HP voices concerns over Xerox full-year results


HP has called Xerox “a company of questionable value” after the business, which continues to pursue a hostile takeover of HP, reported a 6.2% revenue drop for 2019 and a 2.2% decline in Q4.

In its results for the year ended 31 December 2019, released yesterday (28 January), Xerox recorded sales of $9.07bn (£6.97bn), down from the $9.66bn it achieved in 2018. For Q4 its revenue was $2.44bn, down from $2.5bn year-on-year.

Overall equipment sales fell by 2.1% to $616m in Q4, which included sales of high-end kit up 1.5% to $139m.

However, the manufacturer’s pre-tax profit climbed from $549m to $822m for the full-year, and from $124m to $336m in Q4, while its adjusted operating profit margins were 13.1% for the full-year, up from 11.3% a year ago, and 16.8% for Q4, up from 14.1% a year ago.

Its earnings per share, meanwhile, rose by $1.62 year-on-year, from $1.16 to $2.78.

Xerox said it achieved gross savings of $640m under Project Own It, its company-wide initiative to simplify operations, drive continuous improvement and free up capital to reinvest in the business.

For 2020, Xerox said it expects to see a revenue decline of around 4% at constant currency rates and an adjusted operating margin of approximately 13%.

“We are delivering on our three-year plan. We grew earnings per share, increased cashflow and expanded adjusted operating margin for the full year, and we improved our revenue trajectory in the second half of the year as our investments in the business gained traction,” said Xerox vice chairman and chief executive John Visentin.

“We accomplished this while returning more than 70% of free cashflow to shareholders, paying down approximately $950m in debt and increasing investments in our innovation areas. We are well-positioned to carry this momentum into 2020 and lead the way for long-overdue industry consolidation.”

The company said it incurred $4m of transaction and related costs, net during Q4 2019, primarily related to legal costs associated with its proposal to acquire HP, and added these costs are expected to continue in future periods.

Summarising the HP situation to date, Xerox said: “In November 2019, Xerox proposed a business combination transaction with HP Inc in which HP shareholders would receive $17 per share in cash, and approximately 48% of the pro forma combined company (based on 0.137 Xerox share for each HP share).

“In January 2020, Xerox obtained $24bn in financing 25 commitments to support the proposed business combination transaction with HP. HP has rejected the proposal and refused to engage in mutual due diligence or negotiations regarding the proposal.

In January 2020, Xerox nominated a slate of directors to HP’s board to be voted on at HP’s 2020 annual meeting of stockholders. Xerox intends to continue to pursue the proposed business combination transaction.”

In a call to investors yesterday, Visentin said Xerox had received “positive feedback” from HP shareholders it had spoken to about the deal.

“They immediately appreciate the industrial logic and believe in the value we can create.”

He added: “We are pressing ahead with our pursuit of this acquisition and are already working key elements of an integration plan so that we are well-positioned to execute quickly when and if successful.”

In a Q&A session, Morgan Stanley analyst Katy Huberty asked Xerox whether it has the potential to get more than the $24bn in financing that it has secured so far to buy HP.

Xerox chief financial officer Bill Osbourn responded: “We believe that we have flexibility. We lined up the $24bn in financing commitments, and we believe our arrangements with those financial institutions allow us flexibility if need be.”

Earlier this week Huberty said Xerox may need to increase its bid for HP from $22-per-share to $26 in order to attract the company’s board and shareholders.

But, in a statement released following Xerox’s results yesterday, HP said the results “do not alleviate the fundamental concerns about the continued revenue declines and health of the Xerox business”.

“The fact remains: Xerox is relying on HP’s balance sheet to advance its proposal, which significantly undervalues HP and would require our shareholders to exchange the value of our businesses and the opportunities afforded by our balance sheet for stock in a company of questionable value and exposed to meaningful risk, due to inordinate leverage and sustained, declining performance.”

Xerox’s share price climbed by 5.3% shortly after the results announcement, to $36.90, and stood at $36.78 at the time of writing, while HP’s share price climbed by 0.7% to $21.74 yesterday and was $21.64 at the time of writing.