Xerox 2005 Annual Report Download - page 5

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Chairman’s Letter
We do business in a very attractive – and therefore very
competitive – market that currently affords us a $112
billion opportunity. Parts of that market are stable, parts
are growing rapidly, and parts are being created. In each,
we have a clear, consistent and credible strategy. Simply
put, it’s this:
•Compete aggressively and effectively in the relatively
stable $58 billion digital black-and-white printing market.
•Drive the rapidly growing $17 billion digital color printing
market, where the breadth and depth of our technology
gives us a commanding competitive advantage.
•Create anew $17 billion market by harnessing digital
technology to the world of offset printing with applications
such as print-on-demand, personalized communications
and one-to-one marketing. Wecall it the New Business
of Printing®.
•Lead the burgeoning document services market by working
with our customers to reduce document costs, streamline
processes and enable the free flow of documents down the
hall, cross-town and around the world.
That’s the opportunity we’re attacking. It’s a blend of
markets wherewe have traditionally competed and
natural extensions of those markets – extensions that
areenabled by new technology and inspired by the
evolving needs of our customers. A question I’m often
asked by investors is how Xerox believes it will win in
this $112 billion market. It’s a fair question. When I
reflect on it, I believe there are six tangible – and one
intangible – reasons why Xerox will succeed.
First, our technology – a past, present and future
strong suit for Xerox. We routinely invest 6 percent of
our revenues in research, development and engineering.
Our research investments are closely aligned with our
growth strategy; this way we’re always outrunning
our competitors. For example, Xerox and our partner
Fuji Xerox are jointly investing about two-thirds of our
combined research and development budget on color.
Over the last decade, this investment has resulted in
more than 2,700 color-related patents.
During 2005, we brought 49 new products to market –
products that won more than 260 industry awards.
In fact, fully two-thirds of our equipment sales last year
came from products introduced in the past two years.
Our progress in 2005 provided more evidence that
we are on track and continuing to build momentum:
•Net income of $978 million or 94 cents per share, an
increase of 9 percent from full-year 2004.
•Gross margins of 41.2 percent – in line with our expectations.
•Selling, general and administrative (SAG) expenses of
26.2 percent of revenue – down one-half point from
the previous year.
•Debt balance of $7.3 billion, a reduction of $2.8 billion
from year-end 2004 – and virtually all of what remains
is in support of our customer financing activities.
•Operating cash flow of $1.4 billion.
•Year-end cash and short-term investments balance of
$1.6 billion.
Xerox is at a pivotal point. We get a lot of credit these days
for turning Xerox around. We’re pleased by that, but hardly
satisfied. All of our hard work these past five years has
been done with a single-minded purpose – to return Xerox
to growth, thereby providing value to our shareholders.
We made progress in 2005, but not enough. We accelerated
the pace of install activity for Xerox digital systems such
as color printers, digital presses and multifunction devices
that print, copy,fax and scan. In fact, activity increased
by double-digit rates in our key markets. At the same time,
we aggressively ramped our services business, winning
moreglobal consulting contracts for Xerox’s document
management expertise.
All of this bodes well for our long-term success: increased
equipment installs drives morepages printed on Xerox
systems. More pages fuel growth for Xerox supplies and
service. This translates into “post-sale” revenue, which
represents about 70 percent of Xerox’s total revenue. More
multi-year contracts for Xerox’s document management
services also flows through to supportour annuity stream.
Our post-sale revenue turned positive in the second half
of 2005 – an important sign that our annuity-based
business model is working. However, total revenue was
flat, slightly below our expectations. We know we can
do better and are confident we will. And that’s what I’d
like to take this opportunity to discuss with you – how
we will grow Xerox over the next few years.