Xerox Corporation
(
XRX
) reported adjusted (excluding special items) earnings of 26 cents
per share in the second quarter of 2012, in line with the Zacks
Consensus Estimate and its own guidance. However, profit, as
reported, declined 3% to $309 million in the quarter from $319
million a year ago, but remained flat on a per-share basis at 22
cents.
Revenues in the quarter declined 1% (up 1% in constant currency)
year over year to $5.54 billion, missing the Zacks Consensus
Estimate of $5.58 billion by a whisker.
Ramp up of new services contracts along with higher mix of
Services revenues led to a year over year drop in gross margins by
1.4 percentage points to 32% in the quarter.
Operating margin fell 0.7 percentage point year over year to
9.7% in the quarter. The decrease resulted from a lower gross
margin, but was partially offset by expense reductions.
Segment Performance
Revenues in the
Services
segment, which include Document Outsourcing (DO), Business Process
Outsourcing (BPO) and Information Technology Outsourcing (ITO),
rose 5% to $2.8 billion (including a negative impact of 2
percentage points from currency), driven by higher revenues from
all three subdivisions.
Growth in government healthcare, financial services and retail,
travel and insurance businesses helped BPO revenues move up, but
lower transaction volumes from existing contracts anchored the
growth to some extent. Also, DO revenues jumped 3% (including a
negative impact of 3 percentage points from currency) due to new
partner print services offerings and new signings.
Revenues in the
Technology
segment dipped 7% to $2.4 billion, including a negative impact of 3
percentage points from currency. The decline was attributable to a
10% fall in equipment sales and a 6% decline in annuity revenues.
The negative performance of this segment stems from the fact that
Xerox's customers are migrating to its partner print services
offering within DO.
Revenues in the
Other
segment slid 6% to $365 million, including a negative impact of 2
percentage points from currency. The decline in revenues was
attributable to lower paper sales.
Financial Position
Xerox had cash and cash equivalents of $814 million as of June
30, 2012, compared with $902 million as of December 31, 2011. Total
debt stood at $9.2 billion as of June 30, 2012, compared with $8.6
billion as of December 31, 2011.
In the quarter, cash generated from operations stood at $228
million, down from $347 million last year. The company expects to
generate cash flow of $2 billion to $2.3 billion from operations in
2012 and buyback shares worth $900 million to $1.1 billion.
Guidance
For 2012, the company now expects adjusted earnings between
$1.07 and $1.12 per share, down from its earlier view of $1.12 to
$1.18. The revision is based on weakness in its technology
franchise. Xerox anticipates adjusted earnings of 24 cents to 26
cents in the third quarter of 2012.
Our Take
Xerox Corporation, headquartered in Norwalk, Connecticut, is a
leader in the development, manufacture, marketing, servicing and
financing of document equipment across the world. We appreciate the
company's clarity in every aspect of its financial results.
However, we believe economic weakness in Europe and intense
competition from its peers - including
Canon, Inc.
(
CAJ
) and
Hewlett-Packard Company
(
HPQ
) - might affect the company's operations. We are also concerned
about its rising debt level.
Xerox retains a Zacks #3 Rank, which translates to a short-term
(1-3 months) Hold rating.
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