When I initiated coverage on Xerox (NYSE:XRX), I concluded that the stock wasn't dead, and in January, I opined the name was also not "dead money." That is important to reiterate. But this once stellar blue chip has certainly fallen from grace, big time. I had in my prior work numerous times that we needed to see some improvement in the underlying metrics before I could get behind the name. Well, in the past three months, the stock has moved sideways to higher, but will there be sustained momentum? That is tough to tell, but with Q2 earnings having just come out, I will discuss the performance and where the company and stock may be heading.
We know Carl Icahn has been into this trade and now has a role on the board. Remember prior to this he had been upping his stake and has worked to get some of his own people into management at the company. Remember previously that I also discussed that the company was splitting into two separate companies to generate value. That is planned to occur later this year. Post split, we know that Jeff Jacobson will take the reins, while Ursula Burns will move to Chairman of the Board post-split. The question is, how is each business piece performing now, ahead of this move?
Well look, performance had been pitiful of late and is the reason shares have declined. Well here, Q2 shows that there are still declining revenues. Revenue as a whole came in at $4.39 billion, but this did meet estimates. However, this was down 4.4% year over year, continuing a string of declining quarters. Of course, as I have discussed in-depth in other articles, the strong dollar has plagued companies with international businesses.
Thus, we need to look at revenues on a constant dollar basis. Doing so, we still see revenues were down 4% year over year. That is still a huge negative. Revenue from the company's "services" business was $2.5 billion, which was a decrease of 2% (but down only 1% in constant dollars) with margins at 7.7%. Where the weakness continues is the "document technology" business.
Here revenue came in at $1.8 billion, down 7% on an absolute basis or 6% in constant dollars. Margins, however, did improve thanks to cost reductions and productivity improvements. They came in up 2.4 points versus last quarter, at 12.6%.
So revenues declining are never a good thing, but margin improvement is strong. So that means expenses must be under control. Well total costs and expenses were down 6.6% year over year. Adjusted gross margin and selling, administrative and general expenses were 31.2% and 19.7% of revenue, respectively. Both metrics improved quarter over quarter.
In terms of cash flow, Xerox produced $177 million in cash flow from operations during the second quarter, in line with normal seasonality, and ended the quarter with a cash balance of $1.2 billion. Considering revenues and expenses, the company saw an earnings of $0.15. Now, we need to factor in some items and in doing so, we see that adjusted earnings came in at $0.30 per share. This actually beat estimates by $0.05, and is down from a year ago.
The take home? I'm looking forward to the separation and split up of the company, as it desperately needs a catalyst. I continue to be concerned with declining revenues and although margins widened, they have been pressured heavily this year.
The company affirmed its full-year guidance for adjusted earnings of $1.10 to $1.20 per share. The company expects full-year GAAP earnings of $0.44 to $0.55 per share. It also expects 2016 cash flow from operations of $950 million to $1.2 billion and free cash flow of $600 to $850 million.
I think given the reach of the company and despite the headwinds, should the stock dip to the point where it yields 3.5%, I would be a buyer from a speculative standpoint and income standpoint.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.