Xerox Shares Downgraded From Buy To Hold At Brean

Xerox Corp XRX reported its March Q revenue and EPS in-line with expectations. Brean Capital’s Ananda Baruah downgraded the rating for the company from Buy to Hold, ahead of Xerox’s split into two independent, publicly- traded companies.

Results And Guidance

Xerox reported its quarterly revenue at $4.28B, representing a 4 percent y/y decline, and its EPS at $0.23. Both figures were broadly as per Street expectations. Revenue at Services was up 1 percent y/y, while Document Technology revenue slid 10 percent y/y. Annuity revenue, which comprises of 87 percent of total revenue, was down 3 percent y/y. Equipment sales declined 10 percent.

Xerox reiterated its full-year revenue and EPS guidance at $17.4B - $17.8B and $1.10-$1.20, respectively. The company also projected its June quarter EPS at $0.24 - $0.26.

The Split

Management indicated that its restricting program and the planned split of the company would result in savings of $700M in 2016, all of which would add to the bottom line. Management projected $2.5B in cost savings over the next three years – 2016-2018.

“Management hinted at disclosing dis-synergy specifics in H2 ‘16, but pointed out that there has not been significant integration between legacy printing and services,” analyst Ananda Baruah wrote.

Xerox did not repurchase shares during the March quarter, and would not conduct any buybacks in 2016, as it focuses on debt reduction with the intension of setting up an optimal capital structure leading into the split, Baruah said.

The split is likely to be completed by the beginning of 2017. The analyst commented, “Moving to Hold as we look to digest the dynamics of both XRX’s upcoming split as well as the underlying fundamental environment.” He added that a more focused pair of companies would “ultimately run optimally.”