By Trevor Shackelford May 8, 2006 -- Xerox Corporation (NYSE: XRX) recently announced their first quarter results. Total revenue for Xerox’s first quarter was $3.695 billion, down 2% from $3.77 billion reported for the same period in 2005. This decline is made up of a 4% decline in equipment sales, a 1% decline in post-sale and other revenue and a 1% decline in finance income partially offset by 14% growth in color revenue. Net income for the first quarter was $200 million, or $0.20 per diluted share, down from $210 million, or $0.20 per diluted share reported for the same period in 2005. Gross margin as a percentage of total revenue was 40.2% down from 41.8% in the same period a year ago. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Xerox saw a 14% growth in color revenue. Color revenue for the quarter was $1.214 billion, representing 33% of total revenue, compared to 29% of total revenue in the fourth quarter of 2005. • Q4 gross margin was 40.2%, decreasing approximately 2% from previous year, reflecting cost improvements, partially offset by change in product mix and price declines. • Total revenue dispersement was as follows: $2.747 billion in digital revenue, $436 million in developing markets, $100 million in light lens (SOHO), and $412 million in other revenues. • Xerox ended the first quarter with $1.794 billion in cash and short term investments. • The company issued $700 million, 6.4% senior notes due in 2016. • Debt was down $1.9 billion, year-over-year. • The company paid $226 million in pension compensation in April. This was 100% funded on a current liability basis under ERISA. • The pre-tax profit margin decreased 2.1 points to 5.6% compared to last year’s first quarter figure of 7.7% Segment Performance Production Segment Q1 revenues for the segment were $1.035 billion, down 3% from the same period last year. Total digital revenues were $1.004 million (down 1%), and light lens revenues were $31 million (down 44%) from the prior years first quarter. Production equipment sales increased 8% while post sales and financing were up 12% when compared to the Q1 2005. Lower OEM printer sales impacted the pace of color equipment sales growth. Office Segment Q1 revenues for the segment were $1.804 billion, down 1% from the same period last year. Total digital revenue was up 1%, to $1.743 billion while light lens revenue was down 37% at $61 million compared to $97 million during the first quarter last year. Color printer growth was driven by Xerox branded printers, but there was a decline in OEM activity. Developing Markets Operations (DMO) Segment Q4 revenues for the segment were $436 million, up 6% from the same period reported in the last year. Equipment sales in the fourth quarter grew 8% reflecting strong growth in Eurasia, Central and Eastern Europe, and Latin America. Post sale and other revenue growth of approximately 5% were primarily driven by strong growth in Eurasia, Central and Eastern Europe, and Latin America. Other Segment Q4 revenues for the segment were $376 million, down 7% from $404 million reported for the same period last year. Post sale and other revenue in the other segment declined 8% due to declines in paper and other supplies (including SOHO supplies), which comprised approximately two-thirds of segment revenues. Declines were partially offset by growth in value added services. Guidance Xerox expects second-quarter 2006 earnings in the range of $0.22 - $0.24 per share. The company also reiterated its full-year 2006 guidance of $1.00 - $1.07 per share. Anne M. Mulcahy, Xerox chairman and chief executive officer, indicated that she still expects the company will be able to deliver at the high end of this range. Raine Radar Hopefully, Xerox is at the bottom of its slump. Despite disappointing results over the last few quarters, the company has been slowly reducing its debt and buying back shares. It’s a slow start to 2006, but perhaps Xerox’s fortunes are set to change. Some analysts believe that Xerox is undervalued, and that if they can continue improving their financial situation and get some traction in sales, the company’s stock will jump upward. Q & A 1. Two main areas of disappointment in Q1 for the company were: U.S. related accounts’ time to revenue and time to contract; and a slowdown in the OEM channel. 2. The tax rate should be modeled under the basis of 34%. 3. The company is undergoing “right actions, right now” to readjust the cost base in line with business model to improve gross margin during the Q2. 4. Xerox expects continued activity growth from product launches from the prior 18 months. 5. Post sale improvement trend continues to fuel total revenue growth. Some key drivers of this growth are color, page growth, install activity and document management services. 6. Xerox signed a $1.25 billion, five year, unsecured credit facility. 7. Xerox believes they can maintain the 3% projected growth in 2006 by driving up the post sales side of their business. 8. Expectations are that Latin America, Eurasia, and Central and Eastern Europe will continue to drive sales and boost overall performance. 9. The new DocuColor 240/250 is boosting production color activities. 10. Production revenue was negatively impacted by a decline in high-end cut sheet sales.