Xerox Revenue Declines Again; Cost Management Improves Operating Profit and Cash Position

On Jan. 29, Xerox announced fourth quarter and FY2018 year-end earnings. During the earnings report webcast, Xerox CEO John Visentin pointed out that the company is continuing to focus on its strategic initiatives:

  • Optimize operations for simplicity
  • Drive revenue
  • Re-energize innovation
  • Focus on cash flow and increasing capital returns

He provided examples of the European reorganization and the move of Global Imaging Systems (GIS) to Xerox Business Systems (XBS), as well as project “Own It,” as ways the company is looking at simplifying processes and the delivery of product and services to customers.

Visentin proudly noted recent accolades Xerox received. Xerox was named a leader by IDC in their latest Marketscape for Worldwide Contractual Print and Document Services and Keypoint Intelligence–Buyers Lab gave Xerox the  Document Imaging Software Line of the Year award. Emphasizing the innovation Xerox continues to bring to markets, Visentin talked about other areas of products, development andawards. These included industry-specific solutions such as their Digital Insurer solution, development of sensors for use in the IoT and an award won by PARC’s developed Printed Methane Sensor, a sensor that can detect oil and gas leaks in pipelines.

Free cash flow was also a highlight as Xerox delivered over $1.05 billion in free cash flow for the year. Visentin reported that 92 percent of that ($969 million) was returnedto shareholders in the form of share repurchases and dividends for the full year.

However, while the total year operating profit margin was up 1.8 points to 16.1 percent, and operating profit dollars increased 5 percent resulting in an EPS of $1.14, revenues continued to fall.

Revenue trends

Xerox 4Q FY2018 total revenues were 6.1 percent (all percent changes based on constant currency), lower than 4Q FY2017 with totalyear FY2018 revenues down 4.9 percent from FY2017. The steepest decline in 4Q FY2018 was in the “Other” region category with a 40 percent fall off from the previous year (down 29 percent for the whole year). The “Other” revenue category includes OEMbusiness, sales to Fuji Xerox and licensing. The North America region 4Q FY2018 revenue experienced a 4.9 percent drop from 4Q FY2017 and ended FY2018 with a 3.4 percent decline for the total year. The International region was down 3.2 percent from 4Q FY2017 and experienced a 3.7 percent decline for all of FY2018. North America represented 60 percent of Xerox total revenue, International was 37 percent and Other was 3 percent.

Xerox earnings FY2018

Equipment revenue for 4Q FY2018 was down $67 million, 6 percent lower than 4Q FY2017. For the year, the revenue source was off $101 million, down 2.5 percent year on year (YoY). Installations of entry A4 MFPs and midrange MFPs were up for both 4Q and total FY2018. Revenue from those sales did not show the same growth. Entry A4 revenue grew 0.2 percent YoY, but midrange revenue was down 1.2 percent YoY. High-end installations were down significantly in both 4Q FY2018 and for the year with YoY revenue plunging 14.7 percent.

Services, maintenance andrentals dropped 9 percent, or $140 million during 4Q FY2018 compared to 4Q FY2017. For all of FY2018, this revenue source was $308 million lower (5.2 percent down) than total FY2017.  In financing revenue, Xerox reported a 9.8 percent decrease ($7 million) for 4Q FY2018 and an 8.8 percent drop ($26 million) for total FY2018 from total FY2017.

Post sales revenue, which includes services, maintenance andrentals, contributed 75 percent of the total revenue during 4Q. For total FY2018 it was 78 percent of total Xerox sales revenue. Managed Document Services contributed35 percent of revenuebut saw a decline of 1.7 percent from FY2017. In the slide deck accompanying the earnings webcast, Xerox shows post sales revenue on a steady decline since at least 2016.

Profit and loss

Gross margin for 4Q was 40 percent, a reduction of 0.3 points from the same period FY2017. Xerox ended the year with a 39.9 percent gross margin, lower than the 40.2 percent for FY2017. Gross margin on sales of equipment improved slightly from 38.9 percent to 39.3 percent but post sales and financegross margins were lower than the previous year. Selling, administration and general expenses were reduced by 13 percent in 4Q when compared to 4Q FY2017. Xerox managed a 5 percent reduction in SG&A for all of FY2018. Operating profit for 4Q FY2018 was down 49 percent compared to 4Q FY2017 but was 5 percent better YoY.

Other information

Guidance for FY2019 included:

  • Expectations of a continued revenue decline at 5 percent
  • Increased operating margin between 12.6 percent and 13.1 percent
  • EPS of $2.60 to $2.70 (GAAP)
  • Free cash flow of $1.0 billion to $1.1 billion with a target of at least 50 percent returned to shareholders
  • The Xerox board has approved share repurchase authority by $1.0 billion and expectsat least $300 million of share repurchases in 2019

Our take

John Visentin has created and is leading a new Xerox. They have delivered operating income growth, EPS growth, and solid free cash flow results to shareholders. Visentin has recruited and created a team focused on simplifying and optimizing the way Xerox does business. Project “Own It” seems to be providing a good return in improving processes and reducing operating costs. The VersaLink, AltaLink and new Iridesse products appear to be finding success in the market.

Yet big challenges remain since cost and expense management alone does not provide a sustainable path to improving profits if top-line revenue doesn’t grow. Xerox has experienced only one quarter in the last eight that showed any growth and that was only 0.5 percent in the fourth quarter of 2017 — before Visentin and team arrived. What is more concerning is that the fundamental annuity model of supplies and services of the Xerox core business has not delivered revenue growth as far back as 2016. The declines Xerox has experienced in the high-end equipment segment have contributed significantly to these revenue declines. Fighting to gain these high dollar equipment revenue sales and the high page volumes that go along with this equipment is going to remain difficult as more and more manufacturers have entered the production print and commercial print space.

Every player in the industry is struggling with the same challenges – declining print volumes and increasing price competition for a piece of a smaller industry pie. Xerox understands this,but is not giving up. However, Xerox doesn’t expect revenue declines to stop until 2021 and then expects only flat revenue growth at that time. Between now and then Xerox will need to rely on core technology sales and the aftermarket revenue stream that comes with that. Both are under hugepressure. Through their software and services, the plan is to deliver more value by moving beyond print. They have been strongin this area in the past and could position themselves to do so again. Focusing on industry-specific solutions – to make customers digital – should provide good returns.

Of course, there is still the Fuji feud. Will this be settled by Xerox finding a new partner? For now, Icahn’s dream and Visentin’s charge of delivering better returns to shareholders seems to be happening. To sustain that return the Xerox team must begin to bring growth to the top line through the Xerox core business or new business spaces being explored.