Xerox Corporation (XRX)

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Xerox Corporation (XRX)

Q4 2008 Earnings Call

January 23, 2009 10:00 am ET


Anne M. Mulcahy – Chairman of the Board & Chief Executive Officer

Ursula M. Burns – President & Director

Lawrence A. Zimmerman – Chief Financial Officer & Executive Vice President


Shannon Cross – Cross Research

Richard Gardner – Citigroup

Mark Moskowitz – JP Morgan

Keith Bachman – Bank of Montreal

Chris Whitmore – Deutsche Bank



Welcome to the Xerox fourth quarter 2008 earnings release conference call hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President and Larry Zimmerman, Executive Vice President and Chief Financial Officer. During this call Xerox executives will refer to slides that are available on the web at

At the request of Xerox Corporation, today’s conference call is being tape recorded. Other taping and/or rebroadcasting of this call are prohibited without the express permission of Xerox. After the presentation there will be question and answer session. (Operator Instructions) During this conference call Xerox’s executives will make comments that contained forward-looking statements which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein.

At this time I would like to turn the meeting over to Ms. Mulcahy.

Anne M. Mulcahy

We’re going to begin with Slide Four and before I get in to the results of the quarter here’s a look at the dynamics we’re facing, the fundamentals of our business that give us confidence in our models and the actions we’re taking to help offset the challenges in the economy. The continued weakening economy and rapid shift in exchange rates put pressure on our business in the fourth quarter.

The impact on earnings was largely due to the strengthening of the Yen and deteriorating developing market economies particularly in Russia and Eastern Europe which started in the later part of the quarter. Within increasingly widespread economic concerns we are finding that more of our customers and partners are scrutinizing investments which is delaying decisions on major contracts. In addition, our distributors are reducing inventory of supplies creating an impact on wholesale revenue this quarter.

Despite this challenging market place our business model delivered $265 million in adjusted income for the quarter or $0.30 adjusted EPS. The basic fundamentals of our operations continue to deliver solid results giving us flexibility in these uncertain times and strengthening our competitive position. As you all know, more than 70% of our revenue comes from our post sale.

We track the success of this annuity extreme by closely managing the metrics that drive it including MIF or machines in field which is the number of Xerox systems in the marketplace. The better our MIF the more pages printed on Xerox systems, especially color pages and these metrics continue to be positive. Our growing services business also flows through the post sales. With a value proposition that helps customers reduce costs we are getting more and more interest in our outsourcing and other document services.

We’re consistently generating solid cash flow while containing our capital investments. We generated $1.7 billion in adjusted cash flow from core operations and $1.36 adjusted free cash flow per share in 2008. These fundamentals will continue to serve us well. While better positioned than most we certainly have not been immune from this environment. We’re taking swift actions to help improve earnings while maintaining investments to drive growth.

The fourth quarter restructuring will deliver $200 million in savings this year. In addition, we remain relentless in our focus on reducing costs and on generating cash. And, like others in our industry we’ve made price adjustments to better support our business model in this environment. We are not underestimating the seriousness of today’s challenges but we have a resolve that we know what to do and we will do whatever it takes to navigate Xerox through this period of uncertainty.

We have an experienced management team that has been tested in the past and emerged a strong and confident group that knows how to take on challenges. Now, let me take a moment to review our Q4 results. Larry will then share more detail about our financial results. I’ll provide some guidance on the coming year and then Larry, Ursula and I will take your questions.

Please turn to Slide Five for a summary of our fourth quarter performance. As I mentioned, adjusted EPS was $0.30. This excludes the previously announced restructuring charge of $0.27 as well as an equipment right off of $0.03. Currency had a significant negative impact on results this quarter on revenue as the dollar strengthened against the Euro and on margins as the strengthening of the Yen increased our product costs.

Total revenue of $4.4 billion was down 10% in the quarter which included a five point negative impact from currency. Wholesale revenue was down 8% or 3% in constant currency. Again, this was largely due to distributors holding lower supply inventory levels as they prioritize cash at the end of the year. Equipment sale revenue declined 15% or 11% in constant currency, a reflection of weakened economies all around the world with especially significant decline in key development markets. I’ll talk more about this in a moment.

But for some perspective consider that up until November our developing markets business was delivering double digit growth. The rapid appreciation of the Yen impacted gross margin. Excluding an equipment write off caused by the retirement of the product line, the decline is due to the strengthening of the Yen which increased our product costs.

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