Xerox (XRX)

Q2 2011 Earnings Call

July 22, 2011 10:00 am ET


Ursula Burns - Chairman and Chief Executive Officer

Luca Maestri - Chief Financial Officer and Executive Vice President


Deepak Sitaraman - Crédit Suisse AG

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

Bill Shope - Goldman Sachs Group Inc.



Good morning, and welcome to the Xerox Corporation Second Quarter 2011 Earnings Release Conference Call, hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Luca Maestri, Executive Vice President and Chief Financial Officer.

During this call, Xerox executives will refer to slides that are available on the web at 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. [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.

Ursula Burns

Good morning, and thanks for joining us today. We'll get started on Slide 3. This is a reminder of the strategy that we're executing on to transform our business. As I've said before, many people talk about transformation, and we're actually doing it. Through these 4 priorities, we mark our progress and measure our results.

First, capturing the sizable opportunity from scaling our Services business. You'll see this quarter that we grew our Services revenue by 6% with very strong performance in both Document Outsourcing and Business Process Outsourcing. Our pipeline grew 21%, and we continue to benefit from revenue synergies through cross-selling with ACS.

Second, maintaining our leadership in document technology. We continue to hold the #1 revenue market share position overall and in color, and we are launching new products that solidify our strong leadership. This quarter, revenue in installed were impacted by the supply constraints stemming from the earthquake in Japan. We're on track to reduce backlog while meeting new demand in the third quarter.

Third, continue to improve the efficiency of our business operations, running a lean and flexible annuity base business. This served us particularly well in Q2. Our disciplined approach to expense management offset the incremental supply chain costs and helped drive strong bottom line results.

By executing well on these first 3 priorities, we are delivering on the fourth: expanding earnings and returning cash to shareholders. Adjusted earnings per share were up 13% in Q2, so we're well positioned for a solid second half of 2011. We plan to invest more in acquisitions that further scale our services and expand our distribution. We'll resume our share repurchase program during the third quarter, and we're increasing our expectations for full year earnings.

As with most businesses, we face headwinds or tailwinds during any 90-day period. Our success is determined by how agile we can be to effectively manage complex challenges while staying focused on our priorities. Considering the Q2 cost and revenue headwinds related to Japan, I'm pleased with our progress and confident in the direction that we're heading in for the rest of the year.

Now let's take a look at Q2 results.

Our performance in the quarter reflect progress in our Services-led technology-driven business and our sharp focus on operational improvement. We delivered adjusted EPS of $0.27. As I mentioned, that's up 13% from a year ago. Our GAAP -- on a GAAP basis, earnings were $0.22 per share. This includes $0.05 primarily from the amortization of intangibles. Revenue was up 2%, aided by the strong euro. Technology revenue was flat and Services revenue increased 6%.

As we discussed during our Q1 earnings call, supply constraints resulting from the earthquake in Japan did increase our costs and impact install activity and revenue in our technology business. I'll provide a more detailed update in a moment that can tell you that we're already seeing significant improvement, and we expect to be back to normal operations in the fourth quarter.

Our effective expense management helped to offset the incremental costs incurred from the supply chain challenges, so we were able to maintain steady margins in the quarter. Operating margin of 10.4% was up 3/10. Gross margins of 33.4% is within our range and reflects the result of more revenue coming from services. We generated $347 million in operating cash flow during Q2. We faced some unique challenges relative to cash usage during the first half of the year, including cash needs from ramping new contract signings and incremental cash required to support the supply chain constraints.

As a result, we are lowering our full year guidance for operating cash flow to $2 billion to $2.3 billion. Our second half of the year is typically stronger for cash generation, so our plans stay the same for $1 billion in available cash to be used toward modestly sized acquisitions and about $700 million in share repurchase.

Considering our expectations for significant year-over-year cash improvement in 2012, we remain confident in our guidance for next year of $2.6 billion to $2.9 billion in cash from operations. Our CFO, Luca Maestri, will provide more detail on cash flow and our financials in a moment. Then Luca and I will both take your questions. So let's turn to Slide 5.

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