“New” Xerox Fourth Quarter Earnings in Line

Exceeds first-year savings target for Strategic Transformation Program

Xerox Corporation announced its fourth quarter 2016 earnings on January 31, 2017 (see Figure 1, Figure 2, and Figure 3). Due to the split with Conduent some numbers are estimated for past quarters.

  • Xerox total Q4 revenue of $2.7 billion (B) from continuing operations, down 7 percent year-to-year (YTY)
  • Document Outsourcing plus some Communications & Marketing Services solutions Q4 revenue of $894 million (M), down 3.9 percent
  • Document Technology revenue of $1.7B, down 10 percent
  • Xerox worldwide employment was approximately 37,600 includes a 800 headcount reduction in 2016
  • Delivered strong adjusted operating margin of 14.0 percent

 

Our View

Jeff Jacobson, Xerox Chief Executive Officer, and Bill Osburn, Xerox Chief Financial Officer, held the first earnings call for the “new” Xerox. In general, these two gentlemen were crisp and succinct. Jeff Jacobson said, “As the strategy begins to yield results, our revenue trajectory is expected to improve over time while we expand our margins and continue to generate strong cash flows.” This became a talking point throughout the earnings call.

Due to the split with Conduent, estimates had to be made in order to get a handle on the revenues and operating income trends (see above Figures). Xerox did make a mention in its press release that it was expecting to shift to a “geographic structure and will be primarily organized on the basis of two main business units: North America Operations (U.S. and Canada) and International Operations (Europe, Eurasia, Latin America, Middle East, Africa, and India).” This may mean that Xerox will report as one reportable segment going forward.

Revenues from the Services segment were down 3.9 percent (YTY) to $894M. Revenues in the Document Technology segment declined 10 percent (YTY) to $1.69B mainly due to weak sales and some currency fluctuations. As can be seen in Figure 3, Document Technology has driven the company and was pretty much the main reason for the split so it could get refocused.

During 2017, Xerox expects to incur additional restructuring to the tune of about $225M and it mentioned almost $125M would be recognized in the first quarter. The initiatives for these actions have not been finalized as of the earnings call.

During its Capital Allocation discussion Osborn mentioned that approximately $100M would be reserved for M&A activities as an opportunistic use of cash. Xerox has not been in the M&A mode in recent quarters.

Several times during the call, Xerox mentioned it would have its largest ever product launch in 2017 including A3 and A4 products with the “vast majority” in Xerox’s supply chain by the end of the first half and then having the products into its partner’s supply chain during the third quarter. This should have an impact on revenue for 2017.

Additionally, Jacobson commented about the upcoming product launch, “From a functionality standpoint the new products will have a tablet-based user interface. They will be mobile-enabled. Cloud-connect, app-centric with benchmark security which is so important to the market today. And there will be fleet coherency between A4 and A3.” This will be an exciting year for Xerox.

It would be remiss not mentioning something about Xerox’s Strategic Transformation program. Xerox had set a goal for 2016 to have a gross savings of $500M. It exceeded that goal with $550M in savings. Not to be outdone, the company has set a target of $600M for 2017, with a cumulative total through 2018 of $1.5B. This is a significant program for Xerox.

For 2016, Xerox had a lighter year in product announcements. See Figure 4 to note the equipment installs for Q4 and FY16. Obviously, Xerox has been quite strong in color with monochrome lagging through 2016. Jacobson mentioned the company had seen some slowdown in product sales due to the impending product launch because customers are holding off buying to get the latest technology. This might explain some of the decreases in B&W.

The Document Technology revenue mix for Q4 was 26 percent high-end, 57 percent mid-range, and 17 percent entry which was consistent with past quarters.

Figure 4: Xerox Q4 and FY16 Installs

 Color B&W  
Q4FY16Q4FY16
High-end3%16%(18)%(13)%
Mid-rangeFlat3%(13)%(16)%
Entry A4 MFPs(8)%(1)%(19)%(12)%

2017 will be all about execution. Xerox has streamlined and refocused its operations in 2016. It has laid a good foundation with its Strategic Transformation program and its Strategic Growth areas in 2016. Now it has a major product launch of innovative products planned for 2017. The strategy is sound and it does have growth areas that it can pursue. The big question concerns its customers and shareholders – will customers buy the new products and solutions and will shareholders stick around?

 

 

 

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