By WTT Contributing Columnist Gail Kailing January 30, 2003 – During its Q4 2002 conference call on the 28th, Xerox Corporation (NYSE: XRX) announced a return to full-year profitability and 2002 fourth-quarter earnings that reflect increased demand in key markets and strong operational results. Total revenue for the fourth quarter was $4.25 billion, a year-over-year decline of 3 percent. Revenue from equipment sales trended positively in the fourth quarter due to customer demand for the 17 new products launched in 2002. The fourth-quarter equipment sale decline of 2 percent was a significant sequential improvement from the 9-percent decline in the third quarter of 2002. For the quarter, gross margins were 43.9 percent, a year-over-year increase of 2.5 percentage points. Selling, administrative and general costs decreased $49 million or 4 percent from fourth quarter 2001. Disciplined management of the balance sheet resulted in fourth quarter operating cash flow of $634 million. Additional finance receivable securitizations also contributed to an increase in Xerox's worldwide cash position, which was $2.9 billion at year-end. Anne M. Mulcahy, Xerox chairman and chief executive officer, noted that the company's investment in advanced color technology resulted in a 10 percent year-over-year increase in total color revenue, largely due to the success of Xerox's DocuColor 1632, 2240, and 6060 production color series. Accelerated demand for Xerox's Document Centre 500 series contributed to a strong revenue increase in the growing market of office digital multifunction devices. And, the company's DocuTech family - Xerox's flagship production publishing system - continued to lead the market, driving an increase in Xerox's monochrome production publishing business. During the question and answer session following the presentation of the financials, topics included: * Production equipment sales * Office equipment sales * Post sales revenue * Consulting and Outsourcing services * Outlook for 2003 * Production printing revenues were better than anticipated and showed strong margins. The performance came from both new product introduction and improved volume and placement. Growth in production color was 22% alone, however the overall production business was strengthened. The DocuTech has done well. The strategy is to gain pages. While Xerox did make price concessions in the office business earlier in the year, it helped in the placements. The price investment was in the range of 10-12% in the office business, but that resulted in activity increases of 13% in installs with slight revenue decline. That activity more than offset the price investment. * Some of the improvement in gross margin came from licensing revenues and other non-recurring events, however the goal has been to keep margins over 40%. Xerox now has the opportunity to go forward more aggressively. * Sales force productivity has been a challenge in the past, but the company believes a corner has been turned. Growing tenure and experience are contributing to better productivity. * The name of the game in post sales is pages! Post-sales revenue has been particularly strong; production printing had a 10% growth, with a 22% growth in color. There was 30% growth in production color, and office color grew by single digits. While office post sales in color were up, there was a slight decline in overall office post sales. Xerox is seeing an accelerating number of pages being produced, and in the lower end of the market a majority are going to Xerox. As the market moves from black and white to color, continued growth in post sale pages will influence the bottom line. As an install base starts to grow, post sales growth lags that equipment by about 12 to 18 months. There may be a slight decline in the growth of post sales in 2003 as a result of new equipment placement, but it will rebound in 2004. * Xerox services fall into two groups: managed services/outsourcing, and consulting services. Managed services grew nicely in Europe, but had a decline in the US. The company is very focused on outsourcing services and is refining their business model to give better profitability. Consulting services saw some growth in Q4, as Xerox refined and launched the service practices groups and executed their “go to market” strategy. * For the full year, SAG (sales, administration, general) expenses went down 6%, a very creditable decline. It was a little less in Q4 due to a one-time software write off, and the end result was down 4% in absolute terms. The company expects to see continued improvements throughout 2003. * Any changes in patterns of cash flow, such as the change in accounts payable, is a function of quarterly fluctuation. There have been no policy changes. * The appearance that investment in R&D is down a bit is a result of focusing on efficiency in each function. The years R&D investment was 5.8%, while Q4 was 5.1%. The corporate goal is to keep it between 5-6%, while reducing time to market and cutting indirect expenses. Increased efficiency will not come at the expense of technology or development. * Xerox has been developing strategies to monetize IP, commercialize technology, and look at licensing and spin off opportunities. * Because the Xerox view is that there will likely be no significant upturn in the economy for 2003, the company is planning on a consistent set of economic conditions. It is expected that equipment sales should see modest growth - higher in the second half. If an upswing should occur, the accelerated restructuring has made Xerox ready to aggressively take advantage of any improvement. * The value of currency has improved in Europe, but is down in Latin America. Xerox expects to exchange rates as a slight plus in 2003. * Xerox has just brought a product to market in Segment 6 (light production) – the 1010. There is no question that competition has grown, that’s why the company is looking at the benefit of an offering in that space. Market share outside of Segment 6 has done well; digital placements in the office are up 13%. * A reduction of inventory in the channels, specifically office color, will have an impact, though there was a full year of growth. * Declining light lens copier business is offset by other segment growth, but it is still a factor going forward.