By Steven Schnoll August 5, 2004 -- Xerox Corporation (NYSE: XRX) announced strong second quarter results against a 2% decline in revenue. The second quarter profit more than doubled on stronger sales of copiers and digital printers. Net income rose 149% to $187million or $0.21 per share. The consensus on Wall Street had anticipated $0.17 per share. The company raised guidance on its full year earnings to a range of $0.80 to $0.84 per share from a range of $0.67 to $0.72 per share. Topics of this summary: Company Performance Overview Guidance Raine’s Radar Q & A Company Performance Xerox reported a 5% increase in equipment sales growth with color representing 25% of total sales. There were 10 new product introductions in the quarter; most showcased at Drupa in May. Gross margins, center of attention last quarter, improved to 41.3% from last quarter but is still off from the 42.4% of Q2 in 2003. Pre-Tax profit margin surged to 7.1% from 2.8 % prompting a federal tax bracket adjustment. Even with the higher tax rate net income for the quarter was $208 million compared to 2003 results of $86 million. The Mulcahy team deserves kudos on another stellar quarter. Mulcahy stated “technology investments are certainly paying off” and one sees clear evidence in the numbers. Since, “Two-thirds of Q2 equipment sales came from products launched in the last two years.” The numbers continue to improve with a healthy cash flow of $256 million. Reduced debt coupled with continued productivity gains; lower interest expense and decreasing bad debt are major factors in the positive state of cash flow. This cash balance includes a $232 million pension contribution. The company cash balance stands at $2.5 billion. Amongst these positive numbers the company reported a significant problem in the developing market segment of Latin America. Xerox experienced declines in revenue reflecting several problems. Xerox, in an effort to effectively deal with this issue, is transitioning to a two-tier sales approach. Office products will be sold through channel partners and production engines will continue to be handled via Xerox’s direct sales team. The DMO segment did report an iGen3 sale to an organization in St Petersburg, Russia that then produced the largest personalized piece ever done in that country. Guidance Xerox is raising its full year guidance expectations and plans to deliver 2004 earnings in the $0.76-$0.80 per share range. In Q3 they anticipate earnings per share in the range of $0.11 to $0.15 this is all being done in a year which experienced heavy investments in Drupa and the Summer Olympics. Raine’s Radar In years past when a Xerox sales representative showed up at the local printer the response was “we don’t need another copier”. Now the Xerox representative is treated in a whole new light. Most knowledgeable graphic’s executives now recognize the dynamics of the Xerox offerings and the impact they can play in the future of their respective companies. Much of this metamorphous is due to people like Gil Hatch, Tom Wetjen and John Hamm. While equipment sales in the production segment demonstrated a 14% growth it is mostly due to these people changing the mindset of graphic communication professionals throughout the world. With even more new announcements anticipated at Graph Expo in the fall, no company executive looking to compete in the new information age can ignore the glowing patina on this once thought decaying antique. Q & A Several questions centered on the problems in Latin America. The key issue is the quantity of devices coming off lease that did not get renewed with newer Xerox devices. It is hoped the new two tier sales model can adequately address this sales erosion. The company related that they are holding their own in market share in monochrome office, lost some share in low end color and gained share in high volume color. In production segment B/W light production and high end machines are steady. Low end color is being impacted by recent Konica Minolta offering but in high end color engines Xerox maintains over 66% of market. Company is very pleased with production sales and this reflects in offsetting some of the declines in light lens in gross margin The cost of the Summer Olympics will be higher than dollars spent for Drupa The sales force is in great shape. SGA has decreased without sacrificing or compromising sales productivity. Company experiencing less than 4% turnover rate in sales force. Hired over 1000 new people in Q2. Company’s commitment to R&D is not declining. Xerox anticipates 5% of full year revenue will go to R&D. It is still anticipated that 5% revenue growth will be achieved in 2004 with much of it coming in Q4, this usually being the strongest quarter for sales. Value added services margins, mid-to-high 20’s, are less than equipment sales, however, many times these consultative services throw off leads to equipment sales. Strong production product offerings in Q3 and 4, Graph Expo will have multiple announcements. In office area, constant new offerings throughout balance of year. Margins improved in office segment in levels 3 to 5. Good mix of b/w and color all moving at good pace with digital offerings looking very good. Productivity improvements will continue to outpace pricing pressure therefore helping to maintain margins. Q3 should be a bit stronger than previous historical levels due to Drupa backlog of orders. Q4 naturally strong and it is anticipated this will occur again. Confidence in strength of product launches and services.