XRX: Xerox Asks Investors to Ignore the Accountant Behind the Curtains
Xerox Reports Fourth-Quarter 2006 Earnings: Financial News – Yahoo! Finance
Xerox Corporation (XRX) announced today fourth-quarter 2006 earnings per share of 22 cents, including a restructuring charge of 16 cents per share. This compares to fourth-quarter 2005 earnings per share of 27 cents, which included a 5 cent restructuring charge. Excluding restructuring, Xerox delivered adjusted EPS of 38 cents, an increase of 19 percent over fourth-quarter 2005 adjusted EPS of 32 cents.
Sorry Xerox, but when you’ve taken restructuring charges in each of the last seven years (perhaps more – we didn’t bother going back farther) you stretch credulity by asking investors to take them out as “one-time” items. On an unadjusted basis, your earnings were $0.22 per share and far below expectations. At least the company finally had a year/year increase in cash from operations.
“Xerox delivered solid performance in the fourth quarter, contributing to another year of double-digit earnings growth,” said Anne M. Mulcahy, Xerox chairman and chief executive officer.”It was a year of steady improvements across the board,” she added. “We grew revenue through stronger annuity and expanded our industry-leading portfolio of products and services. We acquired companies that broaden our share of the fast-growing document management and production color printing markets.
Yet the 3% growth in sales was entirely attributable to changes in currency exchange rates, not operating performance. In other words, not only did the company not grow its underlying business, but they also managed to negate any contributions to sales that were provided by the companies they acquired.
Equipment sale revenue was down 1 percent in the fourth quarter including a 3 point benefit from currency.
OK, so down 4% in operating terms. How is the company going to generate the “annuity” supply and maintenance revenue if there are fewer machines to supply and maintain?
Xerox’s investment in innovation led to the launch of 14 products in 2006 that together earned 208 industry awards. The company expects to more than double its number of product announcements this year.
How about more sales rather than more announcements? Xerox guided to first-quarter 2007 earnings between $0.21 and $0.23, right in line with the 22-cent consensus. We’re sure they will report at least $0.22. The real surprise would be if they did it on an unadjusted basis.
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When assessing Xerox’s financial performance, it’s important to understand these key facts. Here’s the view from Xerox:
– First Call estimate for Xerox’s Q4 earnings was 37 cents. That number did not include restructuring. While Xerox provided guidance on restructuring for Q4, analysts posted an adjusted EPS number that excluded any impact from restructuring. Compared to First Call and Xerox’s own Q4 guidance, Xerox did exceed expectations for the quarter at 38 cents adjusted EPS.
- About 70 percent of Xerox’s total revenue comes from post-sale — the annuity stream from supplies (toner, ink) and service for Xerox products. To boost the annuity stream, Xerox is focused on increasing the installs of its products, especially color multifunction printers and digital color presses. Considering the price pressures in the industry, it’s not unusual to see dips in equipment sale revenue. Xerox is increasing the placement of products and broadening its product portfolio. Many of the products are sold at lower prices but Xerox continues to maintain margins in its range of 40-41 percent. For example, Xerox installed 35 percent more color multifunction devices and 74 percent more color publishing presses in 2006.
- Xerox is seeing rapid declines in revenue from its older black-and-white light lens (analog) business as it accelerates customers’ transition to all digital devices. This transition takes time and does have an impact on the company’s annuity revenue. In Q4, the drag from light lens cost the company 2 percent of post-sale growth. For the full year and without the impact from currency, Xerox grew post-sale 2 percent. As the impact from light lens diminshes and as the flow through from the placement of color products picks up, Xerox expects to see steady growth in its annuity stream, which boosts total revenue.
- All the key metrics: color, services, post sale and install activity are trending in the right direction.
- Xerox grew earnings by 17 percent – and has committed to earnings expansion of another 10-15 percent in 2007.
- The company generated $1.6 billion in operating cash flow in 2006. And, it returned to investment grade last year.
- Since launching its stock buyback program in October 2005, it has repurchased about 100 million shares, totaling $1.5 billion of the $2 billion program.
We believe the facts tell a positive story about the company’s long-term value.
Good points from Christa. Your also missing the dedication people in the company have to Xerox. I dare say Christa work for Xerox and her beleif in the company isn’t untypical.
One more point, services will lead to an increasing part in the companies fortunes and these are again more profitable in the later stages of a contract. As this is a relatively new (in terms of XGS) area, Xerox should see greater returns from this area in the future.
[...] XRX: Xerox Asks Investors to Ignore the Accountant Behind the Curtains [...]
[...] XRX: Xerox Asks Investors to Ignore the Accountant Behind the Curtains [...]
[...] In addition, some companies tend to take restructuring charges so frequently that they appear to be an ongoing expense, as suggested in this article at Stock Market Beat: Xerox Reports Fourth-Quarter 2006 Earnings: Financial News – Yahoo! Finance [...]
[...] We have been very critical of companies taking charges and asking investors to ignore them. However, the charge Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Ingram Micro announced in an 8K Filing this morning is a good example of when investors should look past the charge. In its recently-filed report on Form 10-K, Ingram Micro Inc. (the “Company”) stated its expectation that it would be required to record a charge for commercial taxes on software imports for the period January 2002 to December 2005 if proposed tax legislation in Brazil was enacted in the form in which it was submitted to the Brazilian president for signature on February 9, 2007. On February 28, 2007, the subject legislation was enacted and became law. As a consequence, the Company will record a charge to cost of sales in the first quarter of 2007 of approximately $33.3 million, consisting of $6.0 million for commercial taxes assessed for the period January 2002 to September 2002, and $27.3 million for such taxes that could be assessed for the period October 2002 to December 2005. All sums expressed above are based upon the exchange rate as of February 28, 2007 of 2.118 Brazilian Reais to the U.S. Dollar. The subject legislation provides that such taxes are not assessable on software imports for the period after January 1, 2006. The Company does not anticipate recognizing any income tax benefits for this charge, which will negatively affect the effective tax rate for the first quarter of 2007. An effective tax rate of 28% is estimated for subsequent quarters of 2007.Based on this event, the Company is adjusting its net income guidance for the first quarter, which ends March 31, 2007, to reflect the charge of $33.3 million or $0.19 per diluted share. Net income including this charge now is expected to range from $30 million to $37 million, or $0.17 to $0.21 per diluted share. First-quarter revenue guidance is not affected by this charge. [...]