By Zacks Equity Research

Xerox Corp. (XRX) reported adjusted (excluding special items) earnings of 25 cents per share in the third quarter of 2012, in line with the Zacks Consensus Estimate. However, profits declined 11% to $333 million in the quarter from $374 million a year ago and by 3.8% or a penny on a per-share basis from the year-ago level of 26 cents.

Revenues in the quarter declined 3% (down 1% in constant currency) year over year to $5.42 billion, marginally missing the Zacks Consensus Estimate of $5.49 billion.
 

Owing to the investments in new service contracts and the adverse impact of government budgetary pressures, operating margin declined 1 percentage point to 8.6% in the quarter from 9.6% in the year-ago quarter. Ramp up of new Services contracts, along with higher mix of Services revenues, led to a year over year drop in gross margins by 1.7 percentage points to 31% in the reported quarter.

Segment performance

Revenues from the Services segment, which includes Document Outsourcing (DO), Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO), rose 5% to $2.8 billion (including a negative impact of 1 percentage points from currency), driven by higher revenues from all three subdivisions.

Growth in government health care, travel and insurance businesses, customer care and retail, as well as favorable impacts from the recent acquisitions, helped BPO revenues improve by 7%. Revenues from the DO segment rose 1% (including a negative impact of 3 percentage points from currency) due to new partner print services offerings. Revenues from the ITO segment went up 6% due to growth in signings in the recent quarter.

Revenues in the Technology segment dipped 10% to $2.3 billion, including a negative impact of 3 percentage points from currency. The decline was attributable to a 17% fall in equipment sales and a 6% decline in annuity revenues. The negative performance of this segment stems from the fact that Xerox's customers are migrating to its partner print services offering within DO.

Revenues in the other segment went down 13% to $317.0 million, including a negative impact of 2 percentage points from currency. The decline in revenues was attributable to lower paper sales.

Financial position

Xerox had cash and cash equivalents of $882.0 million as of Sept. 30, 2012, compared with $902.0 million as of Dec. 31, 2011. Total debt stood at $9.3 billion as of Sept. 30, 2012, compared with $8.6 billion as of Dec. 31, 2011.

In the first nine months of 2012, cash generated from operations stood at $807 million, up from $683 million last year. The company expects to generate cash flow of $2 billion to $2.3 billion from operations and buyback shares worth $900 million to $1.1 billion in 2012.

Guidance

For 2012, the company now expects adjusted earnings between $1.07 and $1.09 per share, down from its earlier view of $1.07 to $1.12. Xerox anticipates adjusted earnings per share of 33 cents to 35 cents in the fourth quarter of 2012.

Our take

Xerox Corporation, headquartered in Norwalk, Conn., is a leader in the development, manufacture, marketing, servicing and financing of document equipment across the world. We believe that the company will benefit from the new deals signed and successful acquisitions.

However, intense competition from its peers -- including Canon, Inc. (CAJ) and Hewlett-Packard Company (HPQ) -- might affect the company's results. The company retains a Zacks No. 2 Rank, which translates to a short-term (one to three months) "buy" rating.

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