Xerox Misses on Q2 Earnings, Revenues Down Y/Y

Xerox Corporation XRX reported net income (from continuing operations) of $107 million or 9 cents per share in second-quarter 2015 compared with $255 million or 21 cents a share in the year-ago quarter. The year-over-year decrease in GAAP earnings was primarily due to lower revenues and restructuring charges.

Excluding the non-recurring items, adjusted earnings (from continuing operations) for the reported quarter were $246 million or 22 cents per share versus $303 million or 25 cents per share in the year-earlier quarter. Adjusted earnings for the reported quarter missed the Zacks Consensus Estimate by a penny.

Total revenue in the reported quarter declined 7% year over year to $4,590 million but beat the Zacks Consensus Estimate of $4,581 million. The year-over-year decrease in revenues was attributable to decline in revenues in all segments.

Operating margin for the reported quarter was down 1.6% year over year to 8.2%, while gross margin fell by 1.0% to 31.1%. The decrease in operating margin was largely driven by higher costs associated with Government Healthcare Health Enterprise platform implementations.

Segment Performance

Revenues from the Services segment, which include Document Outsourcing DO and Business Process Outsourcing BPO decreased 3% year over year to $2,569 million in the reported quarter (56% of total revenue). BPO revenues fell 3% to $1,736 million due to adverse currency exchange rates and decline from the run-off of the student loan business and the Texas Medicaid contract. Revenues from DO decreased 3% year over year to $833 million as growth in the partner print services offerings was offset by negative currency translation effect.

Segment margin fell 1.0% year over year to 7.5%. Total contract value of service signings aggregated $3.2 billion with BPO and DO accounting for $2.4 billion and $810 million, respectively. Total contract signings increased 20% year over year.

Revenues in the Document Technology segment dipped 12% year over year to $1,880 million (41% of total revenue) due to negative currency impact. Segment margin fell 2.3% year over year to 12.1%. The revenue mix for the segment comprised 57% mid-range, 24% high-end and 19% for entry-level products.

Revenues in the Other segment decreased 14% to $141 million (3% of total revenue) due to lower IT and networking hardware and services sales and lesser paper and wide-format sales. Segment loss of $76 million increased $1 million from the year-ago quarter.

Financial Position

As of Jun 30, 2015, Xerox had cash and cash equivalents of $1,641 million compared with $1,007 million in the prior-year period. Long-term debt at the end of the reported quarter stood at $5,998 million versus $6,314 million as of Dec 31, 2014.

Net cash provided by operating activities for the quarter stood at $349 million versus $325 million in the year-ago period. The company repurchased $395 million worth of shares during the quarter.

Other

In Dec 2014, Xerox announced an agreement to sell the ITO business to Atos. The sale was completed on Jun 30, 2015 for approximately $940 million.

Outlook

Xerox expects third-quarter 2015 GAAP earnings to be in the range of 17 cents to 19 cents per share. Third-quarter adjusted EPS is expected to be in the range of 22 cents to 24 cents per share. For full-year 2015, Xerox expects GAAP earnings in the range of 69 cents to 75 cents per share and adjusted EPS in the range of 95 cents to $1.01 per share.

Xerox expects full-year 2015 cash flow from operations to be in the range of $1.7 to $1.9 billion and free cash flow from operations to be in the range of $1.3 to $1.5 billion. The company intends to increase its share repurchases by $300 million to $1.3 billion and reduce its acquisition investments.

Xerox is intensely focused on improving its services margin and implementing restructuring actions and prioritizing investments to accelerate benefits in the future quarters.

Xerox currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth a look now include Rentrak Corp. RENT carrying a Zacks Rank #1 (Strong Buy), Acacia Research Corp. ACTG  and Iron Mountain Inc. IRM carrying a Zacks Rank #2 (Buy).

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