Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Xerox (XRX) were trading 10% lower as of 11:30 a.m. today after the document specialist released a lackluster first-quarter earnings report early this morning.
So what: Xerox reported quarterly revenue of $4.5 billion and adjusted earnings of $0.21 per share, representing year-over-year declines of 6% and 19%, respectively. Analysts had expected $4.56 billion in revenue and $0.21 in EPS, so Xerox's results narrowly missed expectations on the top line but hit the mark on the bottom line. The company's quarterly free cash flow was also dramatically weaker than it had been in the year-ago quarter, falling from $202 million to a mere $38 million. This discrepancy appears largely due to a doubling in inventories year-over-year, and to lower depreciation and amortization charges.
CEO Ursula Burns noted that Xerox's Document Technology segment (the copier business) "largely met ... expectations," but also said that "Services segment results fell short of our expectations" as a result of higher-than-expected setup costs for some large corporate health care accounts.
The company has now lowered its full-year guidance. Constant-currency revenue is expected to fall by 1% year-over-year, and EPS is expected to range from $0.95 to $1.01, down from the prior range of $1.00 to $1.06. Xerox also projected that EPS would range from $0.21 to $0.23 for the second quarter. Analysts had expected $0.25 in EPS for the second quarter and $1.02 for the full year, so this guidance is somewhat underwhelming.
Now what: Xerox's revenue has yet to recover to 2012 levels, and its EPS has likewise been unable to recover to that year's heights. Today's guidance offers investors no indication that this recovery will happen in 2015. After waiting and hoping for years for a turnaround that always seems just over the horizon, today's disappointment could be the black mark that sends shareholders scurrying.
It must be especially galling for investors to realize that Xerox's adjusted EPS may be up to 8% weaker in 2015 than it was in 2012, even though Xerox has trimmed its share count by nearly 10% since then. Xerox may be cheap, but it's not growing at a fundamental level, and there's only so much share-price growth a company can trigger through financial engineering before the market catches on.