Welcome to the Xerox Holdings Corporation Fourth Quarter 2021 Earnings Release Conference Call. After the presentation, there will be a question-and-answer session. [Operator Instructions] At this time, I would now like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation fourth quarter 2021, earnings release conference call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the express permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor, and 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 for joining our Q4 2021 earnings call. I hope everyone is safe and healthy. Summarizing results for the year, revenue of $7.04 billion grew slightly year-over-year in actual currency, but was down 1.4% in constant currency. Adjusted EPS of $1.51 was $0.10 higher year-over-year. Full year GAAP earnings of minus $2.50 reflects an after-tax noncash goodwill impairment charge of $750 million or $4.08 per share which is largely a reflection of the impact of COVID-19 pandemic has had on our print business. We generated free cash flow of $561 million, $87 million greater than the prior year. Adjusted operating margin of 5.3% was lower year-over-year by 130 basis points due primarily to supply chain related disruption and incremental investment in our new businesses. Our assumption entering the year was that in-office work would normalize following 2020 winter's wave of COVID-19 infections and the global rollout of effective vaccines. However, the Delta and Omicron variants of COVID-19 delayed company's plans to return workers to the office, causing a reduction in expected post sale revenue and profits. In the second half of the year, we experienced an unprecedented level of supply chain disruption, with conditions deteriorating throughout the final two quarters of the year. These disruptions resulted in revenue falling below expectations we laid out at the beginning of the year, with most of the shortfall comprised of high margin, mid range devices, and post sale revenue. Supply chain disruptions also drove an increase to our backlog of equipment and IT hardware to nearly $350 million, which is approximately two and a half times higher than at the end of 2020. I am proud of the progress our team made this year, advancing initiatives that will set Xerox up for long term growth in revenue and profits.…

Thank you, John, and good morning, everyone. As John mentioned, continued disruption to global supply chain on new COVID-19 variants negatively affected our financial result in Q4. Revenue increased sequentially from Q3 but extensive high margin product shortages, shipping delays on the Omicron variant caused Q4 revenue to come in slightly below our expectation. Despite this setback in Q4, demand for our product and services remained strong. As evidenced by our increased backlog of roughly $350 million, which is close to 2.5 times the size of last year fourth quarter backlog. Further, our hybrid workplace and digital solutions are driving new business wins, on page volume were higher in Q4 of this year than any quarter since the beginning of the pandemic. These further broad trends underpin our confidence to invest nearly $400 million in our stock this quarter, while maintaining investment in strategic growth priorities and this trend drive our expectation for revenue growth in 2022. Turning to profitability, as with Q3 higher supply chain cost, less profitable mix of equipment on lower margins on post sales revenue, drove our profitability lower year-over-year. Gross margin declined 330 basis points in the fourth quarter. 240 basis points of this decline is attributable to supply chain cost on capacity restrictions, including higher freight and shipping costs on constrained availability of higher margin A3 devices. 90 basis points of the decline relate to investment to support future growth on lower royalty revenue from Fujifilm business innovation. We continue to expect supply chain disruption to pressure gross margin through at least the first half of 2022. Adjusted operating margin of 4.8% decreased 470 basis points year-over-year, reflecting lower gross profit as explained before, lower government subsidies net of Project Own It savings on cost associated with standing up new businesses. These headwinds were…

Thank you, Xavier. Operator, will you open the lines for questions?

Certainly. [Operator Instructions] Our first question comes from the line of Ananda Baruah from Loop Capital. Your question please?

Hey, good morning guys. Happy New Year. Thanks for all the detail and for taking the questions. Just a couple, if I could. First, on the revenue growth, how are you guys thinking about based on what you see right now, kind of the normalized revenue growth of the business given the back -- given when you net out the current backlog, we're not yet back to office and what you've seen since 2020 given that you're actually looking for revenue growth this year off of sort of big drop down in 2020, but then pretty stable 2020 and 2021, would love to get your thoughts there? And then I have a quick follow-up.

Yes, Hi, Ananda, so good morning. So revenue, you should look at that with two angles. One is equipment and as you have seen it, that mean we suffered in quarter four from, I would say, supply chain disruption, mainly driven by the lack of chips there, but you saw as well that our backlog equipment backlog, which is a strong backlog has increased 31% over quarter three, but also year-over-year, a very significant increase there. So we expect this backlog to resolve or to clear during the second half of the year. With the visibility we have on supply chain we are used to have around $100 million to $150 million of backlog of equipment. We expect -- I will call that half of this backlog to be resolved, the remaining backlog to be resolved in quarter -- in the second half so H2. Then post-sale is everything related to back to the office and employee using our solution and using our equipment there. So good news Ananda, we mentioned this, and we commented here is that in Q4, since the pandemic, the beginning of the pandemic, we have had the highest print volume on our equipment and it was very strong in October, November. And then as we already quoted, strictly related to the variant on the pandemic there, there is a strong correction with the presence in the office and the ability of a user to use our solution. So December was a little bit softer, but we feel encouraged with Omicron now being more behind us and the recovery we start seeing in quarter one, coming from different countries, not only in the U.S., but also in Europe.

And do you think sort of the new business notwithstanding, do you guys think once you get through the backlog, the revenue decline profile of the core business resumes that to being similar to prior the pandemic or do you think it could look different?

Yes, Ananda. Good morning. I would say when you think of the revenue backlog in our print business, what we've done also is invested in the IT services business, which wraps a lot of solutions and digital services around the product and we've seen a lot of good growth come from both those businesses. So our strategy moving forward is one, win market share, which we have in the last few quarters, and continue to win market share in the spaces where we're strong. And then two, continue to wrap our services around security services, IT services, NPS services around our product base, so that we could have sustainable growth going forward.

That's really helpful. I'll leave it there, I know there are a lot of questions. Thanks guys.

Thank you, Ananda.

Thank you, Ananda.

Thank you. Your next question comes from the line of Shannon Cross from Cross Research. Your question please?

Hi, yes. Thank you very much for taking my question. I'm curious, I realized you're not giving EPS guidance, but as we look too early in -- sorry in 2022, how should we think about operating margin trajectory? I know Xavier, you talked about it being up to the full year, I believe, on a year-over-year basis, but clearly, there's going to be pressure early on. So maybe if you can just give us some more color on how you're thinking about linearity during the year that would be helpful?

Yes. So, hi Shannon, good morning. So what we expect from an operating margin is an improvement. As you know, the operating margin is highly driven by the revenue mix, what we faced during 2021, 2020 as well there is less of a mix of post-sales revenue. And as we just commented here, we expect this post-sale revenue to increase, improve next year with hybrid environment and back to the office environment we just described. At the same time, the backlog that we have currently from an equipment point of view, impacts mainly the A3 equipment and our generate A3 equipment attract a higher margin. So if I'm assuming that back to office will improve during the second half of the year plus some of the backlog could be resolved also during the second half of the year, I'm expecting a sequential improvement in quarter three, quarter four of margin here. And we provided during the script or during the -- my explanation, some guidance around also the investment that we are making. We are still sustaining this investment and also increasing the investment in order to support growth, revenue businesses that we are building up currently.

Okay, thank you. And then maybe, John, could you talk a bit about, I think it's $200 million that you're investing in your growth businesses. Can you maybe give some more clarity into where those dollars are going? And then what sort of milestones we should be watching within CareAR, 3D Print, the sensor business, and HVAC? I'm not sure exactly where you have focused most of your investment dollars. Thank you.

So, on Analyst Day, we'll detail that out, that out for you in February, Shannon, but suffice to say that we're doing investments both in R&D and go-to-market and partnerships and standing up these businesses so that they can fly on their own, fly on their own, they don't have just a reliability on us. XFS is an example, where in the past they relied on Xerox and Xerox products alone. And now we've asked and they've started becoming a global payment solution business where they're looking for OEM and third-party partners and that takes investment. So we'll detail all of that per unit, so that you could have the right metrics to do valuation at Analyst Day.

Okay. And then my final question. I think there was an 8-K recently talking about some retention program for a change of control. Can you just give us some ideas to what drove that, and maybe more specifics on the program? Thank you.

Yes. This is -- we're just trying to align with some of our key employees that have been instrumental in standing up these businesses. And we're just trying to align compensation for them, which basically says if at an exit, type of exit, they would be also compensated, but there has to be some type of monetization.

Okay, thank you very much.

Thank you, Shannon.

Thank you. Our next question comes from the line of Erik Woodring from Morgan Stanley. Your question please?

Hi, this is Sabrina Hill [ph] on for Eric Woodring. Thanks for taking the question. I guess first, we're wondering how should we think about the pace of buybacks in 2022 given that dividends should account for nearly 50% of free cash flow in the year and so why not buy back more?

Good morning. So buyback profile so as we generate, we have a $500 million authorization of buyback, as we mentioned it, we spent in 2021, $388 million, so we are left with $112 million. And as we already communicated there, we are using this buyback opportunistically to position the share price where it should be.

Okay, perfect. And then just a follow-up for the $300 million of gross savings in 2022 from Project Own It, how should we think about those being concentrated?

So, back to Project Own It, Project Own It is much broader and I would say cost-cutting type of program there. This is a program which is more systematic, which allow us and you have seen this during the pandemic and even in 2021, us being able to adjust our cost base and ensuring that whatever quarter we have faced, we were able to be EPS on the free cash flow positive. So this is the spirit and the mindset we have. We don't take the year has granted here. We are expecting some recovery to happen during the second half of the year. But you never know, and we have to keep this flexibility. So Project Own It, the $300 million will be distributed across the main cost line of the P&L. It's mainly geared towards cost of goods sold and some impact on the SAG as well there. We will detail during the Investor Day the specific area. But just to illustrate example of what we have, we have currently from internal use, much more robot automation that we never had. I mean we have currently more than 500 robots running millions of transactions and replacing, I would say, manual activity and providing better outcome for customers here. We'll provide more detail, more insight during Investor Day on the Project Own It on how we drive it and manage it.

Great, thank you.

Thank you. Our next question comes from the line of Samik Chatterjee from JPMorgan. Your question please?

Good. Thank you. John, you mentioned as you're planning for 2022 the return to work is more a matter of when and not if. But I guess there's also concerns that an increasing number of professionals will work in a hybrid setup even as people come back to work. So just wanted to understand how you're thinking about aligning both the equipment business as well as the managed print business to increasing number of people working in a hybrid setup and sort of growing the business with the consumers in a hybrid setup as well? And then I have a follow-up.

Yes, so if you think of our digital solutions, we are positioned well in a hybrid environment where print will be done both at the office and at home. But as importantly, workflow solutions of assuring where the information is going from one place to the other, keeping it secure and assuring that it's being printed properly at the right places becomes important. So our solutions like our cloud-based print solution, our security solution helps a lot in a hybrid environment. What we also found Samik, is that as clients return back to the office, even in a hybrid environment, or three days a week or four days a week or two days a week, a lot of the printing is done still in the office. And we see it with a few things, not just our market share that we've gained, but we've also seen it with the backlog that we -- that's been increasing, while we're in an Omicron crises where a lot of the offices are still closed. So we're seeing clients getting set up for the future, and that gives us confidence. Now we've modeled that we said they'll come back to the office and more than likely in the second half, but we're following the guidelines like everybody else, CDC guidelines and all and just watch it, that's how we look at it.

Okay. And just a quick follow-up. I think looking at seasonality, 1Q in on average tends to be about down low teens versus 4Q in terms of revenue if I look at the past few years. I just wanted to think -- see if you can help us think about how to think about the setup for 2022, given that you have a backlog, but you're also talking about constraints and sort of the delayed return to work in the first half itself. So just maybe help us think about how maybe it is typical different -- typical seasonality there?

And then I think you've heard us say this Samik, that in the first quarter we're not seeing much of a supply chain improvement, albeit a little bit in the first quarter and we're modeling that supply chain should start stabilizing in the second half of the year. And again, back to work and with Omicron and all that, we're modeling a second half of the year a return to the office gradually over the next few quarters.

Thank you.

Thank you. Our next question comes from the line of Jim Suva from Citigroup. Your question please?

Thank you. In your prepared comments, you mentioned incremental investment of $200 million. You mentioned that on the Investor Day, you'd give some more details. But I wasn't sure, is that $200 million for Xerox core or for PARC or kind of a combination, and was it kind of always planned or was it just kind of new or communicated to us? Because I'm trying to figure out is it, you're getting closer to go-to-market with more initiatives in Xerox PARC or is it expandable, addressable market or I'm just kind of curious for additional commentary if possible?

Yes, hi Jim. Good morning. So look just to clarify, the $200 million are not incremental. What we have commented here is that we will have $200 million of investment to support the investments that we are making in these new businesses. These new businesses is what we call Innovation, XFS and software businesses. So that are the three businesses that we are currently supporting since the beginning of the year. What we mentioned is that with this $200 million is roughly $70 million above what we were doing last year, so in 2021, which is roughly 50% of the increase. So as you can sense it, this is more insight that we are providing on these businesses. So you can have a view of the investments that we are making and also see how we use some of the cash generated by the print business to invest in the future of the company from a revenue point of view. So this is continuous improvement with an increase in acceleration, and just show as well the maturity of some investment on our intent to drive the revenue growth and monetize this investment there.

Okay, thank you. It's greatly appreciated and look forward to hearing more from you next month.

Thank you, Jim.

Thank you, Jim.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Visentin for any further remarks.

Thank you, Operator. As you heard today, we are confident in our ability to deliver at least $7.1 billion of revenue in actual currency and $400 million of free cash flow in 2022 despite the continued uncertainty. That confidence stems from the strength of our team and a strategy we believe in. We look forward to sharing our three-year outlook and plans for driving long-term growth and results and shareholder value at our Investor Day. We hope to see you all there. Be safe and be well.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.