Xerox cuts earnings target on weak European demand

Fri Jul 20, 2012 12:22pm EDT

A generic picture of a Xerox logo on a photocopier. TECOM REUTERS/Catherine Benson

A generic picture of a Xerox logo on a photocopier. TECOM

Credit: Reuters/Catherine Benson

(Reuters) - Xerox Corp (XRX.N), best known for its office copiers and printers, cut its full-year profit target on Friday after reporting lower second-quarter results, bracing for tough economic conditions in Europe.

The company said it expects revenue to remain weak in its technology business, which includes document systems, supplies, technical services and financing of products.

"What we are seeing is people saying, for any large equipment purchase, let me think about it a little bit more...," Chief Executive Ursula Burns said on a call with analysts.

"That is primarily happening in Europe, but we are also seeing in the United States a mix down," she added.

In an effort to counter sluggish growth in its technology business the company has been transforming itself into a business services provider.

"Strong revenue from services, our growth driver today and in the future, gives us financial flexibility and helps minimize the impact from our slowing technology business," Burns said.

With tech spending sputtering around the world, some analysts had expected Xerox to adjust its targets and anticipate that others will follow.

Barclays said in a recent note that it expected Xerox to have a challenging quarter and that the company "may revisit its full-year guidance" due to negative foreign exchange swings, slower core technology sales, and cash consumption by its services unit.

Xerox forecast 2012 earnings per share of $1.07 to $1.12, excluding special items. Previously it had aimed at $1.12 to $1.18, and analysts had estimated $1.11.

Xerox stuck to its 2012 operating cash flow goal of $2 billion to $2.3 billion.

The company's shares were down 2.9 percent at $6.98 in noon trading.

Companies such as Xerox and rival International Business Machines Corp (IBM.N), which generate a large part of their revenue outside the United States, have taken a hit because a weak euro and other foreign exchange headwinds translate into fewer dollars.

The euro has fallen 5.8 percent against the dollar this year.

Xerox said it anticipated continued revenue weakness in its technology business, resulting in lower than expected third-quarter earnings.

Excluding one-time items, Xerox forecast third quarter earnings per share of 24 cents to 26 cents per share, compared with an average Wall Street forecast of 27 cents.

The warning on the third quarter reflected what the market had seen from other companies, said Shannon Cross of Cross Research.

"They held to their cash flow for the full year, which was good," she said, adding that she expects similar results from other office equipment companies such as Canon (7751.T) and Ricoh (7752.T).

Last week, Lexmark (LXK.N) warned of falling sales in Europe as printing is one of the most dispensable parts of a company's budget.

Xerox, unlike Lexmark, has its services business to fall back on.

Based in Norwalk, Connecticut, Xerox is at pains to prove it has more to offer than just copiers and printers. It moved into business services with its purchase of Affiliated Computer Services Inc (ACS) for $5.5 billion in 2009, the company's biggest deal in its 106-year history.

It now derives more than half of its revenue from its services business, but investments in the business have pressured margins. Xerox has promised cost-cutting and operational improvement.

Revenue in the services unit was up 7 percent in the second quarter excluding the effect of foreign exchange.

Overall, second-quarter revenue fell 1 percent to $5.5 billion, below analysts' average estimate of $5.59 billion.

Net income fell 3 percent to $316 million. Earnings per share were 26 cents, excluding one-time items, in line with analysts' expectations and down a penny from a year earlier.

(Reporting by Nicola Leske in New York; Additional reporting by Sinead Carew; Editing by Lisa Von Ahn, John Wallace and Tim Dobbyn)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.