“Inflation and supply chain challenges affected margins this quarter," said Xerox interim CEO Steve Bandrowczak, but "our revenue grew in constant currency...driven by improving demand for our products and services and the realization of pricing growth."
(photo courtesy Xerox Corp)
Q2 2022 Financial Summary
$1.75 billion of revenue, down 2.6 percent year-over-year or up 1.1 percent in constant currency.
GAAP (loss) earnings per share (EPS) of $(0.05), down $0.51 year-over-year, and adjusted EPS of $0.13, down $0.34 year-over-year.
Adjusted operating margin of 2.0 percent, down 500 basis points year-over-year.
Operating cash flow use of $85 million, lower by $299 million year-over-year.
Free cash flow use of $98 million, lower by $296 million year-over-year.
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| "Improving demand": Steve Bandrowczak Xerox interim CEO |
“While we mourn the passing of our leader and friend, John Visentin, we continue to be guided by – and benefit from – the four strategic initiatives he articulated for returning Xerox to long-term, sustainable growth,” said Xerox interim CEO Steve Bandrowczak in releasing the company’s 2022 second-quarter results.
“Our revenue grew in constant currency in the second quarter, driven by improving demand for our products and services and the realization of pricing growth. Inflation and supply chain challenges affected margins this quarter, but we expect sequential margin improvement throughout the remainder of the year as we realize further price increases, Project Own It savings, and benefits from a more favourable supply chain environment. Strong demand and line of sight to margin improvement give us confidence to reiterate full-year guidance.”
Second Quarter 2022 Overview
During the second quarter 2022, we continued to see strong demand for our products and services despite a challenging operating environment. Supply constraints continued to inhibit our ability to fulfill demand, resulting in the growth of our backlog to $440 million, a 4.3% sequential increase and more than double prior year period's levels.
Although backlog remains elevated, it is considered manageable and its growth rate did decline quarter over quarter reflecting a slowing increase as product supply improves. Post-sale revenue grew in actual and constant currency, due to growth in IT Services, which included the benefits from recent acquisitions, and print activity-driven revenue, such as consumables and services.
Consistent with prior quarters, we see a very strong correlation between return-to-office trends and page volumes. Although return-to-office trends have been gradual, in Q2 2022, service revenue growth outpaced page volumes growth as contractual price increases began to materialize. We expect that trend to continue through the remainder of the year.
The Company expects profitability to improve sequentially for the remaining two quarters of the year as supply chain costs normalize, particularly freight costs, and through an easing of product supply constraints, which will not only improve equipment sales but equipment gross margins, as product mix normalizes.
Inflationary pressures are expected to continue in the near-term, but we expect to offset a large portion of inflation-related cost growth with price increases for our products and services.
The effects of our price increases will compound over time, particularly for our contractual business, where price increases are enacted at specific times throughout the year, or upon contract renewal. Further offsetting these cost pressures will be savings generated through Project Own It.
The Company is targeting gross cost savings of $450 million in 2022, the vast majority of which will be realized in the second half of the year.
With respect to the war in Ukraine, we halted shipments to Russia when sanctions were imposed. The resulting financial impact has thus far been minimal. The Eurasian region in total comprised a low single digit percentage of our revenue and operating profits in 2021. Despite this challenging operating environment, we are maintaining our revenue and cash flow outlook, as we continue to expect supply chain constraints and return-to-office trends to improve in the second half of the year, and we are implementing counteractive measures in response to geopolitical uncertainty and inflationary pressures. Our outlook is also based on current exchange rates.
2022 Guidance
We are maintaining our revenue and free cash flow guidance for 2022. Our guidance assumes supply chain disruption will begin to subside and return-to-office trends will continue to improve throughout the second half of the year. Our free cash flow guidance excludes a one-time payment associated with a product supply contract termination charge.
Revenue of at least $7.1 billion in actual currency.
Free cash flow of at least $400 million.
Return at least 50% of free cash flow to shareholders.
