Is Tough Times Ahead For Xerox? Xerox recently announced earnings for Q4 2010 as well as full year earnings, and after sifting through the numbers, there are some glaring issues Xerox faces. At some periods of the day of their earnings call, their stock was down nearly 10%. Here’s a look at some possible reasons for concern: The Numbers Based on what we are seeing and hearing, the imaging market is beginning to recover. The economic conditions in 2009 were arguably the worst this industry has ever seen. While Xerox’s equipment sales revenue were up a modest 4% in the last three months, they paled in comparison to key competitor Canon, whose office revenues were up a whopping 18.1%. Xerox’s paper and supplies business was also down from 2009 as was revenue from the interest from leased equipment. Xerox equipment sales were down 24% from 2008 to 2009. This recent release shows a 9% increase from 2009 to 2010. If this is correct, then it appears Xerox is still down 15% from where they were and with some of the competition reporting substantially better earnings, it seems that Xerox may be missing the boat. After looking at these figures, does anyone else think it’s strange that one of Konica Minolta’s best accounts in the U.S. may be Xerox? Xerox subsidiary Global Imaging still markets products from several of Xerox’s competitors. Every Konica Minolta and Sharp copier/MFP that Global Imaging sells could have been a Xerox device. I understand they need to support legacy equipment but supporting it and selling net new devices are two completely different things. Xerox has taken square aim at ACS’s market and is understandably excited about the opportunity they have with these customers, but they need to try not to lose focus on the fact that they are still reliant on selling printers, copiers and toner. Other companies are slowly eating their lunch. R & D Spending Was Down This seems to be a major red flag. One of Xerox’s greatest strengths over the years was their ability to create the trends and not simply follow them. This didn’t come easily and it did not come cheap. It came at a great cost. However, that cost was generally rewarded with such cutting edge technological advancements like the iGen product and advancements in solid ink technology among many others. While competitors HP, Konica Minolta and Canon are increasing their R&D expenditures according the most recently available earnings releases, Xerox cut this critical expense by nearly 30% in the most recent quarter and 7% from 2009. Although Xerox’s recent earnings release states that they “believe their R&D spending is sufficient to remain techno-logically competitive,” this may be a move that comes back to haunt them as increased pressure from low cost printer manufacturers such as Brother, OKI and Samsung continues to pick away at their office imaging customer base. This increase in spending from Canon, Konica Minolta and HP, who are becoming increasingly strong in the production market, may add even more pressure to Xerox’s efforts. Also consider that Canon has not yet completed their acquisition of Océ, one of the industry’s top three manufacturers of digital presses and production equipment. How much more formidable will Océ be when they have a company the size of Canon fully behind them? More Layoffs Coming? According to an article appearing on Bloomberg.com, Xerox will be cutting about 5,000 jobs. While there is bound to be some redundancy from the ACS acquisition, we wonder what other key departments will be affected. With all of the reductions over the last few years, are the sales people in the trenches still getting the same stellar support they used to receive? Perhaps, but the sales figures may be showing a different story. Furthermore, staff cutbacks often have a negative impact on the psyche of employees and over the past several years, these employees have seen several rounds of cost cutting moves like this. It’s got to take its toll on them after a while. Larry Zimmerman Retiring Xerox’s Chief Financial Office has just announced Larry Zimmerman’s retirement. Zimmerman has been CFO since 2002 and is largely believed to be greatly responsible for the incredible turnaround he and then chairman and CEO Anne Mulcahy orchestrated nearly 10 years ago when it appeared Xerox was on the verge of catastrophe. Zimmerman has done a remarkable job during his tenure and his replacement, Luca Maestri, current CEO of Nokia Siemens Networks will have some big shoes to fill come February 16 when he joins Xerox. Conclusion Xerox has a lot to be excited about with the continued integration of ACS into the fold. However, the cuts in R&D and staffing, and the failure to keep up with the pace of some key competitors is definitely cause for concern. While revenue from ACS may be a nice infusion into Xerox’s overall revenue, the loss of recurring business from aftermarket sales (supplies and paper – down 6% from 2009) and equipment financing interest (down 9% from 2009) are losses that are not easily recouped. Xerox has taken their eye off the ball in the past and it was very painful. Let’s hope they aren’t doing it again. Andy Slawetsky is President of Industry Analysts, Inc. Much of the company’s research and testing results can be viewed on their website www.industryanalysts.com.