Xerox Continues Its Transformation – Insights from the 2011 Investors Conference

Jeff Hayes
May 11, 2011

At the annual Xerox Investors Conference on May 10, 2011, CEO Ursula Burns and her senior leadership team shared critical operating data and very candid perspectives on the market that provide important insights into the company’s strategy and transformation. Key insights included:

  • Services will soon be the majority of Xerox’ business (vs. Technology)
  • Total page volume is declining, though higher value color pages are growing
  • Xerox continues to reduce and shift its R&D spending away from black & white engines and towards color engines and software linked to business process outsourcing
  • Xerox plans to invest $300 million+ per year in acquisitions to strengthen its distribution (especially in Europe and developing markets) and expand its services portfolio
  • Xerox is targeting a “steady state” growth rate of 6%+ for revenue and 10 to 15% for earnings per share (EPS) in 2012 and beyond

Xerox is one of the bellwether companies in the document technology and services industry, and I believe customers, resellers and competitors should pay close attention to its new direction.

Services-Led, Technology-Driven Strategy

Xerox made their big bet back in 2009 by acquiring Affiliated Computer Services (ACS) to aggressively move into the business process and IT outsourcing business. At the time, Document Processing Outsourcing (DPO) services (managed, print, facilities management, back office scanning, etc.) accounted for approximately 25% of Xerox’ business. Today, Services account for 48% of total revenue and Xerox expects Services to grow by two percentage points each year going forward.




% of revenue (2010)



Revenue growth (2012)

1 to 3%

6 to 8%+

Annuity % of revenue



Operating margin

9 to 11%

11 to 13%


BW declining, focus on high-value color pages, expanding distribution through acquisitions Emphasis on BPO, acquisitions focused on geographic expansion

While printers/MFPs, software, and consumables remain an essential part of Xerox’ business, it is becoming increasingly clear that Xerox views Technology as a critical differentiator for its Services business. Xerox uses technology to improve customer business processes vs. using services to sell equipment and supplies.

Facing Reality … Thriving in a World of Fewer Pages

It is also becoming increasingly clear that Xerox is ready for a world in which there are fewer printed pages — especially low value black & white pages such as transaction or information documents. Xerox stressed it is not abandoning the BW market. In fact, Xerox stated this business remains highly profitable because of its large installed base and low capital investments.

Xerox believes it has increased its share of pages through MPS (replacing competitor’s desktop devices with Xerox’ workgroup devices) and improved its average revenue per page by focusing on high value color pages. Color printing now accounts for 25% of Xerox’ total page volume and 45% of its non-ACS revenue.

Xerox indicated it expects significant page growth to come from several key applications including direct mail, marketing collateral, books, packaging and photo. The company is focusing on affordable color, simplified workflows, and data-driven, mass personalization and agile supply chains (i.e. print on demand).

Shift in Research Development & Engineering (RD&E)

Given these realities, Xerox has been systematically reducing and shifting its RD&E spending. After peaking at around $1,044 million in 2000 when Xerox was deep into its iGen3 development and still engaged in the SOHO market, RD&E will likely be around $750 million in 2011 and drift slightly lower in the coming years.

Xerox also indicated it has significantly shifted RD&E towards color engines and software, especially software that is related to their BPO platforms and other technologies that give the company a competitive advantage for its Services business (e.g. intelligent sensing, unstructured content, analytics).

Xerox has also aligned nine of their chief technology managers with key business process groups (HR, transportation, financial, healthcare, customer care, etc.) in an effort to stimulate technology innovation that is more applicable and has a slightly shorter horizon.

Finally, Xerox has always noted that it strategically aligns RD&E spending with Fuji Xerox — with combined Xerox/FX RD&E spending hovering around $1.6 billion over the last few years. However, Xerox is clearly relying much more on Fuji Xerox RD&E which represented over 51% of the total in 2010 up from 35% in 2001.

Cash Machine … Stock Repurchases, Dividend Increases and Acquisitions

With around 85% of Xerox’ business being “annuity-based” (consumables, break-fix, leases, long-term outsourcing contracts), modest capital expenditures and reasonable debt levels, Xerox expects to generate between $1.0 and $1.2 billion in available cash in 2011 and around $2.0 billion in 2012. The company restated that its business model over the next five years is to use 70 to 80% of available cash to repurchase shares and 1 to 3% for dividend increases.

Xerox will allocate the remaining 15 to 25% of its available cash for “a steady stream of tuck-in acquisitions”, including $300 million in 2011. Year-to-date Xerox has made five acquisitions. Key fundamentals Xerox looks for in an acquisition include:

  • Well-run businesses with strong management (no bottom feeding)
  • Accretive to earnings in Year 1, average valuation of 1X revenue
  • In the Services area Xerox is looking for companies under $60 million that bring new capabilities, adjacent services or geographic presence
  • In the Distribution area Xerox is looking for companies under $30 million to expand under-penetrated markets (especially outside the US)

Repositioning the Brand … The Services Company?

Xerox will continue its “Real Business” marketing initiatives over the next 18 months expanding beyond document process outsourcing themes into BPO-related areas (e.g. customer care). Xerox also indicated it may fold the ACS brand into Xerox sooner than originally anticipated due to the positive reception received from customers about the acquisition. It was clear from the conference that Xerox is increasingly confident in its Services strategy and is intent on accelerating their cadence through stronger marketing efforts.

Xerox … Remaining Relevant

Xerox doesn’t have the glamour of a technology innovator like Apple or a social media/buying firm like Facebook or Groupon. In many respects, Xerox is similar to IBM or Pitney Bowes, a well-established business technology/equipment firm that is transforming into a services-based company that uses technology to improve customers’ business processes.

While Xerox will likely always be inextricably tied to hard copy documents, my sense is that even if the use of paper in our digital/mobile/content-intensive economy significantly declines over next 10 years Xerox will remain relevant and vibrant.

Please click here for access to the 2011 Investors Conference presentation material and here for my review of the 2010 Investors Conference.

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