by Robert Palmer | 7/30/15
On July 24, Xerox announced its Q2 2015 earnings results. While Xerox matched earnings estimates, revenue declined once again and earnings per share were down compared with the previous two quarters. More importantly, Xerox posted revenue declines in both its Services and Document Technology businesses. Xerox has consistently positioned its services business as the primary growth engine to help offset challenges faced in the document technology sector. Meanwhile, the company also announced restructuring efforts that it says would mean a cut of 3,000 employees worldwide. Market reaction to Xerox’s results was less than positive, to say the least.
Xerox blamed revenue declines in document technology mostly on weakness in developing markets and higher declines in supply revenue. Growth in document outsourcing was more than offset by declines in BPO service revenue. In its earnings call with analysts, Xerox chairman and chief executive officer Ursula Burns said the company’s direction has been consistent but admitted there is room for improvement. “We are making progress in some areas but we know we can and should do better in other areas,” she said. While our direction is unchanged, we are making several shifts in the way that we execute against it.”
Burns says that Xerox remains focused on improving its Services margin, while the planned restructuring actions and prioritized investments will help accelerate benefits from its new operating model.
Total revenue in the fourth quarter reached $4.6 billion, down 7 percent from the year-ago quarter. Revenue from the company’s Services business, which represented 56 percent of total revenue, was down 3 percent to $2.6 billion. As mentioned, Xerox’s Document Technology Business continues to struggle. Revenue from Xerox’s Document Technology business, dipped 12 percent to $1.9 billion. Xerox points out that combined with its Document Outsourcing revenue, declines in the Document Technology business would stabilize at 4 percent, based on constant currencies.
A deeper review shows that Xerox’s Document Technology business is suffering in several key areas. Equipment revenue declined 10 percent year-over-year. Meanwhile, annuity revenue from supplies, which represented 71 percent of total revenue in the Document Technology segment, dropped 12 percent compared with the year-ago quarter. New installs in the A4 Color MFD category were up 9 percent, while the mid-range color MFD category grew 4 percent. Meanwhile, A4 and mid-range mono MFDs declined 12 percent and 2 percent, respectively. High-end color installs grew 16 percent in Q2 2015.
Xerox’s Q2 results raise concerns for the firm. It is no secret that Xerox has been aggressively moving to transition itself to a services oriented business. A shift in market focus combined with major acquisitions over the past several years have allowed Xerox to do just that — at least from a financial perspective. Xerox’s services business now accounts for over 50 percent of total revenue.
Yet, Xerox’s services-led strategy was designed to do much more than simply shift the revenue mix. Revenue growth and margin expansion was to come from portions of the services sector that continue to show strong demand and overall market growth: managed services, BPO, and document outsourcing. Meanwhile, Xerox had projected that success in the services sector would strengthen its document technology business by pulling through hardware/software sales and expanding market share. Unfortunately, these two variables have yet to pan out in a way that would show more meaningful results.
Some market analysts say that Xerox seems to be in a perpetual state of restructuring. Continued ongoing efforts to streamline business operations have proven effective in recent quarters — leading to margin growth despite decline or slower revenue growth. Nevertheless, as one market analyst stated, it is difficult to restructure your way to revenue growth. Interestingly enough, Xerox says that the workforce cuts resulting from its most recently announced restructuring efforts will come from its services business.
Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. He is an independent market analyst and industry consultant with more than 25 years experience in the printing industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. In December 2012 he formed Palmer Consulting as an independent consultancy focused on transformation, mobility, MPS, and the entire imaging market. Palmer is a popular speaker and presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA). Contact him at email@example.com.