UPDATE 4-Xerox profit misses estimates, plans job cuts

* Q3 EPS 26 cents vs Reuters Estimates 28 cents

* Plans to cut 5 percent of work force

* Sees Q4 EPS of 34 to 36 cents vs estimate of 43 cents

* Shares off 4.5 percent (Adds CEO and analyst comment, updates stock activity)

By Franklin Paul

NEW YORK, Oct 23 (Reuters) - Xerox Corp posted quarterly results and gave an outlook that both fell short of Wall Street estimates, as demand for high-end printing systems slowed, sending its shares down 7 percent.

Xerox XRX.N, in a bid to cut costs, said it plans to pare about 3,000 jobs, or about 5 percent of its work force that would lead to a $400 million fourth quarter charge for the world's top supplier of digital printer and document management services.

The weak U.S. economy has spurred some clients, such as larger companies that run their own in-house print shops, to delay purchasing higher-end technology like Xerox’s DocuTech line. As a result, the company has marked increased sales of lower-priced products, hurting gross margins.

“We believe weaker-than-expected production revenue (which yield higher margins) led to the shortfall -- the spending trends on which we can’t see significantly changing near-term given macro concerns,” said Bank of America analyst Ananda Baruah in a note to clients.

Third quarter net income was $258 million, or 29 cents a share, versus $254 million, or 27 cents a share one year ago. Its gross margins declined to 39.2 percent from 40.1 percent.

Excluding special items, such as the settlement of certain tax benefits and a restructuring charge, the profit was 26 cents a share, according to Reuters Estimates.

Analysts had expected a profit of 28 cents a share, according to Reuters Estimates.

Total revenue rose 2 percent to $4.4 billion, but was essentially unchanged on the weaker dollar.

Xerox, which earns about 70 percent of its revenue from supplies and services sold to repeat customers, said so-called “post-sale” revenue rose 3 percent, while equipment sales declined 3 percent in the third quarter.


Xerox has benefited from demand from small- and mid-sized businesses, and from developing markets, where revenue rose 15 percent, Chief Executive Anne Mulcahy said. But, in order to stem what she called a “tough business environment,” Xerox will have to shed costs over the next six months.

The restructuring will yield $200 million in savings next year, helping the company navigate the tough economy and deliver double-digit earnings growth in 2009, she added.

But it won’t be enough to save Xerox’s previous goal of keeping margins over 40 percent, a long-held target that was adjusted earlier this year to 39-40 percent.

“I think we are actually preparing for delivering double-digit earnings with gross margin below 40 percent,” Mulcahy said on a conference call. “The context is ... not counting quite frankly on margin improvement and saying ‘maybe that is the real world for the foreseeable future, let’s deal with it.’”

It expects fourth quarter earnings in the range of 34 cents to 36 cents per share, compared to Wall Street’s view of 43 cents a share, according to Reuters Estimates.

“We believe the company faces near-term pressure on revenue in line with weakening demand trends we see for the printer industry,” said Standard & Poor’s Equity Research analyst Tom Smith, in a note.

Shares of the company, which competes with Canon Inc 7751.T of Japan and Heidelberg HDDG.DE of Germany, slipped 36 cents to $7.62 in afternoon trading on the New York Stock Exchange. The shares are down more than 51 percent this year.