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Xerox Q1 Earnings Excel Estimate

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Information technology services provider Xerox Corporation (XRX) reported net income (from continuing operations) of $279 million or 23 cents per share in the first quarter of 2014 compared with $293 million or 23 cents a share in the year-ago quarter. Despite a year-over-year decrease in net income, earnings remained flat on a per share basis due to lesser number of shares outstanding for the reported quarter due to continued share repurchases.

Excluding non-recurring items, adjusted earnings (from continuing operations) for the reported quarter were $331 million or 27 cents per share versus $344 million or 27 cents per share in the year-earlier quarter. The better-than-expected adjusted earnings for the reported quarter exceeded the Zacks Consensus Estimate by 4 cents.

The year-over decrease in earnings was primarily attributable to decline in revenues, which decreased 2% year over year to $5,121 million. Quarterly revenues also missed the Zacks Consensus Estimate of $5,174 million. Operating margin for the reported quarter was up 1.1% year over year to 8.6%, while gross margin was 30.2%.

Segment Performance

Revenues from the Services segment, which include Document Outsourcing (DO), Business Process Outsourcing (BPO) and Information Technology Outsourcing (I.TO), remained relatively flat at $2,923 million in the reported quarter (57% of total revenue). While revenues from DO and ITO increased year over year, BPO revenues declined due to lower volumes in customer care, government and transportation businesses.

Segment margin decreased 0.7% year over year to 8.6% largely due to the impact of price declines, higher healthcare platform expenses and the run-off of the student loan business. Total Services sales pipeline grew 9% year over year. Total contract value of deal signings aggregated $3.0 billion with BPO, DO and ITO accounting for $2.1 billion, $650 million and $200 million, respectively.

Revenues in the Document Technology segment dipped 4% year over year to $2,045 million (40% of total revenue) due to a fall in equipment sales and annuity revenues.

Segment margin increased 3.4% year over year in the reported quarter to 12.2% owing to cost productivities, lower pension expense, positive effects from restructuring and changes in revenue mix. The revenue mix for the segment comprised 57% mid-range, 22% high-end and 21% for entry-level products.

Revenues in the Other segment increased 4% to $153 million (3% of total revenue) due to higher sales of electronic presentation systems. Segment loss of $51 million improved year over year on profit from the sale of the surplus facility in Latin America, partially offset by increased non-financing interest expense and currency impacts.

Financial Position

Xerox had cash and cash equivalents of $1,567 million at quarter end, compared with $993 million in the year-ago period. Long-term debt at the end of the reported quarter stood at $8,005 million versus $8,021 million at year-end 2013. During the quarter, Xerox amended the $2.0 billion unsecured revolving credit facility to extend the maturity date to March 2019 from Dec 2016. At quarter end, the company had no outstanding borrowings or letters of credit under the credit facility.

Net cash provided by operating activities in the reported quarter were $286 million versus cash utilization of $87 million in the year-ago period. The company repurchased $275 million worth of shares in the reported quarter. Xerox increased the quarterly cash dividend by 8.7% to 6.25 cents per share, beginning with the dividend payable on Apr 30, 2014.


For second quarter 2014, Xerox expects GAAP earnings between 21 cents and 23 cents per share, while adjusted earnings are expected to be within 25 cents to 27 cents.

For full year 2014, Xerox adjusted its GAAP earnings guidance in the range of 90 cents to 96 cents per share from 93 cents to 99 cents expected earlier. Adjusted earnings are expected between $1.07 and $1.13 per share compared with prior expectations of $1.10 and $1.16. Xerox increased its share repurchase expectations for the year to $700 million from earlier projections of $500 million.

Moving Forward

With a truncated fiscal outlook and year-over-year decline in revenues, investor sentiments were down as share prices fell in pre-market trading post the earnings release. Moving forward, Xerox expects to realign its business model to better adapt to the evolving market trends by expanding indirect distribution channel and streamlining its supply chain and product portfolio. Xerox also intends to focus more on vertical markets like healthcare. In addition, it is integrating its market-leading Managed Print Services (MPS.V) with business process and IT outsourcing capabilities and continuing its thrust for leadership in Document Technology.

Xerox also remains committed to its 5-plank strategy that is centered on portfolio management, global growth, cost transformation, operational excellence and analytics. With sustained investments to expand geographical footprint and build its services capabilities in areas that provide significant customer value, Xerox expects to reap benefits in the long run.

Xerox currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth considering in the technology industry include Advanced Micro Devices, Inc. (AMD), Rubicon Technology, Inc. (RBCN) and Canon Inc. (CAJ), each carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on XRX
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