Xerox Corporation (XRX) reported a flat profit of 23 cents per share in the first quarter of 2012 compared with the same quarter of 2011 (all excluding special items). However, earnings per share exceeded the Zacks Consensus Estimate by a penny and were in line with the company’s own guidance. In absolute terms, profits declined 4.5% to $319 million in the quarter from $334 million in the first quarter of 2011 (all excluding special items).
Revenues in the quarter grew modestly by 1% (2% in constant currency) to $5.5 billion, which was slightly higher than the Zacks Consensus Estimate of $5.4 billion.
Gross margin declined 2 percentage points to 31% from 33% in the first quarter of 2011. The lower margin was attributable to ramping of new services contracts, lower contract renewals from prior periods and higher mix of Services revenues.
Operating margin fell 0.6 percentage points to 8.5% from 9.1% in the first quarter 2011. The decrease resulted from lower gross margin, partially offset by expense reductions.
Segment Performance
Revenues in the Services segment, which include Document Outsourcing (DO), Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO), rose 9% to $2.8 billion (including a 1 percentage point negative impact from currency), driven by higher revenues from DO and BPO.
The government healthcare, healthcare payer, financial services, and retail, travel and insurance businesses contributed to the growth in BPO. Meanwhile, new partner print services offerings and new signings led to the growth in DO.
However, segment margin fell 1 percentage point to 9.3% from the prior year, due to the ramping of new services contracts and the impact of lower contract renewals from prior periods.
Revenues in the Technology segment dipped 6% to $2.3 billion, including 1 percentage point negative impact from currency. The fall in revenues was attributable to a 6% fall in equipment sales and annuity revenues each. Segment margin fell 0.2 percentage points to 10.5% as lower gross profit more than offset the lower operating expenses from restructuring savings.
Revenues in the Other segment slid 11% to $344 million, including a 1 percentage point negative impact from currency. The decline in revenues was attributable to lower paper sales and a fall in licensing revenues. The segment had a narrower loss of $52 million compared with $66 million in the first quarter of 2011 due to lower non-financing interest expenses.
Share Repurchases
Xerox did not repurchase shares during the quarter. However, the company is on track to repurchase $900 million to $1.1 billion worth of shares in 2012.
Financial Position
Xerox had cash and cash equivalents of $1.5 billion as of March 31, 2012, compared with $902 million as of December 31, 2011. Total debt stood at $9.6 billion as of March 31, 2012 compared with $8.6 billion as of December 31, 2011. Consequently, the debt-to-capitalization ratio deteriorated 2 percentage points to 44% as of March 31, 2012 from 42% as of December 31, 2011.
In the quarter, the company’s cash outflow halved to $15 million from $30 million in the year-ago quarter. The company continues to expect to generate cash flow of $2 billion to $2.3 billion from operations in 2012. Capital expenditures (net) during the year increased to $87 million from $69 million in the first quarter of 2011.
EPS Guidance
Xerox anticipates adjusted EPS of 25–28 cents in the second quarter of 2012, including 1 cent to 2 cents of restructuring charges. For the full year 2012, the company continues to expect adjusted earnings between $1.12 and $1.18 per share, including restructuring charges.
Our Take
Xerox Corporation, headquartered in Norwalk, CT, is a leader in the development, manufacture, marketing, servicing and financing of document equipment across the world. We appreciate the company’s clarity in every aspect of its financial results.
However, we believe economic weakness in Europe and intense competition from its peers – including Canon, Inc. (CAJ) and Hewlett-Packard Company (HPQ) – will adversely affect the company’s operations. We are also disappointed about its rising debt level. As a result, the company retains a Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) rating of Hold.
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