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Instant Analysis: Xerox to Split in Two, Announces Results

By Eric Volkman - Jan 29, 2016 at 8:17PM

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The company will separate into two separate, publicly traded entities.

What happened?
Document technology-stalwart Xerox (XRX) has decided to multiply. The company announced that it will divide itself into two publicly traded entities. The first will concentrate on its legacy document-technology business, while the other will specialize in business services such as outsourcing. The former will be the larger of the two by revenue, as its 2015 top line was roughly $11 billion; the latter's came in around $7 billion.

Xerox has not yet determined what the names of the two companies will be, or who will serve as their chief executives. One certainty is that Xerox's second-largest shareholder, Carl Icahn, will be given three board seats on the smaller company's nine-member board.

The move is the culmination of a strategic review of its business that Xerox's management began last October. The company expects the split to be completed by the end of this year.

Separately, Xerox announced its Q4 and fiscal 2015 results. For the quarter, net income rose nearly 43% on a year-over-year basis, to $285 million, or $0.32 on a per-share, adjusted basis. Revenue, however, dropped by 8%, to $4.65 billion. Analysts had been projecting EPS of $0.28 on a top line of $4.73 billion.

On an annual basis, revenue was 8% lower than 2014's result, at just more than $18 million, while the bottom line saw a much steeper fall of 52%, to $488 million.

Lastly, Xerox raised its quarterly dividend to nearly $0.08 per share, 11% higher than its predecessor. This will be dispensed on April 29 to shareholders of record as of March 31.

Does it matter?
Those two business lines, essentially hardware and outsourcing services, never really gelled together. Xerox's annual results tell the tale: Revenue has dropped every year since 2011, with net income generally following suit.

Xerox's position is very reminiscent of the company now known as HP, which also split into two companies along product/service lines. Like Xerox, HP's predecessor struggled with revenue and profit erosion, and management concluded it was best to separate in order to unlock value. This happened late last year, so it's too soon to tell whether this is a boon to either resulting entity, HP and Hewlett-Packard Enterprise.

Regardless, this move fundamentally changes the investing thesis for Xerox given that it will turn into a pair of separate companies. I think, like HP/Hewlett-Packard Enterprise, that Xerox has a sluggish business at its heart that won't necessarily be improved by the split. Of course, much will depend on leadership and strategic decisions, so investors should keep a watchful eye on how both develop.

Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. 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.

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