Zacks_Analysts' Blog : Xerox Beats but Revenues Flat - Analyst Blog

Xerox Corporation (XRX) reported a 10.8% increase in profit (adjusted) to $462 million in the fourth quarter of 2011 from $417 million in the same quarter of 2010. On per share basis, profits (adjusted) improved 13.8% to 33 cents per share from 29 cents in the fourth quarter of 2010, exceeding the Zacks Consensus Estimate by a penny.

Revenues in the quarter were flat at $5.96 billion compared with $5.98 billion in the fourth quarter of 2010. It was lower than the Zacks Consensus Estimate of $6.06 billion. Operating profit (adjusted) dipped 4% to $594 million from $619 million in the fourth quarter of 2010. This led to a decrease in operating margin to 10.0% from 10.4% a year ago.

Segment Performance

Revenues in the Services segment, which include Document Outsourcing (DO), Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO), grew 6% to $2.86. The increase in revenues was mainly attributable to an 8% increase in revenues in both BPO and DO businesses.

However, segment margin fell 1.7 percentage points to 10.3% from the fourth quarter of 2010, driven by the ramping of new services contracts and the impact of lower contract renewals from prior periods.

Revenues in the Technology segment slid 5% to $2.71 billion, including a 1-percentage point negative impact from currency. The segment revenues, which include the sale of document systems, supplies, technical service and financing of products, was significantly impacted by the economic weakness in Europe.

Segment margin was flat at 11.7% compared with the fourth quarter of 2010 as lower cost and expenses from restructuring actions was offset by a fall in gross margin.

Revenues in the Other segment ebbed 8% to $388 million, due to a decrease in paper sales, wide format systems and other supplies, partially offset by an increase in revenue from patent sales and licensing.

The segment reported a narrower loss of $30 million compared with $36 million in the fourth quarter of 2010. The decrease in loss was attributable to increased patent sale and licensing as well as a fall in non-financing interest expenses.

Annual Results

For the full year 2011, Xerox posted an increase in profit (adjusted) to $1.56 billion or $1.08 per share from $1.30 billion or 94 cents per share in the previous year. The profit was in line with the Zacks Consensus Estimate. Revenue went up 4.6% to $22.6 billion, nearly meeting the Zacks Consensus Estimate of $22.7 billion.

Share Repurchases

During the quarter and full year 2011, Xerox repurchased shares worth $392 million and $700 million, respectively. The company’s board of directors increased the share repurchase authorization by $500 million to more than $1.3 billion. With this, it expects to repurchase between $900 million and $1.1 billion worth of shares in 2012.

Financial Position

Xerox had cash and cash equivalents of $902 million as of December 31, 2011, compared with $1.2 billion as of December 31, 2010. Total debt was flat at $8.6 billion compared with the corresponding period in 2010. Debt-to-capitalization ratio was 41.8% as of December 31, 2011 compared with 41.4% as of December 31, 2010.

In 2011, cash flow from operating activities declined to $2.0 billion from $2.7 billion in 2010. The company expects to generate cash flow of $2 billion to $2.3 billion from operations for 2012. Capital expenditures (net) during the year increased to $310 million from $303 million in 2010.

EPS Guidance

Xerox anticipates adjusted EPS of 21–24 cents per share in the first quarter of 2012. For the full year 2012, the company expects adjusted earnings between $1.12 and $1.18 per share, including restructuring charges.

Our Take

Xerox Corporation, headquartered in Norwalk, Connecticut, is a leader in the development, manufacture, marketing, servicing and financing of document equipment across the world. We believe economic weakness in Europe, intense competition from its peers – including Canon, Inc. (CAJ) and Hewlett-Packard Company (HPQ) – and higher debt level will adversely affect the company’s operations in the near future. As a result, the company retained a Zacks #4 Rank on its stock, which translated to a short-term (1–3 months) rating of Sell.