全錄公司 (XRX) 2010 Q4 法說會逐字稿

Good morning and welcome to the Xerox Corporation fourth-quarter 2010 earnings release conference call posted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Larry Zimmerman, Vice Chairman 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 expressed 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 Ms. Burns. Ms. Burns, you may begin.

Good morning and thanks for joining us today. Before we review our results, let me take a moment to comment on another set of news of the day, Larry Zimmerman's retirement and the appointment of Luca Maestri as our new CFO.

To be candid, this is a bittersweet moment for me and for many of us at Xerox. It is not easy thinking of Xerox without Larry and it is impossible to thank him enough for all he has done. In his nine years as our Chief Financial Officer, he has made contributions that far exceed the role that any CFO plays. He is truly respected not only for his exceptional financial management, but also as a trusted business partner.

Larry retires at the top of his game after helping us create a financially strong and growing global enterprise with a sustainable and successful future. In building the solid foundation, he has paved the way for his successor. For that, we are grateful and we are fortunate.

Next month, Larry hands the CFO role to Luca Maestri. Luca brings to Xerox two decades of international experience and a successful track record of leading large finance operations. Through his most recent positions as CFO of Nokia Siemens Networks and his 20 years in financial and operational leadership roles with General Motors, Luca's experience extends across several geographies and sales channels and his expertise reflects the balance between disciplined financial management and business expansion. They are skills that complement the strength of our leadership team and the experience our Company can benefit from in these transformative times.

So while Larry will stay with us as Vice Chairman through April 1 and he knows I will be counting on his counsel during that time, this is his last official earnings release. Luca is here with us today to observe, but he doesn't officially join the Company until February 16. And while the CFO is changing, certain things always remain the same. First and foremost, delivering value for our shareholders through consistent revenue growth, disciplined cost controls and strong operating cash. We did just that in Q4, so let's move on to our results. You will hear from Larry in a bit to cover our financials and then Larry and I will both take your questions. We will get started on slide 3.

We closed the year strong with steady revenue growth and excellent cash generation, reflecting the strength of our business model and the benefits of our expanded Technology and Service offering. For this quarter, we are still reporting not only GAAP earnings, but also adjusted EPS. We are also reporting on a pro forma basis, which assumes that ACS was in our 2009 results.

Our fourth-quarter pro forma revenue was up 2%, or 3% in constant currency. We delivered Q4 adjusted EPS of $0.29, on track with our guidance and bringing us to $0.94 for the full year. On a GAAP basis, earnings were $0.12 per share. This includes restructuring and intangibles. We took a restructuring charge of $273 million in the quarter, a bit more than we initially planned. And as we shared with you last quarter, the restructuring gives us more flexibility in our business so we can continue improving operating margins while maintaining investments to drive growth. So where there was restructuring opportunity in Q4, we pursued it.

Cash from operations was $1.3 billion, contributing to a very strong $2.7 billion in full-year operating cash and free cash flow of $2.2 billion. With that, we also reduced debt by $1.9 billion from the time of the ACS acquisition last February. Cost and expense management continues to be an operational strength of ours, leading to a Q4 operating margin of 10.4%, a year-over-year improvement of 1 point. So a good quarter and a solid way to end the year and let's turn to slide 4.

As you see here, our revenue remains almost equally split between Technology and Services. This gives us a steady mix of annuity that comes from both segments. It is always worth repeating that, in Technology, we generate recurring revenue from service and supply and multiyear outsourcing contracts are the source of strong annuity from our Services business. Total revenue of nearly $6 billion was up 42% and on a pro forma basis, it was up 3% in constant currency. Annuity revenue on a pro forma basis was up 3%. Equipment sales were up 6%, a growth rate that is more in line with normalized levels considering that the economy began slowly improving in the fourth quarter of last year.

For the full year, we grew equipment sales 10% in constant currency, reflecting strong demand for our new products and expanded global coverage, both of which positioned us extraordinarily well as the economy improved and businesses started to invest back in Technology.

During the year, we launched 21 products with an emphasis on broadening our color portfolio for both production and office markets. As a result, we made more progress in growing color pages an important contributor to our annuity stream. Slide 5 shows some of the key metrics in this area where we saw solid sequential year-over-year progress.

In our Technology business, we monitor page growth and machines in the field or MIF. More MIF leads to more pages. More pages generate more revenue from supplies and technical service, both of which flow through to our annuity stream. For Q4, we saw continued growth in MIF supported by a 6% increase in installed Xerox equipment. And through our innovation and leadership in color printing, we continue to drive an increase in share in MIF and in pages. Total revenue grew 6% in the quarter, 8% for the full year.

Big contributors to this growth rate are the Xerox Color 800 and 1000 series and the ColorQube family of multifunctional systems, which uses our proprietary Solid Ink technology. With Solid Ink, we are able to significantly lower the cost of color printing, making it a more viable option for businesses of all sizes. That is why we are growing our line of ColorQube systems, scaling our Solid Ink investments to make color printing as affordable as black and white.

And we did see a pickup in usage trends during Q4 leading improvements in digital pages and color page growth. As color continues to replace black-and-white printing in office and production environments, color pages grew 11% on a year-over-year basis. We saw this as a good sign, helping to offset declines in black-and-white pages.

We've stated before that more transactional pages are logically moving off-line like bill statements and more of the marketing-focused pages are moving to color. So our strategy remains the same. We are focusing our investments on creating more color pages through affordable office color printing and more advanced digital production printing.

In the Services side of our business, signings were $3.6 billion. On a trailing 12 month basis, we grew signings 13% and it represents some very large wins from Louisiana where we were awarded a contract to upgrade and significantly expand the state's customer service center for their Department of Children and Family Services to Zurich where we won a multimillion dollar deal to convert the city's bus fares into electronic payment systems managed by ACS.

Our growth in Services was driven by an 11% increase in revenue from our BPO offering and 5% revenue growth from IT outsourcing. Solid results that reflect our competitively advantaged portfolio, as well as the progress that we are making on cross-selling with ACS and expanding our relationships with global accounts. Our efforts in this area led to a 23% increase in our total pipeline. A strong opportunity that we are aggressively pursuing for 2011 signings.

In 2010, our total revenue was $21.6 billion. More than 80% of this is in annuity revenue. By combining our strength in Services and the sale of more Xerox technology, we are fueling this annuity stream, which positions us well for more growth this year and for the long term. And it's a good place for me to turn it over to Larry.

Thank you, Ursula and good morning. As Ursula commented, we are pleased with fourth-quarter results, as well as total 2010. We exceeded the commitments we made in October of 2009 at the time of the ACS acquisition announcement. Our 2011 guidance will also exceed those commitments. This was a year of returning to revenue growth, expanding operating margin and earnings, coupled with really good balance sheet performance. We strengthened our hands significantly with the ACS acquisition, which is performing at a very high level.

We also strengthened our business model with significant restructuring to align our business for the future. We believe we can build on these achievements going forward and deliver significant shareholder returns.

Now let's go to slide 6, our Technology segment. Technology revenue was flat and up 1% in constant currency and represents $2.8 billion, or 48% of our business with a segment margin of 11.7%. Overall, good performance with good installs and equipment growth at more sustainable levels given a tougher prior-year compare. Post-sale metrics improved with sequential page growth beyond normal seasonal levels, a good sign for future quarters.

Supplies revenue was flat year-over-year at constant currency as fourth-quarter 2009 revenue benefited from improving supplies inventory, strong operating margin despite currency and mix impacting gross margin. Entry and mid-range and high-end all saw a continued strong growth in color fueled by our strong color portfolio. In 2010, we launched a number of key products, including, on the high end, the Color Press 800/1000, which continued to perform extremely well, driving production color demand in an otherwise pressured graphic arts environment.

In mid-range, we recently launched multiple products that have leadership quality, productivity and price value. In 2011, we will continue to enhance our mid-range color portfolio. And in entry, we just launched the ColorQube 8570/8870, which refreshes our popular Solid Ink desktop platform and we have more planned for Solid Ink in 2011 as we build on this proprietary technology.

With revenue growth of 3% at constant currency for the year and a segment margin over 10%, the Technology segment showed solid performance in 2010, which we expect will continue into 2011. Next slide.

The Services segment is comprised of three lines of business -- business process outsourcing, document outsourcing and information technology outsourcing. Revenue mix for the quarter was about 54% business process outsourcing, 33% document outsourcing and 13% IT outsourcing. On a pro forma basis, total revenue improved and grew 6% at constant currency, driven by BPO, which was up 11% and ITO, which was up 5%.

BPO growth was solid across all areas and reflected good new business ramp, as well as increased volumes in the areas such as healthcare payer and customer care. ITO growth of 5% was driven by new business. We expect continued positive contributions from ITO given new contract ramping and a strong pipeline.

Document outsourcing was flat at constant currency and benefited from underlying improvement in page volumes and exhibited strong signings of $1 billion. Operating margin of 12% is up half a point and reflects higher revenues, effective portfolio management, as well as savings from the restructuring and synergies.

Indicators for future revenues remain positive. New business signings were at their second-highest level going back to 2007 and grew approximately 10% year-over-year on a trailing 12 month basis. Total signings of $3.6 billion grew 13% driven by BPO and document outsourcing. On a year-over-year basis, we grew our total Services pipeline by 23%, including synergies. With a synergy pipeline of over $5 billion, we are pleased with our ability to generate new opportunities for our Services offerings. We saw positive results in both Technology and Services segments. Slide 8.

Revenue growth was 3% at constant currency for the fourth quarter and full year, good growth or improvement in all parts of our business. Full-year gross profit margin of 34.4% is above the midpoint of our 33% to 35% business model range. This was accomplished while absorbing the negative impact on costs caused by the strengthening of the Japanese yen to the dollar and yen, about a $45 million headwind in the fourth quarter and $60 million in the full year. Using current rates for 2011, we would expect about a $50 million negative effect, which is more weighted towards the first half.

With approximately half of our business in Services, our focus is on operating margin expansion. Our operating income on a pro forma basis grew $69 million in Q4 and $271 million for the year. This drove a full-year margin of 9.6%, which is a 1 point improvement over 2009. We finished the year with adjusted EPS in the fourth quarter of $0.29, high end of our range and $0.94 for this year.

We continue to differentiate between GAAP earnings and adjusted earnings for guidance and for actuals reporting in order to give you transparency into the fundamentals of the business. As a reminder, 2010 earnings on an adjusted basis exclude amortization of intangibles, restructuring and asset impairment costs, acquisition-related costs, including direct transaction costs and specifically defined integration costs and any discrete unusual items.

We had $273 million of restructuring in Q4, $83 million above our third-quarter estimate. Restructuring supports exiting certain businesses and accelerating the shifts in our business model to more indirect channels, optimizing the infrastructure and services, and centralizing support functions, achievement of cost synergies such as continued outsourcing through ACS of some back-office functions.

The restructuring from 2010 will save us approximately $270 million in 2011 and more than offsets currency and cross headwinds going forward, as well as investments in the business. In 2011, we do not anticipate any further significant restructuring and plan for adjusted earnings to exclude only amortization of intangibles and any discrete unusual items. Next slide.

We had a strong cash flow from operations in Q4 of $1.3 billion and $2.7 billion for full year, about $100 million above our $2.6 billion guidance. It was driven by earnings and very good working capital performance, $685 million fourth quarter and $348 million full year source of cash. CapEx was $519 million full year resulting in $2.2 billion free cash flow, $200 million above our $2 billion guidance.

Debt decreased $889 million in the fourth quarter and $1.9 billion since the ACS acquisition last February. This performance positions us well to deliver $1 billion to $1.2 billion of available cash in the second half of 2011.

One last point. With the strong activity growth this year, our finance receivables and equipment on operating lease grew and were a $235 million use of cash in the fourth quarter and a $159 million use for the full year. This is important as it is not an actual use of cash because we leveraged these assets 7 to 1. So in an environment of financial asset growth for cash flow, cash from ops before financial assets is more relevant.

In 2011, we expect the financial assets to grow, driven by equipment activity and revenue growth, as well as from an expansion of leasing activities to support Global Imaging. As a result, we will focus on core cash flow and core cash flow less CapEx is our free cash flow measurement. Next slide.

Slide 10 expands on our guidance for 2011. We remain on track to reduce debt by midyear to $8 billion, which will put us at a steady-state leverage ratio of approximately 2.3 on total debt and 0.6 on core. Achieving this leverage will allow us to have $1 billion to $1.2 billion of available cash in 2011 and $2 billion by 2012 to return to shareholders. We remain committed to using over 70% of this towards share repurchase beginning in the second half of 2011. To achieve our $1 billion to $1.2 billion of available cash in 2011, we will need to generate $2.8 billion of core cash flow and $2.2 billion of free core cash flow.

Within cash flow, there are a few points I'd like to make relative to the individual lines. Earnings are expected to grow by 15% and drive cash flow. Pension funding will be higher as we account for a lower discount rate and a requirement to move to quarterly contributions. We estimate contributions of approximately $500 million in 2011. Looking beyond 2011, we expect contributions to reduce approximately to $350 million in 2012 and then below $300 million going forward.

Lastly, we are planning for working capital to be a use of cash as we continue to see revenue growth. The positive results on revenue in 2011 for both Technology and Services positions us to achieve 3% to 5% revenue growth in 2011. We are also confident that our actions on cost coupled with our revenue growth can drive a point improvement in operating margin. Our EPS guidance is $1.05 to $1.10.

So in summary, I can retire with confidence in the future of Xerox. First, I have utmost respect for Ursula and the senior management team. Second, we have an incredibly strong strategy that will sustain Xerox for the long term. Third, we have an advantaged market position in Technology and Services. And finally, we benefit from a business model that will deliver earnings expansion and cash generation.

So it is the right time for me to retire and it is the right time for Luca to step in, bringing to Xerox extensive global experience and a complementary set of operation and financial skills. My thanks to the investment community for your interest and investment in Xerox. I am confident you will continue to be rewarded. And now back to Ursula.

So thank you, Larry. We started 2010 with the acquisition of Affiliated Computer Services. It transformed our Company into the world's leading enterprise for business process and document management and we closed the year with results that reflect the benefits of our expanded services and competitive technology, as well as the strength of our business model.

In 2010, we grew adjusted earnings, increased revenue, improved operating margin and generated $2.7 billion in operating cash. We delivered on our commitment across the board and by doing so, we generated greater value for shareholders. We have momentum. I have every expectation that we will build on it in 2011. We start the new year as one company with our total Xerox performance reflecting the combined strengths of our Technology and Services businesses.

For our customers, that means relying on one reliable source for the back-office support that gives them more freedom to focus on their core business, their real business. Our 2011 priorities keep us on track to expand earnings and continue building shareholder value. We won't compromise our leadership position in document technology. Through investments in innovation and expanded distribution, we will increase install activity and equipment sales with a focus on driving more color pages that help boost our annuity stream.

We will continue to grow our Services business by leveraging our brand, our global scale, innovation and world-class delivery platforms to win multimillion dollar deals for business process, IT and document outsourcing. We remain diligent in our cost and expense management, capturing key cost synergies from the acquisition and driving efficiencies through the enterprise.

Generating significant cash flow remains paramount to how we run our business. This year, we expect $1 billion to $1.2 billion in available cash and while reducing debt, delivering dividends and buying back stock. I am confident we have the right strategy, the competitive strength, the skilled leadership team and a disciplined focus on execution to build on our progress in 2010 and I expect a strong start to 2011.

So for the first quarter, our expectations are for adjusted earnings of $0.20 to $0.22 per share and full-year adjusted EPS of $1.05 to $1.10. With that, I thank you again for joining us today and let's open it up to questions for Larry and me.

(Operator Instructions). Ben Reitzes, Barclays Capital.

Yes, good morning. Larry, obviously congrats on your next endeavor and we will miss you. Two main questions today, and I am going to address this to Ursula, but obviously Larry and maybe even Luca can chime in. But the number one thing is, and you mentioned it is, with Larry leaving, Larry obviously shepherded a major buyback program six, seven years ago that was very good to shareholders for a few years. And we know how Larry feels about buybacks and I think there is some concerns that, with the change, whether there is any change to that philosophy on returning cash to shareholders. So Ursula, now that it is going to be yours and Luca's, if you can talk about timing of the buyback and pace and your philosophy and whether anything can change with Larry not being there, that would be appreciated.

So thanks, Ben, for the question. I think it is an appropriate question to start the session with. Larry's commitment to share buyback is Xerox's commitment to share buyback and mine as well. So while Larry is phenomenal, we will all miss him and love him, the good news is that he acts and speaks on behalf of our Company, on behalf of the strategy that the Corporation has put in place that I lead and that I am committed to. So he wasn't out on a limb all by himself.

We will continue on the strategy that we laid out -- Services and Technology generating cash, using that cash to buy back shares, doing that as in a timing that we had we have always spoken about, which is in the middle of this year. None of that has changed. None of that has deviated at all -- delivering the results, buying back the shares, paying back our debt, buying back the shares and using cash for acquisitions as well.

So net net, change is always hard. This one is particularly hard, but you should not be concerned and our shareholders should not be concerned about a change in strategy because Larry is leaving.

Right. And that is -- your 70% or 75% of available cash was going to be for buyback and that's still (inaudible) as well.

That is correct. That's right. 70% to 75% of available cash for share buyback starting in the second half of 2011 and as I said, that is the mantra and the mark that we will be on.

Okay. Then I would say the other one is that, with the quarter, we have gone through all the numbers with the revenues in line with the Street and the EPS. In terms of the guidance, there is obviously -- you had never given quarterly guidance before for 2011, but obviously you know it is $0.01 or $0.02 below the Street. Is it just because of the timing of these currency hits? And in terms of smoothing it out, how do you see like the earnings playing out by quarter for the year? Is there nothing to read into with the 1Q guide? Is it just a progression of gross margin throughout the year? And if you can just talk about the distribution of earnings throughout the year, that would be great. Thanks.

I will let Larry start on the answer on that and then I will jump in.

Yes, I think, first of all, I think the consensus on the Street is $0.22, so we are at $0.20 to $0.22. And I think the first quarter is consistent with our making the whole year -- our guidance for the full year. I think it just recognizes the headwind of transaction currency. Transaction currency, if you look at it quarter-by-quarter, it has a big effect and we are saying that it is about -- if the rates stay where they are now, it is about a $50 million effect in 2011. And a good portion of that, more than half we say, so I don't know, $30 million for argument sake here is what is going to hit you in the first quarter.

The restructuring that we did in the fourth quarter to try to take -- to offset any kind of headwinds that we have obviously doesn't have that kind of magnitude effect in the first quarter, so you have a little bit of mismatch there and I think that does put a little pressure on gross profit margin in the first quarter. However, it really doesn't take away from the full-year performance because we have positioned our business model here to deliver.

So I think it is consistent. I think it is right on. There is no hidden messages there and I think we will definitely hit or exceed our guidance.

I just want -- let me just kind of pull this together a little bit exactly what Larry said, but with an overriding statement that if you look at the two sides of our business, our Technology and our Services side, and you look at the fourth quarter -- look at all of 2010, the progression through the quarters, the fourth quarter and what we are out looking for 2011, you will see continued progress along the strategy, expanding distribution, growing our Technology line, growing our machines in the field, our pages, our color pages. That is the plan here and that is what is coming out. That is what is happening.

And I think in the first quarter, we recognized -- we have recognized that currency throughout 2010 had a negative impact on us and it will continue. Our outlook is that it will continue through 2011 and the first quarter just recognizes the fact that a lot of that will happen at the beginning of the year, not at the end of the year. There is no other message here except for that. And we are taking the restructuring to make sure that we are in line and able to perform.

All right, well, thanks. And Larry, it has been nice working with you and I guess maybe I outlasted you. I remember the days (multiple speakers)

You might be a little younger than me, I don't know.

That's true. But you are young at heart.

When you give 45 years, let me know.

All right. Good work. Bye.

Thank you. I appreciate it, Ben.

Shannon Cross, Cross Research.

Hi, and I would just like to echo Ben's comments, Larry, on congratulations and we will definitely miss you. My first question is with regard to the Services business. If you can talk just a little bit about essentially what you are seeing with the $5 billion pipeline or I guess it was $3.5 billion, $2.5 billion last quarter.

So in terms of the revenue synergies, how are things closing and what type of deals are you doing? Just any more color you can give us on sort of how the revenues are working on that side.

So, first of all, let me start at the higher level. We are really pleased with the three lines of business that we have in Services. We saw a good quarter across the board, excellent signings in both business process and IT outsourcing, but also a very, very good signing quarter in document outsourcing.

I think it is important to see the distribution and we are seeing it. It is good and we believe that that is caused almost solely by the fact that we have these two very strong companies together now as one, and we are able to leverage that.

I am going to skip to a little bit further ahead. In the future we are going to kind of stop talking about synergy as distinctly as we do, because we are finding we are putting a lot of work into trying to distinguish what is a synergy signing and what is not. And all we are looking at -- all I am looking at now is whether revenue is growing. If the revenue is growing, the signings and total are growing and the pipeline is growing, then I am pleased.

It turned out for this quarter all three of those things are happening. On a trailing 12-month basis, signings are up, new business signings are up, which is extremely good, and the pipeline is growing. And the synergies are over $5 billion. I think I have kind of wrapped it all around.

We see excellent uptake. This acquisition is doing what we thought it would do, even a little bit faster. We signed 50 deals in 2010, which was more than we had even planned. Interestingly enough, those deals have revenues a little bit lower than we had thought. We thought we would get fewer deals at bigger revenue, but what we are doing is getting a lot more deals at slightly less revenue. And we will be able to get into those accounts and then grow our position in those accounts in this whole penetrate and then radiate strategy that we have.

So we are very pleased with the signings in quarter four, the new business in particular. We are very pleased with the [slit] of business and all of the metrics are tending in the right direction.

Okay, great. And then can you talk whether it is, Ursula, you or Larry, about the gross margins? I mean clearly currency was a big impact during the quarter, a couple of pennies and going forward. But can you talk maybe more about sort of the underlying trends, what are the puts and takes we should think about in terms of the gross margin, the restructuring charges that you took and the movements you made, sort of how -- again, I guess those flowed through more toward the second half of the year. But just anymore color you can give us on how you're thinking about gross margin.

I would say, first of all, Shannon, that with the content of our Services business, this really becomes an operating margin story and is not as much -- I am not saying we wouldn't look at gross profit margin, obviously we would, but it is an operating margin story and it is a question of whether you can expand margins here or not, which we are confident we can. We obviously did it all year and we expect to have another point next year. So we are doing all the things here that expand operating margin.

And within that, we are trying to just do a balance of gross profit margin. Gross profit margin, since the currency changed in 2008, is over a $200 million cost increase if you want to look at it as just cost. And I think if you look at the gross profit margins, the Xerox team has done a great job of offsetting that and maintaining our gross profit margin within the 33% to 35% range.

Now, in this fourth quarter, we probably had -- I think it was $45 million of -- so it is like 7/10 of a point or something effect of transaction currency. And we offset it on other lines so that the operating margin still improved a point. And again, as we look at 2011, we are expecting about a $50 million hit. Maybe the currencies will help us and if they do then we will report that back. But right now, it looks like a negative headwind of $50 million, $30 million of which is in the first quarter.

But we are still committed to be in the 33% to 35% range and more importantly, we are committed to increase the operating margin by a point. So gross profit margin varies, but we have our act together to make sure that we deliver the earnings associated with that.

Great. And then just one last question, Larry, since we still have you for this call. I am just curious if you look back over the last year, I would be curious as to sort of what the biggest surprises, both positive and negative, have been for you and just sort of if you can position us in your thoughts as you sort of leave the Company. I think your perspective would be helpful. Thank you.

Thanks, Shannon. Well, I think my -- I wouldn't say it is a surprise, but I am really, really thrilled that the ACS acquisition has fit so well into our Company. They are performing well, they love being part of our Company. We love having them. Our management team is unbelievably excited about the way we can address customers in the marketplace now with all -- I mean literally all the infrastructure needs -- BPO, ITO, document outsourcing, technology better than anybody else's. And I kind of drank the water here, we all know that, but that is the best thing.

And we put together these numbers sort of predicting the future back in the summer before we announced ACS and we were trying to be fair. We weren't trying to be real conservative or anything and we actually blew the doors off of all of them. We did really well.

So I wouldn't say it is a surprise, but I am really happy and that is why it turns out this is a good point because it has done so well. The currencies I think are something that -- at least I prayed to the currency God that we would get a break here and the weaken yen would weaken to the dollar and the euro. That is a recurring dream and maybe one day it will happen. Things tend to go one way against you and then when you least expect it, they go the other way.

I think the currency has been hard work, but again I think we hit the numbers on it. So I am just proud to be part of the team here who delivered on what we said and I think the numbers going forward are going to be -- the investment community is going to like them.

I would just add one thing, even though you didn't ask me and I am not leaving, but I will throw it in anyway. So I agree with Larry totally. I mean ACS, we had great aspirations and dreams about it and it is coming through well, how we are working together, how we are dealing with customers, that is all good.

Interestingly enough, Global Imaging, which is one that is now just part of us, had a phenomenal year again. We managed that operation like we thought we should, like we said we should and we are doing it and they are delivering. So there is a lot of parts of the business that are doing well. Our developing markets operations has picked up quite a bit. So I think that we are moving the Company along in a balanced -- in a strong balanced way. I think that is the way that I would -- that is the thing that actually pleased me the most in 2010, even though you didn't ask me.

Well, thank you for that. And Larry, don't drive your wife too crazy.

No, I won't.

Take care.

She might be listening.

Richard Gardner, Citigroup.

Okay, thanks. Can you hear me?

We can.

Okay, thanks for taking the question and Larry, I will miss you as well. I wanted to ask about cost synergy realization in the fourth quarter, as well as your outlook for 2011. Your targets were $100 million to $150 million for cost synergies related to ACS in 2010 and I think at $140 million from the restructuring. I would just like to get, Ursula, your assessment of how you did versus those targets and/or Larry. And then what we should expect in terms of additional cost savings both from the restructuring actions that you are announcing today, as well as ACS merger synergies going into 2011 and 2012, if you are willing to go out that far.

Let me hit the synergies and then I will turn it over to Larry. The cost synergies for 2010 were well within the range that we had predicted that we would be in. We said $100 million to $150 million and we are solidly there. We are across-the-board pleased with how we have performed. As Larry said, we laid this thing out such a long time ago, I can't even remember the buckets anymore, but we delivered across the board. I obviously can remember the buckets, Rich, but we delivered across the board and we delivered over $100 million. In 2011, we expect to get in the range of about $120 million or more and well on the path to get to the $375 million that we said we would get to in year three.

So the way that you should think about the cost synergies from the acquisition are that we are knocking them down on a year-by-year basis with very little risk, like no risk that we will miss any of them. So strong performance there in the categories that we said that we wanted them to be in.

I think on a restructuring basis for 2010, we had said about $140 million of pretax savings and that is about the number we got. And that is how we got operating margin improvement in the face of pressure on gross profit margins. So I think we are -- we did good things there. And then because we added restructuring, additional restructuring in the fourth quarter, our expectation is to get about $270 million of, again, pretax savings. That is the headwinds, again, from any pressure on gross profit margin and the currency, which I said a couple of times was $50 million.

So these restructurings are targeted to places that will help us on all lines of our income statement and they are delivering the way we expected and they are helping us get our results in the face of some tough currency situations.

It also allows us to invest, reinvest -- I mean we are reinvesting in our people in 2010 and then continuing in 2011, we had a fairly significant investment in marketing in the new brand campaign. And we need to be able to do that, to make these investments to grow the Company. And that is one of the reasons why synergies and restructuring, both of those two things together and the savings that come from that are so important to us.

Okay, great. And then if I could just ask maybe a little more specific question on that. It looks like given your 3% to 5% revenue growth guidance and assuming that gross margins don't go up next year because of mix and currency, that operating expense dollars actually need to be down pretty nicely year-over-year in order to achieve 100 basis point improvement in operating margins. And I just wanted to confirm that that is indeed what you think you can achieve next year.

I don't think there is a big minus effect. I think, with the revenue growth and if you can maintain gross profit margin, gross profit margin (inaudible) a different subject, but you grow revenue, you maintain gross profit margin, we will be able to expand --

And you expand your Services business (inaudible).

All right, well, thank you.

Keith Bachman, Bank of Montreal.

Hi, guys. I actually have a reconciliation question. Number one, normally gross margins are up a little bit, anywhere from 20 to 100 basis points from Q3 to Q4. Secondly, as I look at the last conference call, as we talked about Q4, there really wasn't a significant discussion surrounding gross margins.

And then third is I look at the yen/US dollar rate, most of the variance happened prior to call it September to October. From mid-October, the yen/euro has actually been within a more normalized trading range. It certainly had some volatility, but nowhere near where the volatility occurred for the prior call it nine months.

So I am just trying to understand, putting all that together, gross margins were actually flat sequentially from Q3 to Q4. How do I reconcile all those data points because it looks like gross margin frankly was a little bit disappointing? I am not sure I can really fully explain it with the yen/dollar exchange rate.

Well, I think it is a couple of things, Keith. First of all, I don't think the seasonality of gross profit margin is the same when you add ACS into our business. We did have a pretty good bump in the fourth quarter, Xerox without ACS. I think when you add ACS in the Services business, the gross profit margin story is different on a seasonality basis.

And secondly, I think that currency definitely. I mean we know the arithmetic by when we got the cost, by what the rates were year-to-year and so it definitely cost us almost a point, 7/10 I said. So there is pretty good accuracy on that as far as the reconciliation. And the rest of it is associated with you have a Services business with a much lower gross profit margin on average than the Company that had BPO grow 11% and ITO grow 5%. And so you just do the arithmetic of the average of that and that lowers the gross profit margin. But they have -- that same business has a higher operating margin and therefore, again, arithmetic, you get growth there. So I am sure Jim's staff here can give you --

Well, let me follow up then, Larry, if I could. Could you -- to follow from Rich's question, could you be more specific in how -- what numbers you are thinking about say for Q1 and then also implicit in '11, how we should be thinking about the range of gross margin, including the FX impact? Thanks.

We are expecting the gross profit margin to be between 33% and 35%.

Yes, sorry. I understand that. I was hoping to get a little more specific, particularly on Q1.

Well, if you can tell me all the revenue mixes of the products, I can give you an exact answer. But our commitment is $0.20 to $0.22, $1.05 to $1.10, a gross profit margin between 33% and 35% and an improvement of one point on operating.

And the first quarter -- the first half we believe to be a little bit more pressured than the second half because the currency impacts are more in the first half than the second. But I do believe it is important, as Larry said. We actually -- for the fourth quarter of 2010, the premise was not exactly accurate and the staff will take you through that. First quarter of 2011 and the first half of 2011, we are going to fight to make sure that we can hold the total operating -- the operating margin will increase for sure, but to hold the gross margin at the 33% to 35% range and I am confident we will be able to do that.

Okay. Thanks very much. Ursula, you got some good callout plus side on the TV at the Presidential election, so it looked good. Thanks very much for all the answers.

You are welcome.

Ananda Baruah, Brean Murray.

Thanks, guys. I guess I will just echo the sentiment, Larry. Definitely will miss working with you and miss your sense of humor. I guess this means you have plenty of time to fire that RV up to do that roadshow we have been talking about. I guess a question I guess just on sort of tone of business both in Services and maybe come in hardware too. Have you noticed a tone I guess amongst your BPO customers in their willingness to look at spending I guess incremental dollars a little bit more than they had as we had moved through 2010? I guess I will just leave it there and then I have a follow-up as well. Thanks.

I think that, from the Services side, I think that the tone is improving and -- positive and improving. I think that it shows up in our metrics. It shows up in signings, but more importantly in the pipeline and how the pipeline is growing for us across the board, including document outsourcing, by the way, which had a phenomenal fourth-quarter signings rate, which was kind of a record for us.

But I think that what customers are saying, large enterprise customers, government, midsized customers as well, is that they understand the value proposition of this Services bundle that we offer and that we have kind of proven to them with examples from different industries that we show to them that we can actually pull it off and they need the help in managing their infrastructure and reducing their costs. And it has shown up in our signings and our pipeline numbers. So it is a positive trend that we are seeing.

Got it. So this is sort of I guess a cyclical aspect to it, kind of a recovery aspect, but just in general you feel that the tone has picked up as well?

Yes, I think that there is -- there is -- obviously some of that tone improvement is a little bit of a recovery in the economy, but I think independent of that, even before the economy was recovering, we saw that Services grew better, faster than Technology and we are continuing to see that. So independent of a recovery, I think that we will see that this business continues to be attractive from a client perspective, attractive line of business for us to get engaged with them on.

Got it. I appreciate it, Ursula. And I guess just going over to the traditional Xerox business, a lot of the install momentum was still really good this quarter again. I guess could you just comment on what you are seeing other than sort of the new product cycle as being the driver of that? Do you see maybe a little bit more secular strength embedded in the installs as we've moved through the year than, I don't know, than maybe you may have expected as we entered the fall? And then just on the supply side, I think there was comments related to document outsourcing, but I would just like to get your thoughts on general supplies trends and I guess what you are seeing out there from customers on supplies.

I think the first part of the question was on what I am seeing from a Technology standpoint and any secular strength, weaknesses, etc. And I think that -- the things that we know were happening are continuing to happen. That is that color is a significantly more attractive investment line from our customer's perspective than black and white, that at the high end of black and white, while there is still a large business there, that business is under pressure from a growth perspective because many pages, especially in the transaction portion of the business, are moving away from being printed and being viewed, etc. Those trends have not changed. Color strength, high-end black-and-white transactional printing under pressure.

We invest our money to make sure that we can actually capitalize on that strength. We invested both in Technology in color, but also very importantly in distribution. We just brushed over Global Imaging a minute ago, but they had a phenomenal quarter and year actually as well and that actually bodes well for us. We have expanded distribution in Europe as well.

So we are seeing across the board in the areas that we would expect growth to happen, we are seeing across-the-board growth. The lower end of our portfolio, as we expand distribution to serve those customers, color as we continue to invest in both distribution and technology.

Geographically, I think we are seeing positive news from all geographies, kind of strange to say. We were seeing it in DMO from the beginning of the year. We are seeing Europe being as we would expect, so no significant bad news is Europe, actually pretty managed performance there and we saw an uptick in the fourth quarter in the US. So from a geographic standpoint, that's how it is going and from a line of business standpoint, government is strong, large enterprise is improving and small and medium businesses are the strongest. I think I answered all of the questions.

You did a great job, Ursula. I appreciate it. And maybe I will lob one last one in for Larry so I get to ask him at least one last question here. Larry, given sort of the yen headwinds and all the conversation around the push and the pulls on the gross margin, does it have you guys try a little bit more to see what you can do in terms of collaboration with Fuji Xerox to maybe push some more R&D their way? Is there anything you guys can do in areas like that to sort of offload some OpEx?

I will take it. The answer is not to offload OpEx only. That is not the way we approach it, but the fundamental question is a good one, which is we have an arrangement with Fuji Xerox and we work continuously and this year no different than any other year, this quarter no different than any other quarter -- to try to optimize the investments that Fuji Xerox and Xerox makes so that we minimize duplication so that we can drive cost competitiveness, but we can actually work a significantly more efficient business model between the two of us.

So the fact of the matter is that we will continue to push that vector there. We will drive them on cost competitiveness, a big focus for us, synergies or any kind of collaboration we can have in R&D, a big focus for us as well. And there is obviously more to be gotten there. It is not perfect, so we're working it. Next question please.

Chris Whitmore, Deutsche Bank.

Thanks very much. A question on growth expectations for the Services business next year. What is the key driver of that 4% to 7% target? Is that growth in existing contracts or new contracts coming onto the business model?

I will take it and then Larry can chime in. It is both. From the BPO and ITO side for sure and growth in existing contracts. Usage started to improve in the fourth quarter in our document outsourcing Services line and that trend is a good trend from the revenue perspective. So it is both from signing new deals and from improving usage on the deals that we already have.

So when I look at gross margins in the Services business, that was a little light versus my expectation and it has been down the past couple of quarters. Is that decline in gross margin trend going to continue as you layer on these new contracts? Is that a headwind of the gross margin line and are you restructuring below that in order to meet the operating margin targets?

No, I think, again, the way we are approaching this in total is from an operating margin standpoint because there are some things that you find in a services business that focus isn't the same on gross profit margin as it is in a Technology business where you are selling a piece of hardware.

So again, I think our expectation is not declines in gross profit margin. We are thinking gross profit margins will stay where they are and we are thinking within any particular quarter, they are between 33% and 35% depending on a lot of variables, not the least of which is the mix of the business, the mix of the products, the mix of the geography, how much Services business.

So other than calling out the pressure caused by the currency, just year-to-year comparisons, that has the biggest quarterly effects and when we have it, it takes it down more than you would expect and when we don't have it, we are back to a higher range like you saw at the beginning of 2010.

So again, every line you have to be cost competitive here and we are working on currency as a cost, if you will. So if it is up $200 million since the end, strengthened big time in the fourth quarter of 2008, we are just plowing ahead like this is a cost problem, but we think it is all manageable within this 33% to 35% and again 1 point of operating margin improvement.

And just one point to add is that our operating margin big focus, as you know and historically, we had a gross margin focus, we still do on our Technology business, but we don't really report -- we don't report gross margin on the Services business. So there is no way to really actually answer the question accurately that you answered, Chris, I'm sorry, but operating margins integrated for the business and historically, we looked at gross margin for the Technology business.

Okay, thank you very much. Larry, best of luck in retirement.

Thank you.

Next question please.

Douglas Ireland, JMP Securities.

Thank you, good morning. I was wondering, one of the fastest-growing areas you have identified in the BPO business is around healthcare. And I was just wondering if the current uncertainty around the government's plans has had any impact in your forecasts for that area.

Not really. We obviously pay a lot of attention to this and actually not only by watching from afar, but engaging with the government where appropriate and when appropriate in formulating a path forward for them on health, IM or any kind of automation or information automation of the healthcare system. So we haven't really seen an impact from a business perspective. We haven't seen an impact from a business perspective based on the uncertainty.

There are certain things that we count on happening. I mean we count on people needing access to healthcare. We count on the fact that the information infrastructure that we currently have in this country and lots of other countries, as well as inefficient and ineffective and needs to be improved. It doesn't matter who is in what office, those two facts are for sure and known and that is what we are riding. We are riding this wave of just a need for fundamental improvement and all the debates actually don't include a debate around those two points. So we are seeing good news from the focus on healthcare. I think we have time for one more question.

Mark Moskowitz, JPMorgan.

Thank you, good morning and Larry, best wishes. You did a hell of a job over the past decade helping [Ann], Ursula and team turn around Xerox. Two quick questions here really quickly. I want to get a sense more on the gross margins and a lot has been discussed as far as FX. I guess I can't really understand, our investors can't really understand how come currency continues to be an issue given your hedging, consistent hedging. Is there really a cost issue or a structural issue we need to be aware off as well?

And then the second question is more around the revenue profile. If the Services -- the synergies really take off, should we start to anticipate gross margins maybe being at the low end or maybe even being below the low end of the 33% to 35% range, but actually op margins holding steady because of the mix?

So on the currency and hedging, the fact of the matter for Xerox or any company when the currency changes notwithstanding hedging, hedging is a very short-term idea that protects you against changes. So there is an exchange rate, you have a normal pattern of buying 25% of your forecast, 50% of your forecast, so it has got a very short-lived protection. The fact that a currency changes significantly 30% takes your costs up. That is what it does. And as soon as you start hedging after the fact of that, you can protect your balance sheet so you don't have to pay in a different exchange rate than you put it on your books for. But the hedging doesn't protect Xerox or anybody, it is just the short-term kind of balancing of it.

So when you look at exchange rate changes, I mean those changes have to be comprehended as cost impacts and you have to take significant cost actions or expense actions, which we have done in the business to offset them. And as I said, it is about a $200 million cost hit and we can spread that by quarter. We have looked at it over and over again and that has really been the impact.

And if you look at the pattern of gross profit margin, we have done a good job, if I don't say so myself, of managing within, even with taking a $200 million cost hit, which is profound because if you ever get a break the other way here, it is going to roll to the bottom line. So that is just a fact. You can ask any CFO in any company who has to deal with changing exchange rates on a transaction cost basis and I think you'll get the same answer. And I am sorry, what was the --

The revenue mix -- the gross profit margin given the fact that we may actually be growing Services faster.

I think that is the story of operating margins because you are growing the business that has a much lower gross profit margin than the Technology business and you're growing it much faster and so that puts pressure on your gross profit margin, which by the way we don't just accept, we try to offset. However, they have a higher operating margin. And so when you get down to the operating margin line, you actually get helped by it and it drives profit and it expands earnings.

So the model works here and I think we just -- again, I think it is important to look at gross profit margin. I'm not saying it isn't, but you have to put it in the context of a business that is 50% Services, higher operating margin, lower gross profit margin and when you show that kind of expansion in margins, it is pretty damn good.

So thanks for your time and for your interest and please enjoy the rest of the day.

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