Digital and Color Growth Boosts Xerox Revenues: Summary of Second Quarter 2006 Earnings Call August 7, 2006 -- Xerox Corporation (NYSE: XRX) announced their second quarter 2006 results recently. Total revenue of Xerox’s second quarter was $3.97 billion, up 1% from $3.92 billion reported for the same period in 2005. This increase is made up of a 4% increase in digital growth, a 2% increase in post sale and financing revenue, a 14% growth in color revenue, while equipment sale revenue remained flat. Net income for the second quarter was $260 million, or $0.26 per diluted share, down 39% from $423 million, or $0.40 per diluted share reported for the same period in 2005. Operating margin for the quarter was 8.1% compared to 8.6% last year. Total operating profit for the quarter was $3.22 billion compared to $3.37 billion in the same quarter a year ago. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Xerox has completed the previously announced acquisition of Amici LLC for $174 million, officially launching the Xerox Litigation Services line of electronic discovery and records management services. • Xerox saw a 14% growth in color revenue. Color revenue for the quarter was $1,364 million, representing 34% of total revenue. • Xerox completed $895 million of a planned $1 billion share buyback program. Q2 gross margin was 41.1% increased approximately 0.7% from previous year, mainly due to costs aligning with the business model. • Debt balance was at $7.1 billion, down $1 billion year-over-year, and down $0.6 billion from Q1. • Operating cash flow for the quarter was $220 million after a $226 million pension contribution. • Xerox closed the quarter with $1.2 billion in cash and short-term investments. • During the second quarter, the company used $225 million of cash towards the repurchase of its common stock. Segment Performance Production Segment Q2 revenues for the segment were $1.134 billion, up 1% from the same period last year. Production equipment sales were flat due to accelerated activity in key markets. Post sale and other revenue increased 2%, including 3% negative impact from currency and reflecting declines in revenue from black and white digital products and older light lens technology, which were partially offset by growth in color products. Operating profit for the segment was $88 million, up $9 million from the same quarter a year ago. Color production operating margin continues to improve reflecting the scaling of product platforms. Office Segment Q2 revenues for the segment were $1.927 billion, up 1% from the same period last year. Color printer install decline was driven by OEM and branded sales. Post sale and other revenue was up 2%, driven by 4% digital growth. Color revenue was up 14% and now represents 34% of total revenue. Operating profit for the segment was $213 million, up $40 million from the same quarter a year ago. Developing Markets Operations (DMO) Segment Q2 revenues for the segment were $469 million, up 7% from the same period reported in the last year. Equipment sales in the second quarter grew 5% reflecting strong growth in Eurasia and Central and Eastern Europe. Post sale and other revenue growth of approximately 7% were primarily driven by strong growth in Eurasia and Central and Eastern Europe. Operating profit for the segment was $34 million, up $15 million from the same quarter a year ago. Other Segment Q2 revenues for the segment were $447 million, up 1% from $442 million reported for the same period last year. Operating loss for the segment was $13 million compared to the operating profit of $66 million in the same quarter a year ago. Guidance Xerox expects third quarter 2006 earnings in the range of $0.20 - $0.22 per share. The company also reiterated its full-year 2006 guidance of $1.00 - $1.07 per share, and they expect to be at the high end of this scale. Anne M. Mulcahy, Xerox chairman and CEO, indicated that she now expects the company will deliver full-year earnings in the high end of this range. The company also expects to have earnings expansion of 10-15%. Raine Radar Year-over-year, this was a pretty flat quarter for Xerox, although it was a fairly strong rebound from Q1. Color revenue was a primary driver for the increase, showing how tightly tied to color economics Xerox still is. As prices continue to come down, and customers require more and more color, the potential is present for Xerox to see great improvement. Q & A 1. The company cited continued improvement in its developing markets operations (DMO). Total revenue grew 7% in DMO. 2. The majority of the changes in gross margins are structural, particularly in the technical services. 3. Mulcahy stated, “Revenue was up: the benefit of increasing install rates of digital and color systems as well as continued demand for document management services, all of which fuels their healthy annuity stream.” 4. Revenue from Xerox’s color systems grew 14% in the second quarter and now represents 34% of total revenue. 5. The company discussed its plans for boosting revenue through annuity from color products and services contracts; and contributing to post sales growth with a 16% increase in color post sales revenue and 5% post sale growth from global services. 6. Signings for document management services were up more than 15% in the quarter. 7. The company repurchased $225 million more in Xerox stock, nearly completing the $1 billion program. The company also stated that their financial strength allows them to increase the buyback program by another $500 million.