EUR 850.00 For Business Accounts Only

Morningstar | XRX Updated Forecasts and Estimates from 06 Feb 2019

On Feb. 5, no-moat Xerox held its 2019 investor day, adding more detail on its revenue roadmap--a pressing topic, given print’s secular decline. Xerox’s stock rose nearly 43% during January due to fiscal 2018 fourth-quarter results, which reported margin expansion from Xerox’s operational efficiency program, Project Own IT. According to management, most of this year’s savings are expected to come from organizational and benefit restructuring, delivery, and procurement. After hearing specifics on management’s expected savings from the program, we think these will be doable in the near term. However, we think these savings will eventually not be sustainable as Xerox steps into new territories, like digital print sensors, to stabilize traditional revenue. We are therefore maintaining our $27.50 fair value estimate for this no-moat company.

In 2011, Xerox’s post-sales and equipment revenues were nearly identical. Since then equipment has had a steady decline in sales, with a drastic fall since 2017, with post-sales revenue declining at a much slower pace. Therefore, a big question lies in whether post-sales revenue can be sustained off a declining equipment base. Management thinks so as it looks to tap into the small and medium business market, selling post-sales offerings like its XMPie or DocuShare software (made with large enterprises in mind). However, appealing to the SMBs will be tough, in our view. Much of the post-sales services are framed around maximizing efficiency for companies, and we think the value proposition for savings on inefficiencies will be much lower for SMBs. Thus, while management is optimistic that revenue will start to see inching growth starting in 2021, we are more skeptical and think such outlets will only help to sustain revenue.

On the equipment side, Xerox detailed plans in digital print packaging and 3D printing. We admit these are potential opportunities for Xerox in the long term, but they pose risks: They could be much more niche than expected or dependent on shaky partnerships. For example, Xerox is not yet ready to enter the digital printing solutions market, which is expected to be a $45 billion total addressable market by 2026. But once ready, we think Xerox will need to strike relationships with analog printers, given that some parts of packaging will probably still be worth an analog run, and this could prove tricky. Congruently, Xerox noted it is working toward offering printed electronics solutions, which would entail sensors in digital print packaging that will guide customers on everything from food expiration to consumption directions. We think Xerox’s sensor success will hinge on its ability to first make a dent in basic digital packaging. On the 3D printing front, management said it will solve 3D printing’s niche problem of mainly being used for prototypes and not the more lucrative manufacturing side. Xerox plans to create a market for 3D print manufacturing by lowering materials costs and printing in other media, like liquid metal through its acquisition of Vader Systems. We think this will take time, however, to appeal to more than niche manufacturers.