Xerox Announces Second-Quarter Results, Delivers Increased Cash Flow, Earnings Growth and Margin Expansion

Second-Quarter 2019 Financial Summary:

• $313 million of operating cash flow, up $78 million year-over-year, and $297 million of free cash flow, up $94 million year-over-year
• GAAP earnings per share (EPS) of $0.77, up $0.35 year-over-year, and adjusted EPS of $0.99, up $0.19 year-over-year
• Adjusted operating margin of 12.7 percent, up 170 basis points year-over-year
• $2.3 billion of revenue in the quarter, a decrease of 8.8 percent in actual currency, or 7.2 percent in constant currency, year-over-year
• Adjusting full-year revenue guidance to approximately 6 percent down at constant currency
• Maintaining full-year guidance for EPS, adjusted operating margin and free cash flow
• Completed $300 million of share repurchases year-to-date, expecting at least $600 million in total for the year

NORWALK, Conn.–(BUSINESS WIRE)–$XRX–Today Xerox (NYSE: XRX) announced its second-quarter 2019 financial results.

“This quarter we delivered improvements in EPS, adjusted operating margin and free cash flow largely underpinned by our enterprise-wide transformation initiative, Project Own It. These results have enabled us to increase planned investments for the second half of the year to support our revenue roadmap while maintaining our full-year guidance for EPS, adjusted operating margin and free cash flow,” said Xerox Vice Chairman and CEO John Visentin.

Key Financial Results:

^{(1) Refer to the “Non-GAAP Financial Measures” section of this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.}

Key Business Highlights:

• Investing in revenue-generating initiatives including, but not limited to:
  • Adding new revenue streams for software and services targeting small and medium-sized businesses through partnerships with HP and American Express
  • Expanding Xerox Business Solutions’ (XBS) IT Services capabilities to capitalize on this growing $95 billion market in the United States
  • Acquiring two new multi-brand dealers, Rabbit Office Automation and Heritage Business Systems, to grow XBS’ foothold in key markets
  • Launching new products such as the Xerox Baltoro™ HF Inkjet Press and the Xerox Adaptive CMYK Plus Technology to capture incremental production volume
• Added and renewed several multi-year contracts with Fortune 500 and public sector clients such as Morgan Stanley, the Commonwealth of Massachusetts and the County of San Diego
• On track to drive gross savings in 2019 of at least $640 million under Project Own It, Xerox’s enterprise-wide initiative to simplify operations, drive continuous improvement and free up capital to reinvest in the business

About Xerox

In the era of intelligent work, we’re not just thinking about the future, we’re making it. Xerox Corporation is a technology leader focused on the intersection of digital and physical. We use automation and next-generation personalization to redefine productivity, drive growth and make the world more secure. Every day, our innovative technologies and intelligent work solutions-Powered by Xerox ^®-help people communicate and work better. Discover more at www.xerox.com and follow us on Twitter at @Xerox.

Non-GAAP Measures

This release refers to the following non-GAAP financial measures for the second quarter 2019 and 2018 and full-year 2019 guidance:

• Adjusted EPS, which excludes restructuring and related costs (including our share of Fuji Xerox restructuring), the amortization of intangible assets, transaction and related costs, net, and non-service retirement-related costs.
• Adjusted operating margin and income, which exclude the EPS adjustments noted above as well as the remainder of other expenses, net.
• Constant currency (CC) revenue growth, which excludes the effects of currency translation.
• Free cash flow, which is cash flow from operations less capital expenditures.

Refer to the “Non-GAAP Financial Measures” section of this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.

Forward-Looking Statements

This release, and other written or oral statements made from time to time by management contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “will”, “should”, “targeting”, “projecting”, “driving” and similar expressions, as they relate to us, our performance and/or our technology, 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. Such factors include but are not limited to: our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business; our ability to attract and retain key personnel; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; the risk that partners, subcontractors and software vendors will not perform in a timely, quality manner; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; 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; the risk that confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyber attacks or other intentional acts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; the exit of the United Kingdom from the European Union; our ability to manage changes in the printing environment and expand equipment placements; interest rates, cost of borrowing and access to credit markets; funding requirements associated with our employee pension and retiree health benefit plans; the risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws; the outcome of litigation and regulatory proceedings to which we may be a party; any potential termination or restructuring of our relationship with Fujifilm Holdings Corporation; the proposed holding company reorganization; the occurrence and timing of any closing of the proposed holding company reorganization; the shared services arrangements entered into by the Company as part of Project Own It; any potential strategic transaction involving our customer financing business and/or related assets; 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 2018 Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC. These forward-looking statements speak only as of the date of this release or as of the date to which they refer, and Xerox 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.

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Xerox^®, Baltoro™ and Powered by Xerox^® are trademarks of Xerox in the United States and/or other countries.

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

⁽¹⁾ Certain prior year amounts have been conformed to the current year presentation. See Appendix III for this change in presentation.

⁽²⁾ Referred to as “Pre-Tax Income” throughout the remainder of this document.

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

XEROX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Revenues

CC – Constant Currency (see “Non-GAAP Financial Measures” section).

⁽¹⁾ Certain prior year amounts have been conformed to the current year presentation. See Appendix III for this change in presentation.

⁽²⁾ Refer to Appendix II for our Geographic Sales Channels and Products and Offerings Definitions.

⁽³⁾ Excluding equipment revenue, Xerox Services was $753 million and $793 million in the second quarter 2019 and 2018, respectively, representing a decrease of 5.0% including a 2.1-percentage point unfavorable impact from currency.

Second quarter 2019 total revenue decreased 8.8% as compared to second quarter 2018, including a 1.6-percentage point unfavorable impact from currency, and an approximate 0.6-percentage point unfavorable impact from lower OEM sales. Second quarter 2019 total revenue reflected the following:

• Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which is affected by installs and removals, but also by the page volumes generated from the usage of such devices, and the revenue per printed page. Post sale revenue decreased 8.4% as compared to second quarter 2018, including a 1.8-percentage point unfavorable impact from currency, and reflected the following:
  • Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. These revenues decreased 7.4% as compared to the second quarter 2018, including a 1.8-percentage point unfavorable impact from currency. The decline at constant currency¹ reflected the continuing trend of lower page volumes (including a higher mix of lower usage products), an ongoing competitive price environment, and a lower population of devices, which are partially associated with continued lower Enterprise signings and lower installs in prior periods.
  • Supplies, paper and other sales includes unbundled supplies and other sales. These revenues decreased 12.3% as compared to second quarter 2018, including a 1.4-percentage point unfavorable impact from currency and a 1.8-percentage point unfavorable impact from lower OEM sales. Excluding the impact from OEM sales, the decline at constant currency¹ reflected the impact of lower supplies revenues primarily from our developing market regions and from our indirect channel in the U.S. associated with lower page volume trends, as well as timing of sales associated within our two-tier distribution and lower paper sales from developing markets in eastern Europe.
  • Financing revenue is generated from financed equipment sale transactions. The 10.3% decline in these revenues reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods and included a 2.1-percentage point unfavorable impact from currency.

CC – Constant Currency (see “Non-GAAP Financial Measures” section).

• Equipment sales revenue decreased 10.2% as compared to second quarter 2018, including a 1.2-percentage point unfavorable impact from currency as well as the impact of price declines of approximately 5%. The decline at constant currency¹ was primarily driven by lower sales of our office-centric devices (entry and mid-range products) partially affected by a challenging comparison against the period of highest equipment revenue growth in the prior year. The decline at constant currency¹ reflected the following:
  • Entry – The decrease reflected primarily lower sales of ConnectKey devices through our indirect channel in the U.S.
  • Mid-range – The decrease reflected lower sales of Connect Key devices. The majority of the decline was in North America, reflecting primarily the continued transitional impact associated with recently implemented organizational changes in our XBS sales organization (as part of our Project Own It transformation actions), which included the transitioning of accounts to implement coverage changes, consolidation of real estate locations and the reduction of management layers. The decrease also reflected lower activity and a lack of large deals in EMEA.
  • High-end – The decrease was led by continued lower sales of black-and-white systems partially offset by higher sales of color systems associated with continued demand for our Iridesse production press and higher installs of our Inkjet cut-sheet systems. Lower sales of our iGen and Versant production systems also contributed to the decline.

Our rate of revenue decline in the second quarter 2019 was impacted by organizational changes, primarily in North America. While this impact gradually mitigated during the quarter, it still remains and we recognize that the implementation of our strategic initiatives to transform the company for long-term sustainability (including offering, go-to-market, sales coverage and cost structure changes) will continue to impact our revenues in the near term. As a result, we now expect our revenues to decline approximately 6% for the year, excluding an approximate 1.0- percentage point unfavorable impact from currency, compared to our previous guidance of approximately a 5% decline, excluding an approximate 1.0-percentage point unfavorable impact from currency.

Total Installs

Installs reflect new placement of devices only. Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our Xerox Services revenues (which are both reported within our post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity from Xerox Services and Xerox-branded products shipped to our XBS sales unit. Detail by product group (see Appendix II) is shown below:

Entry²

• 12% decrease in color multifunction devices reflecting lower installs of ConnectKey devices from our indirect channels in the U.

Contacts

Media Contact:

Caroline Gransee-Linsey, Xerox, +1-203-849-2359, [email protected]

Investor Contact:

Ann Pettrone, Xerox, +1-203-849-2590, [email protected]

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