Commentary & Analysis
FREE: Xerox Reports Steady Earnings; On Track To Meet 2004 Expectations: Summary of Q3 Earnings Call
By Jean Goodwin November 4,
By WhatTheyThink Staff
Published: November 4, 2004
By Jean Goodwin November 4, 2004 -- Xerox Corporation (NYSE: XRX) announced another quarter of improved earnings reflecting increased sales of industry-leading digital systems, demand for documentation services and continued operational excellence. Net income in the third quarter rose from $117 million to $163 million year over year. The company reported third quarter earnings per share of $0.17 including a $0.04 benefit from Xerox’s share of a Fuji Xerox pension settlement gain, which was partially offset by restructuring charges of $0.02 per share. Topics of this summary: Company Performance Overview Guidance Q & A Company Performance Equipment sales grew 5 percent in the third quarter including a currency benefit of 2 percentage points. Total revenue for the third quarter was flat year-over-year at $3.7 billion including a currency benefit of 3 percentage points. Revenue growth continued to be impacted by post sale revenue declines from the company’s older light lens technology and weak performance in Latin America. To drive growth in this region, Xerox is implementing a two-tier distribution channel across Latin America. Third quarter revenue from Xerox’s targeted growth areas - office digital, production digital and value-added services – grew 7 percent year-over-year and now represents about 74 percent of Xerox’s revenue. Revenue from color products grew 18 percent in the third quarter and is a key driver of Xerox’s growth strategy as the increasing volume of pages printed on Xerox’s color systems flows through to post-sale revenue. Color revenue represents 24 percent of Xerox’s total revenue. Gross margins remained strong at 41.3 percent in line with Xerox’s full year expectations. Xerox generated operating cash flow of $435 million in the third quarter contributing to a cash balance of $3.4 billion. Debt decreased $1 billion from the third quarter 2003. Guidance The fourth quarter for Xerox is on track with full year guidance expectations to deliver 2004 earnings in the $0.76-$0.78 per share range. In Q4 they anticipate earnings per share in the range of $0.23 to $0.25. Q & A Page counts have stayed consistent quarter over quarter; however the overall pages represented an increase in digital and color pages with accelerating declines in the light lens pages. The decline of the light lens pages will have an impact on revenues in 2005. Due to the acceleration of the decline, it probably will not impact the revenues beyond 2005. Mulcahy is very confident with the unit forecast of 350 for the iGen3. The concern is the amount of sales and marketing support it requires not competition. There are now 30 customers with more than one iGen. There has been a lot of progress made with the two tier model in Europe. Color printing has done extremely well. There is still a lot of opportunity left. The focus is now on the business model on the cost side. Software services are in many cases is leading the large product sale. Software sales are growing at a double digit pace. Customers need to see a good workflow and software solution prior to buying the product. Sequentially, Xerox does not expect o see a decline in Latin America. Year over year you may see a decline in the next 2 or 3 quarters. By moving away from the rental model, the region should become more predictable and less volatile. Prices have stabilized in both the office and production market. There appears to be less of an impact price this quarter than on previous quarters. The delay of Nuvera 100/120 in the fourth quarter should bring an upside in 2005. The sales force is ready and there should not be any loss of momentum in 2005. There should not be any concerns about the fact inventories are up. Generally speaking, it is the result of new products and will be worked off in the fourth quarter. The guidance has changed from $0.80 - $0.84 to $0.83 -$0.85 due to better visibility and, in general, a desire to tighten the range. Xerox’s color enabled devises are generating more color pages (about 70%) than the competition. With regard to cash usage and acquisitions, Xerox will continue to be opportunistic in considering acquisitions that meet their established criteria.