By Trevor Shackelford August 1, 2005 -- Xerox Corporation (NYSE: XRX) announced their second quarter results today. The company posted earnings of $0.40 per share on $3.9 billion in total revenue. Revenue was up 2% from the previous year; however there was a 2% currency benefit, equating to essentially flat revenue. Earnings included a $0.33 per share gain from an IRS tax settlement as well as a charge of $0.13 for restructuring. The $0.20 EPS excluding the tax benefit was lower than expected, despite an increase in the sales of color equipment. Topics of this Summary: Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights Q2 gross margin 39% lower than anticipated, due primarily to a change in sales mix toward lower margin desktop office products. 25 new product releases, 24 launched at the end of June Post sale and financing grew 1% to $2.812 billion Overall, light lens / SOHO saw a 41% decline year over year, which is in line with the previous 3 quarters 15% debt-to-capital ratio, down from 39% last year Segment Performance Production Q2 revenue for the segment was flat at $1.125 billion from the same period last year. Total digital sales were up 4%, while light lens was down 41%. Production monochrome installs grew 1% while color installs grew 18%. Demand for DocuColor 8000 and iGen3 have both picked up. Office Revenues during the quarter grew 2% year over year to $1.914 billion. Light lens saw a 39% decrease, while digital grew 6%. Office B&W digital copiers and multi-function devices saw a 29% install growth, office color copiers/MFD’s saw a 69% install growth, and color printers saw a 155% growth. The segment saw 24 product launches in June. The initial benefit of these launches will be seen in the Q3, picking up in the Q4. Developing Markets Total revenue for the quarter is up 6% to $440 million. Equipment sales were up 10% and Post Sale and Financing was up 4%. Xerox reports strong growth in Russia and Central and Easter Europe, with Latin America continuing to recover. During the call, Xerox also announced that they expect the segment to have a positive contribution during the second half. Guidance For the Q3, Xerox expects earnings per share of $0.16 – $0.18, including $0.01 of restructuring. Full year 2005 EPS should be within the original guidance of $1.04 – $1.14, though the company expects the final result to be at the low end of the range. Full year gross margins will likely be in the 40-41% range. Xerox has initiated actions to increase gross margins. Revenue in the second half will be driven by the new product launches as well as the continued move to color. Raine Radar Xerox has, and will continue to ride the shift in color economics. Effectively managed, this will be a huge contributor to post sales consumables moving forward. Almost 30% of Xerox total revenue during the quarter came from color, growing 17% year over year. Looking at pages, there is a 26% growth rate in color office pages. Equipment margins in low end office color may not be great, but it shows the demand for color in the office. As this trend continues to trickle down to the home office, we should continue to see traction for color equipment. Although CEO Anne Mulcahy was quick to point out that pricing was not an issue, it is hard to imagine that relatively stiff competition from Canon and the newly refocused HP will not affect pricing in the second half. On the positive side, the company has been proactive with restructuring to fine tune their business and keep margins up. Q & A Price is not a factor in the gross margin pressure. The pressure is generated by 3 main factors: a shift from high speed monochrome office products to lower speed products, high demand for low end office color equipment, and increased performance of light production versus high end production publishing equipment. New product launches are targeted to relieve margin pressure, as are recent restructuring actions. The effect of currency is expected to negatively impact revenues somewhat during the second half, particularly in the Q4. The average iGen3 is delivering 400,000 color pages per month. Equipment sales are important, but the ability for the platform to deliver high margin post sales is most exciting for Xerox. According to the company, lower activity in high end office products has come from a lack of new high end products. Xerox hopes its new product releases will help reverse that trend. Brazil will be the lagging market in the Developing Markets segment. Nuvera has started slower than anticipated, mostly due to staggered functionality. Upgraded finishing and feeding functionality is anticipated to help performance in the second half. The positive trends seen in post sale appear to be sustainable in the second half.