Xerox 2008 Annual Report Download - page 27

Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
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. 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 $132 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. Customers
are demanding document services such as assessment consulting,
managed services, imaging and hosting and document intensive
business process improvements. Additionally, our customers
demand improved technology 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.
Our business model is built upon an annuity model that yields
consistent strong cash flow, expanded earnings and enables us to
provide good returns to shareholders. The majority of our revenue
(supplies, service, paper, outsourcing, rentals and financing) is
recurring, which we collectively refer to as post sale revenue. This
recurring revenue provides a significant degree of stability to our
revenue, profits and cash flow. Post sale revenue currently
represents more than 70 percent of the Company’s revenue and is
driven by the amount of equipment installed at customer locations
and the utilization of that equipment. 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. In addition, our growing services business,
including offerings such as managed print services which help
customers reduce their costs, also drives post sale revenue.
In 2008, we completed several acquisitions to further strengthen
our distribution capacity and expand our reach in the small to
mid-size business (“SMB”) market. Global Imaging Systems, Inc.
(“GIS”) acquired Saxon Business Systems (“Saxon”), an office
equipment supplier with offices throughout Florida, as well as three
additional smaller businesses – Better Quality Business Systems,
Precision Copier Service Inc. DBA Sierra Office Solutions and Inland
Business Systems of Chico. We also acquired Veenman B.V.
(“Veenman”), expanding our reach into the SMB market in Europe.
Veenman is Netherlands’ leading independent distributor of office
printers, copiers and multifunction devices serving small and
mid-size businesses.
Financial Overview
2008 was an extremely challenging year due to worldwide
economic weakness, particularly in the second half of the year. The
unfavorable economic conditions, as well as a rapid shift in
currency exchange rates and the related impact on foreign
currency revenue and purchases put significant pressure on the
business in 2008. The downturn in the economy adversely
impacted equipment sales to large enterprises, as well as revenues
from high volume production systems. In the fourth quarter of
2008, the increasingly wide-spread economic concerns found
customers and partners prioritizing cash and delaying decisions on
major contracts. In addition, our distribution partners reduced their
inventories of supplies at year end, which negatively impacted our
post sale revenue.
Revenue from our developing markets were also negatively
impacted by the dramatic weakening of the Russian and eastern
European economies.
Despite the difficult economic conditions in the second half of
2008, total revenue in 2008 increased 2% over the prior year,
reflecting 4% growth in post sale revenue offset by a 2% decline
in equipment sales revenue. Total color revenue of $6.7 billion was
up 5% over the prior year, benefiting from our investments in this
market and post sale revenue for document management services
(also referred to as “Xerox Global Services”) of $3.5 billion increased
3% over 2007.
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