(XRX) Xerox’s Earnings Marginally Miss

Information technology services provider Xerox Corporation (XRX) reported GAAP earnings of $300 million or 23 cents per share in the first quarter of 2013 compared with $276 million or 19 cents in the year-ago quarter. The reported earnings marginally missed the Zacks Consensus Estimate by a penny.

Excluding non-recurring items, adjusted earnings in the reported quarter were $347 million or 27 cents per share versus $319 million or 23 cents in the year-earlier quarter. The healthy year-over-year performance is attributable to a solid growth in the service businesses, along with a stable margin, and a 64% rise in the total contract value of signings to $3.7 billion.

Total revenues in the quarter declined 3% year over year to $5.4 billion, missing the Zacks Consensus Estimate of $5.5 billion. Operating margin was down 1.1 basis points to 7.4% in the reported quarter, driven by higher selling and administrative expenses in the Technology segment. Gross margin dipped 1.0% to 30.0% driven primarily by the revenue mix within the Services segment.

Segment Performance

Revenues from the Services segment, which include Document Outsourcing (DO), Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO), rose 4% to $2.9 billion in the reported quarter, driven by higher revenues from all three subdivisions.

Although segment margin was relatively flat, total Services sales pipeline grew 5% year over year. Total contract value of deal signings aggregated $3.7 billion with BPO, DO, and ITO accounting for $2.8 billion, $792 million, and $108 million, respectively.

Revenues in the Document Technology segment dipped 9% year over year to $2.1 billion, with no negative impact from currency. The decline was attributable to a 12% fall in equipment sales and a 7% decrease in annuity revenues as Xerox’s customers migrated to its partner print services offering.

Segment margin decreased 1.7% to 8.8% as prices were reduced due to weak macroeconomic environment. Xerox focused more on the mid-range products in this segment (a revenue mix of 58%) compared to entry-level (a revenue mix of 22%) and premium range (a revenue mix of 20%).

Revenues in the Other segment went down 13% to $301.0 million compared to the prior-year period due to lower paper sales and electronic presentation systems. In order to boost its profitability, Xerox decided to divest its North American paper and print media products business (representing about 20% of the segment revenue) to Domtar Corporation (UFS). The transaction is expected to close in second quarter 2013.

Financial Position

Xerox had cash and cash equivalents of $993.0 million at quarter-end, compared with $1.5 billion in the year-ago period. Total debt at quarter-end stood at $8.5 billion, almost flat compared to year-end 2012.

Net cash used in operating activities in the reported quarter were $87 million. In the reported quarter, Xerox increased its dividend payout by 35% year over year to a quarterly payment of 5.75 cents per share or 23 cents on an annualized basis.


In order to better adapt to the changing market trends, Xerox is continually shifting its business model by expanding its indirect distribution channel and streamlining its supply chain and product portfolio. The company expects these operational changes to yield higher margins going forward, thereby enabling it to maintain its strong market share in Document Technology business.

For second quarter 2013, Xerox expects GAAP earnings between 19 cents to 21 cents per share, while adjusted earnings are expected to be within 23 cents to 25 cents. For full year 2013, Xerox reiterated GAAP earnings guidance in the range of 94 cents to $1.00, and adjusted earnings guidance of $1.09 to $1.15. The company also reiterated its operating cash flow guidance of $2.1 billion to $2.4 billion in 2013.

Xerox faces stiff competition from other players in the industry such as NCR Corp. (NCR) and Concurrent Computer Corp (CCUR). Xerox currently has a Zacks Rank #2 (Buy).

CONCURRENT NEW (CCUR): Free Stock Analysis Report

NCR CORP-NEW (NCR): Free Stock Analysis Report

DOMTAR CORP (UFS): Free Stock Analysis Report

XEROX CORP (XRX): Free Stock Analysis Report

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