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Franklin Paul

NEW YORK, July 24 (Reuters) - Xerox Corp posted higher-than-expected quarterly earnings on Thursday, but concerns that large customers were delaying big-ticket purchases helped send its shares down nearly 5 percent.
Xerox, the world's No. 1 supplier of digital printer and document management services, said total revenue rose 8 percent fueled by growth in developing markets, strength in the small and mid-size business segment and an increasing demand for Xerox's document management services.
But because of the weak U.S. economy, some large clients have been hesitant to purchase higher-end technology, Xerox said. Therefore more sales of lower-priced products hurt gross margins, which fell to 39.3 percent in the 2008 first half.
Xerox, which has targeted margins at 40-41 percent, now sees them in the range of 39-40 percent for the full year.
The outlook for margins follows results from Canon Inc., which posted a 12 percent decline in quarterly profit due to sluggish copier demand and a stronger yen. Canon said demand was slow in North America for its office equipment, particularly copiers, and weakness was spreading to Europe.
Anne Mulcahy, Xerox's chief executive, said on a conference call with analysts that the company is working on cutting costs and on "operational improvements" to bolster margins.
"As the U.S. and production comes back, there is no question that the gross margin will improve," Mulcahy said, referring to the Xerox line of high-end products.
Cross Research analyst Shannon Cross said there may be reason for optimism about sales of new equipment, but added that cutting costs must remain in focus.
"Margins will remain under pressure without strength in the U.S., which is why their restructuring program ... focused on gross margin is critical," she said.
Xerox's second-quarter net fell to $215 million, or 24 cents a share, from $266 million, or 28 cents a share, a year earlier.
Excluding restructuring costs, the profit was 29 cents a share, beating analysts' forecasts of 24 cents, according to Reuters Estimates.
Xerox said its revenue rose to $4.53 billion, outpacing analysts' estimates of $4.46 billion. Total revenue from color printers, supplies and services -- which are far more profitable than black and white products, were up 11 percent. More than 70 percent of Xerox total revenue comes from sales of supplies and services -- also known as "post-sale."
The company also said it would buy back another $1 billion of its own stock and maintained its full-year profit outlook.
Xerox expects third-quarter 2008 earnings per share in the range of 28 cents to 30 cents per share, and stood by its full-year earnings expectations of $1.26 to $1.30 per share. Both forecasts were in line with analysts estimates.
Xerox shares were down 69 cents at $13.34 in afternoon trading on the New York Stock Exchange. Xerox shares have declined 15 percent so far this year, while shares of Japan's Canon trading on the New York Stock Exchange are up 6 percent year to date. (Reporting by Franklin Paul; Editing by Derek Caney, Dave Zimmerman)
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