UPDATE 3-Xerox profit slips despite equipment sales growth
July 28, 2003 4:34:00 PM ET
(Updates with earnings details, analyst comment, CFO comment, closing stock prices, byline)
By Franklin Paul
NEW YORK, July 28 (Reuters) - Xerox Corp. (XRX) on Monday reported slightly lower second-quarter earnings, hurt by weak demand for supplies and services and soft sales in developing markets. But improving sales of new copiers and printers helped drive results past expectations.
Xerox, whose shares rose more than 4 percent, is working to gain momentum by building sales of new digital products after several exhausting years attempting to overcome persistent losses, debt woes and the distraction of a now-settled regulatory probe into its accounting practices.
Although sales in developing markets and demand for services and supplies suffered, analysts were encouraged by an 8 percent rise in equipment sales, even though nearly all of the gain came from a weak dollar, which increases the value of goods sold in overseas markets.
"The fact that they had equipment sales up even 1 percent (without foreign exchange factors) is a positive factor because the economy is anemic," said Tim Ghriskey, president of Ghriskey Capital Partners, which does not own Xerox shares.
Growth in hardware sales and leases bodes well long-term for Xerox, because of customers' recurring need for supplies such as toner, or for outsourcing, where Xerox sends a person to manage a client's printing machines, analysts said.
"Equipment sales are important because you need to see increases in units so that they can stabilize that (installed) base," said analyst Shannon Cross of Cross Research. "We are going to continue to see slippage in post-sales revenue until they stabilize, because it's a trailing indicator."
Lawrence Zimmerman, chief financial officer of Xerox, said that, for example when customers upgrade to a new digital printer, older machines are retired. But steady growth in new equipment sales will yield gains in supplies and services revenue in the latter half of 2004.
"Post-sale revenue on those (older) machines comes down, because they won't be buying supplies any more," he told Reuters. "They move to digital (for its) lower cost -- eventually once you get to a steady state it will show growth."
EARNINGS BEFORE CHARGES BEAT ESTIMATES
Xerox said second-quarter net income fell to $86 million, or 9 cents a share, from $87 million, or 11 cents per share, a year earlier.
Before a charge for fees from a terminated credit facility, earnings in the latest period were 14 cents a share.
On that basis, Xerox had said it expected profit of 9 cents to 12 cents a share. Analysts' estimates averaged 13 cents, according to Reuters Research, a unit of Reuters Group Plc.
Earnings after payment of preferred dividends were $75 million.
Revenue fell to $3.92 billion from $3.95 billion a year earlier despite the boost from currency translation.
Developing market sales, which represents about 10 percent of revenues, was down 11 percent. Xerox said revenue declines in developing markets are moderating, and it expects "continued improvement" in the second half of the year.
Xerox said gross margin slipped to 42.4 percent from 42.5 percent amid plans to sell low- to mid-level digital copiers and printers as it aims to win back market share from Japanese rivals Ricoh Co. Ltd. and Canon Inc.
Looking ahead, Xerox projected a third-quarter profit of 8 cents to 12 cents a share, and reiterated its view of a full-year profit of 50 to 55 cents a share, excluding one-time costs. Analysts had on average expected a third-quarter profit of 12 cents a share and a 2003 earnings of 58 cents a share.
"They still have a lot to do over the next two years, but it may at least be more manageable at this point," said Standard & Poor's analyst Richard Stice who kept his rating at "avoid" due to the tough competition Xerox faces in the imaging industry.
Xerox shares closed up 44 cents at $11.17 on Monday on the New York Stock Exchange. REUTERS
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