NEW YORK (CNNfn) - Xerox Corp. warned Friday of a disappointing quarterly profit for the third time in just over nine months, and said the recovery from problems will continue to hurt results in the second half of this year.|
Problems from a restructuring of its sales force and new competition for its high-end and most-profitable copiers have hurt results, prompting a change in leadership last month, according to the company's new executives.
The news punished shares of Xerox (XRX: Research, Estimates), which tumbled 4-3/4, or 18 percent, to 20-5/8 in trading Friday, after selling off sharply in pre-market trading.
The world's largest copier company said second-quarter results, excluding special items, will likely be about 30 cents a share, compared with the forecast of 42 cents a share by analysts surveyed by First Call. It also warned it would take a charge for "significant unexpected provisions in its Mexico business." That charge may be in the 5 or 6 cents a share range, according to company comments to analysts.
A year earlier, Xerox earned 62 cents a share. The company blamed weak sales of high-end printing and publishing products for the latest shortfall, saying they would reduce profit margins.
"The disruptions in customer relationships caused by our sales force realignment, at a time when competitors have strengthened their product capabilities, is producing a drag on the second-quarter sales of our most profitable products," said the statement from Paul Allaire, the company's new chairman and chief executive.
Company officials would not give new guidance to analysts for second half earnings, but said that it would be below current targets. First Call had forecast the company to earn 49 cents a share in the third quarter, up from 47 cents a share a year earlier, and 76 cents a share in the fourth quarter, up from 41 cents a share in the fourth quarter of last year.
PaineWebber downgraded its rating on the company to "neutral" from "attractive" after Xerox issued its warning Friday.
In a research note, analyst Benjamin Reitzes said Xerox provided little financial guidance and that sales force disruptions and weaknesses at the high-end of the production publishing market contributed to the downgrade. In addition, he said that competition from rivals Canon (CANNY: Research, Estimates) and Heidelberg were "not helping."
PaineWebber adjusted its earnings estimates on Xerox for 2000 to $1.60 from $1.95 a share, and to 31 cents a share from 40 cents a share for the second quarter.
"While we do not like to 'react' to information, given where Xerox has opened - we just do not believe there is much upside," Reitzes said. "...We are also particularly concerned about an 'unexpected' receivables problem in Mexico that should hit EPS this quarter by up to 6 cents per share. This development calls into question management's systems and controls."
CEO confident of turnaround
"Clearly, the fact that our current expectation on the second quarter is less than we anticipated ... our recovery is pushed back in time," said Allaire. "We do expect the turnaround to be there and be significant and therefore have an improvement in the second half and have good momentum going into 2001."
Allaire returned to the top positions at Xerox last month, on the resignation of Richard Thoman after less than a year in the top job. He reminded analysts that his record of meeting or beating forecasts had been strong during his previous tenure as CEO. He said he's confident the company will be able to turn around the current problems.
While the earnings are a disappointment, they shouldn't be that great a surprise given the changes taking place at the company, according to Marjorie Saint-Aime, analyst for Pittsburgh Institutional.
"We basically think it's going to take some time before Xerox turns around and they gain confidence from investors," said Saint-Aime. "While this is a little unexpected, because of the restructuring, you really don't know what will happen."
Many analysts already had a low rating for the stock, and early Friday PaineWebber downgraded it from an "attractive" to a "neutral" rating. Prudential, which already rated the stock a hold, reduced earnings forecasts for the year to $1.95 a share, and forecasts for 2001 to $2.30 a share.
Allaire insisted that the company is moving to address the weak sales, although that requires some increased expenses.
"Our new team is focused on initiatives that will stabilize the direct sales force, stimulate sales productivity, and streamline the sales support operations ... even though this involves some incremental costs," he said.
Last year, the company had issued warnings on profitability for its third and fourth quarters. It beat lowered earnings expectations in the first quarter this year, soon after it announced plans to cut more than 5,000 positions.