Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sequential improvements in adjusted operating income margin, cash flow, and revenue validate strategic changes.
- Free cash flow increased by $27 million compared to Q2 of last year.
- Momentum in equipment orders and pipeline, new product launches, and improved sales processes are expected to drive stronger revenue growth in the second half of the year.
- The company has identified more than $700 million in cost reduction initiatives between 2023 and 2026.
- The introduction of AI-assisted multifunctional printers is expected to enhance product offerings and drive growth.
Negative Points
- Revenue of $1.6 billion decreased 10% year-over-year in actual and constant currency.
- Adjusted EPS was $0.29, $0.15 lower year-over-year, primarily due to higher taxes and interest.
- Adjusted operating margin of 5.4% was lower year-over-year by 70 basis points.
- Full-year revenue, adjusted operating income, and free cash flow guidance were lowered.
- Higher freight and product costs are expected to impact margins.
Q & A Highlights
Q: You mentioned the reinvention initiative being the catalyst for the guidance lower. Is it intra-quarter? Did you move around some of the timing of the initiatives, or are you just learning more about the impact of the initiatives?
A: We are executing the strategy as planned. The guidance change for this year is entirely related to reinvention actions, specifically offering and geo simplification. The core business is behaving as expected. The timing of actions, such as geo simplification, impacts revenue immediately, but cost reductions take time. The overall program is on track, and we are sticking to the three-year guidance.
Q: When we think about the incremental lowered guide for the full year, is the impact primarily in the second half? How should we think about timing?
A: In Q2, total revenue declined 10%, with 300 basis points from backlog, 200 basis points from non-strategic revenue reduction, and 150 basis points from geo and offering simplification. For the second half, we won't have the backlog flush impact, and we expect revenue growth. The second half will still see impacts from non-strategic revenue decisions and geo simplification, but overall, we expect growth.
Q: Did Q2 have an incremental impact on revenues coming in below consensus due to changes decided intra-quarter? How do we get confidence that there won't be more deals in the pipeline affecting revenue guidance?
A: The consensus may not have accounted for some actions like geo and offering simplification. We are executing the strategy as planned, and if there are additional significant actions in the second half, we will inform investors. The mix and timing of actions are well understood, and we are confident in our pipeline.
Q: Can you provide more details on the growth opportunities in digital and IT services? What are the drivers of growth, and what operational investments are needed?
A: We see opportunities in mid-market clients for AI, RPA, and intelligent document flow. We are well-positioned as a trusted partner to bring these technologies to clients. Digital services include invoice processing, AI-based document handling, and IT services like managed cloud and security. We are focusing on SMB opportunities and leveraging our brand and distribution.
Q: How are you addressing the secular challenges in the print market?
A: We are focusing on gaining market share in A4, holding and strengthening our position in A3, and entering new segments in production print. We are enhancing our offerings with AI and other technologies to maintain competitiveness. Our strategy includes optimizing our product mix and focusing on high-growth areas within print.
Q: Are you planning to break out services revenue in your disclosures?
A: Yes, we plan to present results in two segments: print and core print, and IT and digital services, starting next year. This will provide better clarity on the business dynamics.
Q: Have there been any product or supply shortages due to the reinvention actions?
A: No, we have no issues with supply or inventory shortages.
Q: What is the revenue trajectory post-2024, and how are you addressing market share and operational improvements?
A: We expect growth in digital and IT services to offset declines in print. We are focusing on mid-market opportunities and leveraging AI and other technologies. Operational improvements include cost reductions and optimizing our product mix. We are confident in our ability to grow adjusted operating income by $300 million over 2023 levels by the end of 2026.
Q: How are you balancing the need for operational investments with the goal of driving growth in digital and IT services?
A: We are investing in areas with the highest growth potential, such as AI and digital services, while optimizing our existing operations. Our strategy includes leveraging our existing client relationships and focusing on high-value opportunities. We are confident in our ability to deliver long-term growth and profitability.
Q: Can you provide more details on the impact of geo simplification and offering simplification on your financial results?
A: Geo simplification involves shifting from direct to indirect distribution in certain markets, allowing us to focus on core markets and reduce costs. Offering simplification involves exiting non-strategic product lines and focusing on high-growth areas. These actions are expected to improve profitability and drive long-term growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
