Xerox Print Services Impact Hardware Revenue And Page Volumes — But That’s OK

by Charles Brewer, Actionable Intelligence

Xerox had a better year in 2011 than many hardware manufacturers. While the second half of the year was tough, the firm managed to grow its total 2011 revenue approximately 5 percent to $22.6 billion, up about $1 billion over the previous year’s revenue. Xerox has its Services organization to thank for much of the growth. Revenue from Services was up in fiscal 2011 compared to the year before, but sales from Xerox’s Technology business, which includes sales of hardware and supplies, appear to have been down last year compared to 2010.

Since acquiring ACS (Affiliated Computer Services) in 2010, Xerox has restructured its business in two segments: Services and Technology. The Services segment is responsible for the sales of certain outsourcing offerings such as business process and information technology outsourcing, much of which came to Xerox as part of the ACS buyout. The Services segment is also responsible for Xerox’s document outsourcing business, which includes managed print services as well as other document management services. The Technology segment markets hardware and document technology along with related supplies, technical services and equipment financing that is not related to Xerox’s document outsourcing contracts.

During a conference call with investors and Wall Street analysts reviewing the firm’s 2011 fourth-quarter performance, Xerox Chairman and CEO Ursula Burns said the company reaped more revenue from its Services segment last year than it did from Technology. She explained that services are increasingly important to the firm because “multiyear Services contracts benefit (Xerox’s) business for the long term through a healthy base of recurring revenue.”

During Q4 2011, Services revenue grew to $2.86 billion from $2.71 billion in Q4 2010, which represents a 6 percent gain. Burns indicated that Xerox managed print offerings were responsible for some of the growth and called MPS “an engine of growth for (Xerox’s) business.” While Xerox’s IT outsourcing revenue declined 4 percent last year, business process outsourcing grew 8 percent, and document outsourcing, which includes managed print services, grew by 9 percent.

Although Burns did not disclose total Technology revenue for fiscal 2011, it appears it will be down a few points compared to 2010. Sales of annuities such as paper and third-party cartridges buoyed total revenue for Xerox’s Technology segment while equipment sales dropped between 1 and 8 percent in three out of four quarters last year. Xerox’s Technology segment experienced a 5 percent decline in Q4 2011 compared to Q4 2010, the segment’s largest drop of the year. Equipment sales declined by 8 percent during Q4, and declining demand for paper drove annuities revenue down 3 percent.

While I’m sure Xerox’s senior managers didn’t relish reporting sagging hardware and supplies sales to investors, it didn’t seem to worry them too much. In fact, it appears some decline in hardware revenue was expected as a result of the growing popularity of MPS. While reviewing the drooping Q4 Technology numbers, executive vice president and CFO Luca Maestri said, “It should also be noted that as planned our Technology results are impacted by the launch of our partner print services.” He described Xerox’s MPS business along with other services marketed by Xerox’s channel partners as “very successful.”

I’m not surprised to hear that MPS may be “impacting” Xerox’s hardware sales. Efficient printing requires all equipment to be fully employed, and no idle or underutilized machines should be maintained. MPS programs often seek to identify and eliminate machines that are not in use. As a result, machines are often retired without replacement devices being ordered, which is bound to lower hardware revenue over time.

MPS programs also lower print volumes, and data released by Xerox over the past few years indicates that’s what the company is experiencing. Last year, the firm said the number of pages generated digitally by its machines dropped each quarter. Page volumes dropped 5 percent in the first quarter of 2011, 4 percent in Q2, and 1 percent and 3 percent in Q3 and Q4, respectively. Moreover, Xerox has been reporting declining volumes of pages rendered digitally for years. You have to go back to 2008 to see any increase in digitally printed page volumes.

If you look at OEMs like HP, Lexmark and others, it seems they are experiencing similar declines. Hardware shipments are off lately along with supplies revenue, suggesting that Xerox isn’t the only vendor experiencing a declining need for hard copy. Lexmark’s total 2011 revenue, for example, stood at $4.173 billion, a 6.4 percent decrease compared with revenue of $4.199 billion in 2010. Hardware revenue totaled $989 million, down 7 percent year over year, while its $2.912 billion supplies revenue was flat. Software revenue was Lexmark’s bright spot — up 22 percent to $272 million.

In late February, HP’s Imaging and Printing Group (IPG) reported its total revenue was down 7 percent in the first quarter of this year and stood at nearly $6.3 billion compared to $6.7 billion in Q1 of 2011. This followed a 10 percent drop in revenue during Q4 2011, when revenue stood at $6.3 billion, down from nearly $7.0 billion in Q4 2010. For the full year, IPG brought in $25.78 billion, up less than 1 percent from $25.76 billion in fiscal 2010. IPG’s full-year supplies revenue, which is a good indicator of print volume, fell to $17.15 billion in fiscal 2011, down from $17.25 billion in fiscal 2010. A steep decline came in Q4 as supplies revenue tumbled 14 percent to $4.0 billion from $4.7 billion in 2010.

Of course, MPS isn’t the only factor behind the declining hardware and supplies numbers. The worldwide economic picture has been bleak for the past few years, and a bad economy stymies growth in office equipment markets. The U.S. economy may be recovering, but, if true, the turnaround has been recent and would not have had much impact on last year’s market for hardware and supplies. Moreover, economies in regions like Europe remain in the weeds, which will further restrict demand for office equipment.

Xerox, however, seems to be well-positioned to weather any lingering ill economic effects, thanks to the firm’s investments in services. While these investments have provided the firm with revenue growth over the past couple of years, they could be even more important in the future as print volumes continue to decline. I expect that HP, Lexmark and others will tread a path similar to the one Xerox is traveling and offer an increasing selection of services in the short term. Hardware and supplies sales will remain important, but, like Burns said, services will be the growth engine for the future.