Xerox 2nd-Quarter Tech Revenues Down, Cites Supply-Chain Disruption, but Earnings per Share, Total Revenue Up, and Firm Raises Fiscal 2011 Outlook

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Xerox today announced that second-quarter 2011 revenue was up 2 percent versus second-quarter 2010, and earnings per share were up at 22 cents, versus earnings per share of 16 cents a year ago. The firm reported hardware revenue from printers, MFPs, etc. had been affected by supply constraints caused by the Japan earthquake in March, but also raised its earnings per share outlook for both third-quarter quarter 2011 and the entire fiscal year 2011.

Second-quarter revenue was $5.6 billion was up 2 percent. Revenue from hardware technology (printers, MFPs, supplies, technical service and product financing), was flat. Net income was $319 million, versus $227 million for second-quarter 2010. Xerox’s U.S. Securities and Exchange filing for the second quarter can be accessed here.

Xerox says the lower hardware-related revenue was primarily due to supply constraints resulting from the March earthquake and tsunami in Japan. It had expected the disaster to disrupt its supply chain in the second quarter, and says that the situation is improving. “We’re seeing steady progress and making all the necessary investments to respond to customers’ needs,” Xerox CEO and Chairman Burns noted, “As a result, we are on track to reduce backlog while meeting new demand in the third quarter, and we remain confident we’ll return to normal operations in the fourth quarter.”

As we had reported earlier in April, although Xerox’s manufacturing partner, Fuji Xerox of Japan, did not suffer any significant damage from the Japan disaster, it did temporarily shut down two plants in the March – April period. This summer, Japan is also experiencing power outages, with central and local Japanese governments calling for businesses to curb power consumption in order to avert power blackouts due to power shortages caused by the country’s crippled Fukushima nuclear power plant. On July 1st, the Japanese government imposed mandatory power usages cuts.

Services Revenues Up

Revenue from services—which in the second quarter just edged out hardware revenue as the leading revenue contributor at Xerox—was up 6 percent in second-quarter 2011. Services include document outsourcing and managed print services, as well as the business processing outsourcing (BPO) provided by Xerox’s Affiliated Computer Services.

In the services category, signings for document-outsourcing contracts led the way, while signings for business-process outsourcing and IT-outsourcing were lower. Signings for Xerox services totaled $3.5 billion in second-quarter 2011, up more than 15 percent compared to first-quarter 2011, but down 10 percent on a 12-month basis due to longer lead times for signing certain multi-year outsourcing contracts, and what Xerox calls the “cyclicality of large deals.”

“Our leadership in managed print services contributed to 10 percent revenue growth in our document-outsourcing business, and our diverse offerings in business process outsourcing resulted in 9 percent BPO growth,” said Xerox’s Burns. “As important, our pipeline remains very strong—up 21 percent—helping to fuel our healthy annuity stream for the long term.”

Technology Revenue Breakdown

With the hardware segment, second-quarter equipment revenue totaled $925 million, down 1 percent from second-quarter 2010.

Hardware installations in the second quarter were as follows:

  • The entry-level segment saw an 8 percent decrease in installations. According to Xerox, the decrease was due to a decline in sales to OEM partners, as well as a decline in installations in developing markets—Xerox says the decline of entry-level installations in developing markets was due in part to a very strong second quarter 2010 in which entry-level installations in developing markets more than doubled. The company also noted it experienced supply constraints on entry-level hardware sourced from Fuji Xerox.
  • In the mid-range hardware segment, second-quarter 2011 saw a 3 percent increase in installations of mid-range monochrome- black hardware products driven by growth in all geographies. There was also a 10 percent increase in installations of mid-range color hardware products. Xerox notes that although this color category was the most significantly affected by supply constraints due to the Japan disaster, the mid-range color segment continued to produce double-digit growth, primarily driven by demand for the Xerox Color 550/560, WorkCentre 7545/7556, and WorkCentre 7120.
  • In the high-end hardware segment, there was a 2 percent increase in installations of monochrome black systems, driven by growth in North America. Xerox also reported strong growth in installations of its Color 800 and 1000, and iGen presses, while there was a decline in entry-level production color systems. It says the July 2011 launch of a new entry-level production system, the DocuColor 8080, will fill a gap in this product category.

The firm says it will continue to pursue “modestly-sized acquisitions” and buybacks of its shares—it’ll seek to purchase approximately $700 million of stock throughout this year.

The company raised its full-year 2011 earnings expectations to 91 cents to 96 cents per share.

Full-year adjusted earnings are expected to be $1.07 to $1.12 per share. For third-quarter 2011, it’s raised its outlook to earnings of 20 cents to 22 cents per share, and adjusted earning per share in the 24 cents to 26 cents range.

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