Xerox Profit Hurt By Storm Costs but Sales Strong

Xerox Corp. (XRX) on Friday posted strong quarterly sales of digital copier supplies and services and said it would buy back shares for the first time in nearly eight years, fueling optimism about the office equipment maker and driving its stock up more than 7 percent.

The buyback of up to $500 million of common shares capped a quarterly report showing profit and revenue matched expectations, and indications of success in Xerox's plan to drive profits by selling new color digital printers and document management devices.

Xerox plans to buy the shares back over the next 12 months. Analysts said the action was a sign of confidence by Xerox's board.

"We announced a share repurchase program, evidence of the strength of our financial position and our commitment to providing increased returns for our shareholders," Xerox Chief Financial Officer Larry Zimmerman said on a conference call. "We fully expect that the trends you see today will continue."

Sales of color printers over time yield five-times the revenue of black-and-white systems, Xerox said, fueled by service contracts and supplies like paper and replacement ink and toner.

Xerox, best known for its office copiers, said third-quarter net income fell to $49 million, or 5 cents a share, including charges and other items, from $149 million, or 17 cents a share, a year earlier.

Excluding costs of litigation, losses from Hurricane Katrina (search) and other one-time charges, Xerox earned 18 cents a share, meeting analysts' average expectation, according to Reuters Estimates.

Total revenue rose 1 percent to $3.76 billion, just shy of analysts' estimate of $3.80 billion.

Over the past two years, the Stamford, Connecticut, company has unveiled new digital printers and office systems and taken market share from competitors, but is still struggling to boost revenue growth in a slow sales market, where pricing pressures have cut into profit margins. Xerox has said that over time, it expects digital sales to yield higher margin profits.

Third-quarter total equipment revenue rose by 2 percent, fueled by demand for supplies and service for its newer digital and color products, which offset declines from similar sales to customers who still have older models.

Xerox said total color revenue in the quarter rose by 22 percent, and now represent 30 percents of its total sales.

"It was a solid quarter where the growth in color was very strong," said Cross Research analyst Shannon Cross, who rates the stock at "buy." "They have seen strong equipment revenue growth over the last two years and now with positive post-sale revenue growth, we can see they are starting to grow their installed base."

Xerox added that it reduced its debt by about $700 million during the third quarter, and that total debt was down $3.3 billion from one year ago.

Looking ahead, Xerox forecast fourth-quarter earnings per share based on generally accepted accounting principles (GAAP) in the range of 25-29 cents, including restructuring charges of 5 cents per share. Excluding the charge, its sees 30-34 cents. It sees full year revenue up by about 1 percent.

Analysts were expecting a fourth-quarter profit on a GAAP basis of 28 cents a share. Excluding one-time costs, they had on average forecast a profit of 32 cents a share, according to Reuters Estimates.

Xerox shares rose 88 cents to $13.29 on Friday on the New York Stock Exchange (search). The stock, which hit a 52-week low of $12.40 on Thursday, had slipped more than 8 percent over the past three months.

The stock trades at about 13.7 times estimated 2005 earnings, compared with a 23.2 multiple for the Merrill Lynch Technology 100 Index (search).