Xerox Says Net Falls 19% But Confirms Outlook

Xerox Corp.'s second-quarter profit slid 19% on a restructuring charge and lower margins, but the copy-machine and printer company maintained its 2008 profit outlook despite concerns about the weak U.S. economy.

Xerox, based in Norwalk, Conn., reported net income of $215 million, or 24 cents a share, down from $266 million, or 28 cents a share, in the year-earlier quarter. The latest quarter's net was diminished by five cents a share in restructuring charges. Revenue climbed 8% to $4.53 billion, helped by a 19% gain in developing markets. Gains from currency conversion contributed four percentage points of the revenue growth.

The latest quarter was boosted by the acquisition of Global Imaging Systems, an office-equipment chain that sells to small businesses, during the second quarter of 2007. If Global Imaging had been part of Xerox for the full quarter in 2007, revenue would have risen 5% from the year-earlier period.

"It was a pretty solid quarter," said Shannon Cross of Cross Research. She said many commercial printers held back on buying digital presses because they wanted to compare offerings at the Drupa trade show in Germany in June. Xerox's sales of production equipment were down 7% world-wide.

Xerox unveiled six new printing systems at the show, and said it received 33% more orders than it anticipated. "Drupa was a huge success for us," the company's chief executive, Anne Mulcahy, said in a conference call with analysts. However, she said that many orders were for products that won't be available until the end of the third quarter.

Xerox's gross margin decreased 1.1 percentage points to 39.2%, and it said it expects margins to be between 39% and 40% for the full year. It blamed revenue weakness in the U.S., especially in sales of black ink. The U.S. sales weakness was offset by strong revenue growth from services and developing markets.

Xerox also reiterated its full-year earnings forecast of $1.26 to $1.30 a share. Ms. Mulcahy said Xerox doesn't anticipate a strong rebound in machine sales in the U.S., but was looking for solid revenue from service contracts, sales of ink and lease payments. She called these follow-on sales an "annuity-based business" that "is our driver of profitable growth."

In 4 p.m. composite trading on the New York Stock Exchange, Xerox shares fell 76 cents, or 5.4%, to $13.27.

By: William Bulkely
Wall Street Journal; July 25, 2008