Good morning, and welcome to the Xerox Corporation Third Quarter 2018 Earnings Release Conference Call, hosted by John Visentin, Vice Chairman of the Board and 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. [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 Mr. Visentin. Mr. Visentin, you may begin.

Good morning and thank you all for joining us for our third quarter 2018 earnings call. We are progressing on our priorities to optimize our operations for greater simplicity and reenergize our innovation engine while focusing on cash flow to drive increasing shareholder returns. In the quarter, we delivered operating margin expansion of 100 basis points year-over-year and a strong cash flow that is enabling us to raise our full year cash flow expectation for 2018. Work remains on all fronts. However, clearly our priority to drive revenue requires the most effort. We were disappointed in the revenue in Q3. We have an action plan to improve revenues that include, among other things, simplifying the organizational structure, improving alignment of compensation and evaluating contracts that are not profitable. We will go through each of the priorities in more detail. But I will start with a closer look at our results. Revenue in the quarter was down 4.7% at constant currency with equipment revenue performing better, down 2.7% while post sales declined 5.2%. Both A4 and A3 equipment revenue grew at a constant currency, up 9% and 1%, respectively, showing the continued momentum from our ConnectKey products. While high-end declined 5%, we did improve from Q2 and we saw good market demand for our new Iridesse printing press. Iridesse hits a sweet spot within the high-end market enabling both better productivity with a single pass technology and differentiation with gold, silver, white and clear dry ink capabilities. Wholesale will take time to improve. We need to build back our machines in field after ceding share from multiple quarters leading up to the ConnectKey launch and penetrate further offerings into our customer base. Operating margin of 13.1% in the quarter increased sequentially 120 basis points and 100 basis points year-over-year driven in…

Thanks, John. Let me start with a review of the income statement. Overall, we were pleased with the performance within the cost and expense lines, especially G&A that resulted in operating margin expansion despite revenue headwinds and delivered adjusted earnings per share of $0.85. Revenue, as John highlighted, clearly remains a challenge. Overall, revenue declined 4.7% at constant currency while actual currency was down 5.8%. Currently went from being a benefit of about 2 points last quarter to now a headwind of approximately a point. Within revenue, we had growth in workplace A3 and A4 equipment and overall equipment revenue would have grown 1.7% at constant currency if it had not been for the impact of lower OEM sales. Post sale, however, continues to be pressured. Specifically, we saw weaker supply sales as well as a slowdown in managed print services post sale. I’ll spend more time on these dynamics when I cover the revenue slide. However, as noted last quarter, to stabilize revenue we need our market share and placement growth to recover over multiple quarters to drive increases in machines in field and page volumes to help improve trends in post sale. Turning to profitability. Adjusted operating margin of 13.1% improved 100 basis points year-over-year. The improvement came from a 40 basis point improvement in our SG&A ratio driven by actions to reduce spans and layers and gain greater efficiency in our operations. Gross margin of 40.1% was flat year-over-year, a good result as the impact of higher revenue declines was offset by benefits from productivity initiatives including greater price discipline and controls. From a stream perspective, we saw positive mix within equipment from lower OEM sales where we lose money on the upfront sale, while within post sale mix was a negative factor given the higher declines…

As I have said to our employees, we own our destiny. We have everything we need today to improve our performance. Our leadership is engaged and working with speed to transform our business. We have a lot more work to do but I am pleased with the early progress we are making. We will now open up the line for questions. Jennifer?

Thanks, John. Before we get to the Q&A with John and Bill, I will point out that we have posted on our Xerox Investor Relations Web site a full set of earnings materials to provide you with an overview of our third quarter earnings. During Q&A, I would ask participants to limit follow-on and multipart questions. Operator, please open the line for questions now.

Thank you. [Operator Instructions]. Our first question comes from the line of Paul Coster of JPMorgan. Your line is now open.

Yes, thanks for taking my question. John, you outlined a lot of initiatives that may turn the company towards growth. Can you give us some sense of what the easiest and shortest timeline initiatives might be so that we can kind of get some sense of what to look out for in the next few quarters perhaps?

Yes. Good morning, Paul. Project Own It, as we had said earlier, it focuses on simplifying the business driving end-to-end transformation of our systems and processes. And really what the greater focus is, is on speed, accountability and effectiveness. And we’re looking forward to take you through all of what Project Own It in early February when we do our Analyst Day.

Okay. So we need to be a bit patient I suppose. The other thing I observed is that you’re just doing an awful lot whether it’s on the expense side, the balance sheet side, the growth initiatives and internal organizational transformation. Can you talk to us about the risk mitigation here when you’re doing so many things at once?

I would say the experience of our key hires is instrumental in driving this change. We have a key executive with extensive background in technology transformation and service delivery, supply chain and logistics, shared services. And Paul while it seems like it’s a lot, we’re siloing it and ensuring that we have the right expertise and focus on it.

Thanks, Paul.

Thank you.

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

Thank you very much. I have a question on revenue and then one on Fuji Xerox. Can you talk a little bit about – on the revenue side there were a couple of comments; one, evaluating contracts that aren’t profitable. I’m curious if those are in the MDS business or where that sort of fits and if it’s something that’s going to be kind of a longer-term pressure on top line? And then I’m just curious within your shrinking – like in terms of the pressure in post sale, is that just a factor of your shrinking installed base or are you finding that customers are actually printing less on a like-for-like basis? And then I have a question on Fuji Xerox.

All right. Thanks, Shannon. So from – evaluating from a profitability perspective, we’ve always done that as a company. I would say that in recent months there’s clearly a lot more scrutiny. We’re looking for strong margins throughout the life of longer term, four, five-year MDS arrangement and just making sure that from the get-go, the initial year and over the life of the contract that there’s appropriate amount of margin in those contracts. To say have we lost any specific contracts because of that or not, that’s really hard to tell because there is clearly an emphasis on making sure that all the arrangements that we’re entering into are profitable not only the initial year but over the life of the arrangements. As far as the post sale and the shrinking install base, I’d first like to say that the new product launch that we did last year is having an impact to offset to get back the machines in field that we had lost in anticipation of that product launch. We’re not fully back to where we were say the beginning of machines in field in the beginning of 2017 but we certainly have made progress with our ESR in recent quarters. There is also an impact from page volume declines, a smaller impact but the big thing for us is to get those machines in field continue with the strong ESR we’ve seen in recent quarters.

Okay. And then I don’t know, John, can you talk a bit about the relationship with Fuji Xerox right now and any thoughts on litigation strategy given the recent appellate court decision?

Like I said in the past, first and foremost we’re focused on doing what’s right for Xerox. But we’ve had continued communications with Fuji and with them as JV partner. In fact they were here recently for discussions on how as a prospective they can provide and earn our business. We have regular Fuji board meetings which we have representation. As for the appeals court favor, like we don’t believe it means very much for Xerox because Xerox terminated that transaction for reasons unrelated to the injunctions.

Thanks, Shannon. Operator, next question.

Thank you. Our next question comes from the line of Katy Huberty of Morgan Stanley. Your line is now open.

Thank you. Good morning. Why do you think renewal rates are tracking so far below your target? And then a follow on is when do you think or do you have line of sight into signings growing again?

Yes. Hi, Katy, it’s Bill. So a couple of things. So you’re right. Renewal rates during Q3 were at 79%, still below our 85% to 90% target, an improvement from the 75% in Q2 but clearly not where we want to be. Part of that factoring into that is looking at just the profitability of all the contracts and making sure as I was responding to Shannon’s comment that we’re getting strong margin not just over the total life but also in the initial year. From a new business signings perspective, we were actually up 15% during the quarter. So overall signings we’re down about 2.8% but new business signings we’re a good story and it’s clearly an area of focus for us.

Thank you.

Thanks, Katy. Operator, next question.

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

Thank you very much. And continuing the focus a little bit on the renewal rate, does any of it have to do with all the sales force realignment and a little bit of dislocation in the marketplace because you have new ConnectKey products out there that one would think would actually be helping your renewal rates?

Yes, really from a sales force realignment change, we do believe we are putting programs in place that are more appropriately incentivizing our sales people as part of our overall Project Own It to make sure that people are being compensated on the right metrics, not just the total value in dollars but the margin and profit on the contracts. So I guess high level, we don’t think it’s having much of an impact. It’s more of us just making sure that we’re putting in the right effort and making sure that we’re getting the right profitability on the contract.

Yes, what I’d add, Jim, is that we’re also looking at investing more in independent channels. And as we’re transitioning we’re implementing a safe passage process which allows us to measure performance before and after transition. So this is key because any transition to quickly recognize the variation so that we can be able to improve SF. So as we’re making the changes, we have a whole process in place to assure that it goes smoothly.

And then as a quick follow up, you mentioned on your prepared comments managed print services saw some challenges. What’s going on there and are those longer-term challenges or just something behind us now?

Yes, specific of the managed print services I was really talking to contracted revenues both from a rate fixed services and managed print services or outsourcing. And really the declines were a little bit about a point worse than we’ve seen in recent periods and that’s partially reflective of lower signings or renewals in recent periods, but nothing significant.

Thank you so much for the details.

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

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

Hi. Good morning, guys. I appreciate you guys taking the question. Just two for me if I could. The first is, Bill, with regards to kind of moving parts on cash flow as we think about going into '19 and not looking for a guide but just what you guys see as the thing that could be the bigger influences on the cash flow from the guide that you are at right now? And then I have follow-up. Thanks.

Thanks, Ananda. Cash flow is clearly a very good story for us. Xerox historically has been a strong cash flow producer and we continue to expect that to be the case. From a specifically – rational reasons for why we are upping to the higher part of our range from an OCF perspective and free cash flow perspective, first of all as you saw during the quarter better cost controls, better margins we have in place and more increased focus not that we weren’t before but there was really an increased focus on working capital and we saw improvements there when you compare the third quarter this quarter to the working capital impact in the third quarter last year. And then lastly as I mentioned in my prepared remarks, from a CapEx perspective we’re not a very CapEx intensive company but a lot of it would be in the IT spend area. And we’d originally projected this year around $150 million and we’re just being more careful, in particular make sure that we’re spending those dollars in the right area where we’ll get a payback on them. And right now we’re estimating that we’ll be about $50 million less or about $100 million for the year in CapEx.

And do you anticipate opportunity for improvement in those areas going forward as well? It seems like you’re at the beginning stages of your initiatives there.

I don’t want to comment too much on '19 yet, but this is – suffice it to say that we believe the cash flow is a strength and will continue to be a strength for the company.

Got it. And then just my follow up is just with regard to the comments around revenue and John you mentioned that – you sounded like you were somewhat disappointed with the revenue. Question is to what degree do you think sort of just the public dynamics of the last 12 months may have had – could be having an impact on the go-to-market such that the settling down could reduce the impact and there just maybe some natural reversion back to friction reduction there. I appreciate all the initiatives you’re taking but just sort of natural friction reduction from last 12 months getting slightly improved, get back to normal like that.

Ananda, I wouldn’t – what I’ve told the team – so kind of what I’ve told my team is we’re not going to use excuses of what’s happened in the past 12 months, past six months. We’re back to work. So when we think of revenue, we have a comprehensive plan to improve revenue. It’s not easy. It’s going to take time. But we have the foundation. We have leading positions in key market segments. We have strong innovation capability and we have deep customer relationships. So that’s really – and as part of our Project Own It, we’re going to start by building a more simplified, agile structure which will include better aligning sales, account metrics, global sales enablement tools and I can go on and on. But I would say that’s behind us. And one thing we do here is communicate, communicate, communicate with our teams. In fact, tomorrow I’ll be talking to all 35,000 employees again and taking them through what we’re doing. So we’re off to the races here.

Okay, got it. Very helpful. Thanks, guys.

Thanks, Ananda. That’s all the time we have for questions today. We appreciate the interest from everyone. John, back to you for some closing remarks.

Yes. First of all, thank you for all of you to be on the call. Look, we have work to do. And as I said last quarter, we’re going to focus on the four core priorities. We’re going to drive revenue, we’re going to optimize our operations with simplicity which is key to delivering value to our clients, we’re going to reenergize our innovation engine and we’re going to focus on cash and increasing capital returns. We’ve taken the necessary first steps to layout the objectives that will be the foundation for creating value for all our stakeholders. And with the teams that we have in place, I’m fully confident that we will build on our third quarter momentum and be successful. We look forward to presenting our full long-term strategy in detail at our Analyst Day in early February. Thank you all for joining the call.

Thanks, John. That concludes our call.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.