A growth in services revenue for Xerox’s first fiscal quarter 2022 proved to be a bright spot in an otherwise down quarter for the print and digital services provider as supply chain issues hurt product sales.
However, a large backlog in shipments, as well as increased print volume as employees started stepping back from working at home to return to the office as the pandemic subsides, is providing some optimism for the future.
Norwalk, Conn.-based Xerox Thursday also used its first fiscal quarter 2022 financial analyst conference call to update analysts on its position in regard to Russia’s war in Ukraine.
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John Visentin, vice chairman and CEO of Xerox, started his prepared remarks acknowledging what he called the “humanitarian tragedy taking place in Ukraine.”
“Our thoughts are with all those who have been affected,” Visentin said. “As the situation began to unfold in late February, we took swift and decisive actions to ensure the safety and security of our people. We suspended all but emergency support operations in Ukraine, and provided emergency cash grants to the Ukrainian employees through our Employee Relief Fund. Shipments to Russia were halted as soon as the conflict started. We continue to evaluate the situation in this region, and we’ll adapt our response, hoping for the restoration of peace as soon as possible.”
Only a small, single-digit percentage of Xerox’s revenue is exposed to the Eurasian region, Visentin said.
Xerox also faced a challenging operating environment in its first fiscal quarter and expects that to be the same in the second quarter, Visentin said. He cited the resurgence of COVID-19 in the form of the Omicron variant for causing some customers in large markets to close, as well as supply chain disruptions caused by COVID-related factory closures in parts of Asia.
“Inflationary pressure is building across our cost base, including cost of goods sold, labor and logistics,” he said. “At this point, we continue to expect supply chain conditions to ease beginning in the second half of the year, albeit at a slower pace than originally anticipated.”
However, as people return to the office, Xerox is seeing increased page printing volumes, with March being one of the highest months for post-sale revenue since the pandemic began, Visentin said.
“The continued correlation between in-office work and print activity, and strong demand for equipment and consumables, confirms that employees are using our equipment and services when they return to the office,” he said. “Third-party data points to momentum and increasing office attendance, and we continue to expect a gradual return of workers to the office in Q2, with momentum building in the second half of the year barring another variant outbreak.”
While Xerox knew going into the quarter that supply chain constraints would weigh on margins, the company was surprised by the magnitude and intensity of inflationary pressure across its cost base and its supply chain costs, Visentin said.
“We expect the margin dilutive effects of supply chain costs and new business investments to subside as constraints ease and our new businesses scale,” he said. “The effect of inflationary pressure is more difficult to predict, but we plan to offset most inflation-related cost growth with price adjustments and additional Project Own It savings. Price adjustments are being implemented, but it will take time to realize, given most of our revenue is contractual.”
Project Own It is an enterprise-wide transformation that is aimed at helping Xerox reduce costs to free up capital for investments.
Xerox’s bright spot revenue-wise was 20-plus-percent organic growth in its IT services business along with its February acquisition of Powerland, a Canadian IT services provider.
The company’s IT services business is experiencing strong interest in some of the newest offerings, such as robotic process automation, data solutions and managed security, Visentin said.
“We launched our commercial RPA business only recently and are already seeing repeat business from customers wanting to add bots to improve operational efficiency,” he said. “Our bots help customers with invoice processing, order entry, financial reporting and document classification. And the pipeline of use cases continues to expand. In Q2 we will offer an AI solution that automates data extraction from high volumes of unstructured documents for our legal clients.”
Visentin said Xerox Digital Services offerings are resonating with new and existing managed print services customers who use them to navigate their digital documentation transformation with intelligent document processing and personalized customer communications.
Xerox also saw mid-single-digit growth in its SMB IT services business, Visentin said. “Competition is highly fragmented and our IT services business scales efficiently,” he said.
Xerox during the first fiscal quarter 2022 saw growth in FITTLE, which until February was known as its financing business. Visentin said FITTLE added 24 dealers and grew its indirect origination by 7 percent, which included a doubling of non-Xerox products.
“This growth was offset by [a] 22 percent decline in Xerox direct origins for the quarter due to an equipment shortage,” he said.
During the question and answer period of the conference call, when Visentin was asked about supply chain availability relative to expectations through the quarter, he said supply chains have two elements: capacities and cost.
From a capacity point of view, Xerox was impacted during the quarter as equipment revenue fell year over year and the company did not get the high-margin A3 product equipment it was expecting.
That, he said, led to 22 percent growth in backlog from the prior quarter, he said.
“So we are quite confident in our ability to get orders from customers and having this backlog being installed over time,” he said. “So quality of the backlog is also strong. We are currently monitoring how long it takes on average to install product, and I would say close to 50 percent of our backlog is less than 60-days old. So we turn it, but at the end of the day we don’t have the equipment we’re expecting in order to close the gap in the equipment revenue.”
For its fiscal first quarter 2022, which ended March 31, Xerox reported revenue of $1.67 billion, down 2.5 percent over the $1.71 billion the company reported for its first fiscal quarter 2021.
That included print and other revenue of $1.55 billion, down 2.0 percent from last year’s $1.58 billion, and FITTLE revenue of $158 million, down 12.2 percent from last year’s $180 million.
For the quarter, Xerox reported a GAAP loss of $57 million, or 38 cents per share, down significantly from last year’s net income of $39 million, or 18 cents per share. On a non-GAAP basis, the company reported a loss of $14 million, or 12 cents per share, down from last year’s net income of $47 million, or 22 cents per share.