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Xerox (XRX) Down 8% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Xerox (XRX - Free Report) . Shares have lost about 8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Xerox due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Xerox Earnings Beat Estimates in Q3, Revenues Lag

Xeroxreported mixed third-quarter 2018 results, wherein the company’s bottom line surpassed the Zacks Consensus Estimate but the top line lagged the same.

Adjusted earnings per share of 85 cents beat the consensus mark by 8 cents but declined 4 cents from the year-ago quarter number. Total revenues of $2.35 billion missed the consensus mark by $68 million. The top line also decreased 5.8% year over year on a reported basis and 4.7% on a constant-currency basis.

Revenues by Segment

Equipment sales totalled $511 million, which decreased 3.8% year over year on a reported basis and 2.7% on a constant-currency basis. The segment accounted for 22% of total revenues.

Post sale revenues of $1.84 billion declined 6.4% year over year on a reported basis and 5.2% on a constant-currency basis. The segment contributed 78% to total revenues.

Revenues by Region

Revenues from North America came in at $1.44 billion, down 4.6% year over year on a reported basis and 4.2% on a constant-currency basis. The region contributed 61% to total revenues.

International revenues amounted to $814 million, down 4.6% year over year on a reported basis and 2% on a constant-currency basis. The region accounted for 35% of total revenues.

Revenues from Other region summed $94 million, down 27.7% year over year on a reported as well as on a constant-currency basis. The region contributed 4% to total revenues.

Operating Results

Gross profit of $942 million decreased 5.9% from the prior-year quarter number. Total gross margin of 40.1% remained flat year over year.

While equipment gross margin expanded 510 basis points (bps) year over year to 34.6%, post-sale gross margin contracted 120 bps to 41.7%.

Adjusted operating profit of $307 million was up 1.7% year over year. Adjusted operating margin improved 100 bps year over year to 13.1%.

Selling, administrative and general expenses, as a percentage of revenues, declined to 24.8% from 25.2% in the year-ago quarter. Research, development and engineering expenses, as a percentage of revenues, increased to 4.3% from 4.2% in the prior-year quarter.

Balance Sheet and Cash Flow

Xerox exited the third quarter with cash, cash equivalents and restricted cash balance of $1.22 billion compared with $1.33 billion at the end of the previous quarter. Long-term debt was $4.82 billion compared with $4.81 billion in the preceding quarter. The company generated $274 million of cash from operating activities in the reported quarter.

During the quarter, Xerox returned $284 million through share repurchase and $69 million through dividends.

2018 Guidance

Xerox has raised its cash flow guidance for full year. The company now expects operating cash flow in the range of $1-$1.1 billion compared with $900 million-$1.1 billion projected earlier. Free cash flow is now anticipated in the band of $900 million-$1 billion compared with $750-$950 million anticipated previously.

For 2018, the company also increased its share repurchase expectations to $700 million from $500 million. Management plans to inform investors about the company’s strategy and long-term financial expectations on its analyst day, which will be held later this year or early 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 9.43% due to these changes.

VGM Scores

At this time, Xerox has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Xerox has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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