By Gail Kailing April 23th, 2003 - Xerox Corporation (NYSE: XRX), The Document Company, announced quarterly earnings for the quarter ending March 31, 2003. During the conference call, Xerox outlined first quarter revenues of $3.8 billion, a decline of 3% over the previous year. The net loss available to common shareholders for the quarter, after all adjustments, was $75 million, improved 34% from a loss of $114 million the previous year. The decrease in first-quarter total revenue was primarily driven by declines in the company's developing markets business and light lens products. For the first quarter, gross margins were up 0.9 percentage points to 41.9%. Selling, administrative and general (SAG) costs continue to decline and SAG as a percent of revenue was 27.1%, a year-over-year improvement of 3.2 percentage points. The company reported first-quarter operating cash flow of $159 million. Xerox's worldwide cash position increased to $3 billion at the end of the first quarter. Xerox has $159 million in operating cash. And the goal of securitizing 60% of receivables will likely be achieved by the end of 2003. With $14.3 billion in total debt, the company is focused on strengthening the balance sheet. The first quarter loss of 10 cents per share included a 25 cent-per-share litigation charge. The after-tax litigation charge of $183 million results from a judgment against Xerox's primary U.S. pension plan for salaried employees. The judgment is being appealed, and it is believed that it should be overturned. However, under accounting standards, the company is required to take a charge for the value of the judgment. If the district court ruling were upheld, the final judgment would be paid from the pension fund assets. Should Xerox need to make a cash contribution to compensate for any potential shortfall in the plan related to the litigation, it would not be required to begin doing so until 2005. Anne M. Mulcahy, Xerox chairman and chief executive officer, outlined positive operational performance through increased equipment sales and increased demand in key markets. Performance Overview Equipment sales increased 3%, reflecting first quarter growth in color and multifunction devices. The production color and office color markets revenue was up 16% over the same period last year, attributable to DocuColor success. Production color installs grew 8%, led by demand for the DocuColor 6060. There are more than 7500 installs of the DocuColor 6060 and 2000 worldwide. Installs of Xerox's advanced multifunction systems also grew. Office color multifunction installs increased 48% and black-and-white installs grew 15%. The revenue decline came primarily from declines in Light Lens, Developing Markets (DMO), and SOHO. Light Lens and SOHO dropped 29% to $415 million. A year ago revenues from these products were 20% of office revenue, now at 14%. DMO showed a 17% growth in sales, but less revenue in the short run than expected. Xerox exited the SOHO market in 2001, and less and less revenue is coming from that segment. Some markets are growing, some are declining - the company is seeing increasing revenues in growth areas and decreasing revenues in declining or speculative markets. Growth areas saw 7% growth, declining areas contributed only 17% of revenues, a drop of 28% in the quarter. DMO was 10% of revenue, down from 19%, and is expected to turn at the end of the year. Xerox has also rolled out a new service the "Office Document Assessment (ODA)" to review the cost of producing and managing office documents, including better asset management, streamlined work processes, and web-enabled document management tools. In summary, the company is seeing a continuing positive trend, profit growth is exceeding revenue growth, and operating margins are expected to expand. Earnings projections for next quarter are 9-12 cents per share. Q & A Summary * While unwilling to detail the number of installs in the more profitable color market or the percentage of pages that are printed in color, Ms. Mulcahy was willing to add that midrange color installs were up 15%, production color installs were up 8% and the total color revenues were up 16%. However she did indicate that a color page is four to five times more profitable than a black-and-white page. As color becomes more affordable margins are expected to compress. Solid ink delivers more reasonable prices to customers. * Mid-range color is less of a graphic arts/production play and more of an office application. The re-segmenting in the color market probably result in a change in the production market too. * Office black-and-white has resulted in "pricing investment" of about 10-15%, however office multifunction black-and-white grew 7% in revenue and 15% in installs, with a good margin level. * While production equipment declined 14%, it is still a $1.5 billion business. Production color performed well and is 20% of total revenue. The install base for production black-and-white remained pretty stable with no real deterioration in mix or market. With the introduction of the Xerox 1010 (Nov. 2002), Xerox has entered a new segment, and expects to see growth. * Inventories are at expectation however the company is committed to get inventories down more. * About half of equipment sales are from products released in the last two years. A vast majority of the products available - probably close to 90% - were launched in 2002. * New equipment sales are driven by success with major accounts, including asset management and centralized web-based services for large institutions. New case studies are available on the web site showing the savings that are driving the growth in the black-and-white multifunction area. * Xerox has been carefully controlling the IGen3 pipeline and rolling the product out in a measured way. The potential for a couple of hundred installs in 2003 is still doable, however the company is holding back until ready for full launch. The intent is to solidify the technology and ensure the profitability of the customers. "We will get the first 100 right!" * The outsourcing market has softened, and revenues from service/outsourcing/rentals have dropped 5%. Post sale revenue is down, and outsourcing margins have improved almost 3 points. Xerox is working hard to improve both the service offering and the profitability of outsourcing deals. By reducing expenses the company is positioned to grow as the market increases. * It is hard to estimate the effect of restructuring that occurred in the fourth quarter 2002. Those released from the company have a year to decide when to take their pension dollars. The total is projected to be $115 million for the year, however it's hard to project when it will happen. * Major events such as the war in the Middle East and SARS have had a small impact on total capital spending, although there doesn't seem to be major volatility. As expected the war has caused a drop in Middle East business, and SARS has led to some travel restrictions. * The pricing environment is still tight, though there has been no real increase in pricing pressure, and no additional pressure from Asian competitors. * Questions on EBITDA and bad debt, drew comments from Larry Zimmerman, CFO: "I don't look at EBITDA or EBITDA margins" and "a good run rate for bad debt would be $0." He did note that the bad debt rate is much more appropriate than during 1999-2000, and that the partnership with GE Capital should result in continued improvement. * Capital expenditures for the year are expected to be about $225 million and the pension expense for the year is expected to be $150-175 million, with an additional $40 million case contribution. Stand-by For More News Next week, Xerox will make a "significant office product announcement." While company officials would not elaborate "for competitive reasons," the announcement will describe new product(s) expected to "position the company to win market share and drive revenue growth." Stay tuned!