全錄公司 (XRX) 2002 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Xerox Corporation third quarter 2002 earnings release conference hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Lawrence Zimmerman, Senior Vice President and Chief Financial Officer.

At the request of Xerox corporation, today's meeting will be tape recorded. Taping and rebroadcast of this call are prohibited without express permission of Xerox.

After the presentation there will be a question and answer session. During this meeting, Ms. Mulcahy and Mr. Zimmerman will make comments that constitute forward-looking statements. Actual results could differ materially from those the projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially is included in the Company's second quarter 10-Q filed with the SEC. The Company does not intend to update such forward-looking statements.

At this time I would like to turn the meeting over to Ms. Mulcahy. Ms. Mulcahy, you may begin.

Good morning and thank you for joining us today.

By now you've seen our third quarter results which include another strong quarter of earnings and cash flow as we are continuing to build momentum in the marketplace and build value for our stakeholders.

We reported third quarter net income of $105 million. A profit of 5 cents per share reflecting a 10 cent improvement from third quarter of last year. Our results include restructuring charges of 6 cents per share.

As you know earlier this week we announced the completion of our U.S. equipment financing agreement with General Electric. A significant eight-year contract that gives Xerox added financial flexibility and steady cash flow to continue effectively managing and strengthening our balance sheet.

You'll also be hearing from us this morning about customer's demands for the new technology we introduced this year, including the Document Center 500 series, which is proving to be one of our most successful product launches in several years.

So we have a lot of ground to cover today.

Good news on earnings, operations, financing and market demand. So I'd like to get started.

Xerox's Chief Financial Officer, Larry Zimmerman, will provide a quick review of Q3 results and a thorough overview of the GE agreement. I'll then return to discuss our operational metrics, provide updates on new products and share our expectations for the balance of the year. Larry?

Thank you and good morning, everyone.

Our results today are evidence of the solid progress Xerox continues to make in sustaining profitability and generating strong operating cash flow.

I'll start with a quick review of the P&L, then spend a few moments discussing liquidity and vendor financing.

As Ann noted we reported earnings of 5 cents per share including restructuring charges of $63 million or 6 cents per share.

Despite the challenges of difficult market conditions during what is traditionally our weakest seasonal quarter we continue to benefit from the strong flow-through from our operational improvements. The proof points are in the results.

Margins improved by 4.4 percentage points to 42% despite competitive pricing pressures which we've been effective in managing. Margins remain strong due to improved manufacturing and productivity which represented half of our margin increase.

As expected, our exit from SOHO also contributed 2 percentage points to this improvement.

Considering the good news on margins, it's important to note that despite a revenue decline in the quarter, gross profits increased from the third quarter of last year.

As you know we closely monitor our selling administrative and general expenses to ensure that our spending is in line with business needs. In the third quarter we again reduced SAG to slightly more than $1 billion. It was down $152 million or 13% from the third quarter of 2001. Factoring into SAG is the steady progress we are making in reducing bad debt expense primarily as a result of improved receivables aging and reduced historical writeoff trends due to tighter credit policies particularly in North America.

We continue to take restructuring actions which resulted in a pre-tax charge of $63 million in the quarter. For the balance of the year we will intensify our restructuring activities, capturing additional savings as we continue to streamline and strengthen operations.

While Ann will review with you in detail our revenue for the quarter, let me quickly brief you on the numbers.

We reported $3.8 billion in revenue, a 6% year-over-over decline. About half the decline is due to our exit from the SOHO business as well as declines in our developing markets where we continue to prioritize profitable transactions.

In Q3 trends improved in equipment sales revenue with a decline moderating to about 9%. 3 points of which are attributable to the SOHO exit. This improvement reflects the positive impact of new products launched earlier this year which Ann will fill you in on shortly.

So let's move to an area I closely manage and have great confidence in, cash. In Q3, Xerox generated operating cash flow of $611 million. Roughly half of this reflects the net runoff of our finance receivables portfolio as well as lower accounts receivable.

Year to date we have generated $1.2 billion of operating cash reflecting the improved management of our balance sheet. Worldwide cash at the end of the quarter was $2.3 billion, up $390 million in the quarter.

We reduced debt by about $300 million in the quarter. This includes payments totaling $785 million related to our bank facility and other scheduled debt obligations as well as $350 million for loans securitized by our finance receivables. And we obtained cash of about $830 million from new loans secured by portions of our finance receivables in the United States, Canada and the United Kingdom.

So for the quarter we had a net increase of about $500 million in debt related to finance securitizations. In fact that's our strategy. We are increasing the proportion of our debt that is securitized by finance receivables. This debt is supported by funding received from third parties like GE.

As we collect cash from the finance receivables, we pay down the secured loans. It becomes a self-sustaining model that provides Xerox with the financial flexibility to effectively support our financing business and manage other debt obligations.

At the end of Q3, $3.2 billion of our debt was secured by finance receivables. We have about $5 billion available for future securitizations out of our current $8.9 billion finance receivables portfolio and we are actively pursuing opportunities to securitize more of this debt through agreements similar to the one we announced with GE on Monday.

And here's a quick recap on the deal. GE Vendor Financial Services will finance the majority of our lease receivables in the United States through monthly securitizations based on new lease originations. Under the terms of the eight-year contract, GE has agreed to provide up to $5 billion outstanding at any given time. That's in addition to the $2.5 billion already funded by GE which is secured by portions of Xerox current U.S. lease receivables.

The U.S. represents more than half of our worldwide revenues so the significance of this long-term agreement cannot be overstated.

With the U.S. GE deal now complete, we are moving forward with plans to complete additional securitizations and third-party financing arrangements in other countries including Canada, France and Germany.

So from my vantage point it's clear that Xerox is on firm financial ground. We are well positioned to meet debt obligations and the related interest payments.

To provide additional future flexibility, we intend to access the capital markets only when market conditions are appropriate.

To be prudent and to be ready for opportunities, we plan to file with the SEC over the next couple of days a $3 billion universal shelf allowing us to issue various forms of debt and equity.

Like many other companies, the market performance over the last few years has decreased the value of the assets held by our pension plans. This, along with a decline in interest rates, will likely result in a fourth quarter non-cash, non-P&L charge to shareholders equity that could total several hundred million dollars. We are also considering reducing the discount rate and expected return on plan asset assumptions for our major pension plans in 2003.

In closing, let me again reiterate the key highlights from the quarter from a financial perspective.

Strong profitability with earnings of 5 cents per share driven by increased margins and lower costs. Significant operating cash flow of $611 million. And a steady flow of good news related to the effective management of the balance sheet.

It was a powerful quarter reflecting our disciplined and intense focus on strengthening every area of our business. It's tough work by tough talented people and it's paying off.

I'll now turn it over to Ann to discuss revenue and our expectations for Q4.

Thank you, Larry.

It was just about two years ago when we outlined a very aggressive plan to restore the strength of this company and our objective was clear. Create a sustainable business model that leverages Xerox's core competencies, exploits the growth opportunities in the market and adds value for our shareholders by delivering solid profitable returns.

We've made adjustments to the strategy along the way in response to economic uncertiancy and shifts in the marketplace, but we have been relentless about executing in a determined manner that ensures are actions are aligned with our objectives and that we deliver on our commitments. Our results today are evidence of that and speak of the sustaining power of our improved business.

As Larry discussed, each of our operational metrics continues to trend in the right direction. With margins up and costs down and we continue to be aggressive on costs, recognizing that there is always room for productivity improvements as we strengthen our operations. Therefore, we continue to expect additional restructuring actions in the fourth quarter.

For Q3, we reduced head count by 1600 including 1100 through restructuring. Our worldwide employment is now 69,900. We're reducing costs while maximizing the strength of our marketing and sales activities. In fact we made strategic decisions to invest in additional sales capacity this year by ratcheting up our tele-web operations which continue to provide us with additional productivity.

We remain as committed as ever to investing in our future through research and development. In Q3, R&D spending was steady at 6% of revenue. With 45,000 global patents to Xerox's name and a strong heritage of fostering innovation, we continue to deliver technology breakthroughs that define our leadership in the document industry. In fact, we plan to showcase some of this innovation at our upcoming investor's conference. And it's these technology investments that will generate the revenue results we expect in key markets.

While total revenue declined year-over-over, we are making progress in the areas of the business with greatest growth opportunity.

As Larry noted, we reported Q3 revenue of $3.8 billion, a decline of 6% from Q3 2001. About half of the decline is due to our exit last year from the retail SOHO equipment business as well as reductions in our developing markets operations.

Our major overhaul in the business model in DMO continues to pay off. For the third quarter DMO's profit increased by $33 million year-over-year and margins improved by 7.7 percentage points to 5.2%. The Q3 profit improvement is a result of significantly lower SAG spending and currency devaluation. Our improved liquidity has allowed us to better hedge currency exposures in these developing countries.

And in North America and Europe, we are meeting expectations reflecting the flow-through of operational improvements and strong performance in key segments of our business. Which brings me to the big picture on revenue, where we were in the quarter and what we expect as new products lift equipment sales.

In the production business, color is the highlight with revenues improving year-over-year due to the strength of the Docucolor 1632 and 2240 printer copiers as well as continued success with the Docucolor 2000 and 6060 series. We are really quite encouraged by the strong order flow on all recently launched color products.

And a few weeks ago, we officially added a new offering in Xerox's rich production color portfolio with the Docucolor iGen 3 digital production press which is now available in six major markets.

To say that it is a breakthrough technology is an understatement. There is no one in the industry that comes close to matching the 100 page-per-minute iGen 3 in print speed, image quality, cost effectiveness and paper handling capabilities.

And just yesterday we announced our latest entry in the light production with the Xerox 1010. A monochrome digital copier-printer that fills an important gap in our product line. The 1010 as a stand-alone digital copier is the least expensive and most advanced product in its class.

While the production monochrome business declined in Q3, we believe we have held or gained share in both the production publishing and printing markets outside of light production. Now with the launch of the Xerox 1010, we are an active participant in the growing light production segment driving future gains and market share.

Q3 margins operating margins and production continued to trend in the right direction; up year-over-over by 5.6 points to 10.8% despite competitive price pressures. The operating profit for the production business improved $69 million from Q3 last year to $142 million.

Xerox's office business delivered $1.6 billion in revenue in Q3 with profits increasing by $52 million to $115 million. Margins improved by 3.3 points to 7.1%, evidence of the flow-through from our cost-saving actions as well as manufacturing and service productivity.

Our new Phazer office color printers launched in May continue to attract customers boosting office color revenues as customers transition from black and white printers to Xerox's affordable solid ink and laser color technology.

While office monochrome revenue was down in the quarter due to substantial declines in light lens copiers, we continue to capture growth in network multifunction, a market we prioritize and are aggressively attacking through new "best in class" technology. And we called it right with the launch of our Document Center 500 series which offers unparalleled productivity at significantly lower manufacturing costs for Xerox and lower prices for our customers.

Customer response to the 500 family is exceptionally strong. The 500 series is designed to strengthen Xerox's play in the largest revenue segments of the office monochrome market, segments 3 and 4. By winning against the competition with this new product, we expect to grow share in these segments as we realize the full effect of the launch by year-end.

Despite the impact from weakened economies, as we look at revenue and market share, we're comfortable that the picture is as we expected, even better in key growth markets. We designed and delivered new products that exploit these growth opportunities. We've effectively managed cost to ensure our pricing is competitive without sacrificing margins. In some cases we've reduced prices while increasing margins.

Plus, as customers expect from Xerox, our technology, our quality and our service continues to be leading edge. To help our customers find better ways to do great work, Xerox continues to add value through our broad portfolio of software solutions and services in areas like one-to-one marketing, on-demand printing, wireless document retrieval and printing as well as knowledge and content management.

Just recently customers like Microsoft, Renault, Ratheon, Airbus, the Provincial Bank of Venezuela, Kinkos, Office Depot, Dow Chemical and many, many more have responded. Recognizing the opportunity to capture productivity improvement through Xerox's product, solutions and services.

This progress will continue in the fourth quarter as we gain speed in all the right markets.

While we expect the economic uncertainty will continue to impact year-over-over results, total revenue in the fourth quarter will continue to trend positively largely driven by significant improvements in equipment sales due to the new product launches. We anticipate that continued business model enhancements including additional restructuring actions will strengthen our bottom line delivering strong full year profitability and fourth quarter results consistent with consensus expectations.

As has become our pattern, the third quarter was a busy and successful one for Xerox. Our deliberate and determined actions in improving operations and driving future revenue growth are delivering results indicative of the new Xerox. To keep the momentum building, we started the fourth quarter with more strong product launches, the Docucolor iGen 3 and Xerox 1010. Plus we developed and now have in effect a solid long-term financial plan with GE for our U.S. equipment financing business.

For Xerox, our actions continue to speak louder than our words. So keep watching and we'll keep delivering. I thank you for your time and now Larry and I would be delighted to take your questions.

Thank you, if you have a question, please press the one on your touchtone phone. All participants are asked to limit themselves to one question. Once again, please press the one on your touchtone... We have Ben Reitzes from UBS Warburg on line with a question. Please state your question.

Good morning and thank you. Wanted to get a few clarifications just with regard... did I hear that right, a $3 billion shelf and does that just set you up for the very long-term? Does that mean you need to do anything immediately?

Ben, I think you're right in the sense that, you know, it's certainly is a reasonable amount for the near future for this company to have a $3 billion shelf, but it's not indicative of any immediate plans. I think we've been pretty clear that we're quite comfortable with our operating cash flow and securitization strategy over the near term. So this really turns out to be an opportunity for us when we choose to implement it.

Any idea of what you would think of doing? Is it equity or debt or when you do, do you have a preference for debt or is there anything you can say right now?

I think we are keeping our options open. A lot of it's going to depend upon market conditions and interest rates, stock price, etcetera. so we are not, at this point, locked in on any particular options.

It seems like, based on the cash you have on the books and your obligations for the fourth and first quarter, I don't think why we need to do one in the immediate term.

And we would definitely agree with that.

Okay and then just a clarification, Larry, your accounts receivables in the quarter, the balance went down about a $100 million. Could you talk about what is going on there in the actual contribution of the AR to the cash flow in the quarter and what the trend is, there? It's improving a little faster than I anticipated?

Well, I would like it to improve faster than you anticipated, but we are putting a lot of focus on accounts receivable. It's a huge amount of cash and we feel we can do better with cash collections, especially since our whole billing process is getting better and better with the joint venture with GE. So, we are putting a lot of focus, worldwide, on improving our cash collections and we had some success, I think, in the quarter and we intend to have more success every quarter after. Fourth quarter becomes a little more difficult, because you have more sales, so it's hard to keep accounts receivables down. But that's our goal, here, is to have cash collection faster than we currently are.

And so you're seeing benefits from GE a little earlier than I thought? But are you seeing that? Is that what you mean?

Yes.

And with declining sales, I don't understand why it would wouldn't continue to improve, but far as one other clarification, you received a lot of funding in the quarter up to $825 million. Could you just give us an update, and then I'll cede the floor, an update on what you are expecting for the fourth quarter in your term, maybe an update on France and what we should expect with regard to other countries on the incoming side for the fourth quarter and maybe a little bit on the components of the $825?

Well, the $825 is Canada, U.K. and the United States. So that's where we got the securitization. As far as the future is concerned, what I said in my words here, were that we had about $5 billion of unsecuritized receivables and we are making every effort in every country to find a way to securitize as much as we can. I'm not anxious to put timetables on this, because it depends on how complicated the deal is and how much resources you have to put on it, but we intend, just like with the GE, we intend to put the resources on the next big event and get it done as fast as we can. And we are also looking at having go-forward programs in as many countries as we can. I don't think it's productive to put exactly timetables on these, Ben. I think you can be assured we are paying a lot of attention to it and we will get it done as fast as we possibly can.

Well is at least the France still on the table?

France is still on the table.

That's in the neighborhood of half a billion, still?

That's in the neighborhood of a half a billion, still.

And of the $5 billion, how much is current that you're going to let run off any way and there is no reason to securitize?

Well, there is a certain amount that runs off. But for the most part, we would go after most of it. There are some parts you are not going to have the ability to get.

And I think we are going to take you up on your offer to cede the floor, here.

Thanks,

Okay, thank you.

We have Gibboney Huske from Credit Suisse First Boston on line with a question.. Please state your question.

Thank you, I'm going to try to stick to one question but there may be multiparts.With regard - you've got, obviously, a lot of things going on. You talked about pensions as possibly having an impact and taking a charge in Q4. There was the [Arrisa] lawsuit where I think you said in your MD&A that you expected that you would not have to create a provision for it in the short term. Just, all of these things, it seems like there's a reasonable possibility you are going to take some hits to equity. How are you feeling with regards to your cushion relative to the credit agreement and I have one follow up.

Let me just be clear as we talked about the pension hit, it is an equity hit, it's not a cash or a P&L hit that we described. And the cushion that we have is absolutely more that adequate. We are in full compliance. We have a very large buffer, Gibboney, and we are not concerned about the covenant on the equity cushion in the least. The [Arrisa] lawsuit, we felt we could state strongly in the MD&A that we absolutely do believe we have a good probability of winning this one and certainly have outside counsel that supports that. So, we'll fight that one vigorously and dont' believe it's a real risk.

This is on the pension, if you lower your expectations for expected return. I mean, in terms of impact on EPS. It seems like one percent is roughly five cents is that about right? Is that sort of the type of magnitude we should be looking for.

I'm not sure I understood your question, could you ask it again, Gibboney?

You were talking about lowering your expected return on plan assets, which a lot of companies are doing right now. What would be the magnitude in terms of the earnings impact of next year, one percent reduction and your expectations would result in five cents in earnings. Is that in the ballpark?

I don't necessarily think we would equate it to earnings, right now, but one percent is probably what most companies are looking at and we don't believe that's a huge impact in terms of the implications of it going forward.

Okay, thank you very much.

We have Steven Weber from SC Cowan on line with a question. Please state your question.

Yes, Anne and Larry. As far as the fourth quarter on equipment sales, I would like to get a feel for thinking, at this point, given all of the moving parts, including the economy. Last year, the sequential uptick in equipment sales, by my calculations, was about 33%, well below the normal 50%. Are you expecting anything materially better than the kind of one-third step up on a seasonal basis in the third quarter at this point?

Steve, I think, first of all on equipment sales, we actually do believe we have momentum in equipment sales and will continue to improve the picture. The new product launches will have full impact in Q4. We really didn't have a ton of deliveries in Q3 and the order rate is very encouraging on that, despite the fact that we are taking very aggressive pricing. We are not counting on the economy to improve at all to drive our outlook on equipment sales. This one is is more about us than it is about the economy and what we have brought to the marketplace in the strength of our offerings and I think the sequential spike that you saw last year is probably an appropriate one to think about as we go into Q4 of this year and I think, an importantly, I think we will begin to really make progress as it relates to the year-over-year impact as it relates to equipment sales.

If I could follow on, do you think you can show, in 2003, some meaningful -- well, the SOHO thing is gone -- do you think you could show some meaningful improvement in equipment sales year-on-year, in 2003, given the sluggish world economy. When I say "material," I would think somewhere in the 6 to 10% kind of range? Is that realistic at this point or too aggressive in your mind?

I think, you know, this one is a tough one, in terms of being able to give you a good assessment. We really would like to see Q4 and certainly get into Q4 before we start to qualify some of the 2003 outlooks. We're looking towards the investor conference time, Steve, as really a time when we think we'll have enough trend data through Q4 to give you a more responsible outlook on equipment sales for 2003. But I would say that, certainly, when I think about what we are entering the year with, 2003, as it relates to the strength of the portfolio, the price positioning, quite frankly, the position of the company in total, we certainly believe we are in a lot stronger position going into 2003.

Okay, if I could ask one more question. In terms of SGA expense in the fourth quarter, number one, are there any unusual items beyond the trend and bad debt expense that we ought to have in mind? And secondly, do you think the year-on-year decline in SG&A expense will be better, same or worse than in Q3?

Well, first of all, I want to be clear on this, sequentially, Q4 SG&A increases--

I'm counting on that.

You will continue to see ratio improvement as it relates to SG&A as a percentage of revenue. We ended this quarter at about 27% in change and we certainly expect to see improvement in Q4 from there. We did see, I think, one of the things we saw on Q3 on the SG&A improvement, was the ESOP piece, which obviously is a non-repeatable, so I would not expect the same amount of improvement in Q4 as we saw in Q3, but definitely directionally right.

We have Carol Sabbagha from Lehman Brothers Online. Please state your question.

Just a couple of questions on the financing front. Is it right to assume that with this GE deal in the U.S., now, that you are going to be on a run rate basis of 50% of new receivables, somewhere around 50% being [monitized] by others and what percentage of your U.S. leasing, future leases will not be eligible at least currently to be placed into the $5 billion facility?

I think the percentage that we have, so far, is $3 billion out of $8 billion or $8.5 billion and on a going rate basis, I think you're about right, that we would expect to see somewhere around 50%. What was the second part of your question?

What percentage of your U.S. leases, or future U.S. leases, do you think currently won't be eligible to be put into this $5 billion facility?

What I would say about that is not only in the U.S., but everywhere, we are trying to make everything eligible for securitization. I haven't ruled out anything. I'm trying to work each one of them, one at a time, and that's the way we are approaching it. There is nothing ruled out from the standpoint of what we can secure.

And I think, Carol, it would be important to add that we have receptive partners for that discussion, as well, although a third of the receivables currently may not be eligible, there is no question we will be working together to increase the eligible population, as Larry noted.

Okay, sure seems that way. One quick follow-up, on the cash flow side, looking forward to the next couple of years, what should we think about Capex investment in the software and most importantly, equipment on operating leases, how much you will have to use from cash flow for that? 'Cause it has come in lighter than I expected over the last several quarters. Thank you.

On Capex we feel we have reached a run rate that sustainable on Capex. I think we set expectations around a couple hundred million, maybe a little higher. We will probably do better than that in terms of Capex spending this year. But we think in that range, it's something that is sustainable. We is have not taken any decisions that are not in keeping with our strategic focus to support the business going forward. We think that is sustainable. On the equipment leasing side, I think there is nothing that we would expect that should change that significantly. We do expect, as our services business increases that it could go up slightly with the services businesses, because more of that tends to be rental approaches than outright sales. So, I would say it all will be paced a lot with our services business going forward. Therefore, you would see some increase, but not something that would be huge.

Thanks very much.

Thank you, Carol.

We have Craig Ellis from Salomon Smith Barney on the line with a question . Please state your question.

Good morning, Anne and Larry. Some clarifications to start off with. First, Anne on your comments regarding comfort with consensus, estimates in the fourth quarter, were you referring to both EPS and revenues?

Certainly EPS and I believe it's relatively consistent with revenue, but I have to say that thats one we'll be updating at the investor conference as we see the Q4 momentum. It's certainly in the ballpark on revenue and nine cents EPS.

With the revenue being in the ballpark, is that assuming the same type of currency impact that we have this quarter?

Yes.

And understanding where we are headed with cost savings, the company has done a heroic job trimming staff during the year, would you look for the same magnitude of changes to take place as we look out towards the fourth quarter and perhaps early 2003 as we've seen in recent quarters or are we getting to a point where the inflection on the slope of that line changes pretty dramatically and we flatten out?

No, we are are actually on a course to be pretty aggressive on the cost front. We actually have some fairly agressive plans as it relates to continued productive initiatives. So, Craig, I don't think you will see us flatten out on the cost front. I think we still expect to take the actions that will result in positive flow-through to the bottom line.

Okay, thanks, and then just one last question. Understanding the segment performance better, it looks like there are some interesting cross-currents in production and in offices, we have light lens declining, some good growth in digital monochrome and in color, but over all year-over-year revenue declines. When does the momentum shift to the side of digital monochrome and colo so that we start to see year-over-year growth?

If you look at us, compared to our competitors, we have a much lower percentage of light lens activity in our mix than our competitors. We have been pretty aggressive about really, digital upgrades as it relates to our customers, so, we definitely, the light lens proportion is very small in production and office, so, that decline is moderating, I guess, in terms of its impact on the overall business. I think it will be an advantage going forward for Xerox because of the percentage of digital in our business mix.

So am I hearing that we are one to two quarters away?

Well, I wouldn't say. I think that there will be a lingering beyond one to two quarters, but I think you will tend to see it improve quarter-over-quarter in terms of the impact of the light lens decline.

We have Solin Cho from Morgan Stanley on the line. State your question.

Thank you. A few questions. First, some interesting comments you made on European trends and the services and outsourcing sides of it. I'm someone surprised that you actually experienced growth in that market. Can you expand on some the drivers there and exactly what you are seeing both on the straight service side as well as the document outsourcing?

Yes, first of all, straight service technical service, we have really, I think, done a great job in Europe of managing productivity and clearly seeing increase in the technical service revenues in Europe, which is helping the post-sale line. On the outsourcing side, quarter-over-quarter, we're seeing growth in Europe and despite a weakened economy, it's probably important to note that the European market for outsourcing is less mature than the U.S. Market, so it represents a much smaller portion, but a then again, a large larger growth opportunity as it relates to outsourcing. So I think part of it is quite frankly, the maturity of the market and the fact that it's still a relatively new business for Xerox in Europe, versus the duration of the outsourcing business for us in the U.S., which has a much larger scale and a much longer history.

Okay, can you actually share some growth rates for the three key regions, North America the developing markets, and Europe?

We gave you bottom line growth rates in terms of the perspective in terms of bottom line impact. Obviously all three grew profit dramatically in the quarter. On the revenue side, I think Europe actually trend was probably the strongest with the U.S. or North America following and our weakest revenue performer was developing markets, but we have been pretty consistent in saying we are not, number one, financing revenues in developing markets and we are really working on profitable transactions, so as we continue to improve in developing markets, we will be able to focus more on revenue growth.

Just, on the bad-debt expense side, it looks like levels stabilized, somewhat sequentially, can you provide more specifics on what you're seeing in terms of credit quality and chargeoff experience and if you just split the expense between nonfinance and finance.

I'll take a shot at it. I may need some help on the split between finance and nonfinance, but we actually believe there is still a lot of opportunity for improvement in bad-debt, although as Larry indicated, we are pleased with the fact that it seems like we are getting quicker progress, if you will, with our joint venture than we might have anticipated. There is no question that the credit is definitely more disciplined, so, we are certainly going forward, expecting to continue to improve the trend. Collections are definitely improving and from that perspective, I'd say we should continue to expect some results that are consistent with the actions that we have taken with this joint venture.

So we should expect the bad debt expenses to climb in the fourth quarter?

I think one of the things I might focus on is year-over-year and say there will be significant improvements year-over-year. There is a little volatility in bad-debt quarter to quarter. So, it's a little more difficult to project, but you can be assured that year-over-year, there will be dramatic improvements in bad debt.

And then the split?

I think we'll have to get back to you on that. I don't think we have that answer immediately, but we'll follow up with you.

Okay, great.

Okay, thank you.

We have Nat [Zolen] from Lehman Brothers on the line. Please state your question.

Good morning.

Good morning.

You offer five quarters of debt amortization projections in one of your press releases. I guess what would be helpful is would there be a way to match that with a couple of quarters of what you expect to receive in financing from your financing sources like GE? Would that be available?

I think our intent is to absolutely provide a comfort level as it relates to cash flow and debt maturities. It would be a little bit complicated to try to go through all of the dynamics of that right now, but we'll clearly be focused on providing that at the investor conference and you can be assured that we really have a very deep understanding, right now, of what the hydraulics are with regard to debt maturities and all the cash flow dynamics, and are very comfortable with regard to the schedule. We are looking to provide more detail in November.

Do you care to project your fourth quarter cash balance,and if not, a direction of either up or down.

Our goal is to keep the cash balance as high as we can. In the fourth quarter, you generally have somewhat of a glut down on it. You can't expect the improvement in accounts receivable and some other things. If I were to projected that out, I would think it would be reduced from the levels we are now, but not someplace where we thought was very low. There would be some moderation downward in the fourth quarter.

Thank you very much.

Thank you.

We have Peter Ausnit from Deustch Banc on the line, please state your question.

Yeah, thanks, just a couple. First, can you walk us through the mechanics on your share count? It seems to have come down dramatically at the same time your stock was a lot lower last quarter than it was the quarter before. Can you help me understand that a bit?

I think the number of shares is effected by two aspects of, one is the ESOP, which kicks in at a certain time, which is what happened here in the third quarter and that's a certain amount of shares, over and above, what you have that has to kick in when you have a certain level of earnings per share. In addition to that, there is an "if converted" rule that says that some of the other converts, depending on -- and this is complicated -- but depending on, whether - it has to be dilutive, it can't help you. If it helps you, you go back to the lower shares. If it doesn't help you, and it has to go with taking the interest out and the cusp there is around 12 cents a share for that to come in.

And that's 113 million shares.

See, that's why it's confusing because last quarter, yes, you had higher earnings but a substantially lower share count, which would pushed up the ESOP dilution, I would have thought.. I mean the share price was lower this quarter, so the ESOP dilution should have been higher this quarter., I would have thought.

I think it might be appropriate, this is complicated arithmetic. I assure you it is right. We'll call you back and let you know exactly what the what the arithmetic is.

I look forward to that. Here's another, broader question. You're leaner on a head count to revenue basis from some of your pure distribution competitors and you just told us that you expect a further push on that number. Are we running a risk, perhaps, of coming close to the edge of things like service problems, which years ago were significant problems that the company took a little too much, perhaps, out of the business?

You know, Peter, I think about that all of the time, and I kind of know the dynamics of this business real well in terms of what we can tolerate. Our service response, right now, is absolutely the best it's been in probably a decade and that's with much fewer resources. We are focused on productivity. We are focused on cost, actions that enable productivity and, clearly, all of the cost reductions do not relate totally to head count, as well. There are a lot of opportunities that we look at, not the least of which are things like bad debt and write-off but also improved the cost picture considerably. But you can be assured we are going to manage through the cost opportunities in a way that doesn't put our customers at risk or our future in terms of the kind of cost actions that we take.

I'm glad to hear that. I have to ask one more question. You have some notes coming up that you have flexibility on how you pay them back, either cash or stock. Would this shelf likely be used in that way? You have indicated you want to maintain as high a cash balance as possible.

Well, I think that's a decision we have to make depending on market conditions at that point in time, Peter, none of this is absolutely necessary and we have never indicated that we need to keep a cash balance of over $2 billion. We do believe we have choices to make and flexibilities in terms of what the conditions are at that point in time.

Thanks, very much.

Thanks, Peter. I think we have time for one last question.

Thank you, we have Marissa Clinton from Merrill Lynch on the line. Please state your question.

I understand you began taking actual orders for the iGen 3 at the beginning of the month at Graph Expo. Given the weak economy, can you comment on customer demand for this product thus far?

I was at Graph Expo with some of our initial customers and I can tell you there is a tremendous amount of excitement. We are gating our install process simply because it's a complicated market and it requires a lot of market development to ensure these customers are profitable before we roll out to an extensive area. We have opened up in six cities. We will not keep tally of order counts because we don't do that for any of our products, but certainly based upon the feedback we have had from Graph Expo and, quite frankly, the amount of companies who would like for us to instal iGen 3, really, demand is not an issue. It's a matter of rolling this out appropriately so that all of these installs are successful and help to grow the graphic arts market.

A quick follow-up on the Gibboney's question regarding pensions. In terms of the noncash charge you anticipate in Q4, can you provide a more specific range for the amount of the charge?

We basically kept it basically general, because it really depends on what happens to the equity markets in the fourth quarter. We'll have to wait, together with other companies, to give you something more accurate in terms of an update.

Okay, thank you.

Thank you very much, and I just want to thank all of you for your participation, and your interest in Xerox. Before we sign off, I would like to remind you that we will be holding a investor conference on November 25th in New York. We'll keep in touch with regard to the details and we would like to - look forward to seeing you all there. We believe we have a lot of good -- good things to share. So thank you, again, for your participation and enjoy the rest of the day.

Thank you, this concludes today's teleconference, thank you for participating, you may all disconnect at this time.