and cash flow with a mix story on sales, where we had a significant amount of foundation building revenue generation activities, but we have not yet seen the benefits come through in the top line. Revenue in the quarter was down $226 million or 8.1% in actual currency, 6.4% at constant currency. We had anticipated, as stated during Q1 earnings, that Q2 revenues would be the weakest of the year, given product launch timing coupled with Q2 having the most challenging compare. That played out, driven by equipment revenue declines that were weak, given the significant product transition. Post sale revenue decline of 3.9% in constant currency was in line with the first quarter rates and our expectations. Turning to the cost ratios, we continued to see good progress. Savings from our strategic transformation program during the quarter more than offset the impact of revenue declines and a negative transaction currency impact of 100 basis points or $27 million, resulting in adjusted operating margin expansion of 40 basis points. Within that, gross margin expanded 50 basis points. R&D as a percentage of revenue was flat and SG&A as a percentage of revenue was up 10 basis points as a result of the higher revenue declines. As stated last quarter, within our definition of operating income is equity income, almost entirely related to Fuji Xerox, which was down year-over-year. I should note that equity income in Q2 did not include any out-of-period impact from the resolution of the Fuji Xerox accounting practices review. It was determined that our share of the final Fuji Xerox adjustment of approximately ¥40 billion was…

Thank you, Bill. Let me wrap up the presentation with a few closing remarks. We are pleased with our earnings, margin, cash performance and the continued progress on our cost and productivity initiatives during the second quarter. Equipment revenue was softer as we work our way through the expansive product transition. We are laying the foundation in our strategic growth areas and we expect to see overall revenue improvement build toward the end of quarter three and then more strongly in quarter four and into 2018. Our new products have been well received and will support our pursuit of the growing A4 and Managed Print Services markets, while positioning us to enhance our share position in A3. The ConnectKey portfolio appeal to the SMBs who are supported by our growing ranks of channel partners and it favorably faces off against our competitors, enabling us to maintain our leadership across the board. And we're not taking our eye off the high end, where we're seeing good demand for our Aqueous Inkjet devices and new Versant products, while gearing up for PRINT 17 in the fall. Our strategic transformation program remains a critical focus to and continues to yield supporting strong margins and cash flow, while also enabling investment in the business. Additionally, as Bill mentioned, we're applying our proven process discipline to drive revenue improvements. Our progress through the first half, along with the work underway for the second half, gives me confidence in our ability to meet our 2017 commitments. We will now open up 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 multi-part 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.

Thank you. Our first question comes from the line of Katy Huberty of Morgan Stanley. Your line is now open. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Hi. Thanks. Good morning. I appreciate why you narrowed the top end of the range, just given you would need to see well above normal seasonality in the back half to hit the prior top end of the range. But curious why you didn't also narrow the bottom end of the range, which would require weaker seasonality despite the product cycles. And maybe just speak to the factors in the back half that would put you closer to $3.20 versus the upper end. Thanks.

Yeah hey, Katy, it's Bill Osbourn here. Thanks for the question. So let me just give some thoughts to you on all the four measures that we give a little guidance on, on the adjusted EPS. But first of all, adjusted operating margin, we gave guidance at 12.5% to 13.5%, reaffirming that. We're very comfortable with where we're at year-to-date, 13.3% in Q2, first half at 12.2%. And just to remind everyone, the third quarter is typically our seasonally our second weakest quarter of the year, but Q4 is our strongest from an operating margin and from a revenues perspective. But we're still very comfortable with the 12.5% to 13. 5% range and believe we're set up pretty well for that. Revenues mid-single-digit down in constant currency for the full year; first half, we are 5.4% down. We believe the second half will be better than the 5.4% down at constant currency with once again Q4 being the strongest quarter of the year and Q4 being better than Q3. From an operating cash flow perspective, once again, as I said in my prepared remarks, we're very pleased with where we ended for Q2 at $343 million, $533 million for the first half of this year. And I think most everybody knows and I'll just remind everyone the timing of our pension payments we gave guidance towards $350 million in pension payments for the full year, which is still on track, but only $46 million were made in the first half. So a lot of the pension payments are back loaded. There's also some timing of payables, with payables management that was a help in the first half that won't necessarily repeat in the second half. So then after all that getting to your question regarding the adjusted EPS and really,…

Great. Thanks, Katy. Operator, next question please.

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

Thank you very much for taking my question. Can you talk a bit more about the pipeline that you have? I understand things have been pushed back and MDS is taking a while to train in a longer sales cycle. But I'm trying to figure out if this is a change to, sort of, the typical sales cycles? Or is that this is just more with regard to your product launch? And so I'm just trying to figure out how this delay that we've seen is either going to sort of just continue on and impact next year? Or if you think the weakness now is probably going to lead to some upside in 2018? Thank you.

Hey, Shannon, how are you? This is Jeff. Yeah. So, let me take that one. So, as Bill indicated, we thought that Q2 for us was a bit softer by about 1 point. So if you were to take our total revenue and say 1 point, it's about $25 million. So finishing the first half on a total revenue decline basis at constant currency of negative 5.4%, if you were to ask Bill and I at the beginning of the year, that's kind of about where we thought we would be. As we look back, we said Q1 probably ended up a little stronger than we thought it would be, Q2 a little weaker. If you'd put the two together, it will be right where we thought we would be. Getting to the backlog, the reasons we feel more confident, especially in Q4, because – as we all know, Q3 is seasonally weaker. July and August is more difficult. From a direct backlog standpoint, we actually, from end of March to end of June, we see that up around 17%. We also look at the new business pipeline in Managed Document Services, which also gives us confidence of why that will turn probably more starting in the fourth quarter. The Managed Document Services, 180-day new business pipeline is up about 35% sequentially from Q2 to Q3. And again, that's a 180 day pipeline, which I say will – why it will benefit us more in Q4. If I look at the renewal of pipeline for Managed Document Services, that's also up about 13%. So when I look at those things and when I say the equipment this quarter for us down negative 14.6% constant currency, which is something we had not seen. And I get even more confidence in addition…

Thank you. Great. Thanks, Shannon. Operator, next question?

Thank you. Our next question comes from the line of Kulbinder Garcha. Your line is now open. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC: Thank you. Just a couple of questions. The first one is given all the initiatives that you have with respect to on the revenue side whether it's the product portfolio upgrade, the backlog that you mentioned, the initiatives of the channel, it sounds like – correct me if I'm wrong – year-on-year growth should start to improve from Q3, get better in Q4, and does this product cycle of new initiatives drive fairly equally through 2018 as well, or are there other factors we should think about from just the secular challenges? And the second question is, I think we're halfway through this cost reduction program. And there's been talk of having greater than $1.5 billion of cost savings as you go through that, your margin performance is obviously quite good in this quarter just gone. When will you revise – if you will at all – and when we'll be told about that? Can you give us any insights the timing as to when you will assess whether you should be doing $1.7 billion, $1.8 billion or whether this is enough, and to what degree that depends on revenues? Thank you.

Yeah, hey, Kulbinder, how are you? This is Jeff. I think I got most of it. We had a little bit of difficult time hearing you. So if we don't get all of your questions, just let me know and we'll be happy to do so. So, from an overall rollout from a revenue standpoint, we would expect in Q3 – certainly for the half year, as Bill said before, we expect to see improvements second half versus first half. In terms of Q3 versus Q2 sequentially, we would expect to see an improvement in revenue declines on a constant-currency basis, Q3 versus Q2 with the bigger impact being in Q4, which would be the seasonality but also having the benefit of all the new products for just about a quarter then. Some of the last A4 products will be coming out in September, so that might lag a little bit. But we do believe that will also help us, then, into the first half of 2018. With regard to the strategic transformation, I'll let Bill get into that in a little more detail, but we'll certainly update that as we get into the 2018 Investment Day. But as we've been saying all along and as evidenced by the 13.3% operating margin, even despite the 100 basis point currency headwinds, that's something we work hard at every single day and we'll update where we are at the Investor Conference. I should also mention and Bill did mention that in his remarks, we do are starting similar types of, what I'll call, operating initiatives on the revenue side to make sure we have the same diligence in introducing all these new products and rolling them out to the field. Bill?

Yeah. Just a little bit on a strategic cost transformation. As everyone knows, last year we overachieved with respect to the $500 million target and achieved by $550 million. In 2016, we stated a goal for $600 million, this year we are very pleased with where we're at year-to-date, and believe we are firmly on track to meeting that target and hopefully exceeding it. Which would lead to, obviously, your $1.15 billion, if I'm doing my math right, that we're likely very much on the plus side of the $1.5 billion for the three years when you factor in 2018. But as far as formally giving an updated number, it'll probably be later this year. But we are very confident in being – hitting the $600 million this year and overachieving on the $1.5 billion. But to give updated three-year number later this year, we'll give that.

Great. Thanks, Kulbinder. Operator, next question.

Thank you. Our next question comes from the line of Ananda Baruah of Loop Capital. Your line is now open.

Hey. Thanks guys for taking the questions. A couple for me as well. Just sticking with that cost saves topic, guys, I believe of the $1.5 billion cumulative 2018 target, $500 million was incremental and $1 billion was sort of your business as usual saves. So my question is, of that $500 million in the context of the sort of the net new investments you've been making, how should we think or how would you like us to think about a potential for drop-through to the bottom line over the next couple of years? And I have a follow-up as well. Thanks.

Yeah. A couple of thoughts. So yeah, I'd agree, this incremental about $500 million over three years versus what was more BAU already on the cost reductions. But one of the main reasons why was to allow for investment and investment includes things like the A4s, being able to sell A4s up front, which are at a negative margin or a loss initially but profitable over the life. But it also offsets other headwinds, such as currency. We've had significant currency headwinds, both last year and this year, and the incremental amounts over the BAU allowed us to still increase margins despite those currency headwinds, and like I said, it allows us to do investments, so the investment in selling initial A4s or investments in the way we are doing things internally.

Yeah. And I think, Ananda, and good to hear your voice again on these calls. I should mention that, when Bill talks about investments, it's not just the new products, but it's what we're doing with the SMB expansion. We brought on more than 30 new partners and it's almost evenly split between the financial operations in North America, but it requires investment there. It's demand generation. We've hired dozens of new logo hunters. And as the year goes on, we hope to even do more A4 investment, because as we see the success of this, and as you know that's an investment putting those devices in, but we'll get the benefit on the post sale. So we could see ourselves doing more and more of that once we get even more comfortable than we are with where we are for the full year.

Okay. And just a quick follow-up on that. That's really helpful, guys. So, as we move through the next kind of two-and-a-half years here, well let's call it one-and-a-half into 2019, is the success – the return success, I'll call it, kind of the op income dollar growth impact from the incremental cost saves, the EPS growth impact from the incremental cost saves, will that be generated by the success of these new initiatives? Or will there be some portion of incremental cost saves that will not be reinvested back into new initiatives and it could be just it's a drop through to the bottom line?

Yeah, I would say clearly, it would be a mix that there would be a mix of investments. But some would continue to drop to the bottom line and we're not giving guidance in out years, but I would expect cost transformation, although maybe not at the same levels that you see in these three years, will continue as a significant part of this company's future.

Yeah. And another way, Ananda, I'd look at this, and this is I think where we laid it out at the investor conference. Just to make the math easier, let's just say on an $11 billion business or a $10 billion business, mid single digit declines would be 5%. So let's take $500 million, until you turn the revenue trajectory and we should not lose sight of the fact that when we started this 18 months ago and announced this program, it was not just to drive cost out, but it was to be able to reinvest back in so that we can change the revenue trajectory so that we're not declining at that mid single-digit level in the outer years. So right now, the cost transformation program is being used to offset the revenue decline and it's not just putting the margin, the 40% gross margin on the revenue declines. You have some price erosion in the industry, et cetera, which drops 100% to the bottom line. As we're able to take those declines from mid-single digits to something better, we'll have more opportunity to drop more to the bottom line as we also continue to reinvest.

Great. Thanks, Ananda. Operator, next question.

Our next question comes from the line of Matt Cabral of Goldman Sachs. Your line is now open. Matthew Cabral - Goldman Sachs & Co. LLC: Yeah. Thank you. Jeff, just in terms of the competitive landscape, just wondering how you'd characterize the current pricing environment and if you've seen any response from any of your competitors just as your product launch continues to roll out?

Yeah. Hey, Matt thanks for the question. Yes, no, competitive reactions have been very stable. Pricing has been for us at about the same levels that it's been really for the last couple of years. If anything, where we're feeling really good is although the products are just coming out now, and again, we'll be coming out in Q3, but more fulsome in Q4, as we're speaking to the channel partners to bring on the SMB expansion, the reaction we're getting not just from the industry analysts or the awards we're getting, but from the resellers, the multi-branded resellers who are looking at these products and saying, we now understand that Xerox is very serious about going into the multi-brand channel. They've seen the hires we've made, that we've hired a gentlemen named Pete Peterson, Jim Morrissey, two people who are pretty well known in these channels, that they are going out and speaking to people. And where have seen some competitive reaction is saying, we now see the multi-brand channel speaking to Xerox now. We actually like it to be a little more low-key because we'd like to stay below the radar as we bring and these new multi-brand channel partners. So and again, we're not getting out ahead of our headlights. We're also making investments in our mono brand channel. These are the resellers who have been extremely loyal to us. We're continuing to invest with them. And we're also streamlining what we do in the enterprise. We're getting much more focused by saying, for years, there have been a number of customers that we've had – that we've called on directly that quite candidly, we shouldn't. We're going to work with our mono-branded resellers, our multi-brand resellers to have them call on them, do it more through telesales as we change our model, so that the new logo hunters can focus on the largest enterprise customers in the industry.

Thanks for the question, Matt. Operator, next question please.

Our next question comes from the line of Jim Suva of Citi. Your line is now open.

Thank you very much. I have two questions; I'll ask them both at the same time. First, you mentioned Q4 will be stronger than Q3. I wanted to get a little clarity about why are you calling that out when isn't that normally always the case? Or is there something special, because with the product ramps, I would think that Q4 would always be the strongest regardless of product ramps or not. And are you actually implying that maybe year-over-year sales could be flat to up in Q4? Or you just kind of reminding people of what's normal? And then my second question is, you narrowed your EPS guide by taking the high end down, but the operating cash flow and free cash flow didn't change at all. So what causes the bridge to where there was no impact to operating cash flow and free cash flow? Thank you.

Hey, Jim, it's Bill. Thanks for the questions. So, yeah, regarding the Q4 versus Q3 from a revenues perspective, a couple of things. You're right that Q4 seasonally our strongest quarter from a revenues perspective each year and that normally occurs. This year, we expect there to be even more of a ramp, the degree of it, we're not giving that specificity, but more ramp than normal because of the new product launch. Not giving specific guidance as to flat or positive for Q4, but as far as Q4, it's owned. But we do expect there's a normal ramp from Q3 to Q4 that occurs. We expect there to be more of a ramp this year than in prior years just because of the full availability of our products at that point in time. As far as EPS and operating cash flow, once again, there are a lot of variabilities, as you know, that go into operating cash flow. And one of them in particular is the pension contributions, and we've said $350 million. It's an area that we look at closely as far as our funded pension status. And just want to leave things open from the perspective of whether we want to have flexibility for maybe additional funding there. But yes, normally, all else being equal, you would – you could have a slightly less, actually operating cash flow because taking off the top, but it's not that significant compared to all the variables that go into determining it.

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

Thank you. And our last question comes from the line of Paul Coster of JPMorgan. Your line is now open.

Yeah. Thank you. It's a two-part question. First of all, you mentioned some successful contracts at the beginning of the prepared remarks, Jeff. Were any of them competitive wins? And unrelated question, but as you move through the remainder of this year, is there anything you can share regarding channel and your own inventory mix? And to what extent you have some visibility into the 4Q ramp owing to a sell into the distributors and resellers? Thank you.

Yeah. So – hi, Paul. Yeah. So certainly, some of those wins were competitive wins, no question about it. And we're putting even more and more of a focus on it, part of the reason in on Managed Document Services that our Q2 to Q3 sequential 180-day new business pipeline, which would all be new, is up 35%. It's these new logo hunters that we're hiring, many from the outside, some just targeting them on the inside. So they're building a competitive pipeline again and because it's a 180-day pipeline, we'll get some benefit from that in Q4 and then certainly some in the first half of next year as well. From an industry standpoint, we've been very – from an inventory standpoint, we've been very stable. That's something we watch very tightly. When Bill talked about working capital improvements and our cash flow, it's part of the rigor with the way we manage our business. And that's even with having – we just made the Global Imaging acquisition, where we actually buildup some inventory for that. When Bill talked about some of our closures of facilities or whatever, some of those could even be manufacturing facilities where we'll actually have a little – we built some inventory for that to manage through that. So even despite all that, we manage it very well and still with pretty significant cash flow improvements.

Great. Thanks, Paul. That's all the time we have for questions today. Thanks for your interest. Jeff, anything to wrap up?

Yes. Thanks very much for all your questions. And as I mentioned last quarter, we are keenly focused on the work ahead of us. We are positioning ourselves to reverse our revenue trajectory trends. We understand the market and our success will come by methodically laying the building blocks to capture growing share of the workplace market and increase our participation in the expanding high-end color market. We continue to make headway on our strategy and we're confident in our ability to meet our full year commitments. We look forward to continuing to update you on our progress, and I thank you all for joining our call.

Ladies and gentlemen, thank you so much for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.