The ‘Everything is Different’ Xerox

On  Jan. 29, Xerox released its Q4 and FY 2018 financial results and reporting hinted at tectonic changes in store for the firm that once called itself “The Document Company”. On Feb. 5, the company held an Investor Day event in which it laid out a multiyear strategy to stop the shrinking revenue spiral, stake out a path designed to foster focused innovation and diversification and ultimately trigger the elusive revenue growth trendline necessary for long-term survival.

As has been the case for multiple years, Xerox’s Q4 and FY 18 results announcement highlighted bottom-line and operational metrics such as EPS and cash flow while downplaying the usual top line measures such as revenue growth. Why? Because company revenues in its core copy-print-related businesses have declined every fiscal year since 2014, a Compound Annual Growth Rate (CAGR) of -4.96 percent, which represents a revenue drop of 22.5 percent over that period.

Xerox annual revenue (millions of US $) – core business

Source: macrotrends.net

Metrics such as EPS, cash flow and return to shareholders are very important, mind you – particularly to those shareholders. However, a shrinking revenue base obviously dictates the firm must constantly cut costs, either through improved efficiencies/productivity or by headcount reductions.

For the Wall Street types holding Xerox shares, the last year had been a brutal ride downward, from a high of $32.29 per share in May 2018 to a low of $18.84 on Christmas Eve 2018 – 10 days after Moody’s Investors Service downgraded the firm’s rating to junk bond status from an investment grade level with a negative outlook, citing “an uncertain revenue base” in addition to a “decline in demand for copy and printing services” and “intense global competition.”

Courting the seers

The Feb. 5 Investor Day event, hosted by a new management team installed last year after activist shareholder Carl Ichan and like-minded investors quashed a move by Fuji Xerox to “acquire” Xerox, featured some frank comments about the company’s cultural weaknesses and the challenges it faces in a highly competitive document imaging industry.

Vice Chairman and CEO John Visentin set the tone for the event with an opening review of the process the new management team had led since its installation. Visentin noted, “We’re a globally recognized brand. We’re reliable. We have quality. We have a robust portfolio. We have innovation capabilities.” However, Visentin also revealed the not-so-nice things partners had to say when asked to “tell us what we don’t know.” Those included “a complex operating model. We were difficult to do business with. Our supply chain can be improved. Our R&D … innovation [in] our software businesses … was lost in [our] product business. Our strategic transformations never flowed through to the bottom line.” Visentin admitted, “a question I get asked often is, ‘What’s different?’ and what you’re going to see today is simply everything is different.”

When Visentin says, “everything is different,” it represents a summary of major initiatives including:

• A review of Xerox’s financial plans and three-year roadmap detailing improvements in its revenue trendline to be flat to growing by 2021, along with improvements in operating margins, 7 percent annual EPS expansion and an expected cumulative cash flow of over $3 billion while delivering greater than 50 percent of free cash flow to shareholders via dividends and share repurchases over the next three years.
• A look at “Project Own It,” a company-wide program to simplify its business and improve operational efficiency while infusing a culture of continuous improvement. “Project Own It” benefits are expected to be an increasingly frictionless, high-velocity business for clients; more significant investments, especially for longer-term innovation; and annual profit growth.
• An outline of a strategy to reverse the company’s revenue slide, including improving the company’s Core [document imaging] Technology business; expanding its Services and Software business; capitalizing on an opportunity the firm sees in SMB; transform its clients’ digital experience; and leveraging its intellectual property with a “Powered by Xerox®” licensing strategy aimed at applications including digital packaging and print, 3D printing, AI workflow assistants, and sensors and services for the Internet of Things (IoT).

Visentin asserted Xerox bona fides in laying out such an aggressive plan: “Our clients want us to succeed. We’re No. 1 in A3, we’re No. 1 in production, we created the MPS business. So we’ve earned the right with our customers to go and get what we want to get.”

Let’s take a deeper look into some of these major initiatives … some long overdue.

Project Own It

According to Xerox, Project Own It is not just about taking costs out, it’s about simplifying the business. The company hopes to drive a frictionless, high-velocity business that is easy to do business with and yet continues to improve to adapt to the fast-paced change of technology. If the company can provide that type of consumer experience, executives believe they will grow revenue.

President and COO Steve Bandrowczak highlighted the new faces brought in to drive the transformation: from HP, new Chief Digital Officer Naresh Shanker; from IBM, Chief Commercial Officer Joanne Collins Smee; from Oracle, Chief Delivery Officer Mary McHugh; and from DHL, Chief Supply Chain Officer Fred Beljaars.

Executives believe this team is up to the challenge of transforming the company, but acknowledge that similar promises were made to Xerox shareholders in the past with disappointing results. This team, however, is confident in its abilities.

Stopping the slide, growing beyond the core

“[W]e have to succeed in our core business, of course, it’s the generation of cash that makes us all necessary. But we need to grow beyond our core,” said CTO Steve Hoover. “And the good news is that’s in the roots of Xerox. We are an innovative company, a technology-driven company that’s created markets. And so, we’ve been through a process over the last seven months of really looking at what are our core capabilities from a technology viewpoint, from a market knowledge, and a market access viewpoint; and where is there growth in the world that that’s relevant.” Hoover notes four areas in which Xerox will focus. “$20 billion in addressable market, double-digit CAGRs and secular growth that’s driven by technology that we can help deliver and create is going to be key to our ability to return to growth,” said Hoover, “not in 2019 … but starting to see some of the fruits of that in 2020 and then in 2021 and beyond.”

Digital Packaging and Print: Hoover says “Digital packaging today [is a] $5 billion market, growing in the low double digits. But the packaging market is a $45 billion market and … secularly growing. People buy things in packages. We know the value of digital, personalization, customization, short run. We talk to brands, we talk to packaging providers. They want that value of digital.

AI Workflow Assistants for knowledge workers: Hoover explained that the firm believes that the applications of robotics, analytics and AI is crucial for businesses, noting Xerox has an aggressive strategy to bring a collaborative AI assistant for knowledge workers. The plan, says Hoover, if tests are a success, is to go to market with this initiative in late 2019 or early 2020.

Aiding this initiative, on March 19, Xerox announced a seven-year extension of its relationship — for an incremental $1.3B — with HCL Technologies, which will manage portions of Xerox’s shared services, including global admin and support functions plus select IT and finance functions. The original agreement traces back to 2009 and covers HCL managing aspects of Xerox’s printer and imaging product lines. HCL offers, among many services such as Robotic Process Automation (RPA) to help organizations become leaner and more agile, and Toscana — HCL’s proprietary BPM Tool that optimizes work distribution, prioritization, exception and approval management, audit trails, compliance, and SLAs management. HCL also offers IT services management and numerous other services.

3D Printing and Digital Manufacturing: Hoover announced that Xerox acquired technology and the key employees from a small pre-revenue startup, Vader Systems, which had developed a printing process that actually melts metals and turns them into a hot molten liquid and ejects them from a nozzle like an inkjet printer to print drops of liquid metal.

Sensors and services for the Internet of Things: Hoover says the IoT needs sensing to work, to be low cost, to be democratized, and Xerox is focused on how to develop the next wave of sensors for IoT that are smaller, lower cost and consume less power. This is an early stage development, Hoover notes.

The company is also working on a concept to create a “Venture Studio” out of PARC. “We’ve already brought in significant entrepreneurial talent that complements the technical expertise at PARC with the right business and customer focus … we have the real opportunity to create some new technology breakthroughs that can significantly begin to change the [revenue] trajectory profile.”

William F. Osbourn, EVP & CFO, made some solid financial points. “Xerox has a strong, stable cash generation model … our 2019 plan alone includes a 20 percent increase in investments in our four innovation areas that Steve Hoover detailed.”

Osbourn states the case for a “new” Xerox. “I would like to point out that we have the right to be a leader in this consolidating market. We have an iconic brand and we are the leader in important market segments including the office workspace, environment, the high end and managed print services. Not only does this result in a strong base of recurring revenues, but also a foundation to build out new services and software capabilities. Investors have choices where to invest. And Xerox in recent [days] has not always delivered on its promise. We realize that and we are focused on delivering.”

There were a couple of other announcements following Investor Day worth noting as well: Xerox is exploring a possible “strategic transaction” for its customer financing/leasing business. Reuters reported last summer that the firm was considering selling its leasing unit. The financing unit accounts for about $3.4B of Xerox’s total debt of $5.2B as of the end of last year and the group generated about 4 percent of the overall $7.63B in FY18 sales. The sale is a bit puzzling since it appears that the company’s financing arm is profitable.

On March 7, Xerox released a statement that announced that it will execute a corporate ownership reorganization process in mid-2019 in which Xerox will become a wholly owned entity of a new to-be-established holding company, whose shares will trade on the NYSE under the current “XRX” ticker. According to various news reports, implementing a holding company structure can enable a firm to lower its tax bill, protect patents and diversify its unit’s businesses efficiently. If such a paperwork move can save the company money or offer other benefits, one has to ask why previous Xerox executive management failed to seize this opportunity: score one for the new team.

Our take

The details provided by Xerox during its Investor Day are endlessly fascinating and are a voyeuristic journey through Xerox – good, bad, and what is possibly to be. The statement by CEO Visentin that “everything is different” seems accurate – in theory anyway. The case made by the company accepts the reality of opportunities and shortcomings of Xerox, many of which were either widely known or suspected in the industry.

The inability of the company to capitalize on many of the inventions and technologies coming out of PARC for decades is almost a cliché – a go-to case study in B-schools. However, it is also likely that many of the technologies were not directly applicable to productization by Xerox in its existing markets or capabilities. Therefore, it seems a “Powered by Xerox” licensing program as a revenue source is an initiative long, long overdue – though one worries that potential changes to the structure and mission of PARC risks changing the experimental and innovative nature of this valued resource.

It is true that the company has been guilty of making promises in the past that have not materialized … a change to that culture is welcome. However, several of the assertions or timetables given during the investor meeting appear to be either very aggressive or wishful thinking. Productizing any of the AI administrative software ‘bots in development in 2019 is hard to conceive, and even in 2020 is risky once software qualification testing is accounted for. The company is obviously counting on its partner HCL to deliver.

A few days after the Investor Day where Xerox touted the success and contributions of the newly named XBS – formerly GIS – in the SMB channel and pushing 28,000 new accounts into XBS’ domain, the company announced plans to significantly slash the management and the staff and close many of the XBS locations it operates. Huh? Those familiar with the dealer channel – from which all of the successful XBS operations originated before their acquisition by Xerox – will likely scoff at the company’s inability to understand how the dealer channel successfully competes against Xerox every day, reflected by the apparent blind gutting of XBS’ core assets — the assets that drove its success. While Xerox says it is still looking for dealers interested in an acquisition, after the skinning of XBS, Xerox may not find many interested listeners.

The roster of free agents with impressive resumes the company has added to lead the transformational changes it says are necessary looks like an “All Star” team. The problem is, often, managing the players on such a team isn’t for the faint of heart.

There is little question that Xerox fits the bill as a company in need of transformation in many key competencies, though that could easily be said of a number of its OEM competitors as well. Despite the firm’s stumbles over the years, Xerox remains a very formidable force in the imaging/print/copy arena – especially in larger organizations – and a company sporting a brand that is synonymous with copying and documents. One challenge not identified by the company in its presentation is the difficulty of repositioning a world famous brand – a brand so well known that it has become a verb strongly associated with a declining “old technology” industry sector. Many legendary brand owners have been forced to tackle that difficult challenge when faced with a changing market landscape – with mixed results.