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Xerox Net Jumps, Color Page Output Strong, Tax Gain Stronger

Press release from the issuing company

STAMFORD, Conn.-- Xerox Corporation announced today third-quarter 2006 earnings per share of 54 cents compared to third-quarter 2005 earnings per share of 5 cents. The company's third-quarter earnings this year include a previously announced tax benefit of 45 cents per share partially offset by restructuring of 7 cents per share and a litigation charge of 7 cents per share. Excluding these items, Xerox delivered adjusted EPS of 23 cents, an increase of 28 percent over third-quarter 2005 adjusted EPS of 18 cents. "Through earnings expansion, annuity growth and a strong financial position that allows for stock buyback and acquisitions, we exceeded our expectations this quarter and are delivering on our commitment to build shareholder value," said Anne M. Mulcahy, Xerox chairman and chief executive officer. Total revenue of $3.8 billion grew 2 percent in the third quarter. Post-sale and financing revenue, which represents about 75 percent of Xerox's total revenue, increased 3 percent, largely driven by 4 percent post-sale growth from digital systems. Total revenue and post-sale revenue included a currency benefit of 1 percentage point. "The leading indicators of our growth strategy - which is all about boosting our annuity stream through growth in digital, services and color - continued to trend positively in the third quarter," added Mulcahy. "Install activity was up for Xerox digital systems in key markets like office multifunction and production color. Our expertise in document management flowed through to post-sale growth of 7 percent from global services. And, our broad portfolio of color technology fueled a 16 percent increase in post-sale revenue from color." About 48 percent of the company's equipment sales in the third quarter were from color products, a year-over-year increase of 7 points. Total revenue from Xerox's industry-leading color systems grew 16 percent in the third quarter and now represents 36 percent of the company's revenue, up 4 points from a year ago. The number of pages printed on Xerox color systems grew 35 percent in the quarter. While equipment sale revenue was down 1 percent in the third quarter including a 1 point benefit from currency, installs of key products like the Xerox iGen3 Digital Production Press and DocuColor systems as well as WorkCentre multifunction systems drove up activity, fueling future gains in the company's post-sale revenue. Signings for document management services were up 16 percent year to date and were about flat in the third quarter as the company experienced longer lead times for finalizing multi-year contracts. 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 3 percent in the third quarter including a 2 point currency benefit. Installs of production black-and-white systems declined 6 percent with growth in light production only partially offsetting declines in higher-end production printing. Production color installs grew 107 percent, reflecting accelerated activity for the iGen3 and continued strong demand for the DocuColor 5000 and 7000/8000 series as well as the DocuColor 240/250 multifunction system. Earlier this month, Xerox made several announcements that strengthen its leadership in the production market including the acquisition of XMPie, a leading provider of variable information software; advanced finishing capabilities for the iGen3 and DocuTech 180 Highlight Color system; and a dual-engine printer that sets a new speed record for two-sided, cut-sheet black-and-white printing. Xerox's office business provides document technology and services for businesses of any size. Total office revenue was flat in the third quarter including a 2 point currency benefit. Installs of office black-and-white systems were up 10 percent, largely driven by 19 percent growth from Xerox's mid-range line of WorkCentre multifunction products. In office color, installs of multifunction systems were up 46 percent reflecting strong demand for the color WorkCentre systems launched in May and the continued success of the office version of the DocuColor 240/250. Expanding its competitive offerings for small and medium-sized businesses, Xerox launched in September the WorkCentre 4150, its fastest-ever desktop multifunction system. The company also cited continued improvement in its developing markets operations. Total revenue grew 7 percent in DMO. Gross margins were 40.2 percent in the third quarter, a year-over-year decline of 1.1 points. The decline was primarily due to product mix and equipment pricing as well as lower margins in Xerox's global services business as the company incurred upfront costs to support new multi-year managed services contracts. Selling, administrative and general expenses were 25.6 percent of revenue, a year-over-year improvement of 1.3 points. Xerox generated operating cash flow of $530 million in the third quarter and closed the quarter with $1.5 billion in cash and short-term investments. Since launching its stock buyback program last October, the company has repurchased about 78 million shares, totaling $1.1 billion of the $1.5 billion program through the third quarter of this year. Also during the quarter, Xerox closed on the $175 million cash acquisition of Amici LLC, a provider of electronic-discovery services that support litigation and regulatory compliance. In early October, Xerox announced the $54 million cash acquisition of XMPie, which is expected to close in the next few weeks. Xerox expects fourth-quarter 2006 earnings in the range of 21-24 cents per share, including restructuring charges of about 13 cents per share. Excluding restructuring, Xerox expects fourth-quarter adjusted EPS of 34-37 cents per share. "We expect our fourth-quarter performance will keep us on track to deliver our full-year earnings expectations," said Mulcahy.

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