Xerox Misses as Costs Rise

The company pledges to take action.
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Xerox (XRX) - Get Report missed first-quarter earnings targets Monday, citing rising costs that narrowed profit margins.

The Stamford, Conn., imaging company made $200 million, or 20 cents a share, in the latest quarter, compared with $210 million, or 20 cents a share, a year earlier. Revenue fell 2% from a year ago to $3.7 billion. Analysts surveyed by Thomson Financial were looking for a 21-cent profit on sales of $3.82 billion.

The company said sales would have been flat if not for a 2-percentage-point hit due to currency adjustment. Equipment sale revenue dropped 4% from a year ago but was offset by gains in postsale revenue. Postsale and financing revenue, which accounts for 75% of the total, dropped 1% from a year ago as reported but rose 1% on a constant currency basis. Gross margin dropped 1.6 points to 40.2%.

"Our steady improvement in postsale revenue shows that Xerox's business model is working," said CEO Anne Mulcahy. "We also delivered solid product install growth, a more than 25% increase in signings for document management services, and 11% growth in revenue from Xerox digital color systems.

"While encouraged by annuity growth, I am disappointed in our gross profit decline. This was largely due to increased costs and had a direct impact on our first-quarter earnings," added Mulcahy. "We have consistently demonstrated excellent execution in controlling costs and are confident we'll be back on track next quarter. We've identified the issues and are taking the right actions right now to readjust our cost base in line with our business model."

The company said it expects to make 22 cents to 24 cents a share for the second quarter, after a penny a share in credit line termination costs. Analysts were looking for 24 cents.