Giovanni Visentin - Xerox Corp. William F. Osbourn - Xerox Corp. Jennifer Horsley - Xerox Corp..

Ananda Baruah - Loop Capital Markets LLC Shannon S. Cross - Cross Research LLC Paul Coster - JPMorgan Securities LLC Jim Suva - Citigroup Global Markets, Inc. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC.

Good morning, and welcome to the Xerox Corporation Second Quarter 2018 Earnings Release Conference Call, hosted by John Visentin, Vice Chairman of the Board and Chief Executive Officer. He is joined by Bill Osbourn, Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor.

At the request of Xerox Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. After the presentation, there will be a question-and-answer session.

During this conference call, Xerox executives will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Mr. Visentin. Mr.

Visentin you may begin..

they want us to succeed. We are an important and often critical component of our customers' and partners' work processes and their success. They recognize the quality and ease of use of our products and many have strong personal relationships with our company.

Channel partners work with us because of the breadth of our portfolio and because of the support we provide, such as the marketing and training tools and resources that help them grow their business.

Our customers and partners expect Xerox to bring breakthrough solutions to the market more quickly to help them keep pace with continuously changing technology landscape and we need to be easier to do business with. Xerox employees care deeply about our company.

One of the first things I did as CEO was reach out to employees and ask them to share with me what they think of Xerox. What do we do well? And where do we need to improve? Their responses reaffirmed my assumption that the team has the knowledge and enthusiasm to transform this company and they want change.

They want to be part of a company that is growing, a company with a new way of working, a company they can be proud of. We have a portfolio of leading-edge, feature-rich products and solutions that support the needs of our customers.

In the office, we have ConnectKey technology that is powered by an embedded secure cloud-enabled workflow management software platform with artificial intelligence and real time analytics that enables the same app-based flexibility on our products that app stores do on mobile phones.

Software-based flexibility is the new paradigm for hardware and we are leading our industry with ConnectKey. With the Xerox App Gallery, users can download apps to a ConnectKey device and make their work easier.

There are apps with broad appeal like those that scan to a cloud-based repository and apps that are industry-specific like the Healthcare MFP app, which enables a HIPAA-compliant paper to digital content workflow. At the high end of the business, our focus is on helping our graphic communication customers be more profitable.

In May, we launched the Iridesse production press. What is special about Iridesse is its ability to use clear and metallic silver and gold dry inks for print embellishments, a lucrative market for commercial printers.

By layering the inks, it can create images that are iridescent in one pass through the machine, eliminating multiple presses and processes saving our customers both time and money. Demand for Iridesse has exceeded our plan. Beyond products are our software and services. We are a leader in Managed Print Services.

Industry analyst firms, IDC, noted in their most recent report that we have been at the forefront of the industry when it comes to enabling workflow optimization. We are growing this business, expanding offerings for the channel but growth remains in the low single digits. This tells me that we have more work to be done.

Our software business are some of our best kept secrets. They are small but they have tremendous growth potential. For example, our DocuShare offering, think Dropbox, think Box is a cloud-enabled and helps companies manage their digital content, one of the biggest challenges we all face.

We will soon launch a series of solutions for our DocuShare Flex cloud repository that will connect and allow the integration with applications such as Salesforce, Intuit and DigiSign (05:54). Such integrations will simplify business processes and enable automated workflow apps.

XMPie is a second software business and it provides customers with technology to transform their print business into omni-channel print and digital communication businesses. Just last week, we won an InterTech Award for XMPie's Circle PersonalEffect Edition. This automation software connects every stage of marketing campaign production.

We need to take our software and services businesses to the next level. One of the first areas I recognized that we must take better advantage of is our innovation in high-tech portfolio. I conducted reviews in PARC and our operations in Webster, New York and was impressed by what I saw.

We have valuable and differentiated offerings that are underutilized as well as some new technologies, work that's underway in our labs that has the potential to disrupt industries. And as we develop and deploy these technologies, we must think differently about business models.

Is our role to be the system integrator and provider of the entire offering or, for some of these technologies, are we better off following the model of Intel in the PC industry and focus on high-value technology elements and sell them broadly across an industry? What I saw in our labs tells me that Xerox has the potential to go beyond our current core markets and achieve scale by providing a critical technology element for several high growth emerging areas, where we do not participate today.

While we may choose not to develop the product, we have technology that will go into others' products. It could be inks and imaging systems for digital packaging, it could be printheads and materials for 3D printing, it could be low-cost pollution or hazardous gas sensors to keep us and the environment safe.

The exact path of these opportunities is hard to predict but the opportunities are real. Another opportunity is in optimizing our business. To do that, we need to look at things differently. Xerox has been running cost takeout programs for years but they have not been effective.

The benefits are not flowing to the bottom line and, as we saw this quarter, margin was down 130 basis points. The processes and the systems we use are complex as is our operating model. For example, there is a lack of clarity on decision authority and who is accountable for outcomes in our current matrix organizational construct.

Often, the result is management by committee and a painful decision making process. We have over 1,000 IT systems that takes resources to manage all these systems and disparate data from various systems hampers the decision making process.

From order entry to product install, to repair and billing, we need to redefine our supply chain not only to meet customer requirements but also increase our competitiveness.

We will anchor the transformation of our business on improving how we serve our customers and partners, better differentiating our products, services, systems and resources based on the way they want to be served. The majority of our revenues are recurring, which drives the dynamic of a relatively stable cash flow over time.

This cash flow gives us the room to invest in the business and more directly return cash to shareholders. We have not effectively deployed our capital. M&A has been minimal and we've not done share repurchases in the recent past. It's important that we have a maniacal focus on maximizing cash flow, ensuring its strength well into the future.

From this assessment of the business, we can pivot to our priorities. First, we have an opportunity to drive improvement in our top line by addressing how we go to market. We need to take a strategic approach to customer engagement to meet their evolving needs both in how they choose to buy and the level of service necessary for their business.

We're going to make sure that we have the right mix of direct, indirect and online or e-commerce channels to support our various clients.

And we're going to work with our channel partners whether they are agents, concessionaires, document technology partners, solution providers or velocity partners to create frictionless processes and quick response times. To make this happen, we need to optimize our operations, which is our second priority. This is more than just process optimization.

We need to optimize the way we organize our product portfolio, our supply chain, our financial model. Xerox carries the legacy of a much larger business with processes, systems and resources beyond what are required or affordable today. We need to change the way we operate.

In our supply chain, we need to think differently and holistically to eliminate costs while ensuring we get the right offering to the right customer at the right time. We will drive for greater efficiencies, reduced complexity and faster time to market to enable an end-to-end integrated customer experience.

As we improve our operations, we know that to be a tech company, we must re-energize our innovation engine and to revamp our innovation business model, to invest in our own capabilities as well as M&A to enable commercialization of technologies we create.

We also need to pursue more partnerships to accelerate our competencies while still maintaining our core differentiation in IP for value capture. And finally, we will have a priority of always focusing on our cash flow and capital returns to generate shareholder value. I spoke earlier of how cash flow is a critical measure.

We are looking at everything, all the pillars of working capital to drive cash flow growth. And in terms of capital deployment, we are revitalizing our M&A engine and we'll deliver our commitment to return at least 50% of our free cash flow to the shareholders.

And, today, we announced that Xerox board of directors authorized a $1 billion share repurchase program and that the company will opportunistically repurchase up to $500 million in 2018. This positive step forward is a strong endorsement of the company and represents an immediate action to deliver value to our investors.

I want to directly address some of the most frequent questions I hear. First, we are not conducting an auction process for the company. An auction is time consuming and costly. If a potential buyer comes forward, it is the responsibility of the board to consider any proposal that could generate additional shareholder value.

The team and I are committed to doing what's best for Xerox and we are focused on strengthening the company. We've been asked if all the recent news headlines and changes have negatively impacted our business. That's not something that is easily measurable but I can tell you we're not here to give excuses.

What we've realized is that our customers and partners want us to succeed. We have work to do to further simplify our operation but we have a solid base to start from. And that is going to be our focus. We're not looking back. That's also why I'm not going to talk about strategic transformation program.

We are taking a new comprehensive end-to-end approach to optimize our operations, drive sustainable cost saving more directly to the bottom line and improve how we serve our clients and partners. The final two questions are related to Fuji Xerox.

As you know, in June, I sent a letter to Fujifilm Chairman, Komori, in response to their lawsuit seeking to save the proposed merger of Fuji Xerox and Xerox. We are confident in our right to terminate the transaction and will defend ourselves through the legal process.

The lawsuit was the first communication I received from Fujifilm or Fuji Xerox and it was a surprising tactic from a company that is also our supplier. The letter to Fujifilm stated that we currently do not intend to renew our TA agreement with Fuji Xerox when it expires in 2021. I want to clarify what that means.

First, Fuji Xerox is a joint venture between Xerox and Fujifilm and the TA establishes the technology and brand licensing relationships between the two companies. Not renewing the TA does not dissolve the joint venture. We have a 25% ownership position in Fuji Xerox that is governed by separate Joint Enterprise Contract.

As I have said, we will do what is best for Xerox. This is true of the work we are doing to improve our supply chain to be more competitive. This means we need to source products, parts and supplies from the best and most competitive suppliers.

Fuji Xerox is one of our suppliers, today providing 59% of our cost production and we will continue to work with them in areas where they are competitive. We manufacture a portion of the remaining 41% ourselves and have high-quality suppliers for the rest. But we are rethinking the way we choose our suppliers.

The company in the past has not seriously pursued other suppliers. But recently, we were successful in partnering with a supplier for a new product. Just because a supplier has had business with Xerox in the past does not guarantee future business. They will have to earn our business.

With all of our suppliers, we execute comprehensive contracts for each product. And these contracts assure continuity of parts and supplies-over the product's life. As for Fuji specifically, we have not seen any disruption in our supply chain.

I am confident in the continuity of supply of Xerox equipment, parts and supplies and we have time to work (16:40) changes in our supply chain to be more competitive and to better serve our customers and partners. At this point, we turn to the financial results. Our second quarter results were mixed.

Equipment revenue and cash flow were good, while margin was pressured. Total revenue declined 4% in constant currency. Within that equipment revenue was better, up 0.9% or down 0.6% at constant currency. Post sale revenue was a disappointment, down 5%.

There were a couple of one-off factors that Bill will cover, but we need to deliver multiple quarters of better equipment performance to drive post sales revenue improvement. Profitability in the quarter was lower than expectations.

Adjusted operating margin of 11.9% improved 150 basis points from the first quarter but declined 130 basis points year-over-year, as cost savings were not enough to offset the impacts of revenue declines and other factors. As a result, adjusted EPS of $0.80 was down $0.06, reflecting the impact of the overall lower operating profit.

Through the first half of the year, we generated $451 million of operating cash flow, which was above our expectation and we ended the quarter with $1.3 billion of cash on the balance sheet. As I mentioned previously, with the restart of our share repurchase program, we plan to opportunistically repurchase up to $500 million in shares in 2018.

We are committed to returning at least 50% of our free cash flow to shareholders in the form of dividends and share repurchase. Return of cash flow to investors is an important and appropriate element of our capital allocation policy, given our strong cash flow profile.

And we are pleased to restart the program, especially at a time when we believe our shares are not trading at their underlying value. I'd like to hand the presentation over to our CFO, Bill Osbourn, to review our financial performance in more detail..

$13 million of accelerated depreciation associated with the consolidation of real estate in Rochester. This had a 52-basis-point impact to margin and a negative $0.036 impact to EPS. As of June 30, this accelerated depreciation has been fully recognized.

In addition, there was a $7 million IT project write-off, which had a 28-basis-point impact to margin and a negative $0.019 impact to EPS. Partially offsetting these impacts was a non-core asset sale of $16 million. This came through other expenses net, so had no impact on margin but was a boost to EPS of $0.044.

For the second half of the year, we're not giving specific guidance on margin as we continue to build out the plan to support the priorities John highlighted. That said, it is correct to take away from our discussion that the focus on improving profitability is very high and we expect higher margins from this business over time.

Operating cash flow was a source of $235 million in the quarter and we are at $451 million through the first half, while free cash flow was a source of $203 million in Q2 and $401 million for the half. Cash flow is priority one to the business, and I'd like to take a minute to cover our results through six months.

Working capital has been a use of $93 million through six months, driven by timing of payments and includes $38 million of transaction and related payments. A great emphasis is being placed on improving all the cash conversion cycle pillars to drive even greater cash efficiency.

Finance receivables have been a source of $149 million through six months, which compares to $167 million for the same period last year. Typically, finance receivables are a higher source in the first half given the seasonality of revenues, but this is an area where we were traded being less of a source for higher equipment sales.

Pension contributions are $75 million through six months, while restructuring payments are $91 million. Our guidance was for $200 million for the full year for each of these areas.

Pension contributions are running under that amount, so there could be an opportunity to do better there, while restructuring payments will likely not be an opportunity, given the greater focus on productivity. Lastly, CapEx in the quarter was $32 million and is at $50 million through six months.

This is an area where we are placing greater scrutiny and could be an opportunity as we move into the back half of the year. In summary, the first half cash flow performance puts us well on track to maintain our full year expectations for both operating cash flow and free cash flow.

If we turn to the next slide, I'll finish by speaking to our capital structure. The second quarter ended with $5.2 billion of debt and $1.3 billion of cash on the balance sheet. In the quarter, we reduced debt by approximately $265 million through the repayment of the May 2018 senior notes.

We break down debt between financing and core, by first calculating the finance debt by applying a 7:1 leverage ratio to our financing assets, finance receivables and other equipment on operating leases, with the remaining debt assumed to be in support of our core business.

In Q2, this calculation resulted in an assumed financing debt of $3.5 billion and core debt of $1.7 billion. As the debt ladder shows, we have no remaining maturities in 2018 with our next maturity of approximately $400 million coming in March of 2019. Another important element of our capital structure is our pension assets and liabilities.

As of December 31, 2017, our net unfunded position was $1.4 billion, which compared to $2.2 billion as of December 31, 2016 and includes approximately $850 million of unfunded pension liabilities, which, by design, do not get funded.

From a net unfunded perspective, we believe we are well positioned following the higher pension contributions last year. Before turning it back to John, I'd like to spend a minute to talk about guidance.

As you just heard from John, we are confident in our business as demonstrated by our reiteration of our cash flow guidance and the resumption of our share repurchase program. We will be driving improvement in all financial measures. And with 75% of our business recurring in nature, we expect results will follow recent trends.

However, we want to be sure we are making decisions for longer-term sustainability, and, hence, won't be giving specific near term guidance, think balance of the year outside of cash flow. We'll be providing additional details on financial expectations for the business during an Analyst Day in late 2018 or early 2019.

I'll now turn it back to John for some concluding comments..

Thank you, Bill. Let me wrap up the presentation with a few closing remarks. We have an opportunity to transform Xerox to return to a technology powerhouse. We are starting from an enviable position. We have tremendous assets. We have great product portfolio and robust innovation capabilities. We have a recognized and respected brand.

We have a great customer base, supportive partners and committed employees who are ready for change. We are ready. We will now open the line for questions.

Jennifer?.

Thanks, John. Before we get to the Q&A with John and Bill, I will point out that we have posted on our Xerox Investor Relations website a full set of earnings materials to provide you with a review of our second quarter earnings. During Q&A, I would ask participants to limit follow-on and multi-part questions, so we can get to everyone.

At the end of our Q&A session, I will turn it back to John to close the call. Operator, please open the line for questions now..

Thank you. Our first question comes from the line of Ananda Baruah of Loop Capital. Your line is now open..

Hey, good morning, guys, and welcome back online here. I appreciate all the – John and Bill, thanks for all the incremental context, that's helpful to start. Just, I guess, a couple if I could and I'll try to be brief.

Just, John, going back to some of your remarks about initial impression when kind of peeling back, how you see Xerox to start, you made comments about opportunities to get more quickly to market, comments about opportunities to be easier to do business with, could you maybe talk a little bit more about that? Are those significant opportunities? And how quickly can those things be addressed? Those seem to be things that might speak to being able to impact the last year revenue growth.

And then I have a quick follow-up also. Thanks..

Okay. Hi, Ananda. If you think of – if I look at the initial perspective on the business, I see tremendous opportunity. And we're focused on the priorities we discussed. But the complexity of the business is greater than I thought. So part of what we're doing in cost opportunities is we're looking at it in an operational way.

Let me give you just an example. If you're looking at manufacturing a box for a client, you need to look at it end-to-end from the manufacturing, what the costs are, to the development of it, to what's the value to the client and how do you maintain it and how you ship it.

And something as simple as if you can manufacture and ship a box under 45 pounds, you only need one person to deliver that box versus having two people delivering it. So when we're looking at optimizing the business, we need to look at things differently. Today, as an example, we have 1,400 IT applications to support our business.

How do we simplify that? How do we take resources that manage all these systems and put it into an end-to-end solution? And our job is to identify all these issues in our processes, so we can drive a clear end-to-end accountability for decision-making and financial performance..

Got it. Got it. And then just quickly, comments about new market opportunities, you highlighted software in a couple of different context.

How prominent do you think software can become at the company? And then to the extent you can share now, what might be sort of (36:21), I believe, philosophically some other market segments that you guys think could be attractive to look at?.

Yeah. Capitalizing on our innovation is a key priority, Ananda. Look, so we have assets like XMPie and DocuShare that we have not fully looked at the potential of both these offerings. We also have new technologies that have potential to be disruptive. 3D printing, to make printheads that could change the industry in 3D printing.

Packaging, we're creating inks that could revolutionize the way the packaging industry is out there today. We're working on artificial intelligence. We're looking at augmenting reality innovations that will bring more content and more useful, more valuable to our clients. So our researchers are putting a lot of efforts.

It's how do we take all of this and how do we capitalize on it. So, I see a lot of opportunity in our innovation and in our software business, which albeit today is small but growing but how do we continue to focus on that..

Thanks, Ananda..

Okay. Great. Thanks so much..

Thanks, Ananda.

Operator, next question?.

Thank you. Our next question comes from the line of Shannon Cross of Cross Research. Your line is now open..

Thank you very much for taking my questions. I guess, John you commented that auctions are off the table and that if a buyer presents itself, you would consider it.

So should we read from that that there are no active engagements right now for a deal? Are you committed to the fact that there is no relationship or no potential for an actual deal with Fuji Xerox to come together?.

No. So, an auction – first of all, hi, Shannon. To run an auction, it's time consuming and it's costly and it's taking our people away from what's important, which is what we said our priority is to fix the business. So we are first and foremost focused on doing what's right for Xerox and strengthening the company.

If – the board will evaluate a strategic alternative as indicated but at the end of the day, if someone wants to offer – wants to come in with a strategic offer, we would need to evaluate it and bring it to the board..

Okay. And then -.

But I would not – yeah, so, I'm not commenting on any potential discussions. So....

Okay. And then what are your thoughts – one other things that didn't come up during the call were thoughts on investment grade. That's been something that Xerox has maintained for many, many years since the challenges back in like 2000. So, and – or actually, I guess, it took a while to get back.

But what do you think about investment grade? Is it something that you need to keep? And then, obviously, there was commentary in the press about the leasing business.

What are your thoughts on the leasing business at this point?.

Yeah, I would say we're currently committed to our investment grade rating. Nothing we announced today should signal otherwise. We have a strong balance sheet. We've met our commitments on paying down debt earlier this year. So we've got priorities in place to strengthen even further our business.

So the board, in keeping with its responsibilities, will consider, when appropriate, strategic alternatives for the company but there is no changes to communicate at this time..

Okay, and then just my final question, I appreciate you're not providing earnings guidance because you're still going through the strategic review.

But I don't know if you or Bill could possibly just talk about some of the trends or thoughts that you think will happen over the next couple of quarters, just so people's numbers don't get sort of massively out of whack in terms of where you guys think things will flow through because, obviously, with cash flow there are a lot of different levers you can pull to generate the cash flow but in light of where we are in earnings, it would be great to have some color..

Yeah. Thanks, Shannon. So, yeah, just a few things, to reiterate a few of my comments on the prepared comments, we are very confident in the business. We think that the share repurchase is a clear indication of that confidence in the business and that we believe that our current stock price does not reflect its true value of the company.

We're driving for improvement on all measures, not just the cash flow measure. And as you know, 75% of our revenues are recurring in nature and thus you wouldn't expect our results to differ significantly from recent trends overall.

And specifically I know you understand, we're early in the new leadership here at Xerox and we're specifically looking at all things, and we're making decisions for the longer-term on sustainability. But our overall commitment is to do what's best for Xerox and that won't be measured by the next three to six months of an adjusted EPS number.

With that said, we do believe that the cash flow guidance does provide some guide rails as far as overall expectations on where we'd be for the rest of the year. A few things to think about when you look back last year's results, obviously, Q4 will be a tougher compare versus Q3.

There was some one-time items, you can go back to, specifically looking at what we reported last year in Q3 and Q4, which is calling out like the headwind in Q3 would be – there was a Grenoble technology sale that created about a $0.09 headwind. There was a lower tax rate during Q3 of last year due to some tax reserve adjustments that took place.

But overall – and then you look at the seasonality of the business, it's still true, no matter what. Q3 tends to have lower operating margins than Q4. And then, I guess, I'm trying to think through (42:24), finally, on share repurchase, people can model through the impact, but we don't expect much of an impact in Q1.

It could be up to $0.05 or so potentially depending if you go to the higher end of the range of the up to $500 million in Q4. Those are sort of things at a higher level to give some context on year-over-year thinking..

Great. Thank you. That was very helpful..

Great. Thanks, Shannon.

Operator, next question?.

Our next question comes from the line of Paul Foster (sic) [Paul Coster] of JPMorgan. Your line is now open..

Yes, thank you very much for taking my question, and thank you John for the clarity and candor of your assessment of the company. I think it really helps preferencerize (43:07) the risks for us to understand the opportunities better.

That said, obviously, there is a ton of action points falling out of your assessment already and I'm sure you're going to bring it all together into some kind of program that you'll disclose at the Analyst Day event.

Can you, though, give us your hunch as to how long you think it will take to sort of bring about the sort of change in direction that you seek? And to save time, just a quick question for Bill, on total contract value, look like there's a little bit of weakness in that enterprise segment, if you could just provide some color there.

Thank you very much..

Thank you, Paul. Look, as I said in my statement, those are significant opportunities to optimize our business. And we're looking at how we do things differently and it's always focused on how we even better serve our clients.

In terms of timing, by fourth quarter, end of fourth quarter, early first quarter, we'll have an Analyst Day and we'll take you through the whole plan and everything.

But we're focused starting today on doing everything that we've said in our business, which is how do we help drive revenue, how do we optimize our operations, how do we re-energize the innovation engine and our continuous focus on capital returns and on cash flows. So that starts today.

In fact, it started eight weeks ago but – and we're continuing to focus on that..

Yeah. Hey, Paul, it's Bill. Yeah, regarding if you're looking at signings in the quarter being down, MDS signings down 20.6%, just breaking that down in a little bit more detail, new business signings, which are really the – all signings are important, but it's critical to say that (44:55) new business signings were actually up 2% during the quarter.

Renewals, somewhat can be lumpy in nature depending on what is the opportunity and what's available. And actually the amount that came up for renewal during the quarter had a fair amount of impact. There was just less coming up in Q2 of this year versus Q2 of last year.

But renewals were down and part of that was also due to the win rate percentage that was clearly lower than our targeted 90% plus win rate and lower than our prior year win rate, we were at about year 75%.

But really that was driven by two larger enterprise deals and so like I said, there's lumpiness and there's also just large deals can drive that percentage from quarter-to-quarter. And clearly you look at it, we're striving to do well in all parts of the market.

But clearly, we're also very pleased with what's happening in the SMB side of the signings area, where we don't get as quite as much detailed (46:03) information, because we're dealing with partners a lot, but the end results when you look at what's happening in MDS, we feel good about that..

Thank you..

Thanks, Paul.

Operator, next question?.

Thank you. Our next question comes from the line of Jim Suva of Citi. Your line is now open..

Thank you very much, John and Bill. I'll ask my questions and you guys can decide how to divide it up and thank you for the details so much. So, first of all, John, in your prepared comments, you mentioned several times about Xerox needing to come to market faster and be more efficient.

For myself as well as many of us on the call, we've heard this many, many, many times in the past. So can you help us understand about really what's new or what you found that has prevented this from happening, because it feels like a little bit of a broken record? And then my follow-up question is on the renewal rate of 75%.

That seems to actually counter to your prepared comments of the great relationships you have and the need and the value that Xerox is providing because the renewal rate of 75% is not overly encouraging.

So can you help us bridge the gap of those prepared comments and kind of what we're seeing and maybe it's just a matter of time or timing, but something just I'm not grasping there? Thank you..

Okay. So look, Jim, let me start with answering it. We've talked to a lot of clients, talked to a lot of partners and what came out was a common theme. One, they want us to win. Two, they like the products we have.

As we look inside of our own technologies and our own innovations, the questions that they were asking us is how do you take this to market faster and how do we help you take it to market faster. So we have existing products today that go through our channels, go through our different channels.

But how do you take other products whether it's a new technology that you have in your innovation, those are some of the best kept secrets out there in the industry.

So as recently as a few days ago, I spoke to a very high level executive in a financial organization and just took them through some of the offerings we have over and above what we offer today, the MDS, the services. And we're going to do an Innovation Day with their team. And this is in a competitive environment, so it's a non-Xerox account.

And they want to see because most of our clients are asking us tell us what we don't know.

You have these great products but what else do you have? And that's where I got excited when asked, hey, John, what's different when I got here? That's one of the area that's different is that our innovation assets are much better than I even assumed when I was looking at it.

But how do we get it to market faster? And that's part of getting it to market faster. It's not just what we have today but a lot more. How do we capitalize on that? We have tremendous assets like DocuShare, whether it's XMPie. These are game changers for clients.

How do we assure ourselves that we use our go-to-market in our (49:25) channels to help us get that to clients faster?.

Yeah. And I would just add on, Jim, that as I said in a response to previous comment, the 75% was driven by primarily two larger enterprise contracts that came up for renewal.

We don't want to lose any contract, obviously, we would prefer not lose any, but I would not extrapolate from just two renewals that we didn't win to how our overall customer base, how satisfied they are with us.

And as John said, based upon our discussions and our overall feedback, our customers are clearly with us and want us to do well and serve them well..

Great. And then my quick follow-up is, in the past the management team kind of gave, I believe, some EPS ranges of, I think, it was, if I remember right, $3.50 to $3.70 and revenues of down 2% to 4% (50:18). You reiterated cash flow for this year.

Is it fair to say that the revenue and EPS is something that you guys are no longer affirming to?.

Yeah. Effectively that's – in my response to Shannon's earlier question, really just giving the rationale, that we have guide rails, we believe, by pointing to the cash. People know, as you know, the industry that there the trends, 75% recurring revenues, et cetera. But – and you wouldn't expect significant changes from recent trends.

With that said, over the next six months, we have a new leadership team in here. John has been here for roughly 10 weeks and we're making decisions that are going to benefit Xerox's shareholders for the longer-term. And we don't want to be bound just by the next three to six months of results.

With that said, we are very confident overall in our business. And there is stability in the organization. We are back to work, not that we are away from work or anything but there was a lot of noise out there in the media earlier in the year but that didn't impact us while we were going through that and certainly now we're all back to work..

Thanks for the details. Greatly appreciate it. Thank you..

Thanks, Jim. Operator, I think we have time for one last question..

Thank you. Our last question comes from the line of Katy Huberty of Morgan Stanley. Your line is now open..

Thank you. Good morning. Just following on some of the last few questions, obviously, there is some concern around the weaker MDS signings, high-end equipment sales were also weaker. And so just speaks to confidence around the strategy and stability in your large enterprise customer base.

So I wonder if you can comment now that the leadership team has been put in place for a couple of months, as you said, everybody is back engaged at work. Have you seen stabilization in those two metrics, MDS signings and high-end equipment sales in the month of July? And then I'll just ask my follow-up.

Bill, on cash flow, you talked about needing to improve working capital. When should we expect to see that impact? What are you specifically doing? And do you need improved working capital in order to hit the free cash flow targets for the remainder of the year? Thanks..

Great. Let me – I think most of those questions all fall towards me. Let me answer the last one first regarding working capital. There has always been a focus on working capital within the company. I would tell you with John coming onboard that there has been even more. John said in his comments, maniacal focus on cash.

I would view it in terms of that we're comfortable with the cash flow guidance that we provided originally, that we're reiterating, that we provided originally in January.

As far as working capital pillars, days sales outstanding, days sales in inventory, days payable outstanding, we're working to improve all of those significantly even though (53:27) we had originally planned that.

It's just that the need to actually – those will make it even better I guess, I would view it from a cash flows perspective that if you look at where we're at year-to-date on cash flows, we're already at $400 million of free cash flow year-to-date.

And seasonally, Q4 is the strongest, that improvements in working capital, additional improvements will only help us and give us upside. It's really my perspective on that. From an MDS perspective, don't like to start going to the months, as we get to the lumpiness, it can be even lumpier within months, within a quarter.

With that said, overall MDS was up 2.3%. MDS revenues 2.3% in constant currency, driven by a significant improvement in ESR, equipment sales revenue, in Q2 within MDS. The channels or the SMB part of the business continues to be strong, it's growing double-digits again and up 14.4% in MDS revenues.

And enterprise still continues to be – it's a more competitive, more mature market, it was down about 1% in revenues for the quarter. So overall, we view ourselves as the market leader in MDS and we expect to continue to be that.

The two larger deals we lost during the quarter, we're not happy about but overall for the longer-term we're still expecting to be strong in MDS..

Thank you..

Great. Thanks. Katy. Let me hand it back to John to wrap up with a few closing comments..

Look, I'll end as I started, like this is a new beginning for Xerox. I look to updating you on our progress. We have work to do. But I want to be clear of our objectives and they include we're going to drive revenue, optimize our operations for simplicity, which is key for what our clients are looking for.

Re-energize the innovation engine and we're going to focus on cash and increase capital returns. At the end of the day, our success will be measured based on our ability to satisfy our clients and deliver value to our shareholders. So I'd like to thank everyone for joining our call..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day..