Xerox CEO Anne Mulcahy was in Toronto yesterday and I talked to her about her business. The Globe has the story I wrote but here's an extended version, with more details about Xerox's work to restore its balance sheet:
Communication by now was supposed to be nothing but electronic beeps and burps, the pundits said.
But in fact, so much old-fashioned ink has never been put on so much out-of-style paper.
“”The greatest source of paper growth is the printing of e-mail. Isn't that amazing?,” said Anne Mulcahy, chief executive officer of Xerox Corp., on track to rack up more than $16-billion (U.S.) in sales this year because of the need to print and copy just about anything.
In fact, experts say that not only are people printing things more than ever before, but people want to print things in colour.
Those two trends, analysts say, have opened up some remarkable opportunities for Stamford, Conn.-based Xerox, which as recently as three years ago had been left for dead.
Now, it's a hot investment, with an improving balance sheet, strong cashflow, and a growing market, analysts say.
“Xerox poised to regain quality growth stock status,” said a headline in a recent report by Steve Weber, analyst at SG Cowen Securities Corp. of Boston.
Indeed, one of the meetings Ms. Mulcahy had during a trip to Toronto that ended yesterday was with a group of growth investors, who, she acknowledged, would hardly have given a Xerox CEO the time of day when she took the job in August, 2001.
At that time, the company had $14.1-billion of debt and just $1.7-billion in cash on hand and U.S. securities regulators had found that the company had misstated financial results.
Many thought Ms. Mulcahy would be the last CEO Xerox would ever have but today, with the company's fortunes turned around, she said the problems she inherited were relatively straightforward to fix, particularly when compared to other companies — she mentions Eastman Kodak Co. as an example — which are still trying to find their footing in a digital world.
“I would take those set of problems [I had] over a strong balance sheet with a bad business strategy and no core competencies. So I feel grateful for the assets that I walked into the job with,” said Ms. Mulcahy yesterday.
After hitting an all-time low of $4.20 in October, the stock is now trading around $14. Merrill Lynch analyst Jay Vleeschhouwer, who rates the stock a 'Buy', has a 12-month price target of $18.
“We believe that investor perception of the operational and financial performance [of Xerox] will continue to improve,” Mr. Vleeschhouwer wrote after Xerox released its first quarter results in April.
One of the factors driving investor interest in Xerox now are some relatively new products that enable high-speed, high-volume colour printing.
“We expect color to provide all of the top-line growth we see for 2004-05 and beyond, as high volume digital color printing, a truly disruptive technology, invades the very big market now dominated by offset printing,” Mr. Weber said. “This is virgin territory for Xerox, which clearly is the number one player; with no major competitive threat in view, Xerox's revenue should grow very rapidly.”
SG Cowen does not rate stocks but Mr. Weber believes Xerox should post a profit of 80 cents a share this year and $1.05 a share in 2005.
The key product for Xerox's revenue now and for the next few years is called the iGen3, which is being targeted at print jobs which once could only be done using relatively expensive and time-consuming four-colour Web offset printing — the kind of printing technology used, for example, to put out the Globe and Mail. In Web offset printing, giant rolls of paper are fed through rollers and four different colour inks — black, cyan, magenta, and yellow — are laid down on the paper one at a time. The combination of those four colours produces a full-colour document.
But now, many offset printers are buying or leasing iGen3 machines, which are essentially, $1-million (CDN) colour laser photocopiers. Analysts say that for print runs of up to about 10,000 copies, the iGen3 matches the quality of Web offset printing and can do that at a fraction of the cost and time.
Ms. Mulcahy, though, says it goes beyond just unit cost. High-volume digital printing is also about personalization. That is: With offset printing, the same content must be printed on the entire print run. But with products like Xerox's iGen3, each copy in a print of, say, 10,000 copies can be printed with a unique impression. For large corporations, the ability to cheaply print presonalized client statements and other customized documents is a boon.
“What it enables is this whole new industry of personalization that you could never do on offset,” said Ms. Mulcahy.
Mr. Weber estimates that Xerox's iGen product line was worth $60-million (U.S.) in sales last year and will be worth $240-million this year and $520-million next year. By 2008, the iGen could add as much as $1.56-billion a year to Xerox's overall sales.
“The number of short-run color pages printed appears to be growing by 6-8%. It seems quite plausible that, in 2008, 25% of the projected 230 billion short-run color impressions will be printed on digital systems; if so, digital print volume will grow at a steep 48-50% rate over the next five years,” Mr. Weber says.
Ms. Mulcahy says Xerox believes there is a market worth $18-billion in sales a year in opportunities where a high-volume digital printer can displace Web offset technology.
“And that's just the tip of the iceberg. It'll just get better and better and better,” she said.
So, while Dell, HP and a host of others fight it out in the low-end market for colour printers, copiers, and multi-function peripherals — machines that can print, scan and fax documents — aimed at the consumer and small-office, home-office (SOHO) market, Xerox will extend its technology portfolio at the high-end corporate market.
“It's a decision we came to three years ago, that focus is usually important on getting a return. Understanding what you do well and aligning your resources behind it and being brutal about ensuring that there all supported by core competencies and capabilities that differentiate you in the marketplace is a big deal. So we exited the SOHO business. That's not us. Would be be number one? The answer was no. But where we participate, we'll be number one.”
Ms. Mulcahy is also paying close attention to Xerox's balance sheet. Debt is being rapidly paid off, one factor which is helping Xerox generate what Mr. Weber describes as “terrific cash flow” of as much as $1.1-billion to $1.2-billion this year and next.
Analysts expect Xerox to use this free cashflow to buy back two to three per cent of its oustanding common shares each year. Mr. Weber also believes that interest Xerox earns on its cash reserves will generate as much as $100-million a year by 2008.
“We intend to continue pay down debt and get in a stronger position,” Ms. Mulcahy said. “And I think, going forward, we'll look at options like investments or technology acquisitions. But there's no question we are looking at options that are available to us now that haven't been for a number of years.”