Xerox Beats by a Penny - Analyst Blog

Xerox Corporation (XRX) reported a profit of $417 million or 29 cents per share in the fourth quarter of 2010, barely exceeding the Zacks Consensus Estimate by a penny. The profit was higher than the year-ago level of 235 million or 26 cents per share.

Revenues in the quarter surged 42% to $5.98 billion, which was in line with the Zacks Consensus Estimate. The rise in revenues was driven by an impressive growth in the Services segment, comprising document outsourcing (DO), business process outsourcing (BPO), and information technology outsourcing (ITO) businesses.

Gross margin declined to 33.6% from 39.9% a year ago due to unfavorable impact of currency exchange rates and mix impact from the acceleration of growth in BPO and ITO revenues. However, operating margin rose to 10.4% from 7.9% due to higher revenues.

Annual Results

For 2010, Xerox posted a profit of $1.30 billion or 94 cents per share compared with $613 million or 70 cents per share in the previous year. The profit was again higher than the Zacks Consensus Estimate by a penny. Revenue soared 42% to $21.6 billion from $15.2 billion in 2009.

Segment Performance

Revenues in the Technology segment slid marginally to $2.85 billion from $2.86 billion last year, driven by flat supplies revenue. The segment profit increased $31 million to $301 million from the last year.

The increase in profit was attributable to lower cost and expense reflecting restructuring savings and lower bad debt expense, which more than offset the decline in gross profit caused by the unfavorable impact of transaction currency and mix.

Revenues in the Services segment nearly tripled to $2.71 billion from $928 million in the fourth quarter of 2009. This was attributable to a stupendous growth in revenues to $1.48 billion from $24 million in BPO services, which accounted for 54% of total revenue in the segment.

The growth in BPO services was driven by healthcare services, customer care, transportation solutions, healthcare payer services and acquisitions completed in 2010. The segment profit quadrupled to $324 million from $81 million in the previous year.

Revenues in the Other segment declined 3% to $420 million from $434 million a year ago. However, the segment showed a narrower loss of $66 million compared with $79 million a year ago.

Financial Position

Xerox had cash and cash equivalents of $1.21 billion as of December 31, 2010, compared with $3.8 billion in the year-ago period. Total debt amounted to $8.61 billion, reflecting a debt-to-capitalization ratio of 42%, down from the year-ago level of 57%.

In 2010, cash flow from operating activities improved to $2.73 billion from $2.21 billion in 2009. Meanwhile, capital expenditures increased significantly to $355 million from $95 million in 2009.

Guidance

Xerox anticipates adjusted EPS of 20 cents–22 cents per share for the first quarter of 2011. For full year 2011, the company expects adjusted earnings between $1.05 cents and $1.10 cents per share. It also expects $1 billion to $1.2 billion in available cash for the year.

Our Take

Despite the improved results, we believe intense competition from its peers and rising debt will adversely affect the company's operations in the near future. As a result, the company retrained its Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) rating of Hold.