Anne Mulcahy positioned herself, her management team and the whole company as professional, realistic about the situation and optimistic about their capabilities to come through the current difficulties stronger and well equipped for future growth. In general, the cautious optimism seems to be well founded, with a clear view for what their focus should be: expense reduction, cash/debt management and execution of their business model.
The good news is that overall the model works. There were, however, a few points of concern we should keep an eye on:
- Product mix: altogether, Xerox has positioned their business portfolio well with relatively high-end products and a healthy and growing percentage of color installations. But due to their heritage as the dominant vendor in the high end, we need to track their mix especially closely. Almost every other competitor is edging into the production space from below, so all installs are net wins for them. Xerox, however, is often in a defensive position, trying to hold on to high-volume contracts and installations. They can (and must!) often adjust the deal to keep the customer, but that can mean dropping prices and/or replacing top of the line products with more modestly equipped models, essentially rightsizing the customer before the competition does. In the earnings call, Xerox management noted modest revenue growth in segment 3-5 installations products. That news may or may not be good: a segment 3 product will deliver something like 10K-20K monthly volume, but a segment 5 model can lock in 5 times the volume. And even that product delivers less value if it replaced a production unit. Depending on which end of the scale your installations are grouped, your annuity stream will look very different!
- Color page growth: Xerox has rightly tracked the development of color installations closely for several years and has proudly reported healthy increases in key metrics. In Q4, however, the steady growth of color pages, while still positive, slowed noticeably. The quarterly figures may be an aberration, but we need to track these figures closely. Xerox has profited handsomely from the color boom. If that windfall is now starting to fade, they (and their competitors) will need to adjust their business model. Xerox is better positioned than most, but they will also not be immune to the situation.
- Post-sales business: in difficult times, it is not so surprising that hardware sales dropped. But an 8% reduction in post-sales revenue is indeed a concern. While the explanation concentrated mostly on channel inventory reductions, the phenomenon also begs the question whether user patterns are changing: economic pressures could also be influencing customer document strategies, implying a tighter management of overall print output. Xerox management acknowledged this possibility, but also admitted that they really do not know how much this is a factor currently. Inventory reductions would be a one-time event, but changed customer behavior would result in a more permanent change in post-sales revenue levels.
- Future cash generation: the outlook for the coming year is for lower revenues but constant cash generation. Despite the confidence of the management team that this ambitious goal can be achieved with aggressive expense and working capital management, the general economic climate and the points mentioned above do raise some doubts. If the product mix shifts downmarket, and/or if the color growth slows, and/or customer usage patterns change, the model needs to be reconsidered and adjusted.
The next quarter will be vital to generate new business momentum and to prove or disprove how deep some of these trends really are.
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