by Robert Palmer | 2/5/15
On January 30, Xerox announced its Q4 and FY 2014 results. As we reported in December of last year, Xerox has agreed to sell its ITO business to ATOS in a deal that is designed to allow the firm to focus more on higher value services. As a result, Xerox’s most recent results reflect the pending sale of its ITO business, which is being reported as discontinued operations.
Total revenue in the fourth quarter reached $5 billion, missing most analyst expectations and down 3 percent compared with $5.2 billion in the year-ago quarter. For the full year, revenues were $19.5 billion, down 2 percent compared with $20 billion a year ago. Xerox chairman and CEO Ursula Burns noted that the firm delivered strong profit and cash in the fourth quarter. “Services revenue growth improved and margin expanded both sequentially and year-over-year,” she stated. “This is an indication that our plan is delivering positive results.”
Revenue from the company’s Services business, which represented 54 percent of total revenue, was up 1 percent to $2.7 billion. Yet, despite a more promising picture on the services side, the firm’s Document Technology Business continues to struggle. Revenue from Xerox’s Document Technology business, which represented 43 percent of total revenue, declined 8 percent to $2.2 billion, down 8 percent from the same period a year ago.
The challenges Xerox is facing with its document technology business are quite evident when reviewing the firm’s equipment installs for the quarter. Xerox noted that equipment revenue declines were larger than expected, while decline in supplies annuity revenue was moderated somewhat.
New installs in the A4 Color MFD category were down 9 percent, while the mid-range color MFD category was essentially flat. Meanwhile, A4 and mid-range mono MFDs declined 25 percent and 8 percent, respectively. Xerox says that the high end of the market continues to be its highest performing segment. High-end color installs grew 12 percent in Q4. Despite declining installs and revenue, Xerox noted that Q4 margins in the Document Technology segment came in higher than expected at 14.4 percent. Margin growth was attributed mostly to overall changes in cost structure designed to improve productivity.
Like many vendors these days, Xerox is facing numerous challenges with its printing business. Of course, this is the primary motivator behind Xerox’s strategy to reposition itself as a services company, a strategy that remains on track. As already mentioned, services revenue now represents more than half (54 percent) of Xerox’s total revenue, and with the pending sale of its ITO business to ATOS the firm can focus more effectively on high-value services to strengthen its portfolio and improve service margins.
Nevertheless, the rate of decline in the Document Technology business appears somewhat unnerving. For the past few quarters, Xerox has reported declining installs and revenue in Document Technology, while touting strong profits in the segment as a result of ongoing improvements in operational areas. Naturally, one wonders how long Xerox can continue to make up for revenue losses in the segment by reducing costs in other areas of the business. The firm says that it continues to invest in Document Technology, noting for example that it launched 20 new products in the second half of last year.
Meanwhile, Xerox is marching forward with expansion plans that include acquisitions primarily in the services sector. During the full year 2014, Xerox invested almost $350M in acquisitions, and the firm says it has set aside $900 million for additional acquisitions in 2015. Although it declined to speak about specific deals, Xerox says it will focus its acquisition targets on opportunities that offer a good strategic fit and the ability to expand the firm’s global reach.
Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. He is an independent market analyst and industry consultant with more than 25 years experience in the printing industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. In December 2012 he formed Palmer Consulting as an independent consultancy focused on transformation, mobility, MPS, and the entire imaging market. Palmer is a popular speaker and presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA).