Xerox 2015 Annual Report Download - page 55

Operating Margin
Operating margin1 for the year ended December 31, 2015 of 8.4% decreased 1.2-percentage points as compared to
2014. On an adjusted1 basis, this decline was driven by a 0.9-percentage point decrease in gross margin and a 0.3-
percentage point increase in operating expenses as a percent of revenue. The operating margin decline includes
lower Services margin driven by targeted resource and other investments as well as higher costs associated with
our GHS HE platform implementations prior to the announced changes in strategy. Document Technology margin
was also lower as compared to the prior year due to lower gross margin, higher year-over-year pension expense
and unfavorable currency. These negative impacts were partially offset in both segments by restructuring savings
and productivity improvements as well as lower compensation and a $22 million curtailment gain in the U.S.(3)
Operating margin1 for the year ended December 31, 2014 of 9.6% increased 0.6-percentage points as compared to
2013. The increase was driven primarily by a 1.0-percentage point improvement in SAG as a percent of revenue
partially offset by a decline in gross margin of 0.4-percentage points. The operating margin improvement reflects
restructuring savings and productivity improvements, continued benefits from currency on yen based purchases and
lower bad debt expense. As anticipated, operating margin also benefited from lower year-over-year pension
expense and settlement losses (collectively referred to as "pension expense"). Services margins decreased in 2014
due to higher government healthcare platform expenses, including net non-cash impairment charges, as well as
platform and resource investments across the Services segment and the continued run-off of the student loan
business.
_____________
(1) Refer to Operating Income/Margin reconciliation table and the Key Financial Ratios reconciliation table in the "Non-GAAP Financial
Measures" section.
(2) Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting policies for additional information.
(3) Refer to Note 16 - Employee Benefit Plans for additional information.
Gross Margins
Total Gross Margin
Total gross margin for the year ended December 31, 2015 of 29.2% decreased 2.8-percentage points as compared
to 2014. On an adjusted1 basis, gross margin of 31.1% decreased by 0.9-percentage points as compared to 2014.
Declines in gross margins for both segments as well as a higher proportion of our revenue from Services (which
historically has a lower gross margin) resulted in a reduction in overall gross margin.
Total gross margin for year ended December 31, 2014 of 32.0% decreased 0.4-percentage points as compared to
2013. The decrease was driven by margin declines within the Services segment as well as the impact of a higher
proportion of our revenue from Services (which historically has a lower gross margin than Document Technology)
partially offset by a higher gross margin within the Document Technology segment.
Services Gross Margin
Services gross margin for the year ended December 31, 2015 decreased 3.6-percentage points, and remained flat
on an adjusted1 basis, as compared to 2014. Targeted resource and other investments, impacts from unfavorable
line-of-business mix, increased expenses associated with our GHS HE platform implementations and price declines
were offset by productivity improvements and restructuring benefits.
Services gross margin for the year ended December 31, 2014 decreased 1.1-percentage points as compared to
2013. The decrease is primarily due to higher expenses associated with our public sector and government
healthcare businesses, including costs for the Medicaid and Health Insurance Exchange (HIX) platforms, the
anticipated run-off of our student loan business and price declines that were consistent with prior periods. These
impacts were only partially offset by productivity improvements and restructuring benefits.
Document Technology Gross Margin
Document Technology gross margin for the year ended December 31, 2015 decreased by 0.7-percentage points as
compared to 2014. The decrease reflects unfavorable product mix, price declines and an increase in pension
expense, partially offset by the retiree health curtailment gain, lower compensation and benefit expenses and
restructuring and productivity benefits.
Document Technology gross margin for the year ended December 31, 2014 increased by 1.5-percentage points as
compared to 2013. The increase, driven by cost productivity and restructuring savings, favorable transaction
currency on our Yen-based purchases, lower pension expense and favorable revenue mix, was partially offset by
moderate price declines and the impact of the prior year finance receivable gain.
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