Xerox Corp (XRX.N) warned that operating margins in what is now its biggest business, outsourcing services, would remain low in the current quarter due to the loss earlier this year of a high-margin federal contract to handle student loans.
The printer and copier maker's shares fell as much as 10 percent on Thursday morning even though it reported better-than-expected third-quarter results.
Xerox shares have risen 57 percent this year, largely due to anticipation that operating margins would improve in the outsourcing business, J.P. Morgan analyst Mark Moskowitz said.
"We are skeptical of margin improvement manifesting in the near term, thus we recommend investors take profits in Xerox," Moskowitz wrote in a note.
The outsourcing business provides services such as customer care, accounting and loan and data processing to a wide array of industries.
The contract loss, along with slow growth in Xerox's higher-margin business-processing unit, will shave 60-70 basis points from the fourth-quarter margin and reduce overall revenue growth by 1.5 percentage points, Chief Financial Officer Kathy Mikells said on a conference call with analysts.
The margin in the services business is expected to remain below 10 percent in the current quarter, she said.
Federal student aid body IFAP (Information for Financial Aid Professionals) said in January it would transfer the federally owned loans being serviced by Xerox-owned ACS to another service provider. (link.reuters.com/guj24v)
Xerox forecast adjusted earnings per share from continuing operations of 28 to 30 cents for the three months to December 31, below the average analyst estimate of 33 cents.
The forecast includes about 4 cents per share for restructuring charges and higher pension settlement expenses.
Xerox started a restructuring program in November focused on its services business as growth slows in its printer and copier business, which accounts for about 40 percent of revenue.
Mikells said Xerox would speed up offshoring of jobs.
Adjusted net income from continuing operations attributable to Xerox rose to 26 cents per share in the third quarter, from 25 cents per share a year earlier.
Analysts on average had expected earnings of 25 cents per share, according to Thomson Reuters I/B/E/S.
Revenue was little changed at $5.26 billion. Revenue from the services business grew 3 percent to $2.94 billion.
Xerox also reduced its full-year forecast for adjusted earnings from continuing operations to $1.08-$1.10 per share, from $1.09 to $1.15.
The company's shares were down 9.6 percent at $9.69 in early afternoon trading on the New York Stock Exchange.
(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Sriraj Kalluvila)