For Wall St., Xerox Does Not Copy

Xerox (NYSE: XRX) is supposed to have gone through a renaissance of sorts in the past several years. After a series of poor decisions about its technology and sales operations, Xerox was forced off of the list of big American companies into irrelevance. What had been a top 40 member of the Fortune 500 in the late 1980s disappeared from the top 100 completely.

The illusion about the improvement in Xerox’s position among corporations that are broadly considered tech companies comes from improvement in its revenue. That improvement has been based on decidedly low-tech products. And the margins on Xerox’s products and services are remarkably poor. Whatever progress Xerox has gained in sales, the share price does not show it. It has been flat over the past three years, while the S&P 500 has risen more than 30%.

Xerox’s revenue in 2007 was $16.4 billion and net income on those sales was $1.14 billion. For the current trailing 12 months, revenue has reached $22.6 billion, but net income was only $1.28 billion.

Xerox has had some sales success as it moved into the color printing and services businesses. But the improvement has stalled. For the first quarter, revenue was nearly flat at $5.5 billion. Net income dropped slightly to $269 million. The margins in Xerox’s services operations were only 9%. In the other segment — technology — margins were just above 10%. These profits have to carry Xerox’s corporate expenses of doing business.

Analysts have been left to wonder why services that are usually the profit makers at tech companies have not been at Xerox. Perhaps it is because customers will not pay premiums for what they view as support of low-tech products. Xerox also has to contend with the worry that color printing will never be more than a modest portion of the overall industry.

Analysts estimates for the current and next quarters for Xerox offer nothing to enthuse investors. And a weakening market in Europe could hurt these quarterly results more than Wall St. expects.

Xerox’s shares are off slightly so far this year, compared to an improvement of 8% in the S&P 500. Whatever renaissance Xerox has been through recently, if there ever was one, is over and the firm has begun another decline.

Douglas A. McIntyre