November 8, 2006 -- Xerox Corporation announced their third quarter 2006 results recently. Xerox’s third quarter revenue was $3.84 billion, up 2% from $3.76 billion reported for the same period in 2005. This increase was made up of a 4% increase in digital revenue, a 1% increase in post sale and financing revenue, a 16% growth in color revenue, while equipment sale revenue decreased 1%. Net income for the third quarter jumped up to $536 million, or $0.54 per diluted share, compared to $63 million, or $0.05 per diluted share in the same quarter last year. Total operating margin for the quarter was 7.8% compared to 7.1% in the same quarter a year ago. Total operating profit for the quarter was $299 million compared to $266 million 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 $1.1 billion of a planned $1.5 billion share buyback program. - Gross margin for the third quarter was 40.2%, a year-over-year decline of 1.1%. The decrease was primarily due to product mix and equipment pricing as well as lower margins in the global services business. - SG&A expenses improved 1.1% year over year and were 25.6% of revenues in the third quarter. - Cash and cash equivalents for the end of the third quarter were $1.33 billion compared to $1.34 for the same quarter in 2005. - Worldwide employment ending in the third quarter was 54,900, down approximately 300 from year end 2005. Segment Performance Production Segment Q3 revenues for the segment were $1.088 billion, up 3% from the same period last year. Production equipment sales increased 3% including the benefit from currency exchange. Production color installs grew 107% reflecting a strong demand for the new DocuColor systems. Operating profit for the segment was $73 million, which is unchanged from the same period of 2005. Office Segment Q3 revenues for the segment were $1.849 billion, up less than 1% from the same period last year. Office equipment sales remained flat including a 2 point currency benefit. Installs of office black-and-white systems were up 10%, largely driven by a 19% growth in the WorkCentre products. Post sale and other revenues were up 1.4% compared to Q3 2005. Operating profit for the segment was $183 million, down 6%, compared to $189 million in the same period a year ago. Developing Markets Operations (DMO) Segment Q3 revenues for the segment were $478 million, up 7% from the same period reported in the last year. Equipment sales in the third quarter grew 6.7% reflecting strong growth in Eurasia and Central and Eastern Europe. Post sale and other revenue growth of approximately 7.4% were primarily driven by strong growth in Eurasia and Central and Eastern Europe. Operating profit for the segment was $28 million, up 10%, from the $18 million recorded in Q3 2005. Other Segment Q3 revenues for the segment were $429 million, up 5% from $407 million reported for the same period last year. Post sale and other revenue in the other segment declined 7.9% due to declines in paper and other supplies. Operating profit for the segment was $15 million, up 29%, from the loss of $14 million in the same period in 2005. Guidance Xerox expects fourth quarter 2006 earnings in the range of $0.21 to $0.24 per share, including restructuring charges of about $0.13 per share. Excluding restructuring, Xerox expects fourth quarter adjusted EPS of $0.34 to $0.37 per share. Anne M. Mulcahy, Xerox Chairman and Chief Executive Officer, indicated that she now expects the company will deliver full-year earnings in the high end of this range. The anticipated effective tax rate for the fourth quarter will be approximately 31%. Raine Radar Xerox beat earnings expectations this quarter, helped by a tax benefit and climbing sales. Sales of Xerox’s digital systems were better than expected. The company seems to have navigated the conversion to digital, with the company stating that over two-thirds of its revenue is coming from products released within the last two years. The fourth quarter outlook also looks strong, and should allow the company to meet its 2006 guidance. Q & A 1. With respect to gross margin, Xerox believes that they can help bring down costs by improving supply chain management, continuing to focus on the restructuring efforts, continuing to have opportunities in the technical services infrastructure, and selected offshore activities. 2. The company is very pleased with the new and expanded product lines in the DMO market. They believe they can optimize their coverage and improve their productivity in their quest to improve overall revenues. 3. The announcement of a $1 million grant to the Conservancy from the Xerox Foundation coincides with the release of Xerox's 2006 Report on Global Citizenship, a comprehensive summary of the company's citizenship practices and policies, recent accomplishments, and goals. 4. The effective tax rate for the fourth quarter will be approximately 31%. Statutory tax rate is between 34-35%. 5. According to Mulcahy, the pricing pressures have not really changed throughout the year. Nearly half of all equipment sales are now from color revenues. 6. Xerox’s number one priority, as far as acquisitions are concerned, is to expand and accelerate the services business. The opportunity to acquire the XMPie information software will provide leverage in the digital print segment. 7. Xerox has offered several new products that should strengthen their industry leadership. Xerox is offering a dual engine, high speed Nuvera system, DocuTech highlight color, and photo quality enhancements from the iGen3.