Is there a New Xerox in Rochester?

I had the privilege to attend Xerox’s 2016 Investor Conference in NYC on December 7, 2016 and to hear what Xerox’s new management team, headed up by Jeff Jacobson, had to say about Xerox future strategy and direction.  I also had an opportunity to attend a round table discussion with Jeff and also a 1 on 1 with Kevin Warren, President of Xerox’s Commercial Business Group for Xerox’s services.

I must say, there was a high level of excitement, enthusiasm, and confidence from the new Xerox management team.  Since there will be many analysts writing about the financials presented, I wanted to focus on my key takeaways.

First, Xerox well understands that the overall printer market is in decline so they are implementing the following initiatives:

  1. Accelerate productivity improvements through a $1.5B+ transformation program – will allow them to generate more cash and allow them to make some strategic investments.
  2. Defending their leadership position in key areas such as the A3 market segment where they hold a 22% market share
  3. Grow their market share in the A4 printer segment where they currently have only a 6% share
  4. Grow their SMB (mostly “M”) business – will depend on new leading price/performance products such as the Xerox WorkCentre 6515 color MFP demonstrated at the event is a good example.
  5. Focus on continuing to expand and growth their leadership position in the MPS market
  6. Continue to expand their multi-brand offerings and channel for them – where Xerox provides supplies and service for non-Xerox branded products
  7. Continue to invest in high end digital commercial print (inkjet and electrophotographic, cut sheet and continuous feed) since today, only 3% of the 50 trillion commercial printed pages are printed with digital presses as opposed to analog presses.
  8. Invest in printing beyond documents. Xerox showed examples of direct to object printing including packaging applications, direct printing on bottles or cans using UV ink technology (https://www.xerox.com/digital-printing/continuous-feed-printer/direct-to-object-inkjet-printer/enus.html)
  9. Document Outsourcing – strengthen leadership position in large enterprise MPS and CPS, focus on SMBs, workflow automation, and Security
  10. Maintain their “Investment” grade credit rating

Xerox expects that about 37% of their revenue will come from new strategic areas in the short term but by 2020 expects this to grow to 50%. Some of this will come from initiates to increase market share in existing markets and some will come from totally new markets for Xerox.  Between 2017-2018, Xerox expects that they will have one of the biggest new product launches in their history including 29 new products, 16 of which are A3 products.  Xerox expects to continue to invest about 4% or revenues in R&D and keep the new patent filings at least the 2015 level of 1500 patents.

How well is Xerox protected against factors that could potentially hurt them?   Well, consider the fact that >75% of their business comes from annuity/contracted business with an average contract period of about 4 years.   Also, because so much of their business is contracted, their exposure to aftermarket cartridge suppliers is limited whereby about 13% of their supplies businesses is exposed to the aftermarket suppliers.   Keep in mind that Xerox’s multi-brand program will provide totally new incremental revenue and profits from supplies and service from non-Xerox branded products.

Photizo View

There is no doubt that there is excellent in the air in Rochester.  The new management team is excited and enthusiastic about their plans but they will need to have that excitement and enthusiasm ripple throughout the Xerox organization, their channel partners, and user base.

It is very interesting that as Xerox defends their leadership position in the A3 market and sets out to increase their A4 market share, HP is actually doing the opposite by trying to increase their very small current share of the A3 market using PageWide technology, A3 product line from Samsung etc. while they defend their leadership position in the A4 market where PageWide technology is implemented in their higher end office products.

From a supplies standpoint, Xerox is not as exposed as much as their competitors to aftermarket cartridge competition since only 13% of their supplies business is really exposed.   Xerox will gain incremental supplies revenue and profits from Xerox supplies sold on to non-Xerox branded products so Photizo would expect Xerox’s supplies business to increase over time.

When the dust settles a bit, where will this all end up?  It is far too early to tell and that dust may not settle for some time, but it will certainly be interesting to monitor quarterly market share shifts between Xerox and HP particularly as we move forward.

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