Xerox (XRX) Q4 Earnings Beat Estimates, Revenues Lag Y/Y

Xerox Corporation XRX reported adjusted earnings (from continuing operations) of 32 cents per share, up 3.1% year over year and ahead of the Zacks Consensus Estimate of 29 cents.

Weak revenues across the company's segments, along with negative currency translation impact acted as a deterrent to the bottom line.

For the full year, the company reported adjusted earnings of 98 cents per share, down from $1.07 per share in 2014.

Total revenue in the reported quarter was $4,653 million compared with $5,033 million in the year-ago quarter. Reported revenues missed the Zacks Consensus Estimate of $4,729 million. The year-over-year decrease in revenues was attributable to declines across all segments and adverse currency exchange rates.

Revenues for 2015 came in at $4,748 million, down about 10% from the prior-year figure of $5,288 million.

Operating margin for the reported quarter was down 120 basis points year over year to 9.2%, while gross margin fell by 80 basis points over the prior-year quarter to 31.3%. The decrease in operating margin was due to lower services margin driven by resource and other investments.

Segment Performance

Revenues from the Services segment, which include Document Outsourcing DO and Business Process Outsourcing BPO, decreased 3% year over year to $2,638 million in the reported quarter. BPO revenues fell 4% to $1,786 million due to adverse currency exchange rates. Revenues from DO decreased 2% year over year to $852 million, as growth in the partner print services offerings and improved equipment sales due to higher signings were offset by continued declines in developing markets.

Fourth quarter 2015 Services segment margin was 9.4%. Total contract value of Service signings aggregated $4 billion, with BPO and DO accounting for $2.9 billion and $1.1 billion, respectively. Signings increased 26% year over year.

Revenues in the Document Technology segment declined 13% year over year to $1,877 million due to weak sales and an adverse currency impact. Segment margin fell 260 basis points year over year to 11.8%. The revenue mix for the segment comprised 57% mid-range, 26% high-end and 17% for entry-level products.

Revenues in the Other segment decreased 7% to $138 million. Segment loss of $53 million decreased $12 million from the year-ago quarter, led by gains from sale of surplus assets.

Financial Position

As of Dec 31, 2015, Xerox had cash and cash equivalents of $1,368 million compared with $1,411 million as of Dec 31, 2014. Long-term debt at the end of the reported quarter was $6,382 million compared with $6,314 million as of Dec 31, 2014.

Net cash from operating activities for the quarter came in at $878 million compared with $857 million in the year-ago period.

The company repurchased $1.3 billion worth of shares during the year. Also, Xerox announced an 11% increase in its quarterly cash dividend to 7.75 cents per share, which is payable on Apr 1 to shareholders of record as on Mar 15.

Restructuring Plans

Concurrent with the earnings release, Xerox announced its plan to split its BPO business from its Document Technology and DO business. The separation will see Xerox segregating its hardware operations and its services business, with each functioning as an independent, publicly traded company.

As part of the restructuring, Xerox has also decided to execute a three-year strategic transformation program which will target incremental savings of $600 million across all segments. When combined with savings from cost streamlining actions currently in process, Xerox is attempting to realize cumulative cost reduction of $2.4 billion over three years.

Guidance

Xerox expects first-quarter 2016 GAAP earnings to be in the range of 5–8 cents per share and adjusted EPS in the range of 21–24 cents.

For 2016, Xerox expects GAAP earnings in the range of 66 cents to 76 cents per share and adjusted EPS in the range of $1.10 to $1.20.

Xerox expects 2016 cash flow from operations of $1.3–$1.5 billion and free cash flow from operations of $1.0–$1.2 billion.

Our Take

Xerox has been grappling with slow demand in its printing business for years, while its attempts to leverage the business process outsourcing market also failed to lend growth momentum to the company's operations. The company also endured a number of slip-ups in its Medicare and Medicare information services for several government agencies across the U.S.

However, Xerox has been striving to focus on strengthening its portfolio, improving productivity and boosting its higher-margin segments. Its planned restructuring might just bring the turnaround that the company needs.

Xerox currently has a Zacks Rank #3 (Hold). Other favorably ranked stocks that currently look promising in the industry include Rentrak Corp. RENT, General Employment Enterprises Inc. JOB and Liberty Tax, Inc. TAX, each carrying a Zacks Rank #2 (Buy).

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