全錄公司 (XRX) 2009 Q1 法說會逐字稿

Good morning and welcome to the Xerox Corporation first-quarter 2009 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 is being recorded. Other recording 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, Nikita. Good morning, everyone, and thanks for joining us today. We will get started. If you would look at slide four. Before I get into the results for the quarter, I will begin with a look at the global economic issues we are facing, what they mean to our business fundamentals, as well as the actions we are taking to mitigate these challenges.

Last month we adjusted our first-quarter guidance to reflect an early assessment of our business results including a negative impact from our equity partner, Fuji Xerox, and a significant swing in revenue due to lower sales of equipment and printer-based supplies. Q1 earnings per share of $0.05 are in line with those revised expectations.

Our Q1 performance largely reflects the downstream effect of the economy with constraints in the overall business environment which is delaying purchasing decisions, as well as the Company's distributors holding lower inventory levels.

This is impacting us in three primary areas. First, the slowdown in technology spending and lower business volumes together put pressure on hardware and supply sales. Second, we saw significant declines in developing markets that are hard-hit by the economy, like Russia, Eurasia, and Latin America. And, third, continued negative impact from currency affected us on revenue and gross margin.

As we monitor the shifting economy-related trends in our marketplace we are setting conservative expectations for the economy in 2009. We are managing the business with a heightened focus on capturing the $550 million in savings from our restructuring and other cost reduction actions, generating operating cash and sustaining our strong balance sheet, and maintaining our investments in growth to ensure we strengthen our industry leadership and number one revenue share. That is why in the second quarter we are moving forward with product launches, including a breakthrough color solid ink system that will redefine color printing in the office.

So let me take a moment now to review our Q1 results, then Larry will share more detail about our financial results, I will provide some guidance for next quarter, and then Larry, Ursula, and I will take your questions. So if you will turn to slide five, I will provide a summary of our first-quarter performance.

We delivered adjusted earnings per share of $0.07. This includes a $0.02 impact from Xerox's share of Fuji Xerox's restructuring. The increasingly challenging economy drove total revenue of $3.6 billion down 18% in the quarter, which includes a six-point negative impact from currency.

Supplies revenue was down in the quarter as our distributors continued to hold lower inventory levels. This issue was exacerbated in developing markets due to major economic and currency swings in key regions. As a result, post sale revenue was down 8% in constant currency and the industry-wide slowdown in technology spending led to a 26% decline in equipment revenue.

Currency and lower supplies sales also impacted gross margin, which was 38.9% in the quarter, down about half a point from the prior year but stable sequentially.

Our cost and expense management is beginning to flow through with selling, administrative, and general expenses down year-over-year by $120 million. SAG as a percent of revenue was 28.2%.

Cash flow of $22 million in the quarter is in line with last year and it keeps us on track for full-year cash flow of $1.3 billion. (Technical difficulty) Sorry for that. Debt was down $485 million from fourth quarter 2008.

Now if you will turn to slide six, we will do a more detailed review of revenue. While Xerox remains the prominent player in our industry with number one revenue share, we did see weakness across the board in Q1 especially in developing markets. For some perspective, our developing markets revenue was up 17% in Q1 2008 largely driven by the regions that today are facing intense economic pressure. Developing markets' revenue declined 33% this first quarter.

As I mentioned, the impact of our business can be seen in lower install activity and supply sales. At the same time we are very pleased with our install base, what we call machines in the field or MIF. MIF is holding steady. Maintaining MIF is an important indicator of how we will succeed as the economy improves and I am assured by this healthy sign.

Equally important is the continued growth in our iGen business. Demand for iGen 4 remains strong as the commercial print industry invests in digital. It's the fastest growing market segment. Xerox's iGen systems are the industry standard, so even in this tough economy customers who are ready to invest in digital are doing so with Xerox. In fact, we recently installed eight iGen 4 presses with [Bown and Company], a global marketing services company that depends on iGen to print enrollment kits, 401(k) statements, and personalized direct mail.

We have also expanded distribution knowing the value of reaching more customers through more channels. During the quarter our global imaging subsidiary closed on the acquisition of ComDoc, one of our competitors largest US distributors. The deal gives us access to 14,000 new customers.

Our corporate clients are more open than ever to outsourcing and other document services. Earlier this month we announced a five-year contract to manage Procter & Gamble's worldwide print operations, helping them reduce operational costs by 20% to 25%.

Recognizing that this value proposition is attractive to smaller businesses as well, we have just launched managed print services for the channel arming our channel partners with the tools they need to help SMBs cut their document costs by up to 30%.

I mentioned earlier that we will be making noise in the marketplace in Q2 with product launches, expanding what is already the industry's broadest portfolio of document technology. Choice is important to our customers and so is price. Our launches bring the best of both, more options that best meet their businesses unique needs at more competitive prices.

We are managing the business with a clear view on controlling costs and generating cash to help offset the economy-driven revenue issues, while ensuring that Xerox is in an advantaged position as the economy improves. Now I would like to turn it over to Larry for a deeper dive on our financials and then I will be returning to discuss Q2 expectations. Larry?

Thank you, Anne, and good morning. On March 20 after reviewing our January and February results we updated our first-quarter guidance to $0.03 to $0.05 of EPS. We are now reporting $0.05, including a $0.02 Fuji Xerox restructuring charge. Our results were significantly impacted by the weak worldwide economic environment compounded by negative currency exchange rate effects.

Our competitiveness and win rates continue to be strong, but overall delays in decisions by our customers and inventory management by our partners have lowered demand. As we go through my slides I believe the best insight I can give you is looking forward to where our actions will lead to improved results sequentially. Next slide.

We continue to aggressively drive for revenue in all parts of our business while recognizing the economic realities we face. Although we all know that year-over-year comparisons will be challenging, going forward we expect sequential growth which will add positively to our results. Gross profit margin was 38.9% and represents good performance when considering lower volumes and the impact of the strengthening yen. Through cost and price adjustments we expect margin to be stable going forward as restructuring savings as well as non-restructuring cost actions we announced in March deliver.

R,D&E and SAG expenses, excluding bad debts, declined significantly; $178 million including $69 million positive impact of currency. Going forward year-over-year improvements will continue. Although bad debt expense increased $41 million, they were consistent with fourth-quarter levels and as a percent of receivables declined slightly at approximately 0.75%. Going forward we are assuming it stays at this level.

Operating income was 5% of revenue and will improve going forward as we deliver additional revenue and continue to reduce costs and expenses. Other net is primarily composed of interest and exchange losses, and finally the economic effect of our equity partner, Fuji Xerox, resulted in a $38 million lower year-over-year performance. This includes $22 million of restructuring. Going forward we intend to build on these results to ensure that each quarter has a cost-base that will enhance the flow through of increased revenue short and long term. Next slide.

Cash flow from operations is relatively consistent with last year's first-quarter. Lower net income in first quarter 2008 was offset by working capital improvements and driven by accounts receivable. I want to emphasize the outstanding cash generation capability of Xerox, which is driven by our annuity revenue stream. Even in difficult economic times we will generate significant cash flow and we will reduce our debt by over $1 billion in 2009.

Our full year is on track to deliver $1.3 billion cash from operations with over $300 million in second quarter. CapEx for the quarter was $65 million and we invested $145 million in the acquisition of ComDoc, now a global imaging systems company. We reduced our debt by almost $500 million in the quarter and ended with a cash balance of about $550 million. Cash generation has been and will continue to be a key priority. Next slide.

Many messages to cover on this slide; top left, debt maturities. Our cash flow from ops has in the past and will in the future exceed our annual debt repayment requirements. $900 million payment in 2009 is already behind us. In addition, with a $2 billion credit facility, access to capital markets, and a proven cash generation model we are very comfortable with our position even in challenging times.

Top right, receivables. Although bad debts increased in this economic environment, they remain a relatively small percentage of our receivables and are consistent with fourth quarter. We expect this trend to continue going forward this year.

Currency; there are two kinds. Translation, in non-US countries P&L converted to US dollars. For example, this quarter the US dollar to euro is 13% stronger year-over-year, a huge change that resulted in six points of negative impact to revenue. If it stays there, we will have a similar effect in second quarter.

Second, transaction currency is the conversion of costs from shipping country's currency to the local country's currency where the product is sold. For example, yen converted to dollars and euros.

As you can see from the slide, we have had significant strengthening of the yen since first quarter 2008 of 23% against the euro and 11% against the dollar. Also since fourth quarter the dollar has strengthened against the yen and the euro, and the euro has strengthened against the yen. Still weak compared to last year, but improved from the fourth quarter. Our actions to mitigate this continue to include price management, hedging, sourcing, and currency cost sharing with Fuji Xerox.

Now let's spend a minute on 2009 capital structure. First, we will deliver approximately $1.3 billion of cash flow from operations. I have already talked about the proven cash generation capability of our model. Second, cash usage going forward this year will provide about $300 million for CapEx and $150 million of dividend payments, as well as paying down the $600 million remaining debt due in 2009. We expect to reduce debt by over $1 billion for the year.

Third, we have the benefit of the $2 billion credit facility through 2012; $749 million drawn in first quarter, which will decrease in second quarter. Two points to ensure flexibility. We have amended our credit facility leverage covenant to ensure head room and as capital markets have improved we will consider accessing them. All this done in the context of being conservative, not required, but prudent in these uncertain times. Next slide.

The last topic I would like to cover before turning it over to Anne is our first-quarter post-sale revenue dynamics. Although impacted by the economy, post-sale had held up relatively well with a 7.6% constant currency decline. Almost 70% of the decline, 5.2 points of the 7.6, was driven by paper and supplies. Both of these revenue streams were impacted significantly by tight cash and inventory management by our distributors.

Developing markets results were a key driver as they are primarily a two-tier model. We are seeing less of an impact on usage levels on our equipment which affects outsourcing, service, and rental. Only $64 million lower on a base of $1.9 billion, or two points. This usage decline resulted in a 3% constant currency decrease in annuity from global services.

Going forward we expect the revenue streams to grow sequentially. Our machines in the field continue to grow 27% for color and 3% in total digital. This is another positive sign going forward as our install base is large and growing.

Although pages were down, color pages grew 16% and again on a sequential basis we should see improvement.

Finally, as mentioned in earlier slides, developing markets with its two-tiered distribution has been disproportionately impacted by the economic slowdown resulting in a 24% decrease in post-sale revenue. Their performance is magnified by currency changes in those geographies for which we do not adjust, but which cost us two percentage points on a total post-sale revenue.

Bottom line, we remain focused on the fundamentals of installing machines which generate pages and selling services that help solve customer problems and lower their costs. We believe that this will result in a return to growth in post-sale once economic conditions improve and return to a more normal state.

To wrap up, we are confident in our ability to generate cash from operations, manage our costs and expenses effectively, strengthening our business model and our competitive position in the marketplace. Thank you and now back to Anne.

Thanks, Larry. So to summarize today's review, here is our roadmap to get us through this recession and positioned well as the economy recovers. We will capture $550 million in savings this year from our 2008 restructuring actions and the additional cost reduction initiatives we began implementing in quarter one. Working capital improvements and the flow through from these cost initiatives will drive operating cash flow of about $1.3 billion this year.

We will continue to broaden our industry-leading portfolio, providing our customers with a relevant value proposition of reducing their costs through advanced technology and document services. We will bring the Xerox brand to more businesses of any size through our expanded channels of distribution.

We are being conservative in our expectations for the balance of the year, assuming neither further economic declines nor improvements. With that we are setting second-quarter guidance at $0.10 to $0.12 and we expect full-year 2009 earnings to be in the range of $0.50 to $0.55.

So thank you all for your time. Now Larry, Ursula, and I would be happy to take your questions.

(Operator Instructions) Shannon Cross, Cross Research.

Hi, good morning. Anne, could you talk a little bit more about linearity during the quarter? It was obviously worse than you thought it would be in January, but how was March and how is April looking? Any thoughts you can give us on kind of where budgets are coming out from your customers? Just any color there would be helpful.

Okay. Well, we saw about an 18% revenue decline in the first two months and as you can see from the full quarter results that was pretty consistent throughout March. I think we saw what I would characterize as some modest, very modest improvement in post-sale driven by printer supplies, but not enough to certainly say we saw significant improvement.

You know, I do think that much of what we are seeing is consistent with the trends that we saw through the first quarter, continued delays in decision-making. As Larry mentioned, our revenue will improve in second quarter but that is kind of seasonally appropriate versus, I think, any kind of significant trend change.

So all-in-all I think we would characterize it as more of the same with certainly no worsening in March, but not enough of an improvement to kind of declare a trend to change.

Okay, great. And then how should we sort of think about the 4% year-over-year decline in digital pages? If you look at that versus, say, the 10% decline in supplies and obviously pressure on paper, how much of this do you think is a continued inventory contraction versus end-user demand? Obviously, people aren't printing as much but I am just trying to get a handle on -- at some point one would think this will sort of bottom out.

And I think that is why we wanted to give you some context around what is happening with the population of installed equipment versus the page piece of it. If you look at our post-sale, it was down 7.6 percentage points. Paper and mostly printer-based supplies were responsible for 5.2 points of that, which is 70% of the decline. So, clearly, the inventory management piece of this and really not, if you will, purchasing in what we would call normal purchasing patterns is causing the majority of the post-sale decline right now.

Having said that, if we look at it we would say the 4% page decline -- by the way, color is still growing at 16% so still good growth in color pages -- does represent what we would call business volume declines in the market place. So I think it would be fair to say that the kind of 3% level that we saw in the global services side is probably more reflective of the overall volume declines than the 7.6% we saw in total post-sale.

Okay, great. And then just a final question on the restructuring and cost savings, how should we think about the ability for the cost savings both the $300 million and the $250 million to flow through to the bottom line? I would assume pricing is out there and impacting, but maybe in a weak market people aren't -- I don't know -- maybe people are being crazy and particularly aggressive or maybe pricing doesn't matter as much if there is just no elasticity. But, again, how should we sort of think about the contribution, the bottom line, and how much you can actually retain of those savings?

I would not point at pricing as an issue. As a matter of fact, pricing moderated in Q1 versus Q4, so we do think that pricing is going to not be a major factor in this. Our bigger issue is currency swings and that is where some of the $550 million will get offset balance of year.

Obviously, if you look at our outlook we expect earnings to consistently improve, particularly in the second half and that is going to be because we see bottom-line impact from the cost flow throughs in the second half. But it will have some offset based upon what happens in currency. And if we look at the March 31 spot rates on currency, you look at that and say the first time we would see significant year-over-year improvement would be Q4.

Okay, great. Thank you.

Mark Moskowitz, JPMorgan.

Good morning and thank you. A couple of questions in terms of Shannon's comments around the pages, I am just kind of curious if you can give us any sense just qualitatively, and/or Ursula, in terms of the customers where you are seeing biggest page fall off. Is this because of the delayed purchasing versus maybe they have been some of the bigger job cutters? And if they are the ones that have been the bigger job cutters, doesn't that mean we have a few years here before this rights itself?

Well, I will start and say the delayed purchasing really isn't the factor on page declines, because one of the things that we wanted to emphasize is that the actual population continues to grow. The total digital population in the quarter grew by 3%. The color population grew by 27%.

So what this means is that we think some of our customers are holding on to technology for longer periods of time and that we are not seeing cancels offset that. So we are growing the population so the decrease in purchases shows in equipment sales, but clearly it's really not the biggest factor on page declines. We would look at it and say that the page declines really are subject more to the economic conditions of things like less advertising, less financial deals, less people in the workplace.

But that is why in many ways it's so important to keep a real good handle on what is happening with the population, because as the economy improves to some extent there is a natural population to absorb the page increases with business volume. So we would look at it and say it's much more a reflection on what is happening across the board in different sectors on business volumes.

I have nothing to add.

Okay. Then the fourth quarter it doesn't seem like Rico, Ikon had any really major impact on the market. Any impact you expect either on the March quarter when the market share data comes out or going forward in the June that could either benefit or hurt Xerox?

Rico continues to be an aggressive competitor in the market place. We haven't seen any significant impact up or down from Rico. They are an aggressive competitor, have been for a long time but no significant change in their patterns.

Okay. Then just lastly for Larry. I may have missed it but, Larry, what is kind of the view on your minimum cash term on the businesses? Is it still around $500 million-plus?

Yes.

Okay.

We have said $500 million for a long time.

Thank you.

Ben Reitzes, Barclays Capital.

Thanks. I have got two questions. Larry, your guidance implies $1 billion, I guess, in free cash flow or -- I am sorry, cash flow from operations in the second half. You have done that many times in the Company's history. Can you just talk about some of the puts and takes that gives you confidence that you can do it once again in the second half in particular? Because I am backing into you need about $1 billion in cash flow from ops in those third and fourth quarters combined.

Well, first of all, I wouldn't take credit for it. I think the Company did it actually. But second of all, I think what you said is true. I think for the seven years I have been here we have had that kind of cash production year after year after year after year. It's all centered around the second half with more of the earnings being in the second half and obviously more of the working capital in the second half.

So as I look at a cash flow forecast and I look at net income and I look at depreciation and amortization, which is added back, I look at provisions that are added back, I look at working capital improvements including AP, AR, and inventory, lower pension expense than last year -- the only real minus that comes out of our use of cash is restructuring that comes out, dollars.

And even that is lower than expected.

Yes.

Yes.

Even that is lower than -- not that you had expected, but that we had expected. So I look at those numbers and it makes me very comfortable in giving the forecast of $1.3 billion and very comfortable with $0.3 billion.

And you think you will get cash out of payables and inventory even in this economy?

I think, first of all, inventory is one where you can have significant improvement. It's one thing to be surprised by volumes going down. We are not surprised anymore so. We even had an improvement year-to-year in inventory in the first quarter and I think that is going to get better and better. So I think we will have very good improvement.

Secondly, accounts receivable. First of all, you are selling less and so you are going to have less accounts receivable. We have had significant improvement on collections in the quarter. We lowered DSO by two days so that is another area. And payables, I think everybody is paying slower so if we are able to collect faster and pay a little slower that will also help. I am not looking for some huge help from payables, but I think it probably could help in the long run.

All right. Switching subjects, on the supplies side you have a slide on the post-sale and you guys were talking about paper. That negative $109 million is the supplies hit year-over-year, right?

Yes.

And according to my math, if supplies -- every $100 million in supplies is about $0.05 to EPS or so. Maybe I am wrong, but I am putting a pretty high gross margin on it. What is going on with the supplies channel inventory right now? I mean, is there a chance that you get that $100 million back in any of the upcoming quarters with a snapback in supplies or is that a more gradual thing?

You are right, the $109 million is the decline in supplies and about 75% of that actually comes from what we would call printer-based supplies and A4, which is definitely all about more inventory management than it is aligned with page levels. This one we have been certainly anticipating the fact that that kind of inventory management would begin to let up a little bit.

We saw a slight bit of that in March, particularly in the US. But the biggest issues continues to be developing markets where the vast majority of what we sell is through two-tier distribution, and channel supplies there have been impacted dramatically.

So the answer is, yes, we do expect some of it back. Not all of it back, because there will be a piece of it that is associated with end-user volume that won't come back.

We also think -- we are not counting on inventories going back to historical levels either. We believe that, quite frankly, people are going to manage with less for some time to come. But having said that, yes, we think gradually we should see some comeback on inventory levels as they are going to be forced to catch up to some degree with end-user volumes over time.

And it feels like the worst of the hit is over?

Well, you know what, I would put it this way, Ben. I don't think we expect further negatives, if you will, but I think we are counting on right now more stability than improvement going forward.

I think it's also year-to-year you are going to have the same kind of declines. Sequentially, we should be better and maybe some of the year-to-year declines would go down a little bit but we are still very, very --

Yes. Thanks so much.

Richard Gardner, Citigroup.

Thank you. Good morning. I wanted to follow up on Ben's question. I am not sure if you are willing to do this, but just to phrase the question a different way. Was wondering if you would be willing to give us an indication of where you think supplies channel inventories are currently, both in the developed and developing markets and how that compares to, I guess, what you would consider normal for a normal purchasing environment. And then I have a follow-up.

You know what, it's tough to do, Rich. Only because I think the rules have changed as well. We know that certainly eight to 12 weeks would not have been -- that kind of is in the historical range. It's obviously well below that. We saw it go below six weeks and it's hard to tell where it is right now.

But the other thing is that there is volatility depending on region as well. We would say that the US went up a little bit, but it could come down. Europe and DMO were relatively flat and we didn't see much improvement. S I think if we had to categorize it we would say DMO is at an all-time low and clearly the one that is most impacted by lower inventory levels. And Europe and the US have been relatively stable at a lower rate by at least probably one-third over the past couple of quarters.

Okay. And, Anne, has DMO historically been higher in terms of weeks of inventory versus US and Europe? When you say that you expect levels to remain lower on a go-forward basis than they have been historically, is that just because DMO seems to be getting a little bit more frugal about managing the weeks of inventory or what makes you make that statement?

Well, it wasn't really just a DMO statement. I think -- by the way, DMO wasn't necessarily characteristically higher than other parts of the world. We were more impacted because the vast majority of what we sell there is kind of the low-end printers and A4 devices which get all of their supplies through kind of channel distribution versus the bundled arrangements that are more prevalent in the European and US markets.

I guess what I am suggesting is that we are not counting on a return to the past in any way. We do think there will be some permanent adjustments coming out of this that we are planning to manage to and make sure that we are not expecting inventories to all of the sudden bounce back to previous levels. So I think that is a true statement across the world, not necessarily just a DMO statement.

Okay. And then one follow-up for Larry. We have obviously seen favorable news in the yen so far in the quarter. You also talked last quarter about going back and renegotiating some of your supply agreements with Fuji Xerox and hoping to get a little bit of benefit there. So, Larry, could you help us out with how we should be thinking about gross margin going into the second quarter based on the renegotiations and the currency movements that we have seen?

I think number one, when you look at gross profit margin what we are saying and thinking here is that it will be stable throughout the year. So we think this 39% range is the right number. Within that we would be obviously managing the currency side, the price side, any kind of agreements we have with suppliers outside of Fuji Xerox.

But also we have an agreement with Fuji Xerox and within that agreement, like any agreement within an agreement, there is room for negotiations around it. We are constantly revisiting that where we try to limit the amount of exposure we have. It's a hard thing to put words around, but I can assure you that the negotiations around that have yielded and that we are doing everything on the cost side to maintain gross profit margin at a stable level.

Is there anything about your hedging strategy that would keep favorable changes in the yen from flowing through immediately, Larry? Or how quickly do those actually hit the cost of goods line? And then I will cede the floor. Thank you.

Well, because a lot of it goes into inventory in the first instance it takes a while, good or bad, to hit you, and it depends on how fast you sell it. Secondly, we never hedge -- if you hedge 100% you are really not hedging. So we hedge some percentages, so there is always taking something as an absolute number and then the rest of it you would either get the advantage or the disadvantage.

So for instance, we got a good portion of the good news that happened with the dollar to the yen because we weren't 100% hedged. We have a strategy of a certain percent that we do, and as we get closer to it we do more and we spend a lot of time on it actually. But we obviously would pass up some of it but get some of it.

All right. Thank you all.

Keith Bachman, Bank of Montreal.

Hi, two questions if I could. Anne, first for you. Do you get the sense that the actual machines in the field have declined at all, either through idling or just general business disruptions?

No, I mean the answer is they haven't declined. The way we kind of measure our MIF -- and by the way, I should at this point point out that we track basically most -- it's a Europe and North America kind of number because it's impossible to kind of track MIF in other parts of the world, but I think it's largely indicative.

But MIF is clearly up. It's up a little bit less than it would have been in previous quarters, but close enough to certainly have us feel comfortable. Part of our definition of MIF is active MIF in terms of service contracts and that kind of thing. So these would be actively either purchasing supplies or service, so these are not idle machines in the field. So we are comfortable that MIF is growing and clearly is there active in customer environments.

Okay, great. Thank you. And then my follow-up is for Ursula. There was a mention of a new competitive dynamic around the solid ink opportunities. I just wanted to hear a little bit more about what is different as we look at the next six months for the solid ink side versus in practice what has happened over, say, the last 12 months? And that is it for me. Thank you.

The next six months and actually in the second quarter you will see the launch of a breakthrough offering for everyday color in the office. The discussion that we are having with our customers is about changing the total cost of ownership for a color implementation in their environment. It's environmentally responsible, productive, reliable, easy to use, and for high color users it is a value proposition that is unmatched today. It's also a benefit to Xerox Corporation.

It's out in customer test sites today. Industry analysts have seen it -- they have actually crawled all over it -- and the product positioning and price per page is very attractive. So you will see that fundamental change in the second quarter.

We are launching it in a measured way, so the impact on the financials will be seen in 2010 more than in 2009 based a little bit on the economy, based on the fact that we want to make sure that we are positioning it correctly. So a fundamental change.

Okay, great. Thank you.

Chris Whitmore, Deutsche Bank.

Thanks very much. First question was around existing contracts, are you seeing any pressure from customers to rescope or downsize your service or outsourcing engagements?

On existing contracts?

Yes.

Generally speaking, no. Our contracts are fairly rigorous in terms of the way they are constructed. They are not applicable for mid-contract kinds of negotiations. I think the place we see it, obviously, is when we are renegotiating contracts at the end of their term where clearly -- by the way, we flow through benefits because it's usually a technology cycle shift.

So we are able to give the customer the benefit of lower prices but maintain margins. So that is generally a strategy to ensure that we do it, and in some cases we will renegotiate earlier, as well as give the customer the benefit on an earlier negotiation. But it would be unusual for us in a mid-contract kind of scenario to renegotiate price.

And on the topic of pricing, I understand Q1 pricing moderated a little bit. But how do you think about your pricing strategy going forward in terms of how do you balance your goal to grow MIF while continuing to hit your gross margin targets?

Well, we know what range we want to be in, in terms of pricing discounts. And we have said that that is a 5% to 10% range. That is what we plan on. And clearly, this quarter it was closer to the 5% than the 10%, and so it did moderate. And we will generally use pricing to take advantage of market share opportunities, particularly in color, because whatever discounting we do to place a color technology, the return on post sale is more than attractive enough to offset that.

So generally speaking, the price discounts will be invested in color, incentives to drive those placements so that we can take advantage of post sale.

A couple quick ones for Larry. Larry, what is your outlook for absolute SAG dollars embedded in the guidance? And within that, what is the bad debt level, the bad debt expense level?

Bad debt we assume will be at the same relationship that we saw in the fourth quarter and in the first quarter. So the absolute dollar amounts will be similar. That is the first point.

SAG levels, at least for the next two quarters, should be bigger dollar reductions year-to-year because of currency, and also because we are going to capture some of the cost savings more as we go forward. Fourth quarter we'll get more cost savings, but then the currency kind of flattens out, so the absolute dollars will I think moderate from the standpoint of a year-to-year basis.

Importantly, I think Larry's focus on year-to-year is important here, because there are seasonal shifts in SAG. For example, a Q2 SAG because of seasonal revenue will be higher, although the year-to-year flow through on cost reductions can be significant.

Last one. Larry, I was a little surprised to see you using cash for acquisitions and not buying back stock if you do have excess cash, particularly in light of the debt payments coming due. How do you think about acquisitions versus stock buyback? That is it. Thanks.

I think in this environment, we wouldn't consider share buyback. So that is the first point. The second point, I think from an acquisition standpoint, this acquisition that Global did was just one that was so good for Xerox, Xerox future, and Xerox shareholders from the standpoint of buying the largest Rico dealership accretive seconds after we bought it and producing that it was really an easy decision to go forward with that.

I think for the most part the kinds of acquisitions you would see in this environment are going to be smaller ones associated with Global would be the basic kinds of acquisitions we would do.

Shannon Cross.

Thank you. Can you talk a little bit about the competitive landscape? There has obviously been enormous change, or maybe enormous is too big of a word, but obviously Ikon, Rico, what is going on with Kodak in terms of some of their movements away to some extent from that business, and then Canon and HP. If you can just sort of talk about what you are seeing from a competitive standpoint that would be great.

I think that we would probably frame two significant competitors as Ikon/Rico and HP in terms of who we see most frequently. Obviously, the Ikon/Rico more in the transaction technology business, HP more in the office services side, but they are clearly out there and have a more aggressive strategy.

I think it would be fair to say we see less of all of the other competitors and do not often -- I think our win rate, if you will, against the other competitors has been quite positive. We feel very comfortable that we are well-positioned to compete.

We are very pleased, I would also say, on the services side. Our biggest problem is the delayed decisions, but our win rate there against competition has been very strong evidenced by the P&G deal that we announced. And in the high-end, Ursula, I think it's fair to say that the iGen performance is indicative of what we are seeing on the high-end from competitors as well.

Right. On the high-end it's production color, particularly the iGen 4 product. We are pleased with the performance as Anne said. We never use the word 'very,' but if we did I would say we were very pleased. We are pleased with iGen 4. It continues to be a standard for the industry. It is a great upgrade pack for customers who have the iGen 3. It also opens up the aperture for applications to come in on this new business of printing, so photo applications, packaging applications. Just applications more and more to help the graphic art industry be more profitable.

So production, color are strong. I will say Kodak -- Anne said it, but I just want to emphasize it -- Kodak we don't really see a whole lot of in the market place. In the past you saw that we saw them in the high-end color segment. They are essentially not there. If we run into them, it literally is one out of every 10 times. It's very, very low.

I will say as well we are taking share in continuous feed black and white and color, large chunks of share. And that was where their strong point was. In the production black and white space where they had offerings as well, we don't see them that much.

The big competitors are Ikon/Rico on the device side and HP on the services side. We are positioned from a technology base and distribution capacity against Ikon/Rico well. And HP, as Anne said, we compete very effectively on deals. What we are doing now is trying to get people to make the decision to make the deal, to get the deals, and then we feel very, very comfortable that they will decide Xerox more than they will decide HP.

One question with regard to leasing. Can you give us some ideas -- you have a captive leasing business, which has been beneficial, albeit it has debt associated with it. But I am just curious as to what some of the other competitors are sort of seeing out there? Are you hearing from customers that it's harder to get access to capital and do you think you are winning deals because you can provide it? Just any clarity you can give there would be great. Thanks.

I actually think you are right, Shannon. I think one of the things, and it's an optics perspective, is that our leasing business looks like the general debt. And obviously it's an advantage to have right now and I think our penetration is getting higher as it plays well in tough economic times. So we feel good about it.

The important thing about our financing business is that it is a Western Europe and North American financing business. So the risk, the huge risk would obviously be in emerging markets now and we do not have any financing debt in the emerging markets. But we do believe it is an advantage and our customers see it as an advantage. Although I would say we are being, I think, conservative and appropriate with our financing business. Yu will not see us doing things like 0% leasing or very aggressive programs. We don't think that is a good thing to do at this point in time, but our leasing package is clearly an advantage to our clients.

Thank you.

Richard Gardner.

Thanks a lot for taking the follow-up. I have two quickies. One is if you could offer a little bit more color on the weakness in the DMO markets in terms of countries and products? I think you said it was -- you have given some detail there but any more color would be helpful. Then also on iGen 4 just a sense of whether the strong placement growth that you had in iGen 4 in the quarter was due to upgrades from iGen 3 or new placements? Thank you.

Okay. On DMO on kind of countries and products, as I said on the product side, because the predominant business we do is printers and A4 devices, obviously that is where we saw the biggest decline. One of the things that you will see from our activity is that in segments two through five, which is kind of the higher end of the black and white space, we grew 9%. In segment one, which is the printer, low-end, primarily DMO space, 85% reduction in installs. So the disproportionate impact right now in the DMO space is clearly all about low-end products, which is good news in terms of profit exposure, because those do not have as big an impact.

From a geographical perspective, I would say the biggest issues we have right now are Russia and Eurasia. And that is because of the lack of availability of credit, which has really shut down a large portion of their business. Then the currency impacts as well as the economic impacts in Latin America as well in that order. So I think that is fair.

I think in other areas, like India, we are seeing actually less impact than we are in the Eurasia and Latin America territories.

On iGen 4, both our populations -- our machines in the field and our installs grew in iGen 4. So clearly there are some upgrades or pass forwards from iGen 3 to iGen 4 but we have a significant amount of new placements as well. So MIF grew and installs grew.

Well, thank you all very much for joining us this morning. We appreciate your interest. Have a great day.

This concludes today's presentation. You may now disconnect. Good day.