Xerox Profit Falls on Slack Equipment Sales

Xerox barely eked out a profit in the fourth quarter, hurt by a dramatic decline in demand from Russia and other emerging markets, and $349 million in restructuring costs, sending shares down 9 percent.

The lingering sting of higher manufacturing costs, due to the weaker Japanese yen, also caused the leading provider of digital printers and document management services to forecast a first-quarter profit that fell short of analysts' targets.

Analyst Shannon Cross said that while Xerox's strong annuity stream -- its customers repeatedly buy high-margin supplies and services -- remains solid, some distributors in the quarter scaled back purchases of toner and ink.

Douglas Healey / AP Xerox

In addition, Xerox saw a startling 14 percent decline in revenue from high-growth regions, after these developing markets delivered 17 percent revenue growth through the first three quarters of 2008. Xerox cited soft currency exchange rates and the rapid weakening of Russian and eastern European economies.

"Where you really saw the weakness was in the developing markets," Cross said. "Some of these areas, whether its Brazil, Argentina or Russia, were really on fire. Multinational companies are going to have a challenge dealing with currency this quarter and going into 2009."

Xerox said fourth-quarter net income was $1 million, or nil per share. That is down from $382 million, or 41 cents a share, a year earlier.

Excluding special items, including litigation charges, profit was 32 cents a share, a penny below the average Wall Street forecast, according to Reuters Estimates.

Late last year, Xerox announced a restructuring plan, including about 3,000 job cuts, aimed at saving $200 million in 2009. In the fourth quarter, restructuring charges were 27 cents a share.

Revenue fell 10 percent to $4.37 billion. Revenue from sales of supplies and services -- known as "post-sale" revenue -- fell 8 percent to $3.1 billion. Equipment sale revenue declined 15 percent to $1.3 billion, reflecting "weakened economic conditions around the world," Xerox said.

Troubled Developing Markets 

The Norwalk, Connecticut-based company, whose rivals include Oce NV , Canon and Ricoh , has rebounded from fiscal troubles earlier this decade, spurred by solid profits and improved market share. However, efforts to boost revenue have been derailed as the recession has forced its customers to cut orders.

Because of the weak economy, some large clients have been hesitant about purchasing higher-end technology. Increased sales of lower-priced products have hurt gross margins.

In the fourth quarter, adjusted gross margin was 38.8 percent, down 1.7 points from a year earlier, Xerox said.

"This decline was almost entirely due to increased product costs driven by the rapid strengthening of the yen," it said.

Xerox said it expects first-quarter earnings of 16 cents to 20 cents per share. Analysts, on average, had expected 24 cents.

"As we head into the first quarter, we do expect the weak worldwide economic conditions, as well as unfavorable exchange rates, will continue to put pressure on the business," Xerox Chief Executive Anne Mulcahy said on a conference call.

However, she said that Xerox, which urges companies to buy its systems in order to save on printing and document management costs, will benefit from restructuring savings, cost cuts and the strength of its services business."

Under the helm of the well-regarded Mulcahy, who was an economic adviser to Barack Obama during the U.S. presidential transition, Xerox shares have until today performed better than many peers, as well as the broader market.

Over the past three months, the shares were down about 5 percent, better than a 17 percent drop for Japan's Canon and a 12 percent fall in the S&P500 index. However, shares of rival Hewlett-Packard are up about 1 percent in the same period.

Xerox shares fell 8.7 percent to $6.93 in early afternoon trading on the New York Stock Exchange.

Copyright 2009 Reuters. Click for restrictions.