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Mark Yu
Mark Yu
Articles (375)  | Author's Website |

Not Yet Time to Pick Up Xerox

The company is still in the midst of an adjustment after the Conduent separation

August 11, 2017 | About:

Xerox (NYSE:XRX), the $8.2 billion New York-based company, reported (-)7.2% revenue decline in the first half and down to $5 billion from the year prior while profits climbed 9% to $206 million, ending with higher margins at 4.1% compared to 3.5% in the same period last year.

Overall company costs and expenses dropped by (-)6.6% year over year to $4.8 billion resulting in better profitability in the period despite poor business revenue performance.

Further, Xerox anticipates its full year 2017 GAAP earnings per share (EPS) from continuing operations to be in the range $1.84 to $2.08 (vs. 58 cents in 2016) and adjusted EPS of $3.2 to $3.44 (vs. 88 cents last year).

“We are pleased with the strong operating margins and cash flow we delivered, as well as the continued progress on our Strategic Transformation initiatives.

“This resulted in solid operating results despite revenue declines, which were driven by lower equipment sales as we transition to the recently launched ConnectKey portfolio.

“The new product lineup has been met with enthusiasm by customers, partners and industry experts, fueling our confidence in improving revenue trends later this year and into next.” – Jeff Jacobson, Xerox CEO


In the fourth quarter last year, Xerox separated a business as will be discussed shortly and recorded an impairment charge of $935 million which resulted in losses resulting in no trailing price-earnings (P/E) multiple derivative.

Meanwhile, Xerox had a price-book (P/B) ratio of 1.67 times vs. the industry median of 3.07 times and a price-sales (P/S) multiple 0.93 times vs. 2.47 times. In addition, the company had trailing dividend yield 2.86% with 55% payout ratio.

Full year revenue and EPS estimates indicated forward multiples 0.81 times and 9.6 times.

Total returns

Xerox has provided total losses of (-)20.2% so far this year compared to Standard & Poor's 500 index’s 11.94%.


Xerox was founded 111 years ago on April 18, 1906 as The Haloid Photographic Co.

According to filings, Xerox is a leading global provider of digital print technology and related solutions; the company operates in a market estimated at approximately $85 billion**.

**Market estimates are derived from third-party forecasts produced by firms such as International Data Corp.

In 2016, Xerox’s revenues by geography were as follows: U.S. $6.4 billion (59% of total revenue), Europe $2.86 billion (27% of total revenue) and Other areas $1.51 billion (14% of total revenue).

The separation

In December 2016, Xerox completed the separation of its Business Process Outsourcing (BPO) business from its Document Technology and Document Outsourcing (DT/DO) business. The separation was accomplished by moving the BPO business into a new legal entity, Conduent Inc. (NYSE:CNDT). The separation made a pretax goodwill impairment charge of $935 million, which was recorded in fourth-quarter 2016.

Xerox has transitioned to a geographic focus and is primarily organized from a sales perspective on the basis of “go-to-market” sales channels. There were three geographical areas provided in the recent earnings release

North America

Revenue in North America in the second quarter fell (-)6.9% year over year to $1.53 billion, 60% of total revenue.


Revenue in International operations in the recent quarter also dropped by (-)8.9% compared to prior year period to $895 million, 34.9% of total revenue.


Revenue in Other (regions) also dropped by (-)12.1% to $138 million.

Sales and profits

In the past three years, Xerox recorded revenue decline average of (-)20.5% and profit margin average of 0.89%.

Cash, debt and book value

As of June, Xerox had $1.25 billion in cash and cash equivalents and $5 billion in debt with debt-equity ratio 0.98 times (vs. 0.8 times the year prior). Overall debt declined by $2.4 billion year over year while equity also fell by $4.1 billion.

Of Xerox’s $16.2 billion assets 25.8% were identified as goodwill and intangibles while book value declined by (-)44% year over year to $5.37 billion.

Cash flow

In the first half, Xerox’s cash flow from operations nearly doubled, 188%, year over year to $438 million secondary to higher profits and no cash outflow in relation to its accounts payable and accrued compensation and other current and long-term liabilities.

Capital expenditures were $47 million leaving Xerox with $391 million in free cash flow (vs. $82 million the year prior). The company also allocated 45% of free cash flow in dividends to noncontrolling interest, preferred and common shareholders and also repurchases in relation to stock-based compensation.

Xerox also allocated $1.32 billion in debt repayments (net issuances) and received $161 million from its Conduent – former business.

The cash flow summary

In the past three years, Xerox allocated $932 million in capital expenditures, raised $83 million in share issuances and $187 million in debt (net repayments), and generated $3.84 billion in free cash flow while having allocated 83.8%, $3.38 billion, in dividends and share repurchases.


“Today is an historic day for Xerox. The successful completion of the separation sharpens our market focus and commitment to our customers.

“I am confident the transformational actions we are implementing position Xerox for long-term success and unlocks shareholder value.” – Xerox CEO Jeff Jacobson (Jan. 3)

Xerox has rewarded its shareholders as its share price has risen about 16.5% since its spinoff. Meanwhile, recent quarterly operations did indicate that the company is still in the midst of adjustment having recorded nearly $1 billion (or more) charges in relation to its former business separation.

Further, average analysts estimates did indicate that Xerox would still have a possible (-)6% revenue reduction for the full year 2017.

Nonetheless, Xerox had a leveraged balance sheet at 0.98 times debt-equity ratio accompanied with a little more than a quarter of blue sky elements – goodwill and intangibles in its assets. The company, meanwhile, has kept a nearly steady free cash flow supported shareholder payouts, ~84%, in the past three years.

Average analysts target price was at $36.63 per share vs. $32.1 at the time of writing. Using analyst revenue estimates multiplied with three-year P/S average and a 30% margin application indicated a per share figure of $18.6.

In summary, Xerox is a pass.

Disclosure: I do not have shares in any of the companies mentioned.

About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

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