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Xerox 1Q Net Falls 4.3% On Charges, Services Revenue Jumps
–Services revenue jumps to surpass half of total top line
–Higher services mix and investment in new offerings pressure margin
–Margin pressure expected to persist short-termNEW YORK Xerox Corp.’s (XRX) first-quarter earnings fell 4.3% on restructuring charges and weaker margins, but revenue growth in the printer and copier maker’s service offerings pushed that segment to surpass half of total revenue.
The company bulked up its services business two years ago with its $6.4 billion purchase of Affiliated Computer Services Inc., its largest takeover ever. It has been cultivating the services side not only as its chief area of growth but also as a way to diversify for more reliable results.
Revenue from the technology business–sales of printers, supplies and the like–extended the decline of the fourth quarter, falling 6.3% in the latest period, or about 5% excluding foreign-exchange effects.
However, revenue from the services business rose 9.2%, or 10% in constant currencies, pushing it to more than half of Xerox’s total top line. Business-process outsourcing revenue climbed about 13% and document-outsourcing revenue rose about 7%, driving the services gains.
Chairman and Chief Executive Ursula Burns said services would "continue to be the growth engine" for Xerox as it expands business-process-outsourcing offerings and strengthens leadership in managed-print services.
"As a result, we see short-term pressure on margins that we will offset through cost reductions and operational improvements," she said.
Gross margin deteriorated to 31% from 33% in the latest period because of the ramping of new services contracts, the impact of lower contract renewals from prior periods and the higher mix of services revenue.
Overall, Xerox reported a profit of $269 million, down from $281 million a year earlier. On a per-share basis, earnings were flat at 19 cents. The latest period included $17 million in restructuring and asset write-down charges. Excluding amortization of intangible assets, adjusted earnings were flat at 23 cents.
Xerox in January forecast per-share earnings of 21 cents to 24 cents, the top end of the range meeting the consensus analyst expectation at the time.
Revenue edged up 0.7% to $5.5 billion, with currency fluctuations cutting roughly 1 percentage point from the growth. Analysts surveyed by Thomson Reuters expected revenue of $5.45 billion.
For the current quarter, the company forecast per-share earnings of 25 cents to 28 cents, bracketing the average estimate of 26 cents. The company also affirmed its 2012 earnings guidance.
Shares of Xerox were up 2.3% at $8.05 premarket. Through Friday’s close, the stock is down 23% in the last year.
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