*NEWS*XEROX:2ND Q. NET INCOMES FALLS 39%

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Xerox Second-Quarter Net Income Falls 39%; Revenue Gains 1.4%
July 06– Xerox Corp., the fourth-largest seller of printers and copiers in the U.S., said second-quarter profit dropped 39 percent.
Net income fell to $260 million, or 26 cents a share, from $423 million, or 40 cents, a year earlier, when a tax gain buoyed results. Sales rose 1.4 percent to $3.98 billion, the Stamford, Connecticut-based company said today in a regulatory filing.Chief Executive Officer Anne Mulcahy is focusing on digital copiers and printers to revive growth and is seeking to shore up sales of supplies such as toner and paper, which are more profitable than the machines. She has eliminated 20,000 jobs since taking over in 2001, paid down $11.5 billion in debt and hired other companies to make Xerox products.“They’re getting the installed base in shape, but they have to get it reflected in earnings per share,” said Shannon Cross, an analyst at Cross Research in Short Hills, New Jersey. She rates the shares “buy” and said she doesn’t own them. “The challenge is to see growth in post-sale revenue.”Cross expected profit of 24 cents a share, a penny ahead of the 23-cent average estimate of nine analysts in a survey by Thomson Financial. Thomson doesn’t disclose the basis of its estimates to Bloomberg News. Xerox in April forecast 22 cents to 24 cents.Xerox shares rose 35 cents yesterday to $13.65 in New York Stock Exchange composite trading and have dropped 6.8 percent this year. Shares of Palo Alto, California-based Hewlett-Packard Co., the largest printer maker, have gained 8.5 percent in 2006.

Sliding Share
Xerox has fallen to fourth in both U.S. copier and printer sales, according to Stamford, Connecticut-based researcher Gartner Inc. The company trails Tokyo’s Canon Inc., Hewlett- Packard and Konica Minolta Holdings Inc. in copiers and lags behind Hewlett-Packard, Konica Minolta and Round Rock, Texas- based Dell Inc. in printers.Mulcahy, 53, is shifting to digital color technology as sales of its analog machines decline. Color pages are five times as profitable as black-and-white, she said in April.Almost three-quarters of Xerox’s revenue comes from supplies and service contracts, or post-sale revenue, whose timing lags behind sales of equipment. As the placement of color machines grows, Xerox says profit margins will rise.Xerox is second in U.S. sales of high-end color copiers and printers, systems that run 41 pages per minute, Gartner said. The company trails Tokyo-based Konica Minolta in the market.

Mulcahy’s Efforts
Since Mulcahy took over in 2001, Xerox has posted four straight profitable years, and net income last year was the highest since 1997. In June, Xerox agreed to buy closely held Amici LLC for $174 million to add research tools for lawyers. It marked Mulcahy’s first acquisition since becoming CEO.She has outsourced manufacturing of cheaper copiers and printers to Singapore-based Flextronics International Ltd. and Fuji Xerox Co., a joint venture with Fuji Photo Film Co. of Tokyo. She also shifted financial management of equipment leases to Fairfield, Connecticut-based General Electric Co. 

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July 31, 2006 at 2:16 PM