Xerox Corporation (XRX)
Q1 2010 Earnings Call
April 23, 2010 10:00 am ET
Ursula Burns – Chief Executive Officer
Lawrence Zimmerman – Vice Chairman, Chief Financial Officer
Benjamin Reitzes – Barclays Capital
Shannon Cross – Cross Research
Mark Moskowitz – J.P. Morgan
Ananda Baruah – Brean Murray
Richard Gardner – Citi
Keith Bachman – Bank of Montreal
Doug Ireland – JMP Securities
Previous Statements by XRX
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During the call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. At the request of Xerox Corporation, today’s conference call is being recorded. Other recorded and/or rebroadcasting this call are prohibited without express permission of Xerox.
(Operator Instructions) During the 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 would like to turn the meeting over to Ms. Burns.
Good morning, and thanks for joining us today. We’ll get started on Slide 3. We’re very pleased with our results for the first quarter, which reflect solid performance in revenue, operational improvements and cash generation. We also recognize that this is an unusual quarter in our financial reporting, so before we go into too much detail, let me walk you through what we’re reporting and how we’re doing it.
Our acquisition of Affiliated Computer Services closed on February 5, so our first quarter GAAP numbers include about eight weeks of ACS’s financial results and show revenue up 33%. To provide a clear year over year compare, we’re also reporting on a pro forma basis, which assumes that ACS was in our 2009 results for the same period.
First quarter pro forma revenue was up 5% or 2% in constant currency. During our fourth quarter earnings report, we said that following the acquisition, we would differentiate between GAAP and adjusted earnings both in our guidance and in actual results. By doing so, we believe we’re providing more transparency to the fundamentals of our business.
At that time, we expected $0.24 of adjustment of the first quarter, which we included in our guidance. We ended up with $0.22 and Larry will walk you through that detail in a moment.
Therefore, on a GAAP basis, we’re reporting a $0.04 loss for the quarter. On an adjusted basis, w delivered earnings per share of $0.18, above our guidance of $0.11 to $0.13.
Cash from operations were also very strong. We generated $375 million in operating cash and closed the quarter with a cash balance of $1 billion. Through disciplined cost management, and capturing savings from restructuring actions, our operating margin of 8.5% was up 1.5 points on a pro forma basis.
This reflects improvement in both gross margin and SG&A as a percent of revenue. We remain on track to deliver our revenue and cost synergy with targets related to the acquisition. I’ll share more detail about that in a bit.
First let me review our revenue results and Larry will cover our financial performance. I’ll close and we’ll both take your questions.
Let’s turn to Slide 4. With ACS, we have more than doubled our services business. As a result, we shifted our reporting segments to align with our expanded portfolio and to provide greater visibility to our growth strategy.
Our revenue categories are now equipment, and annuity. Equipment revenue represents the sale of our document technology, which is multi-function products, printers, copiers and publishing systems. Annuity includes everything else.
Recurring revenue associated with our technology and service business; this includes all BPO, ITO and document outsourcing contracts as well as the supplies, technical service and financing of Xerox equipment.
We’ve also changed our segment reporting to better reflect the businesses that we’re in. Our segments are technology, services and other. Revenue from technology includes the sale of document systems as well as the supplies, technical service and financing of products.
Revenue from services represents the company’s business profits, IT and document outsourcing offerings. And other, reflects smaller areas of the business like paper and wide format as well as other corporate items.
As you can see here, in quarter one, technology represents 53% of our revenue and services 39%. Keep in mind that this includes only eight weeks of ACS in our results. When we have the benefit of a full quarter of ACS in our numbers, we expect the revenue contribution will be along the lines of technology at 46%, and services at 46%, and equal weight in the business.
With that, here’s a look at our quarter one results. Again, total revenue was up 33% including a three-point benefit from currency. On a pro forma basis, it was up 2% in constant currency. Annuity revenue was up 2% in the quarter, and now represents 83% of our total revenue. Equipment sales grew 4%.
Let’s turn to Slide 5 for more detail on our key business metrics. In our technology business, we closely monitor page growth and machines in field, or MIF. Our technology business helps to fuel our annuity stream. More MIF leads to more pages, which generates revenue from supplies and technical services.