Xerox’s announcement of full-year 2019 results on January 28, 2020, came with familiar talking points. Since the current executive team was put in place by Carl Icahn the primary focus has been to increase shareholder value by:
- Reducing operating costs through “Project Own It”
- Improving operating margins
- Improving free cash flow
- Increasing shareholders returns (increase EPS, return at least 50% of free cash flow to shareholders)
Within these areas, Xerox once again showed positive results for 2019:
- “Project Own It” savings of $640 million in 2019
- Operating margin improvement to 13.1%
- Adjusted EPS up 23%
- Free cash flow grew 19%
- $843 million of free cash flow (72%) returned to shareholders and $600 million of share repurchases.
Revenue again declined – by more than 6.5% for the year, with equipment down 6.3% and post-sales down 6.8%. Xerox expects another 4% decline in 2020. Revenue declines must be reversed, and the company knows there is “still a lot of work to do.”
Xerox said increased installations of core technology Baltoro and Iridesse engines are examples of how “benefits of revenue generating initiatives began to flow through” in the second half of 2019. Yet, reality shows in all segments – entry (A4), mid-range, and high-end – installations were down in both color (e.g., high-end color installs down 12%) and mono models. Even Xerox services showed a decline of 5%. Other than expectations of more installations of core technology, broadening services, and bringing new technology to the SMB space Xerox hasn’t been clear on how that is going to happen in a contracting and increasingly competitive market.
Xerox continues to mention their commitment to “reenergize Xerox’s innovation engine,” noting that PARC will celebrate its 50th anniversary this year. While 3D printing and digital manufacturing, AI workflow, IoT sensors and services, and digital packaging and print have been used as examples of areas of innovation, there don’t seem to be any breakthroughs that would suggest the future of the company will not continue to be entwined in core printing technology. Disappointingly, dollars spent in research, development and engineering have been on a downward track for the past three years with the lowest spending happening during the current executive tenure. The question must be posed: “what kind of innovation could Xerox be funding by returning 50% of free cash flow to shareholders and 22% ($254 million) to RD&E?” Funding like that might show a real commitment to reenergizing innovation and a commitment to the industry and long-term success.
To their credit, the management team has cut a significant amount of “fat” out of the organization. Over the last 18 months, $1.8 billion in savings has been gathered. There most likely is cost left to take out of operations but the bulk has probably already been found. Therefore, unless top line revenue begins to reverse its decline, the effect of cost cutting will likely have less impact generating favorable operating profit.
Xerox continues its aggressive pursuit of combining with HP, citing cost cuts as ways to improve the value of the combined company. The industry is due for consolidation at this level. However, it would seem to be most beneficial to the industry for innovation to come out of such consolidation. Xerox and its lead investor do not seem to be focused on that and are only focused on cutting costs to increase cash. That may be good for short term gains by an investor but does not help the industry, the channel, or customers get the innovation that will ensure long term success and survival of a company.
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