CEO’s Letter to Shareholders: This year is all about execution

By Jeff Jacobson

(The following is CEO Jeff Jacobson’s “Letter to Shareholders,” an extract from The 2016 Annual Report for Xerox, released earlier today.)

Fellow Shareholders:

As I write my first shareholder letter as the CEO of Xerox, I am humbled by the opportunity of leading this storied company, aware of both the promising prospects and the challenges ahead, but, most of all, I am excited about what the future has in store for us.

Last year was an extraordinary and pivotal year for our company. On December 31, 2016, we completed the separation of Xerox and Conduent. We are now a new Xerox with a clearly defined mission: to innovate the way the world communicates, connects and works. It’s a mission, which, at its core, is about helping businesses and governments alike improve productivity, maximize profitability and increase customer satisfaction. From the introduction of the first automatic copier in 1959, to the advances we’re making today in printed electronics, personalization and workflow automation, we embody collaboration and communication. As the new Xerox, we are refocused on leading the industry with market-making and disruptive solutions that redefine “print” and change the way information is used and shared.

Our Results

We remain committed to delivering attractive shareholder returns. You should expect nothing less. In this report, we share 2016 financial results that represent Xerox – without Conduent – to establish a baseline you can measure us against moving forward. Here is a summary of how we performed:

• Adjusted earnings per share(1) of $0.88; GAAP earnings per share from continuing operations of $0.58.
• Revenue of $10.8 billion, down 6 percent or 4 percent on a constant currency basis(1) from 2015.
• Adjusted operating margin(1) of 12.5 percent, at the top of the range we expected.
• Operating cash flow from continuing operations of $1,018 million.
• Year-end cash balance of $2.2 billion, which includes $1.0 billion of cash used for debt repayment in first quarter 2017.
• Announced plans to pay an annual dividend of 25 cents per share.

In 2016, we delivered strong margins and a healthy cash flow in the midst of preparing for and completing the separation. We also launched a three-year Strategic Transformation program with a goal of delivering at least $1.5 billion of cost and productivity savings from 2016 to 2018. In the first year, we delivered $550 million in gross savings – exceeding our goal – and we are on pace to meet our target for 2017 of $600 million. But it is not just about the numbers. This program is improving our operational excellence and competitiveness, allowing us to both reinvest in the business and deliver attractive returns to shareholders. It is also helping us mitigate the impact of declining revenue, which we are aggressively addressing through our strategy.

As part of the program, we made numerous operational changes. We delayered the organization to streamline decision making and create an environment that enables a quicker go-to-market path. We advanced the use of automation in service delivery by leveraging automated supplies replenishment and remote solve to resolve break/fix issues on our products without dispatching technicians. Within our supply chain, we removed regional and functional barriers to move toward a truly global organization and consolidating our total warehousing footprint.

Delivering More Value for Our Customers

I am always encouraged and re-energized by conversations I have with our customers. Serving our customers well – and helping them solve the challenges they face in their businesses – is at the heart of everything we do.

Our customers turn to our products and solutions to work more efficiently and bridge the gap between analog and digital processes. Here are a few examples of our efforts in 2016:

• We brought 35 workflow automation solutions to market as part of our managed document solutions. These new offerings address specific customer needs, acting as a bridge between our products and the important business and process workflows of our customers.
• We launched the ConnectKey®-enabled i-Series multifunction printers for the office. This line of multifunction printers promotes work collaboration by coming equipped with ready-to-use apps to speed up paper-dependent business processes. We also unveiled the Xerox App Gallery, an online portal where our customers can select and download multifunction printer-resident apps to add functionality and make our products work better for them.
• We continued to build out our high-end inkjet printing portfolio, adding two new inkjet presses – the cut-sheet Xerox Brenva® HD Production Inkjet Press and the continuous feed Xerox Trivor® 2400 Inkjet Press. Both will allow us to better meet our customers’ needs in the growing inkjet market.

https://youtu.be/oo3uXGgGisA

Pursuing Growth Opportunities

We’re a $10.8 billion company in an $85 billion market, and, as I tell my team, that gives us ample opportunity to grow and expand. We hold leadership positions in key segments and serve a range of customers from small and medium-sized businesses (SMBs) to large enterprises, governments and graphic communications providers. It’s a market we helped create and continue to lead.

Part of the work we did in 2016 was re-examining the market to evaluate how we compare with our competitors and better understand the changing needs of our customers and partners. While the overall market is declining, we identified components that are expanding at rates ranging from low single digit to double digits. Of our revenue in 2016, 38 percent came from these growing areas, and we are now implementing a plan to expand that proportion through a focus on the following strategic growth areas:

• Managed document services, especially managed print services in the SMB. We plan to extend our leadership in the vital services segment.
• Entry products, where pages are moving from single-function A4 sized printers to higher value A4 multifunction printers, where we are better positioned.
• The production cut-sheet color and emerging production inkjet markets, an area where we are historically strong and are making investments in newer technologies.

To pursue these opportunities, we have realigned our go-to-market model and we are expanding our channels to increase our reach and strengthen our relationships with our customers. Additionally, as the new Xerox, all of our investments will once again support our print technology and document services business. Our research, development and engineering efforts continue to be well-funded at approximately $1 billion, including Fuji Xerox, and drive innovation in automation, workflow and content management, graphic communications, analytics and printing.

We’re also poised to extend our overall market leadership with the largest product launch in Xerox history in 2017. Our fleet of new multifunction devices, which serve as a workplace assistant, will help our customers transform how they work with leading security, high-performance apps, on-the-go print capabilities and cloud connectivity. They will support growth areas across all of our channels in the A4 space and strengthen our mid-range A3 multifunction printer product portfolio. These product launches, combined with our leadership and expertise in managed print services, will strengthen our value proposition for distributors and resellers, helping drive growth in SMBs.

A New Xerox

We began 2017 as a new Xerox. We laid the foundation for the future in 2016, and this year is all about execution. Our Strategic Transformation program will continue to support strong cash generation and margin expansion, as well as our ability to reinvest in the business. We’re building a strong balance sheet and we’re focused on deploying our cash flow to drive attractive shareholder returns with a commitment to return over 50 percent of our free cash flow(1) to shareholders over time. Our strategy to capture opportunities in our strategic growth areas will help us change the trajectory of our top line and, over time, outperform the market.

We have a solid business model supported by an iconic brand, a market-leading portfolio, a strong reputation for putting our customers first and the best talent in the industry. I continue to be impressed by the power of Xerox people, innovation and technology. It’s an enviable combination of strengths that makes us unique, keeps us in an industry-leading position and gets me excited about coming to work each day.

Thank you for continuing on the journey with us. I look forward to the letter I’ll write for our 2017 report, sharing our progress along with continued excitement for the future of Xerox.

(1) We have discussed our results using non-GAAP measures. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth on page 7.

Video updated on December 4, 2017.