John Caucis, senior analyst, TBR, said Xerox continues to encounter revenue growth headwinds, though restructuring initiatives and contract runoffs support improved profitability in Q2 2016.
Xerox Services’ revenue remains pressured by the runoff of low-margin contracts, most notably within its government healthcare business, which drove a top-line decline of 3.9 percent year-to-year in Q2 2016. Despite persistent revenue contractions, Xerox managed to improve its operating profitability during the quarter, generating a 60-basis-point improvement in its services operating margin to 8.1 percent during the quarter.
Xerox reiterated its guidance for Services growth in 2016, citing strong traction in its commercial healthcare and financial services businesses. The firm anticipates continued acceleration in regard to profitability, projecting services margins at the higher end of its 8 percent to 9.5 percent guidance range. Xerox may be challenged in meeting its revenue guidance, as the company will be competing against peers that are not restructuring and have shifted their business process outsourcing (BPO) businesses upmarket with a steady infusion of analytics-driven solutions.
Strong annual compares hinder growth in Xerox’s public sector vertical, while investments in analytics-driven healthcare solutions enable sustained commercial HITS expansion
TBR estimates Xerox’s public sector revenue fell in Q2 2016, down 5.6 percent from the year-ago quarter. The company benefited from increasing demand among U.S. federal and state-level clients for transportation, document processing and workflow automation. Additionally, the ramp up of recently secured contracts, including its eight-year engagement with the state of New Jersey to bolster the state’s E-ZPASS customer service supported Xerox’s public sector revenues, though strong annual compares hindered growth in the quarter.
Commercial healthcare remained Xerox’s fastest-growing vertical in Q2 2016, up 2 percent year-to-year, according to TBR estimates, as investments in telehealth and healthcare-specific analytics capabilities such as its Virtual Health Solutions continue to resonate with its core client base. Additionally, Xerox’s commercial healthcare business was positively impacted by inorganic contributions from its 3Q15 acquisition of Illinois-based RSA Medical.
Xerox advances its restructuring process in Q2 2016, appoints CEO successors and rebrands its BPO business
In June Xerox announced it had selected Conduent Inc. as the moniker for its BPO business focused on core markets including financial services, transportation and healthcare. We believe rebranding is an important step in the separation process as the company looks to sustain customer loyalty. Additionally, the selection of a moniker and the naming of executive leadership suggests the firm is ahead of schedule in regard to its 1Q17 separation deadline.
In preparation for its split, Xerox began rationalizing headcount and eliminating redundancies, mostly in customer service positions such as call center support. During Q2 2016 Xerox announced its plans to lay off roughly 233 employees between its Aurora, Colo., Raleigh, N.C., and Orlando, Fla., offices.
John Caucis, senior analyst, TBR