Having missed its FY12 earnings target, even following three previous downgrades (see here), Xerox exceeded its Q1 adjusted earnings per share (EPS) expectations. But this was only achieved thanks to a $0.02 benefit from the reduction of a litigation reserve.
In real terms, total revenue was down 3% to $5.4bn, and the operating margin headed south to 7.4%, from 8.5%. This was despite a further 3% reduction in headcount (or 4,400 people).
We got a better view of the underlying organic growth in services now that some of the big M&A has been included for more than a year. Services grew 4% to $2.92bn, although the operating margin remained flat at 9.3% - even after taking out $30m in costs.
Services margins are under pressure because of higher growth in lower-margin ITO, transactional BPO and the run-off of its high margin student loans business in the US. In the analyst call, services president Lynn Blodgett admitted that there’s also still an ‘awful lot of high-cost labour in our model’ and he now intends to drive a lot more work to lower cost offshore locations.
Diversity of performance is one of the themes across Xerox’s business, and points to a business misfiring on various fronts. In Q1, BPO grew 3%, document outsourcing 1%, but ITO grew 13% thanks to ramp ups on recent big signings. So while ITO was doing very well in Q1, BPO growth was sub-par.
However this situation could well reverse because the total contract value (TCV) of new BPO signings more than doubled in the quarter to $2.8bn, driven by smaller, shorter deals. This helped drive up overall services signings by 64% to $3.7bn. By contrast, ITO signings slumped to $108m from $400m last time, pointing to a tougher time ahead in ITO.
A far bigger concern for Xerox is its document technology business, which appears in almost terminal decline. Revenue here was worse than expected, down 9% and the margin fell 1.7 points. CE Ursula Burns said it would be taking immediate actions in Q2 to cut costs. She is also going to scale investments in higher growth areas, like outsourcing services but also in colour printing and expanding distribution to small and mid-sized businesses.