EDITED TRANSCRIPT XRX - Q4 2011 XEROX CORPORATION …cms.ipressroom.com.s3.amazonaws.com › 84 › files › 20125 › ... · to serve more small and midsized businesses around the

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPTXRX - Q4 2011 XEROX CORPORATIONEARNINGS CONFERENCE CALL

EVENT DATE/TIME: JANUARY 25, 2012 / 3:00PM GMT

OVERVIEW:

XRX announced 4Q11 revenue of $6b and GAAP EPS of $0.26. Managementannounced 2012 GAAP EPS guidance of $0.97-1.03.

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

©2012 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited withoutthe prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliatedcompanies.

http://www.streetevents.com

http://www010.streetevents.com/contact.asp

C O R P O R A T E P A R T I C I P A N T S

Ursula Burns Xerox Corporation - Chairman & CEO

Luca Maestri Xerox Corporation - EVP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Ben Reitzes Barclays Capital - Analyst

Shannon Cross Cross Research - Analyst

Ananda Baruah Brean Murray - Analyst

Keith Bachman Bank of Montreal - Analyst

Richard Gardner Citi - Analyst

Bill Shope Goldman Sachs - Analyst

Mark Moskowitz JPMorgan - Analyst

Chris Whitmore Deutsche Bank - Analyst

Deepak Sitaraman Credit Suisse - Analyst

P R E S E N T A T I O N

Operator

Good morning and welcome to the Xerox Corporation fourth-quarter 2011 earnings release conference call hosted by Ursula Burns, Chairman ofthe Board and Chief Executive Officer. She is joined by Luca Maestri, Executive Vice President and Chief Financial Officer.

During this call, Xerox executives will refer to slides that are available on the web at www.Xerox.com/investor. At the request of Xerox Corporation,today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without express permission of Xerox.

After the presentation there will be a question-and-answer session. (Operator Instructions) During this conference call, Xerox executives will makecomments that contain forward-looking statements which, by their nature, address matters that are in the future and are uncertain. Actual futurefinancial results may be materially different than those expressed herein.

At this time I would like to turn the meeting over to Ms. Burns. Ms. Burns, you may begin.

Ursula Burns - Xerox Corporation - Chairman & CEO

Good morning and thanks for joining us today. We'll get started on slide 3. We began 2011 with a clear articulation of our priorities. You see themlisted here.

While the statements themselves seem relatively simple, the complexity was in the implementation, especially during a year of unexpected externalchallenges. Here is a report card on how well we did.

First, accelerating our Services business, growing it faster by diversifying our offerings and expanding globally. More of our total revenue nowcomes from Services than Technology.

In 2011, revenue from Services grew 6%. This reflects an impressive 8% growth in Business Process Outsourcing and 9% growth in DocumentOutsourcing. Our IT Outsourcing business declined 4% during the year, but we're encouraged by a recent uplift in ITO signings.

1



JANUARY 25, 2012 / 3:00PM, XRX - Q4 2011 Xerox Corporation Earnings Conference Call



In total, our Integrated Sales activity resulted in a stronger pipeline and a 14% increase in new business signings.

Second, maintaining our leadership in document technology.When not only continue to hold our number-one equipment revenue share position,but we also grew share in 2011.We did this by offering a more extensive and affordable portfolio of color products and by expanding our distributionto serve more small and midsized businesses around the world.

Third, we are very good at managing our business with a disciplined focus on operational excellence. This gives us the financial flexibility to helpoffset pressures on the business, whether it is economic uncertainty or necessary investments that drive growth. Either way, our focus is on deliveringstrong bottom-line results.

And by executing well on the first three priorities, we delivered on the fourth -- expanding earnings and returning cash to shareholders. Full-year2011 adjusted earnings per share grew 15%. We generated $2 billion in operating cash and bought back $700 million in Xerox shares during theyear.That's a buyback of 88 million shares, or 71 million net of the pension contribution, which is more than we initially expected.

So during a year where we face our share of headwinds, I am pleased with our progress and confident in our position to build more value for ourbusiness, for our clients, and for our shareholders in 2012. I often say that some companies talk about transformation, but we are actually doing it.We are seeing the results of the Company's strategic shift in our financial performance.

But to understand how we are achieving these results, it is important to understand the breadth of our business.The Xerox brand is now in placesthat may seem unexpected, but the link between our well-regarded technology and our diverse services is one more common objective, which issimplifying for clients the way that work gets done so that they can operate more efficiently and more effectively.

As you would expect from Xerox, innovation remains core to what we do and how we strengthen our competitive advantage. Turn to slide 4 forsome examples of what I mean.

Radical changes to managing information and healthcare are now being more embraced by healthcare providers and payers. We continue toadvance our offerings and be recognized as a valuable player in the industry through our cloud-based technology, our advanced security protocols,and deep expertise in the complexities of building digital health systems.

Two examples, two very good examples. One is our recent acquisition of The Breakaway Group, which provides electronic medical record simulationtechnology; and our contract with the State of Iowa to run its health information exchange.

Xerox innovation is also changing the status quo in some of the more basic ways that we live, like using public transportation.Through large-scalecontracts with transit authorities we are developing easy ways for commuters to pay with smartphones and debit cards, doing away with theirinefficient token and ticket systems.

And no matter where you work, where your work takes you, in the office, on the road, or at home, we help ensure that printing is accessible andaffordable. We do that through continuously extending and refreshing our product portfolio, especially in color, and by broadening our ManagedPrint Services.

Our MPS offerings continue to win the praise of industry analysts. More important, they win new business with clients like British Airways, thatrecently tapped Xerox for a five-year enterprise print services contract.

In all three areas we have developed repeatable, scalable, and integrated solutions. This is our approach to real business, improving our clients'productivity by simplifying the way that they serve their clients. Our results in the fourth-quarter reflect progress in these and other areas.

Please turn to slide 5 for a review of Q4 performance. In the fourth quarter, we delivered adjusted EPS of $0.33; that is up 14% from a year ago. Ona GAAP basis, earnings were $0.26 per share.This includes $0.07 related to amortization of intangibles.

2






Total fourth-quarter revenue of $6 billion was flat. Revenue from our Services business was up 6%; however, revenue from our Technology businesswas down 5%. While our Technology business increased throughout the year in the United States and in developing markets, we saw a drop-offduring Q4 in Technology sales across Europe.

The strength of our Services business model is particularly evident when we are faced with macro issues. Our Services provide cost-efficient waysfor our clients to run more productive enterprises, and our multiyear Services contracts benefit our business for the long term through a healthybase of recurring revenue.

Signings for BPO, Document Outsourcing, and IT Outsourcing were up 15% in the fourth quarter. The increase in Services signings continues toput near-term pressure on margins as we make initial investments to implement new contracts. As a result, operating margin of 10% was down0.4 point. Gross margin was 32.2 points,(Sic-see press release) in line with our range.

We balanced our investments by continuing to improve SAG, with selling, administrative, and general expenses now at 19.3% of revenue. Q4 cashfrom operations was approximately $1.3 billion. And as I mentioned previously, we delivered on our commitment to generate $2 billion in full-yearoperating cash.

We are continuing to use available cash for acquisitions and share repurchase. In a moment, Luca will provide more detail on cash flow as well asreview our balance sheet and reporting segments.Then we will both take your questions.

But first, let's take a little closer look at our top-line results on slide 6. Here you see that Services now represent 48% of our total revenue, up from45% a year ago and continuing to grow in proportion to our total revenue. It's an important metric that reflects investments in building ouroutsourcing portfolio and expanding our offerings globally.

As I mentioned, total revenue of $6 billion was flat in the quarter. Annuity revenue, which was 80% of the total, was flat; or up 1% in constantcurrency. Equipment sale revenue was down 3%, or 2% in constant currency, largely due to the weakness in Europe.

While operating in this challenging economic environment, we have grown our global market share for equipment revenue, and installs of Xeroxequipment grew 8% in the fourth quarter, a good indication of future annuities.

During the year, we launched 27 products with an emphasis on broadening our color portfolio across both production and office markets. And weexpanded our channels of distribution; as a result, our MIF -- that is machines in the field -- for our color devices grew 14% in 2011, an importantcontributor to our annuity stream.

Growth in Services was also a big benefit to our annuity.We continue to focus on joint sales activities between Xerox and ACS. In 2011, this resultedin more than 300 revenue synergy deals, delivering significant total contract value for the Company.

These deals include a multiyear contract with a major consumer goods company to manage their IT systems; an enterprise print services win witha large financial investment firm; and it's expanding our business with one of Latin America's largest banks to now support their commercialforeign-exchange operations. To further accelerate our joint sales activities, we increasingly see the value of going to market as one Xerox,demonstrating to our clients that our services-led, technology-driven strategy offers value to their business through the strength of our offerings,powered by innovation and the expertise of our people.

Therefore, we are retiring the ACS brand in many areas of our Services business and will lead with Xerox as a master brand that now represents theworld's largest enterprise for business process and document management. It is more than a logo change; it reflects the progress that we havemade in transforming the Company, the meaningful growth in front of us, and the value we are building for stakeholders.

With that, let me turn it over to Luca; and I will be back to wrap up and open the call to your questions. Luca?

3






Luca Maestri - Xerox Corporation - EVP & CFO

Thank you, Ursula, and good morning, everyone. As Ursula just explained, revenue was flat in the quarter both at actual and constant currency.Services continued to show good growth, up 6%; and Technology was down 5%, affected by the weakness that we saw in Europe.

Operating margin in Q4 was 10%, a sequential improvement from Q3, in line with seasonality, but down 0.4 year-over-year. Gross margin of 32.2%was lower year-over-year due to the shift of business towards Services and the ramp of new contracts. We expect this gross margin dynamic tocontinue in the near term, as Services growth accelerates and new contracts start up.

We partially offset the gross margin impact through disciplined expense management. Both our R&D and SG&A ratios continue to show significantimprovement from restructuring and synergies.Within SG&A, bad debts increased year-over-year by $12 million as improvements in North Americawere more than offset by higher write-offs in Southern Europe.

For the full year, operating margins grew by 30 basis points. We deployed several cost and expense reduction initiatives to offset the disruptionfrom the natural disaster in Japan during the first half and ongoing currency headwinds. Below the line, we had improved results from lower interestexpense and higher equity income at Fuji Xerox.

Also, in the quarter, we made two one-off entries which are worth mentioning.We realized a $66 million after-tax pension curtailment gain that isassociated with our decision in Q4 to fully freeze after December 2012 any further service and benefit accruals in the Xerox defined benefit pensionplans in the US.This impact was partially offset by a restructuring charge of $39 million after-tax we took to improve the efficiency of our operationsand help counter the pressures in the macro environment.

As a result, adjusted EPS in Q4 was $0.33 and grew 14% year-over-year. The only adjustment to reported EPS was the amortization of intangibles.It should be noted, this adjustment was higher than in previous quarters because in Q4 we accelerated the amortization of the intangibles relatedto the ACS tradename, following our decision to discontinue the use of the ACS brand going forward.

For the full year, adjusted EPS grew 15% and GAAP EPS more than doubled.

Let us now move to the Services segment on slide 8.The 6% revenue growth in Services is a reflection of the breadth and diversity of our portfolio.Within Services, BPO growth accelerated; it was up 8%. And Document Outsourcing was also up 8%. ITO revenue was down 6%.

The 8% growth in BPO came from both commercial and government. Commercial growth was driven by financial services, customer care, andrecent acquisitions. Government revenue growth came primarily from the ramping of the California Medicaid contract.

The 8% increase in Document Outsourcing reflects both the impact of strong new signings and benefits from our partner print services offerings,which began to be reported in Document Outsourcing this year and are accelerating.The competitiveness of our product portfolio and our uniquedocument management software and tools continue to clearly differentiate us in the marketplace.

ITO revenue was down 6% in Q4, driven by two main factors -- past contract losses and lower product resale revenues. On the positive side, during2011 ITO signings were at $3.4 billion and up by more than 150% year-over-year.The impact of a few contract losses will continue to have an effecton revenues through midyear, at which time the ramp in new signings will deliver revenue growth.

Total signings for the entire Services business increased 15% year-on-year in Q4, and the trailing 12-month signings calculation is now flat, evenafter including the California Medicaid new business and the Texas Medicaid renewal, both signed in 2010. Our pipeline continues to be healthyand is up 5%, including synergies. Segment margin of 10.3% was down 1.7 points year-over-year, due to the contract startup costs and lowerrenewal rates we just discussed. California Medicaid alone impacted margins by over half a point.We expect this margin pressure to remain in thenear term, but to gradually improve as we move through 2012.

Let's now turn to the Technology slide. Technology revenue was down 5%, or 4% at constant currency. The largest factor in this decline was theslowdown in Europe, where equipment revenue was down 15%.

4






It should also be noted that as planned our Technology results are impacted by the launch of our partner print services, which have been verysuccessful and are reported in Document Outsourcing. In spite of the revenue decline, segment margin of 11.7% was flat year-over-year and at thehighest level for the year, in line with seasonality. Overall, a good result, thanks to strong control and expense control.

Looking at our product segments in detail. Entry install performance improved in the quarter, although revenue was impacted by price and mix.We are building momentum in this segment with the recent launch of a new price-competitive platform providing both mono and color capability.Entry represented about 21% of our Technology revenue.

Mid-range was the strongest performing area in Q4 and for the full year, thanks to our strong color portfolio.This is the product segment that wasalso most impacted by the disaster in Japan. As we had expected, supply availability has now returned to normal and the backlog, while healthy,is not artificially high due to the product constraints. Mid-range accounted for 57% of our Technology revenue.

High-end results were mixed with continued strong performance in production color, driven by iGen4 and the 800-1000 color press. We're alsoimproving our performance in Entry Production Color with the recent launch of our Xerox 770 system. High-end represented 22% of our Technologyrevenue.

Going into 2012, we are very confident in our Technology offerings, given our market-share gains and recent improvements we have made to ourindustry-leading performing portfolio.

Moving on to our key metrics on slide 10, our most relevant operational metrics this quarter were quite positive. Total Services signing of $4.2billion were up 15% year-over-year with over $1 billion of signings in each of the three lines of business.

For the year, we signed over $14 billion, flat year-over-year, even with the two large Medicaid deals in the prior-year compare. New business signingsfor the year were up 14%.

Looking at the document-related metrics, please keep in mind that these include the Technology segment plus Document Outsourcing.Total colorrevenue was up 2%, both actual and constant currency. Digital machines in field continue to grow; was up 3% in total, 14% for color-capabledevices.

Lastly, digital pages were stable and down 3%, with pages from color devices up 9% both in Q4 and for the full year.

All color segments showed strong install growth, and total installs for the Company were up 8% in the quarter.This did not translate into equipmentrevenue growth, given price erosion and mix impacts, but this will feed annuity over time.

Moving on to the cash flow slide, cash from operations of almost $1.3 billion was in line with Q4 of 2010, for a full-year total of $2 billion. Earningscontributed $383 million; and, consistent with normal seasonality, working capital during the quarter was a source of $696 million. For the year,working capital was essentially flat.

Pension cash contributions in the quarter were $78 million and $426 million for the year, which is about $200 million higher than our 2010 funding.We expect a similar level of pension contributions in 2012 due to a very significant drop in the discount rate, in spite to truly outstanding returnsthat we achieved in 2011 on our plan assets.

CapEx of $134 million was in line with the annual trend, and we had limited M&A activity during the quarter.

Let us turn to the next slide to quickly review the uses of our operating cash flow in 2011. So, we generated $2 billion of cash from operations.CapEx came in as anticipated at $501 million full-year, and the resulting free cash flow of $1.5 billion was used as follows.

5






We paid down over $600 million in debt, and we have now repaid the debt we took on for the ACS acquisition.We ended the year with $8.6 billionof debt, of which $6 billion can be associated with the financing of Xerox equipment for our customers.The finance debt is calculated assuming a7-to-1 leverage of our finance assets of $6.9 billion.We also had $265 million in dividend payments and our current yield sits at approximately 2%.

Our focus was to deploy our available cash primarily towards the share repurchase program. As mentioned earlier, we repurchased $700 millionworth of shares at an average price of $7.97.We also continued to invest in tuck-in acquisitions, spending $212 million full-year, primarily in Services.

Let me now move to guidance for 2012. For revenue growth in 2012, we are guiding to 2%-plus at constant currency. We expect Services to growmid to high single digits with growth accelerating throughout the year, and Technology to be flat to modestly lower, given the macro environmentand our strategy to lead with our Managed Print Services offerings.

We expect GAAP EPS in the range of $0.97 to $1.03, and adjusted EPS in the range of $1.12 to $1.18.The change in guidance from May of last yearis driven by a pension expense increase of well over $100 million because of the significant decline in discount rates, negative currency dynamics,and worsened economic outlook in Europe.

Our earnings estimate will put us in a position to deliver strong cash flow, between $2 billion and $2.3 billion. This is also lower than we wereassuming back in May of 2011 due to three main factors -- revised earnings, as I just explained; pension funding in line with 2011, this is $200 millionhigher than previously assumed due to the historically low discount rate; and restructuring payments of approximately $150 million instead of anearlier assumption of nominal payments.

We took a $61 million restructuring charge in Q4 and anticipate taking a modest amount of additional restructuring in 2012. This will allow us toimprove our operating leverage and offset some of the cost pressure in the environment.

We expect operating cash flow to be negative in Q1 with higher pension contributions adding to the typical working capital seasonality. On CapEx,we are planning for investments of $500 million, which will result in free cash flow of between $1.5 billion to $1.8 billion.

Our capital allocation priorities remain unchanged. In 2012, we expect to repurchase between $900 million and $1.1 billion worth of shares, skewedto the second half of the year, consistent with our cash-generation seasonality. We are announcing today that our Board increased the sharerepurchase authorization by $500 million, so it now stands at over $1.3 billion.

We anticipate spending between $300 million and $400 million on acquisitions, with primary focus on expanding our Services offerings. Anddividends are planned to be a use of around $300 million given current payout and number of shares outstanding.

With that, I will turn it back to Ursula to wrap up.


Thanks, Luca. Let me quickly wrap up so that we can get to your questions. 2011 presented its share of challenges, and our performance in thefourth quarter and for the full year reflects our operational discipline in delivering strong bottom-line results while scaling our Services businessand maintaining our leadership in document technology.

Signings continue to grow for our diverse Services offerings; installs are up for our industry-leading Technology. Both of these areas contribute toa healthy annuity stream that serves us well for the long term.

In the near term, we are planning for continued economic weakness, so we are being somewhat guarded with our expectations and remain focusedon operational efficiency. For the first quarter, our expectations are for adjusted earnings of $0.21 to $0.24 per share, including $0.01 to $0.02 ofrestructuring. And as Luca noted, we expect full-year adjusted EPS of $1.12 to $1.18.

6






Throughout 2012, our productivity initiatives will be balanced with making the necessary investment to expand our Services business and aggressivelypursue growth opportunities in key markets around the world, and our business model will continue to yield strong cash flow. I am confident wehave the right strategy, the competitive strength, the skilled leadership team, and the disciplined focus on execution to build on our progress.

With that, I thank you again for joining us today, and let's open it up to questions for Luca and me.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Ben Reitzes, Barclays Capital.

Ben Reitzes - Barclays Capital - Analyst

Thanks a lot. Luca, given the lower cash flow estimates and the pension being $400 million plus in terms of funding, do you plan to issue moreequity like you did a quarter or two ago to fund the pension? Is that an option to you? And what would be the offsetting share count impact?


Ben, yes, pension contributions are going to be in total similar to what we have seen in 2011. So at this point, even though we have not made afinal decision, we are planning to issue stock in a similar size of what we have done in 2011. Bear in mind that the contributions to the pension planthis year is going to be skewed towards the first half as opposed to the second half as we had last year.


Is there any benefit to issue equity and be buying back stock at the same time rather than just fund the pension with cash and then just buy backless stock? Is there a reason to go through the motions of buying back stock while you are issuing equity?


The reason is the same that I talked about last year. It really gives us a bit more flexibility with our cash. It allows us to be more consistent in themarket as we buy back the stock.

And frankly, particularly because these contributions this year are so skewed towards the first half, we want to make sure that we retain appropriatecash balances throughout the year.


Can you just recap how many shares you issued in the last tranche? Is it 16 million, right?


16.6 million shares.

7







Right, so that when you say similar size, maybe you do it a few times like that?


We would be looking to do -- I am talking about the absolute amount that we are talking about. Right? Last year we did about 130 million; it isprobably going to be a similar size.

And obviously the amount of shares is going to be depending on the share price on that day. But we are thinking of doing one single contributionin stock.


Okay. Then my follow-up issue is with regard to cash flow. So, it sounds like you were at $2.6 billion to $2.9 billion in cash flow from ops. Now weare at $2 billion to $2.3 billion. So call it $600 million of a difference.

You're going to issue some equity for pensions; so it sounds like pensions may be $200 million of the lowered cash flow from the May. Can you talkabout where the extra $400 million in lower cash flow is coming from now, if I am right on the pension?


You are right on the pension. And if you remember, when we were talking at the investor conference back in May, we gave guidance on earningsof $1.18 to $1.28; so that has come down. So we got about $200 million in earnings there.

I think when you think about earnings, you need to think about currency, you need to think about the economic outlook for Europe. And also thepension expense itself is $100 million higher than we were expecting at the time.

So you've got about $200 million in earnings, $200 million in pensions, and restructuring.We are going to be doing a bit of restructuring.We talkedabout $150 million of restructuring in 2012, but we were expecting only nominal payments back in May. So that is the rough math.


Okay, so that gets us to the $600 million.Then with all that, my final question is -- okay, we know about 2012 now.You just went through the bridgereally. Does 2013 have a snapback now?

If we have flattish cash flow this year, slightly up; and then due to all these headwinds, where current rates are today and best we know, withoutgiving earnings guidance or anything, technically do we have a snapback in cash flow next year? Or do similar factors keep it flattish next year?


The one thing that I can tell you right now, all else being equal, that pension is necessarily going to be a tailwind going into 2013 and '14 and '15.So we are at a point where you have got discount rates which are at historical lows; given the dynamics of our pension plans, we have now frozenfuture service and accruals. So we cannot cap the exposure there.

8






We have had great returns on assets on the pension plan during 2011. So if discount rates do not come down further, you could have certainly wellover $100 million just from pension moving forward. And then of course, we're going to be trying to grow the business and all the other thingsthat should bring additional earnings into the Company.


Okay.Thank you very much.

Operator

Shannon Cross, Cross Research.

Shannon Cross - Cross Research - Analyst

Thank you very much. Good morning. My first question is with regard to Europe. Ursula, can you give us a little more color on linearity during thequarter, where you specifically saw some of the weakness? And have you seen any changes as we have entered 2012?


On linearity, it got worse as the quarter went on. If you recall last quarter we spoke about Europe and we were guarded, because we still had positiveresults in Europe or good results in Europe, but we knew -- we were suspecting that something would happen. It started to happen in the earlyparts of the quarter and it definitely continued throughout the quarter.

I don't see any -- foresee any significant change in either direction in Europe. That is the way that we are planning; we are planning for continuedweak activity in Europe.

So linearity, yes, it got worse as the quarter went on, and it is all over Europe. Obviously, Southern Europe -- the Italy, Spain, Portugal, Greece, etc.-- are worse than the rest of Europe. But we do see weakness even in the stronger countries where decisions are delayed and activity is a little bitlower, etc. etc.. So we do see a significant change in Europe.

Interestingly enough, balance that off against what's happening in the United States and developing markets. Developing markets were strongthroughout the year. It had up and down based on a war here or a war there. But strong business throughout the year.

And the US, as the year went on and we implemented changes and rationalized our coverage, got better every quarter -- every month and everyquarter. So we see a relatively strong on the equipment side, US business, and a strong developing markets business, offset by weakness in Europe.


Okay, great. Can you talk a bit about the Services business? Just in terms of the contracts that you have signed, the 14%, I think, or 15% year-over-yearincrease in signings, like what type of contracts are you signing? Where are you seeing the strength? And maybe talk a little bit about ITO as well.


Yes, so think about our Services signings are almost across-the-board. So, we have signed in the public sector, we have signed transportationcontracts with -- in Pennsylvania Transportation Authority, for example, which we announced earlier. We signed in the private sector with airlines,

9






with banks. So we are seeing a broad range of signings primarily in the US, obviously, which is where most of our business is. But we also havesignings in Latin America, in developing markets, and signings in Europe.

As we spoke before, Europe in the BPO business and the ITO business is a smaller portion of our business, a smaller portion. And we did a changein strategy at the end of the third quarter or in the third quarter to move an executive there to actually manage -- stick handle our European business.Which is particularly important now since we are seeing some headwinds in Europe -- not yet in the Services business, but we want to make surethat we start up that business with the right cost base in mind.

So, across-the-board signings, everywhere, it is really good. ITO signings were unbelievably strong. We are managing ITO. The ITO business is onethat clearly we are learning about as we go through more and more.

ITO signing, as you know the revenue -- we had some cancels from last quarter that are hitting us on the revenue side this quarter. We also have abusiness in ITO that is a resale business, an equipment resale business, that while good should not be our major focus and will not be our majorfocus on a go-forward basis.That also puts some pressure on our revenue.

So our purpose with ITO is twofold. One is to actually accompany the rest of the business that we have and make ourselves more relevant in therest of the business, the Document Outsourcing and the BPO business. But in and of itself is to get around these things that you are now hearingthe vernacular SIC verticals, where you are not just selling a bunch of technology or not just selling some software. You're actually trying to sell asolution around a vertical market. Healthcare is the most obvious one to talk about; it's the one that we are spending the most time on.

So ITO, what we are doing with ITO is repositioning it; focusing on longer-term, more higher value engagements with our clients; focusing onassuring that we renew.This is a problem that should not exist. Renewals should not be a problem for us, and it was in quarter three and a little bitin quarter four.

So we're focusing on actually changing that and making sure that we actually have value with our clients and intimacy with our clients.


Great.


ITO should be good.


Okay, and then my last question is just sort more of a philosophical one. As you think about the fact that you're getting strong growth from Servicesand good signings but it's clearly impacting the margin a little bit with the pressure that you are seeing in Europe, how do you sort of balance andthink about the investment required on the Services side versus the growth, given some of the macro trends that are out there?


Yes, this -- it's a great question by the way -- and the way I would think about this is to think both in the short and the longer-term, right? So in theshort term we have to make sure that anything that we sign falls within a set of parameters that allow us to deliver it with high-quality and not sinkour financials, right?

10






So we get lots of deals proposed, but those deals -- some of them would not be good if we took them in the beginning. If we did a lot of CaliforniaMedicaid, as I said this over and over again, we would be having a significant and broader problem.

By the way, the good news is winning at least one or two or three Medicaids because they are big and foundational for our business. So what wedo with signings is we look to make sure that we can operate them well, that we can actually stand them up, that we can deliver the revenue, theSLAs, the revenue and the profits that we want and have strong margins.That is in the short term.

In the long term we try to make sure we have platforms that are repeatable, that lighten the load. We stay close to our customers; that keeps ourrenewal rates high. And we continue to expand outside of the areas that we have today to continue to grow our services offering.

So the way that we think about Services, it is an engine for growth. And if we and when we operate it well, it actually does fuel the growth that weare seeing today, 6% growth even with a very poor ITO revenue quarter.

Thank you very much, Shannon.

Operator

Ananda Baruah, Brean Murray.

Ananda Baruah - Brean Murray - Analyst

Hi, guys. Thanks for taking the question. My first one, I guess, is on operating margin. There wasn't explicit operating margin guidance for 2012,and it feels kind of flattish, I guess, after we adjust for the share buyback. But I just wanted to confirm that and get your thoughts.Thanks.


Yes, Ananda. To confirm, I think we are planning around operating margins to be flat to slightly up. As you go through the year, probably they aregoing to be accelerating throughout the year because you are going to be seeing better growth as we go through 2012. So flat to slightly up.


Okay, great. And I guess just sort of follow-up to the Services comment you guys made. The BPO signings I guess just optically appeared to be abit light, particularly after last quarter. Were they in line with your expectations or were they, in fact, light? And if they were light with the strengthin ITO signings, does that maybe push out some of the ramp to margin expansion as we move through this year and maybe even into '13?


Yes. So, Ananda, signings were a little -- BPO signings were a little bit light. But they were not significantly off, nothing to panic about. They werea little light. We had a huge signings quarter, as I said, up -- and as Lucas said -- up 150, some huge number in ITO, and Document Outsourcingremains a strong thing. I wouldn't -- I don't see any real issue with BPO signings. It is bumpy; it comes -- they come and they go and we are focusingon them, so they should continue to come.


Got it. And, Ursula, would it tend to shift your thinking around the roadmap to operating margin expansion over the next year to two years, giventhe mix of the Services signings?

11







I don't think so, but --.


So if I understand the question correctly, Ananda, as we look at operating margins, we know that in the short term we have got a number ofpressures. Pension is one, currency is another one, and obviously some weakness in Europe. At the same time, we have a number of tailwinds andobviously want to capitalize on those positive factors.

We've got very strong signings that we bring in from 2011, we've got a technology portfolio which is market-leading, we've gained share in everygeography of the world. And obviously, share repurchases will help a bit on earnings and we will continue to do tuck-in acquisitions.

So as we think about it longer-term, longer than 2012, of course it is our aspiration to continue to grow operating margins.


Okay. Thanks a lot, Luca. Last one for me. Just regarding the comments about the restructuring that you will be doing as we move through theyear, can you give us some sense of how we should layer those into our quarters in terms of earnings, just so we get the linear to earnings appropriatelyset? Thanks.


Well, let me give you the Q1. I think we have said $0.01 to $0.02. It is part of our guidance.We said $0.21 to $0.24.You should model $0.01 to $0.02of restructuring.

As we go through the year, we will see how much we are going to be doing. It really depends on the environment and many other factors.


Could it top out at $0.02, or should we almost certainly expect something beyond that as we move through the year?


It may round up.


Okay. Okay, thanks a lot.

Operator

Keith Bachman, Bank of Montreal.

12






Keith Bachman - Bank of Montreal - Analyst

Hi, thank you. Luca, I want to ask just on the -- for the guidance, for the sale of the IP that happened in Q4, did that get recognized in Q4 or is thatmore coming in calendar year '12? So that will be -- is that included in the guidance as well?


Yes, it is included in the guidance, Keith, and we have got it well laid out in the MD&A. The majority of the sale was recognized in Q4. I think theprofit impact was about $16 million, but then we got smaller amounts in '12 and '13 because of the way we set up the arrangement.


Okay, so could I say that the amount in '12 and '13 is relatively -- I mean it is not material to the guidance?


Yes, again, in the MD&A it is $12 million and $8 million respectively.


Okay, then let's go to the --.


To the guidance.


Well, let's go then in the EPS forecast, could you give us your underlying assumption for operating tax rates, please?


Yes, and we are guiding at 29%.


Okay, you have been consistently coming in below that. Okay, well, we will go with 29% then.

Then, perhaps this is for you, Ursula, if I could. The operating margins, just confidence that that works its way through. I think it is understandablethat as you ramp new contracts, it is a bit tougher for the new contracts versus the maturing contracts. But just confidence that you are going tobe able to manage that margin sequence, particularly in ITO, where those renewals I think have been a bit tougher than you anticipated.


So, I mean it is the operative question and the place that we spend significant amount of our focus, Keith. We are confident. We are confident -- asconfident as you can be before you do it. We have mapped it. We know the customers in ITO. It is all around renewals here, right, because the

13






signings are coming. We know the ramps. We don't have any really egregious contracts, large contracts outside of California which we already arecomprehending for sure, that will take up a significant amount of investment before we get revenue. So we have a normal kind of layout of contracts.So our focus is going to be on renewal.

Our renewal rate overall is a little bit lighter than normal. BPO is a little bit light but fine; Document Outsourcing not really that relevant. The bigplace that we have a to spend a lot of our attention is in ITO, and we are doing that. So we are getting the business and now we are managing thecustomers to assure that we stay intimate with them. And if there is a nonrenewal, it is because the customer no longer needs the service versusthey are not pleased with our service delivery.


Okay, yes, you just hit my -- my follow-up on that one would be to say it a different way, you are not losing those ITO renewals on price; it is justthe customers, say, insourcing?


Yes, price is generally not the issue here. There are two -- there are three reasons why you can lose, obviously. One is that the customer doesn'tneed the service anymore.They insource or their contact is just done.

The second one is price, meaning some other competitive type thing, price or terms and conditions, which will end up in price. And the third isthat outright, you just outright lost it. I mean you compete with somebody and they say, I like Joe better than Peter, or like Xerox better thansomeone else.

The place that we have to make sure we continue to focus, price is not going to be our issue.We will manage price. If we want to win it, we will winit if it looks good in the long term. That is not the issue. It is all around assuring that we continue, and even level of contact and service with theclients, and making sure that they understand that we are in their camp. It is basic customer care.

We will -- we have taken a really big focus on this in the ITO business and we will continue to do that, which will drive up the business. Clearly, pricehas something to do with everything, Keith, everything.


Okay, fair enough. I'm going to ask one more philosophical question, particularly for you, Ursula. If I look at your layout on page 13 -- slide 13, excuseme -- about 25% of your available cash for 2012 is targeted to acquisitions, with the balance towards share repurchase.

And I just wanted to know kind of an IBM type of question. Is that how you think about the model over the next number of years, or is there anykind of comments or color you could give that we should be thinking longer-term?


Yes, I think the way that we should think of it, for '12, clearly, the plan is as laid out in slide 13 and the philosophy pretty much the same as happenedin '11. The way you should think about '13 and beyond is along the same bucket. So clearly, we are going to use our available cash to buy backshares, think about a dividend, so that type of shareholder return; acquisitions and dividends.

But the mix may change, depends a lot on the price of the shares, what is available in the marketplace. Right now we are using a disproportionateamount of our cash towards share repurchase, and it will -- it may change. But it will not be so far different -- we will not walk away from sharerepurchases.

14






It is still a very valuable tool for us and very lucrative for the shareholder, so we will continue to do that. And the whole question is on -- around theedges. How much (inaudible) or the other.


Well, I would encourage you to think about mix more, but I will cede the floor and thanks very much for answering my questions.


Thank you very much, Keith.

Operator

Richard Gardner, Citigroup.

Richard Gardner - Citi - Analyst

Well, thank you. Good morning. I wanted to -- I guess not to beat a dead horse, but go back to the Services margin decline a little bit more andmaybe try to ask the question differently.You have always said that 5% to 10% was sort of the right -- well, I think it is fair to say that you have said5% to 10% was the right growth rate to think about for the Services business.

And yet the margins are coming in a little lower year over year, and so I just wanted to see if you could help us parse out how much of that is newcontract ramps, how much is contract runoff, and how much is price pressure? And then I have a follow-up.


Yes, I will give it a try, Richard.We have been -- when you think about the dynamics of gross margins, and clearly they came in on the Services sideslightly below what we were expecting. And I think the issue has been around a combination of contract ramps, which were pretty much includedin our projections, and renewal rates which were below the historical ranges.

So we have always talked about renewing at about 85%, ideally at expiration we do 90%. Our renewal rates have come in in the low 80%s for theyear, so that is where you really see that level of gross margin compression that we want to avoid going forward.


Okay. And in light of that, Luca and Ursula, could you talk about the right way to think about operating margins for services for this year? And Idon't know, maybe even philosophically for 2013?


I would say for 2012, probably during the first half we are going to be seeing a continuation of what you've seen during 2011. But we believe thatwe are going to be improving margins in the second half because there is going to be an acceleration also in the revenue growth. for Services.

And then as we go into 2013, of course, again our aspiration is to grow margins all the time, but we need to recognize that if growth acceleratesand we end up winning very large deals like we have done in the past, for example, re California, this is something that in the short term becausethey are so sizable will have an impact on margins.

15






But as you look longer-term, they become profitable contracts and they expand our position in the marketplace.


Okay, thank you. And then one other question from me and that is, was there any meaningful benefit from Japan expedite expenses going awayin the fourth quarter? I think that had been a meaningful drag for you earlier in the year.

Could you talk about whether that was a benefit in Q4 and whether there is any residue left there, or if we are back to zero?


We have had very minor expenses with the restructure in Japan in Q4. It wasn't a big issue, so quarter-on-quarter was obviously a slight positive. Iwould like to step back for a second and talk about operating margins for Technology for the year. We were up in Technology 60 basis points inoperating margins. In spite of all the disaster from Japan, in spite of currency, I mean the yen is more than 30% higher against the dollar over thelast three years; in spite of the weakness in Europe.

So I think if you step back and you look at our performance in technology in terms of preserving margins, I think it has been admirable.


Okay, great. If I can sneak one more in, Ursula, have you seen any movement on supplies pricing in the marketplace? We have heard from somecontacts out there that there are general price increases going through on the supply side here in January and February. And I am wondering ifyou are seeing that and whether you think that that could potentially benefit Xerox here in Q1?


Through to Q4 this earnings period, we didn't see any. And we have heard the same things that you have heard, and we will look around and seehow we are positioned competitively, and if we have space, we will take it.

If we are positioned in a place that allows us to take price up, we will do that. We want to stay competitive to the marketplace. We want to makesure that we continue to gain share, and so we will look at the marketplace out there, and if we can fit it in, we will do it.Thank you very much, Rich.

Next question.


Thank you.

Operator

Bill Shope, Goldman Sachs.

16






Bill Shope - Goldman Sachs - Analyst

Okay, thank you. So I have a question on the Services division as well.You know, specifically drilling down on some of the challenges you are havingwith renewals, can you help us understand exactly how you addressed those challenges, particularly this year? And from your prior experiencehow much control do you really feel you have over this dynamic?

And I guess really what I'm trying to get to is can you give us some assurance that this isn't a sign of an emerging problem with competitivepositioning or anything?


So we have -- we've got a long history around renewing contracts, and particularly ACS but also on the Document Outsourcing side. And we havealways been in a range of 80% to 90%, and clearly our target is to be 85% to 90%.

What we have seen during 2011 has been a specific issue around renewal rates, exclusively in our ITO business, and it's been related to three orfour meaningful contracts. It hasn't been a widespread loss on renewals. It has been three or four specific situations, different reasons.

At the same time, we have signed up significantly more than what we have lost. So the net-net of the two things, the growth in signings versusthe loss of renewal, is clearly a positive that will translate into revenue growth, we believe, starting from the second half of 2012. So there isn'tanything systemic that we are concerned about, and I would say that having grown signings by 15% year-over-year actually tells us that we arequite competitive in the marketplace. If you exclude the California and Texas contracts that we signed in 2010, megadeals, very specific events,actually our signings are up 40%.

So we feel very, very good where we are in the marketplace.We have had specific circumstances in ITO. It is about customer engagement, and thatis what we need to work on.


Yes, that makes sense. And then final question, I know we are getting kind of towards the end here, on cash flow if there are any further downwardsurprises, whether it is macro or whatever it may be, or mix, at what point -- just trying to gauge the risk here. At what point do you have to bemore constrained with your cash usage in terms of the share repurchase plans in particular?

Is there a line in the sand that you are looking at where you would have to step back or where it would make sense to step back a bit? Or do youfeel fairly comfortable at this point that you have really factored in all of the risk to this cash flow outlook?


Just to be practical, and we have included this in our -- also in our earnings range.We have been doing most of our repurchase activity during thesecond half of the year, so we're going to have much better visibility. If something happens, any collapse somewhere else around the world, wewould be dealing with it.We don't need to make a decision right now.

We feel at this point, given all of the puts and takes, we feel very confident that we can deliver on this capital allocation strategy. Of course, at anypoint in time, we can revisit. It is very difficult for us to get ahead of ourselves because most of the activity will happen towards the end of the year.


Very helpful.Thank you.

17







Next question, please.

Operator

Mark Moskowitz, JPMorgan.

Mark Moskowitz - JPMorgan - Analyst

Thank you. Good morning.Two questions if I could. I want to get a sense -- you can kind of give us some context.You have been kind of a perennialcost container or restructuring type company and very diligent in that process, but are we getting close here to starting to cut into too much musclewith this next round of restructuring, and probably more restructuring down the road if the macro worsens?


I can assure that we have got plenty of opportunities, plenty of opportunities in our product cost. We have really a gold mine there in terms ofremoving complexity, realigning the portfolio, rationalizing components. And again, we have a significant infrastructure; it is a legacy infrastructure.

We are now near the end. We will continue every day that we come to the office to look for efficiency in our operations. If we can get revenuegrowth, that efficiency will go into the revenue growth. If we cannot get revenue growth, that efficiency will go towards cost reductions.


Muscle are things like research, our selling resources, our customer engagement, that is muscle. And I think what Luca is saying, that while everythingis needed -- a lot of things are needed to run the Company, there are certain things that are really hard to rebuild if you take them away.

We are not focusing on those areas. Those are areas for as long as we have done restructuring, that to the 2000 time have been protected andexalted, because we know it is difficult to get them back. But we have a lot of cost in this Company and we will -- as the world changes we are goingto actually have to morph the cost to actually be more appropriate to where growth is coming, or just remove it from the Company. And that iswhat -- that's the path that we are on.Thank you very much.


Okay. My second question is around cash flow. Clearly it has been a hot topic for investors over the past year, and I kind of share Keith Bachman'ssentiment here. I am trying to figure out if your cash usage is being applied appropriately here.What I mean by that is we have been here now foralmost two years about all these signings, and eventually we're going to get the revenue and thereby the cash flow. But I hear more about band-aidsthan I do really about return on the cash flow here.

I am just wondering if you need to maybe jumpstart the acquisition machine to really get that cash flow and the return on the cash flow workingin the right direction over the next 12 to 24 months?


I don't know where to start. I think we are making the investments that we believe are appropriate.We are looking at acquisitions in a very disciplinedmanner. ACS has done it consistently.We keep doing it even now, and so we look at attractive returns on our acquisition investments.

18






So we are going to be looking at opportunities.We bought 16 companies during the course of 2011. It is very important for us that our cash flowsare sustainable for the long-term. And so sometimes we get asked why our cash flow has come down a bit versus past expectations, and one ofthe reasons is because we put a lot of investments into the business and sometimes they don't come to acquisition. Sometimes they come througha new large contract like California, for example.

So maybe there has been a bit of a shift between investing in acquisitions versus investing in the organic business, but again, I think we look at itfrom a return on capital perspective, and that's the way we actually assess our investments.


Thank you.


Next question, please.

Operator

Chris Whitmore, Deutsche Bank.

Chris Whitmore - Deutsche Bank - Analyst

Thanks very much. I wanted to ask about the sustainability of Technology margins. Specifically, I am interested on what you are seeing from apricing standpoint on equipment. It sounds like you have turned a bit more aggressive on equipment to drive some unit placements. How doesthat flow through to margins over the next couple of quarters, number one.

Number two, is it fair to say that you have gotten more aggressive in order to drive those unit placements?


I think that you can look at the unit placements from two different perspectives. Price, we are still in the range of 5% to 10% price erosion on ayear-to-year basis. Maybe a little bit higher this quarter, at the higher end of the range than in the past, but not anything outside of that range.Thebig driver here is mix. Mix is -- mix in all of the categories, entry, mid and high, if you look at the product sets that we have been very successful onand the products that we have launched, these 27 products, they are skewed toward the lower end of the mix range, the price range, so we getlots of activity.

We will get post sales, but the revenue doesn't necessarily map to it in the short term because the prices are lower. I think that the margins for theTechnology business, connecting it to the previous conversation that we just had, the previous question, are -- we are in a range where they aresustainable. They take work to get there. This is where we have manage costs and expenses continuously; simplification, etc. etc. But I do believethat they are sustainable, and I think that we are showing good results on that.


Yes, just to add to that. So as we get into 2012, as I said 2011 was very good for margins in the Technology business we actually expanded marginsin spite of all the pressures.We continue to have currency issues and we continue to have pension expense issues for 2012.

19






And so that will put some pressure on technology margins, and that is the reason why we are talking about efficiencies and we are talking aboutrestructuring, and we keep managing it. But I would say net-net when you look at technology, we are industry leader gaining market share,expanding margins. I would say that it is a testament to the quality of our products.


Thank you. Last question, please.

Operator

Deepak Sitaraman, Credit Suisse.

Deepak Sitaraman - Credit Suisse - Analyst

Great, thanks very much. First, just a clarification if I could. I just want to confirm that your revenue guidance for the year does include the impactof acquisitions, which I expect would probably add a couple of points of growth in itself?


It does include acquisitions, Deepak.


Okay. And then, Luca, if I can just follow up on Europe, can you remind us of your revenue exposure to Europe in the Technology segment? Andex Europe can you give us a sense of growth in the Technology segment in the fourth quarter, and maybe just talk us through your expectationsfor the year both for Europe versus ex Europe?


So Europe in total is about -- we're exposed about 20% of our revenue base. In Technology, just to give you a sense, Deepak, equipment revenuefor the Company was down 2% in Q4. It would have been up 2% excluding Europe. So both US and DMO were solid in Q4, and we definitely sawthe weakness in Europe.


Okay, that's really helpful. And then maybe lastly for Ursula. In the Technology segment, can you give us an update on where you are in terms ofjust expanding distribution, particularly to reach SMB type customers, and any metrics that you can share around contribution to the overall Techsegment revenue. And perhaps growth that you saw in your SMB revenue last year would be very helpful.Thanks so much.


Yes, expanded distribution, this is something that has been very successful for us. I think it is showing up, by the way, in the US revenue dynamicsand the activity dynamics that we just talked through.

20






The performance of the tech business without Europe which would have been up, which is a change for us. US has been on and off. We have, Ithink, a solid footing now, primarily focused on the products and the expansion of distribution, so it has worked out fairly well.

We have -- everything that becomes available that is good for us to tuck in, we tuck in.You know, my -- I don't think I have said this publicly before,but after a while you run out of things to buy. I don't know if we are quite there, but we may be getting there on the tech side. So a lot more of ouracquisitions will be focused on Services as we go forward.

We will pick up the odd SMB distribution capacity in the United States. So good news across the board. I think that we have done as much as wecan do with a little bit around the edges to expand it, and we will be focused on Services on a go-forward basis.

So all of you, thank you very much for your time and for your interest. Have a good first quarter.

Operator

This concludes today's conference call.You may now disconnect.

D I S C L A I M E R

Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.

In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based uponcurrent expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are morespecifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of theassumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION,THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUMEANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLECOMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

©2012,Thomson Reuters. All Rights Reserved. 4687183-2012-01-25T18:26:30.237

21






Documents

EDITED TRANSCRIPT XRX - Q4 2011 XEROX CORPORATION …cms.ipressroom.com.s3.amazonaws.com › 84 › files › 20125 › ... · to serve more small and midsized businesses around the