By Ann Levine February 12, 2004 – Stamford, Conn. based Xerox Corporation (NYSE: XRX) today announced fourth quarter earnings per share of $0.22, which included a $0.03 positive effect from a reduced litigation reserve, exceeding expectations. For the full year, the company reported earnings of $0.36 per share on net income of $360 million. Total revenue for the quarter was $4.3 billion, a 1% increase over the fourth quarter of 2002. Total revenue in 2003 was $15.7 billion, representing a 1% decline from the $15.8 billion reported for 2002. The revenue drop was due to declining post-sale revenue from the light lens technology and the departure from the small office and home office business. Equipment sales grew 11% in the fourth quarter with 60% of all sales generated from the 38 products launched in the last two years. Cash from operations was $971 million with $1.8 billion in cash from operations for the entire year. Gross profit margin was 42.5%. Topics of this summary: Segment Highlights 2004 Guidance Q & A Segment Highlights Production Segment - In the production segment, the number of production color installs increased by 19%, monochrome system installs at 22%, production printing up by 6%, Segment 6 installs increased 90% and black and white publishing installs decreased by 10%. Preliminary U. S. market share numbers for the third quarter 2003 over third quarter 2002 indicate black in white publishing up 11 points, or 68%, black and white printing up 2 points or 98%, Segment 6 up 3 points or 22% and production color up 12 points or 59%. Office Segment – Office Black and white install growth was 22%, color printers install growth was 30%, Office color copiers/MFD’s 25%. Preliminary third quarter U.S. market share information indicates a gain for the black and white segment at 1 point or 14% and color with a 2 point gain for 26% market share. Growth in the Office Segment reflects advanced offerings and competitive pricing for small to medium sized customers. Color and printing growth was driven by demand for the DocuColor, WorkCentre and Phaser products, and expanding relationships with large global enterprises. Developing Market Segment – Equipment sales revenues were at 21% in the fourth quarter compared to 33% in the third quarter. Total revenue in the quarter was at 1%. The fourth quarter showed a moderate decline in post-sale revenue a five-point improvement from the previous quarter. 2004 Guidance Xerox expects earnings per share in the first quarter at $0.13-$0.16 with full year EPS at $0.67-$0.72. (i.e. Xerox expects to double their 2003 performance) Q & A Xerox anticipates a flattening out of the pricing environment in 2004. In 2003 the company was aggressive in obtaining market share. Price investments in the fourth quarter remained at 5%. Post sale-pricing pressure has been in the low teens to single digits. Xerox is ramping up a two-tiered sales distribution effort, especially in Europe. The company has solidified and strengthened its direct sales channels. Coverage is now stronger. In 2004 the expectation is for 95% of office technology devices to be distributed by two-tiered distribution. Fourth quarter showed an increase in installs, which will deliver in terms of volume. An increase in equipment sales may bring lower margins. The company is making slow and steady progress with regard to post-sales. The biggest driver on the post sale turnaround will be color equipment sales. The impact of the 2003 market clearly showed strength in the fourth quarter. Expectations are for a strong 2004 with the strongest part of the market growth expected in Xerox’s color business. In response to a question about the “holes” in Xerox’s product line, the company indicated that over the course of the past two years 38 new products have been released in response to significant gaps. New product and platform announcements will be made on Thursday, January 29th which will add strength to Xerox’s portfolio. The upcoming DRUPA show is not expected to cause downside for Xerox in buying or demand issues in the short-term. In fact, DRUPA is expected to help with sales expectations for iGen 3. The company’s working tax rate is 40% the statutory rate is below that figure. The pricing environment in 2004 is expected to be consistent with the second half of 2003. Pricing will be in the 5-10% range. There may be some volatility between color and in the black and white environment based on past observations. Xerox will be opportunistic in terms of use of cash and acquisitions. The company is taking a strategic approach in terms of global services growth and is not constrained by the use of cash to ensure growth. Although the fourth quarter was the strongest of the year. The first quarter is not expected to be at the same level as the fourth quarter. However, Xerox is pleased with the pace of demand. Year over year, the expectation is for high single digits in sales. New product launches will be in the company’s favor in the first quarter. Foreign exchange had a small impact on the company’s overall numbers reported for the fourth quarter.