Q2 2010 Earnings Call
July 22, 2010 10:00 am ET
Ursula Burns - Chairman and Chief Executive Officer
Lawrence Zimmerman - Vice Chairman and Chief Financial Officer
Keith Bachman - BMO Capital Markets U.S.
Benjamin Reitzes - Barclays Capital
Richard Gardner - Citigroup Inc
Chris Whitmore - Deutsche Bank AG
Ananda Baruah - Brean Murray, Carret & Co., LLC
Mark Moskowitz - JP Morgan Chase & Co
Douglas Ireland - JMP Securities LLC
Previous Statements by XRX
» Xerox Corporation Q1 2010 Earnings Call Transcript
» Xerox Corporation Q4 2009 Earnings Call Transcript
» Xerox Corporation Q2 2009 Earnings Call Transcript
Good morning, and welcome to the Xerox Corp. Second Quarter 2010 Earnings Release Conference Call hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She's 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 Corp., today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without expressed permission of Xerox. [Operator Instructions]
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.
Good morning, and thanks for joining us today. We'll get started on Slide 3. Our second quarter results reflect strong across-the-board improvements in driving revenue growth, generating cash and expanding earnings. I'm quite pleased with our solid performance. And I'm confident that we'll continue to deliver consistent, steady progress throughout the year.
Along with reporting Q2 earnings today, we're also raising full-year earnings guidance. It's a good sign of our improving business and momentum in the marketplace.
So let's start with a review of the quarter. Just as a reminder, considering the acquisition of ACS that closed in February and its related expenses, we’re reporting not only GAAP earnings, but also adjusted earnings per share. And to ensure we're providing clarity on year-over-year compares, we're also reporting on a pro forma basis, which assumes that ACS was in our 2009 results.
Our second quarter pro forma revenue was up 2%, or 3% in constant currency. We delivered Q2 adjusted EPS of $0.24, above our guidance of $0.20 to $0.22. On a GAAP basis, earnings were $0.16 per share. This includes restructuring and intangibles, as well as acquisition-related and litigation costs.
Cash from operations continued to be quite strong at $678 million in Q2. For the first half of the year, we generated $1.1 billion, keeping us well on track to meet our full-year operating cash expectations of $2.6 billion. Through disciplined cost and expense management, our operating margin of 10.1% was up nearly one point on a pro forma basis. Revenue and cost synergy targets related to the acquisition are on target. I'll provide more detail about this in a moment.
First, let me review our revenue results and Larry will cover our financial performance and I'll close and we'll both take your questions.
So let's turn to Slide 4. The first quarter, we introduced our new revenue categories and segments to better reflect the balance between our Technology and Services businesses, each of which represent about 46% of total revenue. Our revenue categories are now Equipment and Annuity. Equipment revenue represents the sale of our document technology. Annuity includes everything else, recurring revenue associated with our Technology and Services business. It represents about 83% of our total revenue.
Our segments are now Technology, Services and Other. Revenue from Technology includes the sale of document systems as well as the supplies, technical service and financing of products. Revenue from Services represents our Business Process, Information Technology and Document Outsourcing offerings.
Total revenue of $5.5 billion was up 48%, including a one point impact from currency. On a pro forma basis, it was up 2%, or 3% in constant currency.
Annuity revenue on a pro forma basis was flat in the quarter and up 1% in constant currency. And we made good progress in Equipment sales growth, up 14%. This is the payoff of decisions that we made at the height of the recession to continue investing in new products. It is also a result of our ramp up in marketing spending to drive more Equipment sales. We launched 34 products in 2009 and another 14 through the first half of this year. So as the economy has turned more positive, we've been winning in the marketplace and saw the benefit this quarter in Equipment sales and install activity.
You can expect this increased investment in marketing to continue, both in demand-generation campaigns that support our product sales and in brand-building awareness around our expanded offering in Business Process and Information Technology Outsourcing.
Let's turn to Slide 5. In our Technology business, we closely monitor page growth and Machines in Field, or MIF. It's always worth repeating that our Technology business helps to fuel our Annuity stream. More MIF leads to more pages, which generate more revenue from supplies and technical service.
For Q2, we saw a steady growth in MIF, supported by a 45% increase in install. This install activity reflects strong demand across all segments, including a 56% increase in entry-level devices. That's a good indicator of accelerated demand from developing markets and small and mid-sized businesses, most of which comes through our indirect channels or network of Global Imaging companies.
As important, our leadership in color printing continues to drive an increase in share of MIF and pages, important trends that generate more revenue and gross profits than our business from black-and-white systems. Total color revenue grew 8% in the quarter, reflecting the continued success of our ColorQube MFP and a very strong launch in Q2 of the Xerox Color 800 and 1000 series. Color pages were up 9% year over year and grew a point sequentially from quarter one. It's a good sign that uses trends continue to improve, helping to offset declines in black-and-white pages. We saw sequential page growth across most categories. The most notable decline was in production black-and-white. This is no surprise, since the total production monochrome market is declining. It's still a highly profitable business and one that we benefit from, however, our growth strategy and where we're aligning our investment is all about advancing customized digital printing to create more color pages.