Photocopier maker on track for separating into two companies by end of 2016
Photocopying giant Xerox Corp. (NYSE: XRX) announced its Q2 FY16 financial results on July 29th, 2016. 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.
Q2 FY16 financial highlights
During Q2 FY16, Xerox posted better-than-expected results as restructuring efforts ahead of its separation into two independent companies helped with cost-cutting initiatives. However, revenue declined 4% Y-o-Y to $4.4 billion in actual and constant currency, marking the sixth consecutive quarterly revenue decline.
Xerox’s Services business revenue declined 2% or 1% in constant currency to $2.5 billion in Q2 FY16. Services margin was 9.6%, up 2.4% Y-o-Y, driven by cost and productivity improvements including benefits from the Company’s strategic transformation program.
Xerox’s Document Technology business revenue fell 7%, or 6% in constant currency, to $1.8 billion in Q2 FY16. Document Technology margin inched up 0.1% Y-o-Y and 2.4% sequentially to 12.6%, driven by cost and productivity improvements. The legacy business is Xerox’s biggest, accounting for about 40% of total revenue.
During Q2 FY16, Xerox’s operating margin grew 0.8% to 9.3% as compared to the year-ago period. Gross margin came in at 31.2% and selling, administrative and general expenses at 19.7% of revenue, respectively. As a result, Xerox’s total costs, which included restructuring and related charges of $71 million, declined 6% to $4.24 billion.
The lower costs helped Xerox’s GAAP earnings from continuing operations jump to $155 million, or $0.15 per share, compared to earnings of $107 million, or $0.09 per share, in the year-ago period. On an adjusted basis, the company earned $0.30 per share, beating estimates of $0.25 per share; a 7% Y-o-Y growth driven by lower tax rates, fewer shares, and higher operating profits. Adjusted EPS excludes after-tax costs of $156 million, or $0.15 per share, related to the amortization of intangibles, restructuring and related costs, certain retirement related costs and separation costs.
Xerox generated cash flow from operations of $177 million during Q2 FY16 and ended the quarter with a cash balance of $1.2 billion. The Company also announced that it reduced about 1,300 jobs globally in Q2 FY16.
Separation on track
On January 29th, 2016, Xerox announced its plans to split into two companies by the end of 2016. The firm is now on track to separate into a document technology company manufacturing printers and copiers, which would have annual revenues of roughly $11 billion, and which will keep the Xerox name. The $7 billion business process outsourcing company will be renamed Conduent Inc.
Xerox expects one-time pre-tax separation costs of $175 to $200 million from this split, lower than the $200 to $250 million estimated earlier.
The separation comes at a time when the Company has been trying to shift focus to being a software and services provider, as corporate customers have been cutting printing costs and consumers rely more on mobile devices. Xerox decided to split its business in two after its management had come under pressure from activist investor Carl Icahn, who had long been supporting a reshuffle of Xerox’s business model. On June 30th, 2016, Xerox announced the initial filing of a Form 10 registration statement with the U.S. Securities and Exchange Commission in connection with its separation into two independent, publicly traded companies.
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 expects to realize approximately $700 million in annual savings in FY16 from these ongoing initiatives.
Rejig of top brass
In June 2016, Xerox named Jeff Jacobson the new CEO of its copier business. Ashok Vemuri is slated to take on the CEO role for Conduent Inc. Xerox also appointed Jonathan Christodoro as Director on its board with effect as of June 27th, 2016. Ursula Burns will continue as Chairman and CEO of Xerox until the separation and then serve as Chairman of the Xerox board following the separation.
Failed talks with R.R. Donnelley
Xerox was in talks to acquire financial printing firm R.R. Donnelly & Sons Co. (NASDAQ: RRD), as reported by Bloomberg on Monday, July 11th, 2016. Xerox was looking to merge parts of R.R. Donnelley with its copier, printer, and related-services business and the rest with its smaller business process outsourcing services following a potential acquisition. However, the talks fell through since R.R. Donnelley asked for its executives to take control, and for several hundred million dollars in cost cuts.
Updated guidance for full year FY16
Xerox expects Q3 FY16 GAAP earnings of $0.14 to $0.16 per share and adjusted earnings of $0.26 to $0.28 per share. On the other hand, analysts are expecting earnings of $0.28 on revenue of $4.33 billion.
Xerox’s stock ended the day at $9.84, slipping 1.01%, at the close on Thursday, August 4th, 2016, having vacillated between an intraday high of $10.00 and a low of $9.80 during the session. The stock’s trading volume was at 4,783,699 for the day. The Company’s market cap was at $9.59 billion as of Thursday’s close.