全錄公司 (XRX) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Xerox Corporation first quarter 2003 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 rebroadcasting 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 Actual results could differ materially from those projected in such forward-looking statements. Information concerning certain factors that could cause actual results to differ materially is included in the company's 2002 report 10-K filed with the SEC The company does not intend to update any forward-looking statement made during this meeting. At this time I would like to turn the meeting over to Anne Mulcahy. You may begin.

Thanks. Good morning, everyone and thanks for joining us today. By now you've seen our first quarter results which were impacted by the litigation charge that we disclosed on Monday. In a moment, Larry is going to provide you a bit more detail on this.

What's most important is the strong operational performance in the quarter, exceeding expectations on a continued focus on effectively managing the fundamentals of the business while driving equipment sales growth and building momentum in key markets. It's certainly no secret this has been a tough economy to compete in and certainly for the technology industry, that's especially impacted by delays in capital spending. But here at Xerox, we continue to feel advantage to winning the marketplace through our leaner more flexible business model and our rich portfolio of systems and services, and our operational results today are evidence that we're doing just that.

So Larry is going to walk you through these results and the balance sheet, and then I'll return to talk more about revenue and share our expectations for the balance of the year and we're going to try to keep our comments brief and leave plenty of time for your questions. Larry?

Thanks, Anne, and good morning everyone. Certainly from a business perspective, this was a great quarter. In a tough economic environment, we made progress on all fronts, overachieving our expectations. I'll take you through the details in a moment, but first an explanation on the litigation charge we announced Monday.

This is all about a lawsuit brought against our primary US pension plan. In September, 2002 a district court is adopted the plaintiff’s methodology in calculating damages in the suit. We appealed and following oral arguments on April 9th, we chose to take a more conservative view of the level of probability of a favorable outcome. That being said, we believe, and our external concurs that once the three-judge panel has thoroughly reviewed the legal briefs, the district court's judgment should be overturned. If the district court ruling is upheld on appeal, any final judgment would be paid from the pension plan's assets. If there are any cash implications to the company, they would not begin until 2005.

So we're not letting this news detract from the significant progress we continue to make in building value for our stakeholders, which brings me to our first quarter results.

Including the $.25 litigation charge, we reported a $.10 loss in the quarter. Excluding the charge and a $.02 benefit from the lower share count associated with the loss, earnings would have been $.13 per share, clearly well ahead of $.06 to $.09 expectation. Our results benefited in part from savings achieved from the restructuring actions we accelerated into the fourth quarter of last year. We've also continued to make progress, strengthening the balance sheet through operating cash generation and effective execution of our finance receivable securitization strategy.

Highlights in the quarter include 3% equipment sales growth, which includes a six point benefit from currency. Our equipment sale performance in Q1 continues the improving trend we delivered throughout the four quarters of 2002. Despite a challenging economic backdrop, we grew equipment sales in the production, color, office multifunction color and office multifunction black-and-white. Each of these areas represents important growth opportunities for Xerox, as such, and have been the target of all our R&D investments. It's clear through our Q1 results that these investments are paying off with equipment sales in key areas growing due to the strength of our new technology launched in the second half of last year. Anne will provide more detail on each of the segments in a moment. But it's important to remember that driving equipment sales in key markets represents one step of our revenue growth strategy. Improved equipment sales means more machines in the field that depend on Xerox supplies and service, business that flows through to our post-sale revenue and has a sustaining benefit for our top line results.

So it's an important indicator of our future success, and it's clear that we're on the right track to continue building momentum in all the right markets. Our total revenues declined 3%, including a 4% point benefit from currency. The total decline was driven by decreases in light lens, developing markets, and Soho. As you'd expect, light lens revenues continue to decline significantly, becoming a smaller and smaller part of our total. In fact, light lens revenues in the production and office segments declined 29% in the first quarter to $415 million. A year ago in Q1 2002, light lens represented 20% of our production and office revenues. It now represents 14%. Revenues in developing markets operations declined 19%, representing almost one-third of the company's total Q1 revenue decline. The actions that we've taken over the past two years have reduced the risk and improved the profitability of our DMO business. Our priority was clearly focused on stabilizing the business, which meant less revenue in the short term. We are beginning to see the turn. Equipment sales grew 17% in the first quarter, although post-sale revenue declined 25%. We anticipate DMO revenues stabilizing in the second half, as the post-sale declines moderate and equipment sales grow.

You'll recall that we exited the Soho business in 2001. Since then, it's obviously represented less and less of our total revenue. This really is the model to understand Xerox revenues. Like any business, some of our markets are growing and some are declining. We are taking the necessary actions to increase the proportion of our revenues in growth areas, like color, multifunction, and services, while reducing the proportion of our revenues in businesses we have exited like Soho or markets which are on significant secular decline, like light lens.

To quantify this model in Q1, the growth areas of our business which represent about two-thirds of our revenue grew 7%. Declining areas, where we are making no investments, light lens and Soho represented 14% of our revenues and were down 28% in the quarter, and as I mentioned earlier, DMO, which represented about 10% of our revenues, was down 19%, and we expect that this will begin to turn in the second half of the year.

This all leads to future revenue increases as investment areas grow and grow faster, and declining areas become a smaller part of our total. In terms of the bottom line, operational improvements and our streamline cost structure continue to drive positive results. We expect this to be a continuing trend for the near term with profit growth exceeding revenue growth. Our relentless cost focus will ensure that revenue growth always outpaces cost increases, and we anticipate operating margins will expand. Gross margins improved just under one percentage point to 41.9%. Productivity and operational improvements more than offset plan lowering new product pricing and other marketplace pricing pressures. Selling, administrative and general expenses declined $149 million or 13% from last year. Factoring into SAG is the steady Prague progress we're making in improving our cost base and reducing bad debt expense. In addition, some of the significant one-time expenses in last year's first quarter were not repeated this year. The combination of stabilizing revenue trends and leaner cost structures contributed to improved operating margins in each of our segments, production office, and DMO. And we'll certainly continue to effectively manage cost.

In terms of the tax rate, here's where we stand. Excluding the litigation charge, the underlying tax rate in the quarter was 33%, compared with our full year expected tax rate of. Approximately 40%. This provided a $.02 benefit in the first quarter and will even out through the year. For the balance sheet we generated $159 million in operating cash in the first quarter. This was consistent with my expectations, given the sizeable restructuring cash payments in the first quarter, and the favorable Q4 increase in accounts payable that we anticipated would reverse in Q1.

Accounts receivable performance did not meet my expectations, but cash collections did improve from last year's first quarter. I continue to believe that we will see more progress by year-end. Write-offs are down and we recently implemented actions in order to improve the training and skills of our people. I feel confident that we can capture cash in that area. Our strategy to secure ties and increasing portion of our finance receivables continues to work exceedingly well. You'll recall that we set a goal of securitizing 60% of our finance receivables by year-end 2004 and I expect we will achieve this commitment reaching the 60% mark by the end of this year.

In the first quarter, we completed new securitizations of just over $800 million, including $580 million in the U.S. In the quarter, we repaid $459 million for previous secured finance receivable debt. As a result of these activities, we increased the proportion of our securitized finance receivables from 49% at the end of the fourth quarter, to 54% first quarter. Earlier this month we signed an agreement with Merrill Lynch for the majority of leased receivables in France to be financed through ongoing securitizations based on new lease originations. Our targets for go-forward agreements are in Germany, the UK and Canada.

We ended the first quarter with a total debt of $14.3 billion. Finance receivables securitized debt increased to $4.3 billion or 30% of our debt at the end of the first quart. Term and revolver declined from $10.3 billion at the end of the fourth quarter to $10 billion this quarter. We are focused on strengthening the company's financial position in all areas. P&L, balance sheet and internal controls. We're making great progress on all fronts, and I remain totally committed to investing the time and the resources in ensuring that Xerox has a best in class finance organization. As you know, the audit committee of Xerox board engaged an independent consultant as part of our settlement agreement last year with the SEC. This consultant has completed his review of our accounting policies and controls, and the audit committee has shared his assessment with the commission and the full board. The consultants feedback was constructive and consistent with the actions we've been working on over the past year, like a realignment of our global accounting operations, so all accountants report to our chief accountant around the world, a massive initiative to upgrade our financial systems and a comprehensive approach to ensuring that our accounting policies are always consistently updated. In addition, we've hired a new controller, a new treasurer, and engaged Ernst and Young as our internal auditors around the world. There's still more to do, but the evidence of our hard work is already paying off through more effective risk management and tightened controls across the board.

In closing, let me again reiterate the key highlights of the quarter from a financial perspective. Continued sequential improvements, moderating revenue declines, and in fact, growth in key market areas, increased margins and lower costs while continuing to invest in the future, continued progress in operating cash flow and finance receivable securitization. Discipline, execution and intense focus on strengthening every area of our business and another quarter of solid effective delivery on our commitments. Anne will now provide a bit more detail on our revenue segments and expectations. Anne?

Thank you, Larry. As you know, we've been successful in strengthening our core operations, while we've been investing in new technology, so that we can build customer value with industry's leading products and services. And we've been consistent in delivering results that are evidence of this effective execution. So it is with the same revolve that we're executing on a well-defined plan to win market share and grow revenue based on current market share results, and Q1 equipment sale trends, it is clear that our technology investments and expanded sales outreach are generating positive results in key markets.

Color is a great example. In the office and production environment, it continues to be a highlight in our revenue results. Total color revenue was up 16% in the quarter, led by the success of our DocuColor series. Xerox color technology delivers superior quality at reasonable cost, leading more customers to recognize the value of using color to add greater impact to their work. And that is really great news for Xerox, not only for equipment sales, but also in driving post-sale revenues for supplies. Monthly paid volume is an important metric for monitoring the annuities extreme for Xerox's color systems. Consider, this our DocuColor family appeals to customers who tend to have higher monthly page volumes and more production-oriented applications. Sales of this product family continue to grow. In fact, we've surpassed 7,500 installed worldwide. It is the best selling system in its class. More placements, more pages printed in color, Xerox color. More color supports our top line through equipment sales and post sale revenue. It is a powerful business model, and it is reaping rewards for us today and it's positioned to continue doing so well into the future. That's why production color say key growth opportunity for us and in Q1, production color installs grew 8% led by the DocuColor 6060. Latest market share reports for the second half of 2002 show Xerox holding the number one production color market share position in both the U.S. and Europe.

And with Xerox's DocuColor IGEN digital three production press steadily gaining acceptance in the highest end of the production color market and customer's expanded use of our one-to-one and just in time solutions, we expect to continue building on our leadership success in this important growth market.

For Xerox the overall market nor production Monday know chrome is not as robust and is clearly more impacted by economic uncertainties than other business, but we continue to be recognized as the industry leader through our advanced technology with our DocuTech and Docuprint families. The Xerox 1010 which was launched last November and our first entry into the light production space has started to see results but we're not yet seeing the full benefit of the launch. As important, we have new technology and solutions in the pipeline that will broaden our offerings in this space and drive increased page volume.

On the topic of new offerings, let me segway to Xerox's office business, where next week, we'll make news with our most significant product announcement of the year. I'm not going to go into detail on this for competitive reasons, but I can tell you that it represents the true benefit of the heavy lifting we've done to strengthen operations in our office business. We've said all along, we're playing to win, to take back the office and drive profitable revenue growth in this very important space, and what you'll learn next week is that we are competitively positioned to do just that.

And there's an area of the office, the networked multifunction systems, where our investments and expanded sales outreach are already paying off. In the first quarter, office color multifunction installs increased 48% year over year, and we gained three points in the U.S. and ten points of European market share in the second half of 2002, compared to the first half of last year due to the success of the DocuColor 1632 and 2240 launched last June.

In office black-and-white multifunction installs grew 15% largely grew to the great success of the Xerox Document Center 500 series which we also launched last year. And U.S. and European market share reports are further evidence of the strides we're making in this key growth market, with Xerox gaining two share points in the second half of 2002 for the 21 through 90 page per minute segment of the digital office market.

As I mentioned earlier, Xerox's global services offerings enhance our production and office businesses by providing customers with the expertise and applications, strive for greater efficiency in their businesses. More important in today's economic environment than ever before. You may have seen a new Xerox commercial that promotes the advantages of the Xerox office document assessment, which measures and analyzes the exact cost of how much a business spends on printing, copying, scanning, faxing and managing the incredible volume of documents it generates each year.

So with an ODA, we help customers achieve measurably year over year savings, often as much as 40% through better asset management and streamlining work processes with web-enabled document management tools. This is just another example of the power of the Xerox value proposition and how through Xerox systems and services we're helping businesses small to large become more efficient and effective.

And that's why, despite economic challenges, we believe that we're well-positioned to compete aggressively and continue strengthening our business through improved year over year equipment sale trends and increased revenue in key growth markets.

So for the second quarter we expect earnings in the range of $.09 to $.12 per share, and for the full year, we expect earnings to be consistent with our prior expectations, but adjusted to reflect the $.25 cent first quarter litigation charge. We are quite pleased with the progress we've made this quarter. From an operational perspective, it was a good start to the new year, and we fully intend to continue doing what we've proven we do best, executing with precision to build value for our shareholders and our customers. Once again, thank you for joining us today. Now, Larry and I would be delighted to take your questions.

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

Can you hear me? Sorry about that.

Now we can. Hi, Ben.

How are you? A couple things. A clarification on the outlook for the second quarter. Does that include any charges in the GAAP amount?

No, Ben T does not.

Okay, secondly --

Let me just -- obviously, there will be some restructuring. We're including that in our GAAP number, bottom line GAAP.

Bottom line GAAP, but the operating number might be a few pennies higher?

Yes.

Okay.

If you add back in restructuring, yes.

Which I do sometimes. Okay, and then with regard to some of the speculation in the marketplace, Larry, would you mind making any comments on any efforts that you're doing to -- any refinancing, anything that you could be doing or any thoughts on anything, any opportunities that are out there to financing wise that are perhaps more accretive and less dilutive than you might have seen in the past, and if you wouldn't mind tying that into how you're going to tackle the $4 billion in debt fort rest of the year, given your $3 billion cash balance.

Sow want me to speculate on the speculation that's out there?

Well, whatever you're comfortable with, sir.

Well, first of all, to answer your question, your second part of your question, you know, we think we're well positioned with our securitization strategy and our cash flow and the current cash we have on board. You know, we can stay the course here with our cash, you know, to pay our debts in the future. As I presented time and again here, so we don't see any problems in doing that. In fact we’re very comfortable with it. As far as assessing capital markets and refinancing, I they those are always options and as we've said in the past, we're going to do it when we think it's the best for the shareholders of Xerox, and so we're constantly evaluating it and thinking about it and you know, there's rumors all the time on what exactly we might or might not be doing, but I'm not going to comment on the speculation. I will say we constantly evaluate redoing bank deals or going out in the marketplace at all times and when it's appropriate, we'll do it.

Okay, and as far as some of the debt throughout the year, with regard to the $4 billion, you see cash flow from operations, plus your ability to continue to securitize, you're still on track for the over $1 billion cash balance from what you see?

Yes.

Thank you.

Our next question comes from , Caroline Sabbagha of Lehman Brothers.

Thanks. Just a couple questions. First, given the outperformance this quarter versus what you had previously outlined I'm surprise you didn't inch up your guidance for the full year. Are the markets a little bit worse than what you are expecting when you initially gave the 50 to 55% -- 55 cent guidance?

Hi, Carol. I think what we're doing, I think, being prudent and really assessing, you know, no significant economic upturn or downturn, for that matter. We're not counting on improvements in the economy. Therefore, we think it's wise to be somewhat prudent about our outlook for the future at this point. So you know, clearly, if the economy improves significantly, we think we're well positioned, you know, but I don't think it's wise to outlook on that basis right now.

But are you seeing any deterioration in the first quarter in the broad economy, not specifically related to your results?

No, I don't think we're seeing a deterioration, no.

My second question is, I presume your total installs are down year over year, although you're gaining share or you're gaining -- you have higher installations in the more profitable areas of the business like color and multifunction, and that you've made the point translates into hopefully higher print volumes over the long-term. Can you give us a feel for, if your total print volumes are down year over year, and at what point is the higher installation potentially more profitable areas offset the declines in the total installed base?

Okay, so I think when we've given you kind of our models and you know, total print volumes have a lot to do with obviously annuity trends. We've given you our model, we've said that turn will take place in 2004 in terms of post sale revenues breaking through and growing, which will be a function of actually growing pages, but I would suggest as well that, you know, pages are important to us. Color pages are most important to us. So despite the fact that we may be seeing and we are seeing some overall page declines, the percentage of color pages is increasing. So therefore, the ability to leverage the profitability of those pages is getting better and better as well. So I think the first part of this is, if all pages were equal we would make the turn next year in terms of, you know, certainly driving back into page growth year over year, but the fact that we're a bigger portion of our portfolio is in color says that we'll be able to leverage the profit from those pages, you know, for the balance of this year, as well as obviously into next year.

Would you be willing to share with us what percentage of your total pages are now color versus a year ago, and typically, how much more profitable a color page is versus a black-and-white page?

Well, you know --

Some sort of feel around that.

Obviously, when we talk about mid range color installs being up 15%, production color installs up 8%, total color revenues being up 16%, you know, you can make some, certainly analogies in terms of page growth as well. Generally speaking, the profitability of our color page is about five times, four to five times more profitable than a black-and-white page in terms of the profitability of those pages. So it's pretty significant.

Okay, thank you very much.

You're welcome.

Our next question comes from Bill Shope of JP Morgan. Please state your question.

Can you hear me?

Yes, Bill.

I had two quick questions. Did you see any impact during the quarter from the war on your customer's spending patterns? Did you see it dip down and come up towards the end of the quarter? We've been hearing that story from a few other technology vendors. Second question, could discuss the pricing environment? Are you seeing the Asian competitors becoming more aggressive in response to your improving cost structure?

First of all, I'd say we do believe, certainly, that in total for the first quarter we do see an impact in terms of capital spending that would have been, you know, probably a little bit weaker than Q4 last year, but I don't know if I could reflect on any big volatility month-to-month on that. Clearly, we're hoping that Q2 is an improvement. Obviously, since it's pretty obvious, we did see a dip in our revenues in the Middle East business and we'll continue to obviously see that for awhile. We not seeing any tremendous volatility as it relates to pricing. We've made significant pricing investments. We can obviously see the results of those with the share increases that we're seeing, but I wouldn't say that we're seeing tremendous reaction or response at this point from competitors.

Okay, great. Thank you.

You're welcome.

Our next question comes from Sundar Baharagam [ph] from Merrill Lynch.

I had one quick question on your nonfinancing EBITDA margins. I noticed it kind of declined from 15.7% in the fourth quarter to 10.2% this quarter. I understand you are making investments, some of your cost saving investments into your pricing. Is there anything going on here in terms of one-time that kind of cost the margins to decline by about 4.5% quarter over quarter?

I don't look at EBITDA margins but if you call in or we'll call you back and give you an analysis and explanation for it.

Okay.

Our next question comes from Stephen Weber from SG Cowen. Please state your question.

Good morning. I wondered if you could -- I'm particularly interested in your feelings today about a couple of the line items consistent with your restated guidance, particularly the gross margin seems tangibly better than what you were leading us to believe three months ago, and I'm wondering whether you did have some statements about SAG and the 10-K, and then you made some statement about R&D or the current run rate, and I don't know whether that was relative to revenues or in absolutes, was "adequate" or something like that. Could you kind of go through these line items with us and tell us what's changed and not changed in your thinking?

Okay, Steve, let me start with gross margin. I think we've been setting an expectation that our intent was to keep our gross margins north of 40%. You know, you're correct in the sense that we've been significantly overachieving that and they were just under 42%, and obviously, that's been the case for a few quarters now. Our intent and our business model says that we have the ability to deliver expectations with 40% gross margins if we need to go there for price competitiveness. We're pretty pleased that this quarter we could see the kind of install gains and share gains and still maintain gross margins under 42%. So you can count on the fact that assuming market conditions allow us to continue to do that, we have no intentions of letting the margins deteriorate, and I think feel fairly sure we can probably keep our margins north of 41% now for the balance of the year or at least for the full year.

Okay.

Okay, on SAG, I think we did have a lot of progress in SAG in terms of the Q1 performance. Some of that also had to do with some nonrepeating things. So it wasn't all, you know, operationally driven, but a good portion of it was, and we believe that we'll continue in absolute terms to focus on SAG reductions going forward, and focus on a level of efficiency in SAG, particularly as we look at the improvements in back office operations. I mean, you're seeing improvements in bad debts and those areas. We continue to keep very focused on that. We'll continue to work the absolute SAG costs down throughout the balance of the year, and on R&D, it went up slightly, but that really wasn't due to increased engineering or development spending. It was due to, I think, a benefits flow-through and therefore, we don't expect to see that continue to repeat itself and we'll be back in the 5 to 6% kind of ratios for R&D for the balance of the year.

Okay, if I could just come back. You talk about office installs or multifunction installs up, black-and-white up in the mid teens.

Yes.

It seems that, if I remember the Al rhythm, the pricing cut on the DocuColor 500 was pretty stiff.

Yes

My calculation you need to do a lot better than 15% to keep the equipment sales revenue fluid. Are you getting utilizations that are better than you thought or is it this tough environment that's holding down the installs?

No, I think, you know, we're pretty pleased. I think the pricing investments have been about 10 or 11% but that the efficiencies were driving in terms of cost reductions are offsetting any price investments, and therefore we're seeing in that category some modest growth. I'm looking at probably 7% or so in terms of the office multifunction black-and-white business. So we're growing that segment by 7%, and in revenue, 15% in installs, and clearly, offsetting any of the pricing investments with really good efficiency so that we're maintaining a good level of margin on those. So I think we're -- we think we can do better, and we're planning on doing better, but we're doing pretty well right now in that segment.

Okay, thank you.

You're welcome.

Our next question comes from Craig Ellis with Smith Barney. Please state your question.

Good morning.

Good morning, Craig.

It looks like you're doing a good job on the cost savings. A clarification in the income statement on bad debt expense. Is the $56 million a good run rate to use going forward?

We're going to try to get that better. So zero is a good run rate.

But we think there's opportunity there, but we're back at levels that certainly would have been more historically appropriate before we had some of the issues we had in '99 and 2000. So I think we're at a reasonable run rate, but one of the reasons we did the GE capital partnership was really to gain a level of expertise in this area that we think can improve our reasonable historical run rates so we do have high expectations for continued improvement.

And then questions on the segment results. It looks like the production equipment declined about 14% on a constant currency basis. That's my estimate, and it looks like there's a number of factors there, pricing, competition, light lens declines and it looks like that's about a $1.5 billion business right now. Can you help us understand what's contributing to the sales decline and how those hydraulics work as we work out over the course of the year?

First of all, when we work at the production segment, I really should talk about three pieces of it, one is production color. The other is the production black-and-white and the other is the light production segment and that's kind of what drives the total for that segment. I've already said production color performed well, 8% up in installs and similar amounts actually a higher amount actually in revenue, and in total revenue, I think we were up in the 20% kind of level. In production black-and-white, we're actually pleased that our install base remains pretty stable in the DocuTech area. We're not seeing any deterioration in our midst. Our post-sale revenue stayed pretty flat there. However, that has been the area of the market that we've seen the most impact from the economy in terms of the, you know, the production black-and-white space and in the light production space is where we're seeing the biggest declines because we haven't been participating until we introduced the 1010 in November, and quite frankly, that was somewhat of a limited launch in November, and now we really have it fully available throughout the world. So we really have the opportunity to do with the 1010 to participate in the segment we haven't been participated in to date. I think have you to look at the production market that way, and certainly evaluate it based upon those segments.

Okay, thanks, Anne, and then looking at the office segment operating profitability, you had a nice increase year over year. Can you help us understand what contributed to the substantial increase?

Well, I think the fact that, you know, digital office installs did very well. You know, we talked about the power of color and having a 48% install increase in the mid range color installs is pretty powerful, 15% in our black-and-white digital installs. And the fact that the vast majority of our cost actions were focused on the office segment, so that our margins are really healthy and we're getting great flow-through from those products. So we think we've actually delivered what we committed to in putting an office model together that can deliver sustained and continued profitability.

And Larry, on inventories, it looks like that ended the quarter a little higher than certainly what I expected. How was it versus your expectations and what should we look for over the next quarter?

I think it was about our expectations. I mean, that's going to swing a little bit each way. I mean, we are committed to get it better and better. That's a little bit of the story like bad debts, where the number was very high and we made tremendous -- cut it in half or by 80%. It's been a tremendous improvement and I think you're going to see swings of a little bit. The intent is to get it down somewhat more.

Okay, and then final clarification. Just with respect to the size of the restructuring charge in the second quarter, can you give us any order of magnitude, $20 million to $30 to $40 million there?

That's a hard number to estimate. Because our restructuring charges for the rest of the year are associated with the restructuring we did in the fourth quarter, and it has to do with when people take or decide to take their pension dollars, and they have a reasonable amount of time, I think it's a year, to decide to take it. So that's why we forecasted actually more restructuring or talked about more restructuring in the first quarter than actually happened. So it's hard to predict. You could have -- we were saying there's about 115 for the full year, and a lot of it could be in the second quarter or half of it could be or it could be a small number again. I think.

That's one of the reasons why we provided a range for second quarter estimates as well.

Okay, thank you.

Our next question from Jay Vleeschhouwer of Merrill Lynch. Please state your question.

Thanks, good morning. Your press release refers to equipment sales being comprised of new products within the last two years, accounting for half of equipment sales. Could you narrow that down and say what the 2002 launches only might have contributed to first quarter revenues and equipment sales or what your expectation might be for 2003, from again, just the '02 launches? Secondly, since you mentioned ODAs, could you talk about what you're seeing there in terms of the number or trend of the engagements there and what your experience has been in terms of the ODAs subsequently leading to new equipment sales?

Okay, Jay, I'll take a shot at this one, but I think we're going to have to get back to you on the new equipment launches. But the vast majority of our equipment launches happened in '02. So I'm going to guess that the vast majority of that 50% actually happened in 12 months versus 24 months, but I think we have to get back to you on that. I think what you will see in '03 is the vast majority of our equipment sale revenue will come from the last 24 months worth of product introductions, picking up the '02 portfolio as well as we have a very robust year planned in this year in product launches. So I think the percentage will actually potentially go up in terms of products that represent the vast majority of our equipment sales in '03. And we'll get back to you on the specifics, but I'm now, as I think about it, I'd say 90% of our product launches happened in '02. So it's probably more like 50% almost within a 12-month period of time than a 24-month period of time. On the ODAs, we're seeing a great deal of success particularly with our major accounts, and you know, significant clients. I mean, this really is kind of a major account segment offering in the sense that it has so much to do with asset management and really kind of the centralized web-based services that can be delivered for large institutions. So we are seeing them grow rapidly. As a matter of fact, we are now actually filing a lot of case studies on the web so that people can get an idea of what kind of savings opportunities there are when you look at these asset management solutions. So although I don't have a specific number to tell you, I would tell you that it's driving a lot of the growth, particularly in the black-and-white multifunction area.

Okay. A follow-up, if I may. You reclassified some of the mid range color business.

Yes.

From production into office, I believe. Can you give us a background as to why you did that and might there be other areas where there could be some further resegmentation or any operational implication from a resegmentation?

We actually did it because it made sense, because that's really the way third parties were looking at the market, and clearly, as color becomes more affordable and more accessible in the office, mid range colors becoming less of a graphic arts and production play than it is an actual general office play. So we were truly trying to make our data more consistent with what's happening in the marketplace so you have a better sense of evaluating that. I don't think that's the last time we'll do that. I think as markets converge and shift, we've got to be responsive in terms of how we boundary our segments to look more like the way you look at share in the marketplace. So I think we may see some changes in the production marketplace, you know, in the future, and how we segment that. For today's purposes, the major change was the mid range color shift.

Okay. Finally, you made an interesting point earlier that the possibility of color pages is, I think you said a four to five multiple of black-and-white profitability. Is that a multiple, you think, sustainable if, for instance, the ratio were to decline? Would you see perhaps even a further expansion of the color market? Would you willing to absorb lower profitability per page to drive the market?

We think about that all the time, and clearly, we don't -- we do expect that profitability will get compressed as color becomes a bigger, bigger portion of the document market, and it's part of the way we think we can actually accelerate the adoption of color not to go into too much detail here, but it's the reason why solid ink is such an enormous leverage point for us because the economics of solid ink will allow us to bring more reasonable prices to customers so we can continue to leverage customer profitability without having the cost impacts be as significant as they are to our customers in color.

Thank you very much.

You're welcome.

Our next question comes from Shannon Cross [ph] of Cross Research.

Hi, guys. In the past you've talked about maintaining a cash cushion of about $1 billion. Are you still holding with that?

Yes.

I think is it a simple yes. Obviously, we've been exceeding that cushion for quite a time now, but we think that's probably still a healthy boundary for us to keep in place.

Okay, so you know, as all debt comes due, you're still going to look to keep that in place?

Oh, yes.

Okay. With regard to SARS, any issues, any implications that you've seen? You work with Flextronics [ph] we closely. Anything there?

No, I think we've tried to be responsive in terms of travel restrictions. We've talks to Flex daily and we've not seen nor do we expect to see any fluctuations in terms of inventory and availability, anything that we believe we should expect on that.

Okay. Finally, in terms of IGEN three, can you give us an idea of where the installs are at now? The pipeline, if you’re seeing a slow down there, given the economy?

No, we're actually the ones that are controlling the pipeline on IGEN 3, versus just responding to demand in the marketplace. Our intent was to roll it out in a measured way as we both work with our customers to solidify both the technology, as well as ensure profitability for our customers. So we are on our schedule in terms of, you know, what we expected from IGEN 3. We do think that certainly as the economy picks up that certainly there will be more demand for IGEN 3 going forward but we are on schedule and feel very good about the results we've had, particularly in terms of customer feedback on the technology.

Okay, [ inaudible ] indicated they were running about 20% behind where they had anticipated. You're still on plan with the first plan we talked about a year or so ago?

I think we've talked about potentially a couple of hundred installs this year. I think that's still quite doable. We've also reiterated the fact we're going to get the first 100 right and profitable. I will tell you that we've seen incredible demand for the product. We're the ones who are clearly holding back on meeting all that demand until we're absolutely positive that we're able to handle a scaled rollout of IGEN 3. I think we have time for one last question.

Jack Kelly of Goldman Sachs. Please state your question.

Good morning, Ann.

Good morning, Jack.

Two questions. One if we look at surface -- excuse me, service, outsourcing and rentals, revenues were down about 5%. It appears outsourcing was up. So I guess really the question is, if that conclusion is right, is what's happening on the service side? Are things worse than you would have thought? I don't mean just maybe lack of placements but just kind. On an apples to apples basis and secondly, a question for Larry in terms of CAPEX for this year, and update on the pension hit in the quarter and for the full year.

Okay, willet me begin with the service question. Obviously post sale revenues were down indicative primarily of, you know, past quarters. So it's kind of a lagging indicator on the revenue side. The thing that, you know, was kind of a big shift in our service streams was the fact that the margins had improved, and that was primarily due to two reasons. One is that our outsourcing margins improved significantly, almost three points, I think, and that's been a fairly measured calculated approach from our perspective. A few years back we were really having trouble with the margins on our outsourcing deals. We've worked very hard in improving the profitability of our outsourcing deals as well as going up market in the terms of services we're providing to our outsourcing customers. We're pretty pleased with that and we've seen other competitors go the reverse route, where their margins deteriorated significantly. The revenue, while we've been doing that, has not grown as much as we would have liked, and clearly, the outsourcing market has weakened somewhat, but we are well positioned as that market grows to certainly make good profitable income from the outsourcing market. The other piece of it is service expense. We've really been focused on reducing service expense, getting more efficient, and we're seeing the flow through of that in improved margins as well. You had a question for Larry?

Yes, on CAPEX and pension expense in the quarter and update for the year.

Well, on CAPEX, I think, our full-year expectation is around $225 million. On the pension expense, we're in the same position where we were when we said there would be a $40 million additional contribution this year compared to last year.

Larry, contribution, that's a cash contribution?

Yes.

What about on the actual expense?

I think it's the same number also, between 150 and 175 additional compared to last year. So there's no change on those.

Okay, thanks.

Okay, so let me once again thank you for your time. We appreciate your time this morning. We would like you to kind of stay tuned next week for more product news from Xerox, which we believe will really create a buzz in the marketplace and continue us on our journey of winning in the marketplace. Many thanks for your attention today. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for participating. You may now disconnect.--- 0