Shares in Xerox took a c3% slide after the document technology and business process services (BPS) giant lowered FY12 profit guidance again (see Xerox drops ACS brand, lowers guidance) following a second successive quarter of declining profitability.
Xerox’s operating profit in the second quarter fell 12% to $351m, driving the pre-tax margin down to 6.3% vs. 7.1% last year. Pre-tax profits had slipped 10% in the previous quarter. Consequently, Xerox now expects FY12 adjusted earnings per share of between $1.07 and $1.12, effectively 4.5% to 5.1% down on previous expectations.
Xerox today is very much a player of two halves, with a heritage copier technology business in deep decline, and a newer services business keeping things moving. In the quarter, services revenue grew 5% in constant currency (ccy) to $2.8bn, while technology revenue (printers, copiers and products) was down 7% to $2.37bn. Europe was singled out as particularly difficult due to the macroeconomic situation - technology revenue here was down 4%. Overall Xerox’s headline revenue declined 1% to $5.54bn, although this was up 1% in constant currency.
All areas within services are heading in the right direction, thanks in part to recent acquisitions such as call centre provider Unamic/HCN in the Netherlands, which completed last March. BPO grew 7% ccy to $1.6bn, driven by the government healthcare, financial services and retail, travel and insurance businesses. Document outsourcing grew 3% to $900m thanks to new partner print services offerings as well as new signings. IT outsourcing with external clients meanwhile was up 6% to c$300m. The weak spot for services was the margin, which fell 150 points to 10.6%, due, it said, to investment in new services contracts. But surely this is par for the course in outsourcing deals.
The good news is that strong services growth is mitigating the decline in Xerox’s technology business. While this continues the fall out on Xerox as a whole will be relatively small. If however services start to slow, the picture could become very different. M&A to support the continued services expansion is therefore an important part of Xerox’s strategy. Xerox made two acquisitions in the quarter, of legal software firm Lateral Data, and UK-based WDS (see Xerox acquires WDS for wireless telecoms BPS). These deals should help keep the services top line moving in the right direction.