Xerox Earnings: Mixed Results With Flat Sales Offset by a Focus on Profitability

We maintain our $13 fair value estimate for no-moat Xerox XRX after the firm reported a mixed first quarter, with below-estimate sales offset by improved operating margins. While the near-term macro environment continues to be tough, we believe some of the more acute macro pressures stand to dissipate over the coming quarters as a frosty IT spending environment shows signs of thawing. From a long-term perspective, we reiterate our view of Xerox as a large fish in a shrinking pond. While we commend management’s focus on cost optimization, we don’t believe these savings can offset the secular decline Xerox’s products face. With shares trading 5% up after Xerox reported results, we believe investors are overly optimistic about the firm’s future and view Xerox’s shares as overvalued.

Second-quarter sales clocked in at $1.75 billion, flat year over year and up 2% sequentially and slightly below our estimate. Like last quarter, a rebound in equipment sales spearheaded the top line as demand for office printing made a comeback after a dismal fiscal 2022. Improving supply chain conditions, coupled with price actions taken by Xerox, also boosted equipment revenue for the quarter.

On the margin front, decreases in shipping-related costs and higher equipment sales enabled Xerox to expand gross margins 210 basis points to 34%. Similarly, due to aggressive cost savings enacted by management over the last few quarters, Xerox’s adjusted margins expanded 410 basis points to 6.1%. The marked improvement in margins is aided by the easy comparison with the second quarter of 2022, a period in which lagging sales and high shipping costs were wreaking havoc on the firm’s financials.

Looking ahead, Xerox upped its adjusted profitability outlook for the year to 5.75% from 5.25%, factoring in benefits from the continued cost optimization the firm is undergoing. Xerox maintained its guidance for sales, with 2023 sales projected to be flat to down single digits in constant currency terms.