When Xerox Corp. (NYSE: XRX) paid $6.4 billion a year ago to acquire business process outsourcing firm Affiliated Computer Services, Xerox shares plunged nearly 15%. Since then, the company’s fortunes have improved significantly, even though the share price has only managed to recover the loss it suffered when the ACS purchase was announced.
Xerox, led by its new CEO Ursula Burns, is making the transition from a hardware company to a software services company with a hardware component. This is not unlike the transitions undergone by IBM Corp. (NYSE: IBM), Hewlett-Packard Co. (NYSE: HPQ), and, to some extent, Dell Inc. (NASDAQ: DELL). An article in Barron’s this weekend points out just how far Xerox has come in a year, and the prospects for adding to the company’s success so far.
The combination of the back-office processing services offered by ACS and the printing management and equipment servicing offered by Xerox represent recurring revenues that yield about 83% of the company’s total revenue, according to Barron’s. The company’s CEO calls her company “a cash machine,” which is an apt description for a company expected to generate $2.6 billion in operating cash this year, nearly 20% better than a year ago.
Xerox has raised its EPS guidance for 2010 from $0.75-$0.85 up to $0.88-$0.92. The company also expects to reduce its debt by $1.1 billion in just the second half of this year.
The choice of ACS as an acquisition target was inspired. ACS’s business is to collect, process, analyze and store information for its customers. Xerox takes advantage of that by taking a hand-off of the information and then making it electronically retrievable.
Xerox now has a serious wedge into the government, health care and financial services markets that generate documents by the train-car load. The company is also pushing its sustainability efforts. Xerox has estimated that for every dollar spent on printing, another six dollars are spent handling and distributing printed matter. Couple the company’s electronic information handling with the host of new mobile devices like smartphones and tablets, and the long-awaited paperless office looks to be at least a step closer.
The company still must execute, but it now has the tools it needs to compete. The company’s shares are up about 8% today.
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