Xerox 2007 Annual Report Download - page 54

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. The document industry is
transitioning to digital systems, color, and to an increased
reliance on electronic documents. Increasingly, businesses
are digitally creating and storing documents and using the
Internet to exchange electronic documents. More
customers are seeking to gain efficiencies in their
document management processes and are looking to us
for document related services to achieve those
efficiencies. We believe these trends play to the strengths
of our product and service offerings and represent
opportunities for future growth in the $125 billion market
we serve. These transformations also represent
opportunities for future growth since our research and
development investments have been focused on digital,
color and services offerings and our acquisitions have
focused on expanding our services, software and
distribution capabilities.
We operate in a global business environment, serving
a wide range of customers with about 50 percent of our
revenue generated from customers outside the U.S. Our
markets are competitive 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 demanding document
services such as assessment consulting, managed services,
imaging and hosting and document intensive business
process improvements.
We deliver advanced technology through investments
in research and development and offset lower prices by
focusing on streamlining 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 driven by the
amount of equipment installed at customer locations and
the utilization of those devices. As such, our critical success
factors include equipment installations, which stabilize
and grow our installed base of equipment at customer
locations, page volume growth and higher revenue per
page. Key drivers to increase equipment usage are
connected multifunction devices, new services and
solutions. 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 2007, we grew revenue, expanded earnings and
generated strong operating cash flow. Our 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.
During 2007 we completed the acquisitions of Global
Imaging Systems, Inc. (“GIS”) and Advectis, Inc. The
acquisition of GIS greatly expanded our reach in the small
to mid-size business (“SMB”) market and together with
favorable currency was a key driver of our increase in
revenue. Total revenue increased 8% over the prior year
reflecting 9% growth in post sale, financing and other
revenue and 7% equipment sales growth. Total color
revenue was up 14% over the prior year reflecting our
investments in this market and document management
services (also referred to as “Xerox Global Services”) post
sale, financing and other revenue of $3.4 billion increased
8% over 2006.
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