Xerox Corp. (XRX) announced that it would release its results for the first quarter of 2011 before the market opens on April 21, 2011. Norwalk-based Xerox Corp. earned a profit of 29 cents in the fourth quarter, barely exceeding the Zacks Consensus Estimate.
In the upcoming quarter, the Zacks Consensus Estimate for Xerox Inc. is pegged at a profit of 22 cents per share, reflecting an annualized growth of 21%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is just 4.55%.
With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 16.58%, with positive surprises in each of the quarters involved.
Fourth Quarter Review
Xerox reported a profit of $ 417 million or 29 cents per share in the fourth quarter of 2010, barely exceeding the Zacks Consensus Estimate by a penny. The profit was higher than the year-ago level of $ 235 million or 26 cents per share.
Revenues in the quarter surged 42% to $ 5.98 billion, in line with the Zacks Consensus Estimate. The rise in revenues was driven by an impressive growth in the Services segment, comprising document outsourcing (DO), business process outsourcing (BPO) and information technology outsourcing (ITO) businesses.
Gross margin declined to 33.6% from 39.9% a year ago due to the unfavorable impact of currency exchange rates and mix impact from the acceleration of growth in BPO and ITO revenues. However, operating margin rose to 10.4% from 7.9% due to higher revenues.
Revenues in the Technology segment slid marginally to $ 2.85 billion from $ 2.86 billion last year, driven by flat supplies revenue. The segment profit increased $ 31 million to $ 301 million from the last year.
The increase in profit was attributable to lower cost and expense reflecting restructuring savings and lower bad debt expense, which more than offset the decline in gross profit caused by the unfavorable impact of transaction currency and mix.
Revenues in the Services segment nearly tripled to $ 2.71 billion from $ 928 million in the fourth quarter of 2009. This was attributable to a stupendous growth in revenues to $ 1.48 billion from $ 24 million in BPO services, which accounted for 54% of total revenue in the segment.
The growth in BPO services was driven by healthcare services, customer care, transportation solutions, healthcare payer services and acquisitions completed in 2010. The segment profit quadrupled to $ 324 million from $ 81 million in the previous year.
Revenues in the Other segment declined 3% to $ 420 million from $ 434 million a year ago. However, the segment showed a narrower loss of $ 66 million compared with $ 79 million a year ago.
Xerox had cash and cash equivalents of $ 1.21 billion as of December 31, 2010, compared with $ 3.8 billion in the year-ago period. Total debt amounted to $ 8.61 billion, reflecting a debt-to-capitalization ratio of 42%, down from the year-ago level of 57%.
Estimate Revisions Trend
The first quarter 2011 estimate remained unchanged at 22 cents. This implies that the analysts are cautious about the stock. The overall macro economic condition has marred the near-term visibility of the analysts.
Agreement of Estimate Revisions
Only 1 out of the 10 analysts covering the stock for the first quarter of fiscal 2011 has made a downward revision in the last 30 days. However, no upward revision has been made in the past 30 days. Intensifying competition and availability of close substitutes for the company’s products have kept the analysts cautious about the stock.
Magnitude of Estimate Revisions
The first quarter 2011 estimate remained unchanged at 22 cents in the last 60 days. However, the estimate witnessed a penny drop from the previous 23 cents immediately following the fourth quarter earnings release in January. The Zacks Consensus Estimate for the first quarter is 22.2% higher than the year-ago profit of 18 cents.
Our Take
Xerox is a highly recognized brand globally with an estimated brand value of $ 6.1 billion. Xerox is highly focused on expanding its business globally based on its well-knit distribution network. The company has also identified a huge scope in the domestic markets and in the emerging markets for expanding its business.
In order to seize the opportunities in the emerging markets, Xerox partnered with Trigon last year to offer its authorized products for the first time in the UAE. The company also appointed Seven Seas, a UAE-based systems integrator and reseller, as its channel partner with an objective of expanding its indirect channel business and boosting its market share.
The company has also taken similar initiatives in the domestic market as well. The recent acquisitions by GIS reflect this fact. Apart from Iowa-based Premier Office Equipment, GIS also acquired Illinois-based United Business Solutions and Pensacola-based Florida Imaging & Network Systems recently with the same objective.
With all these agreements, contracts and acquisitions, Xerox aims to capitalize on the growing market in order to strengthen its financial performance in the upcoming quarters.
However, growing competition, advancement in IT, reduced demand for papers and other document equipment may emerge as potential threats to the company in the near future.
We have a ‘Neutral’ recommendation for Xerox in the long term.
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