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Michael Pechman

While xerox is best known for its multifunction copier / printer / fax machines ^[1], 2/3 of it revenue in 2006 came from ongoing maintenance and support services, and sales of printing supplies.^[2].

Over the last five years, Xerox has restructured, cutting costs and deemphasizing the sale of lower margin products.

Business Financials

As the document industry has changed over the past few years, Xerox has focused more on the sale and maintenance of high-end color image and managing systems ^[3]. Xerox continually tries to make new technological advances to maintain their equipment sales. Simultaneously, Xerox has taken a larger role as a service-based company. This transition will allow the company to reduce risk and maintain a consistent revenue stream as clients sign long-term agreements with the company ^[4].

Despite relatively flat revenues, Xerox has shown consistent growth in profit over the past three years including an increase in net income of 23.7% from 2005 to 2006. The increase in net income has been driven by the company's shift towards higher-margin operations that include the sale of high-end color systems and a variety of post-sales services ^[5].

^[6]

^[7] Other areas include all other international operations outside of the United States and Europe.

^[8] The Office segment serves small and medium-sized commercial customers as well as government and other public sector customers. The Production sector consists of high-end systems designed for large companies and customers in the graphic communications industry. Developing Markets Operations includes the sale and servicing of products in South America, the Middle East, India, Eastern Europe and Africa ^[9]. The Other segment includes revenue from paper sales and certain value-added services. Value added services enable Xerox to use its knowledge and experience to offer solutions that optimize customer output and minimize costs ^[10].

Key Trends and Forces

• Digitization of information: Computers and the internet have become indispensable parts of business operations. As emails and digital documents replace traditional means of sending and storing information, Xerox and other document industry firms will face the challenge of decreased demand for paper-related systems and products. The company has begun to offer services such as the Office Document Assessment that allow the company to analyze client’s workflow and document needs, and then identify the most effective mix of office equipment and software for that business ^[11]. Xerox works to reduce their customer’s document-related costs while increasing their own profits as they offer these and similar high-margin services. Despite the transition to digital systems, paper-related products will remain a vital element of Xerox's business so the company is still vulnerable to fluctuations in Timber Prices.

• Debt Obligations – As of December 31, 2006, Xerox had $7.1 billion of total debt ^[12]. This debt load could hinder the company’s ability to borrow in the future and could require Xerox to use a substantial portion of future cash flows to service debt rather than to develop new products or expand operations ^[13]. Additionally, changes in interest rate can substantially impact the cost of holding this debt.

• Transition to Color: A transformation continues to take place in the document industry, as the demand for monochrome systems diminishes and more customers want color products. Xerox and its competitors are continuously developing advances in color printing and copying and the firm that is able to take advantage of this new market will see significant growth in profits. Since color products require more supplies, they also have profit margins five times as great as monochrome printers ^[14].

Competition

Below are the six largest companies in the office equipment industry (excluding computers) by estimated 2007 revenue as of December 2007 ^[15].

Market Share

Among the above companies in the office equipment industry, only Xerox and Ricoh rank among the top firms by total copier sales. Xerox ranked fourth among total copiers sold in 2006, capturing approximately 8.5% of the market for combined monochrome and color copiers ^[17]. The top ten producers of copiers are listed below:

Xerox ranked fourth in new copiers sold, but only 28% of the company’s revenue comes directly from equipment sales. Nearly three-fourths of Xerox’s revenue comes from maintenance, service and supply sales ^[19].

Notes

1. ↑ XRX 2006 10K, Item 1, pg.2
2. ↑ XRX 2006 10K, Item 1, pg.7
3. ↑ XRX 2006 10K, Item 1, pg.2
4. ↑ NY Times "Prices Are Lower, but Profit Is Up at Xerox," Claudia H. Deutsch, April 21, 2007
5. ↑ NY Times "Prices Are Lower, but Profit Is Up at Xerox," Claudia H. Deutsch, April 21, 2007
6. ↑ XRX 2006 10K, Item 9, pg. 88
7. ↑ XRX 2006 10K, Item 1, pg. 1
8. ↑ XRX 2006 10K, Item 1, pg. 3
9. ↑ XRX 2006 10K, Item 1, pg.3
10. ↑ XRX 2006 10K, Item 1, pg.6
11. ↑ XRX 2006 10K, Item 1, pg.5
12. ↑ XRX 2006 10K, Item 1, pg.14
13. ↑ XRX 2006 10K, Item 1, pg.13
14. ↑ Bloomberg "Xerox Profit Climbs 2.3%; Full-Year Forecast Raised," Courtney Dentch, July 25, 2007
15. ↑ Reuters, “Office Equipment: Company Rankings,” December 2007
16. ↑ Reuters, “Office Equipment: Company Rankings,” December 2007
17. ↑ Gartner Dataquest “Printer Quarterly Statistics United States – Database,” Camille Iorns, February 2007
18. ↑ Gartner Dataquest “Printer Quarterly Statistics United States – Database,” Camille Iorns, February 2007
19. ↑ XRX 2006 10K, Item 1, pg.7