Xerox Xerocked (Fool Plate Special) October 8, 1999

An Investment Opinion

Xerox Xerocked

By Dave Marino-Nachison (TMF Braden)
October 8, 1999

Shares of publishing, printing, and copying equipment maker Xerox Corp. (NYSE: XRX) moved back more than 25% this morning after the company said it expects to report "essentially flat" Q3 revenues -- last year's tally was $4.61 billion -- and EPS down 10% to 12% from the year-ago $0.53 figure. Wall Street was looking for a $0.58 per share profit.

Xerox plans to report results on October 18th.

Revenue, particularly in September, was below expectations both in the U.S. and Europe and the company said that hurt operating margins, along with an unfavorable product mix and increased competitions; also thrown in there were some pressures from disappointing results from the company's Fuji Xerox division and economic weakness in Brazil.

"Today's announcement is clearly disappointing," said Xerox President and CEO Rick Thoman, who was named to the post in April after two years carrying an "OO" instead of an "EO" at the company. "However, we are convinced that our strategy of focusing on industry solutions, a broader array of distribution channels and an expanding product and services portfolio is correct and over time will achieve the revenue and earnings benefits it is intended to produce."

With the shares of this iconic American company beaten down this year, it's important to evaluate Xerox's performance not only in terms of black numbers on white paper but in the context of its progress as it works to recreate itself as a "solutions" company -- a technology consultant of sorts -- instead of just a "products" company.

This is a move that many companies looking to monopolize their customers' money and time -- from software to consulting to commerce -- are making now as they look for ways to leverage growth in their traditional core businesses.

The idea is that, with the company's sales force redirected toward specific industry groups, Xerox can respond directly to the specific needs of its customers with customized packages.

Of course, in order to do this successfully Xerox has to make sure it has the best and broadest product offerings in the business, which is where last month's $950 million purchase of Tektronix's (NYSE: TEK) color printing and imaging division comes in. Although the division's revenues were small last year compared to Xerox's, as a member of the Xerox lineup it gives the company a strong position in the color market that will help it challenge Hewlett-Packard (NYSE: HWP).

It also affords Xerox access to a slew of new distribution channels which, if properly plied, can be turned around to help boost consumer access to the rest of the company's line. (For a Foolish take on the purchase, click here.)

But this redirection effort has also required that the company realign its sales force and with Xerox doing that twice in the past year sales have been disrupted, making investors -- particularly the earnings-consensus obsessed Wall Street community -- wary of the company's ability to deliver on its, and their, expectations of performance. Today's news means disappointment for those who got behind a sales projection the company endorsed last month; revenues were up just 1.3% for the first six months of 1999.

A company exec said at a mid-September conference to look for sales growth of approximately 4%.

The bottom line here for investors thinking long-term should really be less a matter of what they think of Xerox' performance vis-a-vis Wall Street's expectations but rather their assessment of Thoman's ability to pull off the reorganization, both operationally and on the product side, while handling his competition.

In interviews and other public statements, Thoman has expressed optimism. Investors who've bought into that might want to start looking more carefully at Xerox with the stock currently out of favor. But with near-term performance anything but guaranteed and a balance sheet long on debt, some caution is probably warranted.

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