When I initiated coverage on Xerox (NYSE:XRX), I concluded that the stock wasn't dead. This once-stellar blue chip has certainly fallen from grace, big time. I mean, it has been struggling for a long time. I suggested on nice dips you could buy simply for the yield and collect the dividend, but growth was nowhere to be found. I had said 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, and the completion of the split of Conduent is now complete. The newly created company is essentially Xerox's former business process services segment. Conduent will operate in three segments, healthcare, public sector services and commercial industries, with commercial industries making up nearly half of revenues. The newly leaner Xerox is focusing on the document technology side of things. This move was a value creator. But will there be sustained momentum in Xerox? That is tough to tell, but let's check in on the name to see where we are at.
The truth is that performance has been pitiful of late and is the reason shares had declined quarter after quarter. Well here in Q4 we still see declining revenues. Revenue as a whole came in at $2.73 billion, and this missed estimates by $40 million. However, this was also down 7.5% year over year, continuing a string of declining quarters. In addition, the degree of declining revenues seems to be picking up. However, as I have discussed in-depth in other articles, the strong dollar has hurt companies with international businesses.
Because of this issue we, we need to look at revenues on a constant dollar basis. Doing so, we still see revenues were down 5% year over year. That is still a huge negative. The bulk of revenue came from annuity. I was also pleased to see that adjusted operating margin improved this quarter to 14.0%, while gross margins were a solid 40%. Declining revenue is of course not a positive, but margin improvement is strong. So that means expenses must be under control, right? Well, total costs and expenses were 23.4% of revenue, which is a solid result, but I would like to see this come in under 20%.
In terms of cash flow, Xerox produced $462 million from operations during the fourth quarter, and ended the year with a cash balance of $2.2 billion. Considering revenues and expenses, the company saw earnings of $0.17 per share. Now, we need to factor in some items and in doing so, we see that adjusted earnings came in at $0.25 per share. This actually met estimates.
The bottom line? I'm very much looking forward to the performance of the new company now that the separation and split-up of the company is complete. I have opined that Xerox desperately needs a catalyst. Compared to years past, this name is far weaker than it used to be, but the outlook is positive and there is value here. I continue to be concerned with declining revenues, and although margins widened, they have been pressured heavily. As for the new company's outlook, Xerox sees $0.42 to $0.52 cents in earnings from continuing operations, but $0.80 to $0.88 on an adjusted basis. I would be a buyer from a speculative standpoint since there may be some new life in the stock following the separation.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.