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Xerox Reports Earnings, Raises Expectations

Press release from the issuing company

STAMFORD, Conn.--July 23, 2004-- Xerox Corporation announced today second-quarter earnings of 21 cents per share that reflect continuing success in the company's operational performance. Services-led offerings for large enterprises generated major wins in the quarter while continued strength in color technology and monochrome light production systems contributed to equipment sales growth. The company also said it is raising its full-year earnings expectations. "Market demand for new systems and specialized services as well as a clear focus on providing smart document management for businesses small to large - all delivered through a flexible cash-generating business model - resulted in another quarter of earnings that exceeded our expectations," said Anne M. Mulcahy, Xerox chairman and chief executive officer. "This earnings performance and strong demand for Xerox's new technology and value-added services give us the confidence to raise our full-year earnings expectations to 80-84 cents per share, up from earlier expectations of 67-72 cents per share," she added. The increase includes the 8-cent gain from the sale in the first quarter of Xerox's ownership position in ContentGuard, which will be partially offset by an incremental marketing and restructuring investment of 4 cents per share expected during the balance of the year. With technology investments fueling equipment sales, the company said that about two-thirds of all equipment sales in the second quarter came from products launched in the past two years. Equipment sales grew about 5 percent in the second quarter, and total revenue was $3.9 billion, down 2 percent from the second quarter of last year. Both equipment sales and total revenue included a currency benefit of 2 percentage points. Revenue growth continued to be impacted by post-sale revenue declines from the company's older light-lens technology. In addition, weak performance in Latin America significantly impacted post-sale and total revenue. Second-quarter revenue from the company's targeted growth areas - office digital, production digital and value-added services - grew 4 percent year over year and now represents about 73 percent of the company's revenue. Revenue from color products grew 17 percent in the second quarter and is a key driver of Xerox's growth strategy as the increasing volume of pages printed on Xerox's color systems flows through to post-sale revenue. Color revenue now represents 25 percent of Xerox's total revenue. Leading with Services Along with continued success in delivering affordable, innovative technology, Xerox is making a powerful impact with services for large companies like implementing e-learning programs for a global workforce, deploying Xerox's proprietary DocuShare software for Web-based editing and archiving of critical corporate documents, and applying Lean Six Sigma tools to reduce customers' overall document spend by an average of 30 percent. The growing base of customers that have engaged Xerox for consulting, imaging and content management contributed to a significant increase in revenue generated from value-added services. Driving the New Business of Printing Through the company's production business, Xerox continues to lead the "new business of printing" by helping commercial printers and document-intensive industries make the transition from offset to the more dynamic world of digital. During the second quarter, Xerox announced at drupa -- the world's largest graphic arts and printing show -- seven new digital systems with an expanded suite of services and workflow tools that drive profit for customers as well as Xerox. Production color installs grew 17 percent in the quarter largely due to the Xerox iGen3 digital color production press and DocuColor 5252 digital color systems. Installs of production monochrome products increased 13 percent primarily driven by demand for the company's Nuvera(TM) 100/120 copier/printer and the Xerox 2101 light production system. Digitizing the Office Xerox continued to fortify its portfolio of office products with new offerings like the Phaser 6100 color printer, the Phaser 3130 monochrome printer and the WorkCentre M20 and M20i multifunction devices, all of which launched in the second quarter. Installs of Xerox office monochrome systems were up 25 percent in the second quarter due to continued strong demand from small and midsized businesses for the Xerox WorkCentre desktop multifunction devices. Office color multifunction installs grew 40 percent and office color printing installs were up 54 percent driven by continued positive momentum from the Phaser line of solid ink and laser printers. Selling, administrative and general expenses were down 4 percent in the second quarter to 27.3 percent of revenue. Gross margins of 41.3 percent improved sequentially and are in line with the company's full-year expectations. Xerox generated operating cash flow of $256 million after contributing $232 million to pension plans. Commenting on the third quarter, Mulcahy said she expects earnings in the range of 11-15 cents per share, citing continued equipment sale growth and increased revenue in key markets. She added, "While maintaining our disciplined approach to managing costs, we will continue to compete aggressively with new systems and services that solidify Xerox's position as the leader in document management, delivering another quarter of improved earnings performance."