Xerox Corporation (XRX) reported a profit of $ 281 million or 19 cents per share in the first quarter of 2011, including $ 53 million or 4 cents per share charges on amortization of intangible assets.
On excluding the charges, adjusted profit of Xerox amounted to $ 334 million or 23 cents per share, barely exceeding the Zacks Consensus Estimate by a penny. The profit reflects significant improvement compared with the year-ago loss of $ 42 million or 4 cents per diluted share.
Revenues climbed 16% to $ 5.47 billion in the quarter, which was slightly lower than the Zacks Consensus Estimate of $ 5.50 billion. The rise in revenues was attributed to 40% year-over-year growth in the Services segment, comprising document outsourcing (DO), business process outsourcing (BPO) and information technology outsourcing (ITO) businesses.
Gross margin declined to 33.0% from 36.1% in the prior year 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 9.1% from 8.5% due to higher revenues.
Segment Performance
Revenues in the Technology segment remained almost unchanged at $ 2.50 billion, driven by a decline in entry installs despite growth in mid-range and high-end installs. The segment profit increased $ 33 million to $ 266 million from 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 expanded nearly 40% to $ 2.58 billion from $ 1.84 billion during the corresponding quarter in 2010. This was attributable to remarkable improvements in BPO and ITO services.
Revenues from BPO increased 70% to $ 1.43 billion and that from ITO surged 66% to $ 331 million. Revenues from DO services also witnessed a 4% growth to $ 839 million in the quarter. The segment profit was $ 266 million compared with the prior-year profit of $ 203 million.
Revenues in the Other segment declined 2.3% to $ 386 million from $ 395 million a year ago. However, the segment showed a narrower loss of $ 66 million compared with $ 104 million a year ago.
Financial Position
Xerox had cash and cash equivalents of $ 1.00 billion as of March 31, 2011, compared with $ 1.01 billion in the year-ago period. Total debt amounted to $ 8.61 billion, reflecting a debt-to-capitalization ratio of 41%, unaltered from the year-ago level of almost 42%.
In the first quarter, net cash used in operating activities amounted to $ 30 million compared with $ 375 million of net cash generated from the operating activities a year ago. The deterioration in cash flows resulted from lower accounts payable and accrued compensation, lower inventory and other spending.
Guidance
Xerox anticipates GAAP and adjusted EPS of 18 cents–21 cents per share and 23 cents–26 cents per share, respectively, for the second quarter of 2011. For full year 2011, the company expects GAAP earnings between 89 cents and 94 cents per share and adjusted EPS in the range of $ 1.05 per share to $ 1.10 per share. It also expects $ 1 billion to $ 1.2 billion in available cash for the year.
Our Take
Xerox is a highly recognized global brand with an estimated brand value of $ 6.1 billion. Xerox is highly focused on expanding its business worldwide 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. The recent acquisitions by Global Imaging Systems (GIS), a Xerox company, reflect this fact. Apart from 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 give Xerox shares a ‘Neutral’ recommendation in the long term.
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