全錄公司 (XRX) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Xerox Corporation third quarter 2004 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. During this, Ms. Mulcahy and Mr. Zimmerman will refer to slides which are available on the Xerox investor website at www.Xerox.com/investor. 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 forward-looking statements. 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 2004 report 10-Q for the period ending June 30, 2004, and filed with the SEC. The Company does not intend to update any forward-looking statements made during this meeting. At this time, I would like to turn it over to Ms. Mulcahy. Ms. Mulcahy, you may begin.

Thank you and good morning everyone. Thanks for joining us today. If you will turn to slide 4, you will see a summary of our Q3 results. We remain consistent in our delivery of solid performance with steadily improving growth in key areas of the business and strong bottom-line results, contributing to earnings per share of 17 cents which is up from 11 cents in Q3 of last year. This quarter's results include a 4 cent gain from our share of a Fuji Xerox pension settlement which was offset by 2 cents of restructuring. So let me review some highlights in the quarter. Revenue trends continue to improve with total revenue essentially flat year-over-year. Strong install activity led to a 5 percent increase in equipment sales and we are continuing to expand our portfolio offerings with 35 new products announced year-to-date, including 17 this month alone. Revenue from our targeted growth areas increased 7 percent and that represents about 74 percent of the Company's revenue, which is a clear indication that our growth strategy is working. Demand for our color technology increased in both the office and production markets, and our gross margins of 41.3 percent are in line with our full year gross margin expectations. Across the board, cost controls benefited SAG, R&D and interest expense, and we delivered another quarter of exceptionally strong cash flow at 435 million contributing to a healthy worldwide cash balance of 3.4 billion. That is a year-over-year improvement of 1.1 billion following $1 billion reduction in debt.

Larry will walk you through more detail on the income statement and cash flow in a moment, but I would like to spend a few minutes on revenue and installs. Of course, before we take your questions I will wrap up with a few thoughts on Q4. So if you would turn to slide 5, this is really a look at the revenue story. Our Q3 total revenue was essentially flat from Q3 2000 through 2003 and it includes a 3 point currency benefit. As I mentioned, our targeted growth areas are digital office, digital production and value-added services, continue to drive our topline with 7 percent growth in the quarter. Our value-added services revenue increased 18 percent, largely due to major contract signings for content and asset management, imaging and consulting. In fact earlier this morning, we announced a multi-million dollar services deal with Sun Microsystems for Xerox to manage the entire fleet of Sun's document management services in 31 European countries. Color continues to be a highlight with total color revenue up 18 percent, and color revenue now represents about 24 percent of total revenues. Yet still color accounts for only 4 percent of total pages printed on Xerox technology, so the opportunity for color remains huge, both in equipment sales and the flow through to postsale. Revenue growth continued to be impacted by postsale revenue declines from our older Light Lens technology and weak performance in Latin America. And as I indicated last quarter, the accelerating decline in Light Lens in postsale, and the postsale weakness in Latin America is postponing the turn in postsale. The major declining area of our business, Light Lens and SOHO, was down 44 percent in the quarter and now represents only about 6 percent of total revenue. At this rate, we expect that the impact from Light Lens and SOHO will no longer be an issue after 2005, which leads us to the dynamics of what we are seeing in the marketplace. As expected, the market is growing for office color MSD's, office color printing and production color.

Our strategy continues to be focused on driving paid volume growth in these areas to boost our postsale stream, especially in color, which is 5 times more profitable than black and white. Latest market share assessments for first half 2004 indicate that our paid share remains steady despite some decreases in install share. At the same time, we have just launched new products in several of these categories which we expect will further strengthen our competitive position. In the black and White space, we've seen some share growth in office segments 2 through 5 driven by our award-winning WorkCentre and Copy Center line, and our share activity in production monochrome is largely influenced by our success in segment 6 with Nuvera and the Xerox 2101. Now I would like to give you a little closer look at both the production and the office businesses. So if you will turn to slide 6. Production black and white installs were up 8 percent reflecting strong demand for the Nuvera 100/120 copier printer, as well as the continued strength of the Xerox 2101, and both of these products are considered light production systems and their success offsets decreases in monochrome publishing and printing. Clearly we are starting to see the markets converge in production monochrome with technology like Nuvera blurring the lines between light production and production publishing, and production printing is converging with publishing. Earlier this year, we announced the expanded Nuvera 100/120 digital production system and we were prepared for sales of our DocuTech line to be impacted as customers anticipated the Nuvera availability. This Nuvera production system has started shipping in Europe with a full ramp up in North America in Q1 2005.

In production color, installs were up 16 percent due to continued success with our iGen3 and DocuColor 5252. As important, production color pages continue to exceed expectations, again driven by the DocuColor family and iGen3. In fact, we recently at Graph Expo highlighted 30 iGen3 customers who have each printed one million pages or more in one month on an iGen3. Customer acceptance of iGen3 remains very strong. Our prospects continue to grow, print volumes average in excess of 400,000 pages per month per machine, and more than 30 of our customers are installing multiple iGen3 systems. As we discussed in the past, market development for iGen3 is a critical element of our sales strategy. We are continuing to take a careful approach insuring that our customers are satisfied and successful with their iGen3 investment. Considering the intensity around this market development and with activity heavily weighted toward Q4, we now believe that are total iGen3 installs in 2004 may be more in the 350,000 range.

At the same time we are continuing to strengthen our production portfolio giving our customers a broad range of offerings with a focus on Xerox winning all production color pages. In September, we began shipping the DocuColor 8000, an 80 page per minute digital color production press that bridges the gap between our DocuColor 6060 and the iGen3. We are complementing this technology with upgrades to our software offerings like FreeFlow. And earlier this month, we announced 3 highlight color systems and 2 new wide format printers. So if you will turn to slide 7, we will focus on our office segment. Our office portfolio is growing as well with 12 new products launched this month alone. Total office revenue was flat for the quarter with digital revenues growing 6 percent driven by strong installs. Office black and white digital systems were up 20 percent with continued success from our desktop and office multifunction systems, especially in segment 1, with a 27 percent increase, and 14 percent growth in segments 2 through 5. Installs for color office MSD's were up 19 percent and color printing was up 40 percent which is largely due to the Phaser solid ink and laser printer.

Xerox's suite of office services continues to help customers identify cost reduction opportunities while simplifying the flow of paper in digital documents and workgroups of any size. For example, following completion of a Xerox office document assessment, HSBC in Brazil is now saving 20 percent on its document output and management expenses. Xerox replaced 3,000 individual competitive printers with more economical multifunction systems, and HSBC is also outsourcing its print management operations to Xerox. The same is true at Boeing where won a sole source five year contract that includes 5,000 Xerox multifunction systems, services and Web-based management software. So turning to slide 8, we will talk about DMO. Our results in our Developing Market Operations, our equipment sales declined 3 percent, postsale was down 9 percent. There were strong sales in Russia, as well as Central and Eastern Europe, only partially offset -- and those strong results only partially offset the declines in Latin America. This region, again, had a significant impact on our revenue in the quarter, especially postsale through rapid declines in rental revenues.

Similar to the second quarter, this impact represented about two-thirds of our overall postsale decline. As we discussed with you last quarter, we are transitioning to a two-tier model throughout Latin America and expect full completion in the first half of 2005. We are also, as you would expect, adjusting the cost base to this new model and centralizing several support offices for the region which was partially addressed in our Q3 restructuring charge. In other regions where we sell through two tier distribution, revenues is growing at a rate of about 20 percent and this model now generates about 50 percent of total DMO revenue. So before I hand it over to Larry, let me quickly wrap up (technical difficulty). Our technology investments continue to fuel growth with about two-thirds of all equipment sales in the third quarter coming from products launched in the last two years. And we have strengthened the portfolio, again, with 35 new systems announced -- new system announcements year-to-date in addition to upgrades for our software offerings. As equipment sales increases we are also winning non-hardware business that relies solely on Xerox's unparalleled expertise. We call it smarter document management, the combined value of Xerox systems and services that helps our customers work more effectively and efficiently, faster, simpler and better. Global services continues to lead many of our large enterprise wins and or competitively priced award-winning office products are driving demand in the small and medium-size markets. It is a growth strategy that is working. Larry is now going to walk you through our financials. Larry.

Thanks Anne and good morning. I believe the third quarter represents another solid quarter for Xerox. As I have said many times, each ninety day period has its own set of opportunities and challenges, but in the end it is all about delivering on our commitments through further improvements to our business model. This quarter demonstrates just that. With our transition to revenue growth well underway and our continued focus on disciplined cost and expense management, we delivered solid earnings of 17 cents a share. The strong balance sheet and cash flow performance continued with the end result, less debt, less interest expense and more cash. Slide 10. Total revenue was flat for the third quarter from last year, and as Anne mentioned currency benefited our topline by about 3 percentage points. At September 30th spot rates we would expect a 1 percentage point currency benefit for fourth quarter and a 2 to 3 percentage point currency benefit for the full year. Equipment sales were up 5 percent delivering our 7th straight quarter of growth including continued double-digit color growth.

The postsale and financing decline moderated to 2 percent which I will discuss further on the next slide 11. The trend in postsale and financing continues to improve on both an actual and constant currency basis. As you can see, postsale revenues in the growth areas of our business continued to increase as a proportion of the total. They now represent 69 percent of postsale revenue and grew 6 percent year-over-year. In the third quarter, this growth had a positive impact on total growth of +4 points compared to +3 points impact last quarter. Light Lens and SOHO revenue declined 157 million and contributed 6 points to the overall postsales decline compared to a 5 point impact last quarter. The rate of decline is modestly accelerating. Light Lens and SOHO now represent about 8 percent of our postsale revenue, so this drag will diminish overtime. DMO declined 9 percent, contributing 1 point to the overall postsale decline. Excluding the impact of Latin America, total Xerox postsale revenue declined 1 percent.

Last quarter we explained disappointing results from Latin America due to large declines in our installed base of Light Lens equipment, much of which is on rental contracts and included in the postsale stream. You can expect these results to be below par for the next few quarters as our two-tier model takes hold. So key points in postsale, the trend is improving, digital grew 6 percent and represented 69 percent of our postsale revenue, Light Lens is becoming a smaller and smaller part of the total and we expect we'll be minimal by the end of next year and we have a plan in place to improve Latin America. Slide 12. As I mentioned in my opening remarks, this quarter, like every ninety day period, had opportunities and challenges. This quarter's opportunities included a benefit from Fuji Xerox due to the transfer of a portion of their pension liability to the Japanese government. Challenges included some unusually high expenses due to 28 million in Olympic spending, 20 million of hedging costs, primarily in Europe, as well as additional restructuring and weakness in Latin America.

Like every ninety day period, we manage the puts and takes and continue to deliver on our commitments while making the right long-term decisions for the business. Now let me take you through some detail of the P&L. Gross margin at 41.3 percent was up 2/10 of a point year-over-year. In fact this quarter's gross profit dollars grew year-over-year as cost improvements more than offset price investments. In the third quarter we saw the pricing environment moderate in both office and production businesses. With year-to-date gross profit margin just under 41 percent, we believe that our full year gross margin will be in line with our business model but closer to 41 percent due to Latin America's performance. R&D expense reflects improved cost efficiencies as we capture benefits from our platform development strategy. We will see additional platform benefits as we continue to launch more products from these platforms in the future.

SAG Expenses were up 8 million due largely to 30 million in adverse currency and 28 million in Olympic sponsorship. Bad debts and G&A both had excellent results. Bad debts were down 32 million year-over-year and are running at about 1 percent of revenue year-to-date. Interest expense was down 36 million year-over-year, a big boost to our pretax profit margin, now and in the future. Also included in other is 20 million of currency losses largely due to the cost of hedging European currency exposures. Equity income primarily represents strong performance in Fuji Xerox, as well as our share of the FX (ph) pension settlement gain.

The bottom-line, 17 cents a share with all key metrics in line with our business model. Slide 13. We continue to make excellent progress improving our balance sheet. As you can see from the chart on the left, we ended the quarter with 10.8 billion in debt, a year-over-year reduction of $1 billion. We use a combination of secured financing arrangements and unsecured debt to fund our finance receivables portfolio. The mix will be driven by the cost of capital. You can see from the chart on the right that we have two significant term debt payments coming up, $1 billion in the fourth quarter (technical difficulty) and the 900 million in the second quarter of 2005. After the latter payment, we don't have a significant term debt payment until 2009. As most of you are aware, we access the bond market in the third quarter. We did this for 3 reasons; to access the long-term unsecured debt market, extending maturities at attractive rates; (2) a conservative perspective given volatility in the markets; and (3) in a rising interest rate environment we believe it is prudent to lock in long-term debt and insure a balance of secured and unsecured debt at reasonable costs.

The offerings were a success (technical difficulty) from senior unsecured notes due in 2011 at a very effective and attractive rate of 6.6 percent. We were clearly pleased that Moody's recognized our progress, issuing a two notch upgrade in late August. Our goal is investment-grade and I'm very confident we will get there. Slide 14. Cash performance was very strong with 435 million cash from operations including 108 million UK pension payments. To date we have contributed 376 million to our pension plans fully finding our U.S. and UK pension plans. Strong earnings and good working capital performance were the primary drivers of cash from operations in the quarter. Cash generation from Accounts Receivable and Accounts Payable more than offset the cash used from inventory. Inventory levels are clearly higher than we want and we expect to work off a substantial amount in the fourth quarter.

With operating cash flow of 900 million year-to-date, we are on track to generate 1.5 billion for the full year. Capital expenditures for the quarter were 36 million and 131 million year-to-date. At this rate we expect capital spending will be somewhat lower than previously expected, at around 200 million for the year. Cash (indiscernible) financing reflects the proceeds from the bond offering I just discussed and helped us end the quarter very strong with 3.4 billion in cash. So in summary, like every quarter we had a few head winds and tail winds to manage. Our results continue to demonstrate the flexibility of our business model as well as the strength and determination of our management team to achieve shareholder value and returns. That is it for your attention and now back to Anne.

Thanks Larry. So if you all turn to slide 16, we will take a look at our guidance for full year results. You will recall that in November of last year, we said full year 2004 earnings per share would be 67 cents to 72 cents. In July, we increased guidance to 80 cents to 84 cents per share, reflecting our strong operating performance. We also said this included 8 cents from the Q1 Content Guard sale, partially offset by 4 cents of second half marketing and restructuring investments. Now, we are raising full year guidance to 83 cents to 85 cents per share including the benefit of the Q3 Fuji Xerox gain, partially offset by an additional 1 cent of restructuring and some marketing. So, compared to the full year guidance we provided last November, we have taken up expectations more than the 12 cents of gains while investing 5 cents in marketing and restructuring. We believe we are on track to deliver Q4 earnings in the range of 20 cents to 22 cents per share. Again, that would bring full year earnings expectations to the range of 83 cents to 85 cents per share. So if you will turn to the last slide, I will quickly recap. We continue to solidify our market leadership, driving consistently strong earnings performance. We are remaining diligent about costs, generating cash, and prioritizing profitability in every business division and in every operation around the world. We remain quite encouraged by our progress this year and confident in the business decisions we have made to strengthen Xerox's competitive position as a global technology leader. We're delivering on our commitments, winning and keeping customers, and building value for stakeholders. It is positive momentum that we expect will grow stronger each quarter. So thank you all for your time, and we will now Larry and I would be pleased to take your questions.

(OPERATOR INSTRUCTIONS). Caroline Sabbagha with Lehman Brothers.

Good morning. Thank you. Just a question to better understand the postsale revenues. Were the total number of pages down this quarter versus last quarter?

Carol, I think actually our page count was actually pretty consistent quarter-to-quarter in terms of the declines in pages. It did not accelerate in any way, but it was pretty consistent quarter-over-quarter. But that actually represents good growth in digital pages and color, particularly, with accelerating declines in Light Lens pages. Although I think the pages were flat, we are encouraged by the fact that digital is picking up the slack from some of the accelerated Light Lens decline.

Okay. On the new installs, they seem to be doing very well especially in the growth areas. I think the entire equipment population is probably down a little bit. What do you need to see over the next 12 months either in equipment, total equipment sales or total new installations to get the entire equipment population to be up year-over-year?

I think there is a number of dynamics that are happening in terms of the population in place. Clearly the Light Lens declines as we talked about, they declined to 44 percent which was accelerating and we actually now anticipate that Light Lens will be an impact during 2005 and not much beyond because of the accelerating declines. That will have an impact on total population, but the double-digit kind of increases in color and the fact that production, our production monochrome space, next year will be much stronger with a full year of the publishing offering of Nuvera which is a big page driver for us and a big placement driver, we think will really be positive impacts on the overall by-the-way, number of pages and fields, which is obviously just a function of how many placements we have in what categories in the field.

Thank you very much.

Jay Vleeschhouwer of Merrill Lynch.

Good morning. A question on the iGen. Anne, could you elaborate on your unit forecast now at 350. How much of that comes in the fourth quarter alone? Have you pretty much gotten there or are you going to have to rely heavily on fourth quarter? Just elaborate on the reasons for the trimming of that forecast? Is it a support and production issue? Is a competitive or economic issue? Maybe you could just elaborate on that?

First of all, a lot of it comes in fourth quarter, Jay. That is really the nature of that business, but we also had very good visibility to the pipeline as well. So we know what the backlog looks like, what the customer acceptance looks like. Although we have got a lot of hard work to do to make sure that we get all of the installs in, we really do have a good understanding of demand. It is not a competitive issue, by any means. As a matter of fact, we are really encouraged by the fact that we continue to win the vast majority of production color decisions in the field. I really think there are two aspects to it. One is, the breadth of the DocuColor productline and the introduction of the 8000, clearly is also solving a need for the gap between the 6060 and the iGen3. We are in this business to get all the color pages. So the fact that the 8000 might do a little better than expected is not bad news for us at all. IGen, which is as you know, primarily going into the commercial print marketplace really does take a lot of market development, and that is because the vast majority of iGens are getting new pages to the commercial print marketplace, personalized applications. So it really requires a lot of support from us in the field to make sure that our commercial printer customers have the ability to be profitable and successful with iGen.

So we are being a little conservative in the pace of installs, but I have to tell you that I meet with iGen customers all the time. I probably met with 20 or 30 of them out at Graph Expo. They love it. It's providing new business to the graph -- to the commercial print marketplace. We are not losing to competition. It is a home run. And the color pages projection is very, very strong because the iGens are doing well above what we anticipated per unit. So we are really pretty bullish about it, but we had anticipated perhaps more installs 400 to 500, and we think it is prudent to kind of give you an assessment now that says we may commit around 350 -- come in around 350, but we are very, very pleased with the progress that iGen3 is making.

Is it likely then that '05 units will be higher than '04?

For sure. Yes, absolutely. I think the multiple unit placements, 30 iGen customers now have more than a 1 iGen. It really is beginning -- we're definitely gaining momentum and traction in terms of iGen acceptance.

To turn to a different subject, you refer to the two-tier model in Latin America. Could you just elaborate on the two-tier model you began to put in place in Europe a while back and what that has been doing in terms of unit and margin contribution?

We are seeing the progress in Europe on the two-tier model which is encouraging, particularly in the following areas. Color printing has really done extremely well in Europe since we have initiated the two-tier model. As a matter fact, I think we gained 2 or 3 points to share in Europe in color printing and we can clearly attribute that to the strength of the two-tier model taking hold. Also, segments 1 and 2 which is a huge market for us in Europe, much stronger in Europe in DMO than it is in North America, also had very, very good results. We still have a ways to go in Europe, we think, in terms of maturing the two-tier relationships and optimizing, particularly in segments 3 and 4 distribution through the two-tier model which certainly is occurring, but we think has still a lot of opportunity left. The other piece is that we have been really focused on making sure that we adapt to the business model on the cost side so that as we invest in two-tier, that we also have an infrastructure that supports it and that work is really helping us, quite frankly, build a more efficient two-tier channel particularly in Latin America.

So we are pleased with a progress in Europe, we are not done. We think there is still a lot to be realized in front of us. In Latin America, we really have been aggressively building the relationship, setting up the channels, really focusing on making sure that we are prepared to effectively execute in a two-tier environment. That doesn't happen overnight, and I think we have indicated to you that although we will make progress, we will not be operating at full speed for a few quarters because that is the nature of the two-tier implementation, but so far, so good. We have a team there that it's their number on priority to effectively execute the two-tier model.

Lastly just an update on how you are doing on services engagements, just the overall demand there? You and Xerox, generally, have spoken a great deal about software and workflow applications, perhaps more so than some of your competitors. What is really going on there in terms of software demand? It doesn't seem like a very large market yet, but what is really going on in terms of customer acceptance of the whole concept?

It is kind of the silent ally, if you will, in growing our major enterprise business because the vast majority of the big client deals right now are services lead. Meaning they are beginning with, quite frankly, consulting engagements where we're doing certainly all sorts of assessments and Asset Management studies and really helping our customers look at a much broader approach to acquiring technology than just hardware. And I think it is wildly successful in the sense that not only are our pure services revenues growing at double-digit, but clearly they are responsible for the gains, the install gains we're seeing in our office and production markets as well. Although it is not always discreetly visible, our services and consulting engagements are clearly leading a lot of the big wins in the marketplace. In our production business, you don't install an iGen without a good workflow solution. This is all about really understanding the customers' work process and fitting in with the customers' workflow and that is absolutely critical to a successful sale in the commercial print marketplace. So I think the reason why we are so successful and why you are not seeing our competitors talk about it is that we have really focused on providing leadership solutions in the area of workflow and software solutions to our customers that provide a much higher valued sale than a strictly hardware solution.

Thank you.

Stephen Weber of SG Cowen.

Good morning. A couple of questions. Number 1, do you expect the business and your profitability or your profit in Latin America to worsen in the fourth quarter? Is there seasonality down there? I know it's summer in Latin America when it is winter up here. And relatedly, you talk about this being a couple, three quarters. When do you think you will see year-over-year profit growth from DMO?

First of all, I'm now talking sequentially, we don't expect to see a decline in -- so is this -- have we hit bottom? The answer is yes. You will see year-over-year deterioration because we are obviously building backup, but you will see improvement sequentially because we're definitely getting stronger in Latin America. You will see improvement although there still might be some year-over-year comparisons for the next two or three-quarters. I would look at it and say when do we expect full implementation engagement with Latin America. It is really going to be second half of 2005. But we understand it, we are going to manage it, and clearly are setting our expectations appropriately, understanding that it takes a couple of quarters to really solve that problem.

And just relatedly to that, Anne, since this is becoming much more an equipment sales model, or maybe I think that is true, how volatile do you think that business is going to be?

I actually think it will get less volatile, Steve. I think one of the reasons it is volatile today is it's an equipment rental model and not a sales model. The predictability of equipment sales and the follow-on streams of consumables is going to give us a much better level of predictability than the rental model that we're on in Latin America today. So I think your point is well taken, which is why we have gone and made decisions about distributor relationships and two-tier, really so that we get really good control of the cost in the distribution side and we can really be a volume, if you will, equipment sales distributor in Latin America with the predictability of the consumables follow-on which is really more particularly the low end of the marketplace which is where all the aftermarket is.

Right. I just want one clarification quickly. When you talk about Light Lens and then you talk about Light Lens and DMO, I am assuming the Light Lens that you're talking about in all of these charts, etc., is in the core business.?

Yes, it is.

And the part that hits you from the Light Lens and DMO is contained, there is not a double counting here?

There is not a double counting, and Light Lens actually in the rest of the world, outside of DMO, is primarily North America. Europe has a very low Light Lens population. It is more of a North American issue, but there is no double count.

Last question. Pricing. Do you -- how do you feel about your product cost positioning across your lines today? And are you seeing your pricing, your anniversarying, over a lot of those cuts that you made when you brought out the WorkCentre lines, etc. How do you feel about the pricing environment today on a broad way or even maybe by segment?

I think we are encouraged by the relative stability in the pricing environment in the sense that both office and production markets we saw less of a price impact this quarter than in previous quarters. Production was not very low single digit and office was about 5 percent, which is quite frankly as stable as it has been in a long time Steve. So the actual external environment is not volatile right now. And by the way we are driving a lot of that. So I think we are competitive. We are stabilized in the market from a price perspective and that is helpful. On the inside I'm really bullish about our product positioning. Not only -- this is where all of our Lean Six Sigma deployment comes in with regard to continuing productivity which is really yielding big results. But we have also launched -- basically we've got three clean sheet platforms, our production publishing platform, our iGen3 platform and our solid ink platform, all of which have tons of productivity in front of them as you rollout and you get volume in the field. I think we have a ton of opportunity in front of us, not just from ongoing productivity from Lean Six Sigma, but also from the returns on a clean sheet platform that by nature gain significant improvement as you increase the install base.

Very good. Thank you very much.

Thanks Steve, and congrats on your team.

Thank you. We appreciate that, but we've got one more series to go.

Yes, you do.

Ben Reitzes of UBS.

Good morning. A couple of things. I think I just wanted to talk about fourth quarter and some of the things going on. We have reduced the iGen outlook it seems for the fourth quarter, a bit. And Nuvera seems -- I was expecting Nuvera to be shipping, the high-end production printers to be shipping in full globally in the fourth quarter. It seems that those products, the two high-end products that could potentially really push margins are either delayed or not, or you reduced the guidance. I wanted a clarification there? What we should think about in '05 and what it means for '05, your '05 guidance as well, for the 90 cents to $1.00, that both products will ship enough to not alter that outlook. And then just talk to what that means for 4Q outlook. And then I just have a follow-up for Larry.

Okay, so let me just talk about iGen. iGen actually is very bullish for the fourth quarter. It is really a capacity issue right now as to how much can we actually do in Q4 based upon insuring that our customers really have the right support and market development support that is required. I would say that Q4 from an iGen perspective will be very strong. That the gap really has been in terms of the earlier quarters in terms of how many installs versus Q4. But obviously once we get the pace of the Q4 iGen installs in then 2005 is a big deal for us, and we will obviously update that at the investor conference. Nuvera clearly isn't -- by the way it is installing. It is installing in, Europe. As a matter-of-fact, we had installs in September of Nuvera. But we have delayed the launch in North America which actually does have an impact, there is no question about.

We've got 10,000 DocuTech installs out there who are potential upgrades to Nuvera and also Nuvera brings a new type point and footprint in the production publishing market from a competitive perspective, that we're very bullish about as well. So there is no question that Nuvera would have been upside to Q4 if we were rolling it out in full and all of that upside will lay ahead of us now in 2005. So if anything, the discussion on iGen and Nuvera lends strength I think to our 2005 bottom-line 90 cents to $1.00 assessment. We are pleased that we are able to kind of improve our year-over-year expectations, quite frankly, without the strength of the Nuvera publishing product and that gives us confidence for 2005.

I appreciate that. That is helpful. The one thing though, just about the fourth quarter is 20 cents to 22 cents is -- I had included a lot of the charges in my 24. I think the street is at 24, so I mean is lower end of the range largely due to Nuvera or of the streets' range? I know you have upside because of the numbers you reported in the 3Q on the GAAP basis. But would that be it? Would it be a penny or two type of hit, type of thing?

I would look at this way. When I referred to improvement I meant year-over-year, and also with regard to, quite frankly, our full year expectations. I would look and say that both the impact of Latin America as well as the production publishing, is absolutely worth a penny or two as it relates to our Q4 estimates. There is no question about it. Obviously having Nuvera available for the full year 2005 is upside for us, based upon the size of the production publishing market.

One last clarification. Traditionally you are a fourth quarter company where you obviously have had strong fourth quarters in the past. Does Nuvera -- are you able -- do you think you'll be able to install them right away in the first quarter which is typically a training quarter for your, or do we have to wait for the momentum to build throughout the year, as far as looking into next year? Sorry to get too granular there.

That's okay. By the way, I should just mention by the way, our production -- our monochrome production revenues were up and the reason is because although we haven't had the production publishing device, the fact is the Nuvera copier printer and the 2101 are doing fabulously. This is not a wipe out by any means in the production market, but I think you have got a field force that is ready to go full steam ahead as it relates to Nuvera in 2005, and the fact that we're rolling it out in Europe first also gives us a head start. So I expect no delays with regard to Nuvera momentum.

Larry, just one last thing. Cash flow was pretty good in the quarter. It looks like Jim is doing a real good job in his accounts receivable role. Kudos to him. One thing, inventories were up a bit more than I would have expected and other things were better. On the inventory line, can you just talk about what that means and what products those were potentially. Is that all new product going into the fourth quarter? Is there anything there that we should be concerned about?

I don't think there is anything to be concerned about. I think it is, generally speaking, new products, building up for the fourth quarter. And as I said in my remarks, our intent is to work that off as we go through the fourth quarter and actually get a benefit from inventory. That is what I would expect.

Thanks Larry.

Jack Kelly of Goldman Sachs.

With regards - just going back to the '04 guidance, then I have a question about '05, the '04 guidance of 76 to 78 has not changed. It is the 80 to 84 that changed because of the net of the Fuji gain of 4 cent and the additional restructuring of 1.

That is correct.

The 76 to 78 has not changed. But secondly, you raised the 80 to 84, you raised the low end by 3 cents and the top end was raised by a penny. Any color there?

We're tightening the reins. We've got better visibility. We know that we feel better about the high end of the range, so we're trying to tighten the reins to clearly indicate we have got some good visibility and we feel better about it. With one quarter left, we thought it was appropriate to give you a little bit tighter range.

Right, but the 76 to 78 remains unchanged?

Absolutely.

Secondly, looking out to next year, you had talked I think a month or so ago about the 92 cents -- 90 cents to $1.00. Is that still your best guess?

Yes, and I think we will update it at investor conference, but there is absolutely no reason why we would take it down at this point in time.

Terrific. Secondly, I guess going back to the early part of this year, you had kind of mentioned that possibly the postsale number which was down in the quarter would start flattening out by the fourth quarter this year. You mentioned today it has been delayed by the factors you indicated. What is your sense on when that could possibly turn positive in '05? This is the postsale year-over-year?

Yes. This is the thing that we really need to kind of take you through the geology chart at the investor conference. But we've got all of our digital postsale streams growing right now at around 6, 7 percent -- 6 to 8 percent. If you begin to look at it and say, okay, digital is growing at 6 to 8 percent. We've got a Light Lens decline that is accelerating which really, Jack, is good news in the sense that the sooner it gets de minimis the better we are in terms of the quality of our results. Then you've got a developing market issue, a Latin America issue specifically, that we need to turn that we said is going to take a couple of quarters. We are going to go through it in detail with you at the investor conference but clearly we had hoped it would have turned by the end of the year. It will be later than that primarily due to Light Lens in Latin America. And I think one of the messages we just want to kind of keep focusing on is, that the digital postsale is strong and growing and that is the future.

One last question on Latin America. I think you had mentioned 50 percent of the revenues coming out of Latin America are on the new model. Is that correct?

No, developing markets. Developing markets in total. As a matter of fact, it is really swayed towards Russia and Central and Eastern Europe where we have primarily a two-tier and that is on new model. What we're trying to do is to get Latin America to look like the rest of the developing markets group.

So what would you estimate Latin America is versus that 50 percent for all of DMO?

Let me just qualify by saying, Latin America -- developing markets represents 11 percent of our revenues. Latin America is about between 5 percent and 6 percent of our revenues. The vast majority of our Latin American revenues are not two-tier today. So it is well, probably, and I'm going to guess at this but I'm going to guess today maybe 20 percent, 25 percent. We can certainly double that in the next couple of quarters. That is our intent and it will have a huge shift on the business.

Okay.

Thank you.

Bill Shope of J.P. Morgan.

Just a few questions. On the deals where you're using the two-tier model now that you've been doing it for some time and I'm sure you've got some good data on it, can you comment on any difference you are seeing in the attach rate for the postsales services contracts, in particular? Second, on the outsourcing contracts you are starting to do, can you comment on what the general type of profit ramp you see for these contracts is? Is it -- if the loss is fairly heavy in the early quarters, and if so, how many quarters beyond the signing does the profit curve start to turn upwards?

On the two-tier model, just to be clear, most of what is going through the two-tier model is printers and segments 1 and 2. Printers are obviously all connected, and everything in the segment 1 and 2 is network compatible. So I don't think it is having a big impact on what the normal market rates are for the two-tier model. Secondly, on services profitability, there is not any huge swings in terms of beginning and end of contracts. There are some upfront certainly project expenses but there is also upfront revenues on the consulting side as well. We are not looking at something that dramatically ramped on the downside in the beginning and upside at the end. Our biggest opportunity, if you will, in services is scale. It is not the actual delivery of the profitability in the beginning of the contract versus the end of the contract.

Okay great. Thanks.

I think we have time for one last question.

Shannon Cross of Cross Research.

Good morning. A follow-up to talk about your postsale revenue growth. Curious, Larry, if you still feel comfortable given that it was only down 1 percent year-over-year if you net out Latin America, as well as Light Lens. Do you still think you're pretty much on track for the trends noted a year ago, that you would hit breakeven by the end of this year?

Yes, I think we do think that.

So the trends continue on?

Yes.

That is good. Can you talk a little bit about what you're seeing as you have been selling more of the color capable devices, and I know you have just launched a couple of new ones. In terms of networking of copiers, are those, do those tend to be networked, and page volumes and pricing on a color. I don't know if there's an average price per page that comes off those from the standpoint of (technical difficulty) color versus black and white. What are you seeing as those devices enter the market?

First let me talk about the characteristic of our office color installs are that they generate more pages, color pages, than competitive devices because of where they are positioned within the segment. We tend to have a higher amount of color pages per device than the competitors do and that is just in every single category. If you look at kind of the penetration of color pages on the color enabled products, we are averaging I would say over 70 percent in terms of the color pages on the devices, which I think is particularly, as you get to the higher end, the pages are like at 90 percent. When you get to the lower end of the devices, they tend to be more in the 30 percent to 40 percent range. But the fact that we have so many color pages on the high-end devices, it kind of does leverage it toward a more, better penetration. And this is all color office that I'm talking about.

So I think the good news for us is that when you put in a color enabled device, there is a business model that is required to insure that you get maximum profitability. So the trick is to make sure you get good color page penetration on the color enabled devices. I would think we are probably best in class in that league. We probably even could afford to be a little bit more aggressive in terms of our color enabled strategy as it relates to getting a little bit lower penetration of color devices, which says we've got some pricing room there. But we're pretty pleased with the results we have seen to date.

A follow-up from the standpoint of cash usage. Larry, if you could talk a little bit about your thoughts on use of cash following your debt repayments in the next couple of quarters? Do you think you would be more or less inclined to say fund a leasing business versus using GE Capital, or where do you see the cash going?

I think the decision on unsecured and secured is based on a couple of things. One, the rating agencies look at secured and unsecured different ways, so that weighs into it. And the biggest reason is just what the cost of capital is. It looks like it is to our advantage right now to go for longer maturities and lock in the interest rates. We definitely are going to put cash towards our financing business. We are also getting -- our borrowing is going to end up being almost all associated with it and it's going to have a good balance between unsecured and secured.

Okay. No thoughts on actually funding it as opposed to (indiscernible).

I think to the extent that you build up cash, you with fund more of it, definitely, because then you would obviously make more money. And, again, it is a cost of capital decision.

One last question, again, use of cash. On acquisitions, Anne, I don't know if you want to make any comments.

I think we are in the same place, which is we continue to consider what the opportunities are in the marketplace. We are positioned. We understand what our priorities are in terms of what we would look for in an acquisition and the returns we would expect from one. So we will be opportunistic, and it is part of that entire decision portfolio of cash usage for the best -- on behalf of the shareholders, and acquisition clearly could play a role.

Thank you.

Thank you, Shannon, and thanks to all of you for your time and your interest today. I just wanted to also remind you that our investor conference is November 22nd in New York, and we look forward to seeing you there. Have a great day. Thank you.

Thank you very much, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation. You may now disconnect. Have a good day.