Xerox Generates Strong Margins Ahead of its Impending Split

Revenue Continues to Drop

Xerox Corporation announced its third quarter 2016 earnings October 28, 2016 (see Figure 1, Figure 2, and Figure 3):

  • Xerox total Q3 revenue of $4.2 billion (B), down 3 percent year-to-year (YTY)
  • Services Q3 revenue of $2.4B, down 1 percent
  • Document Technology revenue of $1.6B, down 9 percent
  • Xerox worldwide employment was approximately 131,800 and has decreased 11,800 since December 31, 2015 mainly due to restructuring and productivity-related reductions
  • On a positive note, Xerox did reaffirm its full year revenue guidance and separation remains on track by year-end

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2016-1031-fig-2-xerox-q316-earnings

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Our View

Ursula Burns, Xerox Chairman and CEO, reported that during Q3 the company had made good progress toward three of its commitments by delivering on its 2016 financial goals, implementing its strategic transformation, and being prepared for its year-end separation.

Xerox’s total revenue declined once again since it achieved $5.3B in Q214 (see Figure 2). However, the company did realize solid margins in both Services and Document Technology since its low in Q116. Burns discussed Xerox’s upcoming (November 1) “soft separation phase” where the company will begin to separate its corporate functions, business infrastructure, and IT systems. This “test run,” or phased implementation will make sure that Xerox will not stumble when both companies are independent.

Operating margin was strong at 9.2 percent as its Services segment driven by its BPO business and Document Technology margins were solid. Its Document Outsourcing business claimed a win with USDA worth $110 million for managed print services and will be installing up to 16,000 Xerox ConnectKey-enabled printers and MFPs.

Document Technology margin was 13.1 percent, up 0.50 percent sequentially. The trends in entry A4 MFPs and High-end improved as a result of new product introductions, however, mid-range equipment installs were lower due to reduced large account sales in the U.S. (see Figure 4).

 

Figure 4: Equipment Installs

 
Color
B&W
High-end
6%
(1)%
Mid-Range
7%
(25)%
Entry A4 MFPs
16%
(12)%

 

Before Burns, Jeff Jacobson, CEO of the new Xerox, and Ashok Vemuri, CEO of Conduent (post-separation) (new Conduent logo shown below) began to answer questions posed by financial analysts, Burns made note that this earnings call would be the last as a combined entity. It has been over six-and-a-half years that both Xerox and ACS have been a combined entity. It appears that Xerox’s attempt to become one of the most servitized U.S. firm will now be replaced by HP followed by Lexmark.

The servitization strategy was sound. However, Xerox Services was more labor intensive than IBM (the leader) and the company has had major problems with Government Healthcare projects particularly Medicaid Management Information Systems (MMIS). Xerox was sued by several states which put a drag on its earnings. Carl Icahn took a 7.1 percent stake in Xerox last November and eventually increased his stake to 8.3 percent this past January.

Xerox struggled to improve its execution and automate its heavy human-reliant services business. Xerox originally got into Services to create a plan to slowly move out of the commodity printing business. Photizo has been bullish on Xerox’s portfolio but it is clear the company has not been able to execute as expected. It was not able to reach “escape velocity.” Perhaps Icahn’s involvement may save both companies as each ‘stick to the knitting.’

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