XEROX STOCKS OFF AS PROFITS MISS TARGET

[Anonymous]

Xerox Stock Off as Profits Miss Target

Xerox Reports Second-Quarter Earnings of 40 Cents Per Share; Revenue Growth Driven by Strong Sales of Color Systems. Lower-priced systems’ popularity reduces overall profits as digital color moves downstream.

• 20 cents adjusted EPS – excludes tax settlement and restructuring
• Total revenue up 2 percent
• Equipment sales up 4 percent
• Revenue from color up 17 percent
• $290 million operating cash flow

STAMFORD, CT, July, 2005 – Xerox Corporation announced today second-quarter earnings per share of 40 cents, including a 33 cent per share gain from a recent IRS tax settlement, which was partially offset by restructuring charges of 13 cents per share.

Equipment Sales Up 4%
Equipment sales in the second quarter increased 4 percent year over year, and total revenue of $3.9 billion increased 2 percent. Both equipment sales and total revenue included a currency benefit of 2 percentage points. The overall post-sale trend improved as the revenue stream from new digital systems and services offset declines from the company’s older light-lens technology.

“Xerox’s investment in innovation strengthened top-line results in the second quarter with our industry-leading color technology driving equipment sale growth,” said Anne M. Mulcahy, Xerox chairman and chief executive officer.

Lower Margins on Less Expensive Machines
Gross margin of 39 percent was lower than expected due to a change in the company’s traditional product mix, which impacted net income in the quarter. The shift in product mix is primarily due to increased sales activity for desktop office products as well as light production and color systems.

“These equipment sales will drive future post-sale gains, and, at the same time, we’re adjusting our business model to respond to the resulting pressure on margins,” added Mulcahy. “We remain confident that these actions and increased sales of new technology – 25 new products launched in the second quarter – coupled with growth from Xerox Global Services provide the marketplace momentum for strong second-half performance.”

Color Products Sales Strong
Revenue from color products grew 17 percent in the second quarter. Color is a key driver of Xerox’s growth strategy as the increasing volume of pages printed on the company’s color systems flows through to post-sale revenue. Only 3 percent of the total pages produced in businesses today are printed on color devices. Xerox expects new color services and technologies to drive that number to 10 percent of pages by 2008, fueling a $22 billion market opportunity.

Revenue for Commercial Production Printers Flat
Xerox’s production business provides commercial printers and document-intensive industries with high-speed digital technology that enables on-demand, personalized printing. Total production revenue was flat year over year. Production equipment sale growth of 3 percent only partially offset a decline in production post-sale and financing revenue. Second-quarter install activity for production monochrome systems increased 1 percent primarily due to the success of the Xerox 4110 light production system, which offset declines in activity for high-end production monochrome systems. Production color installs grew 18 percent largely due to strong placements of the Xerox iGen3(R) Digital Production Press and the DocuColor(R) 8000 Digital Press. In May, Xerox announced the DocuColor 7000 Digital Press, further solidifying the company’s production portfolio as the broadest in the industry.

Office Business…
In Xerox’s office business, which provides technology and services for workgroups of any size, equipment sales were up 7 percent and total revenue grew 2 percent. Activity was exceptionally strong in the second quarter with office color multifunction systems up 69 percent and office color printing activity up 155 percent. Office monochrome activity was up 26 percent driven by increased demand for Xerox WorkCentre(R) desktop multifunction systems.

In late June, Xerox announced 24 office products, software and services that target a $60 billion market. With the addition of these products, 95 percent of Xerox’s office product line has been completely refreshed over the past 24 months. It remains the industry’s most comprehensive, serving every segment of the business market.

The company reported second-quarter selling, administrative and general expenses of 26.7 percent of revenue, a modest improvement from the second quarter of last year.

In the second quarter, Xerox generated operating cash flow of $290 million after contributing $230 million to its primary U.S. pension plan. The company closed the quarter with a cash and short-term investments balance of $2.1 billion. Debt was down $2.1 billion year over year and down $1.5 billion from the first quarter of this year.

Q3 Outlook
For the third quarter of 2005, Mulcahy said she expects earnings in the range of 16-18 cents per share, which includes anticipated additional restructuring charges of 1 cent per share.

Non-GAAP Financial Measures
In an effort to provide investors with additional and useful information regarding the Company’s results of operations, the Company has disclosed in this press release certain financial measures that are considered “non-GAAP financial measures” as defined in the SEC rules. We believe that these non-GAAP financial measures provide additional useful information to the investors in analyzing the effect of the actual benefit from the IRS tax settlement and the restructuring charges, the approximate amounts of which were previously disclosed in our Form 8-K filed with the SEC on June 30, 2005.

Xerox Corporation is a $15.7 billion technology and services enterprise that helps businesses deploy smarter document management strategies and find better ways to work. Its intent is to constantly lead with innovative technologies, products and solutions that customers can depend upon to improve business results. Xerox provides the document industry’s broadest portfolio of offerings. Digital systems include color and black-and-white printing and publishing systems, digital presses and “book factories,” multifunction devices, laser and solid ink network printers, copiers and fax machines.

[Author]

July 26, 2005 at 12:37 PM