UPDATE 3-Xerox quarterly profit falls but tops estimates

* Q2 EPS 16 cts vs estimate 11 cts

* Profit helped by cost-cutting, margin improvement

* Q2 Revenue declined 18 percent

* Revenue seen pressured in rest of year due to economy

* Shares up more than 9 pct (Adds analyst comment, updates stock, other details, byline)

By Franklin Paul

NEW YORK, July 23 (Reuters) - Xerox Corp (XRX.N) posted a better-than-expected quarterly profit and raised its full-year cash-flow target, helped by cost cutting, sending its shares up more than 9 percent on Thursday.

But the world's No. 1 supplier of digital printer and document management services cautioned that a slowdown in office equipment spending would continue to pinch revenue for the remainder of the year.

"Even in a very challenging environment, Xerox was able to report strong cash flow and improving margins, and cost reductions more than offset top-line pressure," said analyst Shannon Cross of Cross Research. "There is starting to be stability in the marketplace."

Investors, who have pushed Xerox shares down 12 percent this year, cheered the company's ability to control spending, and boost margins and sequential sales in the second quarter, which overshadowed a 35 percent drop in profit and a third-quarter earnings forecast that fell shy of analysts' views.

Xerox posted second-quarter net income of $140 million, or 16 cents a share, down from $215 million, or 24 cents a share, a year earlier.

That beat analysts' expectations for a profit of 11 cents a share, according to Reuters Estimates.

Second-quarter revenue declined 18 percent to $3.73 billion, which was marginally higher than the $3.72 billion expected by Wall Street. However, sales were up about 5 percent from the first quarter.

"We saw no further declines in revenue -- that's a sign of stability," Chief Financial Officer Larry Zimmerman said in an interview. "We demonstrated an ability to get costs and cash-flow generation in line with lower revenues. That is going to help us when revenues do start to come back."

Xerox attributed the revenue decline to spending constraints on some of its clients who are delaying the purchase of higher-end technology due to the recession.

However, the company took solace in the strength of Xerox's annuity business, which benefits from customers consistently ordering supplies and services for their machines.

Chief Executive Ursula Burns noted that while some customers are waiting to replace older printers with new ones, they are also not canceling service contracts.

"The overall slowdown in business activity has lowered demand for supplies, especially in heavily document-driven processes like financing applications, mortgages ..." said Burns, who assumed the role of CEO this month. "(These are) areas where we are confident there will be an improvement as the economy rebounds."

The company has pledged to keep trimming costs, and plans to reduce its overall debt by $1 billion this year.

Cost-cutting helped the company improve gross margins in the quarter to 40.2 percent, up one percentage point from the prior year and up 1.3 points from the first quarter.

Xerox said operating cash flow rose to $609 million, up $167 million from a year ago, and raised its expectations for full-year operating cash flow to $1.5 billion from $1.3 billion.

The Norwalk, Connecticut-based company, whose rivals include Oce NV OCEN.AS, Canon Inc (7751.T) and Ricoh Co Ltd (7752.T), has in the past year scored solid profits and improved market share, but efforts to boost revenue have been derailed by the recession.

Xerox expects third-quarter earnings per share of 10 cents to 12 cents, and now sees a 2009 profit of 50 cents to 55 cents.

Analysts were expecting a profit of 13 cents for the quarter and 51 cents for the full year.

Xerox shares were up 68 cents to $7.67 in afternoon trading on the New York Stock Exchange. (Editing by Derek Caney and Steve Orlofsky)