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Xerox Services: A Solid End to 2014; Can Look to 2015 with Confidence

“A lot has happened in the last 90 days and overall we're pleased with where we ended the year. We're reporting solid results that in some places exceeded expectations” Ursula Burns.

Q4 summary:

  • Services revenue was $2,725m, up 1.5% y/ y, and up 3% in constant currency:
    • BPO CC growth was 4% (up from 2% in Q3) with growth in commercial healthcare payer, electronic tolling, litigation services and international. This growth is in spite of the loss of the Texas Medicaid contract
    • Document Outsourcing was down 4% in CC. Management says Xerox is beginning to see good traction from its next-generation MPS offerings: in November it closed its largest ever MPS deal with the Government of Canada.
  • Segment margin was up to 9.8%, up 12 bps y/y, and up 68 bps sequentially
    • The sequential margin improvement was seen across most BPO lines of business, including government healthcare
    • Y/y productivity improvements and restructuring benefits were partially offset by ongoing - but improving - expenses associated with the government healthcare MMIS platform
    • As we noted before, Xerox has been getting to grips with its government healthcare business, both in the investments in new MMIS development and in the Nevada exchange contract, which Xerox says is now stabilizing; It has also been focusing on improving productivity across the business, and, of course, on higher margin activities. And ir was able to absorb initial investments in New York Medicaid within this.
  • Signings were up, driven by renewals, with a renewal rate of 93%, including 7 out of the largest deals. Docment Outsourcing signings were up to $1bn, the highest in recent history, with growth in both renewals and in new business. But overall Services new signings were down 27% y/y in Q4, and  down around 13% in CY 2014
    • But two large awards - New York Medicaid and Florida tolling - should be signed in H1 15. Excluding this, the pipeline is down
  • Strong cash generation: Xerox closed Q4 with $850m in cash from operations and over $2bn for 2014. Full year 214 underlying cash flow, excluding the impact from prior year finance receivable sales, was $2.5bn, compared to $2.1bn in 2013.

Acquisitions in 2014

Xerox spent almost $340m on acquisitions in 2014, $185m more than 2013, but still significantly below its stated target of up to $500m. The largest transaction by far was ISG Holdings for $225m in May, expanding its workers’ compensation SaaS offerings

Go to market realignment

The sales force is now aligned to specific verticals and there is also increased sales coverage: more cross-sell opportunities from moving away from the heritage ACS go-to-market approach of a large number of independent business units.  

This is likely to be more effective (it is now possibe, for example, to cross-sell HRO into the governent sector, which Xerox simply could not do before), but to it does require of the sales force both sector domain knowledge and a familiarity of the full Xerox Services portfolio. While this GTM reorganization was arguably overdue, it will necessitate some substantial sales training and development activity.

So what should we expect to see in 2015 from Xerox Services?

In short, we will begin to see the benefits from 2015 of recent efforts to strengthen portfolio management, radically change go to market, and improve productivity.

  • Firstly, of course, there is the imminent sale of its ITO business to Atos (see here for a blog which focuses on this: Atos Acquisition of Xerox ITO Business: the A to X). In short this means:
    • A clear focus by Xerox on BPO and Document Outsourcing
    • A increased ability to invest in larger acquisition, with expected net proceeds of ~$850m from the sale around the end of H1 (see below)
    • For clients, Xerox states that, in those cases where it providing IT services to BPO clients (which is the case in over half  of its BPO revenue stream), client reaction to the prospect of having Atos as an IT services delivery partner has been positive
  • Revenues: Xerox is guiding on Services growth of 2% to 4% constant currency (and on a like-for-like business) in 2015. Growth will be back-ended, because of the impact from the Texas Medicaid contract loss last year and slower Document Outsourcing growth in H1. The New York  and Florida awards, both of which should be signed in H1 15 and start ramping up, will begin to make a significant contribution to revenues from Q4, if not before
  • Margins: Xerox is guiding on a 50 bps margin improvement in 2015 (although the Texas loss creates a headwind of about 150 bps until August) coming from further productivity enhancements and topline growth
  • Signings: H1 signings will be boosted by the two large awards. And the impact of the GTM realignment on new business signings should begin to become evident from H2
  • Acquisitions: Xerox says it expects to spend up to $900m in 2015/Q1 2016, and is looking to acquire companies that will expand capabilities in “attractive” service areas as well as extend its global reach. There is a stated desire to do larger acquisitions, including, potentially, client assets that have large outsourcing deals baked in. Likely options include commercial healthcare (perhaps further developments along the line of the investment in telehealth technology ISV HealthSpot), and non-U.S. assets to globalize its BPO portfolio, which, apart from contact center services and HR remains U.S. centric.

All in all, 2014 was a year when Xerox Services had to deal with some challenging problems and also to make some difficult decisions – and it did so. And it ended the year with its strongest quarter for some time/

2015 is looking to be a more promising year, particularly from H2 when factors such as the headwinds from the loss of the Texas contract and investments in the government healthcare business diminish in impact, also proceeds from the ITO divestment come through. 

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