Xerox Earnings: Mixed Quarter as Weak Sales Are Offset by Improving Profitability

We maintain our $13 fair value estimate for no-moat Xerox XRX after the firm reported a mixed third quarter, with weaker-than-expected sales offset by improved profitability. We continue to have a weak outlook on Xerox’s long-term opportunity in a print landscape marred by secular decline. While we commend Xerox’s laser focus on profitability and operational efficiency, we’d like to see a similar level of attention given to a top line that continues to trend downward. With shares down more than 7% following the company’s earnings release, we view Xerox as fairly valued.

Third-quarter sales clocked in at $1.65 billion, down 6% both sequentially and year over year. Equipment sales, a bright spot in the last couple of quarters, struggled in the third quarter, declining 1% year over year and 8% sequentially to $386 million. Post-sale revenue, which constitutes more than 75% of Xerox’s top line, declined 7% year over year as Xerox’s customers bought less paper and IT endpoint devices. From a macroeconomic standpoint, Xerox continued to see softness in demand as customers dial back spending in the current uncertain macro environment.

On the margin front, a mix of pricing actions and ongoing cost-cutting measures enabled Xerox to increase adjusted operating margins to 4.1%, up 40 basis points year over year. As aforementioned, we commend Xerox’s focus on profitability, with the firm generating more than $100 million in free cash flow in the third quarter.

Looking ahead, Xerox maintained its adjusted operating margin outlook for the year of 5.75%, factoring in benefits from the continued cost optimization the firm is undergoing. The emphasis on operational efficiency should also help the firm’s cash generation, with Xerox targeting at least $600 million in free cash flow for 2023. Xerox maintained its guidance for sales, with 2023 sales projected to be flat to down single digits in constant currency terms.