What to Expect When Xerox Reports Earnings

Xerox is set to report earnings on Jan. 24, with analysts predicting weak sales and earnings. The company expects to return to growth, albeit slow growth, in 2014, as services become a larger part of the business.

Jan 23, 2014 at 10:00AM

Xerox (NYSE:XRX), a leading provider of business process and document management services, is set to report its fourth-quarter earnings on Jan. 24. The company is split into two segments: a growing services business and declining document technology business, with services now making up a little more than half of the company's total revenue. With opportunities to grow the services business in industries like health care, Xerox will continue to diversify away from its legacy copying and printing business going forward. Here's what to expect from Xerox's earnings report.

What analysts are expecting
Revenue is expected to fall by 4.7% in the fourth quarter and by 3.9% for the full year, although analysts anticipate a return to growth in 2014. In the third quarter, revenue was flat compared to 2012, with the services business growing by 3% and the document technology business shrinking by 4%. If analysts are correct, then both segments will likely shrink during the fourth quarter.

EPS is expected to decline by a penny to $0.29 for the quarter, with the full-year EPS rising by 9% to $1.09. This is in the middle of Xerox's prior guidance for the quarter, with tight lower and upper bounds meaning that a significant earnings surprise is unlikely. Margins will have to increase, with revenue declining to hit these EPS numbers, continuing the trend from the third quarter where the services operating margin rose by 0.5 percentage points and the document technology operating margin jumped by 1.3 percentage points.

Keep an eye on margins
The key to the Xerox story is maintaining high margins in the declining document technology business, while focusing on high-margin services. Hewlett-Packard (NYSE:HPQ) competes with Xerox in both segments, and the differences between the two companies says a lot about what Xerox is doing right. While HP's printing business enjoys a higher margin than Xerox, 17.7% compared to 12.1% in each companies' previous quarter, Xerox blows HP away when it comes to services.

Xerox's 9.9% services margin last quarter was more than twice HP's 4.4% services margin and more than triple HP's full-year 2.9% services margin. While HP generates about twice Xerox's services revenue, Xerox manages to generate greater profits.

Investors should keep an eye on margins in both segments. In document technology, there's the potential for Xerox to grow its margins, even as revenue declines. Last quarter, the margin increase was due to increased productivity and savings from restructuring, helped by a 92% increase in sales of Xerox's high-end color systems. In services, while Xerox has far higher margins than HP, this number has declined over the past few years and is now at the low-end of the company's target range. There's plenty of room to improve here as well, with Xerox targeting an increase of 0.5 percentage points in 2014.

Possible dividend increase
Xerox reinstated its dividend in 2008, but the financial crisis led to a stagnant payout over the next few years. The company finally boosted the dividend in 2013, increasing the annual payout by 35%, but there's still plenty of room for further increases. The payout ratio in 2012 was just 18.9%, and the company paid out between 15%-19% of its free cash flow as dividends in 2013, depending on the exact free cash flow result.

With four consecutive payments without a dividend increase, it could be time for Xerox to increase the payout again. Even a double-digit increase would still result in just a small portion of the free cash flow going toward dividends. With the company in a far more stable position than it was during the heart of the recession, I wouldn't be surprised to see a dividend increase at some point this year.

The bottom line
Xerox's fourth quarter will likely be weak, with declining revenue and earnings, but the next few years look better. With services slowly accounting for an increasing portion of Xerox's business and plenty of room to improve margins, 4%-5% annual earnings growth in the long-term doesn't seem out of the question.

Learn to identify ultimate growth potential
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers