Xerox Is Not the Problem, the Whole IT Services Industry Is

But it is not just Xerox that is struggling these days in business support services. In fact, its competitors aren’t doing any better. Something is wrong with the whole industry.

If we take a look at Xerox along with three of its main competitors, Canon Inc. (NYSE: CAJ), Hewlett-Packard Co. (NYSE: HPQ) and Accenture PLC (NYSE: ACN), we see that Xerox is actually not the worst of the lot. Look at a five-year chart and Xerox looks stellar compared to Canon and HP. It was even competing decently with Accenture until the beginning of 2015, when the two diverged.

Looking at earnings over the past two quarters, when Xerox began its most recent hard decline, earnings were down 20% year over year last quarter and down 50% in the fourth quarter of 2014. Accenture’s earnings were only down 3.6% in the most recent report, but up 2.8% year over year in the previous quarter. The difference between Accenture and Xerox then is that Accenture is treading water while Xerox is sinking. The reason Accenture shares have been rising is due to buybacks, which the company engages in religiously.

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As for Canon, earnings have not gone anywhere for years. HP’s have shrunk significantly since 2010 and have not recovered.

If we look at it from a labor perspective (Xerox should be pretty bad considering it is the fifth worst company to work for), we do see that the company does have low expenses per employee. Annualizing results from last quarter, Xerox pays about $7,100 per employee per quarter, and squeezes out about $5 in revenue for every dollar spent on labor (including general expenses). Accenture, surprisingly, spends even less per employee per quarter at about $4,100, earning about $5.56 per dollar spent on labor.

Canon spends the most at close to $13,000 per employee per quarter, earning only $3.13 per labor dollar, much worse than either Xerox or Accenture. HP rather surprisingly is not doing that badly with its labor efficiency, managing to make about $7.60 in revenue per labor dollar. The problem with HP is simply its shrinking business rather than efficiency problems.

As disappointing as Xerox has been then, it is not doing any worse than Canon or HP. And Accenture, while it has not pulled away earnings-wise by any means, is the cleanest dirty shirt simply because it has tread water over the past two quarters while Xerox has been hammered. The entire industry is simply stagnant, with yet another piece of evidence confirming this just two days ago.

Namely, Xerox just completed the sale of its Information Technology Outsourcing business to Atos, pocketing $850 million after taxes. And what did it say it will do with this money? More buybacks. You have to keep up with the Joneses, or the Accentures, or whatever the case may be.

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