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Xerox Q3 profit drops, sales increase

Press release from the issuing company

STAMFORD, Conn. - October 19, 2007 - Xerox Corporation  announced today third-quarter 2007 earnings per share of 27 cents.
Total revenue of $4.3 billion grew 12 percent in the quarter with post-sale and financing revenue - Xerox's annuity streams that represent more than 70 percent of total revenue – up 11 percent. Both total revenue and post-sale revenue included a currency benefit of 3 percentage points as well as the benefit from Xerox's acquisition of Global Imaging Systems.
The company's earnings per share of 27 cents compares to 54 cents from third-quarter 2006, which included a 45-cent tax gain partially offset by restructuring and litigation charges of 14 cents per share. Excluding these items, earnings per share for third-quarter 2007 is up 17 percent from the adjusted prior year EPS.
"This quarter's solid results are proof positive that our business model is on track, generating double-digit profit growth and fueling a strong annuity pipeline that serves us well for the long term," said Anne M. Mulcahy, Xerox chairman and chief executive officer.
"With the industry's broadest set of digital color systems, we're knocking down cost and quality barriers to make color printing affordable for businesses of any size. Now, color makes up more than half of our total equipment sales," she added. "Our investments in innovation, rich portfolio of services, and acquisitions of companies that strengthen our leadership in document management are delivering value for our customers and our shareholders. The result is strong third-quarter performance, leading us to increase our expectations for full-year earnings growth."
A fundamental measure of Xerox's business is increasing the number of Xerox systems installed in customers' workplaces. This install activity generates sales of supplies and services that are expected to drive gains in post-sale revenue. During the third quarter, install activity increased 69 percent for Xerox's office color multifunction devices, including the WorkCentre and Phaser families that print, copy, fax and scan. In addition, installs of color production systems grew 14 percent as demand was up for the Xerox iGen3 Digital Production Press and DocuColor systems that enable commercial printers and large enterprises to publish books, personalize marketing collaterals, customize transactional statements and more.
During the third quarter, Xerox saw the benefit of the 38 office and production products launched this year as well as broader distribution to small and mid-size businesses through the acquisition of Global Imaging Systems. Equipment sales were up 14 percent over the prior year, including a 2 point benefit from currency. Already in 2007, Xerox has rolled out more than twice the number of new products it launched last year. Today, more than two-thirds of Xerox's equipment sale revenue comes from products launched in the past two years.
Revenue from color grew 13 percent in the third quarter and now represents 39 percent of Xerox's total revenue, up 3 points from the third quarter of 2006. Xerox color devices produce the highest volume of pages in the industry and are on pace to produce more than 40 billion color pages this year. In the third quarter, the number of color pages grew 32 percent, and now represent 13 percent of total pages, up 3 points from the prior year. Color performance excludes Global Imaging Systems results.
Xerox services help businesses simplify work processes, manage office technology and in-house print shops, digitize paper files, create digital archives and much more. Through multiyear, multimillion dollar contracts, the company's document management services generated about $2.5 billion in annuity revenue through the third quarter of the year, an 8 percent increase in post-sale revenue from services. Xerox recently signed several services contracts including a $93 million contract with the U.S. Navy to provide equipment and services for its entire fleet and a $82 million document management contract with EUROPART, Europe's leading commercial vehicle parts distributor. Xerox Global Services will manage the German company's office and production print services, invoice processing and customer service centers.
Xerox's production business provides commercial printers and document-intensive industries with high-speed digital printing and services that enable on-demand, personalized printing. Total production revenue increased 6 percent in the third quarter including a 4 point currency benefit. Production color installs grew 14 percent reflecting strong activity for the Xerox iGen3 and DocuColor systems. Installs of production black-and-white systems declined 8 percent. Demand for the Xerox Nuvera EA and Xerox Nuvera 288 digital presses as well as continuous feed systems only partially offset declines from other higher-end and light-production systems.
Xerox continues to drive the demand for color in the office with the recent rollout of new solid-ink devices that for the first time enable customers to print in color at the same price as printing in black and white. Total office revenue was up 14 percent in the third quarter including a 3 point benefit from currency. Installs of the company's WorkCentre black-and-white systems increased 9 percent including an 8 percent increase in activity for Xerox's mid-range line of multifunction devices. Installs for office color multifunction devices grew 69 percent in the quarter.
Gross margins were 40.1 percent, about flat from third quarter of 2006. Selling, administrative and general expenses were 25.4 percent of revenue, also about the same as the prior year. Xerox generated operating cash flow of $286 million in the third quarter. The company said it is on track to deliver $1.5 billion in operating cash flow for the full year.
Since launching its stock buyback program in October 2005, Xerox to date has repurchased about 129 million shares, totaling $2 billion of its $2.5 billion program.
Last week, Xerox closed on its $32 million acquisition of Advectis, Inc., which provides one of the mortgage industry's most widely-used solutions for electronic document collaboration. The all-cash purchase of Advectis expands Xerox's expertise in automating work processes, helping customers in document-intensive businesses like lending and finance to reduce costs and simplify how work gets done.
Xerox expects fourth-quarter earnings in the range of 39 – 41 cents per share, delivering full-year 2007 earnings of $1.18 – $1.20.
Note: This release contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should" and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. These factors include but are not limited to the risk that the future business operations of Global Imaging Systems (GIS) will not be successful; the risk that customer retention and revenue expansion goals for the GIS transaction will not be met and that disruptions from the GIS transaction will harm relationships with customers, employees, agents, distributors and suppliers; the risk that unexpected costs will be incurred; the outcome of litigation and regulatory proceedings to which we may be a party; actions of competitors; changes and developments affecting our industry; quarterly or cyclical variations in financial results; development of new products and services; interest rates and cost of borrowing; our ability to maintain and improve cost efficiency of operations; changes in foreign currency exchange rates; changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the foreign countries in which we do business; reliance on third parties for manufacturing of products and provision of services; and other factors that are set forth in the "Risk Factors" section, the "Legal Proceedings" section, the "Management's Discussion and Analysis of Results of Operations and Financial Condition" section and other sections of our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2007 as well as in our 2006 Form 10-K filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.
For more information on Xerox, visit http://www.xerox.com or http://www.xerox.com/news. XEROX, WorkCentre, Phaser, Xerox Nuvera and iGen3 are trademarks of XEROX CORPORATION. DocuColor is used under license.