Insights from the Xerox Financial Investor Conference

Jeff Hayes
May 7, 2010

Xerox outlined its business strategy to approximately 100 members of the financial analyst community on Tuesday, May 4th at the New York Stock Exchange. Xerox has always been one of the thought leaders for the document technology and services industry, and typically does a good job articulating the critical trends, challenges and opportunities facing the industry. The event on Tuesday was no exception.

After attending the event and speaking with several Xerox and ACS executives, here are my key takeaways:

  • Xerox has faced up to many realities of the new “document” market (black & white is declining, print is not a growth market, services are the new recurring revenue stream, software and integration are often the key differentiator — not hardware)
  • Xerox is a fundamentally different company since its acquisition of Global Imaging (2007) and ACS (2009). They have over 1,800 more “feet on the street” pursuing traditional equipment deals, and are a major player in the growth markets of business process and document outsourcing.
  • Xerox’ growth strategy platform has four key planks:
  1. Accelerating the transition to color
  2. Advancing “customized” digital printing
  3. Expanding distribution
  4. Building value through services

Ursula Burns — Firmly in Command

Xerox CEO Ursula Burns was on top of her game, particularly during the hour of open Q&A. She outlined a clear vision for the company’s direction (technology + services), was candid about the market conditions (black & white is challenged, price pressures), and had command of key operational metrics. Some of the key points Ms. Burns made include:

  • Not expecting growth from black & white production printing especially in the transaction market. Xerox will defend its position, but is not investing in this area. All page growth for Xerox is coming from color devices.
  • 50% of ColorQube sales have been to new customers (who previously had no Xerox equipment)
  • Color now represents 44% of Xerox’s revenue (excluding ACS & GIS), 30% of its MIF, and 22% of its pages
  • The transition to digital from offset has been tougher than expected. She expects the transition will continue, but that it will not be a “flood.” Key challenges are technology (running costs, substrate/ink compatibility, etc.), application solutions (workflow, ecosystems), and business training (how to sell and re-engineer applications to digital)
  • Xerox will continue to expand distribution and drive down operating costs
  • Xerox is now a technology and BPO/ITO services company. They will continue to expand distribution and drive down costs.

The View from ACS — Lynn Blodgett and Mark Boxer

Lynn Blodgett, President of ACS, gave a glowing review of the Xerox/ACS relationship, integration, and synergies. He emphasized that Xerox is unique in offering BP, Document, and IT Outsourcing services, and that he is excited about opportunities to leverage Xerox technology into their services offering (scanning, intelligence, workflow). Xerox indicated it has experienced a 20% increase in its 6-month sales pipeline for BPO/Services business (now at $500 million) since the ACS acquisition. Some of this increase may be due to the improving economy or seasonality, but Xerox believes the combined brand and account presence is synergistic.

Right after the formal Investor Conference, Mark Boxer, ACS Group President Government and Healthcare provided an excellent overview of what ACS is doing in the health care industry (their top vertical market focus) and how BPO and Document Outsourcing fit together. Boxer cited a variety of facts on the Xerox/ACS health care business including:

  • $2B in health care industry services business
  • Approximately 15,000 employees dedicated to health care
  • Working with 100% of the top 10 Blue Cross Blue Shield entities
  • 1,100 hospitals as clients
  • Provides services for 39 state governments for Medicare and Medicaid
  • Processes over 900 million health care claims

Xerox has big plans to work with the various government agencies, payers, providers, and physicians to not only drive down administrative costs, but to improve wellness through better management, analysis and access of structured and unstructured data.

Improving Financial Outlook

Larry Zimmeran, CFO, outlined the Xerox financial growth targets and business model. Key growth targets were:

  • Revenue growth 6-8%
  • Operating margin 10-12%
  • EPS growth 10-15%

Xerox is looking for their Services business to grow at 7-9% led by Business Process Outsourcing (BPO), followed by Document Outsourcing and IT Outsourcing.

Xerox projects their Technology business (equipment, supplies, service) to grow at 3-5% lead by their entry-level products, followed by mid-range and high-end devices.

Xerox expects to have $1 billion in available cash in fiscal 2011 and $2 billion in fiscal 2012. Their business model calls for using 10-25% of the cash for acquisitions, 70-85% for stock repurchase, and 1-3% for dividend growth. Xerox estimates roughly 1 to 3 points of its 6-8% growth will come from “inorganic” sources (i.e. acquisitions).

Based on some of the questions, the financial analyst community seemed a bit skeptical Xerox could achieve these revenue growth levels given their performance and the overall industry over the last 3-5 years.

Xerox — Then and Now

Like most companies, particularly in the printing and document services industry, Xerox had a difficult year in 2009. Revenues and profits were down, operating margins were squeezed, and there wasn’t much to cheer about.

However, I think it is important to keep things in perspective, particularly given where Xerox was financially and strategically 10 years ago. A quick comparison of Xerox’ annual reports for 2000 and 2009 shows the company has made critical steps and is now on much firmer ground.

 

2009

2000

Revenue

$15.2B

$18.8B

Gross margin

39.7%

37.4%

Selling, general, administration (SAG)

27.3%

29.4%

Net income (loss)

$485M

($273M)

Earnings (loss) per share

$0.55

($0.48)

Debt

$9.3B

$18.6B

Cash from operations

$2.2B

$0.2B

“Headline”

ACS acquisition

Corporate governance

Xerox has cut costs, reduced debt, improved cash flow, expanded distribution, and dramatically moved into business process and IT outsourcing services. The company still has many challenges including an increasingly competitive production printing market and a new set of competitors in the services market. However, with the improving economy, my sense is the wind is now at Xerox’s back.

Click here to find the Xerox presentation material.

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