When the document technology service provider, Xerox (XRX, Financial), reported its first quarter earnings on April 24, it left analysts depressed with the number mix displayed during the earnings call. Soon after the announcement, the stock was down 9.4% to $11.91 in early market trading reflecting the weakness demonstrated in the quarter’s results. Even for the fiscal year the company has lowered its earnings expectations which are below the Wall Street consensus EPS estimate. Let’s quickly have a glance at the major facts that got shared during the earnings call.
The bleak number mix casts an appalling picture
Revenue for the quarter dropped 6.3% to $4.47 billion, below the analysts’ consensus of $4.56 billion. The company’s services business which accounts for more than half of its total revenue slumped 3% to $2.5 billion during the quarter. The document technology unit saw revenue fall to $1.8 billion in the first quarter. This was partially due to the currency whirlwinds which led to decline of total revenue during the quarter that failed to meet the analysts’ forecast.
The Norwalk company reported net income of $225 million, or $0.21 a share after adjusting for the on time losses during the quarter. This fell in line with the analyst forecast of $0.21 a share for the quarter.
However, on the whole, the quarter results were no doubt dull, thanks to the 10.5% drop year-over-year in the printing business revenue and the 2.7% drop in service revenue. The volatility of the currency rate especially the weakening of the Euro has dented the company’s revenue margins. And this poses a severe challenge for the company going forward.
Operating margin declined 1.1 percentage points to 7.6% during the quarter.
The future outlook is highly dim
The company has downsized its earnings guidance from $1-1.06 per share earlier, to $0.95-$1.01 per share for the full fiscal year. Moreover, it has projected that the revenue for the full year would dip by about 1%, barring the impact of currency fluctuations.
For the second quarter, the company is forecasting earnings growth of $0.21-0.23 a share, which is below the analysts’ estimates of $0.25 a share. This also reflects the cautious stand being taken by the management after seeing the hit on the top and bottom line in the first quarter of the fiscal year.
However, the CEO seemed upbeat on the earnings when Ursula Burns stated – “Results in Document Technology, which included the increased impact from foreign currency, largely met our expectations. Several of our Services businesses performed well, but overall Services segment results fell short of our expectations driven by higher implementation costs in certain Health Enterprise platform accounts…”
Service margins have also been brought down to 8.5-9% from the previous guidance of 9%-10%. So, the management does not really look optimistic on the future quarters as currency woes continue to worry the printing technology giant.
But investor rewards might be showered
The company has expressed plans of utilizing the proceeds from the sale of the ITO business for repurchasing shares of worth $1 billion this year. Through this repurchase program,Xerox hopes to return approximately $300 million to shareholders as dividends and also urges to spend up to $900 million on future acquisitions.
Last word
Xerox’s quarterly report did cast a black cloud on its future as the top brass also projected a lower than expected earnings in the coming quarter, but as every black cloud has a silver lining it remains to be seen whether Xerox is able to transform itself in the future quarters in the presence of several challenges.
