Despite a challenging macroeconomic environment, Xerox Corporation XRX reported strong second-quarter 2016 results with adjusted earnings of $311 million or 30 cents per share compared with $264 million or 23 cents in the year-ago quarter. The year-over-year increase in adjusted earnings was primarily due to diligent execution of operational plans and significant margin expansion and revenue growth in the Document Outsourcing business. The adjusted earnings comfortably beat the Zacks Consensus Estimate by 5 cents.
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GAAP income (from continuing operations) for the reported quarter was $155 million or 15 cents per share compared with $107 million or 9 cents per share. The sharp rise in GAAP earnings was primarily due to lower operating expenses during the quarter.
Total revenue for second-quarter 2016 was $4,385 million compared with $4,590 million in the year-earlier quarter. The year-over-year decrease in revenue was attributable to decline in both the operating segments. However, revenues beat the Zacks Consensus Estimate of $4,377 million.
Adjusted operating margin and gross margin for the reported quarter was up 80 bps and 20 bps, respectively on year-over-year basis to 9.3% and 31.4%, respectively. The improved performance was due to substantial margin expansion in Document Outsourcing business stringent cost and productivity initiatives.
Segment Performance
Revenues from the Services segment, which include Document Outsourcing (DO) and Business Process Outsourcing (BPO), decreased 2.2% year over year to $2,470 million (56% of total revenues) in the reported quarter. While BPO revenues declined approximately 4% to $1,630 million due to lower volumes and lost business, revenues from DO increased 1% year over year to $840 million with growth in the partner print services offerings.
Second-quarter 2016 Services segment margin improved to 9.6% from 7.2% in the prior-year period. Total contract value for deals signed in the Service segment were $2.9 billion, with BPO and DO accounting for $2.2 billion and $0.7 billion, respectively. Signings declined 9% year over year owing to lower contribution from new business.
Revenues in the Document Technology segment declined 7% year over year to $1,752 million due to weak sales and an adverse currency impact. Segment margin improved marginally to 12.6%. Document Technology revenue mix was 58% mid-range, 24% high-end and 18% entry-level products, which was consistent with the recent quarters. Revenues in the Other segment decreased 11% to $163 million.
Restructuring Update
During the quarter, Xerox made considerable progress on its proposed plan to separate into two public companies. The company remains on track to complete the split by year-end 2016. Its Business Process Outsourcing (BPO) firm would be renamed as “Conduent Inc.”, while its Document Technology (DT) division would retain the Xerox brand name. Ashok Vemuri will become the chief executive officer of the BPO firm, while Jeff Jacobson will serve as the chief executive officer of DT. Ursula Burns will continue as the chairman and chief executive officer of Xerox until the separation and serve as chairman of the Xerox board following the separation. The company expects to incur one-time separation costs of $175 to $200 million pre-tax for the split, down from its earlier estimate of $200 to $250 million. Restructuring and related charges are estimated to be approximately $300 million for 2016, $71 million of which was incurred in the second quarter and $197 million year-to-date.
As part of the restructuring, Xerox has decided to execute a three-year strategic transformation program to improve its productivity and reduce costs across the businesses. The company remains on track to save about $700 million in 2016 from the restructuring activities. When combined with savings from cost streamlining actions currently in process, Xerox intends to realize cumulative cost reduction of $2.4 billion over three years. During the reported quarter, Xerox recorded $126 million as restructuring charges and expects to record $300 million for the same in 2016.