Xerox (XRX) Highlights from Q409; Revs Demolish Estimates - $4.22B to $3.92B

Xerox Corporation (NYSE: XRX) reported a Q4 EPS of $0.25, 3 cents better than the analyst estimate of $0.22. Revenue for the quarter was $4.22 billion, which compares to the estimate of $3.92 billion.

Highlights from XRX's Q409 Conference Call follow:

• Ursula M. Burns, CEO:
  • We generated $957 million in operating cash during Q4 and 2.2 billion for full year 2009, that's $500 million better than our previous guidance. Total debt came down 1.1 billion in 2009. This excludes the $2 billion of ACS related notes issued last month. The company ended the year with a cash balance of 3.8 billion, which include the financing raised to support the acquisition.
    
    
  • Selling administrative and general expenses were up year-over-year by $23 million driven by currency and SAG as a percent of revenue was 26.7% in the fourth quarter. Gross margin of 39.9% improved two points in Q4. So we're pleased with our progress in delivering solid, bottom-line result and operating cash, to result of heavy listing in cost and expense management and across-the-board operational improvement.
    
    
  • To sum up the revenue picture for Q4, we saw some signs of stability specifically in developing markets, our distributors, OEM channels in Canada and through demand for our new color technology and Xerox managed print services. We are maintaining our investments in key areas that will have long-term benefits. In fact, we launched 34 products in 2009 and continue to expand our distribution around the world. And through our acquisition of ACS, we'll be the world leader in business process and document management.
• Lawrence A. Zimmerman, Vice Chairman and CFO:
  • We delivered solid gross profit margin for the quarter and the year almost 40%, and grew gross profit dollars by 25 million in the quarter.
    
    
  • Operating margin was 7.9% in the quarter, 6.8% for the year, driven by our cost and expense actions. Other net was adjusted by 63 million or $0.05 a share to recognize the acquisition related costs associated with ACS. We had previously forecasted $0.06.
    
    
  • Our fourth-quarter adjusted tax rate was 20%, same as last year driven by -- driven down by the geographic mix of our results. Our adjusted EPS was $0.25 versus our guidance of $0.20 to $0.22 and $0.60 for the year versus our guidance of $0.55 to $0.57.
    
    
  • Fourth quarter working capital improvements were 489 million and 758 million for the year. In addition, we managed CapEx to only 193 million for the year. We reduced our debt by 1 billion and access capital markets for 2 billion at attractive rates to finance our acquisition of ACS. This allowed us to close out our bridge facility loan commitment. We ended the year with 3.8 billion of cash.
    
    
  • Currency, with the euro versus the dollar at about 1.48 in the fourth quarter of 2009 versus 1.31 in Q4 2008, we have reached the point where the translation currency is now helping us on revenue. Transaction currency, primarily yen, although flattening out at 89 to 90 to the dollar and 132 to 134 to the euro, it is still challenging to our cost base. However, we are starting to let the sharp rise in the yen. We continue to focus on cost actions to enable us to maintain and improve our gross profit margin.
    
    
  • Receivables, both write-offs and provisions remain stable at less than 1% of receivables. Year-over-year bad debt provisions had normal impact in the quarter, which is an improvement sequentially. The bottom part of the slide addresses our financing dynamic to give a perspective and context in understanding our debt and our commitment to maintaining an investment grade credit rating.
    
    
  • The equipment that we financed for our customers represents about 7.6 million in finance assets. This is a committed stream of cash that our customers pay us over the life of their contract with Xerox. We leveraged these assets 7:1 to derive the 6.6 billion of financing debt on the slide. The remaining 2.7 billion is core debt, approximately 2 billion of the core debt represents the debt we took on in December to finance the ACS transaction.
    
    
  • Our full year guidance of both earnings and cash will be based on Xerox ACS combined company. Our adjusted EPS for 2010 of $0.75 to $0.85 and 2.6 billion for cash from operation is consistent with the guidance we gave at third quarter earnings, even though we will only have about 11 months of combined operations.
    
    
  • The major differences between adjusted earnings and GAAP EPS are an estimated 280 million in restructuring charges, 75 million in acquisition related costs and 375 million in amortization of intangibles.
    
    
  • In January, Venezuela devalued its currency, as a result, we expect to record $22 million charge in Q1 for the remeasurements of the impacted assets. Other than this charge, we don't expect this to affect our results as Venezuela is less than 75 million of our revenue.
    
    
  • For the full year, we expect 280 million of restructuring, which includes the 250 million in the first quarter plus an estimated 30 million balance of the year. Of the 250 million, 210 million is severance and 40 million is non-cash asset write-offs. We expect annualized savings of 205 million, a 140 million of which the majority will benefit us in the latter part of 2010. In addition, we anticipate Q1 Fuji Xerox restructuring of approximately 25 million, which we will include in our adjusted nets.
• Ursula M. Burns, CEO:
  • [On ACS acquisition]We are in track to close this transaction early next month.
    
    
  • We've detailed, I'm sorry, over 60 initiatives that are managed across 14 corporate governance, delivery and infrastructure, sales and innovation. Through these initiatives, we remain confident that we'll deliver $100 million in profit synergies during year one ramping to over 375 million by year three.
    
    
  • More than 90% of the ACS's business is in North America, America and only 20% of our customers overlap.
• Q&A Session
  • (Q)Ursula, can you talk little bit about -- some more color on revenue during the quarter, linearity, geographic trends, trends on verticals, comments from customers, just any color you can give us to -- clearly it was good from a sequential standpoint? (A)Yeah. It was okay from a sequential standpoint. We did see some strengthening of revenue in -- particularly in DMO, where the revenue, as you know, in the previous quarters, particularly in quarter four of 2008, and quarter one of 2009 were significantly pressured by the downturns in the economy. We did see improvement in just about every country in DMO, from a revenue standpoint and activity standpoint for sure. So that was a good sign. We also did see an improvement in supplies. Our SMB business channels that cover our marketplace improved slightly as well. We still see pressure in the U.S. and in Europe, particularly in large enterprises, and we still see pressure almost across the board in our black-and-white high-end production business. Color, by the way, color at the high end especially with the new 7002 and 8002 and in the office with the ColorQube is trending better. And so overall, kind of a balanced picture and some geographies picking up some, some not so much and color, the place that we're investing a lot of energy, doing a lot better.
    
    
  • (Q)Okay. Great. And then Larry, can you talk a little bit about sustainability of cash flow? Clearly some of the working capital improvements probably won't necessarily repeat themselves, but how should we think about cash flow both from a core Xerox standpoint? And then is there anything we should keep in mind with regard to cash flow as we look forward through the year, as you incorporate in ACS? (A)Yeah. Thank you, Shannon. Well, first of all, I think the first thing is to look at the last seven years and we consistently, every year that we have a good year with cash, the question comes up about sustainability. And so I think sustainability of this cash model after seven years speaks for itself, number one. Number two, we are committed to the 2.6 billion that we forecasted back in October. We're reconfirming it now, which is the combined companies. And I see improvements across the board. Obviously we had tremendous working capital improvements in the fourth quarter, so you would expect the skew of 2010 to be delayed towards the end of the year. And if you look at 2009, if you looked at the first quarter, you wouldn't have projected 2.2 billion for the year. So I think we're going to see a build-up and a skew of cash in 2010 especially as we take on ACS for the 11 months of it. But we're confident we can make our projections here.
    
    
  • (Q)With regard to your slide show from actually three months ago, I just wanted to go back to couple of things you said. You've reiterated your view for the combined company of $0.75 to $0.85, but then at that time, you've -- you also laid out $0.95 to $1.05 for 2011, and $1.10 and $1.20 for the combined company in 2012. So given that you overachieved in the fourth quarter, how do you feel about the numbers for 2011 and 2012? Now that you've overachieved in the fourth quarter and you've got more of the planning process on deal. (A)Yeah. I've remained -- we've remained extremely confident about our 2011, and for that matter 2012, if not [ph] we'll be far out. EPS numbers, earnings numbers, cash numbers, the model that we've laid out three months ago and even five months ago, actually is doing nothing but strengthening as we worked more and more with ACS, and we manage our business on a daily basis. So the $0.95 to $1.05, and $1.10 to $1.20, and $2.6 billion in cash in 2010 and 2.8 in '11 are numbers that we are -- we remain committed to and are confident in.
    
    
  • (Q)Blended tax rate for the combined company, what's your best view of that, and blended -- price ? (A)32%.
    
    
  • (Q)And blended gross margin, a little -- just a little higher than average? (A)Blended gross margin is between 33 and 35%.
    
    
  • (Q)It feels like there's a couple of things that have happened that could serve as sort of tailwind at least on the margin that probably were baked into the original 2010 combined company EPS guidance, I guess one would be a little bit lower financing cost. And it seems like after today's report in your comments about what to expect from the JV, perhaps a little bit of a -- little bit of an incremental benefit there that wasn't baked in. Is that a correct assumption? (A)Well, I think you're pointing out positive things, but whether or not they were baked in, I mean we baked in a lot of assumptions, some get a little better, some get a little worse. And our expectation is that we can -- these are again projections out in time. Our expectation is that we need those kind of improvements as part of the numbers, because there's always something going the other way.
    
    
  • (Q)Ursula, can you talk a little bit about the competitive environments, what you're seeing out there from the Canon knows their deal and retail icon and anything HP is doing? I'm just kind of curious as to how you -- you're thinking about market share and shifts in the different segments? (A)Yeah, it's good question. Thank you. Good question to close on as well. What we are seeing on is from competition, let me take it into the segments that you've kind of divided it into. I'll start with the Japanese competitors, we go in icon the combination had put, as you know, quite a bit of pressure on Canon and we go therefore kind of duking it out to fight for the old Canon mesh [ph] on that icon used to cover. That is not really impacting us differentially, we do sometimes see some pricing, aggressive pricing between those two, when we come in, we have to actually be engaged in that price. We were increasing coverage, we have a great set of offerings, not just a ColorQube, but a whole color fleet that were launched in 2009. So our activity and our participation in that market is stronger, was stronger in 2009 than even in 2008. And you'll see in both black-and-white office and in color office that we've either maintained our -- share. So I'm pretty pleased competitively how we're positioned in that space. At the prior end we had some weakness as you would recall at the low end of the entry production color space. And actually at the high-end we refreshed the entire product set at the high- end the 7002, the 8002 just hit the market not too long ago and iGen4 is going very, very well. So our share in those segments of the marketplace should be strong, particularly in quarter four and quarter one of 2010.
    
    Competition there is not any more aggressive than it has always been, it's been fairly aggressive, but our products set, our coverage et cetera puts us in good stead. Oc [ph], Canon, we really haven't seen any thing on Oc, Canon, it hasn't really -- it hasn't closed and if anything it's been an opportunity for us as they are trying to do out the wholesale guys are trying to figure out who they belong to. Our continuous suite products continue to gain share, continue to do very well from an install base and a page volume base and continue to gain share. So from a competitive standpoint, fairly good HP, we don't really see them a whole lot across-the-board, I mean they're obviously out there, they're a very good company, very large, but most of our battles on the equipment base is with the Japanese competitors, not with HP that much. And then in services side we're doing extremely well in managed print services. Government just gave us yet another accolades as being the number one provider in this space. So our services signings are higher signings level in quarter four for the -- in the quarter four time for the whole year, services are doing well. So believe it or not, from a competitive position, we're doing, I think we are holding on our own or doing better.

As a reminder, Affiliated Computer Systems (NYSE: ACS) will report their Q110 results after the market closes tonight.

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