Xerox third-quarter profits calms investor fears of slowdown
Xerox Corp. posted a 28-per-cent surge in profit after winning more long-term deals to provide business services to companies, affirming a strategic shift and easing investors' fears about a slowing European economy.
Signings for services – or estimated future revenue from contracts signed during the period – rose 33 per cent to $3.9-billion (U.S.) in the third quarter.
Wall Street has been urging Xerox to expand more aggressively in services, which range from managing payrolls to data analytics for companies. It sharply enlarged its footprint there by buying business outsourcing firm ACS for $6.4-billion, in the biggest takeover in Xerox's 105-year history.
That market offers stability to offset a more volatile copier and printer business that, while profitable, is struggling to grow amid budget cuts by corporations across Europe and the developed world.
Rival International Business Machines Corp reported results this month that stoked concerns about lacklustre corporate IT spending and dragged down its shares.
But a stronger services pipeline is helping Xerox weather the "weak relatively soft and volatile economic environment and the financial markets," said finance chief Luca Maestri.
"In general, GDP and growth rates have been coming down during the quarter," he said in an interview.
Once known for its office copiers, Xerox now only makes 45 per cent of its revenue from those kind of products, and that area is growing slower than Xerox's services business.
Xerox now expects fourth-quarter earnings of 32 to 35 cents per share, in line with analysts' estimates, according to Thomson Reuters I/B/E/S. Xerox expects full-year earnings of $1.08 to $1.11 per share, which is also in the range of analysts' forecasts.
The company, which manages the E-ZPass electronic tolling system in several U.S. states, is signing more business that provides recurring revenue. It no longer depends solely on corporate budgets making room for companies to buy new printers and copiers.
While Mr. Maestri argued that Xerox has shown it can increase earnings in a challenging environment and did not lower its outlook, at least one analyst was worried about Xerox's exposure to Europe and government budgets.
A quarter of its business comes from governments and it has many clients in Europe.
"We have concerns about the overall pace of economic growth, particularly in Europe, and the length of time it takes to get government contracts signed, given ongoing budgetary difficulties," said S&P Equity Analyst Dylan Cather."
While Xerox is expanding the services side of its business, it employed 2,300 fewer workers than last year due to restructuring. Xerox had 134,200 employees at the end of September.
Xerox reported earnings per share of 22 cents, up from 17 cents a year earlier, or net income of $320-million, up from $250-million. Adjusted for various charges, Xerox said it earned 26 cents per share, beating analysts' average forecast by a penny.
Total revenue rose 3 per cent to $5.58-billion, slightly ahead of Wall Street analysts' estimates of $5.57-billion.
Revenue was boosted 2 percentage points by stronger foreign currencies such as the euro, the Russian ruble and the Brazilian real.