In the late 1990s, shares of Xerox Corp. (NYSE:XRX) topped $60. When the high-tech industry imploded in 2001, Xerox shares fell to below $5. Since then the shares have risen to about $19 and fallen again to around $5. Shares in the company hit a new 52-week high this morning following a solid first-quarter report and an outlook that promises even better results down the road.

Xerox introduced its first copier machine in 1950, and the company’s Palo Alto Research Center (PARC) has been responsible for more than its fair share of the technology innovations that are taken for granted today. Apple Inc. (NASDAQ:AAPL), Adobe Systems Inc. (NASDAQ:ADBE), and even Microsoft Corp. (NASDAQ:MSFT) owe more than a little of their success to the innovators at PARC.

The Xerox Star, an early desktop computer system, employed a graphical user interface and a mouse that Steve Jobs first saw at PARC before the Mac was even a gleam in his eye.

The founders of Adobe developed the first device-independent printer language, PostScript, at PARC, and a word-processing program called Bravo was the precursor to Microsoft Word.

Except for the copying machine, all these inventions share one trait: Xerox itself never made a dime from any one of them. Xerox made copiers, and eventually laser printers, for business customers and that was the end of the story.

Over the years the company has taken its lumps for the way it missed out on all the money its inventions made for other companies. Xerox has continued to extend printing and copying capabilities, but it was the company’s acquisition of Affiliated Computer Services, a business process outsourcing firm that has led to its winning report today.

Affiliated cost Xerox $6.4 billion, and when the deal was announced in late September 2009, Xerox shares dropped nearly 15%. The company’s then-new CEO called the deal “transformational” for Xerox as it entered the half-trillion dollar market for business process services.

The purchase was a gamble then, and to some degree remains so today. Competitors include IBM Corp. (NYSE:IBM), Hewlett-Packard Co. (NYSE:HPQ), and Dell Inc. (NASDAQ:DELL), all with a richer, more diverse array of hardware products to go along with their software and services offerings. Xerox could be a solid competitor, though, on the strength of its brand and the installed base of Affiliated customers.

At least, that’s what traders seem to believe after today’s earnings report. Xerox reported a net EPS loss of $0.04, mostly on the costs of the Affiliated acquisition. Backing out one-time charges, the company posted EPS of $0.18, much better than analysts’ estimates of $0.13. Revenue rose 5% on a pro-forma basis to $4.7 billion, again higher than estimates of $4.65 billion.

The company provided guidance for the June quarter of GAAP EPS of $0.14-$0.16 and adjusted EPS of $0.20-$0.22. Full-year GAAP EPS is expected to be $0.37-$0.47, and the adjusted full-year estimated EPS totals $0.75-$0.85. Xerox reported cash flow from operations of $375 million, up from $22 million a year ago.

The impact of the Affiliated purchase has dramatically improved revenues, boosting the company’s services segment revenues by 121% (pro forma 3%). In its technology segment, which includes no revenues from the Affiliated deal, revenue grew 6% year-over-year and profit in the segment grew almost 29%.

Going forward, Xerox can expect to track the overall economic climate for business investment. Its forward P/E ratio is 11.29, so it has some room to grow. The median target price for the stock is $12/share, but that should rise as analyst coverage catches up with the company’s performance. Only two of seven analysts rate Xerox a ‘Buy’.

Of course one quarter does not turn a tortoise into a hare. But Xerox had to start somewhere, and this quarter got them out of the gate with a bang.

Paul Ausick

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