by Amy Weiss | 1/29/16
On January 29, 2016, Xerox announced its fourth quarter earnings as well as its plans for separating into two independent, publicly traded companies. Needless to say the latter, which was leaked by the Wall Street Journal the night before the official announcement, somewhat eclipsed the former.
The two businesses will consist of a Document Technology company and a Business Process Outsourcing (BPO) company. Document Technology, with approximately $11 billion in 2015 revenue, around 40,000 employees and a presence in 180 countries, will include the firm’s hardware and managed print businesses. Business Process Outsourcing, with approximately $7 billion in 2015 revenue and roughly 104,000 employees, will consist of the services business, which includes offerings such as health-care solutions, transportation services, and finance and accounting.
“We are very excited about the opportunities ahead of us for these two businesses,” said Chairman and CEO Ursula Burns in the company’s earnings call. “With increased strategic focus, we can capitalize on their unique strengths and capture the value creation opportunities that we see in each of them.”
Investor Carl Icahn, who has more than an 8 percent stake in Xerox, will select three members of a nine-member board of directors for the BPO company. According to a statement released by Xerox, a committee of its board of directors will begin searching for an external candidate for CEO of the BPO company, and to allow a person selected by Icahn to “observe and advise the committee in that search process.”
We have known for a while that change was on the horizon for Xerox, but the nature of that change was a matter of speculation. After its lukewarm third-quarter earnings report last fall, Xerox announced that its Board of Directors had authorized a review of the company’s business portfolio and capital allocation options. Conjecture at the time included the possibility of the firm separating its technology and services business (see Rumors Fly as Major OEMs Explore Strategic Alternatives).
Fourth-Quarter Earnings: Not Great, But in Line With Expectations
For Q4 2015, Xerox reported total revenue of $4.7 billion, down 8 percent from the year-ago period. Revenue from the Services segment, which represents 57 percent of total revenue, were down 3 percent year-over-year to $2.6 billion. The struggling Document Technology business revenue was down 13 percent to $1.9 billion. Equipment revenue, consisting of 32 percent of revenue, was down 14 percent year over year.
For the full fiscal year 2015, total revenue was $18.2 billion, down from $19.5 billion in FY2014. Of that, $10.3 billion was from Services, compared to $10.6 billion in 2014, and $7.4 billion from Document Technology, compared to $8.4 billion in 2014.
As it reported its fourth year of declining sales, it was clear the venerable company needed to make a change. Splitting in two is a familiar refrain at this point, as we have been following HP’s similar move for more than a year, finally seeing it come to fruition in November.
Like HP and many of its brethren, Xerox has been making a concerted effort to reinvent itself, and many would say has been successful in positioning itself as a services business. That position came at a cost, however: $6.4 billion, the price tag for Xerox’s acquisition of Affiliated Computer Services (ACS) in 2010. In spite of that and subsequent acquisitions, however, as well as the fact that Services has been the stronger segment, it has not been enough to offset the weaker technology business, and both divisions have struggled. Along with the split, Xerox announced a three-year strategic transformation program targeting a cumulative $2.4 billion savings across all segments.
“A core tenet of the strategic transformation we are embarking on today is changing and improving the way we operationalize our businesses. We have identified a plan to deliver cumulative reductions of $2.4 billion over the next three years as part of this process. I have instructed our teams to begin work immediately to deliver the efficiencies needed to achieve our goal,” Burns said in a press statement.
In response to an analyst question on how splitting the business would drive better Services results, Burns noted, among other things, a “ … need to continue to … invest more in automation of our Services delivery infrastructure. Those investment needs obviously compete with other investment needs in our Tech business, and we would be able to actually focus on those investments more, pointedly more, just more. It's a big focus of ours, and as the market has changed, we realized that we have to make more investments there: automation, cloud-based services, service-as-a-service offerings, etc.”
Who Will Lead?
Although there has been a good deal of speculation as to Icahn’s role in the split, in response to another analyst question, Burns stated that “We had no external process pressure on that, which has been reported a lot in the news. Icahn was not engaged at all in the decision-making process, so I am pleased with that. We came up with this decision based on market trends, based on our strengths and weaknesses, based on the performance that we had in these two businesses, based on the current dynamics and thinking by shareholders, by our customers, etc.”
Xerox’s press statements noted that the leadership and the names of the two companies would be determined as the separation process progresses, leading to speculation as to whether Burns would remain with the company.
In response to questions about her future, Burns said, “I have a great relationship with the Board. My future will be contemplated. I will make some recommendations to the Board, and my future will be contemplated as part of those recommendations. I am both confident and solid in that.”
Xerox hopes to complete the separation by year end. Until the separation is complete, Xerox will continue to operate as a single company.
Amy Weiss is editor-in-chief of BPO Media’s publications Workflow and The Imaging Channel and analyst for BPO Research. She has more than 20 years' professional writing and editing experience and has specialized in the office technology industry for the last 14 years, focusing on areas including print and imaging hardware and supplies, workflow automation, managed print, document management solutions and software, business solutions and more. Contact her at firstname.lastname@example.org.