Xerox Stock Hammered Again After Profit Warning

STAMFORD, Conn. —  Xerox Corp., the photocopier giant that ousted its CEO last month after a bungled reorganization, Friday warned that its second-quarter earnings would fall short of forecasts, amid fresh problems in Mexico and stubborn kinks in its sales-force realignment.

Shares of the Stamford, Conn.-based company tumbled almost 19% as Wall Street analysts said they were concerned by the latest round of problems at Xerox. It is struggling to transform itself from a company that makes free-standing copiers into one that sells digital printers connected to computer networks.

“It’s definitely disturbing that the company has not been able to forecast the extent of the problem, and also to let us know rightfully when the problem is going to come to an end,” said James Corridore, an analyst at Standard & Poor’s Equity Group, after a conference call in which top managers tried to strike a contrite yet cautiously optimistic tone.

“This is going to be the third time in the last four quarters where earnings have disappointed, starting in the third quarter of 1999,” Corridore said.

Xerox said its second-quarter earnings, before special charges, probably would be in line with the first quarter’s 30 cents a share. Wall Street analysts on average had expected 42 cents a share, according to First Call/Thomson Financial.

After the warning, Xerox shares fell 18.5% on the New York Stock Exchange, closing off $4.69 at $20.63, barely off the year low of 20. Volume reached 17.5 million shares, compared with a daily average of 2.4 million.

Xerox, whose shares have lost more than two-thirds of their value in the last year, has been plagued by strategic missteps and stepped-up competition in recent months.

The company has struggled to reorganize its sales force along industry lines, rather than geographic boundaries, to compete more aggressively in the merging markets for digital copiers and printers. Xerox is trying to shift more of its revenue into high-growth Internet-related areas.

Friday, Xerox said the expected earnings shortfall partly reflected slower sales of high-end printer products and significant unexpected provisions in its $400-million-a-year business in Mexico.

It said customer relationships had been disrupted by its sales force realignment, hurting sales of its most profitable products.

The company did not elaborate on the problem in Mexico, other than to say it is related to customer receivables and could shave 5 or 6 cents off second-quarter per-share earnings. The Mexican woes are “isolated” and are not expected to affect other regions, Chief Financial Officer Barry Romeril said. He declined to say more until the company completes its review of the situation.

The warning came weeks after Xerox President and Chief Executive Rick Thoman resigned under pressure May 11 as his efforts to revive the company met with repeated profit disappointments,

Xerox did not time its earnings warning to coincide with last month’s management change because it did not realize the full extent of the problems at the time, and because it was unaware of the Mexican situation then, a company spokeswoman said.

Despite the repeated setbacks, some analysts think Xerox’s reorganization strategy is still sound but the execution needs to be sharper as competition intensifies.

“My sense is, net-net, there is a real franchise value here that is not being appreciated at current levels, but this is probably going to take longer to work through the short-term issues,” said Gibboney Huske, an analyst at CS First Boston, who kept her “buy” rating on the stock.

But Salomon Smith Barney lowered its rating of Xerox to “outperform” from “buy.”

“There were high hopes that the second half [of 2000] was going to be the time where it would help turn things around, and those hopes have now been dashed,” said Jonathan Rosenzweig, a Salomon analyst, said.

“The interesting thing is that there’s actually a lot that’s going on here that’s right, and that’s what’s so frustrating about the situation,” Rosenzweig said.

“Color was doing well,” he said. “Sales force turnover is down; prices weren’t getting any worse.

“It’s largely a margin issue, because the high end [of the product line] is getting killed, which is where you have a lot of margin. The revenue growth itself is going to be fairly on track with what we were looking for.”

Xerox Chairman and Chief Executive Paul Allaire conceded that most of Xerox’s problems are of its own making. “It’s now up to us,” he said. “It’s all in the execution, and that must and will improve.

“We’re clearly disappointed about our news for the second quarter. You have our commitment and our determination to fix these issues, and we believe they are within our power to fix.”

Allaire, who took over as chief executive when Thoman was ousted after a rocky 13-month reign, said he was confident of an improvement later this year, with a further uptick in 2001.

Xerox will not cut its dividend, Allaire said. The company is to pay a quarterly dividend of 20 cents a share on July 1 to shareholders of record as of June 2.

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Xerox’s Tumble

Xerox shares tumbled Friday after the company once again warned of lower-than-expected earnings. Monthly closes and latest on the New York Stock Exchange (ticker symbol: XRX):

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Friday: $20.63, down $4.69

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Source: Bloomberg News