Xerox Earnings Call Insights: Services Margins and Tech Business

Xerox Corporation (NYSE:XRX) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Services Margins

Ben Reitzes – Barclays Capital: I think you said that for the year you’re thinking Services margins of 10%, and I think that’ s at the low end of your range. And, if you could just confirm that for the year that you think Services margins will be in that range? When do you think you can at least get to a 11% and maybe the higher end of the range now based on these new restructuring actions?

Kathryn Mikells – Corporate EVP and CFO: Sure, this is Kathy. So when we look at Services margin, if you look through the first half of the year, year-over-year, we’ re down about 20 basis points. So as we look at back half of the year, clearly we’ re targeting to make that up. On a year-over-year basis, I’ d say, we’ re still striving to try and be up a little bit year-over-year. Clearly in the third quarter, we have an easier compare, and we will be up year-over-year, and we’ re looking to maximize that benefit. But overall, as you look at the range for this year of 10% to 12%, we will be at the low end of the range still targeting to try and get a little bit of improvement year-over-year. As you look forward to the different things that we’ re doing to really try and improve overall margin performance, I talked a little bit about the fact that we’ re focused overall on our portfolio and making sure that we’ re putting resources where we have advantaged businesses with good tailwinds and we bring good competitive advantage to the table. We’ re building additional capabilities, so pointing to things like the acquisition of WDS. We did a couple of small acquisitions this quarter, Customer Value Group as well as an e-learning based acquisition. Those things are both in areas where we have good margins and we’ re building capabilities to add additional value that we bring to our customers. We’ ve also talked a little bit about the fact that we’ re continuing to look at offshoring and I’ d call it right-shoring even within here in the U.S. where we do work to get a better balance and a little bit lower cost of labor overall, and that work continues. So we have a number of different things underway. Clearly, those things aren’ t going to take us to the higher end of the range, overnight; it’ s going to take us a couple of years to get there, but we’ re very confident that we’ re on the right path and we’ re confident with our overall guidance for the year.

Ben Reitzes – Barclays Capital: So, you said it’ s – that was my follow-up, it’ s a couple of years to get to the higher end of the range or the middle of the range? I mean, you don’ t give guidance for next year, but I think everybody on the call would probably like to see it at least go up a point next year?

Kathryn Mikells – Corporate EVP and CFO: Yeah, we will give next year’ s guidance at our Investor Conference in November. So, I think I gave you a little bit of color about what we’ re working on and we’ ll give you more about 2014 when we get to November.

Tech Business

Shannon Cross – Cross Research: Can you talk a little bit about the Technology business in terms of the strength in equipment sales? Obviously, you had the backlog going into the quarter, I’ m curious as to sort of linearity during the quarter, and then if you can talk at all about sort of geographic areas of strength and weakness?

Ursula M. Burns – Chairman and CEO: Yeah, we saw the improvement in Document Technology throughout the quarter. As you recall, we exited Q1 with a strong backlog and we started to benefit from that backlog immediately throughout the quarter, even at the tail end of quarter one. And we’ re pleased with that. We expected that to happen and it actually delivered as we expected. From a geographic perspective, I would say, you should – we can characterize it as pretty much the same. So, we continue to see a weak but steady U.S. environment. We see Europe weak but not weakening, and our developing economies are pretty much – they slowed a bit, but they’ re the strongest of the three. We did see a bit of a slowdown in Russia. We started to see that in Q1 and it continued in Q2, but we’ re managing that. So geographies are like that. The high end of our business, particularly in U.S. but – even in Europe, the high end of our business is doing very well. So we’ re seeing that strength with new products and just good focus on the business and good competitive win. So, from a line of business that’ s where we see the improvement.

Shannon Cross – Cross Research: Then, I was curious, Kathy, when you think about mix of revenue, how are you thinking about balancing it from a margin perspective, especially in Services, because, obviously, ITO is a lower margin sale? I mean, are you putting in place – I don’ t know – programs with the sales force to, what have you, to make sure that if you sign a BPO program, then you can maybe do a little more ITO, or how can we kind of stabilize some of the margin there, and maybe just even in the overall portfolio?

Kathryn Mikells – Corporate EVP and CFO: Yeah, so, I’ m going to take that a little bit in two chunks. I am a big believer that at the end of the day we create mix; mix doesn’ t just happen to us. Obviously, changing mix kind of takes a little bit of time. If you look overall at ITO, yes, the growth has been a little bit higher there. That’ s coming from things that we signed in 2011; that we’ ve just continued to implement, and as a result, we’ ve seen that tick up. ITO is a place where we’ re not a huge player in the market. We really participate there, I think, very selectively and we’ re pretty disciplined in terms of what we go after. So, as we look at the overall portfolio of business, we’ re really focused on putting our resources and energy most in the areas where we bring competitive advantage to the table, we bring scale to the table, we bring capability to the table. We can move up the margin chain by penetrating and radiating at customers and that’ s where we’ re really focused over the long-term. I’ d also tell you tactically, right; we are doing better blocking and tackling. I think when we talk about our confidence in terms of overall Services revenues, I’ m sorry, margins, we’ re really seeing that; and that work has got to continue. So, day-in and day-out, making sure that we’ re doing everything we can both to reduce costs and to execute well, because we know especially on these larger contracts, if it takes us too long to stand them up then we see margin pressure. So, those are all the different things we’ re working on.

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