Xerox - Don’t Say We Didn’t Warn You
Xerox (XRX) is down 6% in early trading today after reporting a drop in first quarter sales and profits. In the press release they said:
Equipment sale revenue declined 4 percent -
down 2 percent in constant currency - offset by continued improvement
from the company’s post-sale revenue stream. Post-sale and financing
revenue, which represents about 75 percent of Xerox’s total revenue,
declined 1 percent in the first quarter and grew 1 percent in constant
currency. Our steady improvement in post-sale revenue shows that Xerox’s
business model is working.
As we noted before, XRX claims in its 10K that:
Our business model is an annuity model, based on increasing equipment
sales and installations in order to increase the number of machines in
the field (“MIF”) that will produce pages and generate post sale and
financing revenue streams. We sell the majority of our equipment
through sales-type leases that are recorded as equipment sale revenue.
Equipment sales represented 29% of our 2005 total revenue. Post sale
and financing revenue includes equipment maintenance and consumable
supplies, among other elements. We expect this large, recurring revenue
stream to approximate three times the equipment sale revenue over the
life of a lease.
So now we have equipment sales declining, but somehow the business model is working because post-sale revenue is up 1 percent after adjusting for unfavorable currency trends? Won’t the lower level of machines in the field (”MIF”) resulting from lower sales reduce future post-sale revenue? Or as we said before, management’s estimates for allocating revenue between equipment sales and post-sale revenue could have been incorrect, effectively boosting past revenue at the expense of causing future headwinds.
Today’s press release was did not offer the specific disclosures necessary to determine whether our concerns over provisions for bad debt have been addressed. We will have to wait for the 10Q to get those answers. In the meantime, we should still find lots to say about Xerox’s financials.
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