DOTC Impressions of Xerox Q2 2023 Results: Growth; Upbeat Outlook for the Year

Any improvement is a good thing - as long as the vehicle includes servicing the New Way of Work and is on a path to a world without paper.

Highlights of the Earnings Call:

1. Xerox showed resilience in Q2 2023, with equipment sales revenue increasing by 14.8% year-over-year to $420 million due to stable demand and improved product availability.
2. Xerox anticipates an increase in adjusted operating income margin from a range of 5.0% to 5.5% to a range of 5.5% to 6.0% in 2023, reflecting operational efficiencies and a favorable revenue mix. Free cash flow is also expected to increase from at least $500 million to $600 million.
3. Xerox completed the donation of its Palo Alto Research Center (PARC) to Stanford Research Institute International (SRI), focusing more on its core businesses. The move resulted in a net pre-tax charge of $132 million, offset by a net income tax benefit of $40 million, resulting in a net after-tax loss on the donation of $92 million.

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In a display of resilience amidst challenging economic circumstances, Xerox Holdings Corporation has posted encouraging second-quarter results for 2023. As revealed in their recent financial statements, their performance shows modest growth in revenue, profit, and cash flow due to resilient demand and balanced execution.

Notable is the 14.8% year-over-year increase in equipment sales revenue, which rose to $420 million in the second quarter. This robust rise is attributed to stable demand, improved product availability, particularly in the Americas, and a higher margin on A3 devices. Xerox's focus on products and services addressing the productivity challenges of hybrid workplaces underpins this steady growth.

However, the company saw a slight decline in post-sale revenue, which dropped by 3.4% to $1.3 billion due to lower IT hardware and paper sales, lower finance income, and the cessation of Fuji royalties. These losses were partly offset by gains and commissions on sales of finance receivables.

Xerox reported a pre-tax loss increase driven by a $132 million net pre-tax charge related to the donation of their Palo Alto Research Center (PARC). Notwithstanding, adjusted operating income, excluding the PARC donation, increased due to cost reduction actions, supply chain-related cost improvements, and higher revenues. Xerox maintains expectations for gross operating cost efficiencies in the low to mid-single digits for the year.

In the outlook for 2023, Xerox anticipates its total revenue to be flat to low single digits down in constant currency. Encouragingly, the adjusted operating income margin is expected to increase from a range of 5.0% to 5.5%, to 5.5% to 6.0%, spurred by stronger-than-expected realization of operating efficiencies and favorable revenue mix. This optimism extends to free cash flow, which is projected to increase from at least $500 million to $600 million due to expected improvements in operating income and incremental sales of finance receivables.

Significant changes have also been made in Xerox's segment reporting following a strategic shift in their funding approach for FITTLE's (Xerox equipment financing business) growth through finance receivables funding agreements. This recasting has transferred the management and oversight of the equipment on operating leases from the FITTLE segment to the Print and Other segment. It has also recast shared expenses, commissions, and other payments to better reflect FITTLE's operations in line with this strategic change.

Of notable mention is Xerox's recent donation of its Palo Alto Research Center (PARC) to Stanford Research Institute International (SRI). This move allows Xerox to concentrate on its core business and growth through its business technology solutions for customers in Print, Digital Services, and IT Services. The donation resulted in a net pre-tax charge of $132 million in the second quarter, including allocated Goodwill of $115 million. However, a net income tax benefit of $40 million relating to the donation has mitigated the after-tax loss to $92 million.

The upward trend in Xerox's Q2 2023 results, despite some challenges, demonstrates the company's resilience and adaptability. With the strategic repositioning of their operations and a focus on the productivity needs of hybrid workplaces, Xerox's financial future looks promising. This momentum is expected to carry the company forward in the coming year as they further optimize their operations and revenue streams.