Services continue to drive growth at printer-copier and BPS giant Xerox, however a 10% drop in services signings in the second quarter points to a less certain outlook. In the second quarter ended 30 June, Xerox’s services revenue was up 6% to $2.67b (up 4% in constant currency) and it made an operating margin of 12.1%, although down 0.5% due to costs of new business ramp up. This compares to Xerox as a whole where revenue grew 2% (although down 1% ccy) - and all thanks to services - and it delivered a 10.4% operating margin.
Looking at the services detail, BPO was up 9% to $1.49b (and up 8% qoq), although the growth was mostly inorganic due to recent ‘tuck-in’ acquisitions such as that of HR outsourcer ExcellerateHRO from HP last May (see HP: we’re still in BPO), as well as US-based pharmaceutical customer care provider TMS Health, and most recently in April, Benelux customer care provider Unamic/HCN. Document outsourcing meanwhile, grew 10% to $886m (4% was down to positive currency effects), but this all seems to be organic growth. ITO however is facing a torrid time, with revenue down 10% to $316m, which Xerox blamed on lower third-party equipment and software sales and the timing of new ITO revenue coming on stream.
More concerning however is that services signings were down 10% on a trailing twelve month basis to $3.5b, albeit that this figure was 15% up qoq. The decrease was in both BPO and ITO signings and was blamed on “the cyclicality of large deals”. Most of Xerox’s IT and BPO revenue is derived in the US, and this slowdown reflects similar messages from outsourcing advisor TPI of a “broad” and “deep” decline in US outsourcing (see Will UK follow US outsourcing decline?). That said, Xerox points to a very strong services pipeline, up 21% on the year. So whether this drop in signings is just a blip or a sign of future troubles is going to depend a lot on how quickly Xerox is able to turn this pipeline into real business. A significant decline after all could have serious implications for the broader market.