(XRX) Xerox Reports Profit that More than Doubles

Xerox Corporation (XRX) reported a profit that more than doubled to $314 million in the third quarter of the year from $150 million in the same quarter a year ago. On earnings per share basis, the company has beaten the Zacks Consensus Estimate by a penny with a profit of 22 cents compared with 17 cents in the third quarter of 2009.

Revenues for the quarter surged 48% to $5.43 billion driven by an impressive growth in the Services segment, comprising document outsourcing (DO), business process outsourcing (BPO), and information technology outsourcing (ITO) businesses. The Zacks Consensus Estimate was $5.42 billion.

Gross margin declined to 33.6% from 39.8% a year ago due to higher cost of sales, service, outsourcing and rentals. However, operating margin improved to 9.2% from 6.7% due to higher revenues.

Performance by Segment

Revenues in the Technology segment inched up 3% to $2.47 billion, driven by a 15% rise in equipment sales. The segment profit increased $13 million to $247 million from the last year.

Revenues in the Services segment nearly tripled to $2.55 billion from $865 million in the second quarter of 2009. This was attributable to an 8% growth in revenues from BPO services, which accounted for 56% of total revenues in the segment. The segment profit nearly quintupled to $286 million from the year-ago level.

Revenues in the Other segment marginally declined to $408 million from $411 million a year ago. However, the segment showed a narrower loss of $79 million compared with $88 million a year ago.

Financial Position

Xerox had cash and cash equivalents of $975 million as of September 30, 2010, compared with $3.8 billion as of December 31, 2009. Total debt amounted to $9.5 billion, reflecting a debt-to-capitalization ratio of 44%.

In the first nine months of 2010, cash flow from operating activities improved to $1.42 billion from $1.24 billion in the same period of 2009. The company reiterated its guidance to report an operating cash flow of $2.6 billion for the full year 2010. Meanwhile, capital expenditures increased significantly to $234 million in the same period from $69 million a year ago.

EPS Guidance

Based on the strong results, Xerox revised its full-year 2010 estimates upward. The company expects adjusted EPS in the range of 92 cents–93 cents, up from the previous guidance of 88 cents–92 cents per share. For 2011, Xerox anticipates to earn $1.05 per share–$1.10 per share, up from the prior guidance of 95 cents–$1.05 per share.

Our Take

Despite the improved results, we believe intense competition from its peers and rising debt will adversely affect the company’s operations in the near future. As a result, the company retrained its Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) rating of Hold.

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