Xerox 2006 Annual Report Download - page 28

Management’s Discussion and Analysis of Results of Operations and Financial
Condition
The following Management’s Discussion and
Analysis (“MD&A”) is intended to help the reader
understand the results of operations and financial
condition of Xerox Corporation. MD&A is provided as a
supplement to, and should be read in conjunction with,
our consolidated financial statements and the
accompanying notes.
Throughout this document, references to “we,”
“our,” the “Company” and “Xerox” refer to Xerox
Corporation and its subsidiaries. References to “Xerox
Corporation” refer to the stand-alone parent company and
do not include its subsidiaries.
Executive Overview
We are a technology and services enterprise and a
leader in the global document market, developing,
manufacturing, marketing, servicing and financing the
industry’s broadest portfolio of document equipment,
solutions and services. Our industry is undergoing a series
of transformations from older technology light lens
devices to digital systems, from black-and-white to color,
and from paper documents to an increased reliance on
electronic documents. We believe we are well positioned
as these transformations play to our strengths and
represent opportunities for future growth, since our
research and development investments have been focused
on digital and color offerings and our acquisitions have
focused on expanding our services and software
capabilities.
We operate in competitive markets and our
customers demand improved solutions, such as the ability
to print offset quality color documents on-demand;
improved product functionality, such as the ability to
print, copy, fax and scan from a single device; and lower
prices for the same functionality. Customers are also
increasingly demanding document services such as
consulting and assessments, managed services, imaging
and hosting, and document intensive business process
improvements.
We deliver advanced technology through focused
investment in research and development and offset lower
prices through continuous improvement of our cost base.
The majority of our revenue is recurring revenue
(supplies, service, paper, outsourcing and rentals), which
we collectively refer to as post sale revenue. Post sale
revenue is heavily dependent on the amount of equipment
installed at customer locations and the utilization of those
devices. As such, our critical success factors include
hardware installations, which stabilize and grow our
installed base of equipment at customer locations, page
volume growth and higher revenue per page. Connected
multifunction devices, new services and solutions are key
drivers to increase equipment usage. The transition to
color is the primary driver to improve revenue per page,
as color documents typically require significantly more
toner coverage per page than traditional black-and-white
printing.
Financial Overview
In 2006, we grew revenue, expanded earnings and
significantly improved our overall financial condition and
liquidity. Our continued investments in the growing areas
of digital production and office systems, particularly with
respect to color products, contributed to the majority of our
equipment sales being generated from products launched in
the last two years. Total revenue increased 1% over the
prior year, as growth in our post sale annuities more than
offset declines in equipment sales and finance income. Post
sale and other revenues increased 3% as compared to prior
year. Total color revenue was up 13% over the prior year
reflecting our investments in this market.
We maintained our focus on cost management
throughout 2006. While 2006 gross margins of 40.6% were
0.6-percentage points below 2005, we continued to more
than offset lower prices with productivity improvements.
Gross margins continued to be impacted by a change in
overall product mix reflecting a higher proportion of sales
of products with lower gross margins. We reduced selling,
administrative and general (“SAG”) expenses as
administrative and general expense efficiencies more than
offset increased bad debt expense. We continued to invest
in research and development, prioritizing our investments
to the faster growing areas of the market.
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