Xavier Heiss: Yes. Eric, I would add as well that, as you know, we have quite a resilient business model. The resilient business model is based on, I would say, some simple pillars. The number one is our contractual revenue base. What is contracted for four, five years, even more in some cases there, represent two-third of our revenue. So, we are less subject to the bumps on the high-end loads that some of our traditional hardware competitors are facing. The second point is we still see a strong demand, the demand for equipment, the demand for service, we have noted we have reduced our backlog, but we still have some backlog to clean during quarter two here with a good mix. The third item and to close on this one, price increases.
We have been able to enact during the prior year at difficult time, price increases, and the price increases that we apply, not only on the equipment revenue on the hardware, but also on the contracted revenue will be now with us for three, four, five years depending on the customer contract.
Erik Woodring: Okay. That’s super helpful. Thank you guys. Thanks for all the color. And then maybe, Xavier, just to touch on the point you just made. You’re obviously – or maybe over the last two quarters, you’ve been able to work down backlog. It looks like you ended at $180 million versus $435 million a year ago. So I know you made the comment about backlog being normalized, I think you said around $225 million. But shouldn’t we interpret this as backlog being below normalized? Or maybe just help me square that, and then help me understand kind of as a result of that point, how – if we should still think about a stronger first half of equipment sales relative to maybe a weaker second half just as a result of working down that backlog, if that’s still the same view you take today?
Xavier Heiss: Yes. So it’s quite simple. Backlog normalized value is around $100 million to $125 million. So I will simplify it by saying around one month to one month and a half of equipment revenue. So currently, we are running above, I believe, and this is our assumption that in quarter two, we will clear the backlog. The backlog is solid. That’s another point I want to share here. We are not seeing backlog cancellations. On the second point, the aging of the backlog, more than 50% of the backlog is less than 90 days old, which means that, during quarter two, this backlog should reduce and will be at a normalized level here.
Erik Woodring: And then maybe just the last part in terms of does that – should that still imply a weaker second half of equipment sales relative to the first half? I think that’s what you guys said 90 days ago. I just want to see if that’s still how you’re thinking about the world today.
Xavier Heiss: No, the way we see it because this backlog is refilled every quarter, and this refresh away we’ll see it is back to the prior comment, we still see a strong demand of our equipment. We have orders from customers not only for next quarter, but also that will be deployed during the rest of the year. So I’m not looking at the backlog being like a way to hide slower demand or more of a recession. I mean you know our total revenue guidance that we published here. We are still sticking with this guidance, which is flat to low mid-single-digit decline. We had obviously a strong quarter to compare versus last year is certainly easier. But so far, we are still sticking with the guidance here.
Erik Woodring: Perfect. No, that’s very helpful. And then maybe – Steve, maybe last question for you was, I think the licensing agreement with the existing Fuji Xerox entity has now expired as of the end of last quarter. How should we think about your opportunity to go after the Asia Pacific market? I know you didn’t mention that. Is that a focus? Is that not really a focus? Maybe help us understand yes or no? And then second to that, why it would or would not be a focus for potential growth going forward? And that’s it for me. Thank you so much.
Steve Bandrowczak: Yes, I think there’s a couple of things. One, focusing on profitable growth and an expansion in our existing accounts, in our existing regions, we see more than enough opportunity to expand the TAM within IT services, digital services and software and services in and around the products that we already have. If you think about the amount of capital of what it takes to go put into a new region, building a supply chain, building services, building inventory equipment and that ecosystem, it’s a pretty long putt in terms of setting that up and the costs associated with that. So right now, we see the regions that we’re in as an opportunity to expand profitable growth and expand inside the existing accounts. So at least, short-term, we have no desires to go and spend a whole lot of money to start up and spin up in a new region.
Erik Woodring: Super, very helpful. Thank you guys.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Samik Chatterjee from JPMorgan. Your question please.
Samik Chatterjee: Yes, thank you. Thanks for taking my questions. I have a couple. The first one was really on operating margin, the guide that you are issuing or raising today and congrats on the strong execution here to set that up. But I’m also trying to think about the reasons that the operating margin has to moderate into the second half, particularly if you go back and look historically, your first quarter margins are typically the lowest and your OpEx is typically the highest in Q1. Even if I keep some of the macro headwinds and some of the one-offs you called out, like it seems like OpEx and there is probably more room on the OpEx to go in the second half to drive the margins to remain at these levels or even higher. So I’m just maybe more for Xavier, just to sort of outline why should we expect margins to moderate materially in the second half because, typically, that hasn’t happened in the prior years? And I have a follow-up.
Xavier Heiss: Yes. Good morning, Samik. Good question. So this is very simple there. The margins for quarter one was a strong margin. For the reason we explained it was helped by a mix, product mix, a little bit like what we had in Q4 that was more favorable. We expect this mix to normalize. If you look at the chart, the high-end equipment was higher. The A3 equipment was higher. A4 was a little bit lower. So this helped the equipment margin. The other item is, in Q1, we have had some one-off benefits, specifically a bad debt benefit here that we are not seeing this as a recurring item there. So when you normalize here, we are in the range for this quarter or something which is around 5.5% here. That’s the reason why when we guided for the rest of the year, we are not expecting a deterioration of the margin.
If you look at the implied gross margin for the rest of the year, it is around 4.7% to 5.1% or a little bit higher here. So we are not expecting like a margin deterioration, but we have to take into account some of the items that I mentioned for Q1. And also, we want to consider potentially what we call macro headwinds. There are some uncertainty around still some cost items and how some normalization of the cost base will happen here.
Samik Chatterjee: Okay. And, Xavier, just to quickly follow up, the $471 million in OpEx that you have in 1Q, what’s the best way to think about the run rate exiting the year, particularly with the PARC benefits coming in as well?
Xavier Heiss: Yes. So on PARC under we – I think we commented that or we put that in the press release there. On PARC, PARC was included in our guidance. So we were working on this transaction, and one in January, we have given the guidance there. So the PARC benefit and the flexibilization of the RD&E cost base. By the way, we started this last year. If you remember, with more heavy and also with the ability when we spun these businesses to be more flexible on this year, we’ve got some of these benefits in quarter one, and obviously, in quarter two, quarter three, quarter four, we’ll have further benefit from PARC, but you should consider this being already included in the guidance there. From an OpEx point of view, I believe I mentioned that in my script, we’re expecting around, overall, it’s not on the OpEx, but cost base there, around low to mid-single digit growth cost efficiency, which is the Own It engine and the traditional way of looking at how we address the cost base and we make it flexible, I won’t say regardless, but taking into account potentially some of the macro headwinds that some of the economists are indicating for the back end of the year.
