全錄公司 (XRX) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Xerox Corporation third-quarter 2007 earnings release conference call hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President, and Lawrence Zimmerman, Executive Vice President and Chief Financial Officer.

During this call, Ms. Mulcahy, Ms. Burns, 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 conference call 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. (OPERATOR INSTRUCTIONS)

During this conference call, Ms. Mulcahy, Ms. Burns, and Mr. Zimmerman will make comments that contain forward-looking statements, which may be -- by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Ms. Mulcahy. Ms. Mulcahy, you may begin.

Thank you, and good morning, everyone. Thanks for joining us today. If you turn to slide 4, we will provide you a summary of our Q3 performance.

So as you can see by our performance this quarter, our strategy is on track. The business model is generating double-digit bottom-line results. We delivered EPS of $0.27, slightly higher than our expectations and a 17% improvement over our adjusted results from Q3 last year. We feel good about our progress this quarter and believe we are well positioned to deliver another year of solid earnings expansion.

We now expect full-year earnings per share to be in the range of $1.18 to $1.20. Total revenue, which includes the benefits of our acquisitions, was up 12% this quarter to $4.3 billion. During the quarter postsale revenue, which accounts for more than 70% of our total revenue, grew by 11%. Currency gave us about a 3-point benefit. In a moment, I will provide more detail on the revenue picture with and without the inclusion of Global Imaging.

Highlights in the quarter include a 13% increase in color revenue. Color now accounts for 39% of our overall revenue, and more than 50% of our equipment revenue comes from the sale of color systems. Color was the heavy hitter across the board, with an uptick in iGen3 installs and a 69% increase in installs of our color multifunction devices.

We maintained gross margins at 40.1%. Selling, administrative, and general expenses were 25.4% of revenue, just slightly better than last year. We ended the quarter with $286 million in cash from operations.

We purchased $212 million worth of shares, bringing our total share buyback to $2 billion since we launched the program two years ago.

Just last week, we closed on the purchase of Advectis for $32 million. Advectis's technology created the electronic loan folder, streamlining the mortgage process for lenders and brokers. Not unlike our acquisition of Amici last year for the legal market, Advectis increases our presence in an important document-heavy industry and strengthens our services business.

Ursula Burns and Larry Zimmerman are with me this morning. We will all take your questions in a bit. But first I would like to review our revenue picture, and then Larry will talk more about our financials. So please turn to the next slide.

So here is a look at our revenue trends, noting that the year-over-year compare in actual and constant currency. The adjusted column on this chart assumes that Global's revenues for Q3 '06 is included in our results for the same period. Again, total revenue was up 12% in the quarter to $4.3 billion. When we adjust the compare for Global Imaging, revenue was up 4%, with 2 points of positive currency.

The leverage from postsale continues to be significant. It was up 11% in the quarter; that is an increase of $314 million with Global. Adjusting for Global and the benefits from currency, we are quite pleased that the trend in postsale continues to be favorable, increasing 3% in Q3.

This was our first complete quarter with Global Imaging. As expected, Global is transitioning into selling and servicing more Xerox systems while continuing its strong support of the other vendors' products. Global's results were on par with our expectations for the quarter, especially considering the effects of the transition and the time invested for Global's sales and service reps to learn more about our offerings.

During the third quarter, Xerox saw the benefit of the 38 new office and production products launched this year, as well as broader distribution to small and midsize businesses through the Global acquisition. Equipment sales were up 14% over the prior year, or flat on an adjusted basis, including a 2% benefit from currency.

A greater proportion of our contracts, including some of our services deals, is recognized as operating leases and not as equipment sale revenue. This revenue shift cost us 2 points of equipment sales in Q3, heavily weighted in the production end of our business. While we don't see the revenue in equipment sales, it flows through to postsale revenue over time. We will see the benefit of this operating lease trend in our postsale as we deliver steady annuity growth.

With Global and our core business, we're competing aggressively to increase placements of Xerox systems through new products and expanded distribution, and bolstering growth through Xerox consulting and managed services.

Services deals fueled an 8% increase in postsale from services through the third quarter of this year. Large services deals typically have a long lead time. Several big wins hit us in Q3 rather than later this year. In fact, we recently signed a $93 million contract with the US Navy to provide equipment and services for its entire fleet, and an $82 million multiyear outsourcing deal with EUROPART, Europe's largest auto parts distributor. We're managing all of their office and production printing as well as customer service centers.

At the same time, color continued to give us a big boost to our annuity. So it you turn to slide 6, we will take a look. With color, the power is always in the pages. Right now, Xerox office and production systems are on pace to produce more than 40 billion color pages this year. That is about 10 billion more than last year. We are miles ahead of our competitors on color pages; and pages remain the best source of annuity and profit growth.

Color page volume was up again this quarter, growing 32% and now representing 13% of total pages, 3 points more than Q3 of 2006. Revenue from color this quarter was up 13%; 10% on constant currency. Postsale from color was up 17% in the quarter. That is without factoring in any benefit from Global Imaging.

The solid results reflect steady demand for Xerox office color MFDs and production color systems. Last month we unveiled an industry first, bringing the price of printing a color page down to that of black-and-white. We launched a Phaser solid ink printer and MFD that break the price barrier for customers who need affordable quality color systems and use them a lot to get business done, like realtors, designers, and contractors.

With the advancements in our solid ink technology, a realtor can put a postcard of a new listing in full color for the same price as printing in black-and-white, but with 10 times the impact. It is a strategy that is opening new doors and plays to the significant advancements we have made in our proprietary solid ink technology. And there is more to come.

This launch also included two additions to our series of color laser multifunction systems. We have introduced 17 more color products this year alone, building on what is already the industry's broadest portfolio of color printing technology.

So if you will turn to slide 7, we will review our production business. Total production revenue grew 6% including a 4-point benefit from currency. Postsale was up 7%. More of our production customers are shifting to operating leases, as mentioned earlier. We saw a 4-point impact from this shift on production equipment sale revenue. Again, the benefit of operating leases is that the revenue flows through to postsale over time.

I am really pleased with the demand for new products launched earlier this year like the Nuvera 288 production systems. The mix of products sold in this space is balancing out, with continuous feed in the Nuvera 288 helping to offset declines in other higher-end black-and-white production and light production. We expect the decline in light production will improve with the recent launch of the Xerox 4112 and 4127.

Overall, we remain very well positioned as the market continues to shift to highlight color and full color, and that is what we heard at Graph Expo last month. I know some of you were there, too. Ursula was there, meeting with customers and partners who continue to post huge gains in growing their digital printing business. The show was a success for Xerox, highlighting the breadth of our products, workflow, and services offerings and generating multi-million dollar orders, including multiple orders for iGen3 right from the show floor.

We continue to see strong demand for our iGen3 systems both in our revenue and install figures. Production color install activity was up 14% this quarter.

So regardless of what our customers are buying, high-end or light production, color or monochrome, we continue to benefit from the profitability of production across the board.

As you know, we typically exclude our Developing Markets Operations from our production and office revenue results, since the DMO is a separate reporting segment. But with DMO's expanding growth, I think it is important to show the leverage from our strengthened business in areas like Russia, Central Europe, and more.

Production equipment sale revenue from DMO was up 16% in Q3. That is largely due to more iGen3 and DocuColor sales. So if you will turn to slide 8 we will take a look at the office.

With the benefit of Global Imaging in our results, total office revenue was up 14% in the quarter and 11% in constant currency. Our competitive play to install more and more Xerox units helps to boost postsale, which was up 12% in the quarter. The addition of Global Imaging led to the 18% lift in equipment sales. Global also continues to branch out, making two more acquisitions this quarter that expand our reach to small and midsize businesses.

Even without the benefit of Global, we saw an improving trend in office equipment sales, reflecting a better mix of products sold and a ramp up from the office product launches this year. Install activity for Segments 3 through 5 multifunction devices, which are designed for work groups and midsized offices, increased 8%. Demand for our desktop devices in the Segments 1 and 2 market drove up activity 9%. We saw a 69% increase in installs of our color multifunction systems.

Installs of color printers, a much smaller part of the total, were down due to declines in our OEM business. We have introduced 25 more office products this year, from solid ink advancements to a complete refresh of our black-and-white WorkCentre MFD family and more color laser-based systems. It has been a strong launch year for the Company, along with competitive pricing, breaking down cost barriers of color, and expanding distribution We're seeing positive traction from this aggressive growth strategy.

The same holds true in our Developing Markets business, with office equipment sales up 7% in the quarter. So if you will turn to slide 9 we will provide more details on DMO's results.

Revenue from our Developing Markets Operations was up 12%, with postsale up 13% and equipment sale revenue up 9%. While office printers and multifunction devices are standard play in DMO, we are seeing stronger sales of production systems this year. Commercial printers in countries like Russia and in Central and Eastern Europe are building their businesses on the advantages of digital. We will have a large showing at next week's [Itex] South Asia event, where Xerox's leadership in digital printing is gaining ground in India.

Not unlike businesses in more developed countries, our customers in DMO are seeking cost-effective ways to simplify the way they do work. Demand for our outsourcing and consulting services is forging valuable partnerships with clients and providing a boost to DMO postsale results.

So here is a quick wrap-up on the revenue front. Annuity, acquisitions, color, services, and activity were the drivers of growth. No surprises, just steady, increased improvement across the board. The benefits on the top line were supported by a close eye on managing costs and expanding earnings.

So that is a good place for me to hand it over to Larry. He has more to share on the dynamics of our postsale results and a review of our financials. I will be back to wrap up and discuss Q4 expectations. Then Larry, Ursula, and I will take your questions. Larry?

Thank you, Anne, and good morning. Our third-quarter performance delivered on our commitment of sustained enhancement of shareholder value. Adjusted EPS growth of 17%, 18% year-to-date; $320 million core cash flow, $820 million year-to-date.

The fundamentals of our business model are strong. Equipment installs had strong growth. Annuity revenue growth is driving total revenue growth. There is a balance between gross profit margin and expense levels, all of which yielded expanded earnings and good cash generation. The quarter and year-to-date results position us well to deliver on the full year.

Slide 11. Our business model is driven by annuity, and our leading indicators continue on a positive trend. Keep in mind that the machines in the field, MIF, and page numbers do not include printers, our Developing Markets segment, or Global Imaging Systems, which would only improve the results.

Looking first at the top left, digital revenue was up 7%, 4% in constant currency. MIF was up 7%, while digital pages were flat. This digital performance was driven by color growth of 18% revenue, 34% MIF, and 30% pages, combined with the positive influence of color on price per page.

This remains a huge opportunity going forward as color only represents 16% of the MIF and 12% of the pages. These numbers will continue to grow and drive annuity higher.

In addition, our services annuity, another key indicator and element of our growth strategy, continues its positive growth at 8%. Black-and-white digital is stable with slight declines in pages; but continued growth in MIF is a positive indicator for the future.

The last set of numbers on the bottom relate to Light Lens, the analog transition to digital that has put a drag on our postsale and is now only 2% of total annuity revenue. This positive story, coupled with the office production and DMO installs that Anne reviewed with you, reflect well on continued annuity performance.

Slide 12. The annuity scorecard points to positive postsale and financing revenue growth. Adjusting 2006 for Global, we grew annuity revenue 6%; 3% in constant currency. The trend of improvement is the key to our business model, and at 3% constant currency growth we are on track for sustained performance.

Digital and DMO annuity drove the growth. DMO has had two quarters in a row of double-digit growth. Light Lens is now only $47 million in the quarter and a 1-point drag on the results. So the metrics and revenue results point positively, and we see annuity going forward continuing to support our business model and cash generation.

Slide 13. Our P&L for the third quarter delivered solid earnings expansion of 17%, over third-quarter 2006 adjusted earnings. We have dealt with revenues, so let's start with gross profit margin of 40.1%, about the same as last year and in our model range.

We grew gross profit dollars significantly this quarter. Expense ratios improved, with flat RD&E dollars and a decline in SAG, considering currency and Global.

This quarter, 2006, after-tax -- I'm sorry. Third quarter of 2006 after-tax adjustments were $68 million for litigation matters, $72 million restructuring, and $448 million positive tax audit settlement. With these adjustments, third-quarter 2006 EPS was $0.23 versus $0.27 this year or 17% growth.

Slide 14. Cash flow from operations was $286 million in the third quarter, $860 million year-to-date, with core cash flow of $320 million and $820 million respectively.

Quarter and year-to-date results were driven by strong earnings and the cash generation from our annuity model. This core cash flow performance is on track to reach $1.5 billion for the year, the high end of our 1.2 to $1.5 billion guidance range.

In the third quarter, we paid $197 million into our pension plans, $158 million in US to achieve 100% funded on a current liability basis.

Accounts receivable and inventory are an opportunity in the fourth quarter, as our year-to-date results saw increased uses of cash. However, we have consistently performed well in both areas in the fourth quarter, and I expect the same results this year.

CapEx was $85 million in the third quarter, $247 million year-to-date, going to about $300 million for the year. Acquisitions represent Global and some acquisitions they made in the third quarter. Advectis, the mortgage document management services company, which we just closed on, will show up in the fourth quarter.

On the financing side, we purchased $212 million of shares, $500 million year-to-date. We remain leveraged 7-to-1 on our financing business. Core debt is $700 million, flat with last quarter. This will decrease in fourth quarter. So overall, I am pleased with the cash results.

Slide 15. Looking at year-to-date results has the advantage of smoothing some of the timing considerations of 90-day periods. Our year-to-date performance is quite good, and the trends support our expectations for delivery of shareholder value for the full year.

Our revenue growth shows positive trends on both postsale and equipment, with postsale driving total revenue growth, 40.3% gross profit margin, and is on track to deliver between 40% and 41% for the year. Good expense management with improved expense-to-revenue ratios and year-to-date adjusted EPS growth of 18%.

In addition to our 18% growth in EPS, we delivered $820 million cash from core operations, and used $212 million for share repurchase program in third quarter; $501 million year-to-date; $2 billion since inception of the program; with approximately $0.5 billion dollars remaining on our current authorization.

We continue to leverage our financing business 7-to-1 and balance share repurchase and acquisition with core cash flow. We just closed on Advectis for $32 million.

I am comfortable on the cash side, given our year-to-date performance. We will deliver $1.5 billion core cash, top of our 1.2 to $1.5 billion range.

So in summary, a really good 90-day period as well as year-to-date results. Expanding earnings, delivery on cash, and key indicators pointing positively. Now, back to Anne.

Thanks, Larry. So I will close with a real quick summary. This quarter did set the stage for solid second half of the year, in line with our expectations and evidence of the strength of our strategy. The trends are all moving in the right direction.

Our top-line growth reflects a positive mix of annuity, acquisitions, and activity. Our success in color and services is giving us great leverage and generates postsale revenue. Equipment installs in key markets, especially color and office multifunction, remain strong. The 38 product launches this year alone keep us on a steady pace for continued activity growth.

We are managing the balance sheet effectively. We are continuing to invest in growing our business through innovation and acquisition. And through stock buyback, we continue to build more shareholder value.

For the fourth quarter, we expect to deliver earnings in the range of $0.39 to $0.41 per share. For the second time this year, we have increased our earnings expectations to $1.18 to $1.20. So thanks for listening. Ursula, Larry, and I will now take your questions.

(OPERATOR INSTRUCTIONS) Jay Vleeschhouwer from Merrill Lynch.

Thanks, good morning. First question concerns the Global acquisition. Can you comment on the kind of revenue run-off that you have been seeing post the decertification by Canon and Ricoh of their new product sales from their channel? As well, the ability that you have had to backfill that through that network with Xerox-branded product? So talk about that transition if you could.

On the services side, you have been pursuing these kinds of managed services deals for a long time, of course, and you cited two large wins. Has there been a fundamental change in new demand for such contracts or your close rate on the contracts? Or were the two you just announced somewhat anomalous?

Okay, so let's talk about Global. As I said, we are really pleased with the delivery of Global. Obviously, it is early days. There has been a lot of change for them to absorb. But I have to tell you their results are on track and this is really a heck of a management team.

There has been no revenue run-off that we would find concerning or out of trend, despite the fact that obviously they have adjusted to the Canon and Ricoh decisions. As a matter of fact, I think, you know, in reviewing the results on the Xerox equipment that now is being delivered through Global channels, by the end of third quarter it was over 50%, which is certainly exceeding our expectations in terms of how quickly we would be able to integrate Xerox offerings into the Global channel.

They are just really bullish about the acceptance and feedback as it relates to Xerox technology. So we are really not at all concerned that Global is not successfully integrating Xerox technology to their customers. I think we are through, quite frankly, the beginning days of that transition, so it will just get better and better.

On the managed services side, I think there is lots of deals we don't announce because we have obviously got to get permission from customers to announce. So I would not view these deals as anomalies. We actually now have implemented kind of a big-deal bid desk just to deal with bids that are over 20 or $30 million in a global, very disciplined way.

You know, I think certainly our win rate is increasing as we gain more and more experience. I think the implementation of this global bid desk is going to be very, very helpful.

But the fact is that as you close these deals, they become reference points for segments of the industry that I think are absolutely listening to the Xerox value proposition. We have got demonstrated results that are reflecting enormous productivity gains and great value for lots of service customers out there. So we are really, I think, building on the momentum of what this business has been delivering for the last few years.

A question for Larry on the operating lease side. Can you comment whether you think this phenomenon will grow as a percentage of new business? Or might it abate in some way? It does seem to be spreading across the product line in production beyond just iGen. Is it temporary, do you think? Or is it just going to have to become a larger piece of the business?

Then finally, back to Anne. Can you comment on overall trends in your key verticals, graphic arts, corporate, government? And how you are doing, finally, in some of the new production specialty applications.

Well, I would say on the operating lease side, to the extent that we are being so successful in services bids and we can solve a lot of customer problems that way, that we are going to see more operating leases. I think it is definitely a part of our business, and it is really a positive.

At some point here, there is a steady-state where you are getting the benefits on the postsale side. Right now, it is just a way of explaining what is happening in equipment sales, and that is why we bring it up. It is really a really good point for the annuity stream. As it builds up here, it is going to pay off significantly.

So number one, I think it is going to continue. Number two, I think we are going to get huge benefits in postsale, and I think it is a good thing for the long term.

So I'm going to take kind of a general swag at the verticals, but I want to turn it over to Ursula on particularly the graphic arts marketplace. But corporate, we are actually feeling good about it. I know that there has been a lot of questions, particularly on the financial services segment. But I think we are differentiated in the sense that these kinds of services-led solutions that provide these clients with substantial productivity and cost savings, while we are building more and more valuable around document management services, is absolutely continuing to thrive in a world where perhaps there is a lot more pressure just on pure technology acquisition and capital-based acquisitions.

So I think we are positioned well there. So we are not seeing anything in the corporate sector that we haven't been seeing for the last three years. That is just that corporate clients want a real ROI on whatever investments they make from technology companies.

Government has been terrific. A lot of the big breakthrough services deals, like the Department of Works and Pension in the UK, the Navy deal that we just talked about, are saying government now is beginning to get into the -- they want our ROI from big-time services approaches as well, versus just kind of hardware acquisition. So I think we are just beginning to open up the government opportunities.

And graphic arts looks great, but I'm going to let Ursula talk about it.

As Anne said, graphic arts does look very encouraging for us. Continues to be a strong segment. It plays extremely well. Therefore, we lead with our technology here, both our color technology, which you know about, we are really pleased with our performance in the order, third quarter -- by the way, second quarter as well -- on iGen3. And on our introduction color product line.

IGen3 performance was very strong. Activity is up. Activity and utilization of our workflow to drive application-specific pages are up as well. We are winning and succeeding in the photo market. We are making good inroads in the packaging market. So the production and commercial print market is looking very good. The graphic arts market is looking very good.

If I can also add, our black-and-white portion of the graphic arts market is strong, as well. If you look at our Nuvera EA and our Nuvera 288 systems, they're continuing to be very successful and drive applications like books and transpromo applications in the commercial print market as well.

So this is a quarter and last quarter as well that we are very pleased, very pleased with the activities.

Thank you.

Bill Shope from JPMorgan.

Okay, great. Thanks. Anne, despite the operating lease headwind, there was obviously a nice improvement in equipment sales trends versus last quarter. Could you talk about the sustainability of this improvement? Adjusting for Global and currency, should we anticipate that this segment could start to show some positive growth in coming quarters?

So I think, you know, we are pleased that it really was a nice uptick from Q2 on the equipment sales side. As Larry said, I mean, operating lease is a little bit difficult to predict because it's going to be based on the strength of -- particularly of our services business. But you know, that is one that we are very pleased about.

I think as we look at what really drove the uptick in equipment sale, it was really strong color performance. So that we expect to continue. There is no question that color is the big driver on the equipment side now for growth. Everywhere you looked, just about, the performance was very, very good.

So, is the improvement sustainable? The answer is yes. As we think about kind of the top-line equipment sales for the full year, we certainly see it as an improving trend.

Can there be some volatility quarter-to-quarter, based upon product launches or services content? Yes. But hey, when you look at this over a few quarters, we expect this trend to improve as color becomes a bigger and bigger part of the overall equipment equipment sale portfolio.

Okay. Then final question, are you seeing any competitive pressure or any change in the competitive landscape from the Canon's 7000 series product?

No. I think -- well, I should say, do we see it? Yes. There is a lot of certainly aggression in the marketplace, I think, with regard to trying to place Canon 7000. But I think we have a very entrenched, loyal customer base with our DocuColor and iGen3 customers.

As you can see, in terms of growth rates on installs, 14%, that is really an uptick on installs for us. The revenue story is great. So, I think we are absolutely doing very, very well in light of competitive entries. Ursula, you may want to add.

Yes, the one thing I want to add is that we launched last quarter, most recent quarter, DocuColor 8000 AP. This was a product that we worked on specifically to respond to the one application space that the Canon 7000 would have had an advantage over us; and that is in heavyweight papers. We have launched that product and it is doing very well.

So that product along with our entire product line in the EPC space, and in production color space, and in the office color space, I think we are, as Anne said, very confident where we are today and definitely confident facing off against the Canon.

By the way, if you look, the most recent data we have on market share, which was Q2 market share. Production color, it is just really great in terms of the improvements we have seen both sequentially and year-over-year.

Okay, great. Thank you.

Carol Sabbagha from Lehman Brothers.

Thank you. First, just a very broad question about what you are seeing from regionally across the world. Are you seeing any sort of slowdown in bids at all or requests for proposals? Or is the economy continuing to operate the same level it has in the first half of the year?

So, I mean, I think we see the regional trends being pretty similar. Obviously, you can see from the results in Developing Markets that that continues to be the highest source of growth. We are capitalizing on it and we will continue to do so.

But I think both in Western Europe and North America, we would characterize both our signings and our bid pipelines as being as strong as ever.

Can there be --? When you are dealing with really big services deals, the reality is they do take longer to close, and it is not a transaction business. But all the indicators would say that our big-deal business is going in the right direction, with a pipeline that is very -- as strong as it has ever been.

So, I think we are very much aware, obviously, of the economic challenges as it relates to the debt markets and the financial services segment. But I think that our business model and our business-to-business orientation is actually keeping us in pretty in shape from feeling any real downward pressure from that.

Great. Then, a question on Global Imaging. It looks like if you can back into potentially some numbers, that the revenues are up in the low single digits and their equipment sales were down. I know they had an extremely tough compare versus their third quarter last year. So can you address that a little bit and talk about what you believe trend line is on the Global Imaging revenue side?

Yes. No, and I think you kind of characterized it correctly. On the total revenue side, I think we would view it very much on trend. By the way, pretty good performance in light of the early days of changed management that they have had to deal with, so with regard to the acquisition.

On the equipment sales side, for any of those who choose to go back and read 10-Qs, but if you look at the Global 10-Q from third quarter of last year, you would see they had an exceptionally strong performance in their network services and audiovisual groups. Which are a small part of their business, but it was huge performance and it created, obviously, a compare pressure.

If you look at their core business, we are quite pleased with their equipment sale trends on their core business. But they did have a difficult compare; and as a result, it actually put pressure on our equipment sale performance in our core business and actually deteriorated the performance a bit. But underlying fundamentals are good and we continue to be very pleased with Global's performance.

One last quick question on use of cash. You did a bigger buyback in the quarter than I would have guessed. What is the outlook for how much you are willing to allocate for the stock buyback for the rest of year and if we can look out a little bit into '08?

Larry?

Well, we have $500 million that is still authorized that we have not used. I would say for the remainder of the year, we plan to be modest. I think the third quarter, we just intended -- we just looked at the share price and bought back shares. So that was the motivation. We thought it was a good price to buy at.

I think we are going to continue on the trend that we said at the beginning, which is within cash flow we are going to buy back shares. The important factor, too, is I think by the end of the fourth quarter we will have paid down a significant amount of our core debt. So we will be open to go right back on the trend we have had before, next year.

Great, thank you very much.

Ben Reitzes from UBS.

Morning. Thank you. A couple questions. I guess you got the economy question a lot. Can you just delineate between Europe and the US, please? Talk about any differences you saw there in the quarter and into the fourth.

Yes, I don't think we are seeing any really material difference between Europe and the US at this point in terms of the markets that we serve. For us, if you look at certainly the strength in the graphic arts market and clearly the corporate value proposition, I think it is really important to remember that our go-to-market strategy for significant corporate sectors is now a services-led business.

I think where you might see some short-term pressure is more on the capital acquisition side. I think that we are less vulnerable to that than others. So I do believe that in both Europe and North America, we are not seeing a lot of pressure. Clearly, we are watching it very carefully. But nothing that is terribly worrisome in terms of our particular business model right now.

Okay. Then, could we talk about your acquisition strategy, in light of that you're still absorbing Global? What kind of acquisitions should we expect from Xerox?

What do you think of Lexmark? It is beaten down, and there are some very bullish views out there by some. But I am wondering if you would be able to absorb something like that, or if that would even be on the radar screen.

First of all, I think in terms of what we're ready to digest, I mean Larry said it. We will pretty much have digested Global by the end of this year, which is, I think, was a sizable acquisition for us.

Going forward, we are real clear. We are going to continue to look for service verticals that are all, quite frankly, additive, top-line driven kinds of competencies. We're going to look at software that actually enhances our production solutions business.

And we are going to look for distribution. Global was a big bite, but there's lots of other smaller bites out there. Obviously, Global continues to digest those on a business-as-usual fashion. As a matter of fact, it is interesting, but their acquisition candidate pipeline has never been stronger, because of the fact that they are now -- have Xerox, the Xerox brands behind them. They are really seeing interest from dealers that they would not have seen before.

So I think that the strategy is solid and consistent and will continue and be very well balanced within the capital deployment side.

You know, I think our principles on acquisitions is really value creating, really good revenue synergies where we can acquire a company and actually use it to drive incremental growth in our core business. So it is not a onetime deal. It is not a kind of drug that we have to keep doing, because it's going to actually enhance our ability to drive core growth.

I don't think Lexmark is an ideal candidate with that kind of view. We have tons of R&D and technology capability. We are not looking to increment that. Between Fuji Xerox and Xerox, there is nothing that Lexmark would bring to the table that would be really value creating for us.

From a distribution perspective, I think it is much cheaper and in much better interest of the shareholders to go out and drive additional indirect distribution and optimize on the Global acquisition than we would want to look for. So I think that based upon what we have been articulating as a strategy, it is really not a great fit.

Thanks for hitting it head-on. It was a pretty great complete answer. Take care. Thanks.

Matt Troy from Citigroup.

I was wondering if you could comment just more broadly, not on what you are seeing in the economy -- I think we all look at the same data and data points -- but talk about the business model going forward into 2008.

This is a much different Xerox than what we have seen in past recessions. To the extent that seems to be the flavor du jour in terms of folks' questions, I was wondering if you could talk about how Xerox is positioned if the economy were to go into a negative growth or lack of growth mode.

I look at the business and I say, on the enterprise side color is a more discretionary spend. I know they rein in our ability to use color when costs are tight. If I look at the commercial print, which is a new growth market for you folks, that is correlated to economic activity over the last 25 years to the tune of about 96%. So you potentially could be vulnerable there.

But at the same time, you have changed your manufacturing infrastructure. I am wondering if you just talk about how you think about the economy; how you think about positioning the model. And this is all just generated basically out of Consolidated Graphics' preannouncement yesterday, one of the largest commercial printers saying they are starting to see economic softness.

Yes, so, I mean I actually think that we have been investing in positioning this business to win in tougher and tougher economic conditions in many ways. That has come from the relentless focus on productivity and competitiveness.

But if I look at our strategy going forward, I would say our intent is -- and you are seeing it already, you're going to see more of it. It is to make color more and more affordable. We're going to make it so that people will not point to color as something that is unaffordable despite the toughest of economic conditions.

Obviously, what we have done now with this solid ink positioning is the beginning of a strategy (inaudible) that we intend to have a much broader impact with as we go forward. So from that perspective, I think our plans for color are to make it work and be a source of growth by really being responsive to the fact that the more affordable we make it the better the growth prospects are.

I have talked about our services. But I mean, if you look at our services business right now, driving 8% annuity growth, well above the corporate average, it is all playing in a world where clients have to make tough choices about how they spend their dollars and what they focus on.

I think our ability to kind of continue to make that value proposition attractive to our clients, by reducing their direct costs and allowing their resources to focus on their core business, is really compelling. I mean, a lot of our services business now is about not acquiring technology, but allowing us to host and manage everything for them, either on-site or off-site.

So I think we have solutions to a problem that clients might face out in the future that are going to be very important.

In the production business, if you are going to be a survivor in the graphic arts business, you better be in digital because there is no place else to go for growth in value. So I mean this is a case where things get weak, you separate out, quite frankly, what the sources of growth and profitability are from those that, quite frankly, will be deteriorating. And I think that we are well positioned.

When you add it all up, if the going gets tough, the business model you want is an annuity-based business model; and 70% of our revenues are annuity based. With the impact of services and operating leases, that will be going up.

So hey, do we want a stronger economy? Do we want kind of the GDP to be helping propel our growth? Yes. But I think we are prepared to be a winner among the competitors with regard to the strategy that we have in place.

I understand, I didn't want to sound off alarm bells. Consolidated said both on their call and off-line that they intended to continue their investment in digital. I think if you talk to any commercial printer I would agree; it is becoming just the ante to be in the business, increasingly.

I totally agree, and I think, you know, look at the product portfolio that we're bringing to this market. I think this is going to be one of the biggest strengths we have going forward.

Second question would just be again on new market opportunities. It's been a couple of quarters since you announced a broader interest in focus on photofinishing. I was wondering if you or Ursula could talk about the learning curve there, what those discussions are like, and maybe a hint or forward-looking statement about what we might see at PMA or in 2008, specifically as it relates to your photofinishing push. Thank you.

Ursula?

You know, photofinishing is a focus area for us. In the high end of the business we have, obviously, flagship product. So with expanded copy quality capabilities, it will allow us to participate in the photoimaging market even more deeply than we did before.

We have great examples of this both North America and in Europe. North America, we partner with Shutterfly, as you know; and in Europe, we have a great partnership with MyPhotoFun, with a company called TED Gigaprint.

So we are actually moving far and moving fast there and trying to expand our footprint. And I think in the high end of the business, doing well.

At the lower end, there are applications at the lower end not as high quality as the iGen or EPC space. We through our partner, Fuji Xerox, with Fujifilm to actually participate there, using some of our office multifunction devices in partnership with Fujifilm to be a kiosk-type provider.

That is a new space for us, a beginning space for us, but one that we are positioned well to continue to grow. Especially as we work with Fujifilm, who has a footprint and a deep knowledge there. So our technology hardware, our technology software, and their back-office kind of understanding how kiosk photo works will help us to be effective in that space.

So high end, I think covered, growing well, great technology applications. Low-end, great, working with an expert there with our technology. So we see it as a great opportunity for us going forward.

Certainly a strong partner with Fuji. If I think about that as a channel for you to place devices, is this still early days? Or are you seeing traction and placements growing to a more material number? Or is it really an '08, '09 story, where we will see more from you there?

It is definitely still early days, but I am not discouraged by the way that the market is moving in the kiosk type of space at all.

At the high-end space, it is not as early days, and so the indicators are good there. The real indicators are good there. Great providers of this type of distributed kind of photo application. We are partnered with some of the best providers in the world here. So in the high end of this space, it is not early days.

Thanks, Ursula.

Chris Whitmore from Deutsche Bank.

Thanks, thanks very much. Larry, can you quantify either the intercompany revenue realized from backfilling the Global channel, or the incremental equipment margin capture from that backfill? And perhaps talk about the opportunity there going forward.

Well, I don't think, from -- you are talking about what we transferred through Global and what they add to our business? I mean I think that from the standpoint of going forward, until we have a lot of product there it is not a material difference. But as the products build up, obviously it is going to help us on total dollars that we get from them.

I am not sure that is a public knowledge. It is just like any channel that we have. I don't think we publish what the profitability of those particular channels are. So. But it is going to be very profitable for us going forward, looking out in time, for sure.

What was the second part of the question? Or was that its

I was just trying to get a feel for the manufacturing margin captured from equipment sales through that Global channel.

Yes, I don't think that is a public data number from a channel standpoint.

But obviously, it is one of the things that we pointed to in terms of the ability to leverage the acquisition to be more than what stand-alone Global would have brought us. The manufacturing process is one of the synergies that over time will be a real help in improving actually the margin in the Company. So.

I think we have time for one more question.

Shannon Cross from Cross Research.

I got in under the wire. Okay, just a couple questions. Just curious. Have you seen any changes -- sort of goes back to the economy question and that -- with regard to any pushback of contracts from any of your customers? You know how when things slow down, you tend to push back contracts and not sell as much product. It doesn't appear that that was the case this quarter, but I just wanted to confirm.

When you say pushback on contracts, you mean in terms of deals signed?

Actually lengthening out the contracts. So you know, your salesperson goes in and says, okay, fine; you know, I know times are a little bit tough; let's stretch out the contract another year. And you benefit on the margin side because (multiple speakers).

I see, yes. I mean, I would not say that that is any different. We do go and think it is to an advantage sometimes if we can extend the contract for the client. It tends to be the time frame where it is most productive for the client and most profitable for us. There is no question about it.

So that is kind of a strategy that we have in place. But I don't think we are seeing anything that would be materially different in terms of the economic impact.

Okay, good. Then, Larry, maybe you can talk just a little bit more in terms of the use of cash. You have talked about repurchase, you have talked about acquisitions. Any comments on dividends or any thought process with regard to looking out and how you sort of evaluate the various uses?

Well, I think, you know, as we said before and I think we will cover in more detail later at our investor conference, we consider that in the future Xerox will be a dividend company. it is just a question of when that will happen.

I think going forward you're going to see significant amount of share buyback. You're going to see acquisitions as Anne outlined. Probably not anywhere near the size of a Global Imaging.

Then I think at some future date we will be a dividend company. I think we will cover sort of more detail on that when we go through it at the investor conference.

Okay, sounds good; and I guess we will all see you in November.

Great. That is my parting line, Shannon, because I wanted to thank all of you for joining us. We do hope that we see as many of you as possible at our investor conference. It is in New York on November 19. Thank you very much for your participation today.

Thank you, ladies and gentlemen, for your participation in today's presentation. You may now disconnect and have a wonderful day.