One of the biggest movers on Thursday was Xerox Holdings (NASDAQ:XRX), which saw its stock price skyrocket despite subpar earnings results that missed estimates.
So why was the printing and information technology company up more than 10% on Thursday to over $18 per share? The reason is most likely due to an outlook that calls for improving margins through a revamped operating model.
Earnings fall short of estimates for Q4
Xerox’s fourth-quarter results were certainly not anything to write home about. The company’s revenue was down 9.1% in the quarter to $1.77 billion, while it posted a $61 million net loss, or 50 cents per share, down from a net gain of 74 cents per share in the fourth quarter of 2022. On an adjusted basis, Xerox’s earnings were 43 cents per share, down 52% year over year.
The company’s earnings were severely impacted by a one-time restructuring charge of $78 million, or 62 cents per share, related to its recently announced workforce reduction. In early January, Xerox said it was cutting its workforce by 15%, or roughly 3,000 positions, as part of a major reorganization. More on that later.
However, the firm still missed the adjusted-earnings estimate of 52 cents per share and revenue estimate of $1.79 billion.
For fiscal 2023, Xerox saw its revenue fall 3.1% to $6.89 billion, and it eked out $1 million in net income, up from a $322 million net loss in 2022. The firm’s adjusted net income for the year was $287 million or $1.82 per share, up by $98 million or 70 cents per share year over year. Xerox’s adjusted operating margin jumped 170 basis points to 5.6%.
“Last year, steps we took to structurally simplify our business impacted revenue but led to 170 basis points of adjusted operating margin expansion and laid the foundation for successful execution of our reinvention,” said Xerox CEO Steve Bandrowczak.
The “reinvention” that Bandrowczak mentioned seemed to be the point that interested investors.
Reinvention should improve margins
In January, Xerox announced that it was rolling out a new operating model, splitting itself into three divisions: the core print business; global business services; and IT and digital services. The idea is to diversify the company’s revenue and accelerate its growth beyond its core print business, particularly in its IT and digital services arm. In addition, Xerox realigned its organizational structure to fit with the reorganization while streamlining its expenses and staff.
When that announcement was made on Jan. 3, the stock tanked, but now it has hit investors differently. That’s because Xerox issued guidance for 2024 that indicates improving margins and operating income, largely due to the reorganization. While its revenue is expected to be down by 3% to 5%, Xerox projects its adjusted operating margin to be 7.5% at the end of 2024, up from 5.6% in 2023.
Further, the company’s adjusted operating income is expected to be up more than $100 million in 2024. The company also projects $300 million of incremental adjusted operating income for the next three years and a double-digit operating income margin by the end of 2026.
While Xerox’s print revenue is expected to be stable, its IT and digital services division is anticipated to see revenue growth. Additionally, the company is targeting free cash flow at $600 million or more, roughly on par with 2023.
With Thursday’s run-up, Xerox stock is basically flat for the year. The stock is also cheap with a forward price-to-earnings ratio of just over six, but it remains to be seen whether it’s a value. The reorganization looks promising based on the projections, but investors may want to be cautious to see if Xerox leadership can execute on its plan.
