Xerox Corporation (NYSE: XRX) announced substantial first quarter earnings of $0.25 per share as compared with $0.04 for the same period last year.

Raine Commentary: Wall Street didn't like the call. Analysts were stuck on why Xerox's gross margins of 39% didn't hit expectations rather than focus on the improving reported revenue of $3.8 billion and that equipment sales increased 9%. So what do these experts do? They sell aggressively and the stock was battered on Friday April 23 with a drop of 10%. Goldman Sachs, however, in their Monday research alert said it is raising the rating on Xerox to “out perform”. We believe that Anne Mulcahy and Lawrence Zimmerman deserve a great deal of credit for turning the company into a profitable organization that is aggressively gaining market share.

Topics of this summary:

  • Company Performance Overview
  • Guidance
  • Q & A

Company Performance

The highlights of the financial results are as follows:

  • First quarter delivered $0.25 earnings per share, which includes $0.08 per share from the sale of ContentGuard
  • Xerox experienced 9% equipment sale growth in Q1
  • Cash at the end of the quarter was $2.3 billion
  • Xerox reported $3.8 billion in total revenue, which was 2% growth over Q1 2003
  • In addition, Xerox reported growth in production devices:
    • An increase of 8% in monochrome, mostly as a result of the demand for 2101 and new DocuTech 100/120
    • Also a 27% growth in color from sales of the DocuColor 5252 and 6060
  • As of March 2004 Xerox exceeded 10,000 production color installs
  • Consolidated Graphics has chosen Xerox has their exclusive digital print vendor, purchased six iGen3's
  • Office digital, production digital and value added services represent about 71% of company revenues

Additional comments included:

  • Xerox claims they are in the top position for production color with 55% of all equipment sales in the first quarter coming from products launched in the past two years. No one knows document management better than Xerox, states Anne Mulcahy, Chairman and CEO. Drupa will demonstrate the Xerox's worldwide leadership by offering many new offerings, she continues. Xerox's Chairman was very confident about its future.
  • To maintain cost competitiveness, Xerox has significantly lowered production costs with their Six Sigma efforts that have driven down costs. They have taken this expertise to their customer base by entering a consultative engagement with Intercontinental Hotels to demonstrate how they can drive costs out of their document requirements.


Xerox plans to deliver full year 2004 earnings in the $0.67-0.72 per share range, which does not include $0.08 per share ContentGuard sale. They anticipate $0.14- $0.18 earnings per share for the second quarter with a $0.02 gain expected from sale of ScanSoft. They anticipate using these one time gains to increase marketing and advertising expenditures.

Q and A

  1. Several questions focused on the reduced gross margin percentage and how Xerox would address this shortfall. Zimmerman responded that part of the gap was from moving iGen3 costs from R&D to production costs. Xerox would have to make up the margin shortfall in the remaining three quarters. Margins for full year should be in 41-42% range.
  2. Xerox experienced a decline in high end monochrome page volume but realized gains from new DocuTech offering and MFC products. Xerox executives expect to see the full impact of new DT 100/120 in subsequent quarters.
  3. January and February were weak months but March proved to be very strong. This trend should continue into Q2.
  4. The expectations from Xerox's strong advertising and marketing commitment to both the 2004 Olympics and Drupa exposition are very positive. They expect a strong foundation to be built in Europe for iGen3 from Drupa and strong recognition of all Xerox products from Olympic advertising campaigns. The revenue realized from the ContentGuard sale will be utilized to defray some of these costs.
  5. By year end Xerox anticipates that 5-6% of all volume will be in color pages.
  6. Xerox predicts 400 iGen3 units will be installed by year end.
  7. In response to analysts' questions on markets, Xerox sees strong improvements in commercial print color and expects to realize more wins in government contracts.

Raine Commentary: While the gross margin questions are proper, too much attention was given to this shortcoming and not enough to their recent accomplishments. The real noteworthy item is the improved market position of the production color devices. The big question is what impact the Heidelberg exit and the Kodak entrance will have. The announcement of over 10,000 production color devices worldwide is quite an accomplishment.