(Reuters) - Xerox Corp (XRX.N) trimmed its full-year earnings forecast on Tuesday and said it would take a restructuring charge of up to $100 million to account for a tougher economy as large companies tightened budgets and government had less funding for projects.
“By the time September rolled around, it was very, very clear that we were headed south from a U.S. economy,” Chief Executive Ursula Burns told analysts on a call.
Xerox, which reported lower-than-expected, third-quarter revenue on Tuesday, said it saw economic pressures as a chance to take a look at where to cut costs in its services business.
“It’s a bad thing to say but it gives you the opportunity to step back and say, ‘Whoa!’ If this is a trend that we’re going to see for quarter four and 2013, which is what we are assuming, let’s go back and let’s literally start to scrub everything,” she said.
Xerox, historically known for printers and copiers, said it would take a restructuring charge of $50 million to $100 million in its services business, which handles anything from toll systems to Medicare.
It expects fourth-quarter, adjusted earnings per share to be 33 cents to 35 cents per share, compared with 33 cents for the same period a year earlier. Analysts’ average forecast is 34 cents, according to Thomson Reuters I/B/E/S.
But Burns said that the quarterly outlook, which included an expectation of a worsening economy, did not include the expected charge and that the company would likely reduce its fourth-quarter targets. She said more detail would be given on Xerox’s investor day on Nov 13.
For the full year, excluding one-time items, the company forecast earnings of $1.07 to $1.09. It previously forecast $1.07 to $1.12.
Xerox, which wants to be known as more than just a maker of printers and copiers, made a big bet on business services with its 2009 purchase of Affiliated Computer Services Inc for $5.5 billion, the 106-year-old company’s biggest deal.
It now derives more than half of its revenue from business services, but investment in those operations has pressured margins.
Its technology business includes document systems, supplies, technical services and finance support.
Like other information technology companies that have transitioned from hardware to software and services, such as IBM (IBM.N), Xerox is feeling the pain as governments hold off on spending and projects are delayed.
“We think government demand impacted (business process) revenue, especially at the state level, with uncertainty driving delayed technology sales in both Europe and North America,” Cross Research analyst Shannon Cross said.
The analyst said the restructuring charge was aimed at the business services operations. She also said pressure in Europe on the technology business was “perhaps more than expected.”
While third-quarter earnings per share were in line with expectations at 25 cents, revenue fell 3 percent to $5.4 billion, below Wall Street estimates of $5.51 billion.
Burns explained the revenue was partly due to a signed contract that lost funding.
“This is the first time that it’s ever happened in the business that we can see that we had signed and committed with a state that was defunded after we had started to actually invest in that contract to stand it up,” she said, adding that it was not a Medicare contract.
“We’re still working with the state to actually come to some kind of a reasonable conclusion, but we took a write-off this quarter with that...,” she said, adding that it was a significant and unique hit.
Revenue from the services business rose 6 percent in constant currency, while revenue from its technology business declined 7 percent.
Xerox shares were down 8 percent in morning trading to $6.473.
Reporting by Sruthi Ramakrishnan in Bangalore, Nicola Leske in New York; Editing by Sriraj Kalluvila, Maureen Bavdek and Leslie Gevirtz