Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Xerox Investor Handout Xerox Strategy Overview / Quarter 2 2014 Results
Forward-Looking Statements
This presentation contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act
of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as
they relate to us, are intended to identify forward-looking statements. These statements reflect management’s
current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results
to differ materially. These factors include but are not limited to: changes in economic conditions, political
conditions, trade protection measures, licensing requirements and tax matters in the United States and in the
foreign countries in which we do business; changes in foreign currency exchange rates; actions of competitors; our
ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of
operations, including savings from restructuring actions and the relocation of our service delivery centers; the risk
that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; the
risk in the hiring and retention of qualified personnel; the risk that unexpected costs will be incurred; the risk that
subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; our
ability to recover capital investments; the risk that our Services business could be adversely affected if we are
unsuccessful in managing the ramp-up of new contracts; development of new products and services; our ability to
protect our intellectual property rights; our ability to expand equipment placements; the risk that individually
identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a
result of a breach of our security; service interruptions; interest rates, cost of borrowing and access to credit
markets; reliance on third parties, including subcontractors, for manufacturing of products and provision of
services; our ability to drive the expanded use of color in printing and copying; the outcome of litigation and
regulatory proceedings to which we may be a party; and other factors that are set forth in the “Risk Factors”
section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section and other sections of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2014 and our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The Company assumes no obligation to update any forward-looking statements as a result of new information or
future events or developments, except as required by law.
2
Xerox Direction
Annuity 85% of Total Revenue
Services 57% of Total Revenue
• Grow revenue
• Generate profits in line with industry’s best
• Strengthen and differentiate the portfolio
• Support customers and our people
• Allocate capital to enhance shareholder
returns
3
Xerox Value Proposition
Mix to
Services
~2/3rds
of revenue
by 2017
Advantaged
Verticals
>$2B Healthcare
revenue
Margin
Opportunity
Services
Margin
Expansion
Sustainable
Shareholder
Value
>50% FCF return to
shareholders
4
Differentiate and Deliver
5
Differentiate: by investing in
areas of strength and opportunity
• Advantaged verticals
• International
• Innovation
Deliver: best-in-class across the Enterprise
• Improve cost structure and delivery
• Leverage partners where appropriate
IT Outsourcing
Commercial
BPO
Document Technology & Outsourcing
Customer Care
Healthcare
BPO
Government &
Transportation
BPO
Segment Business Models
2014
Revenue Growth Low-single digit
growth
Segment Margin 9.4% - 9.8%
(low-end)
• Broad and diverse BPO portfolio
– Two-thirds of BPO portfolio with margins ≥10%
– Currently experiencing pressure from student loan and
government healthcare businesses
• Long-term contracts with high renewal rates
– Target renewal rate 85 to 90%
• Solid signings trends despite no mega deals
• Relatively modest CAPEX, around 3% of revenue
– ITO and Transportation more capital intensive
Services (~56% of Total Revenue) Document Technology (~41% of Total Revenue)
Decline in B&W high-end ~8%
of Doc Tech Revenue
Migration to Services ~(2)% pts
impact on Tech Revenue
Growth in developing markets 2%
market CAGR ‘12 to ‘16
Offset to digital transition only 2%
of pages are done on digital
high-end printing devices
Moderate macro sensitivity especially on hardware
and unbundled supplies sales
Limited macro sensitivity given largely recurring
revenue and diversity of business
Note: Expect “Other” segment revenue decline of mid-single digits
2014 guidance as communicated during Q2 earnings on July 25, 2014
Portfolio Dynamics Secular Dynamics
2014
Revenue Growth Mid-single digit
decline
Segment Margin Above 9 – 11%
target range
6
2014 Guidance
2014
Revenue Growth @ CC Low-single digit decline
Services Low-single digit growth
Document Technology Mid-single digit decline
Adjusted EPS1 (incl restructuring) $1.09 - $1.13
GAAP EPS $0.92 - $0.96
Cash From Operations $1.8 - $2.0B
CAPEX $ 0.5B
Free Cash Flow $1.3 - $1.5B
Share Repurchase >$700M
Acquisitions <$500M
Dividend ~$300M
2014 guidance as communicated during Q2 earnings on July 25, 2014
Note: Revenue growth guidance excluding potential divestitures
1Adjusted for amortization of intangible assets
Constant Currency (CC), Adjusted EPS and Free Cash Flow: see non-GAAP measures
Revenue
• Document Technology trending as expected
• Services growth anticipated to show low-single
digits growth in second half
Earnings
• Expect FY EPS of $1.09 to $1.13
• Drivers
– Margin upside in Document Technology offsets
Services pressure
– FY Tax Rate of 24% to 26%
– Fewer shares
Cash flow guidance remains $1.8 - $2.0B
7
Services
Diversified Offerings with a Deep Vertical Focus
Health Care
~19% of revenue
$40B Market
8% CAGR
Transportation/
Government ~17% of revenue
$35B Market
4% CAGR
Commercial
~37% of revenue
$420B Market
5% CAGR
Document
Outsourcing ~27% of revenue
$35B Market
6% CAGR
• MMIS
• HIX
• Provider
• Payer
• Pharma
• Analytics
• Tolling and Fare
• Parking
• Photo
enforcement
• EBT/Debit Cards
• Child Support
• IT Services
• Student Loan
• Customer Care
• HR Services
• Financial Services
• C&MS
• ITO
• Student Loan
Market leader,
industry leading
portfolio of
offerings
$2B+ Business,
among largest
players in U.S.
Healthcare
Diverse set of
offerings,
market leader in
several areas
Market leader in
Transportation
and key Gov’t
BPO offerings
• Enterprise Print
Services
• Partner Print
Services
• Next Generation
MPS
Market data based on internal market analysis; CAGR is for years 2012-2016
Percent of revenue represents percent of total Services segment revenue 9
Services – Portfolio Dynamics
Note: The graphic above is a relative representation of the Services lines of business in 2014
1Graphic not to scale for Student Loan revenue which is expected to decline by approximately 40% in 2014
Revenue Growth
Opera
ting M
arg
in %
Document Outsourcing
Commercial ITO
Transportation
Healthcare Payer/Pharma
Gov’t Healthcare
Human Resources
State Gov’t
Customer Care CMS
Retail, Litigation Learning
Healthcare Provider
Financial Services
Federal Gov’t
Student Loan1
Commercial BPO/ITO
Healthcare BPO
Government & Transportation
Document Outsourcing
0%
10
Xerox Services – Five Plank Growth and Profit Strategy
11
Portfolio Management
Improve mix to drive higher growth and margins
Cost Transformation
Margin expansion through cost competitiveness
Operational Excellence
Foundational for leverage and scale, and delivering predictable, high-quality results
Global Growth
Enhanced focus on profitable growth outside the United States
Analytics
Use the power of our big data to extract and transfer value to our customers
$2B+ Healthcare Services Business
• ITO platforms, including Pharma
• Consulting Solutions for EMR and
Financial Systems, including Buck
• Healthcare Analytics for Care and
Quality Learning Management Solutions
Provider (incl ITO &
Consulting)
12
• Medicaid Administration
• Health Insurance Exchanges
• Pharmacy Benefit Management
• Health Information Exchanges
Payer
Govt
Health
• Business Process Outsourcing
• Business Communications Services
• Call Center and Cost Recovery
Solutions
~40%
%
Total
‘14
Growth
‘14
Margin Drivers
40% Above
average
Low, with
improvement
opportunity
New offerings,
contract ramp and
platform roll-out
pressures margin
36% Above
average
In-line with
BPO
average
Strong BPO
platform base, well
positioned to expand
offerings
24% Above
average
Above
average
Higher level of
software and
consulting drive
higher margin
Emerging Opportunity Employer • Private Exchange solutions
Healthcare is a catalyst for Services revenue growth and margin expansion
Healthcare Back-up
13
Healthcare Overview
Market leader in Medicaid – as new platform matures, profitability will improve - well positioned to retain and win new business
• Recently awarded New York
• Texas Medicaid to run-off : ~$40M quarterly revenue at lower margin
Successful in five of six Health Insurance Exchanges - providing services in support of exchanges – well positioned to grow
• Working with Nevada on transition plan onto the Federal Exchange
• Q2 GHS non-cash impairment associated with HIX platform
Market leader in both Payer and Provider - well positioned to help customers adapt to market shifts
• 100% of top 20 managed U.S. healthcare plans are clients
• 1,700 hospitals served globally
• Commercial Healthcare revenue up over 10% with margin over 10% in Q2
Differentiated offering in emerging private exchange market
* Excludes private exchange revenue which is included in Xerox’s Buck consulting results
Services Margin - GHS Impairment Impact
Q2 ‘14
Services Margin excl impairment 9.2%
GHS non-cash impairment (net)1 (0.6)%
Services Margin reported 8.6%
• Two thirds of GHS revenue has operating margin >10%
As a % of
(estimated FY 2014) Revenue Services Xerox Margin
Total Healthcare* $2.3B 19% 11%
Government (GHS) $0.9B 7% 4% Pressured
Commercial (Payer & Provider)
$1.4B 12% 7% >10%
1GHS non-cash impairment (net): see non-GAAP measures
Our Services Align to Healthcare Industry Priorities
14
Shift to Individual Consumer Model
Changing Payment and Risk Model
Increasing Care and Quality
Measurement
Xerox Solutions
• Midas+ analytics platform to measure quality of provider care
• Care Quality Services (CQS) for population management
• Healthcare Consulting covering EHR, ERP, Meaningful Use,
ICD-10, etc.
• Medicaid Management Information System (MMIS) platform to
support increased eligibility
• BPO platforms to support customer enrollments
• Public Healthcare Exchange (HIX) and Private Exchanges BPO
and technology solutions
• Communications services and platforms
• Managed Care payment consulting and performance
measurement
• Recovery services and fraud, waste and abuse analytics
• Provider credit balances
• BPO platforms to reduce operational cost
Xerox Next Generation MPS What We Do Client Value Xerox Capabilities
Automate
and
Simplify Productivity Insight
Workflow Automation
Content Management
Document Analytics
Digital Alternatives
Sustainability Savings
Assess
and
Optimize
Assessment Services and Tools
Xerox ConnectKeyTM
Transition Management
Business Intelligence
Secure
and
Integrate Security Mobility
Security and Compliance
Mobile and Cloud Solutions
Print Server Mgmt. Services
Help Desk Integration
Synergies
BPO
ITO
15
Gartner Magic Quadrant for MPS, Worldwide
16
Document Technology
An Advantaged Strategy
Market leader with new
technology such as
ConnectKey and our Next
Generation MPS offering
Drive innovation with new
Workflow Automation
software solutions that
generate higher value and
margins
Leverage BPO and ITO
synergies and increase
industry vertical capabilities
Continue to Lead in Managed Print Services
Industry leading offerings
such as Xerox Partner
Print Services
Continue to invest in indirect
channels
Provide greater value for
partners
Align coverage and offerings
to developing markets
Capture the SMB Opportunity
Lead Graphic Communications Transformation
Market leader with world
class capabilities in
productivity, digital
workflow and automation
Deliver new growth via inkjet
and next generation
technologies
Realize digital transition with
expanded workflow and
services for GC customers
18
Focus on Profitability and Cash Flow
Printing Market: Focus on Attractive Segments
non-MPS
Production/GC
Total Xerox print markets in slow contraction, down low single digits
CAGR (‘12-‘16) 8% 6% 13% 9%
Office
(non-DO) Total DO
B/W Color
19
2012 Market Size $55B $35B $2B $4B
Market data based on internal analysis
Digitizing Graphic Communications
Lead In Core
Market
Winning
Cut-Sheet
Capture New
Growth
Inkjet-driven
Applications
Enable
Digital
Transition
Workflow &
Services
Superior Customer Intimacy and Value Creation
Effective Operations to Serve Our Customers
We are and will continue to be the preeminent leader in the
graphic communications industry.
20
• Of 50 trillion worldwide Production Print pages, only 2% are digital
• Investment in Inkjet provides access, over time, to 10 trillion or more
of additional eligible pages (eg collaterals, direct mail, signage)
Additional Back-up
Cash Flow Dynamics
Focused on underlying Cash Flow
improvement
- Working Capital
Opportunistic Finance Receivable
(F/R) Sales in ‘12 and ‘13
- Attractive transaction economics
- Supported capital deployment
objectives
2014 guidance does not include
Finance Receivable sales
- Reflects evolving market; less
attractive economics
22
(in billions) 2011 2012 2013 2014 Est.
Operating Cash Flow (OCF) $2.0 $2.6 $2.4 $1.8 - $2.0
Adjustments:
Cash from F/R Sales $(0.6) ~$(0.6) -
Impact from prior F/R Sales - ~$0.3 ~$0.4
Underlying OCF* $2.0 $2.0 $2.1 $2.2 - $2.4
Operating Cash Flow Trend
*Underlying OCF is reported OCF adjusted for the impacts of Finance Receivable sales
$0
$1
$2
$3
2011 2012 2013 2014E
(in b
illio
ns)
OCF Underlying OCF
Capital Allocation
2013
Dividend Acquisitions
Share Repurchase
2014 balanced to deliver shareholder returns while maintaining investment grade leverage
• Dividend: ~$300M, ability to grow modestly in line with share reduction and cash flow
• Acquisitions: up to $500M, focused on Services
• Share Repurchase: at least $700M
• Debt Reduction: ~$200M, pre-funded in Dec ‘13 $200M of the $1.1B May ‘14 note
2014 Plan
Opportunistic
Acquisitions
Share Repurchase
Dividend
2012
$276M $255M
$1.1B
Acquisitions
Dividend
Debt
Reduction
Share
Repurchase
$696M
$272M
$468M
$155M
<$500M
>$700M
~$200M
~$300M
23
~$200M
Debt Reduction
0
100
200
300
400
500
600
2011 2012 2013 2014E
DB Cash Contribution DB Stock Contribution
0
100
200
300
400
2011 2012 2013 2014E
DB Cost DB Settlement Loss Defined Contribution Cost
Pension Expectations
Expense DB Pension Funding
• Shift to defined contribution plans will reduce
burden over time
• 2013 Estimate above 10-K forecast due to higher
Settlement Losses
$494M
• Local law / regulatory requirements
• 2012 U.S. legislation lowers near term requirements
• Low interest rate environment greatly impacted 2011 and 2012
• All major defined benefit (DB) pension plans frozen
~$250M $230M
$363M $363M
~$250M
$350M
$284M $300M
$267M
~$145M
$556M
24
Xerox Performance Based Incentive System (2014)
Short Term Stock Ownership Guidelines
Annual
Cash
Pay-out
25
Long Term – Annual / 3yr Cumulative Targets
Equity performance shares
3 year vesting from grant date
*Constant Currency (CC): see non-GAAP measures
Second-Quarter 2014 Earnings Presentation Ursula Burns
Chairman & CEO
Kathy Mikells
Chief Financial Officer
July 25, 2014
Xerox Direction
Annuity 85% of Total Revenue
Services 57% of Total Revenue
• Grow revenue
• Generate profits in line with industry’s best
• Strengthen and differentiate the portfolio
• Support customers and our people
• Allocate capital to enhance shareholder
returns
27
Second-Quarter Overview
Adjusted EPS1 of 27 cents, GAAP EPS2 of 22 cents Total revenue of $5.3B, down 2% or 2.5% CC1
Services revenue up 2% or 1% CC1; margin of 8.6% • Revenue growth improving, driven by BPO
• Margin increased sequentially excluding government healthcare non-cash impairment
Document Technology revenue down 6% or 7% CC1; margin of 14.4% • Revenue in-line with expectations; challenging compare from prior year ConnectKey launch
• Profit expansion driven by continued operational discipline
Operating margin1 of 9.7%, up 30 bps YOY Cash from operations of $325M in Q2, $611M for first half • Share repurchase of $204M in Q2, $479M for first half
• Acquisitions of $227M in Q2, $281M for first half
1Adjusted EPS, Constant Currency (CC) and Operating Margin: see non-GAAP measures
2GAAP EPS from Continuing Operations 28
Earnings (in millions, except per share data) Q2 2014 B/(W) Comments
Revenue $ 5,292 $ (99) Services up 2%, Document Technology down 6%
Gross Margin 30.8% (0.7) pts
RD&E $ 142 $ 7
SAG $ 972 $ 69
SAG % of Revenue 18.4% 0.9 pts
Adjusted Operating Income1 $ 514 $ 7 Growth in Operating Profit driven by Document
Technology Operating Income % of Revenue 9.7% 0.3 pts
Adjusted Other, net1 $ 112 $ (14) Restructuring $5M higher YOY and O(I)D $9M
higher YOY
Equity Income $ 33 $ (3)
Adjusted Tax Rate1 27.7% (3.6) pts Compares to prior year tax rate of 24.1%
Adjusted Net Income – Xerox1 $ 322 $ (23)
Adjusted EPS1 $ 0.27
Flat
High-end of 25 to 27 cents guidance
Amortization of intangible assets 0.05 (0.01)
GAAP EPS2 $ 0.22
$(0.01)
1Adjusted Operating Income, Adjusted Other, net, Adjusted Tax Rate, Adjusted Net Income – Xerox and Adjusted EPS: see non-GAAP
measures 2GAAP EPS from Continuing Operations 29
Services Segment R
Revenue continues to improve
Margin flat sequentially
• Includes 60 basis point negative impact from non-
cash HIX platform impairment
Five-Plank Strategy benefits ramp second half
Signings
• BPO/ITO renewal rate of 63%, below target due to
TX Medicaid loss
• New business signings2 improved sequentially,
down 4% YOY driven by ITO
• Total signings impacted by fewer renewal decisions
Q2 % B/(W) YOY
(in millions) 2014 Act Cur CC1
Total Revenue $2,992 2% 1%
Segment Profit $257 (15)%
Segment Margin 8.6% (1.6) pts
Segment Margin Trend
Revenue Growth Trend (CC1)
Signings (TCV) Q2
Business Process Outsourcing $2.0
Document Outsourcing $0.7
Information Technology
Outsourcing $0.1
Total $2.8B
YOY Growth (25)%
TTM Growth (14)%
30
1Constant currency (CC): see non-GAAP measures
2New Business Signings = ARR (Annual Recurring Revenue) + NRR (Non-Recurring Revenue)
Note: Historical data updated to reflect Truckload Management Services divestiture and reclassification to Discontinued Operations
9.4% 10.2% 10.0% 9.6%
8.6% 8.6%
5%
7%
9%
11%
Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14
4%
6%
3%
(2)% 0% 1%
(4)%
(2)%
0%
2%
4%
6%
8%
Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14
Document Technology Segment
Segment Margin Trend
Revenue Growth Trend (CC1)
Q2 % B/(W) YOY
(in millions) 2014 Act Cur CC1
Total Revenue $2,125 (6)% (7)%
Segment Profit $306 25%
Segment Margin 14.4% 3.6 pts
Strong segment profit growth and margin
• Driven by significant cost actions, favorable mix,
pension and currency
Revenue and activity impacted by challenging
compare
• Equipment revenue drove the higher Q2 decline,
annuity improved sequentially
• First half revenue down 5%, 6% CC1
Upcoming product launches across the
portfolio benefits second half activity
Entry Installs Q2
A4 Mono MFDs (38)%
A4 Color MFDs (18)%
Color Printers 5%
Mid-Range Installs
Mid-Range B&W MFDs (21)%
Mid-Range Color MFDs (2)%
High-End Installs
High-End B&W (16)%
High-End Color2 (28)%
31
1Constant currency (CC): see non-GAAP measures 2High-end color install growth impacted by high digital front end (DFE) sales to Fuji Xerox, High-end
down 16% in Q2 excluding DFE’s.
(9)%
(5)% (5)% (6)%
(5)%
(7)%
(10)%
(8)%
(6)%
(4)%
(2)%
0%Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14
8.8% 10.8%
12.1% 11.7% 12.2%
14.4%
5%
7%
9%
11%
13%
15%
Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14
Cash Flow
32
(in millions) Q2 2014 H1 2014
Net Income $ 272 $ 558
Depreciation and amortization 376 721
Restructuring and asset impairment charges 38 65
Restructuring payments (36) (72)
Contributions to defined benefit pension plans (68) (105)
Inventories (43) (103)
Accounts receivable and Billed portion of finance receivables1 (44) (163)
Accounts payable and Accrued compensation (96) (88)
Equipment on operating leases (66) (123)
Finance receivables1 39 96
Other (47) (175)
Cash from Operations
$ 325 $ 611
Cash from Investing
$ (326) $ (446)
Cash from Financing $ (561) $ (910)
Change in Cash and Cash Equivalents (560) (757)
Ending Cash and Cash Equivalents $ 1,007 $ 1,007
Cash From Ops $325M
• First half of $611M, up $165M YOY
• Underlying Cash from Ops2 $437M
in Q2, $846M for first half
First half working capital improves
• 2014 more balanced, with continued
progress on improving cash
conversion
CAPEX $123M
Acquisitions $227M
Share Repurchase of $204M and
$73M of Common Stock Dividends
1Accounts receivable includes collections of deferred proceeds from sales of receivables and finance
receivables includes collections on beneficial interest from sales of finance receivables
2See Underlying Cash Flow slide in Appendix
Capital Structure
Core debt level managed to
maintain investment grade
Over half of Xerox debt supports
finance assets
Retired $1.1B May note and
issued $700M in senior notes
• $400M at 2.8% due 2020 and
$300M at 3.8% due 2024
Continue to expect to end 2014
with ~$7.8B of debt
33
Financing and Leverage
• Xerox’s value proposition includes leasing of Xerox equipment
• Maintain 7:1 leverage ratio of debt to equity on these finance assets
Debt and Finance Asset Trend (in millions)
Q2 2014
(in billions) Fin. Assets Debt
Financing $5.0 $ 4.4
Core - $ 3.3
Total Xerox $ 5.0 $ 7.7
0
2,000
4,000
6,000
8,000
2011 2012 2013 Q1 2014 Q2 2014
Finance Debt Core Debt Finance Assets
Capital Allocation Enhances Shareholder Returns
Repurchased $479M shares in
first half
Continue to expect to do at
least $700M FY in share
repurchase
Quarterly common dividend at
6.25 cents per share2 following
April increase
Expect ~$300M in dividend
payments Full Year
34
Share Repurchase Program
Dividend Program
1Ending fully diluted: see non-GAAP measures
2Dividend increase effective for common dividend payable on April 30, 2014
Shares Repurchased ($M)
Shares Outstanding (ending fully diluted1, in millions)
$0.17 $0.17 $0.23
$0.25
$0.10
$0.20
$0.30
2011 2012 2013 2014
Dividend per share (annualized)
1,391
1,271 1,235 1,213 1,200
1,000
1,200
1,400
2011 2012 2013 Q1 2014 Q2 2014
$701
$1,052
$696
H1
FY: >$700
$0
$300
$600
$900
$1,200
2011 2012 2013 2014
Summary
Growing operating profit with strong cash flow
• Document Technology delivering strong profitability and in-line revenue
• Improving Services revenue and margin outside government healthcare
Executing on Services profitability and growth initiatives
• Driving cost efficiencies throughout business and making progress on resolving challenges
in government healthcare
• Improved level of acquisitions
Cash flow supports capital deployment objectives
EPS guidance
• Q3 Adjusted EPS1 $0.25 - $0.27, GAAP EPS2 $0.21 - $0.23
– Includes approximately 2 cents restructuring
• FY Adjusted EPS1 $1.09 - $1.13, GAAP EPS2 $0.92 - $0.96
35
1Guidance - Adjusted EPS: see non-GAAP measures
2GAAP EPS from Continuing Operations
Appendix
Healthcare Back-up
37
Healthcare Overview
Market leader in Medicaid – as new platform matures, profitability will improve - well positioned to retain and win new business
• Recently awarded New York
• Texas Medicaid to run-off : ~$40M quarterly revenue at lower margin
Successful in five of six Health Insurance Exchanges - providing services in support of exchanges – well positioned to grow
• Working with Nevada on transition plan onto the Federal Exchange
• Q2 GHS non-cash impairment associated with HIX platform
Market leader in both Payer and Provider - well positioned to help customers adapt to market shifts
• 100% of top 20 managed U.S. healthcare plans are clients
• 1,700 hospitals served globally
• Commercial Healthcare revenue up over 10% with margin over 10% in Q2
Differentiated offering in emerging private exchange market
* Excludes private exchange revenue which is included in Xerox’s Buck consulting results
Services Margin - GHS Impairment Impact
Q2 ‘14
Services Margin excl impairment 9.2%
GHS non-cash impairment (net)1 (0.6)%
Services Margin reported 8.6%
• Two thirds of GHS revenue has operating margin >10%
As a % of
(estimated FY 2014) Revenue Services Xerox Margin
Total Healthcare* $2.3B 19% 11%
Government (GHS) $0.9B 7% 4% Pressured
Commercial (Payer & Provider)
$1.4B 12% 7% >10%
1GHS non-cash impairment (net): see non-GAAP measures
2014 Guidance
2014
Revenue Growth @ CC Low-single digit decline
Services Low-single digit growth
Document Technology Mid-single digit decline
Adjusted EPS1 (incl restructuring) $1.09 - $1.13
GAAP EPS $0.92 - $0.96
Cash From Operations $1.8 - $2.0B
CAPEX $ 0.5B
Free Cash Flow $1.3 - $1.5B
Share Repurchase >$700M
Acquisitions <$500M
Dividend ~$300M
Note: Revenue growth guidance excluding potential divestitures
1Adjusted for amortization of intangible assets
Constant Currency (CC), Adjusted EPS and Free Cash Flow: see non-GAAP measures
Revenue
• Document Technology trending as expected
• Services growth anticipated to show low-single
digits growth in second half
Earnings
• Expect FY EPS of $1.09 to $1.13
• Drivers
– Margin upside in Document Technology offsets
Services pressure
– FY Tax Rate of 24% to 26%
– Fewer shares
Cash flow guidance remains $1.8 - $2.0B
38
Revenue Trend
(in millions) FY Q1 Q2 Q3 Q4 FY Q1 Q2 YTD
Total Revenue $21,693 $5,192 $5,391 $5,250 $5,557 $21,390 $5,110 $5,292 $10,402
Growth (1)% (2)% 1% Flat (3)% (1)% (2)% (2)% (2)%
CC1 Growth Flat (2)% 1% (1)% (4)% (2)% (2)% (3)% (2)%
Annuity $18,217 $ 4,468 $4,536 $4,439 $4,588 $18,031 $4,395 $4,511 $8,906
Growth 1% (1)% 1% Flat (3)% (1)% (2)% (1)% (1)%
CC1 Growth 2% (1)% 1% (1)% (3)% (1)% (2)% (1)% (2)%
Annuity % Revenue
84% 86% 84% 85% 83% 84% 86% 85% 86%
Equipment $3,476 $724 $855 $811 $969 $3,359 $715 $781 $1,496
Growth (10)% (11)% 1% 1% (4)% (3)% (1)% (9)% (5)%
CC1 Growth (8)% (11)% 1% Flat (5)% (4)% (2)% (9)% (6)%
2013 2012
39 1Constant currency: see non-GAAP measures
2014
Note: 2012, 2013 and Q1 2014 Services revenue are revised to remove the Truckload Management Services (TMS) business revenues
that were reclassified to discontinued operations
Segment Revenue Trend
(in millions) FY Q1 Q2 Q3 Q4 FY Q1 Q2 YTD
Services $11,484 $2,909 $2,946 $2,932 $3,027 $11,814 $2,912 $2,992 $5,904
Growth 6% 4% 5% 3% (1)% 3% Flat 2% 1%
CC1 Growth 7% 4% 6% 3% (2)% 3% Flat 1% 0%
Document Technology $9,462 $2,135 $2,263 $2,159 $2,351 $8,908 $2,045 $2,125 $4,170
Growth (8)% (9)% (5)% (4)% (6)% (6)% (4)% (6)% (5)%
CC1 Growth (6)% (9)% (5)% (5)% (6)% (6)% (5)% (7)% (6)%
Other $747 $148 $182 $159 $179 $668 $153 $175 $328
Growth (7)% (14)% (5)% (6)% (16)% (11)% 3% (4)% (1)%
CC1 Growth (6)% (14)% (5)% (8)% (17)% (11)% 3% (4)% (1)%
2013 2012
40
2014
1Constant currency: see non-GAAP measures
Note: 2012, 2013 and Q1 2014 Services revenue are revised to remove the Truckload Management Services (TMS) business revenues
that were reclassified to discontinued operations
Metrics Reference
Entry Installs H1
A4 Mono MFDs (23)%
A4 Color MFDs (1)%
Color Printers 3%
Mid-Range Installs
Mid-Range B&W MFDs (18)%
Mid-Range Color MFDs 2%
High-End Installs
High-End B&W (15)%
High-End Color1 (7)%
H1
Business Process Outsourcing $4.1
Document Outsourcing $1.3
Information Technology Outsourcing $0.3
Total $5.7B
Signings Growth YOY (22)%
Signings Growth TTM (14)%
H1
Digital MIF 2%
Color MIF 13%
Digital Pages (3)%
Color Pages 6%
Color Revenue (CC2) (1)%
H1
Renewal Rate (BPO and ITO) 74%
Signings and Renewal Rate Install, MIF and Page Growth
Installs, color revenue, pages and MIF include both the Document Technology and Services segments. Color revenue and color pages reflect
revenue and pages from color capable devices. 1High-end color install growth impacted by high digital front end (DFE) sales to Fuji Xerox, High-end up 7% YTD excluding DFE’s. 41 2Constant currency: see non-GAAP measures
Underlying Cash Flow
42
1Represents cash that would have been collected if we had not sold finance receivables. Net of collections on beneficial interest.
2Underlying OCF is reported OCF adjusted for the impacts of Finance Receivable sales: see non-GAAP measures
Estimated
(in millions) Q1 2014 Q2 2014 FY 2014 Q1 2013 Q2 2013 FY 2013
Operating Cash Flow (OCF) $286 $325 $611 $1.8 - $2.0B ($87) $533 $446 $2.4B
Adjustments:
Cash From F/R Sales - - - - - - - $(0.6)B
Impact from prior F/R Sales1 $123 $112 $235 $0.4B $89 $58 $147 $0.3B
Underlying OCF2$409 $437 $846 $2.2 - $2.4B $2 $591 $593 $2.1B
June YTD
2014
June YTD
2013
Discontinued Operations Summary
43
Note: 2013 Discontinued Operations includes the results related to our North American and
European Paper businesses which we sold in 2013. In addition, 2013 and 2014 Discontinued
Operations includes the results related to our Truckload Management Services business which
we sold in Q2 of 2014.
(in millions) 2014 2013 2014 2013
Revenues 7$ 144$ 17$ 308$
Income from operations -$ 2$ -$ 7$
Loss on disposal (2) (23) - (23)
Net loss before income taxes (2) (21) - (16)
Income tax expense 2 2 2 4
Loss from discontinued operations,
net of tax (4)$ (23)$ (2)$ (20)$
Diluted earnings per share from
discontinued operations -$ (0.02)$ -$ (0.02)$
Total diluted earnings per share,
inclusive of discontinued operations 0.22$ 0.21$ 0.45$ 0.44$
Three Months Ended Six Months Ended
June 30, June 30,
Discontinued Operations Restatement Summary
44
2013 2014
(in millions) Q1 Q2 Q3 Q4 FY Q1
Services Segment Revenue 2,909$ 2,946$ 2,932$ 3,027$ 11,814$ 2,912$
Total Performance Revenue 5,192$ 5,391$ 5,250$ 5,557$ 21,390$ 5,110$
Services Segment Profit 272$ 301$ 292$ 290$ 1,155$ 250$
Total Segment Profit 389$ 484$ 498$ 528$ 1,899$ 449$
Services Segment Margin 9.4% 10.2% 10.0% 9.6% 9.8% 8.6%
Total Segment Margin 7.5% 9.0% 9.5% 9.5% 8.9% 8.8%
Detailed above is the restatement for Services Segment and Total Segment results by quarter for 2014 and 2013
related to the sale of our Truckload Management Services (TMS) business in May 2014. The entire restated
income statement for these periods can be found in the financial model included on our website at
http://news.xerox.com/investors/materials.
Non-GAAP Measures
46
“Adjusted Earnings Measures”: To better understand the trends in our business, we believe it is necessary to adjust the following
amounts determined in accordance with GAAP to exclude the effects of certain items as well as their related income tax effects.
• Net income and Earnings per share (“EPS”)
• Effective tax rate
In 2014 and 2013, we adjusted for the amortization of intangible assets. The amortization of intangible assets is driven by our acquisition
activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period.
Accordingly, due to the incomparability of acquisition activity among companies and from period to period, we believe exclusion of the
amortization associated with intangible assets acquired through our acquisitions allows investors to better compare and understand our
results. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future
period revenues as well. Amortization of intangible assets will recur in future periods.
We also calculate and utilize an Operating income and margin earnings measure by adjusting our pre-tax income and margin amounts to
exclude certain items. In addition to the amortization of intangible assets, operating income and margin also exclude Other expenses, net
as well as Restructuring and asset impairment charges. Other expenses, net is primarily comprised of non-financing interest expense and
also includes certain other non-operating costs and expenses. Restructuring and asset impairment charges consist of costs primarily
related to severance and benefits for employees pursuant to formal restructuring and workforce reduction plans. Such charges are
expected to yield future benefits and savings with respect to our operational performance. We exclude these amounts in order to evaluate
our current and past operating performance and to better understand the expected future trends in our business.
“Constant Currency”: To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact
of changes in the translation of foreign currencies into U.S. dollars. We refer to this adjusted revenue as “constant currency.” Currencies
for developing market countries (Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern Europe) that we operate in are
reported at actual exchange rates for both actual and constant revenue growth rates because (1) these countries historically have had
volatile currency and inflationary environments and (2) our subsidiaries in these countries have historically taken pricing actions to mitigate
the impact of inflation and devaluation. Management believes the constant currency measure provides investors an additional perspective
on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth
rates.
Non-GAAP Financial Measures
47
“Services Margin excluding impairment”: In the second quarter 2014, we present the Services segment margin excluding the negative
impact from the non-cash HIX platform impairment charge of 0.6%. The non-cash HIX platform impairment charge was a significant
discrete and unusual charge in the second quarter 2014 that was primarily related to a HIX contract cancellation in Nevada. We believe
exclusion of this item allows investors to better understand and analyze the Services segment results for the period as compared to prior
periods as well as the expected trends in this segment. A reconciliation of this non-GAAP financial measure and the most directly
comparable measure calculated and presented in accordance with GAAP is set forth in the slide entitled “Healthcare Back-up”.
“Free Cash Flow”: To better understand the trends in our business, we believe that it is helpful to adjust cash flows from operations to
exclude amounts for capital expenditures including internal use software. Management believes this measure gives investors an additional
perspective on cash flow from operating activities in excess of amounts required for reinvestment. It provides a measure of our ability to
fund acquisitions, dividends and share repurchase. It also is used to measure our yield on market capitalization. A reconciliation of this
non-GAAP financial measure and the most directly comparable measure calculated and presented in accordance with GAAP is set forth in
the slide entitled “2014 Guidance”.
“Underlying Cash Flow”: To better understand the trends in our business, we believe that it is helpful to adjust cash flows from
operations for the cash flow impacts from our sales of finance receivables. The sale of finance receivables has a significant impact on
operating cash flows in the period of sale as well as in subsequent periods due to the amounts sold as well as the long term nature of
these receivables. In addition to providing a better understanding of the underlying trends in cash flows from operations, management
believes this measure gives investors an additional perspective on comparing and analyzing the year-over-year changes in our cash flows
as well as the impacts of these sales on cash flows in the period. A reconciliation of this non-GAAP financial measure and the most directly
comparable measure calculated and presented in accordance with GAAP is set forth in the slide entitled “Underlying Cash Flows”.
Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results
against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not
as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant
to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our
consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP
financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP
measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our
executives is based in part on the performance of our business based on these non-GAAP measures.
Unless otherwise noted, reconciliations of these non-GAAP financial measures and the most directly comparable measures calculated and
presented in accordance with GAAP are set forth on the following slides.
Non-GAAP Financial Measures
48
Q2 GAAP EPS to Adjusted EPS Track
(in millions; except per share amounts) Net Income EPS Net Income EPS
Reported(1)270$ 0.22$ 294$ 0.23$
Adjustments:
Amortization of intangible assets 52 0.05 51 0.04
Adjusted 322$ 0.27$ 345$ 0.27$
Weighted average shares for adjusted EPS(2)1,208 1,287
Fully diluted shares at end of period(3)1,200
__________
(1) Net Income and EPS from continuing operations attributable to Xerox.
(2) Average shares for the calculation of adjusted EPS include 27 million of shares associated with the Series A
convertib le preferred stock and therefore the related quarterly dividend was excluded.
(3) Represents common shares outstanding at June 30, 2014 as well as shares associated with our Series A
convertib le preferred stock plus dilutive potential common shares as used for the calculation of diluted earnings per
share in the second quarter 2014.
Three Months Ended Three Months Ended
June 30, 2014 June 30, 2013
49
GAAP EPS to Adjusted EPS Guidance Track
Q3 2014 FY 2014
GAAP EPS from Continuing Operations $0.21 - $0.23 $0.92 - $0.96
Adjustments:
Amortization of intangible assets 0.04 0.17
Adjusted EPS $0.25 - $0.27 $1.09 - $1.13
Note: GAAP and Adjusted EPS guidance includes anticipated restructuring
Earnings Per Share Guidance
50
Q2 Adjusted Operating Income/Margin
(in millions) Profit Revenue Margin Profit Revenue Margin
Reported pre-tax income(1) 324$ 5,292$ 6.1% 332$ 5,391$ 6.2%
Adjustments:
Amortization of intangible assets 84 83
Xerox restructuring charge 38 33
Other expenses, net 68 59
Adjusted Operating 514$ 5,292$ 9.7% 507$ 5,391$ 9.4%
_______________
(1) Profit and Revenue from continuing operations attributable to Xerox.
June 30, 2014 June 30, 2013
Three Months Ended Three Months Ended
51
Q2 Adjusted Other, net
Three Months Ended Three Months Ended
(in millions) June 30, 2014 June 30, 2013
Other expenses, net - Reported 68$ 59$
Adjustments:
Xerox restructuring charge 38 33
Net income attributable to noncontrolling interests 6 6
Other expenses, net - Adjusted 112$ 98$
52
Q2 Adjusted Effective Tax Rate
(in millions)
Pre-Tax
Income
Income
Tax
Expense
Effective
Tax
Rate
Pre-Tax
Income
Income
Tax
Expense
Effective
Tax
Rate
Reported(1) 324$ 81$ 25.0% 332$ 68$ 20.5%
Adjustments:
Amortization of intangible assets 84 32 83 32
Adjusted 408$ 113$ 27.7% 415$ 100$ 24.1%
__________
Three Months Ended Three Months Ended
June 30, 2014 June 30, 2013
(1) Pre-Tax Income and Income Tax Expense from continuing operations attributable to Xerox.
53
Q2 Services Revenue Breakdown
Note: 2013 Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO) revenues have
been revised to conform to the 2014 presentation of revenues.
(in millions) 2014 2013 % Change
Business Processing Outsourcing 1,791$ 1,773$ 1%
Document Outsourcing 860 832 3%
Information Technology Outsourcing 389 385 1%
Less: Intra-Segment Eliminations (48) (44) 9%
Total Revenue - Services 2,992$ 2,946$ 2%
Three Months Ended June 30,