Light at the end of the tunnel for Xerox?

Profile picture for user slauchlan By Stuart Lauchlan October 31, 2016
As Xerox begins its soft separation phase this week, the two men who'll lead the company into its new divided future have started making plans.

Ursula Burns

Is that a sign of light at the end of the tunnel for Xerox? With the settling of a shareholder lawsuit that threatened to delay plans for splitting up the business and a return to profitability, that might just be the case, but there’s still work to be done.

For its third quarter, Xerox turned in a profit of $181 million compared with a loss of $34 million a year ago, a figure brought down by a charge related to healthcare projects. Overall revenues fell 3% year-on-year to $4.21 billion, but services revenue was up 1% to $2.4 billion. The legacy hardware arm on the other hand fell 9% to $1.6 billion.

The settlement with Darwin Deason came after he sued Xerox, arguing that his preferred shares in the parent company entitled him to similar equity in the two spun-off businesses, services and documents. He will now get stock in the Xerox copier arm and in the new Conduent services business.

Two CEOs have been appointed to run those businesses now. Jeff Jacobson will pick up Xerox and Ashok Vemuri will take on Conduent. Upon completion of the split, Conduent will be listed on the New York Stock Exchange, where Xerox will continue to trade.

As for the document arm, where the overall business was down around 5% year-on-year, Jacobson is aware he has a challenge, citing macro-uncertainties as well as corporate ones:

There are uncertainties with currencies fluctuating, the yen and the pound. Certainly the uncertainty of the presidential election in the US; Brexit adds a certain degree of uncertainty in the UK and Europe.

But these complexities are obviously what we deal with all the time, and the important thing are the countermeasures. So, what we are doing is we are very aggressive on the productivity measures to drive down our total delivery cost and enhance the operating margins. What we have done over the last couple of years has been pretty aggressive on productivity, and we are taking that to the next level. We are very focused on innovation and defending our market share, and we are focused on the growth areas.

So, specific to this quarter, what I would say, our revenue was in line and was stable in this challenging market environment. We were pressured on the equipment side, and some of that was more on the high end and government bids due to these uncertainties.

He adds:

From the tech standpoint when you see the equipment revenues, that would tend to be impacted more by uncertainties and the macro issues. We are very fortunate from the standpoint of 75% of our business is annuity, which provides a strong foundation, strong base. We're also very fortunate that the vast majority of our contracts are bundled contracts with supplies, which provide stability for us.

In past years, basically, we have offset the headwinds of annuity, price erosion and done just enough. What we want to do now is take this to a totally another level so that we can reinvest back in the business, bring some back down to the bottom line and invest in some of the growth areas we see certainly in Document Outsourcing, Graphic Communications.

There are strengths to be leveraged, he argues:

We are very strong in federal; we are very strong in public sector. Document Outsourcing is a strong and really good business for us. We are the clear market leader, and we continue to see growth and strong margins in that business. It is an area of focused strategic importance to us. And we had a good renewal rate; we continue to. We are very strong in the large enterprise sector. We are always focused on new logos and new customers, and this was a big part of that.

For his part, Vemuri has clear plans for the services arm:

We continue to invest in the strategic transformation to turn the business so that we are invested and investing in areas that are our traditional strengths. We have certain areas where we would like to continue to drive a higher degree of transformation, especially customer care. But we are pleased with the progress that we have made on the margin front, and I think that will give us the momentum to be able to continue to drive the transformation that we seek in our business.

He points out that signings growth was up around 17% year-on-year in the past quarter:

The bulk of that actually came from renewals. So that is actually good news. We have eight out of our 10 BPO clients actually renewed with us. So, obviously whatever we are bringing to the party, our clients like and they want to continue to do business with us.

The area of concern, if you will, for us is new deal signings. That is down, and that is an area of focus. I called in my go-to-market team in October. We basically sat down to look at the opportunities in the market. In the spaces that we are strong in, there continues to be headroom for growth, and there are opportunities out there which we will selectively pick to drive profitable growth.

This week sees the start of what Xerox’s current CEO Ursula Burns describes as the “soft separation phase”:

This involves separating our corporate functions, business infrastructure and IT systems into discrete capabilities for each company. It is a test run at operating independently for the new companies that will help us ensure a smooth day-one launch. In short, we are moving rapidly toward our separation and remain on schedule to complete it by year-end.

She explains:

The reason why that is important for investors is that it is a time that we can essentially practice, do a phased implementation of all the complex separation activities and make sure that we don't stumble when we're actually independent, including things like the inventory management system.

My take

The future starts here. 

A bittersweet time for Burns - the last time that Xerox will turn in quarterly earnings as a single company. For the woman who was recently revealed to have been a potential vice-presidential running mate for Hillary Clinton, it’s been a relatively orderly transition to date. In her new role as chairman, Burns will still have a role to play in supporting Jacobson and Vemuri in their new new leadership roles.

For those two, there is lots to do. 2017 will be a critical year for Xerox.