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Xerox Q3 Profit Drops 52% On Weak Demand, Yet Tops View; Boosts FY09 EPS Outlook - Update


Printer and copier company Xerox Corp. (XRX) on Thursday reported a 52% year-over-year drop in profit for the third quarter, hurt by a 16% decline in quarterly revenues on lower demand amid the continued weakness in global economy. Earnings per share for the quarter also dropped, but topped analysts' expectations by two cents. The company also provided earnings forecast for the fourth quarter, in line with consensus estimate, and raised its earnings outlook for the full year 2009.

Third Quarter Results

The Norwalk, Connecticut-based company reported net income of $123 million or $0.14 per share for the third quarter, 52% lower than $258 million or $0.29 per share in the prior-year quarter.

On average, six analysts polled by Thomson Reuters expected earnings of $0.12 per share for the third quarter. Analysts' estimates typically exclude special items. The company had forecast earnings per share in the range of $0.10 to $0.12 per share for the third quarter.

The results for the latest quarter include a charge of $9 million or $0.01 per share related to Xerox's share of Fuji Xerox's after-tax restructuring, and an $8 million or $0.01 per share related to costs associated with the acquisition of Affiliated Computer Services.

Total revenues for the quarter declined 16% to $3.68 billion from $4.37 billion in the same quarter last year, but marginally topped six Wall Street analysts' consensus estimate of $3.63 billion. Revenues include a 2 percentage point negative impact from currency, and were negatively impacted by continued weakness in global economy.

Sales revenues for the quarter dropped 24% from the prior-year quarter to $1.56 billion, as well as service, outsourcing and rental revenues declined 9% from a year ago to $1.94 billion. Finance income also decreased 10% to $178 million from the same quarter last year.

In a statement, chief executive officer, Ursula Burns said, "Our third-quarter performance reflects our continued disciplined approach to managing cash and reducing costs. As a result, we exceeded our expectations for earnings and operating cash flow, and are benefiting from operational improvements that are mitigating the economic challenges."

Peer Performance

Among Xerox's peers, Palo Alto, California-based Hewlett-Packard Co. (HPQ) is scheduled to report its financial results for the fourth quarter on November 23. The company expects fourth-quarter GAAP earnings of $0.97 per share and non-GAAP earnings of $1.12 per share, and expects revenue to be up about 8% sequentially, implying fourth quarter revenue of about $29.65 billion. Analysts currently expect the company to report earnings of $1.12 per share for the fourth quarter, on revenues of $29.77 billion.

Another peer, Tokyo, Japan-based Canon, Inc. (CAJ) is slated to report its fourth-quarter results on October 27, 2009.

Segmental Details

Production segment revenue for the third quarter declined 14% from the prior-year quarter to $1.10 billion, and includes a 3 percentage point negative impact from currency. Segment operating profit was $59 million, down from $83 million a year ago.

Office segment revenue for the quarter was $2.07 billion, down 15%, including a 1 percentage point negative impact from currency. Segment operating profit declined to $201 million from $269 million last year.

Other segment revenues dropped 21% to $513 million, and includes a 2 percentage point negative impact from currency, driven by declines in revenues from paper, wide format systems and licensing arrangements. The segment reported an operating loss of $71 million that widened from $46 million a year ago.

Xerox's post-sale and financing revenues for the third quarter declined 11%, or 9% in constant currency, to $2.87 billion, while equipment sales revenue was $802 million, down 29%, or 28% in constant currency, from last year.

Separately, color revenues, which exclude the benefit from Global Imaging Systems or GIS, declined 14%, or 11% in constant currency, to $1.41 billion, representing 42% of total revenue. Color represented 40% of post sale revenue, and 51% of equipment sales.

Other Metrics

Segment operating profit for the third quarter fell to $189 million or 5.1% of revenues, from $297 million or 6.8% of revenues, in the prior-year quarter. Total costs and expenses for the quarter declined 15% to $3.52 billion from $4.12 billion in the year-ago quarter. Selling, administrative and general expenses declined 12% year-over-year to $1.01 billion or 27.4% of revenues, from $1.14 billion or 26.0% of revenues.

Total gross margin for the third quarter grew 60 basis points to 39.8% from the prior-year quarter's 39.2%, helped by cost improvements from restructuring as well as the decline of revenues from lower margin channels.

The company ended the third quarter with cash and cash equivalents of $1.16 billion, compared to $873 million at end of the prior-year quarter.

In a deal, which would accelerate Xerox's growth in the $150 billion business process outsourcing or BPO, Xerox Corp. in September agreed to acquire Affiliated Computer Services, Inc. (ACS), the world's largest diversified business process outsourcing firm, in a cash and stock deal valued at $63.11 per share or $6.4 billion. The acquisition, which would create a $22 billion global enterprise for document technology and business process management, is expected to close in the first quarter of 2010.

In October 2009, the company completed the successful syndication of a $3.0 billion interim Bridge Loan Facility with commitments from several banks that may be used in the event the ACS acquisition closes prior to obtaining permanent financing in the capital markets. In connection with entering into the Bridge Loan Facility, the company also amended our $2 billion credit facility.

Similar to several other U.S. firms, Xerox, the largest maker of high-volume color printers, has been on the path of a restructuring and workforce reduction for some time. The company said in October 2008 that it plans to cut 3,000 jobs in the next six months and speed manufacturing cost reductions to cope with an "unpredictable economy". Xerox expects that the head count reductions will save $200 million in fiscal year 2009.

Xerox's worldwide employment decreased about 3,000 from year-end 2008, and 3,300 from third quarter 2008, to 54,100 at the end of the latest third quarter, primarily due to restructuring reductions partially offset by additional headcount related to GIS's acquisition of ComDoc, Inc.

Nine Month Highlights

For the nine month period, Xerox reported net income to $305 million or $0.35 per share, higher than $229 million or $0.25 per share in the prior-year period.

Total revenues for the year-to-date period decreased 17% to $10.96 billion from $13.24 billion in the same period last year.

Looking Ahead.........

"Just as we are closely managing costs, our customers are doing the same and we have not seen a meaningful shift towards increased spending on technology. For many of our business clients - small to large - there remains a hesitancy to invest until more economic factors show signs of steady improvement. We expect this trend will continue to put pressure on revenue for the balance of the year" Burns added.

For the fourth quarter, Xerox expects earnings in a range of $0.20 to $0.22 per share, excluding costs related to the acquisition of ACS. Street analysts currently expect earnings of $0.21 per share for the fourth quarter, with estimates ranging between $0.17 and $0.23 per share, in comparison to last year's recorded earnings of $0.30 per share.

For fiscal 2009, the company raised its earnings forecast to a range of $0.55 and $0.57 per share from the prior guidance range of $0.50 and $0.55 per share. The full year forecast excludes fourth-quarter ACS acquisition related costs. Analysts are currently looking for full year 2009 earnings of $0.53 per share, with estimates ranging between $0.50 and $0.56 per share, compared to last year's reported earnings of $1.10 per share.

Following Xerox's strong performance, the company raised its expectations for fiscal 2009 operating cash flow to $1.7 billion from $1.5 billion. Xerox also plans to reduce overall debt by $1 billion during the year.

Stock Quotes

XRX closed Wednesday's regular trading session at $7.72, down $0.10 on a volume of 30.21 million shares, sharply higher than the three-month average volume of 14.51 million shares. In the past 52-week period, the stock has been trading in a range of $4.12 to $9.75.

by RTTNews Staff Writer

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