Xerox (XRX) Q2 2011 Earnings Call July 22, 2011 10:00 am ET Executives Ursula Burns - Chairman and Chief Executive Officer Luca Maestri - Chief Financial Officer and Executive Vice President Analysts 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. Presentation Operator
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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. Read the rest of this transcript for free on seekingalpha.com