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Morningstar | Xerox in Paper Jam, but Significant Cost-Cutting Expected

Xerox is an original equipment manufacturing and software company for print industry solutions. Specializing in enterprise print equipment, largely multifunction printers (printers that can print, copy and scan) ranging from A3 to A4 paper sizes, Xerox has been a leader in the print space. In 2018, equipment sales were 22% of revenue and post sales, a subsegment dependent on offering print supplies and equipment servicing, was 78%. We think the print industry is in a jam as the workplace becomes increasingly more digital. In our view, eroding switching costs for Xerox is reflective in their declining equipment market share as Canon and HP grew share. We think this secular decline as well as its competitive positioning is problematic for Xerox because nearly all of Xerox’s offerings are dependent on one another. Only about 13% of print supplies revenue are unbundled from other Xerox contracts, like equipment leases.Despite Xerox's print equipment’s overall declines, isolated offerings have changed for the better. Color printers are gaining more popularity due to the declines in color toner costs. Additionally, Xerox’s new ConnectKey multifunction printers have bolstered sales in entry and mid-range equipment, as they seemingly offer more security via McAfee whitelisting technology and an interface which allows users to print from or scan to third-party apps, like Dropbox. These features are important in the print industry; a 2017 report by Quocirca revealed that 60% of organizations have had at least one data breach due to unsecured printing. However, these mild gains haven’t been enough to lead to equipment growth for Xerox, as its competitors offer similar solutions. On top of that, Xerox's greatest equipment declines are in its high-end printers geared toward the creative industry.Post sales revenue includes largely managed print services (MPS)--a service that brings efficiencies to how employers use their print/copy equipment. MPS has upheld the business through drastic equipment declines, but it’s an offering that we believe to be ultimately cannibalistic to equipment and supplies sales.