Xerox’s Earnings Hurt by Separation-related Costs

Q4 FY16 net income fell 29% to $181 million, or $0.17 per diluted share

Photocopying giant Xerox Corp. (NYSE: XRX) announced its Q4 FY16 and full-year FY16 financial results on January 31st, 2017.

The Norwalk, Connecticut-based company provides business process and document management solutions worldwide through three segments: Services, Document Technology, and Others. Its Services segment comprises two service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO). The Document Technology segment offers desktop monochrome and color printers, multifunction printers, copiers, digital printing presses, and light production devices. It also includes the sale of products and supplies, as well as the associated maintenance and financing of those products. The Other segment sells paper, wide-format systems, global imaging systems network integration solutions, and electronic presentation systems. Read more about Xerox’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Xerox’s revenues fell 7.2% Y-o-Y to $2.73 billion versus $2.95 billion in the prior year same period and 5% on a constant currency basis. Annuity revenue accounted for 75% of total revenue at $2.1 billion and was down 5% Y-o-Y or 3% on a constant currency basis. Equipment revenue came in at $677 million and was down 12% Y-o-Y or 10% on a constant currency basis. Of the total revenue in terms of billings, sales accounted for $1.13 billion, outsourcing, maintenance and rentals for $1.52 billion, while the remaining $77 million came from financing.

During the reporting quarter, total costs and expenses fell 4% to $2.55 billion from $2.65 billion in Q4 FY15. Xerox’s Q4 FY16 adjusted operating margin of 14% was up 0.7% from the same quarter a year ago. Gross margin was 40%, and selling, administrative and general expenses were 23.4% of revenue.

In all, hurt by demerger-related costs, Q4 FY16 net income plunged 29% to $181 million, or $0.17 per diluted share, from $256 million, or $0.24 per diluted share, in the year-ago comparable period. Adjusted EPS was at $0.25, which excludes $0.08 per share of after-tax costs related to the amortization of intangibles, restructuring and related costs, and certain retirement-related costs.

FY16 financial highlights

During FY16, Xerox’s revenues fell 6% Y-o-Y to $10.77 billion versus $11.46 billion in the prior year’s same period. Of the total revenue, sales accounted for $4.31 billion, outsourcing, maintenance and rentals for $6.12 billion, while the remaining $325 million came from financing. During FY16, total costs and expenses fell 3% to $10.20 billion from $10.54 billion in the year ago same period. In all, FY16 net income fell 27% to $616 million, or $0.58 per diluted share, from $848 million, or $0.77 per diluted share, in FY15.

Other highlights

Formation of Conduent Inc.: Xerox earlier announced its plans to split into two companies – a document technology Company manufacturing printers and copiers with annual revenues of roughly $11 billion under Xerox and a $7 billion business process outsourcing Company will be renamed Conduent Inc. This demerger was completed on December 31st, 2016. Conduent Inc. (NYSE: CNDT) has 93,000 employees in more than 40 countries and was launched on January 03rd, 2017 with Ashok Vemuri heading the company as its CEO.

Strategic transformation: As part of the separation, Xerox is implementing a three-year strategic transformation program aimed at productivity gains and cost reductions across its businesses. The Company realized $550 million in annual savings in FY16 from these ongoing initiatives.

Cash flow: Xerox generated $462 million in cash flow from continuing operations during Q4 FY16 and $1.01 billion in FY16. The company made restructuring payments of $35 million in Q4 FY16 and $118 million in FY16 as well as pension contributions of $76 million in Q4 FY16 and $178 million in FY16. Capital expenditure was at $39 million in Q4 FY16 and $138 million in FY16. Xerox ended 2016 with a cash balance of $2.2 billion, which includes $1.0 billion of cash expected to be used for the repayment of maturing Senior Notes in Q1 FY17.

Updated guidance for full year FY17

For FY17, Xerox expects revenue to decline mid-single digits at constant currency with adjusted operating margin of 12.5% to 13.5% and adjusted EPS of $0.80 to $0.88. GAAP EPS from continuing operations is expected to range between $0.44 and $0.52. Operating cash flow from continuing operations is forecasted at $700 million to $900 million and free cash flow from continuing operations predicted at $525 million to $725 million.

Stock Performance

Xerox’s stock ended the day at $7.26, slipping 1.36%, at the close on Thursday, February 09th, 2017, having vacillated between an intraday high of $7.40 and a low of $7.24 during the session. The stock’s trading volume was at 8,524,230 for the day. The Company’s market cap was at $7.38 billion as of Thursday’s close.

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