Xerox Earnings Call NUGGETS: Seeing Secular Trends, Great Renewal Rate

On Friday, Xerox Corporation (NYSE:XRX) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Seeing Secular Trends

Shannon Cross – Cross Research: I guess the first question, Ursula, is that can you talk a little bit about what you’re seeing in terms of the pressure on the Technology side, whether you see at this as a cyclical issue, clearly Europe is weak from an economic standpoint, or more of a secular trend? I think you’ve talked about it some in the past, but I’m curious if you’ve seen any changes in maybe the rate of decline on the secular side, just any clarity you can give us there would be helpful.

Ursula M. Burns – Chairman and CEO: Good question, I think one that many people have, so we’re going to spend a little bit of time talking our way through this. First, let me start with secular, the secular trends that we’re seeing in the marketplace. We see a growth in color, almost across the board. So, mid-range, high, and places that we participate, we see that in color MIF increasing and color pages increasing, we see a shift, a decided shift towards Managed Print Services away from single function devices, we don’t have a very large business in single-function devices, black and white, or color at the low end and we took advantage of this lack of participation by driving – by starting and then driving a Managed Print Services business. More and more customers are pushing towards Managed Print Services, there is no doubt about it, all of our competitors are now engaged in Managed Print Services we have been engaged for a long time and we are leading. That’s the second secular trend we see, growth in small and mid-sized businesses everywhere around the world, U.S. and in developing economies particularly. We see a move away from which we have seen for quite a few years now high end black-and-white transactional pages. That move is continuing and has not slowed down. The momentum is there and we have recognized that and baked that into our business model and our guidance on a go forward basis. We have not seen a slowdown or a shift in those secular trends at all. If you look at the macro environment and then I will bring it all together, we have seen a considerate slowing of business in Europe. We saw this a little bit later than most and in the first quarter we definitely sought to see the pickup, we have seen acceleration of that softness in the second quarter, towards the end of the second quarter. That’s the reason why we’ve adjusted our guidance downwards. We are assuming and planning for mid single digit declines in equipment revenue in the Technology segment. This is – in revenue in the Technology segment. This is a big change from where we were in the first quarter. We were thinking that we could hold that to flat to low single-digits. I mean now I think that’s not a realistic expectation. So secular trends haven’t changed, I mean we haven’t seen a change. If you look at North America and DMO, we still see pickup in color, move to MPS, a slowdown in high-end black-and-white printing, a pickup of SMB businesses. So that’s still there and on a macro side we are definitely seeing a weak Europe. I hope that answered it.

Shannon Cross – Cross Research: My next question is for Lynn actually or Ursula, as of who wants to take it. Can you talk a bit about what’s going on in the healthcare side in your Services business, opportunities, challenges given Obamacare and all that’s sort of developing right now?

Ursula M. Burns – Chairman and CEO: Yes, I’ll have Lynn take it. We are pleased, really pleased and very excited about healthcare, but I’ll have Lynn dive into it, but it’s a real winner for us.

Lynn Blodgett – Corporate EVP and President, Xerox Services: As you know, we are very well positioned in all the aspects of healthcare. Our healthcare business has grown and is now a significant part of the overall portfolio. We have services in the private sector both in the payor and the provider side and on the government side and so the whole effort around Affordable Care is something that we feel we’re very well-positioned for – as well as just the continued evolution on the private side, so we feel very, very good about our position in healthcare.

Shannon Cross – Cross Research: Just can you give us sort of idea of how big it is?

Lynn Blodgett – Corporate EVP and President, Xerox Services: It’s right now about $2 billion of the portfolio, so about 10% of the overall portfolio and it’s growing nicely.

Ursula M. Burns – Chairman and CEO: That $2 billion is just for the healthcare provision for – in BPO and ITO we have – obviously in our Technology side, we have support of the healthcare as well, but for the Services business BPO and ITO, we are definitely a leader here. We also have just recently won some new business throughout the States and you’ll be seeing that next quarter.

Shannon Cross – Cross Research: Then my follow-up question for Luca, we’ve been hearing more about sort of questions about the leasing business, your thoughts on how big of a leasing business you need to maintain given your mix to – or your migration to Services. So, can you talk a little bit about how you think about the leasing business strategically?

Luca Maestri – Corporate EVP and CFO: The leasing business is directly related to our equipment revenue. We support our customers by financing those leases, 85% of all the equipments that we sell is financed by ourselves to our customers. You would see that the size of the portfolio has come down a bit, in line with the decline in equipment revenue. It is really a part and parcel of our go-to-market strategy. It is a great differentiator for us in the marketplace, particularly at times when credit becomes difficult. So, it’s a business that we like because it’s very profitable and it’s very much bundled together with the rest of the Technology business. It will fall in terms of the sizing, it will fall very much the progression in our Technology revenue, and particularly equipment revenue.

Shannon Cross – Cross Research: Is this something that you need to keep in the same size that you have or is it something where you could look for partners or so over time?

Luca Maestri – Corporate EVP and CFO: Well, again, it’s a profitable business. Of course if we can find more efficient ways to run it, we will do so. At this point – again, it’s a very profitable business and that’s the way we’re keeping it right now.

Great Renewal Rate

Ben Reitzes – Barclays Capital: I wanted to ask you if we should be concerned about Services bookings down 26% in the quarter after being down 27% year-over-year the prior quarter on some pretty easy compares and the drop-off in the renewal rate?

Luca Maestri – Corporate EVP and CFO: So, Ben, let me start with the renewal rate. Renewal rate was excellent. During the second quarter, we were at 89%, with the top of our range of 85% to 90%. The drop in bookings is very much driven by less renewal potential, less renewal potential is not necessarily bad. It means that we got long-term contracts, and in this given quarter, we didn’t have much to renew when as you know renewing contracts tends to bring some compression in margins. If you look at our new business signings and you look at it on a trailing 12-month basis, actually we’re up 15%, very good, and by the way, we have seen some level of delays in decision making during the quarter, particularly in document outsourcing. Our pipeline has now grown 10% in the quarter, so new business signings up 15%, pipeline up 10%, so we are not concerned about the progression of signings.

Lynn Blodgett – Corporate EVP and President, Xerox Services: One of the other things, this issue of renewals is kind of an interesting metric because it actually is better for us, if you consider the risk that is associated with renewals, and as Luca said, with margin compression. The fact that we don’t have much up for renewal is a good thing and we renewed a percentage of that. So, we feel very good about renewals and we’re glad there wasn’t a lot up for grabs.

Ben Reitzes – Barclays Capital: With regards to the Technology segment, if you could just kind of talk a little bit more about your positioning? What we’re seeing is a rapid drop off in a lot of the entry level and the inkjet – some of the inkjet areas for certain players, and I was just wondering if you could talk about your relative positioning among the segments. You tend to call an entry level at a higher level than some of the others, and if you could just talk about your relative positioning there and by the segment and what kind of deceleration you’re expecting?

Ursula M. Burns – Chairman and CEO: So, there is two ways to look at this. First is on the traditional single function low end either consumer or very small business – very, very small business market. We are a de minimis player in that portion of the market. We serve those customers through resellers, any resellers who are interested in taking our products and moving it. We are a very, very small player there. The next segment is a little bit higher up in the SMB place and primarily color and multifunction devices, A4 configuration, but some small A3 as well. If you look at our installed growth across entry we have grown installs in all of those places and even in the very, very small color printers, A4 color, and A4 mono. But we are relatively small in this segment and sell it through resellers. The way we participate here is through MPS and MPS does two things for us. One, we can deliver some of our technology into a client’s account, SMB, any large customers as well. But we also through our success in MPS take over pages in client’s accounts that are not done on our technology today. So what we are seeing is definitely a softening of the market potential for the small devices, particularly single function devices and we participate in that, not by bringing new technology only, but by bringing new offer called MPS. I hope that answered it.

Ben Reitzes – Barclays Capital: Could you just clarify how – what kind of growth rate now you expect at the high-end considering I think it has a disproportionate share of the EBIT in the segment?

Ursula M. Burns – Chairman and CEO: We expect to continue to grow color, high-end color mid-to-high and high-end color installs and activity and revenue particularly in color. We expect to continue to see weakness or declines, revenue declines in our high-end black-and-white business. There is no doubt about either of those things. I think that that’s – yes, so the trends haven’t changed. I mean we’re still shifting towards color. We’re still moving some pages down from offset to color driven by applications, that’s why we’re seeing even in a weak economic environment some buoyancy in color – the color metrics and we’re definitely continuing to see to move from black-and-white into high-end.