Xerox's lowered cash forecast irks investors

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NEW YORK (Global Markets) - Xerox Corp (XRX.N) warned it would have less operating cash than expected this year, partly because it has to absorb added costs related to the earthquake in Japan, sending its shares down more than 2 percent.

While Xerox's solid second-quarter results and upbeat earnings forecast on Friday showed that its focus on providing corporate clients with more than just copiers was starting to pay off, its weaker outlook for operating cash flow served as a red flag for investors.

Xerox lowered its outlook for operating cash flow to a range of $2 billion to $2.3 billion for the year, down from a previous forecast of $2.5 billion.

"For a lot of investors in Xerox, the cash it is generating is one of the most looked at data points," said Neuberger Berman analyst Fayad Abbasi. "So in my view, that's the cause of disappointment in the stock today."

Neuberger Berman is one of the top holders of Xerox shares, which fell 2.2 percent, or 23 cents, to $10.07 on the New York Stock Exchange.

The more cash that Xerox has, the more it can reward investors by undertaking share buybacks or dividend increases.

Xerox Chief Executive Ursula Burns blamed the lowered cash forecast on supply problems in Japan and on new client accounts that require more upfront investment.

"We faced some unique challenges relative to cash usage during the first half of the year, including cash needs from ramping new contract signings and incremental cash required to support the supply chain constraints," Burns said on the call with analysts.

Xerox's quarterly revenue, which rose 2 percent to $5.6 billion, would have been higher had it not been for supply disruptions in Japan, the company said. The earthquake hurt revenue by putting constraints on its color supplies, which are sourced from its Fuji Xerox plant in Japan.

Xerox, which competes with Hewlett-Packard Co (HPQ.N), had about $1 billion in cash at the end of the quarter, which it said it would use for "modestly sized acquisitions" and to buy back shares. It expects to buy $700 million of stock in the second half of the year.

SHIFTING BUSINESS

Aside from the cash outlook, Xerox reported a strong quarter that initially boosted its shares.

The company raised its 2011 earnings outlook to a range of $1.07 to $1.12 per share, compared with analysts' expectations of $1.04 to $1.10 per share.

Xerox, which performs services such as managing the E-ZPass electronic tolling system in several states, said its services business contributed more revenue than its traditional copier and printer business in the quarter.

Its services business rose 6 percent, which included a 2 percentage point bump from the weaker dollar. Overall services business revenue totaled $2.67 billion, 48 percent of the business.

The company's business of selling printers, copiers, toners and ink generated $2.5 billion in revenue, representing about 45 percent of the company's revenue.

Adjusted for various charges, Xerox reported earnings per share of 27 cents, beating Wall Street analysts' average estimate of 24 cents per share, according to Thomson Global Markets I/B/E/S. Total revenue increased 2 percent to $5.6 billion, in line with analysts' estimates.

Xerox's adjusted profit also rose 39 percent in the second quarter, to $327 million, or 22 cents per share, from $236 million, or 16 cents per share, a year earlier.

The value of the company's contract signings fell 10 percent, which it blamed on the cyclical nature of large corporate deals.

In the quarter, the company said it employed 133,500 workers globally, which is 3,000 fewer than a year earlier.

A company spokesman said in an email that in the past quarter it cut 500 jobs, "which is based on attrition and the ebb-and-flow of the contracts that we have."

(Reporting by Liana B. Baker; Editing by Lisa Von Ahn, Derek Caney; Editing by Phil Berlowitz)