Xerox Cuts Costs, Margins Improve for Q2
Revenue Continues to Drop Ahead of Split
Xerox Corporation announced its second quarter 2016 earnings today, July 29, 2016 (see Figure 1, Figure 2, and Figure 3):
- Xerox total Q2 revenue of $4.39 billion (B), down 4 percent year-to-year (YTY)
- Services Q2 revenue of $2.5B, down 2 percent (1 percent constant currency (CC)), remained at 56 percent of revenues
- Document Technology revenue of $1.75B, down 7 percent or 6 percent CC
- Xerox eliminated another 1,300 jobs globally (mainly production and middle management employees bringing the total to about 11,800 since the end of December 2015)
- Xerox stated it expects a one-time pretax separation costs of $175-$200M, lower than the previous estimate of $200-$250M
- On a positive note, Xerox did reaffirm its full year revenue guidance (a decline of 2-4 percent)
Xerox’s total revenue declined for the sixth straight quarter as commercial customers reduced printing. Revenue from Xerox’s document technology business declined almost seven percent which is much lower than the 10-13 percent in the prior quarters. Revenue from its business process outsourcing division fell almost four percent while revenue increased about one percent for its document outsourcing division – one of the major bright spots for the firm. The overall results topped Wall Street estimates.
The company mentioned it had filed its Form 10 (registration statement for the split of the company) in June. By 2017 Xerox will be back where it was when it had acquired Affiliated Computer Services (ACS) in 2009 (or 2010 when the deal was finalized).
Xerox believes that focus on the use of inside sales, channel sales, and specific, targeted direct sales will help create a normalized revenue growth.
Xerox has been more Enterprise-focused in the past. Increasingly the company has been focused on MPS in the SMB market which will help create revenue growth. Xerox is a leader in the Production Printing market that has a market of about $6B, however, an area they would like to pursue is packaging which has an $80B market. As such, it announced a press in partnership with KBA that folds cartons and has seven colors. Finally, Xerox’s last A4 MFP market refresh was in 2013. If it wants more of this market it is incumbent upon Xerox to announce an updated A4 MFP product line.
Looking back, ACS was probably a gamble back in 2010, but Xerox executed well to have some good years. Services generally requires more labor and the margins are not as high as Document Technology. With the separation only four months away and CEOs have been announced for both Xerox (Document Technology) and Conduent (BPO), perhaps this split may indeed allow each company to have more focus going forward to win more contracts, increase revenues, and profit.