Xerox Holdings Corp (XRX) Q3 2021 Earnings Call Transcript

Xerox Holdings Corp (NYSE: XRX) Q3 2021 earnings call dated Oct. 26, 2021

Corporate Participants:

David Beckel — Vice President and Head of Investor Relations

John Visentin — Vice Chairman and Chief Executive Officer

Xavier Heiss — Executive Vice President and Chief Financial Officer

Analysts:

Katy Huberty — Morgan Stanley — Analyst

Ananda Baruah — Loop Capital — Analyst

Angela Jen — JP Morgan — Analyst

Shannon Cross — Cross Research — Analyst

Jim Suva — Citi — Analyst

Presentation:

Operator

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.

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 conference call. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor, and we will make comments that contain forward-looking statements, which by their nature address matters that are in the future and/or 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.

John Visentin — Vice Chairman and Chief Executive Officer

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 two significant secular challenges: a deterioration of global supply chain conditions and the Delta variant. As a 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 arrive labor shortages further delayed delivery times. These challenges accounted for two-thirds 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. Wholesale 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 margins 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 two 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 four 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, pre-purchase 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 gain share of total print devices again in Q2 for the most recent report from IBC [Phonetic], marking the fourth consecutive quarter of annualized market share gains. Growth in market share is a key pillar of our strategy and print, and it’s been driven by the quality of our products and our ability to provide secure, connected workflow solutions that our clients need across their multifunction printer fleets.

Complementing our leading position 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 Mail Room offerings increased 67% year-over-year in Q3.

By 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 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 bars performing $4 million transactions per quarter. These transactions create platform in set of use cases for us to deploy externally and in the third quarter, we deployed box 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 three 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 will live, visual augmented reality and artificial intelligence driven interactions, instructions and insights. CareAR sells [Phonetic] 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.

CareARs sells 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 at 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 workflows invested $10 million in CareAR at a post money valuation of $700 million. This investment serves as an endorsement of CareARs technology and will support its growth. As CareAR, a leading certified 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 of 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 three 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 centers 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, Australia in late September.

While technology deployed along with Victoria, a lot of 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. Io technology helps bridge operators, optimize maintenance schedules, limiting expensive field service business and ultimately, lowering the carbon footprint associated with infrastructure and 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 Io 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 materials, 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 roadmap to reach net-zero by 2014. 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 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 a 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 authorized a new $500 million share repurchase program. We will opportunistically buyback 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 plan to reopen offices. I would like to commend our team for its resiliency, while facing these challenges. Revenue and margins have fallen below our expectations 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.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Thank you, John and good morning, everyone. As John noted, significant disruption to global supply chains on [Indecipherable] in the returns of workers through a workplace negatively affected our financial results in quarter three. Despite these challenges, our revenue were essentially flat year-over-year as gradual improvements in page volumes on IT services, growth in post sales revenue and offset lower equipment sales, which were negatively affected by components, shortages and logistic constraints that affected both cost and capacity.

However, underlying demand for our equipment remained strong, as evidenced by our growing backlog, which is almost two times higher than normal level. Higher supply chain costs or less profitable mix of equipment sales on lower margins on post-sales revenue drove our profitability lower year-over-year. Gross margin declined 440 basis point, around 290 basis point of this decline is attributable to supply chain cost on capacity of restrictions, including significantly higher freight on shipping costs and constrained availability of higher margin equipment.

60 basis point of the declines related to investment to support future growth. So 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 per share will likely continue to wait on gross margin in Q4 and into the first half of 2022.

Adjusting operating margin of 4.2% decrease, 320 basis points year-over-year, reflecting lower gross profit, lower government subsidies on 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 [Phonetic] million decreased $31 [Phonetic] million year-over-year, primarily driven by savings from Project Own It, lower bad debt expenses, which include $14 million finance receivables reserve reduction and lower sales on marketing expenses. Savings were partially offset by lower government subsidies, investment in new businesses and prior year 401(k) match with the result on 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 percentage of revenue year-over-year. This reflect increased investment in PARC innovation towers on the 401(k) match with their sale in the third quarter or last year. Other expenses, net was $18 million lower year-over-year, primarily driven by higher gain on asset sales, the reduction in non-service retirement-related cost and lower net interest expense.

Third quarter adjusted tax rate was negative 3.5%, compared to 21.1% last year. So 24.6% year-over-year decrease reflect a non-recurring change to our tax positions and re-measurement 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 pre-tax 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, non-service retirement-related cost and lower restructuring charges.

Turning to revenue, supply chain disruption obscured underlying strengths in our business, as evidenced by our growing backlog on post-sales revenue, both of which grew sequentially on year-over-year. Demand for our equipment remained strong, but in the time since our quarter two earnings call, a challenging supply chain on the month deterioated [Indecipherable] causing shortages in product and logistic delays on cost. As a result, our backlog expanded in the quarter to $265 million, almost two times normal level.

Equipment sales of $387 million in Q3 decreased 7.6% year-over-year, or 8.4% in constant currency, grew primarily to supply chain disruption, specifically component shortages on logistic capacity constraints, which affected the Americas region more than EMEA.

In EMEA, equipment sales grew year-over-year, led by our indirect channel on developing markets. At the project level, supply chain constraint most negatively affected installation of our higher-priced [Indecipherable] equipment in both the mid-range and high-end causing a negative mix effect on equipment are new 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 reopen and school welcome back students.

As John mentioned, September was a second highest months for page volume, since the beginning of the pandemic. Additionally, page volume are correlated well to service on outsourcing revenue, both of which are 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 release. 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 on an increase in investments and 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 reflect 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 consume $46 million of cash, net proceeds from additional debt contributed $76 million of cash and reflected new securitization proceed of under $175 million, partially offset by securitization one-off [Phonetic].

We expect to complete additional securitizations in support of XFS in Q4. Net proceed from debt were offset by $87 million of share repurchase and $49 million in dividends, resulting in a total return of cash to shareholders each quarter of $136 million circa 170% of quarter three free cash flow.

The $87 million of share repurchase in the quarter completed our remaining share repurchase authorization of $500 million. As a result, the 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 two earnings call, we expected supply chain disruption to continue into Q3, but the magnitude of the impact on our business was greater than anticipated. The first year deterioration in supply chain condition on delays and return of worker 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 assistant program were largely offset by lower bad debt expenses on savings from Project Own It.

We are actively working to mitigate the incremental cost associated with supply chain disruption, but we do expect these costs to wait on profitability again in Q4 and into the first half of 2022. So ultimate duration of supply chain costs and capacity constrained on 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, so clearing of our backlog and growth of our newer businesses are expected to positively contribute to operating profit going forward.

Turning to Xerox Financial Services, XFS grew originations 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 constraint, which reduce equipment sales and associated new lease origination on 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 two levels. $2.9 billion of the $4.3 billion of our outstanding debt is allocated to and support the XFS lease portfolio. So remaining debt of around $1.4 billion is attributable to the core business.

Debt mainly consist of senior unsecured bond on finance asset securitizations. We have a balanced bond maturity ladder with no bonds maturing in 2021 and $300 million maturing in 2022. Year-to-date, we have returned circa $650 million of cash back to shareholder 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 would address revised guidance. Quarter three 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 outage, shipment delays and cost increases and the delay in the return of workers to the workplace resulted in a lower level of quarter three revenue than we expected just one quarter ago.

Given the continued uncertainty associated with global supply chains and the 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 initiatives.

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.

John Visentin — Vice Chairman and Chief Executive Officer

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Katy Huberty from Morgan Stanley. Your question, please.

Katy Huberty — Morgan Stanley — Analyst

Yes, thanks. Good morning. 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.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Hi, Katy. Good morning. This is Xavier here. So, yes, regarding backlog on the $200 million revised guidance, so vast majority of this is related to equipment — 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 three. We expect this backlog to grow based on the supplies outlooks that we’ve for quarter four at this date.

Katy Huberty — Morgan Stanley — Analyst

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?

Xavier Heiss — Executive Vice President and Chief Financial Officer

This is correct, Katy.

Katy Huberty — Morgan Stanley — Analyst

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?

Xavier Heiss — Executive Vice President and Chief Financial Officer

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 three, 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 chips on the — profits are becoming very positive, we are facing positive of this year. We’ve put in place a lot of action including redesigning some of the — so based on the boards are currently implemented on our product, but this will take time to recover.

So 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 should not be new news here, the challenges that a lot of company 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 Katy, our backlog is a strong evidence that our customers are still renewing the equipment and also, as we mentioned it during our comment, we grew market share. So we are still growing market share, we did it in quarter one, we did it in quarter two as well.

And Katy, the orders that we are reaching from our customer has a evidence that we still have a strong demand here. So, we will manage it, it’s a little bit early to provide you guidance on that, as we mentioned it, we will hold down the manage. We hope face to face Investor Day in February where we’ll be able to provide you more information.

Katy Huberty — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Ananda Baruah from Loop Capital. Your question, please.

Ananda Baruah — Loop Capital — Analyst

Hey, thanks guys for taking the question. I apologize, if this been addressed, I have a couple of calls and then the 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? Thanks.

John Visentin — Vice Chairman and Chief Executive Officer

Yes, Ananda that 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 the Delta variant, a lot of the corporation’s we spoken to have delayed their openings or slow them down. But demand for our product is strong and again with the supply chain constraints that become an issue for us.

Ananda Baruah — Loop Capital — Analyst

I appreciate the context, John and then, let me just ask a follow-up in that regard. Any, could you guys are pretty deep in the weeds with your conversations, with your enterprise customers. 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?

John Visentin — Vice Chairman and Chief Executive Officer

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 out — 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 and getting their employees back safely to the office.

Ananda Baruah — Loop Capital — Analyst

Very good.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Anands if I may, add as well. We have seen as well on our Global Document Solution businesses, some good traction on offerings enabling to work-from-home and work in the office, as an example in capture and content services here, we are seeing significant double-digit growth of signings, which show that [Indecipherable] are supporting these type of offerings, but also willing to enable this environment.

Ananda Baruah — Loop Capital — Analyst

That’s helpful. Thank you, guys. I appreciate it.

Operator

Thank you. Our next question comes from the line of Samik Chatterjee from JP Morgan. Your question, please.

Angela Jen — JP Morgan — Analyst

Hi, good morning. This is Angela Jen on for Samik Chatterjee. Thanks for taking my question. The first question I have was so — HP at their Investor Day that they expect the low to mid single-digit decline and supplies next year, which we thought 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.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Yes, so good morning. 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 [Indecipherable] or consumer build 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 the device on support workflows that the customer are using here. So we — if you want to, you know, like a data point or proof point of what we face, we saw some increase in quarter three of what was the sole supplies revenue on that we are positive of seeing a gradual recovery of page volume over the time.

Angela Jen — JP Morgan — Analyst

Great, thank you. And then for my follow-up just thinking about your product mix on A3 versus A4 printers, it seems like for the industry deal, is that a A4 will become more popular over time as offices migrate toward 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?

John Visentin — Vice Chairman and Chief Executive Officer

Yes, if we look at our third quarter, our backlog for A3 went up from Q2, we’re gaining market share and then we are seeing a strong demand in the A3 and we’ve also gained market share in the A4 market.

Angela Jen — JP Morgan — Analyst

Great, thank you so much.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Shannon Cross from Cross Research.

Shannon Cross — Cross Research — Analyst

Thank you very much. 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 are 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. Thanks.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Thank you, Shannon. Good morning, Shannon. Yes, it’s 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 on the — this is something that we started executing, we started executing already in quarter two and invest plan in order to reflect some of the costs that we’re facing here, specifically on supply chain and some of the raw material costs that we have here.

Regarding page volume, under the price per page here, this is our product 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, you know, the pricing and also protecting with minimums our annuity volumes.

Shannon Cross — Cross Research — Analyst

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 pre-split 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 one-time 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? Thank you.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Yes, Shannon. So, on SG&A we call details — the only I would say one-offs [Indecipherable] I highlighted here is related to the bad debt release that we have, which is by the way, good news. We chose [Indecipherable] the business is recovering in light of last year or two 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 ingrained in the DNA of the company on how we adjust our cost base, based on, I would say the [Indecipherable]. So flexibility exist within the cost base and we will ensure that we can’t reflect some of the gross profit decline and gross margin declines that we have in our fixed cost base as well.

Shannon Cross — Cross Research — Analyst

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

Xavier Heiss — Executive Vice President and Chief Financial Officer

[Speech Overlap] 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 — on Own It is not only SG&A, Own It is the on-tire cost base of the company. On the — 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 have the benefit of a government subsidies, this government subsidies are instinguishing [Phonetic] and you can see that in our cost base, basically in SG&A, we’re able to offset this via cost actions that we’re taking to a flexibility of cost base.

Shannon Cross — Cross Research — Analyst

Okay, thank you.

Xavier Heiss — Executive Vice President and Chief Financial Officer

Thank you, Shannon.

Operator

Thank you. Our next question comes from the line of Jim Suva from Citi. Your question, please.

Jim Suva — Citi — Analyst

Thank you. 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 — if is the case or not the case or how do we actually know? Thank you.

John Visentin — Vice Chairman and Chief Executive Officer

Yes, Jim. We’ve seen a strong demand for our product and in fact you saw in third quarter than our backlog increased again to record levels. So we are seeing the demand we’re increasing market share. Even in September is 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 and — but that’s how we’re seeing it right now.

Jim Suva — Citi — Analyst

Great, thank you so much for the details.

Operator

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.

John Visentin — Vice Chairman and Chief Executive Officer

Okay, thank you. Look, we cannot predict 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 in office, work will be different, but we are prepared to meet workers evolving print and document management needs. Be safe and be well.

Operator

[Operator Closing Remarks]