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optifan

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  • Xerox Management Discusses Q4 2013 Results - Earnings Call Transcript [View article]
    Look closely into their 'engine room' (development and delivery capabilities and tortoise-like culture) and 'wheelhouse' (senior management and BoD) and you can appreciate why 'serious earnings growth' is quite distant, if not a total will o' the wisp.
    Jan 27 06:58 PM | Likes Like |Link to Comment
  • ModernGraham Valuation Of Xerox Corporation [View article]
    Both fact and myth(s) are at play here. ModernGraham did a nice job of presenting a succinct quantitative analysis. That's the fact portion.

    As for the myths:
    1. The idea that services is salvation for a hardware company is a myth, unless they're proprietary services focused on maintaining their own devices or software, i.e., a 'captive' market. Here are the typical gross margin/operating margin stats for various components of the IT industry: software - 80%/40%; hardware - 60%/30%; proprietary services - 40%/20%; 'other' services - 20%/10%. This last is somewhat higher than where ACS stood just before XRX acquired them; it's now lower and trending downward. IBM got it right - lots of software and good hardware to deliver their high ROE.
    2. XRX's sale of their solid ink business to DDD was at a distressed price, a great buy for DDD. It represents another step in XRX's exit from that market (except for providing certain components). They do not have commanding patents or technologies. Once again, too little too late. From the horse's mouth per a recent CNBC piece: "Kevin Lewis, head of Xerox's 3-D initiatives, said, "I just think the [additive manufacturing] market will be small [for Xerox]." Also, a good deal of XRX's engineering and R&D was placed (by Burns as president) in the hands of HCL Technologies, a head-to-head competitor of ACS. How proactive do you expect they'll be in helping XRX maintain its technology cash cow, which funds competitor ACS?
    3. No board member, including Burns, has ever run a company, or is currently running one, whose ROIC has in recent years exceeded its weighted average cost of capital (OTC:WACC). Such companies are, by definition, short-timers. Just a matter of time, or perhaps a miracle?
    4. As djean states XRX's services business (mostly call centers) is low margin and people intensive. Overstaffing in both their technology and services businesses is the reason XRX's operating margin is suffering and continues to decline annually. Just too many legacy heads and a management lacking backbone to deal with them. ACS moving to India to get cheaper labor only exacerbates XRX's conflicted relationship with HCL. And those who expect that the health care wave will carry them in the future should check out the mess they've made in Montana 'rebuilding' that state's Medicaid computer systems. It's ObamaCare all over, probably worse. And it's not the only one.

    For whatever it's worth, I have done well with Xerox (and other basket cases) over the years. I am currently long, but with a hair trigger finger on it. It's definitely not a good long-term investment for the retirement fund. It must be watched closely, with hand always on the escape hatch lever.
    Jan 8 01:10 PM | 1 Like Like |Link to Comment
  • AT&T's Sale Of Connecticut Wireline Assets Makes Sense [View article]
    Dosto, ya gotta give Stephenson some credit for fleecing FTR of $2b cash for an essentially wasted (read: wireline) asset. Good trick given that they and VZ and others are positioning with FCC to get out of the wireline business starting a year from now. Far better $2b cash now than writing it off in a couple of years or, perhaps worse, having to keep it alive indefinitely for political reasons, especially given its CWA and other pension liabilities.

    Short FTR, stay long T.
    Dec 19 03:50 PM | Likes Like |Link to Comment
  • Frontier Communications Doubles Down On Landlines [View article]
    Relevant facts not mentioned:
    1. CEO Wilderotter became top dog in 2006, with stock price at $14. She purchased certain land line assets from Verizon in late 2009, with stock price falling to $8. Stock now at $4 and change. Is there perhaps a trend here? Will we soon see a $2 handle on FTR? Is this just one more Wilderotter 'Hail Mary' pass? Read on.
    2. FTR is badly in need of new cash flow to keep its payout engine going, the only strategy management can come up with. ATT-CT may provide that short-term, but at the expense of being a rapidly declining market as technology changes the game and customers jump ship to cellular and IP. And does this management stand a chance against the CWA and its pension fund shortfall?
    3. FTR is one of the most heavily-shorted stocks today, with 20% of stock outstanding currently in short interest. Eh?
    4. FTR's Altman Z-Score is very low and in 'red zone' territory, indicating a probability of bankruptcy in the next two years of 'somewhat less than 49%'. Huh?
    5. The land line providers (ATT, Verizon, etc.) have petitioned the FCC to begin SHUTTING DOWN or otherwise abandoning (or better yet selling for a premium price to someone less smart) their land line operations as soon as a year from now, as cellular and IP technologies take over. At $2b, ATT took FTR to the cleaners, just as Verizon did in 2009.
    6. FTR, desperate to generate new cash flow, will cut capex to the bone and raise prices, spurring further deterioration of land line service levels and accelerating customer cancellations.

    Anybody who denies these facts ("but, you know, we need POTS land lines for fax and 911 service") has their head in the sand and/or does not understand technological disruption and how fast it is happening in telecom.

    An interesting stock for day traders, but not for 'buy and hold' types.
    Dec 19 07:18 AM | 3 Likes Like |Link to Comment
  • What's Driving Xerox In 2014? [View article]
    XRX is a classic case of a 'Greater Fool' investment, where the canny investor hopes that there are such out there keeping the stock price inflated until he can cash out or go short before it falls once again. This company is a one-time paragon slowly twisting in the wind as circumstances (and technology) overtake it. Notwithstanding that fact, it is a wonderful 'in and out' investment, i.e., going long and then shorting it as it flips to the downside. Just look at its long-term stock price fluctuations over the last 20-30 years. It's like moguls on a ski slope, momentary ups followed by ever lower downs, but always trending downwards. Not a place to put your money long-term. Ask the Xerox retirees. Sort of a Kodak in slow motion.

    XRX Services doesn't offer much hope, other than steady XRX's top line (essentially fixed for the last five years). They are principally in the commodity business of 'customer contact' (read: call centers), with operating margins of less than 10% that are declining annually. Look at how that vital stat has fallen since acquiring ACS. Given that trend it's not good news that XRX's services business is their 'growth engine'. And it's not at all good news that they need to outsource the higher margin work to the likes of Cognizant.

    Watch Dell and HPQ. They're quickly getting it together, with more than a little help from their 'friends': Dell recently teaming with Accenture to exploit the cloud through their jointly developed services and product sets; HPQ likewise teaming with Accenture in the same vein. XRX, on the other hand, with little software product to leverage and having to outsource its high margin work (by necessity because they lack the capabilities) to an aggressive India-based player, one-third its size but with triple its market cap and with their eye clearly on XRX's customer contact market.
    Dec 14 11:33 AM | 1 Like Like |Link to Comment
  • Xerox Mishap Shows How Far It Has Come [View article]
    Analysts are finally starting to ping on XRX's use of factoring to boost their 'cash flow', i.e., to pull future period revenue into current period (but at a high price due to typically high discount rates, thus lowering operating margins). A good sign in that it may help increase investor insight as to the company's true condition and prospects.

    Query: what portion of the company's future revenue streams (for both equipment leases and long-term services contracts) have been thus cashed ('hollowed') out?
    Oct 26 06:20 PM | Likes Like |Link to Comment
  • Xerox Management Discusses Q3 2013 Results - Earnings Call Transcript [View article]
    Kudos to Ben Reitzes and Mark Moskovitz for starting to ping on XRX's penchant for 'creating' substantial 'cash flow' via factoring. Factoring is a very expensive way to generate quick cash. It can cost between 8% and 20% right off the top. Their operating margin is under 10% and falling. Is factoring perhaps part of the reason?

    Factoring is normally done by (a) companies on the edge financially, and/or (b) companies in need if quickly covering a very short-term and temporary cash gap, and/or (c) companies window-dressing their financials to flim-flam investors.

    XRX was cited by the SEC for the latter back in 2002 and was punished heavily for it. UB was assistant to the CEO at the time. Did she know of these shenanigans? Many of the accounting and finance staff from that time still hold positions of influence there. They no doubt did. Have they reverted to kind?

    For further info, check out the SEC's 2002 complaint at SEC.gov. Google "xerox factoring cash sec". Read paragraphs 72 - 75 to see the details.

    I'm happy at least some of the analysts are starting to do their jobs of digging into smoke and mirrors this crowd peddles. Cheer them on in the name of transparency and service to the investor.
    Oct 26 02:17 PM | 1 Like Like |Link to Comment
  • Xerox Mishap Shows How Far It Has Come [View article]
    What's truly amazing about XRX is - at least to this point - many of its investors' willingness to behave as ostriches, engaging in fantasies about its prospects. The food stamp debacle is failure on a most fundamental level, a clear sign of extreme incompetence. No common sense at all displayed there.

    The company is well on the path to replacing a high-margin (both gross and operating) and high cash flow legacy business with one (IT services) that generates those metrics at one-third their levels (check out the performance metrics of peer IT services companies vs. tech hardware providers). There has been no top line revenue growth at Xerox since acquiring ACS, while gross and operating margins (and free cash flows) decline steadily each year. Run a PV analysis on this trajectory and one finds that the company, at $10.50, is likely overvalued.
    Oct 16 04:50 AM | 1 Like Like |Link to Comment
  • Xerox: A Safe Investment With Over 50% Upside [View article]
    So, IBM just sold its 'too low margin' (20% gross margin) customer contact BPO business to Synnex/Concentrix so it can focus on its 60% gross margin software and hardware businesses. ACS, the year before its acquisition by XRX, had a 17% gross margin. It may be slightly higher now that it includes XRX's proprietary services business, which has always carried a high margin.

    ACS's primary business is customer contact BPO. How threatened will its margins become now that IBM's BPO 'gorilla' is able to perform freed from IBM's extraordinary overhead charges and less-than-decisive corporate culture?
    Sep 11 07:58 PM | Likes Like |Link to Comment
  • Xerox - Copy This, For A 30% Upside [View article]
    Banker/Krustyman,

    Re. 3-D printing, PARC has been 'working on' technology for flex electronic circuit 'printing' for some time. But their becoming a large factor in overall 3-D printing may be a stretch. There's no evidence that they're positioned well to compete with the likes of Stratasys, 3-D Systems, etc. And if they were so positioned would not Ursula Burns be boasting about it as she does other of their accomplishments?

    Other questions:
    - who owns the underlying IP, XRX? AAPL? Alien Technology? a Japanese company?
    - over one-half of PARC's work is done for third parties, not XRX; is this one instance of that?
    - XRX is known for fumbling new technologies, unable to execute, e.g., PC technologies; have they corrected that long-standing cultural quirk?

    I hope you're right about their 30% upside potential. I'm presently long XRX and will stay so committed until it tips back down. David Einhorn has taken his profits and sold out; Lynn Blodgett, XRX's head of services (the ultimate insider) sold $15 million worth of shares over the last three months; several other funds are starting to blend down their holdings. I watch them all closely to decide when to take my profits and run.

    In the mean time, why not check out the USPTO web site to see who owns the 3D circuit printing IP?

    Optifan
    Aug 30 06:37 AM | Likes Like |Link to Comment
  • Xerox - Copy This, For A 30% Upside [View article]
    Banker, you might want to look more closely at XRX, ths time wearing your skeptic's glasses. No year-over-year growth, combined with quite negative tangible book value, not to mention annually declining gross margin, operating margin, and FCF per dollar revenue. Clearly a corporate 'Sad Sack' heading for the graveyard. It will take time but overpaying substantially for a low margin business as ACS (among the lower-margin of players in an inherently low-margin segment) does not bode well for a company that has foresaken its legacy business in pursuit of their 'document services' will o' the wisp.
    Aug 28 08:04 PM | 2 Likes Like |Link to Comment
  • Xerox: A Safe Investment With Over 50% Upside [View article]
    Tap, like you I have too much XRX stock to be as comfortable as the writer. But I have no problem with Burns buying a software company. That's the strategy Palmisano set IBM on years ago. It seems to be working well for them. Software has the highest gross margin/operating margin ratio of any IT segment, 80%/40% (ORCL for instance is at 81%/39%). Non-proprietary IT services such as ACS, on the other hand, has the lowest GM/OM ratio of any IT segment, 20%/10%. Hardware companies with proprietary services arms run in the 60%/25% range (e.g., CSCO: 59%/22%).

    Note that just prior to its acquisition by XRX, ACS had (in 2009) gross margin of 18% and operating margin of 10.5%. Look at XRX back in 1994, when their GM/OM ratio was 61%/27%. Compare that to 2012, three full years after acquiring ACS, now running at 37%/7.4% and declining annually! How's that for a death spiral? IBM runs at 49%/19%, thanks to pursuing their strategy of 'software is the new hardware'. ACN runs at 32%/14%, but how many can duplicate them?

    Here are some facts and realities regarding XRX:

    1. Lynn Blodgett, CEO of their Services unit, sold 1.5 million shares in the first two weeks of this month. What does the writer have to say about that well-publicized tidbit?
    2. Pre-acquisition, ACS earned $0.06 of FCF for every $1 of top line revenue. XRX at that time earned $0.15 of FCF for every $1 of revenue. The combined XRX/ACS now earns roughly $0.10 for every $1 of revenue, thanks to a steady decline in their cash cow legacy technology business and (not really) offsetting growth in a low-margin business, IT services.
    3. XRX's legacy business is woefully overstaffed, by perhaps 20,000 or so. Look for a major restructuring writeoff or, if not, death by a thousand cuts from multiple incremental ones.
    4. Both Burns and Blodgett profited personally several years ago from financial shenanigans while in senior executive positions with their respective employers. The SEC came down on both companies with severe sanctions. Do you trust these same people with your dough or retirement funds? I sure don't.
    Aug 16 09:12 PM | Likes Like |Link to Comment
  • Will CSL Acquisition Improve IBM? [View article]
    mr_dinky is spot-on with his observation that much of the current cloud activity is merely internal transfer of work, with no real net revenue gain. And application builders like Accenture derive more benefit from the cloud than the IBM's of the world since they do not lose the hardware portion of such rotation as the IBM's do.

    Cloud is not a new phenomenon, having been preceded in the '60s and '70s by IBM and their Service Bureau Corporation, as well as Control Data. Different technologies (batch processing vs. online) but the same idea - run your apps on remotely-located hardware owned and operated (and hopefully adequately cared for) by somebody else. That business, generally focused on mid-size companies and special applications for larger ones, rotated into owned processor resources during the '70s thanks to Moore's law, and then dominated up to the recent re-emergence of today's cloud. History repeats.

    Industry analysts continue to be wowed by the cloud's sex appeal and proclaim glad tidings about enhanced earnings. But cloud has the same issues of security and control of one's own environment (probably worse, but likely at lower monetary cost). How many CEO's understand and appreciate that their cloud vendors' server farms hosting their proprietary data may be sitting in Greenland, Iceland or perhaps even Siberia, one of the latter two the possible future home of Edward Snowden?
    Jul 23 08:59 PM | Likes Like |Link to Comment
  • Xerox: Time To Take Profits In Xerox Just Like Einhorn Did [View article]
    (Note: Please excuse the length. Also, the ROIC's cited below are from Morningstar and include goodwill and intangibles.)

    Tap, I have bad news for you. What it takes is either (a) a Carl Icahn, a Nelson Peltz or a Bill Ackman to take a significant position and force the BoD to do the right thing, or (b) a BoD that is competent, conscientious and courageous. We have neither here. The Icahns of the world won’t step in until the stock price hits $3-4 given the overload of goodwill and intangibles on the balance sheet. By then our retirements will have been shot. That leaves (b). Let’s look at the so-called ‘independent’ directors:

    • Glenn Britt, chairman and CEO of Time Warner Cable, whose ROIC during his tenure is even lower than Burns’. So much for competence (he’s the lead independent director by the way);
    • Robert McDonald, until recently the Chairman and CEO of P&G, only weeks ago having been given the boot by his BoD after Bill Ackman questioned his competence and forced them to act;
    • Chuck Prince III, the ex-CEO of Citigroup who was also asked to ‘retire’ early by his BoD after the mortgage fiasco in 2007;
    • Robert Keegan, who as head of Kodak’s Consumer Division led their quixotic charge to squelch digital photography with the Advantix film format. After ‘graduating’ from EK he went on to head Goodyear Tire and left his skid marks on that company (ROIC of minus 5% during his tenure there). Here’s a 2000 quote by an industry analyst upon his announcement he was leaving EK to join GT: “Although the company is active in digital photography, we believe its bread and butter earnings are film right now. Keegan did a good job of not losing sight of that.” Oh well, that was then…;
    • Richard Harrington, ex-CEO of Thomson Corp. (chief of admin for the real power, Chairman Ken Thomson). Dick’s best line was “The future will be about information optimization.” Eh?
    • Mary Agnes Wilderotter, Chairman and CEO of Frontier Communications, scraping along at an average minus 2.5% ROIC during her eight years so far, worse than Burns;
    • Ann Reese, ‘co-founder’ and ‘director’ of the two-person Center for Adoption Policy;
    • William Curt Hunter, retired Dean of 90th-rated Tippie School of Business at Iowa State;
    • Sara Martinez Tucker, formerly in the Department of Education where she became caught up in the 9.5% student loan scam by which she benefited personally at substantial taxpayer expense.

    These are the individuals who must bring themselves to act decisively to remove Burns, the poster child of years-long policies of political correctness at XRX, the showcase of their culture. Pinch your retirement pennies, Tap. It likely won’t be well-supported by your XRX stock.
    Jul 10 09:15 PM | 2 Likes Like |Link to Comment
  • Xerox: Time To Take Profits In Xerox Just Like Einhorn Did [View article]
    Saibus Research does it again – a tough-minded but fair analysis of a struggling company, definitely not your typical ‘blue-chip’ industry analyst ‘softball’ treatment generally observed in the quarterly earnings Q&A’s.

    Here is Burns ‘new Xerox’ compared with what she started with pre-ACS (2009):
    1. A XRX/ACS whose gross margin % has declined by 900 basis points (32% now vs. 41% in 2009);
    2. A XRX/ACS whose rock-bottom ROIC (what Buffett calls the best indicator of a company’s moat) of 5% or so (source: Morningstar) is well below its WACC of 10 – 11%. If you can’t even return your cost of capital year upon year you’re on the way out a la Kodak. With XRX/ACS you’re betting on a management that takes out a ‘loan’ at 10% to generate a return of 5%;
    3. A XRX/ACS whose employees rate its top management at the absolute bottom of the ladder (27% approve of Burns, while only 21% approve of Blodgett, head of services), a sign of horrible morale in the trenches, especially bad news for a services company. It speaks volumes of ‘death marches’ - marginal business is booked and employees are then whipped to make budgets, a recipe for deterioration of any services business (in stark contrast competitors Accenture’s and Cognizant’s CEOs are rated by their employees at 94% and 92% approval respectively – glassdoor.com);
    4. A XRX/ACS whose goodwill and intangibles, resulting mostly from the ill-advised ACS acquisition, are higher than its shareholder equity. The auditors must be quite nervous about pending impairment charges;
    5. A XRX/ACS whose Technology sector remains woefully overstaffed ($150k revenue/employee vs. business equipment industry benchmark of $350 - $700k/employee).

    Who would buy this company other than Greater Fool in-and-out opportunists such as David Einhorn, or the Greater Fools themselves? Certainly not an Icahn or Peltz, at least not until the share price drops below $4.

    What will happen when ACS goes head-on against some real competitors flush with cash and knowhow as it tries to enter their higher-margin sectors, e.g., Cognizant and its Indian outsourcer peers (ROIC of 24-26%), IBM (ROIC of 31%) and Accenture (ROIC of 63%)? Those are true moats. We shall see.

    Accenture (ACN) is especially canny at raising customer expectations on Service Level Agreement (SLA) terms during bidding. By raising the bar they set up a ‘win-win’ situation for themselves: if they win they are prepared to deliver the SLA’s; if they lose they know whomever won will likely suffer financially for years trying to get over the bar they had a hand in setting; they’ve also set themselves up for a rebid when the 'winner' fails.

    Thankfully we have Saibus and a handful of others willing to tell it like it really is. Expect continuing underperformance and more surprises from XRX/ACS, with Saibus et al tipping us off in time to exit.
    Jul 8 02:41 PM | 1 Like Like |Link to Comment
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