全錄公司 (XRX) 2021 Q3 法說會逐字稿

Welcome to the Xerox Holdings Corporation Third Quarter 2021 Earnings Release Conference Call. After the presentation, there will be a question-and-answer session. (Operator Instructions)

At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Third Quarter 2021 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer.

At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor.

And we'll 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'd like to turn the meeting over to Mr. Visentin. Mr. Visentin, you may begin.

Good morning, and thank you for joining our Q3 2021 earnings call. I hope everyone is safe and healthy. Revenue this quarter of $1.76 billion was essentially flat with the prior year's third quarter despite a challenging operating environment. Adjusted EPS of $0.48 was flat year-over-year, and we generated free cash flow of $81 million, down slightly from $88 million in the prior year. Adjusted operating margin of 4.2% was lower year-over-year by 320 basis points.

This quarter's results were negatively affected by 2 significant secular challenges: a deterioration of global supply chain conditions and the Delta variant. As the third quarter progressed, the challenging supply chain conditions we highlighted on our Q2 earnings call deteriorated further.

Specifically, raw material and component shortages limited the availability of certain of our products and supplies, particularly our A3 devices. Transportation constraints extended delivery times by weeks and drove unit shipping costs multiple higher than normal levels. And when our products arrived, labor shortages further delayed delivery times. These challenges accounted for 2/3 of the year-over-year decline in this quarter's gross margin and caused equipment revenue to fall short of our expectations.

Demand for our product remains strong, resulting in further growth of our backlog of equipment and third-party hardware to $265 million, which is approximately 90% higher year-over-year and more than 20% higher than the prior quarter. Our backlog also has a larger proportion of high-margin A3 devices relative to the previous periods.

Post-sale revenue grew 1.7% year-over-year but fell below our expectations as the Delta variant disrupted many companies' plans to return workers to the office. We expect vaccination rates will improve as governments encourage companies to implement vaccination mandates. And we continue to see a strong correlation between vaccination rates, a return of employees to the workplace, page volumes and, importantly, post-sale revenue, which carries a higher margin than equipment revenue. And we are seeing improvements across each of these metrics.

For example, September was the second highest month since the pandemic began in terms of page volumes and services and outsourcing revenue, which are 2 of the largest components of post-sale revenue and the components that are most closely tied to page volumes. Based on what we know today, we expect supply chain challenges to continue during the fourth quarter and through the first half of 2022. We continue to expect the return of workers to the workplace, but our expectations for a broader return has been pushed from Q4 into 2022.

For these reasons, we are reducing our revenue guidance for the year to $7.1 billion in actual currency or $7 billion in constant currency. Importantly, we are reaffirming our guidance for free cash flow of at least $500 million. Our focus on cash generation gives us the confidence to maintain cash flow guidance in spite of the top line headwinds we face, all while continuing to invest in our strategic growth initiatives.

Throughout these challenges, we have been guided by our 4 strategic initiatives: optimize operations; drive revenue; invest in and monetize innovation; and focus on cash flow. In Q3, we made progress across each of these initiatives. Project Own It has made our organization more agile and efficient. That agility was demonstrated this quarter as our operational team responded to unprecedented levels of disruption and uncertainty across our global supply chain. Our team responded quickly and is working diligently to mitigate the adverse effects of the supply chain disruptions on our business. For example, we are working to accommodate a wider array of products and materials, prepurchase components and freight and selectively increased pricing to offset higher costs.

And we are doing everything we can to minimize disruptions to our clients' operations. We cannot control the pace of supply chain normalization or office reopenings, but we are driving revenue growth in areas we can control. In our core print business, we gained share of total print devices again in Q2 for the most recent report from IDC, marking the fourth consecutive quarter of annualized market share gains. Growth in market share is a key pillar of our strategy in print and is being driven by the quality of our product and our ability to provide secure, connected workflow solutions that our clients need across their multifunction printer fleets.

Complementing our leading position in equipment, our suite of digital solutions is resonating with clients, who are increasingly digitizing document workflows and adapting to a hybrid work environment. Global signings for our capture and content services, which help clients extract, categorize and automate document routing such as our digital mailroom offering, increased 67% year-over-year in Q3.

Our subscription-based Workflow Central platform allows clients to manage document workflow from any device including PCs, tablets and smartphones with the enhanced security and functionality clients expect from our leading multifunction printers.

Our products and solutions are evolving to enable productivity from whatever our clients and employees choose to work. Our IT services business grew double digits this quarter despite a year-over-year increase in our backlog of third-party equipment. Within IT services, RPA continues to gain traction. We now have 500 internal bots performing 4 million transactions per quarter. These transactions create a platform and set of use cases for us to deploy externally. And in the third quarter, we deployed bots to support our Lexmark Managed Services integration and enable document classification and posting for our SMB clients. We continue to invest in the expansion of our IT services footprint to deliver a wider set of services to new and future SMB clients.

Earlier this month, we acquired Competitive Computing, or C2, a leading IT services business based in Vermont. C2 provides us with access to a broader set of clients and capabilities that we can leverage through our IT services business.

A key strategic focus in 2021 has been the standing up of the 3 new businesses: software, innovation and XFS. This quarter, we made progress towards our goal of standing up these businesses and monetizing our investments in innovation. In early September, we announced the formation of our software business, CareAR, a Xerox company. CareAR is the industry's first Service Experience Management platform. And we believe it will transform service and customer experiences with live visual augmented reality and artificial intelligence-driven interactions, instructions and insights.

CareAR solves a number of critical secular challenges facing field service management, including a systematic loss of institutionalized knowledge due to the accelerated workplace retirement and the need to be more eco-friendly. CareAR resolves both challenges by enabling field workers with access to live and eventually AI-driven expertise, and it reduces field service visits by more frequently fixing problems the first time around. We estimate the total addressable market for CareAR will grow to $80 billion by 2028.

We also announced that ServiceNow, a leader in digital workflow, invested $10 million in CareAR at a post-money valuation of $700 million. This investment serves as an endorsement of CareAR's technology and will support its growth, as CareAR is a leading certified and integrated AR solution within ServiceNow's field service and customer service management platform.

In the third quarter, we expanded the go-to-market reach for CareAR by adding 15 resellers and forming a partnership with L&T Technology Services, or LTTS, a leading industrial manufacturing and engineering services company. With LTTS, we will develop joint solutions across a range of industries, including discrete manufacturing, truck and off-highway vehicle maintenance and oil and gas. Momentum in new client signings and pipeline growth gives us the confidence to reaffirm our expectation of CareAR generating at least $40 million of revenue in 2021 and at least $70 million of revenue in 2022.

At PARC, we made advancements across our 3 primary innovation pillars: Internet of Things, 3D print and cleantech. In IoT, we continue to deploy Eloque's bridge sensor technology in Australia. The data being gathered by these sensors allows asset owners and operators to monitor the health of critical infrastructure assets in real time, which is particularly useful after the events such as the recent 5.9-magnitude earthquake that hit Melbourne in Australia in late September. Our technology deployed in Longwood, Victoria allowed immediate assessment of the strain caused by the earthquake, resulting in a decision that the bridge was safe to operate without needing to wait for manual inspection.

Our technology helps bridge operators optimize maintenance schedules, limiting expensive field service visits and, ultimately, lowering the carbon footprint associated with infrastructure maintenance activities. We estimate the total addressable market of Eloque's technology offering is $9 billion. And we are currently in conversation with multiple transportation authorities around the world about deploying our technology.

In 3D print, early feedback of our liquid metal printer, ElemX, has been positive, resulting in a healthy pipeline in our target verticals of manufacturing and defense. We are working to add additional material, which will expand our addressable use cases.

In cleantech, we are optimizing the performance of the alpha prototype for our energy-efficient air conditioning technology. This will inform the design of our beta prototype, which we plan to complete by the end of 2022. This technology can help reduce energy consumption in air conditioners by up to 80%. We look forward to sharing more about this groundbreaking technology in the coming quarters. Our work in cleantech is just one example of how we are working to reduce our impact on the environment. In our recently published 2021 Global Corporate Social Responsibility Report, we announced a road map to reach net zero by 2040.

At XFS, originations grew approximately 10% year-over-year. We further expanded XFS penetration within XPS and began offering leasing solutions for IT services. The quality of our book of loans remains high, with loss provisions below 1.5% despite the ongoing pandemic.

During the quarter, we generated $81 million of free cash flow, only a slight decline from the prior year levels despite the effects of supply chain constraints on our operating profit. Our focus on free cash flow has served us well, and we have delivered positive free cash flow every quarter during the pandemic. And that focus gives us the confidence to reaffirm our guidance of at least $500 million of free cash flow this year despite the reduction to our revenue outlook and while continuing to invest in our strategic growth initiatives.

That focus, along with our strong balance sheet, also gave us the confidence to request that our Board authorize a new $500 million share repurchase program. We will opportunistically buy back shares and remain committed to returning at least 50% of free cash flow to investors while continuing to invest in innovation and pursue value-accretive M&A.

Before I hand it over to Xavier, I would like to emphasize a few points. The third quarter presented us with an unprecedented level of supply chain disruption and further delays in company's plans to reopen offices. I would like to commend our team for its resiliency while facing these challenges. Revenue and margins have fallen below our expectation for the year, but demand for our products and services remain strong, our backlog is growing and our new business remains on track to deliver future growth and a strategic optionality for Xerox.

Through it all, our focus on delivering cash flow has not changed, and the buyback authorization allows us to deploy that cash in a highly accretive manner. We also continue to look at M&A transactions, both small and large, that are accretive to our business.

I will now hand it over to Xavier to cover our financial results in detail.

Thank you, John, and good morning, everyone.

As John noted, significant disruption to global supply chains and delays in the return of workers to the workplace negatively affected our financial results in quarter 3. Despite these challenges, our revenues were essentially flat year-over-year as gradual improvements in page volumes and IT services, growth in post-sales revenue and offset lower equipment sales, which were negatively affected by components shortages on logistic constraint that affected both cost and capacity. However, underlying demand for our equipment remains strong, as evidenced by our growing backlog, which is almost 2x higher than normal level.

Higher supply chain costs, a less profitable mix of equipment sales and lower margins on post-sales revenue drove our profitability lower year-over-year. Gross margin declined 440 basis points. Around 290 basis point of this decline is attributable to supply chain cost and capacity restrictions, including significantly higher freight and shipping costs and constrained availability of higher-margin equipment. 60 basis points of the declines relate to investment to support future growth. The remainder of the decline reflects lower government subsidies, net of Project Own It savings and lower royalty from FUJIFILM Business Innovation. We expect supply chain-related pressure on gross margin to dissipate over time as supply chain normalize, but this pressure will likely continue to weigh on gross margin in Q4 and into the first half of 2022.

Adjusted operating margin of 4.2% decreased 320 basis points year-over-year, reflecting lower gross profit, lower government subsidies and higher R&D investment to support our targeted growth area. Indeed, we maintain this investment despite the unfavorable operating environment. These headwinds were partially offset by lower bad debt expense on savings from Project Own It.

SAG expense of $413 million decreased $31 million year-over-year, primarily driven by savings from Project Own It, lower bad debt expenses, which include a $14 million finance receivables reserve reduction and lower sales and marketing expenses. Savings were partially offset by lower government subsidies, investment in new businesses on prior year 401(k) match reversal and negative effect from translation currency.

RD&E was $82 million in the quarter or 4.7% of revenue, which was an increase of 40 basis points as a percentage of revenue year-over-year. This reflects increased investment in PARC innovation towers and the 401(k) match reversal in the third quarter last year. Other expenses net was $18 million lower year-over-year, primarily driven by higher gain on asset sales, a reduction in nonservice retirement-related costs and lower net interest expense.

Third quarter adjusted tax rate was negative 3.5% compared to 21.1% last year. The 24.6% year-over-year decrease reflect a nonrecurring change to our tax positions and remeasurement of deferred tax asset.

Adjusted EPS of $0.48 in the third quarter was flat compared to the same quarter last year. The year-over-year reduction in pretax income was offset by lower taxes on a reduced share count. GAAP EPS of $0.48 was $0.07 higher year-over-year due to a decrease in adjusted items, including lower year-over-year nonservice retirement-related costs and lower restructuring charges.

Turning to revenue. Supply chain disruption obscured underlying strength in our business, as evidenced by our growing backlog on post-sales revenue, both of which grew sequentially and year-over-year. Demand for our equipment remains strong. But in the time since our quarter 2 earnings call, a challenging supply chain environment deteriorated further, causing shortages in product and logistics delays on cost. As a result, our backlog expanded in the quarter to $265 million, almost 2x normal level.

Equipment sales of $387 million in Q3 decreased 7.6% year-over-year or 8.4% in constant currency due primarily to supply chain disruption, specifically component shortages and logistic capacity constraints, which affected the Americas region more than EMEA. In EMEA, equipment sales grew year-over-year, led by our indirect channel and developing markets.

At the product level, supply chain constraints most negatively affected installation of our higher-priced color equipment in both the mid-range and high end, causing a negative mix effect on equipment revenue on margin. The negative mix effect was partially offset by lower installation of A4 black and white equipment, which faced difficult comparison against last year work-from-home demand.

Post-sales revenue of $1.4 billion increased 1.7% year-over-year or 0.5% in constant currency. We continue to see strong correlations between vaccination rate, workplace attendance and page volume. Page volume increased sequentially this quarter but at a slower pace than we expected due to the Delta variant. Nonetheless, we are seeing a pickup in page volume as workplace gradually reopened and school welcome back students. As John mentioned, September was the second highest month for page volumes since the beginning of the pandemic. Additionally, page volume are correlated well to service and outsourcing revenue, both of which are a key component of our post-sales revenues. We continue to expect gradual improvement in post-sales revenue as employees return to the workplace.

Post-sales revenue also included unbundled supplies, which grew significantly due to rising page volume and, to a lesser extent, channel rebuilds. IT services sales, which are included in other sales, also grew this quarter. Last, new business signings for our services business grew in the quarter, as did our renewal win rate and services revenue in the SMB space grew year-over-year.

Next, turning to cash flow. We generated $81 million of free cash flow in Q3, down from $88 million in the prior year. Our strong focus on cash flow resulted in only a mild decline year-over-year despite lower gross profit and an increase in investments in targeted revenue growth areas. We generated $100 million of operating cash flow in the quarter compared to $106 million in the prior year as working capital improvements offset lower profit. Working capital was a source of cash this quarter of $46 million, which was $101 million better than the prior year. This reflects year-over-year improvement in inventory, accounts payables and accounts receivable.

Investing activity were a source of cash of $18 million due to an asset sales of $38 million, partially offset by CapEx of $19 million. CapEx primarily support our strategic growth program and investment in IT infrastructure.

Financing activity consumed $46 million of cash. Net proceeds from additional debt contributed $76 million of cash and reflected new securitization proceeds of $175 million, partially offset by securitization runoff. We expect to complete additional securitization in support of XFS in Q4. Net proceeds from debt were offset by $87 million of share repurchase and $49 million in dividends, resulting in a total return of cash to shareholders in this quarter of $136 million, circa 170% of quarter 3 free cash flow. The $87 million of share repurchase in the quarter completed our remaining share repurchase authorization of $500 million. As a result, a new share repurchase authorization of $500 million was requested and approved by our Board and will be used to opportunistically repurchase share.

Next, looking at profitability. On our quarter 2 earnings call, we expected supply chain disruption to continue into Q3, but the magnitude of the impact on our business was greater than anticipated. A further deterioration in supply chain condition and delays in the return of workers to the workplace accounted for nearly the entirety of the year-over-year decline in adjusted operating income margin. Lower royalty revenue and savings from government assistance program were largely offset by lower bad debt expenses and savings from Project Own It.

We are actively working to mitigate the incremental cost associated with supply chain disruption, but we do expect this cost to weight on profitability again in Q4 and into the first half of 2022. The ultimate duration of supply chain cost and capacity constraint and the period of time for which it will affect our profitability remains uncertain. However, cost efficiencies associated with Project Own It, improvements in page volumes, the clearing of our backlog on growth of our newer businesses are expected to positively contribute to operating profit going forward.

Turning to Xerox Financial Services. XFS grew origination almost 10% year-over-year, driven by growth in origination at XBS. We are also actively offering lease solution for our IT services businesses. However, global finance asset of $3.3 billion in Q3 were down slightly compared to Q2 due to equipment availability constraints, which reduced equipment sales and associated new lease origination and loan repayment.

Next, I will comment on our capital structure. We ended September with a net core cash position of around $900 million, slightly below quarter 2 levels. $2.9 billion of the $4.3 billion of our outstanding debt is allocated to and support the XFS lease portfolio. The remaining debt of around $1.4 billion is attributable to the core business.

Debt mainly consists of senior unsecured bonds and finance asset securitizations. We have a balanced bond maturity ladder, with no bond maturing in 2021 and $300 million maturing in 2022.

Year-to-date, we have returned circa $650 million of cash back to shareholders or around 170% of free cash flow, which contributed to the $400 million decrease in net core cash since the end of 2020.

Finally, I will address revised guidance. Quarter 3 presented our business with a number of unexpected challenges, including a rapidly deteriorating global supply chain and the prolonged impact of the Delta variant. Product shortage, shipment delays and cost increases and the delay in the return of workers to the workplace resulted in a lower level of quarter 3 revenue than we expected just 1 quarter ago.

Given the continued uncertainty associated with global supply chains and a delay in many companies' plan to return to workplaces until 2022, we are lowering our revenue guidance to circa $7.1 billion in actual currency or $7 billion in constant currency. However, our focus on cash give us confidence to reaffirm our free cash flow guidance of at least $500 million while continuing to invest in our targeted growth initiative.

We have also decided to postpone our Investor Day to February of next year, at which point, we'll be in a better position to provide 2022 guidance along with our long-term financial projection. We also look forward to sharing additional financial detail about our new businesses at that time, which we believe will be more meaningful within the context of our 2022 guidance.

I will now hand over to John.

Thank you, Xavier. Operator, can you please open the line for questions?

(Operator Instructions) Our first question comes from the line of Katy Huberty from Morgan Stanley.

How much of the $200 million lower revenue guide at constant currency is a function of the backlog build versus the slower recovery in page volumes? And just connected to that, how much do you expect backlog to build in the fourth quarter? Then I have a follow-up.

This is Xavier here. So the -- regarding backlog on the $200 million revised guidance there, the vast majority of this is related to equipment backlog that we face here. As we quoted here, we ended with $265 million of backlog, which is close to 60%, 59% of the total revenue of quarter 3. We expect this backlog to grow based on the supply outlook that we have for quarter 4 at this stage.

Okay. So backlog grew about $50 million sequentially in the September quarter. If most of that $200 million guide down is related to backlog build, that would imply that you would expect even more backlog build in the fourth quarter? Is that the way to think about it?

This is correct, Katy.

Okay. Okay. And then I know it's really early, but do you have any initial thoughts as to how you're contemplating fiscal '22 as it relates to the increased supply chain costs and revenue impact that carry into the first half of the year? Does that set up for potentially flattish or even pressure on EPS and free cash flow relative to 2021? Or is it too early to tell?

It's -- Katy, as we indicated during the call here, we expect the supply chain impact to carry on and have some impact during the first half. During quarter 3, we have been surprised by the size of the supply chain. As we commented here, it is mainly related to some material shortages but also the fact that the chips and the processor are becoming -- we are positive we are facing paucity of this year. We've put in place a lot of actions including redesigning some of the way some boards are currently implemented on our product, but this will take time to recover.

The second point as well is not only the scarcity of certain component here, it's also the overall supply chain. You have heard of it, it should not be new news here, the challenges that a lot of companies are currently facing with container shipment, but also up to the last point, up to the delivery to the end customer. So we expect some of it to stay into the first half of 2022. And clearly, our backlog is a strong evidence that our customers are still renewing the equipment.

Also, as we mentioned it during our comment, we grew market share. So we are still growing market share. We did it in quarter 1. We did it in quarter 2 as well. And clearly, the orders that we are receiving from our customers are the evidence that there is still a strong demand here.

So we will manage this. It's a little bit early to provide newer guidance. As we mentioned it, we will hold and manage. We hope, a face-to-face Investor Day in February, where we'll be able to provide you more information.

Our next question comes from the line of Ananda Baruah from Loop Capital.

I apologize if this has been addressed. I have a couple of calls and an event going on this morning. But just to the -- to what you guys are seeing sort of demand-wise, revenue-wise and any sort of incremental feedback you've gotten from your enterprise customers as you move through the quarter that might be different from what you have been communicating to us over the last couple of quarters or so.

Yes. Ananda, what we've been seeing is demand is strong. And the other thing that we've noticed is return to the office has slowed down from what we anticipated. So we're anticipating more early next year being pulled back to the office. Because of Delta variant, a lot of the corporations we've spoken to have delayed their openings or slowed them down. But demand for our product is strong. And again, with the supply chain constraints, that's become an issue for us.

I appreciate the context, John. And then let me just ask a follow-up in that regard. Any -- because you guys are pretty deep in the weeds with your conversations with your enterprise customer, strategically from their perspective, have you seen anything change in terms of long-term intention for sort of how they're thinking about kind of back to the office or the use of your products in the context of those strategies?

No. We haven't seen a change from what we've expressed in the past. They're focused on bringing their employees back to the office in a safe manner. And they are using our products more for product -- both for productivity and for security and, in some cases, with our software to utilize a hybrid environment in which when their employees do work from home. But not really much of a change there. I think what slowed that down was the Delta variant, and everybody is being careful in getting their employees back safely to the office.

Ananda, if I may add as well, we have seen as well on our global document solutions businesses some good traction on offerings enabling to work from home and work in the office here. As an example, in capture and content services here, we have seen significant double-digit growth of signings, which show that the enterprise are supporting these type of offerings but also willing to enable this environment.

Next question comes from the line of Samik Chatterjee from JPMorgan.

This is Angela Jin on for Samik Chatterjee. The first question I have was, so HP at their Investor Day said that they expect the low to mid-single-digit decline in supplies next year, which we felt was interesting. Are you seeing similar trends there given that you're also forecasting greater return to office in '22? And then I have a follow-up.

Yes. So as you know it, our business model is slightly different from the one that HP had. We are less dependent on what we call [toner out or] consumable out model. Our model is based on subscription, and we do not see this trend. Our trend is mainly related to page volume, on how customers are using our equipment, but not only to print but also to drive the workflows, that our equipment are much more than a device and support workflows that the customers are using here. So we -- if you want, like a data point or proof point of what we face, we saw some increase in quarter 3 of what we call the [sole] supplies revenue. And we are positive of seeing a gradual recovery of page volume over the time.

Great. And then for my follow-up, just thinking about your product mix on A3 versus A4 printers. It seems like for the industry view is that A4 will become more popular over time as offices migrate towards smaller printers spread out more evenly. Are you seeing a shift in strategy towards A4 printers? And if so, will that result in a structural margin decline?

Yes. If we look at our third quarter, our backlog for A3 went up from Q2. We're gaining market share in it. We're seeing a strong demand in the A3, and we've also gained market share in the A4 market.

(Operator Instructions) Our next question comes from the line of Shannon Cross from Cross Research.

I was wondering about the pricing environment, both on the short and long term, for hardware as well as pages. Obviously, given all the supply chain challenges, certain other industries have been able to raise prices. I know inkjet printers, for instance, there's less promotions. So I'm curious what you're doing there. And then we talked to Canon, and they're thinking long term, they're going to see some price pressure on pages. So I'm just kind of curious how you think this plays out both in the next few quarters and then maybe long term. And then I have a follow-up too.

Thank you, Shannon. Yes, a good question here. What we see on the pricing environment mainly related to the supply-demand dynamic here is the ability of raising prices. And this is something that we started executing. We started executing already in quarter 2, and we have planned in order to reflect some of the costs that we are facing here, specifically on supply chain and some of the raw material costs that we have here.

Regarding page volume and the price per page here, this is, I would call, the usual -- business as usual negotiation. We have not seen an increased competitive environment on this. And as you know it, we are quite stringent in managing the pricing and also protecting with minimums our annuity volumes.

Okay. And then SG&A is at the lowest level that I have in my model even after incorporating the $14 million, it's going back split. And then I'm assuming presplit, Xerox is a bigger company back then. How much further can you cut SG&A? What did you take down? How much of SG&A is onetime versus recurring in nature? Just trying to understand, given the gross margin pressure you're facing, how much flex you have in some of your other expense lines.

Yes, Shannon. So on SG&A, we quoted the only, I would say, one-off that I highlighted here is related to the bad debt release that we have, which is by the way, good news, which shows that the business is recovering in light of last year or 2 years ago starting the impact of COVID-19 here. For the rest, you know that we have Project Own It in place. And Project Own It is much more than a pure cost-cutting type of activity. It's also ingraining the DNA of the company on how we adjust our cost base based on, I would say, the environment here. So flexibility exists within the cost base. And we will ensure that we can reflect some of the gross profit decline and gross margin decline that we have in our fixed cost base as well.

Do you think you can get down below $300 million -- or I'm sorry, $400 million?

It's a little bit early. Yes. It's a little bit early here, Shannon, because we are going through the planning cycle here. But clearly, Own It, as I mentioned it, Own It is not only SG&A, Own It is the entire cost base of the company. And we look at any opportunity we can have here. You know that we have had the benefit of last year, and we call it the amount on this year as well. So we had the benefit of government subsidies. These government subsidy are [extinguishing]. And you can see that in our cost base, basically in G&A, we are able to offset this via cost actions that we are taking to flexibilize the cost base.

Our next question comes from the line of Jim Suva from Citi.

Thank you for being so open and transparent about the -- taking the outlook down a little bit. And can you help us understand, do you fully believe or can you know, is this supply chain issue driven? Or I know, of course, going back to the office has been delayed, or is it actually structurally people are printing less? And how should we think about that if it's the case or not the case? Or how do we actually know?

Yes. Jim, we've seen a strong demand for our product. And in fact, you saw in third quarter that our backlog increased again to record levels. So we are seeing the demand. We're increasing market share. Even in September, there's a direct correlation with vaccination and going back to the office and volumes, and we saw an uptick in September. So our belief is that going back to the office is a question of when, not if. And the delays have happened for, again, safety of employees, but that's how we're seeing it right now.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back over to John Visentin for any further remarks.

Okay. Thank you. Look, we cannot predict then with precision when supply chains will return to normal, but we expect they will normalize over time. We also believe a broader return of employees to the workplace is a matter of when, not if. And office work will be different, but we are prepared to meet workers' evolving print and document management needs. Be safe and be well.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Good day.