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Xerox CEO Discusses Q3 2010 Results - Earnings Call Transcript

Xerox CEO Discusses Q3 2010 Results - Earnings Call Transcript

Xerox Corporation (

XRX

)

Q3 2010 Earnings Call Transcript

October 21, 2010 10:00 am ET

Executives

Ursula Burns – Chairman & CEO

Larry Zimmerman – Vice Chairman & CFO

Analysts

Richard Gardner – Citigroup

Shannon Cross – Cross Research

Keith Bachman – BMO Capital Markets

Ben Reitzes – Barclays

Ananda Baruah – Brean Murray

Chris Whitmore – Deutsche Bank

Douglas Ireland – JMP Securities

TheStreet Recommends

Mark Moskowitz – JP Morgan

Presentation

Operator

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» Xerox Q2 2010 Earnings Call Transcript
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Good morning and welcome to the Xerox Corporation third quarter 2010 earnings release conference call hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Larry Zimmerman, Vice Chairman and Chief Financial Officer.

During this call, Xerox executives will refer to slides that are available on the web, at www.xerox.com/investor. At the request of Xerox Corporation, today’s conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without expressed permission of Xerox. After the presentation, there will be a question-and-answer session.

During this conference call, Xerox executives will make comments that contain forward-looking statements, which by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein.

At this time, I would like to turn the meeting over to Ms. Burns. Ms. Burns, you may begin.

Ursula Burns

Good morning and thanks for joining us today. We’ll get started on slide #3. Building on our solid first half results, we delivered steady revenue and earnings growth in the third quarter, keeping us on track to close the year with strong and giving us confidence to increase our earnings expectations for this year and 2011.

Remember that we’re reporting not only GAAP earnings, but also adjusted EPS to take into account the ACS acquisition. We’re also reporting on a pro forma basis, which assumes that ACS was in our 2009 results. Our third quarter pro forma revenue was up 2% or 4% in constant currency. We delivered Q3 adjusted EPS of $0.22, above our guidance of $0.19 to $0.21.

On a GAAP basis, earnings was $0.17 per share, this includes restructuring and intangibles. Cash from operations was $366 million. We generated $1.4 billion through quarter three and we are still on track to deliver $2.6 billion in operating cash and $2 billion in free cash flow for the full year.

Cost and expense management continues to be a top priority, contributing to a nearly one point improvement in operating margin, and we’re well on target with our revenue and cost synergy.

We also plan to implement additional cost reduction activities this year and into 2011. This gives us more flexibility in our business, so we can continue improving operating margins, while maintaining investments to drive growth.

As a result, we’ll take a Q4 restructuring charge that is $120 million higher than previously disclosed. Larry will talk more about this in a moment. First, I will review our revenue results, Larry will cover our financial performance, and then we’ll both take your questions.

So, let’s turn to slide #4. Our revenue is now almost equally split between Technology and Services. This gives us a steady mix of annuity that comes from both segments. In Technology, we generate recurring revenue from service and supplies that support our document products. Multi-year outsourcing contracts are the source of strong annuity from our services business.

Total revenue of $5.4 billion, was up 48%. On a pro forma basis, it was up 2% or 4% in constant currency and it has been sequentially higher each quarter this year with 2% growth in Q1; 3% in Q2; and now 4% in Q3, good trends that reflect our strengthened leadership in the marketplace, and track with the modest economic improvements we began seeing in Q4 of last year.

Annuity revenue on a pro forma basis was flat in the quarter, up 2% in constant currency. Equipment sales continue to grow. The result of strong demand for new products, expanded coverage, and more focused investments in marketing to support our channel partners.

In Q3, we grew equipment sales 13% or 15% in constant currency. Through the third quarter, we’ve launched 17 products, and we introduced more color printers this week that broadened our competitive offerings for businesses small-to-large.

So, while there is a lot of attention on our growing services business, it’s really important to note that we are investing and benefiting from a rich product portfolio that delivers healthy recurring revenue.

Slide #5 shows some of the key metrics in this area. In our Technology business, we’ve monitored page growth and machines in field or MIF.

It’s worth repeating the formula for success here. More MIF leads to more pages, more pages generate more revenue from supplies and technical service, both of which flow through to our annuity stream.

For Q3, we saw growth in MIF supporting a 20% increase in installs. This install activity reflects solid demand across all product segments and speaks to the strength of our new products and our focus on expanding distribution.

Our leadership in color printing continues to drive an increase in share of MIF and pages. Total color revenue grew 10% in the quarter, reflecting the continued success of our ColorQube 9000 series and a strong launch, earlier this year of the Xerox Color 800 and 1000 series.

Color pages were up 9% year-over-year. We continue to see this as a good sign that color usage trends are improving, which helps to offset declines in black and white pages.

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