全錄公司 (XRX) 2010 Q1 法說會逐字稿

Good morning and welcome to the Xerox Corporation first-quarter 2010 earnings release conference call hosted by Ursula Burns, Chief Executive Officer. She is joined by Larry Zimmerman, Vice Chairman and 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 express permission of Xerox.

After the presentation, there will be a question-and-answer session. (Operator Instructions). 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 Ms. Burns. Ms. Burns, you may begin.

Good morning and thanks for joining us today. We will get started on slide 3. We are very pleased with our results in the first quarter, which reflect solid performance in revenue, operational improvements and cash generation. We also recognize that this is an unusual quarter in our financial reporting. So before we go into too much detail, let me walk you through what we are reporting and how we are doing it.

Our acquisition of Affiliated Computer Services closed on February 5. So our first-quarter GAAP numbers include about eight weeks of ACS's financial results and show revenue up 33%. To provide a clear year-over-year compare, we are also reporting on a pro forma basis, which assumes that ACS was in our 2009 results for the same period.

First-quarter pro forma revenue was up 5%, or 2% in constant currency. During our fourth-quarter earnings report, we said that, following the acquisition, we would differentiate between GAAP and adjusted earnings, both in our guidance and in actual results. By doing so, we believe we are providing more transparency to the fundamentals of our business.

At that time, we expected $0.24 of adjustment for the first quarter, which we included in our guidance. We ended up with $0.22 and Larry will walk you through that detail in a moment. Therefore, on a GAAP basis, we are reporting a $0.04 loss for the quarter. On an adjusted basis, we delivered earnings per share of $0.18, above our guidance of $0.11 to $0.13.

Cash from operations was also very strong. We generated $375 million in operating cash and closed the quarter with a cash balance of $1 billion. Through disciplined cost management and capturing savings from restructuring actions, our operating margin of 8.5% was up 1.5 points on a pro forma basis. This reflects improvements in both gross margin and SAG as a percent of revenue. We remain on track to deliver our revenue and cost synergy targets related to the acquisition. I will share more detail about that in a bit.

First, let me review our revenue results and Larry will cover our financial performance. I will close and we will both take your questions. So let's turn to slide 4. With ACS, we have more than doubled our services business. As a result, we shifted our reporting segments to align with our expanded portfolio and to provide greater visibility to our growth strategy.

Our revenue categories are now equipment and annuity. Equipment revenue represents the sale of our document technology, which is multifunction products -- printers, copiers and publishing systems. Annuity includes everything else -- recurring revenue associated with our technology and services business. This includes all BPO, ITO and document outsourcing contracts, as well as the supplies, technical service and financing of Xerox equipment.

We have also changed our segment reporting to better reflect the businesses that we are in. Our segments are now technology, services and other. Revenue from technology includes the sale of document systems, as well as the supplies, technical service and financing of products. Revenue from services represents the Company's business process, IT and document outsourcing offerings and other reflects smaller areas of our business like paper in wide format, as well as other corporate items.

As you can see here in quarter one, technology represents 53% of our revenue and services 39%. Keep in mind that this includes only eight weeks of ACS in our results. When we have the benefit of a full quarter of ACS in our numbers, we expect the revenue contribution will be along the lines of technology at 46% and services at 46%, an equal weighting in the business.

With that, here is a look at our quarter one results. Again, total revenue was up 33%, including a three-point benefit from currency. On a pro forma basis, it was up 2% in constant currency. Annuity revenue was up 2% in the quarter and now represents 83% of our total revenue. Equipment sales grew 4%.

Let's turn to slide 5 for more details on our key business metrics. In our technology business, we closely monitor page growth and machines-in-field or MIF. Our technology business helps to fuel our annuity stream. More MIF leads to more pages, which generates more revenue from supplies and technical services. Our strong focus on and leadership in color printing is especially important because color pages generate more revenue and gross profit than black-and-white pages.

For Q1, we were pleased with the steady growth in MIF, which is supported by our strong intellectual activity. Installs of Xerox equivalent were up 17% and according to a recent report, we maintained strong marketshare in key segments of our business with the number one revenue share in color. Our quarter-one results reflect improving demand for our document technology in developing markets and from small and midsize businesses.

But equipment sales are still under pressure for large enterprises and the graphic arts market. When I speak with our large enterprise customers, I continue to hear that there is a hesitancy to invest in infrastructure upgrades until there is a more sustainable economic recovery. However, we are seeing an improving trend in enterprises' printing activity on their existing devices, which contributes to our annuity stream and indicates some economic improvement in corporate environments.

Total color revenue grew 11% in the quarter, reflecting the continued success of our ColorQube MFP and our full range of color technology. We made a bold bet to launch ColorQube during the height of the recession last May, but we had great confidence that the value proposition would win in the marketplace. ColorQube cuts the cost of printing a color page by 62%. We're feeling good about the results. It has now launched worldwide and has proven that our proprietary solid ink technology can be a differentiator in cost, ease-of-use and environmental benefit.

For Q1, color pages were up 8% and now represent 22% of our total pages. We are seeing steady sequential growth in color pages. Again, a good sign that usage trends are improving and helping to offset declines in black-and-white pages. And due to the breadth of our color portfolio and our strong marketshare, we continue to outpace the industry in color pages.

In services, we tracked total signings for the quarter, which were $3.9 billion. Contributing to this progress is a recently signed 10-year, $1.6 billion contract to process California's Medicaid claims. We are also now reporting trailing 12 months of signings, which were up 5% in the year. The pipeline looks strong for our services business, including continued high interest for our managed print services that helps businesses cut their document costs by up to 30%.

So to sum up the quarter, we saw some signs of improvement, especially in developing markets through our channels business and demand for our new color systems. Our portfolio is now well-balanced between technology and services, both of which performed well in the quarter giving us a strong start to the year. That is a good place for me to turn it over to Larry.

Thank you, Ursula and good morning. We delivered first-quarter results above our guidance as we started to see some positive improvements in trends in 2009 -- compared to 2009. I believe our commitment to increasing our distribution capacity, consistent cash generation and relentless cost and expense management have positioned us well. The ACS acquisition is going extremely well. The business continues to grow and the team is focused on delivering synergies.

As Ursula mentioned, with the current size of our services business, we thought it appropriate to change our segment reporting to be consistent with how we will focus and manage the Company. Our segments will be first Technology, which includes the equipment sale revenue and post sale revenue of our product businesses. Managed print services revenues have moved to our Services segment.

Our second segment is Services, which includes document outsourcing, business process outsourcing and IT outsourcing. And third, other, which is essentially our paper business and smaller miscellaneous businesses and other corporate expenses. We believe going forward this will provide the clearest insight into our business.

We also show a pro forma format, which adds ACS results to 2009 to have a valid comparison. So let's first start with Technology on slide 6. Technology revenue grew 6%, 3% in constant currency. In the quarter, it is over 50% of our business at $2.5 billion with a segment margin of 9.4%. We have categorized the lines of business in technology as entry, which includes all A4 devices and desktop printers; midrange, which includes A3 devices that generally serve workgroup environments in midrange to large enterprises; and high-end, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.

All of these lines had positive overall trends and color performed well across the board. In entry, both black-and-white and color had large install growth with the only weakness being color printers in our OEM business. Midrange also had good install activity. Midrange is particularly strong in color with our solid ink product, ColorQube and the 7400 midrange series.

Additionally, with the WorkCentre 7120 and WorkCentre 5700 product series announced last week, we expanded our position in the growing A3 color entry market and reinforced our position in monochrome. At the high end of DocuColor 7002 and 8002 launched in the fourth quarter of last year continued to provide significant year-over-year gains, fueling our production color growth. And just this week, we announced the Xerox Color 800/1000 presses, which deliver high quality with the most complete and flexible finishing options in its class. Black-and-white remains pressured and there is continued weakness in the graphic arts market. Overall, we are seeing improving trends in developing markets -- supplies, color sales and page volumes, slide 4.

The Services segment is comprised of three lines of business -- business process outsourcing, document outsourcing and information technology outsourcing. In Q1, we only recorded a partial quarter of ACS's BPO and ITO results given the February 5 close date. As a result, revenue mix for the quarter was about 45% document outsourcing, 44% business process outsourcing and 11% IT outsourcing. On a normal run rate basis, we expect the split will be approximately 50% BPO, 35% document outsourcing, and 15% ITO.

On a pro forma basis, total revenue grew 3% and 2% in constant currency, driven by BPO, which grew 8%, primarily due to the ramp of new business and incremental transaction volumes. Growth areas include commercial healthcare, customer care and electronic payment services where we distribute benefits to individuals on debit cards instead of checks. Document management was flat and continues to be affected by the slowdown in large enterprise spending and lower usage, but it is showing signs of improvement. ITO revenue was down 3%, primarily due to lower growth in new business signings and decision delays due to the economic environment. Overall, revenue growth was solid.

Operating margin was strong at 11%, which, on a pro forma basis, is a 1.3 point improvement over the prior year. This was driven by growth in BPO volumes, new business reaching an operational phase, which delivers higher margins and cost actions we took in prior quarters.

Two new metrics that we will be reporting on are signings and pipeline growth. Signings represent total estimated future revenues for contracts signed during the period, including renewals. The sales pipeline includes the total contract value of potential new business signings.

Signings were good this quarter. On a trailing 12-month basis, new business signings grew 26% and total signings at $3.9 billion, including renewals, grew 5%. We saw a particular strength in BPO as we signed the California Medicaid deal. We also had good signings across our other BPO offerings, including government services like child support payment processing. Signings and document outsourcing in ITO were not as strong as we continue to see decision delays in these areas, but both their pipelines got stronger in the quarter.

On a year-over-year basis, we grew our total revenue -- our total Services pipeline by 5%. On top of this, there are new synergy opportunities that exist as a result of the combination of Xerox and ACS. We look forward to converting this pipeline into signings in the coming quarters. So overall, very good results in both the Technology and our Services segments. Slide eight.

Slide eight is our earnings results. Pro forma revenue grew 5% and 2% at constant currency, which has been covered on the previous slides. Gross profit margin was 36.1% with balanced performance in our Technology and Service segments. Going forward, we expect gross profit margin in the 33% to 35% range as the 36% in the first quarter includes only a partial quarter of BPO and ITO revenue streams at lower gross profit margins.

RD&E was basically flat year-over-year. SAG declined $14 million on a pro forma basis at constant currency as we continue to control our expenses. Growth in gross profit dollars, coupled with lower expense, delivered a 1.5 point improvement in our operating margin. Our adjusted tax rate was 32% and we delivered $0.18 of EPS, which was above our guidance.

As explained during last earnings, we will differentiate between GAAP earnings and adjusted earnings for guidance in actuals reporting in order to give you transparency into the fundamentals of our business. 2010 earnings on an adjusted basis will exclude amortization of intangibles, restructuring and asset impairment costs, acquisition-related costs, including direct transaction costs and specifically defined integration costs and any discrete unusual items.

We had estimated these adjustments would equal $0.24. Actual adjustments were $0.22 reflecting lower restructuring costs than projected, 195 versus 250. We still anticipate doing 280 for the year of restructuring, realizing $140 million of savings, lower amortization of intangibles resulting from the updated fair value analysis of the ACS acquisition and these lower amounts were partially offset by a $16 million tax adjustment for the Medicare subsidy that became taxable with the new healthcare bill recently passed by Congress. Obviously, we are very pleased with adjusted earnings of $0.18. Slide 9.

In Q1, we delivered $375 million of cash flow from operations driven by earnings with some help from the net decline of financed receivables and operating leases and including $75 million of acquisition-related cash outflows. As we start the year, accounts receivable and inventory were uses of cash and were offset somewhat by accounts payable as a source of cash.

Free cash flow was $299 million with CapEx and cost of internal software of $76 million. Our full-year estimate of CapEx is around $600 million. This includes about $400 million from ACS, which is consistent with their historical CapEx levels.

Cash from investing was a use of $1.6 billion as a result of the acquisition of ACS. Cash from financing was a use of $1.6 billion driven by the payment of ACS debt of $1.7 billion. We ended the quarter with $1 billion cash balance and we are on track to achieve our committed $2.6 billion of cash flow from operations for the full year. Next slide.

To continue the story on cash flow in the top left, you can see our expectation for uses of our $2.6 billion of cash flow -- approximately $600 million of CapEx, $1.8 billion debt reduction and $300 million of dividend payments. As we move to 2011, the debt reduction plan is lower than 2010 by $1 billion as we reach our desired leverage. This will make available $1 billion of cash to return to our shareholders largely through share repurchases.

Now let's look at the debt in the financing box. This will give a perspective and context in understanding our debt and our commitment to maintaining an investment-grade rating. We have $10 billion of debt of which $6.4 billion is in support of our financing business. The financial receivables of $7.3 billion is the committed revenue stream from our customers. The receivables section shows that our write-off experiences is than 1%, which is small when measured against the receivables.

In addition, we stagger our debt latter to be well below our annual free cash flow and total liquidity so we can access capital markets opportunistically. So our debt has increased to pay for the ACS acquisition. Remaining debt supports the financing of our customer equipment. Our cash flow and financial flexibility are strong. We will focus on significant debt reduction in 2010 to quickly pay down the incremental ACS debt and enable a return to other cash uses such as share repurchase during 2011.

In summary, very encouraging results and we are cautiously optimistic going forward. We are keeping our focus on day-to-day execution and delivering on our commitments. And now I will give it back to Ursula.

Thank you, Larry. I understand that we are having a few technical problems on the line. So we are hoping -- they are working on it in the background and we are hoping, as we get to Q&A, that it will be brought back in line. Thank you, Larry, again. That is a good lead into a status on our acquisition of ACS. We are about 10 weeks in with the acquisition and making very good progress on every front. Most of the synergies with corporate governance were captured shortly after the close. That was one big bucket. We are now piloting some of ACS's proprietary practices with Xerox's technical and managed services leading to productivity gains.

Through our cross-selling and over 100 accounts, we have strong traction to deliver on our revenue synergies and we are already validating the use of advanced imaging for data recognition and ACS's claims processing, automating more steps in typically manual workload. We will spend more time on all of this, the synergies in particular, at the investor conference on May 4. But in short, we remain very confident that we will deliver at least $100 million in profit synergies during year one with upside potential to $150 million. By year three, this will ramp to over $375 million. And now let's turn to slide 12 to wrap up and then Larry and I will take your questions.

Our Company is now the world leader in business process and document management. Through our expanded offerings, we have become more differentiated in the marketplace and we are leveraging our global scale, our renowned brand and our innovation in ways that add more value to our business, more value for our customers and ultimately more value for our shareholders. Our first-quarter results indicate that we are on the right track.

Revenue was up, we delivered strong cash flow and disciplined cost management helped drive improved operating margin. As a result, adjusted earnings were above our guidance for the quarter. To strengthen our industry leadership, we are continuing to invest in innovation. In fact, we just launched our new presses and office systems with more to come throughout the year. So we remain quite confident in our global competitive position and are seeing strength in services signings and across our channels business. We feel well-positioned to deliver continued revenue growth and strong cash and earnings expansion throughout the year.

For second quarter, we expect to deliver adjusted earnings of $0.20 to $0.22 per share. For the full year, we now expect adjusted EPS to be at the high end of our previous guidance of $0.75 to $0.85 a share. Thanks again for joining us today. Sorry for the technical difficulty. Now let's open it up for your questions for Larry and I.

(Operator Instructions). Ben Reitzes, Barclays Capital.

Thanks a lot, I appreciate it, good morning. Wanted to ask you about your longer-term earnings targets. I mean now you are at the high end of $0.75 to $0.85. Frankly -- actually it seems like you're running above the high end there. And then your midpoint of your other years have been $1 and $1.15, I believe. Are you looking on track there or with the better than expected pace right out of the gate this year and towards the end of last, are you running at the high end of those ranges and then I have a follow-up?

Yes, Ben, how are you?

Good, good. Not as good as you today, but good.

We have to check that everyday, right? Yes, I would say, right now, we are not changing any guidance for 2011 or '12. Obviously, the better we do in 2010 -- the numbers -- our ability to achieve in 2011 will improve. And I think, as we talk about at the investor conference and as we look forward and see more results in 2010, we will take a hard look at that. But we are, as I said in my script here, we are cautiously optimistic going forward.

Okay. And is there -- also with regard to synergies, I mean you have $100 million to $150 million in costs and then [no] revenue synergy in your model for ACS still, I believe. I mean in terms of the costs, would you say you are right in the middle of the plan of $100 million to $150 million or is it looking better than expected? And the same with revenue. Are you seeing anything a little earlier than you expected that actually may bring some revenue synergies to the table this year?

I think where we are, which is what I said earlier, we are very, very confident on the $100 million from a cost synergy perspective. We have teams, as you are aware because we spoke about it before, working on all of the lines of synergy, especially on a cost area. So we are very confident with the $100 million and we are definitely targeting our organization. I am targeting the organization to hit the $150 million or even higher. But I think right now we have our eyes clearly set on getting the $100 million.

And as far as revenue goes, because of the way that these deals are structured, both in the BPO, especially in the BPO space, there is a lot of work to do even after you actually engage the customer to stand it up and actually have it flow through to revenue. So we took a measured approach on the BPO revenue synergies. We are working hard to get revenue earlier. The first one we get, if they allow us to talk about it, will tell you. If it comes, it will be great and we will tell you about it. We are working on it. But I wouldn't put a lot of, in the bank, for early revenue synergies.

And then I guess lastly if you just don't mind, how was Europe and how are you looking at that for the year, especially with regard to the core non-ACS Xerox?

Yes, Europe was solid. I think we are having difficulties in Europe in the same places that everyone else is -- Greece and Italy and Spain. But even in those areas, we were not surprised by anything from a bad perspective. Our receivables are solid, our revenue is good across the board, so Europe is doing fairly well.

It grew -- nicely? It grew above the Company average?

It grew. Wasn't hard to grow over 2009 by the way, but it did grow.

Okay, thanks a lot.

Shannon Cross, Cross Research.

Thank you, good morning. A couple of questions here. The first, I guess, Ursula, can you talk a little bit more about what you are seeing on the supply side? Clearly up 15% year-over-year. What's sort of in that, how we should think about it with regard to the price increase that I think was placed in April? And just also what you are hearing from customers, anymore anecdotal information you can give on page volumes, which clearly are improving?

Let me start with supplies. We did have a strong supplies quarter. It is important to note, and I'm glad you brought it up, that we had --because we announced the price increase that would take effect on April 1, the normal process is that the buyers, our resellers or channel people would buy ahead of that price increase. And so about half -- we had about a $70 million, $60 million to $70 million improvement in supplies quarter-to-quarter and half of that is because of the supplies pricing increase.

So I would expect as we go forward in quarter two and quarter three and probably quarter four that we normalize back to a normal growth level, which is probably low single digits for supplies and not stay at the level that we had, which was -- we had double-digit supply increases. So supply pricing helps us. But strip that out, we did have increasing page volume, which was good and some channel restocking, which was normal. So I think supplies will get back into the normal range even pre-2009 for the rest of 2010.

As far as I am hearing from the rest of the customer types and the industry in general, color is interestingly taking off again. It is doing well. We have some new offerings that help that. ColorQube is great, the 7002/8002 that Larry mentioned earlier. We just launched the 8001, the 800/1000 device as well. So we expect -- it has been happening and we expect color to continue to be strong.

Enterprise accounts and the graphic arts market continues to be stressed, so activity, equipment activity is down on a year-over-year basis. It is weak. The good news there is that pages are increasing. I look at pages because it is an indicator that people who had less volume on their installed base have to first fill up those machines before they start buying new devices. And we're starting to see that happen, so it is actually good.

iGen page volumes were up 9%, which was positive as well, a really good signal for us. Activity in the very high end in black-and-white and color was down and I expect, particularly the iGen space to turn up a little bit because we froze decisions with the 800/1000 device. But enterprise is still weak, graphic communications still a bit weak, BMO strong, office in general on average strong, color very good. On supply, starting to turn back to a normal state. But we are still waiting for the heartbeat of enterprise accounts and graphic communications to turn up.

Okay, great. That was very helpful. And then can you talk a little bit about ACS, just sort of what areas are you seeing strength in? I mean clearly signings up 5% year-over-year. The revenue was up I think 8% on the BPO side. So maybe you can talk about BPO and ITO and where the demand is and what your customers are saying, if there are any verticals that are stronger than others.

Right, so BPO -- you are correct that the star of the show this quarter was definitely BPO. By the way, BPO we expect to grow faster than any of our other service segments, faster than ITO and faster than document outsourcing. It is great, it's doing well. Great is probably an overstatement. It is very good and we are pleased with it. The segments that we are seeing growth in are in healthcare and finance and accounting and education. So I think just about every segment is doing fairly well there in the BPO space.

In the ITO space and in document outsourcing, the weakness, if that would be a word, is associated with what we are seeing with other people in the ITO space, which is extension of contracts, not signing new business necessarily, but extending the contracts that they have and on any kind of technology plays that we have businesses that are buying tech hardware, we have seen extensions there as well. So ITO and document outsourcing in the first quarter, we are still waiting for a turn there. Signings are good in ITO and document outsourcing, pipeline is good. So I think that we will start to see that turn throughout the year.

Okay, great. And then one final question for Larry. Can you talk a little bit about puts and takes on working capital as we go through the year? Any sort of things we should keep in mind now that you have ACS in place with some of the parts of working capital just so we make sure we forecast correctly?

Well, working capital generally was the use of cash as you saw in the first quarter with inventory growing and AR growing and accounts payable coming down offsetting a little bit. I think two things happened in the first quarter. Normally we have inventory in AR as a use of cash in the first quarter, particularly with the fourth quarter that we had last year. I mean we did $2.2 billion last year. We did a significant amount of improvements in inventory the whole year in AR and I think going into the first quarter looking at trying to go after growth in some volumes, we built-up inventory and we actually grew revenue, which kind of takes your accounts receivable up.

So it was not surprising to me that we grew both of those. I think what we are going to see during the year is a moderation of that and hopefully by the time we get to the end of the year. Now this also depends on how well we do on revenue, but I think we will see a moderation and it is not going to affect our ability to make the $2.6 billion.

Great. Thank very much.

Mark Moskowitz, JPMorgan.

Good morning and thanks for the detailed reporting disclosures regarding the services in particular, I appreciate it. As far as the California Medicaid deal, how should we think about that in terms of similar sized deals being able to be captured going forward on a quarterly basis, or should we normalize our expectations for the signings run rate for the rest of the year?

The California deal is clearly a large deal, and we don't expect every quarter to be -- to have deals of that size; probably one of the biggest deals that ACS has -- or our BPO line has signed. So I would not model those into a normal going rate. Obviously, when they happen, we will tell you, and it is really not that easy to predict them. Like I said, a deal of that size is just amazingly large.

So through June of 2012, so there are about 30 Medicaid deals that come up -- that are available to come up for renewal or for bid. Only five of them -- we have very few of them. So we are going to compete for every single one of them out there. California was one of the biggest that is available to win, even of all of them. The good news is we won it.

We will compete for the others as we go forward, but I would not -- net-net do not try to model these into your going rate. It is not an every quarter kind of thing.

Okay, appreciate that. Maybe as a follow-up, Ursula, anything that was learned from that win that you guys were able to extend now to try to capture maybe some incremental (multiple speakers) or other verticals as well?

So one of the things that we do is pay attention to how we win and what formula we use to win. ACS is really good at this. As we said, our penetration here is low, not because other competitors are winning but because states are still doing a lot of this work themselves. So we will use California and other Medicaid platforms that we have to sell to other states.

For sure, the platform is extremely strong. It is a foundational platform so we don't have to recreate it every single time we go through. Everyone that we win makes the next one a little bit easier to win, especially when you win a really big one.

And then we are actually throwing some of the Xerox offerings into it and it makes it even significantly more attractive to the client. So net-net I think we are positioned very well here, very well in this space. It is hard to do, it is hard to sign. And after you sign, it is hard to stand up. And we are the best in the industry and in the market at doing it, so I expect to win more but not every quarter.

And then looking longer-term, either Ursula or Larry, could you help us understand any update to the number of deals to underpin your year three revenue synergies? Has there been any change there?

Then also as we layer around our thinking on that synergy potential, how should we think about the pricing curve that you must fight or contend with in terms of renewals? As you renew some of these BPO deals in years three and four, what is going to be the discount rate we should assume? Is it going to be 5% or is it going to be 10%?

So the number of deals that we need to win to hit the synergies that we laid out in our original case hasn't changed. What we said that we have to win somewhere around three deals, three reasonably sized deals, to actually meet the synergy that we had laid out in the BPO space. So I think that there is no new news on that at all.

As far as pricing, there's no new news on that either, meaning their pricing, especially for renewals, you renew at generally a lower price than you had the previous one at.

The good news about renewals, though, is that we actually can also drive technology or improvements in the process that makes the margin actually hold. Pricing is generally at about a 10% decline, and we actually in the latter of years of a contract are better at operating the contract than we are in the beginning.

So when we re-sign it, we actually hold or maybe even improve margins because we have a lot more knowledge about how to actually stand the deal up better. And then we are applying Xerox's technology, by the way, which is also in the synergy case that we spoke about to actually automate even further the deals that we have.

If I could with a follow-up, any sense in terms of the renewal for this year? Is there a disproportionately higher level of renewals up in the next 12 months versus say the next two years?

So number of renewals are not unusual, and our win rate is not unusual. Usually, we renew about -- a number of deals, about 20% of the deals a year, and the deals are about a five-year life, and we win -- we hold 85% to 90% win rate, always hoping to get to the 90% range. So nothing unusual has happened in that space at all.

Thank you.

Ananda Baruah, Brean Murray.

Good morning, thanks for taking the question. And good solid quarter, so congrats. Ursula -- Ursula, for you and Lynn, if he is on as well, I was wondering, you mentioned your confidence in sort of achieving the deal cost -- sorry -- revenue synergies as we go forward. Just wondering if you guys could offer any maybe anecdotal comments or some stories about your experience, whether it is go-to-market or feedback you have gotten back from customers as you have kind of walked through what you guys see are the merits of the partnership that you've received?

We have been out since the day we signed, as you know and what we are hearing is the value proposition is compelling. We have seen no change in that whatsoever. The value proposition is compelling. Individually, in the BPO lines, they were compelling before the deal and with the addition of Xerox, the brand, the innovation in particular and the reach we can extend to them, client are calling -- continue to call us and engage and so we are seeing a very, very good uptick there.

We are also -- too early to say anything is final -- but we also -- in the pipeline, so we are doing work today and the pipeline grew as you know at 5% in both BPO and in ITO and so it is strong. It is looking good. No pauses in my expectations for the cost synergies or the revenue synergies in year one or any out years. Not a lot of revenue synergies in year one, but in the out years, there are some. So I am confident there and I am hearing nothing but good things about this.

And Ursula, you mentioned that customers are actually calling into you folks. Is that happening to agree greater than you expected or is it sort of -- I guess can you maybe give us a little more context around that part of the dynamic?

So it is happening to a degree -- it is happening to a degree greater than I expected. I expected in the beginning for people to call, but they are still calling, so that is actually good. By the way, calling doesn't mean we have sold anything yet. All it means is that they want to find out some more information from us. But it is definitely a good start.

The other thing that is happening, we said that we would train people in North America and train people in Europe and we have done that. We have trained nearly 200 North American account people to actually go to market and start selling the value proposition of the combined company. We have trained Europe. We will train Europe and the rest of the world next month, so I expect to even, not only people call us and see the pipeline growth, but for us to actually continue to far more effectively and see it grow. We are very encouraged with the early results, very encouraged.

Great, thanks. I guess just touching base on new product introductions. You've got that planned for this year and this week was obviously a big week on Tuesday. I hear you saying that sort of I guess expectations or tone from enterprise hasn't picked up substantively on equipment yet. I believe your expectation for product introductions this year is to be pretty healthy in terms of what you typically do. Can you just sort of recap for us how you view product intros this year relative to past years and I mean I wouldn't assume that you're going to introduce new products if you don't expect there to be demand for them at some point. So a fair expectation for us to be that this could perhaps be a tailwind as you move into the second half of the year? I just want the proper context. Thanks.

Right, so the product introductions this year are actually pretty interesting in that the numbers are not as high as in some of our previous years, but the line that we are -- the lines that we are introducing are amazing. At the end of last year, we introduced the 7002, 8002 and that really helped us to solidify -- actually increase and improve and solidify our position in the EPC space, EPC high space. We are -- just earlier this week, we announced the 800/1000, which will help -- EPC is into production color by the way, just in case people on the line don't know.

We also introduced a product right below iGen, the iGen4, which is 100 page a minute, meant for lower volumes, more flexibility. It has a fixed housing, which allows us to do clear -- expands our reach significantly, more page types, paper types that you can handle, so a strong product.

Also, we refreshed the whole midrange color line as well. ColorQube is online. You are a right, we would not launch products if we didn't expect to sell them and so we clearly expect to sell them and I expect -- one of the weaknesses that we had from last year, we see a little movement in the first quarter. I expect for the rest of the year to continue to see improvement in equipment revenue. That's a place that we -- that's what this is all focused at is equipment revenue and then driving the pages off of that and I think we have an unbelievable lineup to do that.

Okay, thank you.

It's still hard to sell them, Ananda, you know that. We don't (multiple speakers).

I understand, I get it. The fog gates haven't opened yet. I guess, Larry, one quickly for you. With cash remaining, cash flow remaining so solid, is there any I guess chance that you may choose to pay the debt down sooner than anticipated if you have an opportunity or would you still sort of stay on the cadence you are expecting even if you do have the opportunity to do so?

I would assume we are staying on the cadence that we (inaudible) here.

Okay, great. Thanks, guys.

Richard Gardner, Citi.

Hello, Richard.

I'm sorry. His line has been withdrawn from the queue. Keith Bachmann, Bank of Montreal.

Hello, Keith.

(technical difficulty) margin you indicated would (technical difficulty)

Keith, you are breaking in and out. If you are on any kind of a non-landline, can you pick up the phone if you're speaking on a speaker? Maybe that will help.

We do have Richard Gardner back in the queue with Citi.

Can you hear me? Hi, Ursula. Congrats on a great quarter. I had a couple of questions. First of all, before the downturn started, we were talking about your revenue growth rates accelerating because color was becoming a big enough percentage of the business that it was going to start to have a really meaningful impact on growth rates. And it feels like during the downturn and correct me if I am wrong that we've seen black-and-white production maybe decelerate more than folks had expected as companies try to steer people toward online billing and bill payment and so forth.

I'm wondering if you're worried at all that black-and-white production just doesn't come back and is a little bit more of a headwind during the next upturn than we were thinking about before the recession started. Just wanted to get your general view on that. And then I have a follow-up.

My view is that black-and-white production will continue to be stressed from now into the future. We have -- it's not only because of the downturn, it is because Xerox primarily are offering clients a lot more options to do things in color at an amazing price. So we launched and it's out what we call the DocuColor 1000 and if you look at that machine or the DocuColor 800, these machines actually fundamentally change the way that work gets done. ColorQube as well.

So I do not expect us to see a snapback or bounceback to the heyday of black-and-white. I am not -- and by the way, we also took restructuring focused on those areas so we can continue to drive profitability in this segment of the business. But I am not overly concerned about that because the strategy is to continue to invest in color so we can drive more and more people towards color and we are doing that. So I don't expect there to be a significant recovery in black-and-white.

What we are try to do is make sure that clients actually move towards color and use their current black-and-white technology as efficiently as possible and help them to do that by providing them with document services as well. So I hope I didn't overdo the answer.

Actually, that's helpful. And I know you'll probably address this at the analyst meeting next month, but I was wondering if you are still comfortable with the, I believe it was 3% to 5% top-line growth for the core Xerox business that you were talking about before the downturn started as well from a longer-term perspective.

I am.

Okay. And then the follow-up question, I wanted to ask Larry. It looked like part of the upside in the quarter at the gross margin line was driven by Services segment margin, which were up I believe 130 basis points year-over-year. To what extent, Larry, was that driven by the lack of new contract startups in the quarter either because of disruption around the acquisition or just the general sluggishness that we are seeing in ITO across the industry right now?

And if we just forget cost synergies for a minute, do you believe that these margins are sustainable or is it a situation where, as the new contracts start coming back in in a quarter or two, we are going to see margins back back off a little bit?

Yes, I think there is a couple of things at play here, but I do think what you said is right, which is that we have a lot of our contracts reaching an operational phase where they get better profitability than they would otherwise. A good problem to have would be to get a lot more early business, have the margins go down a little bit, which would lead to a lot of profit growth in the future. That is one of the dynamics of this business.

But I think there are other things. I think the mix was better in Services from the standpoint of BPO and ITO going down as a lower number. They had good volumes growth, which flows through to the bottom and I think from a total company standpoint, we are at the 33 to 35, so there is a point swing up or down a point there. Just like at Xerox, we were 39 to 40. I think there is a point swing there depending on who grows and how they grow. But I don't view it as a big exposure going forward.

Just one add is that signings did grow, total company signings did grow and BPO signings grew as well. I don't want you to walk away with the impression or the understanding that signings -- we had poor signings and that actually contributed to the increase in margins. Actually not so at all. In BPO, we had strong signings growth.

Okay, understood. And then if I could, one final question and that is Larry, you talked about the fact that corporate governance represented the early savings associated with the $100 million to $150 million range that you have given this year. I guess my takeaway from your comments was that -- or Ursula rather -- that you had perhaps realized some of those corporate governance savings a little bit faster than expected. Was that the right takeaway from your comments and if so, should we assume that you have already enjoyed a pretty significant portion of the $55 million that you expected to come from that area?

Actually what I said -- and if I didn't say -- what I meant to say is that there was some, I would call them low-hanging fruit from a governance perspective. If you have a two of something, you need one of them, you do that. We did that. We did that part of the savings on plan, so as we expected. The rest of the corporate governance savings and all of the savings are also on track, but they didn't already happen. The low-hanging fruit, easy to implement ones did and every other one, we are working on.

Okay, great. Well, thank you.

Keith Bachmann, Bank of Montreal.

Hi, guys. I will try again. The two questions I wanted to ask relate to some of the questions Rich just asked. But on the gross margin, Larry, wanted to just understand why specifically you think it is going to trend back down. I understand you only had a partial quarter of ACS, but within that context, wanted to try to understand what did currency do? You called it out a couple times in the reports that you provided. What did currency do and how does that impact your thinking amongst other things? And then have a follow-up please.

The only reason I said that margin might trail down a little bit is it is not a currency point, but supplies were, as Ursula said, supplies were a big bubble in the quarter because of the price increase and they are very profitable and that gives you a couple of points of margin. That is really the only reason you would see it. And ACS, as we said before, ACS was two months versus next quarter would be three months and they have a lower margin because it's a services business. They have a very good operating profit, but it is a trade-off there on the gross profit margin.

The currency didn't have much effect year-to-year. Again, it's a bouncing around at $0.93 to the dollar. It might have even helped us a little bit in the quarter and it may not help us in the next couple of quarters. So with all the moving parts in gross profit margin, to land on an exact number is very difficult and sometimes with lower margin, you actually did better in total. So we are confident we can be in that range and we are confident we can deliver the earnings, no matter what it is.

Okay, fair enough. My follow-up is on BPO. It had a very strong margin profile and you illustrated or talked previously about the good volumes in that business. It was up quite a bit year-over-ear on a pro forma basis. How should we think be thinking about that over the next couple quarters?

Well, I think it is what we said on the other answer is that it depends on the mix of new business coming in and the business that they are getting to operational phases. So we have got a little bit here of operational phases where if it is more profitable, then we start at the beginning. If we get a lot of new contracts and install them, it will vary.

But again, I think, generally speaking, we are going to land where we said we are going to land here no matter what operational ones or not. We are going to land on the earnings we want and we are going to be in that range of gross profit margin.

Okay, thanks, guys.

(Operator Instructions). Doug Ireland, JMP Securities.

Thank you, good morning. I had a couple of sort of housekeeping questions first. In your assumptions and your guidance, could you give us a sense of what the share count is that you're looking at I mean coming out of this partial quarter?

I think it is probably better if you call up Jim Lesko and go through the share counts. I mean I have some average numbers. I think that is a better idea.

No problem. And the same thing with the tax rate?

Tax rate, 32% is what we've said.

Okay. Just wondered if that had changed at all. Just making sure. Okay. And then on the headcount, I noticed that you had done some reductions of 2300, but I had also seen some announcements of hiring in specific areas. So I was wondering if you could give us a sense of what happened to the headcount and maybe your proportion of where that is in COGS versus OpEx.

The headcount is essentially on the headcount number when we announced the deal, about 130,000 people give or take 100 people here or there. So we do let people go. We sign deals, bring people on, so we are about where we said we were, 130,000 people.

And where there are COGS in OpEx, actually, I don't know really, probably half and half. (multiple speakers) So I think it's around -- it is around evenly split, maybe a little bit weighing in one direction or the other. But this is another one that we can actually give you details of in a follow-up if you don't mind.

No, I know that you were working on reducing the COGS and that ACS had reported almost all of their expenses as COGS. So I was just trying to figure how that had come together after putting the two companies together.

The places where we wanted to reduce, Doug, in the base Xerox we did reduce and I just don't know the mix now when you add back in the ACS number. We will get to you on that, but we did or are, some of them are already done or in place to actually take the headcount actions that we said and our cost actions that we said in R&D and SAG and so on and so forth in the base business, so nothing has changed there. So it is a matter of math that I have to do.

Great. The real question I have is around your cash flow generation. I mean it is a phenomenal amount of cash flow that the Company produces or is forecasted to produce. Your free cash margin in this quarter was about 6% and it is pretty closely related to your operating margin. Just wondering if you could talk a little bit about the linearity of your free cash generation plan over the next year and maybe going into '11 and how that relates to your operating margin? I know that you have a target for your free cash margin. I am just wondering how we get there?

Yes, I mean that is -- I think it is a little bit of an academic question. We manage every quarter on cash and every quarter, significant lines in the cash flow have been managed, including inventory, accounts receivable, accounts payable and not to mention earnings. And so there isn't necessarily any kind of a specific formula I can give you.

I think if you look back at our history, you will see that we continually deliver and exceed the numbers that we give and each quarter is managed. Sometimes -- last year, we started off, we did $22 million of cash flow in the first quarter and we did $2.2 billion for the full year. So if I had given some percentages on the first quarter, it would have been drunk and disorderly conduct.

So it is your ability to manage within the quarters and work your way to the numbers that you said you would deliver and that are appropriate. So I don't think there is any specific number. At the end of the year, we take some percentage of revenue and we say that is what we are going to deliver. I don't know if that is helpful, but that is how we do it. (multiple speakers)

In your uses of cash, you have your cash fairly well allocated between -- you are running the business and paying down debt. Before, you had talked a little bit about doing more of your small channel acquisitions. Does that mean that that is not on the table for a while? Is there any change in that thinking?

Ursula Burns We have no change in the thinking of how we are going to acquire as we go forward in BPO or in channel. They would be small, they would generally tuck in under running business today and so no change at all. We have time for one more question.

Ananda Baruah, Brean Murray.

Thanks, guys, for taking the follow-up. I guess, Ursula, just to wrap, is there anyway you could just maybe give us a sense of some of the areas where you saw things play out I guess much more -- kind of much more positively in the quarter than you thought they may have kind of back in January when we spoke with you last?

I think the only place that played out better than I thought is probably in usage. BPO I expected to be strong, the acquisition synergies and the go-to-market plans, all we expected to be strong. Now obviously things worked out very well here in the quarter and hopefully next quarter they work out that well as well. We are trying for that to happen. The one place that I had positive unexpected news was in enterprise usage.

And would that be, even if you sort of didn't account for -- if you backed out the part of the usage, that was because of the purchasing ahead?

There is no usage associated with the purchasing forward, if that's what you are saying. (inaudible). We have to now have them use it. But I am talking about in the large enterprise accounts, activity didn't grow, but pages and printing on our installed machines did and it is just -- there is nothing indicating -- there is nothing special about that. You just asked what I was surprised about and that's what I was surprised about.

Thank you very much for your time, all of you on the phone, and let me close with a reminder that we are hosting our investor conference on May 4 in New York City and online in a live webcast. And we look forward to your participation there and we can get into more detail. So enjoy the weekend. Thank you.

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