全錄公司 (XRX) 2007 Q4 法說會逐字稿

Good morning and welcome to the Xerox Corporation fourth-quarter 2007 earnings release conference call hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President, and Larry Zimmerman, Executive Vice President and Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor.

At the request of Xerox Corporation, today's conference call will be tape recorded. Other taping and/or 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, Xerox executives will make comments that contain forward-looking statements, which 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 Mrs. Mulcahy. Mrs. Mulcahy, you may begin.

Thank you, Lauren. Thanks to all of you for joining us today. If you'll turn to slide four, we will provide you a summary of our fourth-quarter performance.

We delivered Q4 EPS of $0.41 at the high end of our guidance, resulting in full-year earnings growth of 13%. It is consistent, steady momentum that reflects the effectiveness of our annuity-based business. Total revenue including the benefit of acquisitions was up 11% this quarter to $4.9 billion. Wholesale revenue, which accounts for about 70% of our total revenue, grew by 12% led by a steady pace of install activity, color, and document services. And currency gave us a 4 point benefit.

New color products and high page volumes from Xerox Color Systems continued to generate positive results. Color revenue grew 14% in the quarter and it now represents 40% of total revenue. Our gross margins were 40.5% in the fourth quarter, down about 0.5 point from Q4 '06 and in our range of expectations for the year.

Selling, administrative, and general expenses were 24.3% of revenue, up about 1 point. Our balance sheet remains exceptionally solid. The flowthrough from our annuity resulted in significant operating cash flow. We generated $1 billion in Q4 alone and $1.9 billion for full year 2007. We used our financial strength in 2007 to build value for shareholders through $631 million in stock buyback, declaring a dividend, and investing in growth by funding $1.6 billion in accretive acquisitions. And our Board just approved another $1 billion for share repurchase.

So we're heading into 2008 with the benefit a stronger business, the industry's broadest portfolio of technology and document services and significantly expanded distribution to businesses small to large. We operate a global business with more than half of our revenue generated from customers outside of the U.S. From small and medium businesses in the public sector to large enterprises and commercial printers, we serve a wide range of markets, giving us diversification globally and in market scope.

So we're seeing steady improvement from our operations in Europe and in key developing markets like Russia, Eastern Europe, and India. Most important, we benefit from a healthy annuity stream. With recurring revenues and a disciplined approach to managing costs, we remain committed to delivering on our 2008 full-year EPS guidance of $1.31 to $1.35. Larry Zimmerman is going to provide you more details on our financial position in a couple of minutes. Ursula Burns is also with us this morning and we will all take your questions in a bit.

So if you'll turn to slide five, we will have an overview of our fourth-quarter revenue. With Global Imaging in our core business, we are competing aggressively to increase placement to Xerox Systems through new products and expanded distribution. The growth in the install activity is a direct driver of increased annuity and we saw the benefit of this trend continue in Q4. This chart shows the year-over-year compare in actual and constant currency.

The adjusted column on the right assumes that Global's revenue for Q4 '06 is included in our results for the same period. Again, total revenue was up 11% in the quarter to $4.9 billion. When we adjust the compare for Global Imaging, revenue was up 5% with 4 points of positive currency. Equipment sales were flat in the quarter adjusted for Global Imaging and down 4% in constant currency.

However, the more significant revenue driver post-sale was up 12% in the quarter. Adjusting for Global and the benefit from currency, the post-sale was up 3% in Q4, continuing a positive trend and reflecting the clearest picture of growth for our Company. In fact, we added more than $1 billion to our annuity stream in 2007, including the benefit of Global Imaging.

So we remain quite confident that our annuity-based business model is working. The focus on increasing activities through both our core business and acquisitions is generating more pages printed on Xerox systems. And of course these pages translate into post-sale dollars that continue to fuel our business for the long term.

At the same time, we're growing annuity revenues through multiyear, multi-million dollar services contracts. In 2007, services generated $3.4 billion in annuity revenue, an 8% increase over 2006. By targeting more document-intensive vertical markets like healthcare, legal, and financial services, we grew the value of services signings by 18% last year. Color was also a highlight in our revenue story and gives a big boost to our annuity.

So if you'll turn to slide six, we will take a look. With color, the power is always in the pages. This past year more than 40 billion pages were printed on Xerox color systems. That is an increase of 30% over 2006. We are miles ahead of our competitors on color pages and most importantly, pages remain the best source of our double-digit color annuity growth.

Color page volume was up again this quarter, growing 34%. It now represents 14% of total pages; that's 4 points more than Q4 of 2006. Revenue from color this quarter was up 14%, which includes a 6 point currency benefit. Again, we're seeing the benefit of our annuity here with post-sale from color up 17% in the quarter and that is without factoring in any benefit from Global Imaging. Color now accounts for 40% of our total revenue, but only 14% of our total pages indicating a tremendous growth opportunity for Xerox going forward.

Last year we made a strategic move in solid ink that made the cost of printing a color page as affordable as black and white and we broadened our color portfolio with 18 new products. We will continue fortifying our leadership position in color this year, steadily growing the number of pages printed on Xerox color systems.

So if you turn to slide seven, we will take a look at our production business. Total production revenue grew 5% including a 6 point benefit from currency. Equipment sale revenue was down 4%. Again, the focus here is on post sale, where we see the benefit of tremendous page volume. Xerox Production Systems generates the most digital color pages in the entire industry and that is fueling the 9% growth in our production annuity and is the leading indicator for strong production revenue growth going forward.

We saw accelerated demand for the DocuColor 7000 and 8000 AP series in Q4, as well as continued growth for the new Xerox Nuvera systems. This growth only partially offset declines in our light production business, which will be a key focus area for the Company in 2008. We know we can do better in the light production. We broadened the portfolio and are offering customers more choices at more price points in the important [segment six] market.

The success of Xerox's iGen3 continues to lead the industry in digital color production, printing and in pages. We have now installed over 2000 systems worldwide. Of those, 126 iGen customers are printing more than one million pages per month on their system and 275 customers now own more than one iGen3 to continue boosting their digital color businesses. As the market for photo applications continues to grow, you'll see Xerox continue to make strides in this industry as we partner with companies like Fuji Film to expand our footprint in imaging.

We are also aggressively targeting the digital continuous feed market with the recent announcement of color and black-and-white systems. Our innovation in this space redefines the standards for speed and quality and gives Xerox a competitive advantage as demand grows. Production sales are also on the rise in developing markets, up 11% alone in Q4.

So if you'll turn to slide eight, we will review the office segment. With the benefit of Global Imaging in our results, total office revenue was up 14% in the quarter and 9% in constant currency. Our competitive play to install more and more Xerox units helped to boost post-sales, which was up 13% in the quarter and will continue to be a driver of total office revenue. Equipment sales were up 16%.

The acquisition of Global Imaging has more than met our expectations. They continue to expand their business, acquiring four more companies in the short time they've been part of Xerox with more to come. More than 50% of the document technology they sell is now Xerox, significantly expanding Xerox's presence in the small- and mid-sized business market. Consider that just a year ago, Global Imaging didn't sell any Xerox devices. With more than half of their equipment sales now carrying the Xerox brand, we're seeing a strong return on this investment.

While activity was up 6% for office black-and-white MFDs, it soared for color multifunction. Installs were up 67% in Q4, 65% for the full year largely due to the success of our WorkCentre and DocuColor families and continued demand for our new solid ink systems.

2007 was a very strong product launch year. 39 new products that garnered more than 190 awards and we're ready for a similar aggressive launch schedule this year. It is all about increasing activity and annuity through new technology and services, expanding distribution, and growing our presence in developing markets. We are clearly seeing the benefits. In quarter 4, office equipment sales were up 4% in developing markets.

So if you turn to slide nine, we'll take a closer look at the developing markets. Revenue from our developing markets operations was up 14% with post-sale up 18% and equipment sale revenue up 6%. As I mentioned in the production and office overviews, DMO sales growth has an increasingly more significant influence on our overall performance. Growth is largely driven from our stronger presence in Eurasia, Central and Eastern Europe, the Middle East, and Africa. While our install activity is weighted towards products for small- and mid-sized businesses, we are seeing increasing growth for our production devices and higher end multifunction systems, the benefit of emerging markets leapfrogging technology.

So in summary, annuity, acquisitions, color, and services were all key drivers of growth in Q4 and for full-year 2007. Our investments in innovation and expanded distribution opened new markets for us and strengthened our brand. As a result, we have built a global business that succeeds through recurring revenues with steady margins generating significant operating cash flow.

And that is a good place for me to hand it over to Larry. He has more to share on the dynamics of our post-sale results and a review of our financials. And I will be back to wrap up and discuss Q1 expectations. And then Larry, Ursula, and I will take your questions. Larry?

Thank you, Anne, and good morning. Fourth-quarter results continue our earnings expansion and cash generation performance; 13% adjusted EPS growth for the year and $2.1 billion of core cash flow generation driven by earnings. These results coupled with a positive trend and growth of our annuity revenue stream position us well for 2008. In addition to the annuity model, our broad set of products and our global diversified customer base provide us the confidence that our model will continue to yield.

Slide 11, we have an annuity business model that provides a consistent and profitable stream of revenue that drives strong cash flow. The leading indicators for our annuity continue on a positive trend. As we go through the scorecard, keep in mind that machines in the field, MIF, as well as page data, do not include printers, our developing market segment or Global Imaging Systems, GIS; and all revenue measures exclude GIS, inclusion of the items would improve the results.

Starting in the top left box, for the full year, digital revenue was up 7%, 4% at constant currency. MIF also was up 7% and digital pages were flat. And if we were to look at fourth quarter itself, digital revenue was actually up 5% constant currency. MIF was up 7% and pages were up 1%. Color continues to drive growth with 18% revenue, 35% MIF, and 31% page growth. This growth combined with the positive impact of color on price per page makes this a huge opportunity in 2008 and beyond as color represents only 17% of MIF and 12% of the pages.

Black-and-white digital is stable with slight declines in pages but continued growth in MIF along with our strong color growth is a positive indicator for future annuity. And light lens, the analog transition to digital that has put a drag on post-sale revenue, is now down to only 2% of our total annuity revenue.

We also continue to see strong growth in another of our key growth strategies, services. Services annuity is up 8% for the year, and that's compared to 1% growth in '05 and 6% growth last year. There remains strong demand from our customers to have Xerox help them optimize and simplify their document processes while lowering their costs. These leading indicators as well as our performance in DMO and Global reflect well on continued annuity performance.

Slide 12. The annuity scorecard points to positive post sale and financing revenue growth, and as this chart shows, the trends also indicate positive growth for the future. Adjusting 2006 for Global, we grew annuity revenue 7%, 3% at constant currency. The trend of improvement reflects the effectiveness of our business model and at 3% constant currency growth, we continue to not only sustain but to improve performance.

Digital and DMO annuity are the largest contributors to growth. The digital growth is driven by color and services. DMO has had three quarters in a row of double-digit growth built on strong product placements through their two-tier channel. Light lens was only $46 million in the quarter and a 1 point drag on results. So the metrics and revenue trends point positively and we believe annuity going forward will continue to drive our business model and cash generation.

Slide 13. Now let's take a look at the fourth quarter P&L as well as the full year. Anne and I have covered revenues, so let's go to the key ratios. Gross profit margin in the fourth quarter was 40.5%, right in the middle of our model range of 40% to 41%. Margin had a tough year-over-year compare in the quarter as the mix of products and growth segments varied driven by strong growth in DMO, services, and office. We see much less variation for the full year of gross profit margin, 40.3 to 40.6. We believe quarter-to-quarter 40% to 41% is the correct model range to run our business.

RD&E was down on a ratio basis, but our investment was basically flat in dollars for the quarter and the year. Our SAG ratio for the quarter increased as we continue to make distribution systems and marketing investments in our business. Full-year SAG ratio improved slightly. The dollar growth in SAG is primarily caused by currency and not having Global in 2006 results.

Net income grew slightly in the quarter due to tough gross profit compares as well as lower OID last year due to the headquarters sale and lower '07 interest income. Full year net income grew 8%. The tax rate was a slight help compared to '06 for the quarter and was a negative for the full year compared to '06. Equity income grew $8 million in the fourth quarter but was down $17 million for the year due to Fuji Xerox restructuring.

For the quarter, EPS grew 8% to $0.41 versus $0.38 on an adjusted basis and full year 13% earnings expansion to $1.19 versus $1.05 on an adjusted basis. The bottom of the slide adjusts for fourth quarter 2006 and full year exactly as we did it in last year's report, taking out onetime items, a favorable tax audit benefit, restructuring, and a charge for litigation matters. There are no adjustments for any quarter in 2007.

Even normalizing for Global, gross profit grew significantly in '07 and along with good expense performance, was a primary driver of earnings growth. This operational performance along with share repurchase delivered 13% earnings expansion for the year, delivering on our commitment to shareholders.

Slide 14. Our cash flow performance for the quarter and the year was outstanding, over $2 of cash flow per share. Cash flow from core operations was $1.3 billion in the quarter and $2.1 billion for the full year. It was driven by our earnings and shows the cash generation capacity of our annuity-driven business model. We also had extremely good working capital execution. Accounts receivable, inventory, and payables were all managed well.

Full-year cash from investing was driven by our acquisition of Global Imaging and Advectis and $359 million of CapEx and internal use software. Cash flow financing was all about short-term borrowing for Global and paying it off as at year end and trading secured for unsecured debt.

Our cash flow gave us the ability to acquire Global, a great company, pay for it in a little over two quarters and at the same time repurchase $631 million in shares with $1.1 billion balance and about the same level of debt 12/31/'07 as 12/31/'06. Given these results, the Board of Directors authorized a total of $1.37 billion for share repurchase, $1 billion new, $370 million remaining from the prior authorization. In the first quarter, we expect to aggressively buy shares.

We are also raising our full-year outlook of core cash flow from about $1.6 billion to $1.8 billion to $2 billion. This is a perfect slide to finish my comments on because it demonstrates one of the key strengths of our annuity model, cash. We are confident we can deliver expanded earnings and with our cash generation, we have all the tools to grow our business and deliver to our shareholders.

Thank you. And now I'll give it back to Anne.

Thanks, Larry. So to wrap it up, we had a very good year and a very solid quarter. Our performance in 2008 will be driven by strong, profitable annuity, fueled by color and services and continued business model discipline. The resiliency of this model and the execution capabilities of our team will deliver double-digit earnings growth and significant operating cash flow. With our strong balance sheet we will focus even more on share repurchase while being opportunistic in making acquisitions.

So in short, here is why I am confident Xerox will increase value for shareholders. We're an investment-grade global firm serving diverse markets. We are an annuity-based business that continues to boost recurring revenue. We are generating strong cash flow. We are investing in our business and in our stocks and we are well positioned to build on this solid momentum in 2008. So for Q1, we expect to deliver earnings in the range of $0.25 to $0.28 per share and we remain firm in our guidance to deliver full-year earnings in the range of $1.31 to $1.35.

Thanks for listening. Now Larry, Ursula, and I would be pleased to take your questions.

(OPERATOR INSTRUCTIONS) Shannon Cross, Cross Research.

Good morning. Just a few questions. Anne, can maybe you provide some context? The digital page growth where you are now -- actually the pages where you are now flat, can you provide some context on how that has trended over the last few years just to give us an idea of how it meets up with the improvement in the machines [and] field?

Yes, absolutely. If you look at 2006 and where we ended up, you would have seen that total pages were negative. They would have been down 2%. If you look at where we had come from there, up until third quarter '07, they were down 1%. Q4 '07 is the first time digital pages have turned flat and that is really driven by the color page growth of 34% color page growth.

So we are pleased we've turned the corner on that, so when you get your population growing and your pages growing, you know, this is a science and it drives annuity growth.

Okay, and then as we look at sort of pricing, because obviously there's been pressure on pricing on the equipment side, can you talk a little bit about what you are seeing out there? And then I think Ikon just talked about some pretty aggressive pricing in black-and-white equipment on their call. Then also on the page side, what we're seeing in terms of specialty color pages?

So I would look and say pricing really didn't change a lot for us in terms of price investments. We have been basically talking about a 5% to 10% range of price investments literally for the last few years and we saw the same exact kind of price investments in Q4. So I think we would suggest that we see actually deeper discounts on the color side than the black-and-white side, but when you add it all up, it's 5% to 10% and we've not seen any significant shifts in terms of price, and that is the equipment pricing investment.

On the page pricing, I mean very consistent. We see declines in the price per color page, but no accelerating trend in price declines. Obviously we are part of the driver of that, particularly when you look at color for the price of black-and-white, our investments in color page pricing is really to accelerate these options of color.

Okay and then one final question just in sort of a macro standpoint because I'm sure there's going to be lots of questions on the economy. Linearity in the quarter, any falloff again, the comments out of Ikon were that they saw some pushbacks of large deals at the end the quarter. Anything that led you to believe things were slowing down?

You know, I think we had some mixed signals. Obviously because of the diversity of our business, we don't see the same concentration as other businesses do in specific segments or geographies. I think we saw perhaps a little bit of a slowdown in some of the corporate environment, but on the other hand, we were really pleased with our services signings, which full year grew 18% with a very strong fourth quarter in services signings. So clearly I think that we had some mixed signals.

By the way, Global had a very, very good fourth quarter and so the small- and medium-sized business environment was staying quite robust. You would have seen an increase in activity in color printing for us from the previous quarter as well and that is not just OEM, but our own branded color printing business was up 7%, which is quite a nice bounce back from some of those declines we'd seen in color printing.

So I would call it mixed at best and for us because of the diversity of our segments and our geographies and the annuity-based business, we would not point to any particular aspect of the economy that would have been a big issue for our results.

Okay, great. Thank you.

Ananda Baruah, Banc of America.

Just on -- I guess to start off on margins, operating margins came in a little bit lighter than we had modeled. Just wondering if -- sort of the blended and the different product areas came in a little bit lighter pretty much across the board than we had modeled. Just wondering if this is sort of consistent with what you were expecting going into the quarter or maybe sort of our forecast was just a little on the heavy side?

Then if in fact margins did come in a little bit lighter than you had expected, reiteration of the full-year guidance, might we think about sort of the way we get there as changing slightly versus when you guys provided the forecast back in November?

Okay, so let me talk about margin a little bit. The first thing I would probably look at and say in our business sometimes 90 days presents some anomalies and I would say if you looked at Q4 '06, it was the high point for margin of the year. It was a very, very strong quarter. So it was a tough compare and that is why we clearly -- we were not surprised or disappointed with margin simply because it was within our range. And if anything, the strength in particularly our DMO and our services business kind of would dictate that that range is one that we think is reasonable for our business. So nothing I think surprising about it to us and clearly probably the biggest factor was just the strengths of Q4 '06 margin, which was kind of above the range that we normally expect.

In terms of full-year guidance, obviously we reaffirmed our full-year guidance. Once again, I think we would look at it and say that, you know, if you look at the percentage of earnings delivered quarter by quarter, 2008 will be a pretty consistent year for us, although 2007, our first quarter, was particularly strong as well. But having said that, the range of guidance that we are presenting is certainly very consistent with the kind of earnings growth we expect and it absolutely is supportive of the full-year guidance that we're delivering.

Thank you, that's helpful. I guess along those same lines, is it still reasonable to assume that you would expect some operating margin expansion for the full year 2008?

Yes, I think -- we basically set a goal 10% to 12% operating margin and making steady progress. If you look at where we ended up in 2006 full year, it was at 8.7%. We improved that by 0.5 point to 9.2%, so we still think there's opportunity there.

Okay, great. Thanks. Then just quickly, one last one if I could. Post-sale, post-sale growth trends certainly appeared to remain intact, perhaps even improve on the margin. Just interesting if you look at kind of production post-sale versus production equipment growth, it looks like production equipment was down a little bit more relative to the last couple of quarters.

And I am just interested in sort of getting your take on if anything has changed in production equipment this quarter versus the last couple of quarters? And then maybe in office equipment as well? And if so, do you think that might be indicative -- I guess getting your thoughts on what it may be indicative of.

If we kind of look at the production business in Q4, we were really pleased with Nuvera and continuous feed. So the high-end of production was strong and we performed very well. Our soft spot was light production. We brought some new products to the market and did not have the full traction in the quarter. We think we can do better in light production, but that really was -- if there was a light part of the production business, it would have been in black-and-white light production.

Our color production all year was fabulous. Q4 2006 was like outside the realm of fabulous. We really skewed most of our activity to Q4 '06. This was a little bit more balanced but we still grew color production installs by 3% in the fourth quarter. We look at it full year and say to grow pages by over 30% to get to 40 billion color pages is really what we look at in terms of long-term health of the business. So nothing there that would be alarming, and we do think that we have some catch-up on the black-and-white light production side that would have improved the overall equipment sales performance in the production business.

Okay, great. Thank you.

Ben Reitzes, UBS.

With regard to following up on a prior question, you had some mixed signals in the economy, etc., and obviously like to hear a little bit more about that by geography because I don't think we have a Europe number in here. Maybe we do and I didn't see it. So that is the first part of the question.

The second part is, you know, with regard to keeping your guidance for the year and with the backdrop of mixed signals in the economy in the corporate space, it looks like you're going to increase the pace of your share buybacks not only because of the good cash flow but because of where the stock price is and the authorization. So is the share buyback necessary to hit the guidance? Is it incremental? I mean, this is a back doorway of asking the EBIT question. Do we have a year where you miss EBIT but you hit earnings because of these mixed signals? So that is the long question. I have a follow-up on color.

Okay, let me just start on the economy, and then I'm going to turn it over to Larry just on the position of share buyback and how it influences earnings. When I look at economy, I would look at it and say we saw strength in Europe. We don't break out Europe specifically, but there was nothing that we saw in Europe that wasn't a continuing trend of good results, great strength in our developing markets led by Eastern Europe and Eurasia. Very good performance in our U.S. channels and Global and a little bit of softness in the corporate environment, but once again, the services pipeline and services signings were very strong.

So when you add that all up, we can clearly still deliver good performance even if there is a little bit of softness in the corporate environment. But you know, Ben, our business is really interesting because a lot of it is not capital acquisition any longer. It is operating lease. Our services contracts are ways for our clients to reduce expenses, which quite frankly plays well to a weakening economy. So we think we can play to our strengths and we feel very confident then about being able to deliver the earnings even with perhaps a little uncertainty in the economy.

So that is kind of the way we have assessed it, but, Larry, on share buybacks?

Ben, on share buyback, I think I would say number one, that our plan was always to be very aggressive on share repurchase given that we sort of traded off between Global Imaging and share repurchase in 2007. So the first point is we always were going to be very aggressive. I think the share price just makes it, you know, if you could be more aggressive, you will be more aggressive. You do have limits on how much you can actually buy compared to volume in the marketplace. So aggressive is aggressive.

You know, I think we are planning on profit growth and we are still planning on profit growth. So we have not adjusted that in any way. If we are able to be a little bit more aggressive on share repurchase, it will help us.

Okay, just it is hard to say right now I guess whether it means there's upside to the guidance with it if you increased the pace, I guess, and the trade-offs?

Yes, but 11 -- over 11 months of actuals to go so --.

Okay, just on color, if I take out currency growth of 8%, I just want -- with all the crosscurrents, with what's coming out of Ikon and [FE], I want to make sure that that is in line with your expectations and what you think the long-term growth rate is of color.

And then also iGen, you know you gave an interesting number of 2000 installs. If I take five and a half years, that's roughly on average of 360 units per year. I know early on in its life you had goals for 300 and then maybe even took that to 500 at one point. I mean, is iGen meeting expectations? And is it a growing business? To what you thought, going in, I mean -- am I reading it right that it is kind of at a run rate of that 360?

Now you have a lower-priced product like -- you know, given the goals early on were to be 300 and now maybe you are on a 360 run rate. Am I looking at this right? Am I looking at it wrong? Is it growing? Is iGen actually growing faster than that 8%? And then what is your view on that 8% just going forward on an organic kind of color growth rate if currency were to take itself out of the equation long term?

Great, I'm going to have Ursula address maybe iGen first and then color.

IGen then is on a growing rate. The 2000 installs that we have achieved are at or beating our expectations. We are very, very pleased with the iGen install rate, but also the iGen average monthly page rate. You can't really just take the 2000 and divide it by the number of years that we have been selling it. Clearly the back end years we sell more than we did in the beginning years. So iGen is exceeding our expectations both on installs and on AMPV, average monthly page volume.

Thanks, so it's growing faster than your color average or you don't want to get that granular?

It is growing faster than our color average, for sure.

Thanks.

And color -- do we just want to -- color in total maybe just -- we look at the color growth rate; we are quite pleased. One of the things that is even more important than just the activity rate in color growth is page rate growth and if you look at the page rate growth, it actually accelerated. It was 31% growth rate full year '07, and 32% in Q3 '07 and 34% this quarter.

So where we make our money is in the pages and pages have accelerated and clearly we're making some investments on the equipment side to make sure we get the placements out there. So you've got to look at really two things I think and that is wholesale and pages and we're really pleased with the pace on both of those.

So the high single digits -- I'm just trying to just get a feel for if we took currency out of the equation and just taking all the comments from all these other companies that are much more negative than yours, is -- what kind of growth rate is color? And it sounds like you are saying it is still kind of close to where you reported. And that's what I'm trying to get out of you.

Absolutely. We've been consistently growing double-digit at constant currency. It was just slightly below that in Q4 but it came off a wildly successful Q4 '06, Ben. So I don't think there's anything in absolute terms that we are not pleased with in terms of color contribution right now.

Including the go forward opportunity, there's only still 14% of the pages are color, so there's still a large amount of opportunity ahead of us.

Thanks a lot. I appreciate it.

Carol Sabbagha, Lehman Brothers.

Just trying to marry what you said and you are seeing in the broader market and what your equipment sales number showed, which was a little weaker than what we saw it and I think you had easy compares. But the weakness did not seem to be as much in the office where I would guess you see more of the corporate spending, but in production. Would you characterize sort of what you saw in production -- and you touched upon light production as more internal or external factors that drove it?

I think we would definitely characterize it as more internal because the weakness for us was black-and-white light production and I think that was more product driven. Our growth in both Nuvera and continuous feed, particularly continuous feed, by the way where we are now installing our new black-and-white systems, was quite healthy and we were very pleased with.

If I look at color production, we grew installs, but I do think that that was virtue of a very difficult compare on production color year-over-year because we look at the growth rates on production color for the full year and just the pace of activity and we were quite comfortable.

So I should also mention operating leases where we have been kind of accelerating the use of operating leases, which is a great way quite frankly to accelerate placements without capital acquisition on the part of the customer. It costs us about 2 points of equipment sale in the production market and nothing in the office market. So in order to get the placements, we have used more operating leases in the production markets, but that is really we think a very smart strategy because it is terrific for production annuity.

So with the new products on the light production side, we think we can bring back better equipment sales performance on production, but overall there was nothing that we thought was really market-driven or economy-driven that we would point to.

Okay, let's assume first, looking at a little bit on the negative that these products don't take hold in the market, could you make your numbers for the year with equipment sales ex-Global, ex-currency sort of down in that 4% range that you saw in the fourth quarter?

Yes, I think that our business model with over 70% of the revenues in annuity, I mean clearly gives us the opportunity to weather volatility in equipment sales much more than other companies. And the other piece is that we have a very disciplined approach with the business model. We know how to clearly get productivity, reduce costs, and manage in a tougher environment. So clearly as Larry said, we are one month into the year. We don't have a ton of visibility, but we do know how to manage this business model and deliver bottom line results. And I think that is a great advantage of having an annuity-based business.

So can we weather continued pressure in the equipment sale area? Yes. But remember as well that we will be looking much more -- in a much more focused way on activity versus equipment sales. What I would look for and really watch is kind of the activity numbers which we think have been quite strong and which really are the indicator of continued post-sale [strengths].

Okay, then going on that note -- going on the annuity scorecard on page 11, just if you look at the three boxes you put on top, digital MIF is up, color MIF is up, and black-and-white digital MIF is up, but in all those three, the pages are up or not -- are down more than the MIF. Should I assume that underlying what is happening in your MIF is a little bit of a mix to lower end equipment overall?

And then trying to marry that with your digital revenues that are stronger than the page, the growth for most of it except for color -- are the black-and-white at least price per page actually increasing? I don't know if I'm reading the right think from those three boxes, I guess.

Yes, clearly price per page is increasing and that is due to the mix of color. So there is no question that with the MIF penetration we have in color now, I think something like 19% of the MIF is now color. As we continue to improve that, the price per page is going to go up. So that is just an absolute scenario.

On the pages versus the MIF, it depends. If you look at for example black-and-white digital MIF, I think you will find that a lot of that is kind A4 and low-end driven, and clearly there will be potentially -- and even light production quite frankly -- a little bit of a -- pages will not grow as fast as the MIF because of the mix there. I think in color you'll find it moves back and forth, quite frankly, but color is much closer. The strength of our production color business is keeping kind of the MIF growth and the color page growth much closer together, and that is where we want it, because that's where the money is. So I think it would be yes on the black-and-white side but not really on the color side.

One last quick question. Your overall MIF for the part of the Company that you measure, I presume that was up year-over-year, but rough percentages?

Yes, overall MIF is up 2%. Digital MIF is up 7%. Color MIF is up about 32% -- 35%.

Thank you very much.

Bill Shope, JPMorgan.

I have a few questions. Anne, first I want to dig a little more into the macro area. I know obviously we've seen a lot of questions there but I think there still are a lot of concerns there. Obviously I think your commentary and your results suggest that you are really not seeing any or you didn't see any issues on a macro basis for the December quarter. I think we have heard similar commentary out of other large companies that are exposed to the U.S. corporate space.

But I think the obvious concern for investors out there is that we could be facing pretty rapid deceleration in spending levels in '08. And that's obviously always hard to see. Now, Anne, in your conversations with your customers, are you getting any sense that their budgets are being impacted due to macro concerns or that budgets are maybe a bit more fluid at this time of year than they have been in years past?

You know, I think what I hear from customers is pretty consistent with what I've been hearing from customers in the last few quarters, and that is the ability to kind of do business under a services contract versus just a capital acquisition contract is preferable in large enterprises because you can actually reduce overall bottom-line spend. So the services business clearly is faring well in an environment where perhaps capital expenditures are coming under a little bit of pressure.

And the second piece is that particularly in the graphic arts marketplace, which is really strong for us, the ability to do operating leases is enabling the graphic arts marketplace to get into, quite frankly, the digital technology side of this without big capital expenditures. So I think that is a big help.

The other thing is Global is a great indicator for us because it is the small- and medium-sized market. They had a fourth quarter that quite frankly was on their trend even prior or the Xerox acquisition in terms of growth. So we were really pleased with the fact that they actually did not reduce sales at all and did not see anything that put any pressure on their business.

So all in all, I think if we're seeing perhaps some pressure on the capital acquisition side that we are prepared to provide clients alternatives that they find attractive in that kind of environment.

Then on the annuity stream, obviously your significant exposure to an annuity stream is a key reason why the model is at least somewhat countercyclical if we do get into tough times. Can you help us to understand within the annuity stream, outside of fixed contracts, how much of that annuity stream is based on activity that could be somewhat sensitive to economic conditions? From what you've seen in the past, obviously.

I would say all of the annuity with the exception perhaps of just individually purchased supplies is under four- and five-year contracts for the most part, certainly three to five years. A lot of our supplies are now bundled along with financing into single contracts. So the vast majority of the annuity is -- are revenues under contract for multiple years. We talked about a services business that has now reached $3.5 billion that would be characteristic of a long-term kind of contractual relationship.

We finance the great majority of our business, so our financing contracts are all for multi years, generally three- to five-year contracts. And as I said, a lot of our supplies business now is bundled into those kinds of contracts. So the answer is it is financing. It is supplies. It is consulting services. It is technical services. It is financed equipment, all in the annuity stream and the vast majority of that is under contract for multiple years.

Okay. That's very helpful. Then finally on the increase in the authorization, obviously it's clear that share repurchase remains on the top of the priority list for use of cash. Can you help us understand sort of where this puts you on your appetite for acquisitions in 2008?

Larry?

Well I think we still have an appetite for acquisitions. It's just that they take a longer time and we're obviously really careful as we look at them. So we are still looking and we're still doing a lot of work. It is unlikely we would have something the size of Global. So right away that gives you a lot of access to cash and share repurchase. So I don't think it will change any trajectory of share repurchase. We are going to be aggressive and if see something on the acquisition side, we will do it. And there's enough cash to do both.

Okay, great. Thanks.

Matthew Troy, Citi Investment Research.

Larry, I had a question for you on the cash flow guidance. Obviously going from 1.6 to the midpoint of your new range, 1.9, 300 million, it's a nice increase. Was just wondering -- you've said several times on the call that we're only one month into the year. You were just in town like six weeks ago to us the original guidance. What has changed? What makes you more confident this early on in the year that the cash flow guidance can go up at that material level?

Well first of all, we finished '07 and we had spectacular results, so -- If that wouldn't give me confidence, I don't know what would, first of all. And I think looking at that and what we were able to do on working capital gives me more confidence than you know --. Remember when we prepare for the investor conference, you are back in September, so there's a lot of months under the belt here that we've seen good cash performance. And I think I also said at the investor conference it was a conservative estimate of where I thought we would be. So I don't really think we're raising it that much. I think our performance dictates that we do do that.

Okay, then on the solid ink side, Anne, you launched a new product in September, an intriguing platform bringing color pricing closer to black-and-white. If you could just update us there in terms of what that experience has been like in the fourth quarter and the solid ink outlook for 2008? I think we're expecting to see some more products per your guidance earlier. What has it been like thus far? What does the roadmap look like from here?

Great. I'm going to let Ursula answer that.

So far the pickup we announced in the third quarter -- color for the price of black-and-white as you remember on our product set, we got to the market and the pickup is -- I will put it in three different buckets, very good across all three. One is the understanding and acceptance by the industry, analysts, and the customers, exceptional. The pickup of the product, we launched the MSP product at the latter part of the year and we actually sold out of that multifunction product that we introduced in the marketplace. Very good pickup, very good acceptance.

We launched a printer a little bit earlier on a worldwide basis and that flow has been strong. We will add more channels to the printer to expand our reach to the customer base, but the flow has been good. If you remember, this is the start of a communication and a marketing strategy for solid ink that we will strengthen as we go forward in 2008 with new products and new offerings.

As for new products, we have told you before that we will move solid ink up line in 2008 and we will do that for sure. It will happen in the second half of 2008, towards the latter part of 2008 with a full line multifunction product, higher end multifunction product.

Excellent. Ursula, since you're here, next week's PMA. Could you just give us an update in terms of the new incremental -- not new -- you've been there for now almost a year and a half, two years and learning rapidly. But just in photofinishing, photo books, greeting cards, a market projected to go to $1 billion within the next two or three years, all greenfield for Xerox, dialogue with partners and the retail channel, how is it going? What can we expect at PMA?

Exciting show next week at PMA. We will be there in full force. We will clearly discuss applications in PMA. Clearly print engines, which you already know about, color print engines both in the office and in the production space. But the big push at PMA will be how do we allow customers, either end-user customers or retail providing customers to actually do this photo work easier? So a lot of application work will be discussed.

Our iGen3 enhancements will be discussed and shown there. And some of our office color products will be shown there as well. And in partnerships with our partners including Fuji Film.

Great, and you know we just announced kind of a plug-in module for our WorkCentre line that brings kind of photofinishing down from kind of the iGen and DocuColor line into the WorkCentre line, which we think is a big deal and we're partnered with Fuji Film on that. So you are right, it is new business it's new opportunities for us.

And it's certainly a positive preannouncement with [Ritz] Camera I think recently coming out of Fuji.

Yes.

If I understand it, you guys will put on a unified front. You're sharing a booth at PMA for the first time.

We are, absolutely.

I look forward to it. Thank you.

Jay Vleeschhouwer, Merrill Lynch.

Thanks. Good morning. I'd like to ask a couple of questions around the channel and market coverage. First for Larry, what is your thinking now about the earnings accretion you could foresee from Global in '08 as compared to what that estimate of Global accretion might have been when you closed six months ago?

In addition, with regard to the channel, could you, Anne, comment on other resellers and other VARs outside the Global channel since you haven't really said very much about them since you began some initiatives there just about a year ago?

On Global, I think as Anne said, they are performing if anything better than expectations, given some of the disruption that happened at the beginning of the year. So they are accretive modestly in '07 and they will be accretive in -- to more extent, which is factored in the guidance for '08. So we are confident of their performance.

In terms of other channels, I would say first of all, that we've got continuing good news coming from DMO in Europe. The vast majority of our office business now is through distribution in those geographies, and we are really pleased and you can see a lot of that in the office performance.

In the U.S., I'd say a couple of things. One is the increase in branded color printers is a good indication that we are getting traction literally with the VARs and the resellers as it relates to the Xerox technology. We have also done a lot of work in some of the up market opportunities with regard to some of the multifunction distribution and packaged services that is starting to take off as well. I mean, they are clearly looking for new sources of revenue and the Xerox relationship is a good place for them to go in terms of the breadth of what we've got to bring to the channel. So we are pretty pleased.

We think continues to bring opportunity and slowly but surely we keep adding new relationships and also broadening the products and services that we bring to the channel. But we were pleased with their fourth quarter performance and full year.

A question about competition and some recent announcements. Shortly after Ikon preannounced earlier this month, in fact, I think the same day Canon U.S.A. announced a reorg of its company-owned resellers. If you had any comments on that, what it might mean competitively, if anything? Similarly with respect to corporate relationships, OSAY seems to be getting closer to Fuji in terms of some product partnering and as well closer as well with Konica. Do you see any marginal changes in either respect for -- in terms of competition?

You know, let me start with the OSAY relationship with Fuji. It is a tactical point product. I certainly wouldn't characterize it as strategic and we source product from lots of different places, so that is really not something that I would say is unusual. OSAY and Konica, we obviously know them as competitors very well. Apart or even collaborating, we think we are really well-positioned with the product lineup and capabilities we have to compete in the marketplace. We are confident about the distribution capabilities we have now to face-off against them, particularly with the addition of Global.

And from a product perspective, we're in great shape and we said it earlier, but we intend that 2008 is going to be a strong product year from a product launch perspective as 2007. So we don't expect to see a material difference in the competitive environment based upon that relationship.

Right, and on the Canon side?

Canon, really no change. I think we saw some activity from Canon 7000 but it was really more on the upgrading of their own fleet than it was quite frankly, impacting us. So nothing that we saw that would suggest that we're losing any ground in terms of either competitive replacements or our ability to kind of continue the pace of growth we're seeing with our production color business.

Right. And even in our office color business, Jay, 67% activity (multiple speakers) phenomenal performance on our side. So we are confident.

Okay. Thanks a lot.

Thank you very much. And thanks to all of you for participating today. We really appreciate your interest. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.