Doing a lot of the right things, but can they show some agility?

Xerox recently reported their financial results for the third quarter, and the general consensus was that they are doing well. Especially considering the problems they had until recently with their debt load and overall business model (acknowledged internally to be “unsustainable”), signs are that they have now stabilized and are on a positive trajectory.

Some of the positive points to emphasize:

• Color digital printing is booming, and Xerox is one of the major manufacturers of color output systems. The results tend to really shine in this area – color hardware sales are growing, high-profit color installations and output volumes as a portion of the overall revenue structure continue to grow, and new color models have been successfully introduced.
• Production printing is a segment that has been traditionally strong for Xerox. Their depth of experience and customer relationships as well as their broad range of high-volume offerings are without question world-class. They are market leaders in key segments of digital production systems.
• They are also working hard to diversify into services and solutions. For example, the recent acquisition of XMPie is a valuable addition to the Xerox portfolio. Other workflow and vertical solutions are also being added and expanded to provide a more complete offering for their customer base.

So Xerox is well positioned on many fronts. They are doing a lot of the right things, and the positive results support the contention that they are on the right track. But can they show the necessary agility to maintain the momentum? Each point mentioned above has, if not a down side, at least another side to consider:

• Color is overall the most attractive growth segment presently, but this is also the area where even high-value products are being aggressively priced by all competitive parties. Also, as the installed base is widened, it will be hard to maintain the ratio of color output (as a portion of total output) that was achieved in the past. New customers are intrigued by the increasingly attractive system costs and modest color output costs, but they still may not produce the same highly profitable color volumes as the enthusiastic early adopters. So future color growth may come at the expense of lower margins. Xerox (and every other manufacturer) of course hopes that slightly lower margins will be compensated by higher and more profitable consumables revenue over the life of each color installation. While early indications are positive, this will be an area to watch closely in the future.
• Production printing is, despite Xerox’s dominant position, potentially even more precarious. The production arena was and is a cash cow category which is now being attacked on several fronts. Traditionally, Xerox has successfully developed and marketed production systems which are positioned and priced well above the office segment. But that inviting gap has encouraged other manufacturers to offer more modestly-featured (and -priced) equipment which is nonetheless attractive for traditional production-class users. These systems are starting to populate the emerging “light” or “entry-level” production segment and are attracting a great deal of attention and business, mostly at the expense of the higher-end products – the classic Xerox domain. They have in response also developed products to address this new segment, but since the average prices and output volumes are more modest, those sales translate into exposure on the revenue and earnings front, now and in the future.
• Solutions offerings are good to develop and this area is indeed promising. The only immediate concern here is that Xerox, like every other vendor trying to grow beyond the hardware sector, has to learn how to ensure that these business areas are complementary, understandable (to their own sales channels as well as to their customers) and ultimately profitable.

So the Xerox results are positive, but not perfect. Watch the items above to gauge their ongoing progress and future prospects.