全錄公司 (XRX) 2010 Q3 法說會逐字稿

Good morning and welcome to the Xerox Corporation third-quarter 2010 earnings release conference call hosted by Ursula Burns, Chairman of the Board and 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 meaning over to Ms. Burns. Ms. Burns, you may begin.

Good morning and thanks for joining us today. We'll get started on slide 3. Building on our solid first-half results we delivered steady revenue and earnings growth in the third quarter, keeping us on track to close the year strong, and giving us confidence to increase our earnings expectations for this year and 2011.

Remember that we're reporting not only GAAP earnings but also adjusted EPS to take into account that ACS acquisition. We're also reporting on a pro forma basis which assumes that ACS was in our 2009 results. Our third-quarter pro forma revenue was up 2% or 4% in constant currency. We delivered Q3 adjusted EPS of $0.22, above our guidance of $0.19 to $0.21. On a GAAP basis earnings were $0.17 per share, this includes restructuring and intangibles.

Cash from operations was $366 million. We've generated $1.4 billion through quarter three, and we are still on track to deliver $2.6 billion in operating cash and $2 billion in free cash flow for the full year. Cost and expense management continues to be a top priority, contributing to a nearly 1 point improvement in operating margin, and we're well on target with our revenue and cost synergies.

We also plan to implement additional cost reduction activities this year and into 2011. This gives us more flexibility in our business so we can continue improving operating margins while maintaining investments to drive growth. As a result we'll take a Q4 restructuring charge that is $120 million higher than previously disclosed. Larry will talk more about this in a moment. First I'll review our revenue results, Larry will cover our financial performance, then we'll both take your questions.

Let's turn to slide 4. Our revenue is now almost equally split between technology and services. This gives us a steady mix of annuity that comes from both segments. In technology we generate recurring revenue from service and supplies that support our document products. Multiyear outsourcing contracts are the source of strong annuity from our services business.

Total revenue of $5.4 billion was up 48%. On a pro forma basis it was up 2% or 4% in constant currency. And it has been sequentially higher each quarter this year with 2% growth in Q1, 3% in Q2 and now 4% in Q3. Good trends that reflect our strength and leadership in the marketplace and track with the modest economic improvements we began seeing in Q4 of last year.

Annuity revenue on a pro forma basis was flat in the quarter, of 2% in constant currency. Equipment sales continue to grow, the result of strong demand for new products, expanded coverage and more focused investments in marketing to support our channel partners. In Q3 we grew equipment sales 13% or 15% in constant currency.

Through the third quarter we've launched 17 products and we introduced more color printers this week that broaden our competitive offering for businesses small to large. So while there is a lot of attention on our growing services business, it's really important to note that we are investing and benefiting from a rich product portfolio that delivers healthy recurring revenue.

Slide 5 shows some of the key metrics in this area. In our technology business we monitor page growth and machines in field, or MIF. It's worth repeating the formula for success here -- more MIF leads to more pages, more pages generate more revenue from supplies and technical services, both of which flow through to our annuity stream.

For Q3 we saw growth in MIF supporting a 20% increase in installs. This install activity reflects solid event across all product segments and speaks to the strength of our new products and our focus on expanding distribution. Our leadership in color printing continues to drive an increase in share of MIF and pages.

Total color revenue grew 10% in the quarter reflecting the continued success of our ColorQube 9000 series and the strong launch earlier this year of the Xerox Color 800 and 1000 series. Color pages were up 9% year over year; we continue to see this as a good sign that color usage trends are improving, which helps to offset declines in black-and-white pages.

These declines are most notable in production black-and-white and they align with industry trends as pages moved to color and more transactional pages like bill statements move online. That's why our growth strategy is focused on advancing digital printing to create more color pages. During Graph, our Expo, earlier this month we showed this firsthand. At the very busy Xerox booth we put the spotlight not on the product, but on the customizable color applications that can be produced only on Xerox digital technology.

In the services side of our business signings were $3 billion. On a trailing 12 month basis we grew signings 26%, that's up from 12% growth in Q2. And it represents some very large wins including the customer care service we're now providing for Italian mobile media company 3 Italia, as well as multimillion dollar government contracts for services like processing child support payments for the state of Wisconsin.

The joint sales activities between Xerox and ACS have resulted in more than 30 revenue synergy deals that deliver significant total contract value for the Company. This includes a couple of deals in Europe where we're very early in our penetration, but quickly following the leads from our customers and from our global cross-selling teams. And we've developed a synergy pipeline of more than $3.5 billion year to date, up $1 billion from last quarter, reflecting the incremental opportunity of our two companies coming together.

So to sum up the quarter, demand continues to improve for our technology, especially in color and across the board and businesses of all sizes. Since the economy started slowly to improve around last year at this time we have seen consistent trends each quarter, particularly stronger growth in our developing markets and from small- and mid-size businesses, as well as a modest uptick from large enterprises.

The benefit of our broad product line and expanded services certainly gives us a competitive advantage as companies begin to invest back into their businesses. Along with double-digit equipment sales growth, multiyear service contracts continue to fuel our annuity which is now 83% of our total revenue. So all in all we continue to track positively this year, positioning us well to close the year strong. That's a good place for me to turn it over to Larry.

Thank you, Ursula, and good morning. Third-quarter results show positive performance as our business model continues to deliver -- revenue growth for both technology and services; good cost and expense management; growth in earnings and operating margin and positive balance sheet results. Let's start with our technology slide.

Technology revenue grew 3% and 5% at constant currency and represents $2.5 billion or 45% of our business with a segment margin of 10%. All three product categories -- entry, the midrange and high-end -- performed well and had double-digit growth in both installs and equipment sale revenue. This is a positive sign for future post sale annuity revenue growth.

In entry, installs continued strong with positive contributions across geographies and channels. Midrange performance accelerated reflecting continued strength in the ColorQube 9000 series and in our color laser portfolio as well as good improvement in A3 Black and White. ColorQube, with its high image quality, ease of use and unique pricing options, has yielded a high competitive knock-out rate of around 50% and reflects Xerox differentiated innovation.

And we're not standing still in our laser products. We just announced this month the WorkCentre 7545 and 7556 Color MFP which brings leadership quality, productivity and price value to the marketplace. And the results in high end were very encouraging with positive install growth in color and black-and-white and a very successful showing at Graph Expo in early October.

The recently launched Xerox Color 800-1000 continues to be the largest contributor to growth. But in addition, our Color Continuous Feed had a good quarter and iGen continues to do well in a challenging commercial print environment.

At Graph Expo we announced the iGen EXP that increases the iGen sheet size to 26 inches increasing productivity and further opens up more applications to digital. The black-and-white market certainly remains pressured, but we were pleased with the positive install growth we saw in third quarter. With revenue growth of 5% at constant currency and segment margins of 10% it was a very strong quarter for technology.

Slide 7. The services segment is comprised of three lines of business -- business process outsourcing, document outsourcing and information technology outsourcing. Revenue mix for the quarter was about 56% business process outsourcing, 31% document outsourcing and 13% IT outsourcing.

On a pro forma basis total revenue grew 3% at constant currency driven by BPO which was up 8%. BPO growth areas include customer care, government and commercial healthcare, financial services and human resource outsourcing. Revenue growth was driven by prior quarter signings as well as volume increases in existing contracts.

Document outsourcing and ITO growth remain impacted by the relatively weak economic environment, although pipeline is strong for both. Document outsourcing had strong year-over-year new business in total contract signings, although account volumes remained pressured. Operating margin of 11.2% is up almost 1 point and reflects higher revenues, effective portfolio management, as well as savings from restructuring and synergies.

Indicators for future revenues were very positive as signings and pipeline growth were strong. On a trailing 12-month basis new business signings, including a growing amount of synergy signings, grew 17% and total signings at $3 billion grew 26%. Additionally, signings growth rates improved quarter over quarter.

On a year-over-year basis we grew our total services pipeline by 34% including synergies which are now over $3.5 billion. We expect to see the benefits of this pipeline in the coming quarters. So positive results in both the technology and services segments.

Slide 8. Pro forma revenue grew 2% and 4% at constant currency and has improved each quarter this year. Operating margin also continues to show good results, up nearly a point year over year. Gross profit margin at 33.6% is within our business model range of 33% to 35% and on a pro forma basis is down slightly year over year.

We have done a lot of cost work to offset the year-to-year pressure of changes in foreign exchange rates. This cost work coupled with hedging and currency sharing with our Part B partner, Fuji Xerox, supports our continued guidance of gross profit margin between 33% to 35%. RD&E continues to reflect restructuring efficiencies; SAG decreased $18 million on a pro forma basis and improved as a percent of revenue by 0.8 year over year.

Improvements in G&A and bad debt expense were partially offset by investments in selling. And year to date we've recognized about $75 million in cost synergies and are on track to over achieve our base case of $100 million for the year. In total, revenue leverage in cost and expense savings improved operating margin by almost 1 point to 9.2%.

We are pleased with the year-to-date progress on operating margin and will continue to drive for improvements. Our plan is to incur an additional $120 million of restructuring charges over the $280 million previously announced. This will allow us to capture synergies earlier and take additional cost actions to address a still weak economy and unfavorable currency.

Our adjusted tax rate was 32% and we delivered $0.22 of EPS on an adjusted basis. We continue to differentiate between GAAP earnings and adjusted earnings for guidance and actuals reporting in order to give you transparency into the fundamentals of our business.

As a reminder, 2010 earnings on an adjusted basis 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. So overall a very good quarter driven by revenue growth and cost and expense management.

Slide 9. In Q3 we delivered $366 million of cash flow from operations driven by earnings. Working capital used $174 million of cash in the quarter as we built up inventory related to new product launches and for fourth-quarter activity. We expect working capital to be a significant source of cash in Q4 as it has been historically.

Year-to-date cash flow from operations is $1.4 billion and has absorbed acquisition integration-related outflows of $144 million and restructuring payments of $148 million. Third-quarter cash flow was $220 million -- $220 million with CapEx and cost of incremental software of $145 million. Our full-year estimate of CapEx is approximately $600 million.

Cash from financing was a use of $231 million and we ended the quarter with about $1 billion in cash. We expect a strong fourth quarter consistent with our cash flow model and our year -- and our full-year outlook is for $2.6 billion of cash from operations and $2 billion of free cash flow.

Next slide. Continuing on cash, we are making excellent progress on paying down our debt to get to our desired leverage. On February 5, 2010 we had $10.5 billion of debt. Since then we have paid down $1 billion of debt and we expect in fourth quarter to pay down an additional $900 million to bring us to an ending year-end debt balance of $8.6 billion, $100 million ahead of our projection.

As announced during second quarter, we have called our 2003 10-year bonds of $550 million. In our fourth quarter we expect to report a $15 million charge as a discrete item which represents $8 million of a non-cash item of unamortized debt costs and $7 million of premium. The early call of this bond not only saves us interest expense, but gives us an increased flexibility in debt reduction.

The top box -- the top right box shows the math that gets us to $8.6 billion year-end debt. We are well-positioned to have at least $1 billion of cash available in 2011.

Now let's look at the debt in the Financing Dynamics box. I continue to show this debt breakdown to ensure there is perspective and context in understanding our debt and our commitment to maintaining an investment grade rating. We have $9.5 billion of debt of which $6.2 billion is in support of our financing business.

The finance receivable of $7.1 billion is a committed revenue stream from our customers. In addition, we stagger our debt ladder to be well below our annual free cash flow and total liquidity so we can access capital markets opportunistically.

And just to touch on receivables, we continue to see significant improvement in both write-off experience and requirements from bad debt provisions. So we are making significant progress paying down debt, remaining debt primarily supports the financing of our customer equipment, our cash flow and financial flexibility are strong, we are focusing on significant debt reduction in 2010 which will enable a return to other cash usage as share repurchase during 2011.

In summary, we continue to be very encouraged by our results and we are optimistic going forward. And now I'll give it back to Ursula.

Thanks, Larry. This is the year we transformed our company into the world's leading enterprise for business process and document management. With nine months under our belt, we've been successful in leveraging our brand, our global scale and innovation to win multi-million dollar deals for business process, IT and document outsourcing.

During the third quarter alone signings for service contracts grew 26% and revenue from our BPO offerings was up 8%. Along with 13% growth in equipment sales, this progress fuels our healthy annuity stream for the long-term.

With ACS now a Xerox company we're capturing synergies from the acquisition to deliver more -- to deliver above our $100 million target for year one. And as I noted earlier, through our cross-selling we've signed more than 30 synergy deals so far this year and generated a synergy pipeline of $3.5 billion.

There is no doubt that Xerox today is more differentiated in the marketplace, we're more competitively advantaged and we are growing our top line. At the same time we're disciplined in controlling costs, we're generating strong cash flow and we're delivering solid bottom-line results. I am confident this progress will continue.

As a result we are raising our full-year guidance for this year and for 2011 to reflect the positive momentum we're building in the marketplace and the efficiencies that we're driving across the business. For the fourth quarter we expect to deliver adjusted earnings of $0.28 to $0.29 per share. This will bring us to a full-year adjusted EPS of $0.92 to $0.93, up from $0.88 to $0.92 per share.

And we now expect 2011 full-year adjusted earnings per share of $1.05 to $1.10, up from 0.95 to $1.05 per share. With that I thank you and again for joining us today and I'd like to open it up for your questions.

(Operator Instructions). Richard Gardner, Citigroup.

Okay, great, thank you and congrats on a solid quarter. I was hoping to ask a question about supplies. It did look like supplies were perhaps a little bit below normal seasonal in the quarter and was just wondering if there was any particular story there? And then I have a follow-up. Thank you.

Thank you, Richard, hello. What we saw in supplies, as you remember for the first three quarters of the -- first two quarters of this year and the last quarter of last year we saw a pull down, a bit of a pull down in supplies, particularly from 2009. And we started to see a little bit of a bounce back in the beginning of 2010.

So what we're seeing now is a leveling off of that supplies inventory in the channel. And so, I wouldn't actually interpret that or read a lot into it except to say that I think our partners at a good supply level. So nothing unusual; I think they're at a level that they can actually operate their business effectively.

Okay, great. And then for Larry -- Larry, could you just give us a little bit more detail on what the additional restructuring actions for Q4 in 2011 entail and exactly what you're planning on doing there? Thanks.

Okay, thanks, good morning. Restructuring is focused on actually little areas across the business to keep us cost competitive. And it's really focused on getting ahead of the curve here. We have obviously had a lot of pressure on costs associated with unfavorable exchange rates, particularly the yen. And we wanted to get restructuring all behind us as we go into 2011 so that we have a clean playing field going forward. So, it's across the board; there's a lot of focus on product cost, supply chain, cost of service in particular, infrastructure, generally spread across those areas.

Larry, if I could just follow up one more time. What exactly can you do in terms of restructuring to help you with the yen problem? It seems like -- I know you have a currency sharing agreement with Fuji Xerox and I think you go back and renegotiate pricing with them based on yen moves. But what would fall into the restructuring bucket that would help you there, please?

Well, I think the first thing is the way we approach currency changes is that it's cost. So, you have to get in your mind that it's cost and you have to compare where cost was, where it is and where it needs to go. And it just means that you have to find ways to get your cost lower.

So some of that happens through changing your sourcing to some degree which we've tried to optimize. Some of it is restructuring around the whole supply chain of how you move product around the world, where you store it, those kinds of things have to be focused on and there's restructuring around that. And then you have to look at other areas where you can't do any additional in that specific, you have to look at other areas that offset it.

So even though infrastructure has nothing to do with currency, in order to make sure that we have a balanced operating margin, which is really the important measurement here, we go after other areas. So I might take infrastructure out of corporate to offset some of the exchange rate effects because you can't get it all in the short term. And so I think that's how we look at it.

Rich, if I may just add onto Larry's point. It's important to actually broaden the spectrum when we look at what's happened from a currency perspective in 2010, what we suspect will continue on a go-forward basis.

So, Larry's point, I just want to reiterate it, is not that we actually look at the source of the problem, which in this case is currency. We look at all the areas and levers that we can pull as a solution to that problem. And that's not only where the source is, it's everywhere in the Corporation. And we don't expect there to be a huge positive turn in currency next year, so we have to prepare ourselves for this today being the reality on a go-forward basis.

Okay, great. All right, well thank you.

Shannon Cross, Cross Research.

Thank you very much. Good morning.

Good morning, Shannon. How are you?

I'm good, especially after this quarter. So, could you talk a bit about printing trends? And what we're just trying to understand is sort of where the pages are coming in, clearly color continues to grow, but what you're hearing from your customers in terms of their willingness to print. And any thoughts you have on the impact from tablets and some of the other pressures out there?

That's a great question. What we're seeing is a continuation of one set of trends and a little bit of a pickup in another. So let me talk about the continuation of trends. Black-and-white pages at the high end are still declining and they're declining for a couple of reasons.

One is driven by Xerox and that's a big push towards color. And we continue to invest R&D, selling, marketing everything that we can towards pushing more and more color pages and that clearly is helping customers decide to move to color.

The second is that there are certain technologies; I'm not -- Internet technologies, eTechnologies that drive pages away, particularly transactional like bill pages away towards viewing, towards other mechanisms to see them and to operate on them. Those trends are continuing and they're moving pages away from black-and-white, particularly at the high-end.

What we see on the flip side is a move more towards color. We show that with color page growth, revenue growth, color as a percentage of our revenue growing and that's positive. And our position in the marketplace in color is stronger than our competitors by far across every industry, across every line of business, every product type, across every industry.

So color is increasing, as it has been, and black-and-white, particularly at the high-end is decreasing. We're also seeing a move as we push more in BPO toward operating an infrastructure a little bit less on a paper-base and moving it more towards a services base.

So while these things are moving around we are preparing and prepared to cover a document process that is paper-based in any means that the customer wants to be able to operate on it. So we see small/medium businesses, obviously developing markets, doing better than US large businesses. But we're also seeing a little trend up in enterprise printing, particularly in color.

Net-net -- I'll give you a long answer -- net-net good movement, black-and-white down at the high-end, we're covering that with color, increasing color up everywhere and we have color offerings everywhere, BPO picking up across the board.

Okay, great. And then just sort of a follow-up on that. In terms of the competitive landscape, can you talk a little bit about what you're seeing from the competitors? I mean it appears with 54% growth in units for the high-end and (inaudible) on color and substantial growth for other color devices that you're gaining share. But can you talk a little bit about where you think the shares are moving and how you think Xerox is doing vis-a-vis the competition?

Yes. As you know, Shannon, we see share in a quarter lag, so I can talk about quarter two share and then my thoughts on what we did in quarter three. Quarter two you saw share increase in just about every segment, particularly in color. Even in black-and-white interestingly our share increased, but that's on a declining base. So share increasing across the board in color.

What we're seeing from specific competitors, it's hard to say it this way but we're seeing nothing too exciting. So everyone is competing in the marketplace with their specialty. So Lexmark focuses on the low-end printing area, mid- to low-end printing area and they have not expanded out of that, they have not operated in an unusual way at all and we're competing well against them. All the way up to HP that operates a little bit broader base they're not doing anything unusual and we're definitely competing well against them.

So at the low end we continue to launch products, we continue to expand distribution. At the high end we continue to launch products and continue to expand distribution and we don't really see a big change at all. I was waiting for a little bit more in our competitive reactions.

Okay, great. Thank you.

Ben Reitzes, Barclays Capital. Keith Bachman, BMO Capital Markets.

I had a couple as well. Could you talk a little bit about why your gross margins were down so much sequentially in sales?

I can, we look at operating margin first as the most important metric, especially as our business moves more towards a services -- with more services mixed in. The margins on services, as you know, are lower than on equipment so we actually -- and we're mixing more and more to a services business. So we look at operating margins -- I'm very pleased with the growth in operating margins, almost 1 point quarter-to-quarter basis and more than a point on a year-over-year basis. So first there.

And then if you look at third quarter, third quarter is traditionally our weakest margin quarter. Fourth quarter will bounce back with more revenue on the cost base that we have. For seasonality a mix of revenue, more services, and clearly we had to outrun a pretty strong headwind from the yen. And we did a pretty good job with that, we covered a lot of it, but on a year-over-year basis still down slightly, but did a lot of work to cover that headwind.

So I would not interpret the margin on a quarter-to-quarter basis as a big signal. You have to look at that, but also look at the operating margin quarter-to-quarter and year-to-year (multiple speakers) read of our business.

If I could just push a little bit -- as a way to think about the larger influences there, was the yen the biggest determinant in either the sales or the service outsourcing and rentals? Both of them declined 50, 60 basis points. Is there a way to prioritize what the impact was relative to all those forces that you just mentioned?

Yes, I think that you have two factors that you have to consider; clearly the yen is a big one. Larry was supposed to handle this question, but the yen is a big one, but also seasonality is a big one as well. We have less revenue in this quarter and more cost. And supplies last year or last quarter were stronger and supplies have stronger margins as well. So supplies down a little bit but in-line with what we expect them to be. Services mixing up in our business and the yen clearly a headwind. But we were able to offset a lot of the yen impact in the quarter.

Okay. And then, Ursula, I guess what you said is you expect it to bounce back. So last year you had over a 35% sales gross margin. In the December quarter it sounds like we should be thinking that it will be back over 35% for the December quarter?

No, we have a -- one of the things that we've done pretty carefully to communicate to the marketplace is the range of margin that we operate in, 33% to 35%. It's important to understand that we have a growing services business, it has a gross margin that's lower than us, but an operating margin that's higher (multiple speakers).

No, no, I understand that, Ursula. Sorry, it was sales specifically, the sales gross margin.

Oh, just want a narrow piece. But it will definitely tend towards the higher end of our range. Whether we'll be able to beat it, we'll try like heck, Keith, but we're tending towards the higher end of the range from a sales -- from a traditional business sales perspective.

Okay, fair enough. And then I'll just ask one more if I could. In terms of DO and ITO, the revenues on a constant currency basis, call it about flattish. When does the services revenues -- the pipeline obviously seems strong, when does that benefit the growth rates, do you think?

We talked about this the last call and it works a little bit. We get probably 1/60 of the signings in a quarter starting after you sign it, if you know what I mean.

Right.

So 1/60 of it. So as we accumulate, as we sign $3.5 billion -- as you continue to sign more and more and more of annual recurring revenue, or total contract value revenue more importantly, you'll see that start to feather in. So it will take -- 12 months from now we'll see a big positive from what we just signed and then it will continue to roll.

So I think it's starting now, Keith. But you won't see the full effect -- and it does vary by line of business depending on where we sign. Most of our signings are on this total contract value basis and across the business lines they kind of come in in the same way.

We do have some business that we call walk in and take over, where when we sign the business the revenue grows immediately. But it's not that much -- this business is not that much like that. We prefer to have total contract value growth. So you'll see it coming, it just is not -- I don't know if we even modeled out when you'll be able to see it all.

I think part of the problem too, Keith, is that you do have -- those two businesses are a little more affected by the economy and they're a little more affected by the current account usage volume that goes on in those accounts. And that, along with new account revenue that you're adding, you're getting a minus here from some of the volume that's going on, a little bit like usage on multi-function devices. So that is having a moderating effect. And as that starts to improve hopefully as the economy gets better next year, I think the combination of both of them will show growth in those two areas.

So, three lines of business if I can just -- one is BPO, the other one is ITO and the last is document outsourcing. BPO strong everywhere, signing, pipeline revenue growth, etc., very, very good and following a very strong trend grew revenue 8%. ITO a little bit more muted and document outsourcing more muted -- not on signings, that was good. But usage on current accounts is where we are seeing -- if there's any dampening it's on that and particularly in document outsourcing and ITO, BPO is -- the wind is at the back in BPO.

Thank you.

Ben Reitzes, Barclays.

Yes, thank you very much. I wanted to just follow up on that, that was actually the thing I wanted to talk about as well. Just with regard to the signings, I mean up 26% trailing 12 months, which means it was up much more than 26% in the actual quarter. Even if you're recognizing 1/60 right after it signed, it obviously seems like that would be a running start to your -- what's your forecast next year for services? Isn't it like 7%? And does that really increase the visibility? And then I have a follow-up.

And so, total trailing 12-month signings up 26%, on a year-over-year basis it's up 40%. So if you look -- so no matter how you look at this business our signings are growing. And the answer is, we do expect that's one -- we do expect to see revenue acceleration in 2010 from the fact that we have a robust services business, robust BPO business.

You have to mix in a little bit of the fact that we -- you have to go over account that you win and you lose -- net-net will have a positive contribution from services and you'll see that in our growth rates in 2011. I don't see any --.

(multiple speakers) the order of magnitude though -- I think you even outlined it at your analyst day. Isn't it from like the 3-ish percentage now? Like towards the -- maybe it's six to eight-ish or isn't that what you laid out?

Yes, that is what we laid out.

Yes, okay. And then --.

And it does work out this way, Ben. We can actually spend more time offline. You have total growth and then you have obviously takeaways, growover accounts. You have lots of different mix issues in the business. But the growth in services we expect to be in the 7% to 9% range, which is what we said in the analyst days. BPO growing the highest, ITO growing the lowest.

Great, yes. And obviously off to a good stored with that visibility. Then I just wanted to clarify the other thing Larry said is that when you see the signings like this, some of this is consolidation of fleet, right, document outsourcing especially, and that would lower usage also as part of the plan.

Does that have a cannibalizing effect too? So people maybe not take this -- extrapolate this too positively, could you just go a little more detail about you mentioned it would keep a little bit, but I think there is an offset there in terms of usage that you guys are driving and as well as the economy. And I was wondering if you could delineate between those two, which is an offset as well.

There are two different hydraulics that happen here, Ben. First is when we engage the document outsourcing customer, the vast majority of the time we do that, we are consolidating printer fleet that is not Xerox fleet. So that is a -- because we are not the biggest player in printers; it's Lexmark, HP, as you know, single function, particularly monochrome printers.

That is an add to us. As we run those accounts, so first year, second year, third year as you run those accounts, volumes either go up or down depending on how the economy is working, how that industry is going. What Larry is referring to is not the upfront engagement, which is growing for us. There is no doubt about it; you see that in our signings, in our document outsourcing signings.

What he is talking about is once you are in the account, volumes go up, volumes go down. Sometimes they go up because the business is growing or because we have introduced another service. They can also go down because the business that we've done this takeover in is not growing or we are losing a service. And that is what he is talking about, not the initial signing. He's talking about the volume in the account once we sign it.

Okay. And then just finally, I think I know the answer, but just wanted to make sure. With all the cash flow that you see coming in in the fourth quarter where you normally have a very strong performance, how's it going on your pace to returning cash to shareholders by mid next year? And what is your priority of share repurchase versus dividends? Has anything changed?

Yes, so, Ben, I think we were on a very aggressive pay down of debt, we're actually ahead of that aggressive plan, albeit $100 million. So that's very good. We've given ourselves the flexibility to pay down more debt, so that will help us. We're confident that the cash flow in the fourth quarter is our biggest. If you look back in history here, we blow the doors off in the fourth quarter and that's what we're working on to make sure that happens here.

And we're confident that what we said -- what we've said for the last year is that we will look at share repurchase by mid-2011 and start to return to shareholders -- also look at the dividend as well in the mid-2011 time frame. So all of that we're confident of. And as we get closer obviously there's more confidence.

Thanks so much.

Ananda Baruah, Brean Murray.

Thanks, guys, for taking the question and congrats on the real solid quarter. Ursula, I guess just a quick question about your thinking relative to your expectations as we move through the summer regarding the underlying installment trends. It feels like this is the first quarter where -- it was a real solid quarter, I think everybody is probably pretty pleased and maybe a little bit surprised across the board.

It's the first quarter to me anyway where we can kind of say, wow, like every segment you guys report on sort of either sustained positive trends or even substantively improved. I just wanted to get your thoughts on how much better are things on the install bases actually going than maybe you guys thought going through the summer?

And then to the extent that they are a little bit better, what could that mean to Xerox as being -- with print being more of a late cycle play when you think about what the tailwinds to any sort of revenue might be into 2011? And if I could just tie that in with you guys maybe updating your 2011 guidance today, you guys typically don't -- you're a pretty prudent management team, don't do anything unless you feel pretty good about stuff.

So, I could read through potentially that that means you feel on the margins a little bit better about sort of trends heading into next year. And then just, Larry, if you could tie in typically -- like in 3Q typically working capital is actually a source of cash, I mean even as you ramp up for December Q seasonality if we kind of just look back.

And it was a pretty significant use of cash, presumably because you guys are sort of ramping up for some of what you're seeing on an install basis. So I guess the point is, are we looking at a little bit better growth here than we thought that just hasn't -- that just hasn't really manifested itself in revenue yet heading into 2011? Thanks.

So, let me start with that very long question. I think I'll catch it all -- Ananda, if I don't you can point out where I've missed. On the question of what are we seeing, so how are we feeling, how is the economy going. I think what we've seen, we saw an uptick, even though slight, in small-/mid-size businesses and in our developing market territories and that's continuing. So we haven't seen a change in trend there, which is good news.

We did see a little uptick in large enterprises this quarter. That's positive, that's positive for us. It helps us in activity, you look at our activity -- every segment from the largest thing that we sell, continuous feed machines, to the smallest thing that we sell grew including black-and-white. So, I think that it would be hard for me to say that things aren't looking a little bit better.

I am not confident yet -- I'm not confident enough yet to say that things -- this better will stay forever. And we're not counting on this better staying forever. We have a great product line, we have expanded distribution, but I'm still cautious on the economy, particularly in the large enterprise portion of the economy, employment rates haven't grown, etc., etc.

So we are approaching the business this quarter and quarters going forward like we have all quarters in the past, which is we approach it cautiously but optimistically. So I do believe that we've seen some uptick and until I see the uptick change I'm not going to predict it changing even more. I hope that that helps. We do have tailwinds, as I said, but I don't know if they'll continue.

2011 change, it got to be a mass problem pretty simply. We're now in quarter three and quarter three when you add it up and you add up quarter four, we're going to be past what we said we would do in 2011. So it was kind of hard to continue to have a conversation about a set of numbers that we were actually running up against in quarter three. So there was no magic around -- about updating the guidance for 2011.

We could have waited I guess. There was no magic, there's no exciting thing about it except for that when you look at it we're going to be at $0.92 this year and it's kind of hard to say -- $0.92, $0.93 this year, full year this year, it's kind of hard to stay at $0.95 next year. So we just decided to do it because the math worked out the way that it worked out.

And I think we do feel optimistic about next year as well. We'll (multiple speakers) the numbers at the end of the fourth quarter in January when we report, we'll revisit it. But I think given where we are in the year with two quarters behind us we're confident going forward here.

On the cash side, I think you have to look back at 2009 here. We had an enormous constraint on anything associated with cash. We obviously didn't have volume on supplies or machines in 2009, and so we pulled back significantly on inventory. And so for the -- and by the way, there were some pliers that went away, I mean there's a lot of stuff that is not announced or talked about.

So the whole three quarters of 2010 has really been building back demand and also the inventory levels to support that demand. And so, that's what we've done for three quarters. We're confident that in the fourth quarter we're going to have very good demand, we're going to have good revenue growth and we're going to ship that supply and the inventory is going to go down and it's going to be a source of cash.

We also have a quarter where we concentrate -- these are my words -- But we concentrate more on accounts receivable, of getting things collected by the end of the year than maybe we should do in earlier parts of the year. So I'm confident that will be better. And then we're going to have a good profit quarter. So all of those lead to confidence in the cash flow.

So, thanks a lot, Ananda. Next question, please.

Chris Whitmore, Deutsche Bank.

Thanks very much. I wanted to follow up on some of the earlier questions around signings. I know last quarter benefited from a lot of renewal activity of existing contracts. Can you give a little color on new business contracts versus renewals in terms of the booking strength you saw in Q3?

Yes, so I think that you'll see across the board we saw growth quarter to quarter and year over year. So new business signings were for this quarter up 17%, last quarter they were up 16%. So new business is good, renewals are very good. We had a high -- a renewal quarter last quarter, we have a another good one.

We always give -- we give a range of 85% to 90% and we are trending at the high end of that range. We did last quarter and we're seeing that this quarter as well. So all aspects, so signings -- pipeline, signings and how that signing comes from synergy, from renewals, are all trending very well. We did sign a couple of deals in Europe as well, so this is kind of working out the way that we had laid out for it to work out.

On the $2.5 billion of pipeline you reported last quarter, now that's up to $3.5 billion of synergy pipeline, can you give some color on the close rate that you've seen on the pipeline of synergy activities?

We've closed -- we've already signed and closed over 30 deals. It's kind of hard to do close rate because we haven't really lost any yet. So, we are engaging clients, and the ones that are up for business we win. So we've signed 30 so far and I expect that we'll continue to sign more and continue to close.

So 30 out of 30, that would be 100%?

Yes, sure. But I mean obviously not 30 out of 30, Chris. I mean some don't go to contact at all, some well before we go down to stage two get moved to someone else. We are -- it's really, really early to actually start to quantify the close rate. I think once we get into this a little bit more we can actually figure it out, yes.

So 30 clients so far, 30 customers, 30 signings, international as well as US, strong synergy mix. Baseline business is going well as well. Baseline business in BPO, baseline and ITO, and baseline and document outsourcing. So I think a pretty good mix.

Okay, thanks for that. Last one for me is around revenue expectations. Previously you talked about $22 billion for this year, $24 billion for next year. Can you update us on the revenue expectations? You did update us on earnings, but any color on revenue expectations? That would be great. Thanks a lot.

Yes, I don't think we've changed our thought process on revenue. I mean, that's a pretty good growth rate that we have in there and when we get into January and we see where the fourth quarter closes we'll be able to talk about growth rates a little more specifically on revenue.

Thank you, Chris. Next question, please.

Douglas Ireland, JMP Securities.

Thank you, good morning. I wanted to ask a little bit about the growth in hardware and installs. Can you help me understand what the lag might be between this growth in machines in the field and when that might hit on the supplies line?

So, yes, we saw install growth across all lines of business and we saw MIF growth as well. So as you -- which is more of the indicator than even the install growth. And it depends on the size of machine and the type of account. But I would -- so -- and since we're dealing with a very large post-sale number, which is a very, very large post-sale number -- you start to see the growth slower. You will not see percentage points growth quickly.

So next month you won't see the impact of this 20% increase in activity. But you will see, and what you've already seen is a flattening out of the post-sale starting to grow through quarters. So, it'll start today, Doug, it's just that the numbers are small on a very, very large base.

The way that I think about this is there is nothing bad about putting in a machine, there's not a thing bad about putting one in. The more you put in the better it goes. The bigger they are the better it goes. And what you can look here is that we have growth in high-end color, we had growth in black-and-white, we had growth in the midrange, etc. So we'll start to feather in this revenue growth. And they are comprehended into the outlook that we gave for the quarter and for the -- for 2011.

Sure. I guess I was just thinking, what is it, three months or six months before people start to order those supplies? I'm just trying to make some connection (multiple speakers).

On no (multiple speakers).

Remember, Doug, you're talking about four year contracts here. So if you look at the service content of it you're adding about 1/48 of the service content every month. And so you multiply that by the growth rate. I think you would see -- what I would say here too is that you would see growth immediately if we weren't facing the same problem we talked about before, which is that there's a lower usage level that you see with customers on the bulk of the MIF that Ursula talked about.

And so it's very hard to see. But this is the kind of thing that slowly adds to the growth rate. And you look at past history, we were down and flat and within a two-year period we got to 3%. So I think you will see the positive signs of this coming through as we get into 2011.

Yes, I know, (multiple speakers) I think it's a great leading indicator. The other thing -- I was just wondering if the ASPs on supplies are stable or is there a natural attrition to the ASPs on the supplies?

No, ASPs on supplies are more stable than ASPs on equipment, obviously, because we signed a contract -- as Larry said, we signed that contract generally for a price throughout the contract. So ASPs on supplies are more -- are stable. I think we have time for one more question.

Mark Moskowitz, JPMorgan.

Yes, thank you. Good morning. Two quick questions if I could. Ursula, can you talk a little more about the ACS deal synergies in terms of the deal size? It seems like the incremental, in terms of 30 deals new, at least versus $10 million previously in terms of signings going from $2.5 million to $3.5 million. It seems like the deal sizes are getting smaller. Should we contemplate that as kind of being the trend line going forward?

And then, Larry, if you could weigh in briefly here. I know you answered Richard's question earlier about the additional cost cutting. I'm just trying to get a sense of what is the driver there, the impetus just given that you're still early here on the ACS piece and your business tone seems pretty constructive here, so why the restructuring now?

Let me just do the first part on deal size and then Larry can go on the second part of the question. Our deals are $5 million to $10 million, average deal size. And we haven't seen a fundamental change there in that deal size. We are seeing -- which is good, which is what we want to see happen -- deals where we see the counts of places that we are new, we start small and we grow over time. But to start, the average deal size is -- annual recovered revenue is about $5 million to $10 million. And I said the [seating] is good. So nothing, no indicators of anything changing in that mode even though it's early days.

Yes, I think the first point here is that we want to go into 2011 as cost competitive as we can. We don't want to do restructuring going forward, we want to have that all behind us. In order to get our synergies airborne early as fast as we can and in order to make sure that we're cost competitive because of the exchange rate changes we wanted to get that all behind us. And that's really what's the motivation between the restructuring. It's pretty straightforward, there's nothing additional to that. And it just seemed to make sense to move it ahead.

Okay, thank you for your time today and for all of the interest and the good questions. Enjoy the rest of the day.

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