Xerox Corporation (XRX)

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Xerox Corporation (XRX)

Q2 2009 Earnings Call

July 23, 2009 10:00 am ET


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

Ursula M. Burns – President, Director


Richard Gardner – Citigroup

Shannon Cross – Cross Research

Ben Reitzes – Barclays Capital

Chris Whitmore – Deutsche Bank

Keith Bachman – BMO Capital Markets

Mark Moskowitz – JP Morgan

Ananda Baruah - Brean Murray, Carret & Company



Welcome to the Xerox Corporation second quarter 2009 earnings conference call hosted by Ursula Burns, Chief Executive Officer. She is joined by Larry Zimmerman, Vice Chairman 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 recorded. Other recording and/or re-broadcasting of this call are prohibited without express permission of Xerox.

After the presentation, there will be a question and answer session. (Operator Instructions) During this conference call, Xerox executives will make comments that contain 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 will turn the meeting over to Ms. Burns.

Ursula M. Burns

As many of you know, I took over the CEO role at Xerox on July 1. With 29 years of Xerox tenure under my belt and the great benefit of working side-by-side with Anne Mulcahy, I am both humbled by the trust the board has placed in me and honored by the opportunity to lead our company now and well into the future. We made progress in the second quarter managing through the challenges of the global recession by focusing intently on cash and earnings while investing for growth.

Please turn to slide four and we'll get started. We delivered $0.16 earnings per share, $609 million in operating cash flow, and a one point increase in gross margin. All of this reflects the strong flow-through of our cost reduction initiatives and operational improvements. At the same time, our industry continues to face challenges from the decline in enterprise spending on technology. This is delaying purchasing decisions and slowing demand for document related supplies and support.

Xerox has seen sequential improvement with revenue up 5% from the first quarter of this year. And our clients are increasingly responding to the up to 30% savings we provide through our managed print services. We believe it is imperative that we continue to innovate and build market place momentum for when the economy starts to improve. That's why we're continuing our steady drumbeat of product launches, 12 through the first half of this year including the Xerox ColorQube that cuts the cost of printing a color page by up to 62%.

Let me take a moment to review our Q2 results. Larry will then share more detail about our financials, I'll provide some guidance for next quarter then Larry and I will take your questions. So please turn to slide five for a summary of our second quarter performance. Sixteen cents EPS is above our $0.10 to $0.12 expectations for the quarter. This is the result of significant efficiencies captured in the business and a disciplined approach to cost and expense management necessary to help offset the economic impact on revenue.

The recession is affecting our business in three key areas. First, the overall slowdown in business activity has lowered demand for supplies, especially in heavily document servicing processes like financing applications, mortgages, insurance enrollments, M&A and hiring and training, all areas where Xerox's technology and services are critical and areas we are confident there will be an improvement as the economy rebounds.

Second, we are closely managing costs and our customers are doing the same, which means delaying spending on technology until there are stronger signs of economic improvements. And while sales cycles are longer and deals are smaller, our customers are taking advantage of the value we offer with outsourcing and other document services.

Third, the especially hard hit developing markets dampen our total revenue picture. In areas like Russia and Eurasia access to credit is still quite limited and is creating a huge burden on the business environment. These factors contributed to a second quarter revenue decline of 18% including a five point negative impact from currencies.

Wholesale revenue was down 8% in the constant currency and equipment sale revenue declined 25%. Total revenue was $3.7 billion, which was $177 million higher than the first quarter that's an increase of 5%. Again, the flow-through from restructuring and operational improvements are helping to relieve pressure from the revenue declines.

Gross margins improved one point from last year to 40.2% and it's up sequentially by 1.3 points. Selling, administrative and general expenses were down year-over-year by $157 million. Second quarter operating cash flow of $609 million was $167 million higher than Q2 '08. This performance positions us well to increase our guidance for full year cash flow to $1.5 billion from $1.3 billion.

Our cash on hand was up $672 million in Q2 and we closed the quarter with a cash balance of $1.2 billion. Total debt is down $347 million through the first half of the year. We continue to remain on track to reduce overall debt by $1 billion this year.

Let's turn to slide six. This slide reflects the recessionary factors that are impacting our industry and our business and where our competitive position is holding up well. As I mentioned, we saw some modest improvements in Q1 with revenue up 5%.

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