Xerox Execs Discuss Page Volumes, Installations, and Recovery
In the beginning of the year, things looked quite different for Xerox, as it pushed for a hostile takeover for HP Inc. and proposed to take over HP’s board of directors.
Now things are quite different. Xerox has dropped its bid for HP, and its majority investor who was pushing for the HP merger, Carl Icahn, appears to be occupied with shorting the commercial real estate market. And in the wake of COVID-19, Xerox is putting some of its energies into making hand sanitizer and ventilators.
Following in the wake of Canon Inc. and Kyocera Corporation, which both reported declines for their latest quarters, this week, Xerox also reported steep declines for its first quarter, with revenue falling 14.7 percent. Net income was down $108 million to $50 million, for an earnings per share of .21 cents, a loss of 68.2 percent year-over-year. It’s also steeling itself for more pain in the months ahead, expecting a tough second quarter.
None of this is unexpected given the circumstances we’re all in. In a first-quarter conference call this week, Xerox CEO and Vice Chairman John Visentin told investors that Xerox – like most companies – hardly anticipated being slammed by a pandemic with lockdowns in all but two countries that Xerox operates in.
The Bad News
The bad news is that Xerox’s office print volumes and hardware installations basically fell off a cliff beginning in about mid-March.
Visentin explained: “The absence of people from the office resulted in an approximately 50 percent decline in page volumes in March, which impacts our variable rate contracts. Delayed installs, whether because of an office was closed or limiting vendors on site, lowered equipment sales revenue by approximately $100 million in the quarter. And the financial impact this global health crisis is projected to have on global GDP and our leasing portfolio required us to increase our bad debt reserve by approximately $60 million.”
Xerox wouldn’t of course be alone in this, as every office-imaging company is likely to report such steep declines.
Vistentin expects gradual recovery in the third quarter, with Xerox returning to its planned levels of revenue and earnings in the fourth quarter. The CEO noted that Xerox’s clients are primarily large enterprise and small and mid-size businesses, both of which had to shut their offices and move to remote working environments in March.
On a bit of a positive side, Xerox saw a mixed situation with some clients such as federal and state governments, as well as with healthcare providers, which are continuing to operate and are in need of additional resources to address the pandemic. According to Visentin, government and healthcare clients are investing in high-end production such as the Baltoro Inkjet Press and the iGen 5.
Placements of Xerox’s new black-and-white light production printer were said to be strong among public-sector clients and those in education. Visentin said Xerox’s “ability to offer a total solution that combines equipment and software remains a key differentiator.”
According to Visentin, Xerox personnel supported the USNS Mercy and the USNS Comfort before they deployed to Los Angeles and New York, respectively. Xerox also rushed printers to pop-up field hospitals in the Midwest and on the East Coast. Clients such as the Cleveland Clinic started using Xerox’s recently launched cloud-based on-demand print platform to help support their overflow volumes and business-continuity plans.
Going Forward – a Tough Second Quarter
Going forward the extent of the COVID-19 impact on Xerox depends largely on when stay-at-home orders are lifted and what’s required for businesses to return to the office.
According to Xerox CFO and EVP Bill Osbourn, Xerox is expecting a tough second quarter – something HP CEO Enrique Lores also expects for HP Inc.
“We fully expect Q2 to be worse than Q1, to be the worst quarter of the year,” said Osborn. “With that said, our base model assumes businesses reopening late in Q2, early Q3, and then Q4 not back to plan, but closer to plan.”
Osbourn says Xerox remains in a strong position, noting “Xerox has a strong balance sheet and liquidity. At the end of Q1, we had approximately $2.7 billion of cash and a $1.8 billion un-drawn revolver. We have approximately $1 billion of debt maturing in 2020, which we plan to refinance over time, as our core debt level remains within an investment-grade credit metric range.”
The Path Forward
Osbourn noted that it’s worth keeping in mind that Xerox, which celebrated its 114th birthday this month, has survived many crises, including the Great Depression.
The key to returning “back to normal” and improving finances for Xerox will be the same as it’ll be for almost everyone – when workers can return to the workplace. The company anticipates businesses reopening late in the second quarter followed by more openings in the later half of the year.