Company Overview: Xerox Holdings Corporation is a provider of digital print technology and related solutions. The Company has capabilities in imaging and printing, data analytics, and the development of secure and automated solutions to help customers improve productivity. The Company’s primary offerings span three main areas: Managed Document Services, Workplace Solutions and Graphic Communications. Its Managed Document Services offerings help customers, ranging from small businesses to global enterprises, optimize their printing and related document workflow and business processes. Managed Document Services includes the document outsourcing business, as well as a set of communication and marketing solutions. The Company’s Workplace Solutions and Graphic Communications products and solutions support the work processes of its customers by providing them with printing and communications infrastructure.
 

XRX Details
 
Innovative Product Portfolio to Enhance Business Prospects: Xerox Holdings Corporation (NYSE: XRX) is a workplace technology company associated with developing and incorporating software and hardware for organizations of large and small sizes. As consumers strive for information management across digital and physical platforms, the business provides a unified, secure and viable experience. The company has extensive experience across the copier, the ethernet, the laser printer segments. The business reported impressive bottom-line growth during the recent past, where the company turned into a profit of $195 million in FY17 from a loss of $471 million in FY16. XRX delivered a yoy growth of 110% in the income from continued operations which amounted to $651 million in FY19. In the financial year 2019, the company made significant progress against its strategic initiatives to transform it and witnessed an expansion in operating margin, cash flows, and investments in the business that are beginning to impact revenue, and increased strategic flexibility by restructuring its relationship with FUJIFILM. Financial Year 2019 was also marked by a 23% growth in adjusted EPS and a 19% growth in free cash flows.
Going forward, the business is focused on robust innovation capabilities to deploy into adjacent and new markets and further emphasize on laying the foundation to expand its revenue trajectory by leveraging new and prevailing markets. The business is looking to accelerate expansion in services and software and scale of its eCommerce platform. The company will leverage its historic leadership in Managed Print Services (MPS) segment. The business is progressing well on its three-year modernization roadmap which includes products related to 3D printing and AI Workflow Assistants. In 2020, the company expects to build on that momentum and continue executing on its strategy to drive revenue, optimize operations, innovate and focus on cash to deliver on full-year guidance. 
 
 

Historical Financial Performance (Source: Company Reports)

Revenue Recognition: The business has two operating segments, i.e., equipment sales segment and Post sale revenue segment. Post sale revenue generates income from contracted services, equipment maintenance, supplies and financing. The above segment is related to the population of devices in the field, driven by a number of installs and removals.  The income is also related to the page volumes generated from the usage of such devices, and the revenue per printed page. It also includes transactional IT hardware sales and application services from the XBS business (Xerox Business Solutions).  Its equipment sales revenue division includes three classification such as entry, mid-range and high-end.

FY19 Operational Highlights for the Period ended 31 December 2019: XRX came up with its full-year results, wherein the company posted total revenue of $9,066 million, down 4.7% (y-o-y) on constant currency terms. Gross margin of the business improved from 40% in FY18 to 40.3% in FY19. The business incurred a $77 million of income realized from an OEM license agreement with Fuji Xerox. The business made expansion across Xerox’s services portfolio with the launch of Intelligent Workplace Services; IT Services for the small and mid-size business market in the U.S.; and vertical services targeting healthcare, retail, insurance, and the public sector. During the period, the business also executed a new logistics and distribution strategy, which included expanding Xerox’s relationship with HP. The period was marked by investments across several start-ups using the company’s core technology business such as the Iridesse^® Production Press, Baltoro™ HF Inkjet Press and Adaptive CMYK Plus Technology. The company reported its pre-tax income of $822 million as compared to $549 million in FY18.

The business delivered operating cash flow from continuing operations of $1.24 billion and $1.18 billion of free cash flows during FY19. The business achieved gross savings of $640 million under Project Own It. The business reported income from continuing operations at $651 million, as compared to $310 million in FY18.


Key Highlights of FY19 Income Statement (Source: Company Reports)

Balance Sheet and Cash Flow Highlights: XRX posted its current assets at $6,140 million which includes cash and cash equivalents of $2,740 million, accounts receivables of $1,236 million and finance receivables, net of $1,158 million at the end of FY19. The business exited the year with total assets of $15,056 million which includes goodwill of $3,900 million, equipment on operating leases, net of $364 million and land, buildings and equipment, net of $426 million. The company reported short-term debt of $1,049 million and a long-term debt of $3,233 million as on 31 December 2019. Total Equity of the company stood at $5,603 million at the end of FY19. For FY19, the company reported net cash provided by operating activities of $1,333 million, net cash provided by investing activities at $2,148 million and net cash used in financing activities at $1,834 million.

Capital Structure: The company has a core debt level of less than 2x of its annual free cash flow. During FY19, the company has repaid $950 million of senior notes. The company’s Core debt reduced by $0.8 billion from the previous financial year. XRX maintained 7:1 debt to equity leverage ratio on its finance assets. Free Cash Flow during FY19 stood at $187 million, witnessing a growth of 19% on y-o-y basis. The company targeted a historical road map, wherein the business will focus on revenue growth by FY21. The business is also emphasizing to generate $3 billion of Free Cash Flow over the next three years.


Debt Profile (Source: Company Reports)

Q4FY19 Operational Highlights: XRX announced its quarterly results, wherein the company reported a revenue of $2,444 million as compared to $2,498 million in the previous corresponding quarter. The fourth-quarter sales include a transaction of $77 million associated with an OEM license agreement with Fuji Xerox, which was received from FUJIFILM Holdings Corporation (FUJIFILM). The company reported income from continuing operations of $266 million, increased from $92 million in Q4FY18. Gross margin, during the fourth quarter stood at 41.6%, depicting an increase of 1.6-percentage points from Q4FY18. Research, Development and Engineering Expenses (RD&E) stood at $93 million, representing 3.8% as a percentage of revenue. Selling, Administrative and General Expenses (SAG) as a percentage of revenue came in at 20.9% in Q4FY19.


Key Highlights of Q4FY19 and FY19 (Source: Company Reports)

Segment-Wise Performance of Q4FY19: The company derives its major revenue from Post sale revenue segment, representing ~75% of the total revenue. Equipment sales business represents the rest 25% of XRX’s income. Both Post sale revenue segment and Equipment sales business declined by 1.5% and 1.7%, respectively on y-o-y basis. The drop in equipment sales segment was impacted by lower volumes of office-centric appliances, which was partially offset by increased sales in the high-end production-centric systems. Entry division within the equipment sales business witnessed lower sales from developing market like Americas, EMEA and the U.S. The high-end division witnessed improved demand, aided by the demand of newly launched Baltoro inkjet press, and improved sales from new business and trade-ins of the Iridesse and iGen laser color systems across the U.S. Supplies, paper and other sales division. Within the Post sale revenue segment decreased 7.9% on y-o-y basis while Services, maintenance and rentals revenue declined by 0.5% on y-o-y basis.


Q4FY19 Revenue-Mix (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 50.37% of the total shareholding. Icahn Associates Corporation and The Vanguard Group, Inc. hold the maximum interests in the company at 10.85% and 10.65%, respectively.
 

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The Company reported strong numbers in FY19, wherein XRX posted gross margin at 40.3% as compared to 40% in FY18. The EBITDA margin, during FY19, stood in at 17.2%, higher than the industry median of 12.9% and 14.7% in FY18. Operating margin during FY19 came in at 9.9%, improved from 6.5% in FY18 while stood higher than the industry median of 7.1%. Net margin, during the year, stood at 6.7%, posting an improvement from 4% in the previous financial year. FY19 Return on equity stood at 11.1%, higher than the industry median of 5.5%.


Key Metrics (Source: Thomson Reuters)

Recent Update:
In November 2019, Xerox Holdings accomplished a series of contacts to streamline its relationship with FUJIFILM Holdings Corporation which includes a sale of indirect 25% equity interest in Fuji at a price consideration of ~$2.2 billion. The company also sold its indirect 51% partnership interest in Xerox International Partners for ~$23 million. The business recognized an after-tax gain of $539 million, which includes ~$9 million of transaction costs and $8 million of goodwill.
 

Key Valuation Metrics (Source: Thomson Reuters)

Guidance: As per the FY20 estimates, the business might witness a ~4% y-o-y decline of revenue at constant currency, excluding revenue from OEM license during 2019 of $77 million. The business anticipates adjusted operating margin to come at ~13% while EPS on GAAP basis is forecasted within the range of $2.80 to $2.90. The company expects its adjusted EPS within the $3.60 to $3.70. Operating cash flow from continuing operations is expected at around $1.3 billion and free cash flow is expected at ~$1.2 billion. During FY20, the business is planning to allocate ~$300 million for its share repurchases.

Valuation Methodology: Enterprise Value to EBITDA Multiple Approach

Enterprise Value to EBITDA Based Valuation (Source: Company Reports)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Month

Stock Recommendation: The stock of XRX closed at $37.62 with a market capitalization of $7.99 billion. The stock made a 52-week low and high of $27.25 and $39.47 and is currently trading at the upper band of its 52-week trading range. The stock has delivered decent returns of ~19.59% and ~27.51% in the last six months and one year, respectively. The business has delivered strong, sustainable cash generation, returning over 50% to shareholders through simplifying business which resulted in operational efficiency. The business has targeted ~$3 billion of Free Cash Flow over the next three financial years through leveraging its growing customer base to deliver end-to-end solutions. Further, the company will relocate from MPS to Xerox Intelligent Workplace Services and lead with integrated technology, services and software solutions. Considering the aforesaid facts, we have valued the stock using Enterprise Value to EBITDA based relative valuation method. For the purpose, we have taken peers like HP Inc (NYSE: HPQ), NetApp Inc (NASDAQ: NTAP), Hewlett Packard Enterprise Co (NYSE: HPE), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ rating on the stock at the closing price of $37.62, up 2.87% as on 05 February 2020.
 

XRX Daily Technical Chart (Source: Thomson Reuters)

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