全錄公司 (XRX) 2012 Q1 法說會逐字稿

Good morning and welcome to the Xerox Corporation first-quarter 2012 earnings release conference call, hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Luca Maestri, Executive Vice President 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'll get started on slide 3 with the review of the strategic imperatives that define our business and align with our financial performance.

First accelerating our services business, growing it faster by diversifying our offerings, aggressively pursuing opportunities in key growth areas like HR outsourcing, customer care, transportation and health care, and expanding globally.

In Q1 revenue from services grew 10% in constant currencies and now represents more than half of our total revenue.

Second, maintaining our leadership in technology. Our printing business continues to benefit our bottom line and remains core to our business model. We are focusing investments on innovation that drives down the cost of color printing and we are expanding distribution to extend our reach to small and midsize businesses. We made good progress in Q1 with installs of Xerox products up 7%.

According to recent external market share reports we remain the leader in equipment revenue share for the 9th straight quarter. In fact we are taking share from competitors, and strengthening our leadership position.

And third, driving operational excellence across our enterprise. This means adjusting our cost model so we are competitively advantaged and have the financial flexibility to quickly adapt to changing marketplace needs while scaling in key growth areas. During Q1, services margin pressure was partially offset by a 5% decline in selling, administrative, and general expenses.

By executing well on these three priorities we are delivering on the fourth -- creating value for our shareholders. Doing so by growing revenue, delivering solid earnings and allocating capital in the areas of acquisitions, dividends, and share repurchase.

So our execution is well aligned with our strategy and is reflected in our performance. But the heavy lifting is in the details.

Since acquiring ACS more than two years ago, we are making a seismic shift in our business. It is not just in how we operate but also in what we do and for whom we do it, all driven by the diversity of our offerings.

As a result, the Xerox brand is now in places you wouldn't expect and certain industries where our relevance extends way beyond printing.

For example, just in the past two weeks we have been part of the conversations at two major healthcare conferences, TEDMED and the World Health Care Congress. At both, we were acknowledged as playing an important role in simplifying the business of healthcare through electronic medical records, health information exchanges and digital protocols -- all of which help lift administrative burdens for providers. Our technology, like advanced imaging, tends to enable these activities but our deep expertise and customized outsourcing offerings make up the total solutions.

Please turn to slide 4 for more examples of what I mean.

We read in the headlines that government need to be more efficient but we don't often hear how that is happening each day. For example, last month the state of Texas announced an $848 million contract with Xerox for a significant overhaul of their IT systems that will simplify and greatly improve the efficiencies of the state's operations. We are consolidating 28 data facilities into two centralized centers, modernizing one of largest IT systems in the country. We've improved cloud services and overall security and disaster recovery capabilities, and while deal like this get a lot of attention, cloud services are not just built for large enterprises.

Through our new cloud-based platform for small and midsized companies, SMBs benefit from the same infrastructure investment that we make for our largest clients. For all of our clients, large to small, data security is paramount to maintain the integrity of their operations.

That is why we teamed up with McAfee and Cisco to help secure the -- ensure the security of data across every touch point, our PCs, in servers, in the cloud all away through to the output on multifunction printers. With this technology backbone, our services to industries like healthcare take on an even more relevant position. When we are dealing with patient data and the complexities of modern-day pharmaceuticals, all of our innovation from Digital Nurse Assistant to customize medication packaging is based on strong security protocols and infrastructures.

That is a quick glimpse of the story behind the numbers. We'll share more with you each quarter and, hopefully, these examples will begin to reframe your perception of Xerox, showcase the amazing opportunity that is in front of us, and better explain the evolving nature of our nature of our business mix and model.

Let's look at how this translates into our financial results. Turn to slide 5. I will provide a top-level review, then Luca will take you through the details. I will close with our expectations for quarter 2 and then we'll take your questions.

Slide 5. In the first quarter we delivered adjusted EPS of $0.23. On a GAAP basis, earnings were $0.19 per share. This includes $0.04 related to the amortization of intangibles. Earnings which are flat from a year ago are in line with our expectations and reflect the investments that we are making to grow our services business.

Services revenue was up 10% in constant currency and revenue from our technology business declined 5%. In total, revenue of $5.5 billion was up 1% and 2% in constant currency.

Technology review was impacted by the continued weak macro environment, the timing of when distributors purchased supplies and by clients increasingly shifting to Xerox managed print services which is reported in our Services segment. Demand for our industry-leading management services led to a 7% increase in revenue from Document Outsourcing. ITO revenue was flat and improving trends from prior quarters and revenue from business process outsourcing grew 13%.

Total signings in the quarter were flat on a trailing 12-month basis, which is what we expected considering the absence of any mega deals during the 90-day period.

All in all, I am quite pleased with our growth in services and the benefits it brings to our topline growth, all while computing to our business for (technical difficulty). As a result operating margin of 8.5% was down 0.6 point and Q1 gross margin of 31% was down 2 points. This is in the range of our expectations for the first half of this year and we balanced our investments by continuing to improve SAG which is now at 19.4% of revenue compared to 20.5% a year ago.

Q1 was the use of cash of $15 million, again in line with expectations and reflecting the seasonality of our cash flow. We remain confident in our guidance to generate $2 billion to $2.3 billion in full year operating cash. We are continuing to use available cash for acquisitions and share repurchase.

Turn to slide 6 for a closer look at our topline results. Q1 2012 is the first quarter where services represents more than half of our total revenue. At 51%, it is up from 47% a year ago and it is an important metric that reflects investments in building our outsourcing portfolio, expanding our offerings globally and the shifting mix of our business. As I mentioned total revenue of $5.5 billion was up 2% in constant currency. Annuity revenue which is 85% of the total was up 2%.

Equipment sale revenue was down 1%. We are still seeing weakness in Europe, although it has moderated for the fourth quarter -- from the fourth quarter of last year. Sales in the US were stable in a competitive environment and we are seeing initial benefits from our new sales coverage strategies. Our wholly-owned global imaging dealers are focusing on midsize clients while our direct sales force becomes more exclusive in pursuing enterprise level technology and MPS opportunities.

In our developing markets, we had a strong quarter in equipment sales reflecting the strength of our channel distribution and competitively priced color devices that serve small and midsize businesses. As I said earlier, all of this activity led to a 7% increase in installs of Xerox document technology. Building up the number of Xerox machines in field, what we call MIF, is a good indicator of future annuity growth. Our approach is to lead in color so Xerox ink is being used to generate the color pages printed in workplaces of any size.

During the quarter, our color MIF was up 13%.

Growth in services was also a big benefit to our annuity. Taking complex business processes and simplifying them results in a major win for us and meaningful savings for our clients. For example with Gartner and IDC giving Xerox a top ranking for our leadership in managed print services, we are able to sign large-scale MPF deals like the one that we announced recently with WellPoint.

We are saving WellPoint more than $3 million a year by consolidating 9,000 document devices into a lot fewer multifunction systems. For now, we have now assumed full management of California's Medicaid program, a massive undertaking and a milestone as part of our 10-year $1.6 billion contract signed in 2010. It is the nation's largest Medicaid program, serving 7.5 million people, and we have processed more than 90 million claims totaling $7.5 billion just in the past six months.

In Europe and Latin America, we are expanding our sales activities and services capabilities. We are signing new business like the recently -- like the recent multimillion dollar contract to manage call center operations for a large IT organization and one for a global tech manufacturer. We are an extension of their customer care operation, the voice on the phone and over the web to support their clients' needs.

These and hundreds of other examples represent our real business and the business problems that we are solving for clients. They bring us value and annuity revenue, they bring us incremental growth opportunities that boost our bottom line and they prove a sustainable success of the new Xerox.

With that let me turn it over to Luca. I will be back to wrap up and open the call to your questions. Luca?

Thank you, Ursula. Good morning everyone. Ursula just covered revenue, and of course we are pleased with the acceleration in services and we expect it to continue. Technology was lower but should show [declining improvement] going forward because Q1 of 2011 represented the most challenging compare of the year for us.

As we expected gross margin was lower, 200 basis points year over year. Two main drivers for the decline.

First, half of the impact can be attributed to the services margin compression, due to the ramping of a significant number of new contracts, along with a few higher-margin contracts running off. Second, the increasing services mix also drove almost 1 point of decline. The gross margin on our services business is half that of our technology segment so the strong growth in services has a direct impact on overall gross margin.

We continued to drive costs and expense efficiencies with SGA improvements of 110 basis points, which went to partially offset the gross margin pressure. As a result, operating margin was down 60 basis points.

We expect both gross margin and operating margin to improve as we move through the year and, by Q4, expect to see year-over-year improvement. The restructuring of $17 million was $32 million higher year-over-year and is fully reflected in our adjusted results. Adjusted EPS of $0.23 was flat from 2011 with the only adjustment to reported EPS being the amortization of intangibles.

Let us move to the segment slides. We have updated the content of these pages to also provide a trend view of our results.

Starting with Services, we see a very positive trend on revenue with 10% growth in Q1 of constant currency. This is driven by the strong signs we have had the past two years. The California MMIS deal we are ramping contributed to about 1 point of growth. Even without that we would have seen significant acceleration with good contribution across all lines of business, both government and commercial. In particular, government and commercial healthcare and financial services began the year very strongly. Signings in Q1 were lower year over year and flat on a trailing 12-month basis, which is not abnormal after the second half that was very strong for us, and reflects the fact that we had no mega deals signed in the quarter.

New business signings on a trailing 12-month basis are up 12% and drive our revenue growth. We anticipate Q2 will be a stronger sign this quarter, given our pipeline. As important as signings are renewal rates, which are within our target range of 85% to 90% for our combined BPO and ITO of businesses.

We have highlighted the pressure on services margins the past few quarters so the Q1 results were not unexpected. The largest factor is the ramp on new contracts which we estimate is two thirds of the margin decline. The main driver of the remaining impact comes from lost contracts specifically ITO from prior periods. We track margins down to the contract level and we are taking actions to improve the profitability of those contracts that are in a start-up phase.

Given the accelerated growth we expect the services margin pressure to continue. But we see sequential improvement as we move through the year and year-over-year margin growth by Q4.

Let's now turn to the technology slide. Technology revenue in Q1 was down 5% in constant currency. Two main factors drove this performance. The largest impact came from unbundled supplies revenues which were down 8%. Unbundled supplies represent a little less than 20% of our technology revenues and are predominantly aligned with entry products.

They can be volatile given channel inventory dynamics, which is what we saw this quarter, and they were facing a difficult compare because Q1 of 2011 was the highest supplies revenue quarter of the year. We expect supplies revenue to be closer to flat for the rest of the year.

The second and important factor is the continuing impact from the launch of our partner print services offering. This has been very successful and excepting to fuel the document outsourcing growth, at the same time it does shift revenue from technology to services. From a geographic perspective, Europe was weak but improved sequentially. For instance in North America in our developing markets, we are roughly aligned with last year absent the Supply's decline. Segment margin of 10.5% was down slightly from 2011 but reflected continued cost and expense control and a good performance when considering the lower supplies mix.

The most recent market share results show that we continue to gain share on an equipment revenue basis, and we expect to continue to build on our leadership position in 2012.

Moving on, I will comment briefly on the key metrics slide. Total Services Signings of $2.2 billion were lower year over year, and are flat on a trailing 12-month basis. As mentioned previously we did not have any mega deals in the quarter but the pipeline remained strong and we expect to have a good Q2 quarter in Signings.

We added renewal rate to this slide as it is an important metric for us and one we want to give more visibility to. In Q1 it was 86% which is in our target range. Looking at the product-related metrics please keep in mind that these include the doc -- the Technology segment plus Document Outsourcing.

Total color revenue was flat at constant currency. If we exclude color printers which is where we saw the supplies impact, color revenue would be up 3%. Digital machines in field continue to grow and was up 2% in total and 13% for color capable devices. Digital pages show a stable trend, were down 2% with pages from color devices up 10%.

Installs were strong with good growth in all color segments except printers, which was down, driven by lower OEM sales. We saw strong growth in A4 color multifunction devices and entry production color, both areas where we have recently launched new products. We also continue to see growth in midrange color. Install growth did not translate into equipment revenue growth, given price erosion and mix impact. But this will fit annuity over time.

Moving on to the Cash Flow slide. Cash from operations was in line with our expectations and was a use of $15 million which compares to a use of $30 million in 2011. Earnings contributed $276 million and, consistent with normal seasonality, working capital during the quarter was a use of $635 million. Cash contributions to our global pension plans in the quarter were $79 million and combined with $130 million in stock contributions resulted in total funding in Q1 of $209 million.

As mentioned last quarter, the timing of pension contributions this year will be skewed towards the first half. Balance of the year, we expect to contribute approximately another $350 million to our pensions -- all in cash.

In terms of investing cash flow, we have spent $128 million on CapEx and $87 million on acquisitions. Dividends paid were $63 million and we repurchased $50 million in stock. We continue to guide for $2 billion to $2.3 billion of operating cash flow for the year and we continue to plan to use available cash to repurchase between $900 million and $1.1 billion for the year, weighted towards the end of the year.

Let us turn to the next slide to quickly review our capital structure. Our Q1 ending debt balance increased to $9.6 billion. Given favorable market conditions, we issued $1.1 billion of notes in March to pre-fund the $1.1 billion in senior notes which come due in May. From a maturity standpoint, we maintain a well-balanced debt ladder with just about $1 billion coming due annually.

During the course of the year, our debt balance may change moderately given the timing of our cash flows. But we continue to plan for $8.6 billion for year end debt. The vast majority of our debt is in support of our financing of customer leases. Of the $9.6 billion debt balance, $6 billion can be associated with the financing of Xerox equipment for our customers. The finance there is calculated assuming a 7 to 1 leverage of our finance assets of $6.8 billion. These finance assets represent committed revenue streams from our customers.

In summary, Q1 is seasonally a lighter results quarter but, overall, we came in as expected with a standout positive being the Services revenue acceleration. Our number one challenge is to improve Services margin. We are already focused on this objective and see this as an opportunity going forward in terms of future earnings expansion.

In terms of capital allocation, we remain committed to using our strong cash flow to return budget to shareholders through share repurchase, dividends, and accretive tuck-in acquisitions. With that, I will hand it back to Ursula.

Thanks, Luca. Let me quickly wrap up so that we can get to your questions. Q1 results were as expected. We have work to do on improving margins while we are scaling Services growth through the ramp of new contracts, expanding globally and increasing revenue with existing accounts. In Technology our focus on competitively advantaged color systems and broader distributions led to strong Q1 install growth and double-digit color mix growth.

We are disciplined in managing expenses, giving us a flexibility we need on margins to support our Services growth. We'll see a sequential improvement in margins throughout the year and continued benefits from operational efficiencies. Our guidance on cash remains unchanged as we remain committed to investing in share repurchase throughout the year.

For the second quarter, we expect adjusted earnings of $0.25 to $0.28 per share. This includes $0.01 or $0.02 of restructuring and our full-year earnings expectations continue to be adjusted EPS of $1.12 to $1.18.

You have heard me say this before but it bears repeating -- some companies talk about transformations, we are actually doing it. Our results this quarter and our expectations for the balance of this year reflect the shifts happening in our business. They are all centered on building a sustainably successful enterprise with a healthy annuity stream and significant growth opportunities. We are making progress on every front and I remain impatient to make even more.

I am also confident that we have the right strategy, the competitive strength, the skilled leadership team and disciplined focus on execution that will deliver more value for you and for all of our stakeholders. With that, I thank you again for joining us today.

As we get into your questions I know that you will want to dive deeper into Services. So this quarter, I asked Lynn Blodgett, the President of Xerox Services, to join us for the Q&A. On occasion we will bring in other members of the senior team during our investor webcast. This way, like me, you can appreciate the breadth and the depth of the team that helps me lead this business.

Now let's open it up to your questions and I will field them and ask Luca and Lynn to chime in as well. Questions?

(Operator Instructions).

First question, please.

Shannon Cross with Cross Research.

Thank you very much. I guess my first question, Ursula, is if you could talk just a little bit more about what you are seeing in Europe and perhaps some of the other geographies. I know you mentioned that it was improving a bit sequentially but I am curious as to, on the various segments and that, what you are seeing both like I said in Europe and in other geos.

Right, so Europe was weak but we did see modest -- light modest improvement this quarter particularly in the Equipment Sales line and clearly in the areas that we are focusing on color throughout the spectrum, from small to large. A modest, very modest improvement there.

But Southern Europe weak -- the rest of Western Europe a little bit better than Southern Europe and the Eastern European nations which had reported in our developing markets operations were generally stronger than all of the rest of Europe.

In North America, we saw a continued trend from the fourth quarter which was a little stronger than throughout the rest of 2011, which is good. We didn't see any downturns there at all. We did see a little bit of weakness in Supplies, primarily driven by timing of pricing increases and OEM sales, that kind of thing. But nothing systemic at all there. DMO continued strength. Throughout the regions in DMO, just about every place that we do business we are seeing growth as those economies grow.

We see SMB everywhere around the world doing better particularly in our North American operations where we have a particular focus in moving coverage. We are seeing our global imaging operations do even well there. By the way Fuji Xerox is having a good result as well, particularly in China and the Asia-Pac areas that they cover. That is also seeing growth.

So I think that we are -- Services by the way, one last is Services, in Europe in particular, we are starting to see expansion there which is very good. It is still a very small portion of our business but we are signing contracts and as we go forward and get more traction there, we will be able to actually call it out to you more specifically. As I told you before Services in Latin America actually were stronger to start off with, particularly in our Transportation segment.

So across the world, we didn't see a significant change except for in Europe a little bit of tick up from a very depressed level and particularly in equipment sales.

Okay, great. And then, Lynn, since you are joining us, can you give us some of your perspective on Services, what segments you are seeing growth in, what you are hearing from your customers? Then perhaps how you are thinking about the margin improvement and how it should progress through the year.

You bet. The areas that we are seeing the most activity in would be in healthcare both government and commercial healthcare for obvious reasons, given the pressures that everybody feels on healthcare costs.

Our customer care area is continuing to grow very strongly and we have some great new tools that we are going to implement there that we think will even make us even stronger in customer care. Financial services is very strong. And HR Outsourcing, we've really disciplined ourselves and we are much better at focusing on point solutions. So those things are helping us to grow strongly in those areas.

Transportation, as Ursula mentioned, was very, very strong and transactional BPO just continues to rock along. It is just a very strong operation.

As far as the margins, obviously the fact that we have as much new business, which we are obviously very excited, about as much new business growth that is going to put a certain amount of pressure on margins. As you look at the decline in Services this last quarter about 70% of it was due to new business startup and half of that was driven by the state of California and about 30% of it was driven by the fact that we have last year, as you know, lower than we like renewal rates especially in ITO.

So we are seeing some impact from that. The vast majority of the pressure is coming because of new business signing. So we are confident that we are going to see -- we like the new signings and we'll see nice incremental growth through the year in margins.

Great. And just my last question, for Luca. Can you talk about how we should think about the [yen] in FX as we go through the year in terms of contribution versus the hedging programs you have in place?

Yes. Let me start with the impact on revenue because I think it is important to highlight also the effect on revenue. It was a -1% in Q1. We expected to be a -2% on revenue during the second quarter because euro was particularly strong last year. But for the full year we expect currency to be -1 point to our growth rate. When you go down to the profit level, directionally, as you know very well, for us weak year-end and strong euro is the best of both worlds.

At this point the beginning of the year, we had talked about $40 million, $50 million negative for the year when we started the year. Rates have improved marginally so now we tell you probably the impact is $30 million to $40 million for the year. That's the way you need to think about it. We are fully hedged for the current quarter. We tend to be hedged 60% to 70% for next quarter and then at different levels for the following couple of quarters again and so the whole concept of the hedging program is to smooth out the volatility of the exchange. But this is the type of impact that we should be seeing this year at current rates, of course.

Thank you, Shannon. Next question.

Richard Gardner with Citigroup.

Thank you. I would just like to address the printer supplies inventory correction that you talked about. Can you talk about what prompted that and where we are and how comfortable you are right now with inventory levels? Just any additional color would be helpful. Thanks.

We are really thrilled with the activity levels that we saw in the quarter. They were up 7% in particular and entry-level was up 9% which, definitely, fuels the supplies revenue. I will turn it over to Luca to talk a little bit more about the supplies revenue details.

Yes, so last year we had some fairly significant price increases at this time of the year. And so, we were facing a very significant compare year over year. Obviously this is a revenue stream that is very affected by the levels of inventory in our channel partners. I think that the decline in Q1 will not be repeated going forward. What we think is that supplies revenues are going to be closer to flat for the rest of the year and so I think we are going to work through this issue starting from Q2.

If I can add, I wouldn't read a whole lot into this correction as you -- if you followed us, which you have for a long time, you'll see depending on the timing of pricing changes by us or our competitors, you will see ups and downs into a fairly lumpy revenue line for us. So you'll see ups and downs. We are seeing great activity, great installs through all of our channel partners, through all of those lines that we get to the market through. So the expectation is that with those equipment sales, there will be supplies improvement. So I would not read a whole lot into this -- into this correction.

And if I could follow up, quickly, I believe the restructuring charge on the technology side was smaller than you had talked about previously. Correct me if I'm wrong, but could you talk about why that is the case? I think, Ursula, you had suggested that there, the potential for technology margins, operating margins they'll actually [be up] this year for a variety of reasons and I just let to get your latest thoughts on that. Thanks.

Yes, so the restructuring charge may be a shade below what we thought at the beginning of the quarter but we still see a lot of good opportunities across the enterprise. So in the guidance that we have given out for the second quarter, again, we are talking about additional opportunities for restructuring. It is just, I think, a timing issue. Nothing more than that.

On the operating margin side, as we said, we believe that from this point we are to start seeing sequential improvement year over year, both in Services and in Technology and that will take us to a point in Q4 where we are going to have, we believe, good year over year improvements when you do the math. We think operating margins should be flat to slightly up for the year, but with some level of revenue growth of course.

If I could just add one last point. Since we will say higher equipment sale revenue in Q2 the margins for the technology business will be a little pressured. As you know, the margins on our supplies are significantly higher than the margins on our equipment. But at the end of the day it will all balance out in the year. It is literally just a timing issue. So I -- nothing more there. Next question please.

Okay. Thank you.

Ben Reitzes from Barclays Capital.

Could you just talk old bit more about Services margins? What are you you specifically doing to get them up and what kind of trajectory should we see going from the 9.3? How quickly -- it sounds like you need to be well into the 12 by the end of the year to hit your numbers. Is that right? And what are you you specifically doing to get there and how does the margin play out sequentially? Just for that line.

I'll have Luca walk you through it and then maybe Lynn could add something, some different color needed.

Yes. 9.3 for Q1. We see it expands sequentially as we go through the year and getting into an improvement, a fairly significant improvement year over year in Q4. Really, the reason is clearly the fact that we are ramping a lot of newness all at the same time but very large [comps], say California is a big example. Also the fact that we are ramping off some higher-margin contracts, particularly in ITO. Some of the losses that we had last year.

We essentially follow these contracts and I will let Lynn expand on it but we follow all of these contracts at the granular level. So each one of them and we got specific actions for all of them, starting from California. But all the other big ones that we are starting out, and I think it's just going to be the way that we go through the year that some of those pressures are going to mitigate as we actually get these contracts to a steady state.

Yes. The natural thing that happens to a contract whether it is in startup mode or through it life is that the margins continue to improve. So, as the contracts that we have, the big things that hit us in terms of margin pressure, those things will continue to mature and their margins naturally improve. So you are going to see a natural progression in margins because the contracts that we are currently focused on are going through that life (technical difficulty).

We haven't seen anything that is unusual as far as the kind of startup costs that we are seeing. We are doing a number of things, we think, to continue to drive margin improvements. We have some tools that we have developed. We have a product called [Simplicity] that will help us a great deal in our customer care area and we are shifting a lot of our work to platforms. You know our new MMIS platform that was a significant investment is the kind of thing that will help drive higher margin.

Of course, as Ursula said, we are just focused on operational excellence. That is our daily bread, bread and butter. So we have to never take our eye off of that ball.

If I can just add to wrap this one up. Losses, this is the place we actually have a lower renewal -- opportunity -- set of renewal opportunities in the quarter, actually end of the year is actually good news and good news for us so there's less chances that we can actually lose a contract.

But even on the contracts that are up, all of the contracts that are up for renewal, we are on them. Meaning, executives are engaged, operational managers are engaged and we are engaged with the leaders of the other companies that we are doing business with to assure that they know that we are paying attention to this.

So I think you heard that we are focused on the normal operation of the business. We are focused on contract renewals. We are focused on tools to simplify the business and we have modeled this out and we are pretty confident that we will be able to see the margin expansions, very confident, that we will see the margin expansion throughout the year with a high point in margins in the quarter at the end of the year in the fourth quarter.

Your next question (multiple speakers).

So that's one of the reasons why we gave you that additional detail on slide 8. It is a little bit dangerous to put out but we decided to put it out to show we will continue to fill this in throughout the year but we will be able to show you you how the margins are improving on a sequential basis. Sorry. Go ahead. Next question.

Deepak Sitaraman with Credit Suisse.

Great. Thank you very much. Ursula, for the full year. can you speak about how you are thinking about the revenue growth outlook? Is there any change to your 2% topline outlook for 2012?

No, we are speaking to the 2+ percent revenue outlook driven by the mix of business that we saw high single-digit growth in the Services portfolio -- BPO, ITO, Document all sourcing together -- and still a little bit of pressure, so flat to slight declines in the Technology business. It is all constant currency, of course.

So we're seeing -- we see that still coming through any kind of upside that we do that we do see, we will actually pass on in future guidance but we really don't see that changing. High single digits on Services and flat to marginal declines in the Technology business.

I guess just to follow up then, on that high single-digit outlook for Services just given the trends that you are saying in terms of pipeline growth and signings on a trailing 12-month basis, can you speak about the level of visibility you have there?

Yes, I will have Lynn take it. But I will summarize a little before he starts. We have a fair amount of visibility on the revenue side in services but go ahead, Lynn.

Yes. The pipeline is, even though we have very strong record bookings the last two quarters of last year the pipeline continues to grow, and in fact it is up 5%, notwithstanding some very strong bookings. So that gives us great visibility in terms of ramp. Growth right now is driven by the ramp of signings, primarily the signings that we had last year. One of the great things about this business because it is so oriented to recurring revenue is that you can pretty well predict that if you have a pipeline, it is going to translate into a certain amount of bookings, and then those bookings will contribute very predictably to the revenue growth. So we feel really confident in the ongoing revenue growth.

And just maybe the last one for Luca. Luca, you mentioned margins overall could be flat to up slightly on a year-over-year basis for the full year. Is that commentary appropriate for just Services margins as well?

I think it is going to be -- I -- yes. Overall. But keep in mind that we also have the other segment which should also have been so but, yes, very close for that.

Okay, great. Thank you very much.

Chris Whitmore with Deutsche Bank.

Thanks very much. I had a balance sheet question for Luca. Specifically around your buyback on a medium to longer term basis. You have committed to buying back $1 billion of stock this year. How should we think about that as an ongoing commitment? Should we expect buybacks to continue in 2013, 2014 at this type of scale?

Very clearly, we will have a place for share repurchase on an ongoing basis. As we think about capital allocation, we want it to be well-balanced. Clearly there's going to be room for dividends and possibly a consolation for a big dividend increase as we go forward and some element of our position that is very important to our business model, particularly on the Services side. So we will, as we get towards the end of the year and we are going to have investment conference in November, we will give you a full debrief on the way we are thinking about capital allocation.

Certainly for the remainder of the year it is what we mention and, clearly, going forward it will remain particularly at this level of the stock valuation it will remain a very significant element of our capital allocation strategy.

Do you think that the commitment to the buyback is limiting your opportunity set on the M&A side? In other words you think you are missing out on opportunities to accelerate the growth of services given that, the size of the buyback commitments?

Absolutely not. We are we have a pipeline that is active, a fishing and pipeline net out there and anything that we see that fits into the parameters that we buy buy, we operate on. So I do not believe -- and more than I do not believe, I know that we are not limiting our M&A opportunities for, because we are buying back shares.

My last one goes back to the issue around supplies and the recurring elements of the Technology business. I mean we've been hearing about pretty strong MMIS growth for many quarters now; yet that doesn't seem to be translating into the annuity revenue stream and now we are actually seeing down sides on supply usage. So can you help me understand the disconnect between past growth and MMIS and continued declines on the recurring elements and tech services? Thanks.

There are two primary elements to that. Obviously there is an element of price erosion that it's there, it's added to the market and we know that causes some pressure on the revenue and the second one is the mix. The mix is big as well. We are seeing particularly the way we have launched products recently, we have seen very good growth in stores, in our Entry segment which, obviously, carries different levels of pricing. And so, I would say those are the two reasons from a pricing and mix perspective and, obviously, we have had macro economic environment in Europe which has not helped in that respect.

If I may add another piece here. If you think about our business the way we are reporting it today, we report activity to you. That activity is from our Technology business and from our Document Outsourcing business. We just don't -- it makes sense to do it that way after that total activity. The revenue splits between the Technology business and the Document Outsourcing business or the Services business.

If you were to take into account in the Technology business the revenues from the Services business that we now book in Services, the Technology revenue would have been down 2%. That is almost totally attributable to the weakness that we see in Europe. We offset everything else. Price is up, down, activity up. Color pages up, digital pages, we manage all of that in a box that is pretty consistent and in line with what we have said in the past except for a very significant downturn in business in Europe.

So all that Luca said but you have got to actually start to look at the business. We try to give you all of this information to look at the business such that you can actually translate activity into -- which we split into two different -- we show in one segment that actually comes from two different segments into the rest of the results, revenue et cetera. So I (multiple speakers).

Got it. Thank you.

Okay. Thank you.

Ananda Baruah with Brean Murray.

Good morning. Thanks for taking the question. I guess this one is probably for Luca. Can you give us a sense --? I mean, I guess on Services operating margins, are we now in the process of moving forwards and reaching, I guess, exiting the [schedule] going into next year, steady-state in services operating margins. Our could we see some sort of a similar dynamic in 2013 where we are still trying to stand up yields and we are not yet reaching steady-state operating margins?

I think we are going to exit 2012 at a level that where we feel is pretty steady-state. So you are going to see some progression during the course of 2012 and then steady-state. But you also need to keep in mind and you know it very well, right? I mean, a lot of what we do is driven by the cadence of new contracts and so, obviously, if we continue to see the level of revenue acceleration that we have seen this year then obviously you are going to see some ups and downs in margins. But I would say end of 2012 is going to be pretty much our steady-state.

Then, Luca, what would be the opportunity for Services' operating margin expansion in 2013?

Well, of course, on a year-on-year basis is going to be obviously significant because we are starting from a relatively low point in Q1.

Yes, I understood that. I guess what I'm wondering is on a like for like basis, December quarter Services margin going forward through 2013 what inside the Services business could improve the margins?

Well, I think that the -- as I said earlier, the maturing of the contract we tracked very closely each contract and we know the margins, we know the startup costs, we compared against the models that we have built and occasionally we have things that we have to focus on more than we expected, and others go a little bit better than we expected. But we are confident that as we move forward, that natural maturing will occur.

The other thing that will happen in the fourth quarter is that we will essentially lap the big jump in growth; and that is one of the big reasons that we were confident you are going to see a margin increase. If we can tack another 5% growth on top so we are growing 15% but you would see the same kind of activity. I guess that would be a really good problems to have.

Yes. Got it. I guess I am just try to get your thoughts on the opportunity to expand margins in 2013 with what is going on with as you see the book of business versus exiting the year.

Yes, the other thing that is happening is the use of the platforms that we have made significant investment in, the MMIS application that has taken us a long time to build. It's the first new MMIS system that's been built in 15 years and it is compliant with all of the new regs and everything. That is a major accomplishment to get that in and as we put applications or states on that new platform we will see improved margin.

The margin pressure for a new add is significantly less than it would have been for Cal -- than it was for California.

(multiple speakers)

Ananda, to your question, maybe it is a bit early to start for us to start talking about 2013 operating margins at this point.

Okay. Fair enough and just one real quick one, last one for me. What should we think of as the gross margin range for this year?

We are guiding 31% to 33%.

We will see that improve sequentially. Thanks. Next question.

Keith Bachman with BMO.

Two. Luca,the first one for you. Could you just confirm that the EPS guidance of $1.12 to $1.18, does that include the actuarial changes associated with the pension whereby you have significant pension headwinds this year? I think it is $145 million.

All in. Although the increase in pension contributions is in that range in terms of the pension expense, which I think is going be reflected in EPS, is in the $40 million range -- $40 million to $50 million range. But it is all in. All in.

Thank you. The second question I have then, Lynn, this is for you. You've talked about a lot of confidence in the margins and, yet, over the past during particularly during calendar year 2011 on Services, margins did disappoint and it was fairly consistent and it was driven by as Ursula said I think the leakage on ITO. And so if you could just come back and address from a management, from a focus, from a systems perspective, what's different now on the renewals in particular that did not exist shortly after Xerox bought ACS and fairly consistently during calendar year 2011?

I think the renewal rate, particularly in ITO, was disappointing last year and that -- this is not -- it is not unprecedented that we have seen a point where we've had disappointing renewals in IT. It seems to have -- there are things that drive it that sometimes if we get a little bit behind this year because of the focus that we put on IT renewals specifically, we have much more executive involvement earlier in the process. And as Ursula said, we don't have as many opportunities this year for renewal which should help us in terms of the renewal rates as well. So more focused. I think, just the attention, that's the main thing that we have seen it before and it is what we try to do.

Okay. Ursula, one last one for you. Drupa. How should we think about it? You think you'll get a little lift off of Drupa, either in the June or September quarters? Or is the European backdrops such that we shouldn't be thinking about it? And that is it for me. Thank you.

Yes I don't think that we should be thinking about a specific Drupa lift. I mean if it happens it happens. I actually just don't think it is fair. The show is a show of buying but that buying is generally baked into the normal course of business. Everybody -- you know Drupa has been going on for years and years and years and everybody expects what happens at Drupa to happen. So we Drupa for us will be a color show. It will be a show that we highlight the advances that we have in color and in solutions wrappers. So not a product show for us but more of a workflow show for us like how you do you put together packaging solutions, et cetera, et cetera.

Got it.

We will have some new products there but it won't be a product show as I said. And I don't think that you can bake a whole lot of hope on Drupa changing the cost of European technology business. Thank you very much.

Bill Shope with Goldman Sachs.

Thanks. Ursula, I was wondering if you could walk us through your latest read on the competitive landscape within Document Outsourcing. All of the key players continue to tout competitive momentum here. So it is a bit tough for us on the outside to see which vendors are really breaking out as long-term leaders. So if you could give us your perspective on that, that would be helpful.

Yes, I think that I would speak about two companies outside of the other group. So the other group is Canon, Ricoh, KM. You know, the normal technology people, technology hardware providers, and they are still infants in document outsourcing. They are really not large players. They are trying to get together solutions and offer them, but we really don't compete actively against them.

The places that we -- the competitors that we compete actively against are HP, Lexmark and us. Those are the three people who are in this document outsourcing business today as mature players. I will break out HP of those three as behind both Lexmark and Xerox. HP is trying hard to reorganize themselves into having a good set of solutions on the Document Outsourcing space but they are lagging, for sure.

Xerox is ahead. We have not only our Document Outsourcing business, our Managed Print Services play, but the fact that we have a whole set of services that's attached to that actually elevates us in the minds of particularly larger customers out there. We have an open platform, one that allows -- and a standard one, meaning open and people understand it. One that allows other people's technologies and other people's workflow and other people's processes to kind of come under the umbrella of us very easily and we are innovative so we continue to upgrade what we offer.

So HP behind. The next two are Lexmark and us, and Lexmark is a very specific segment kind of a player. They pick an industry and they go after that industry and the good news about that is that it leaves all the rest of the industries for us to focus on. We actually continue to actually be very very aggressive against Lexmark in the Document Outsourcing market.

So I think all in all if you look at the ratings of Gartner and IDC, if you look at how we are growing this business 7% revenue growth in the quarter, and how that revenue growth positions us from a size perspective larger than anyone else. You'll see that in document outsourcing, we are definitely winning.

It is a very competitive market. But we can't take our eye off of it but we are winning and we have a gap between our next focused competitor.

Just as an extension of that, if we just took a snapshot of the environment today when you go up against HP and Lexmark, where does -- which verticals, types of contracts does Xerox typically have an advantage and where do you think you still have some work to do?

Yes. We have strength in the tech sector, in the telecom sector and in banking. I think Lexmark kind of does legal fairly well. And they do some financial fairly well. So we have to -- they are going to try to catch us in the places that we're good and we are going to definitely try to catch them in the places that they are, that they are good.

So I think the market is still very wide-open which is the good thing and the fact that our reputation is very strong here. It is not an easy thing for a customer to do. The fact that our reputation is very strong here and the fact that we are local and a lot of the growth comes in the X what we call partner print services space we call it XPPS. The fact that we are local and our global imaging partners go out with XPPS. It is really a win for us. They are very intimate with their clients. A lot of the growth is in the not big segment and so we are winning there. Our coverage is phenomenal there.

All right. Thank you very much.

Thank you very much. If there are no more questions, thank you for joining us today and have a very good summer.

This concludes today's conference call. You may now disconnect.