Fresh off an ostensibly cheery and upbeat quarterly earnings announcement of profits for the first time in five quarters, Xerox is still facing a world of worries. This marquee brand behemoth, which once dominated the copier landscape, is now challenged with controversy, competition, and a commercial color market slump.
Fishy Financials

Perhaps the biggest monkey on Xerox’s back is the continued smell of scandal surrounding questionable accounting practices and the company’s massive restatement of three years and billions in revenues. Though the initial SEC probe is behind the company after a $10 million settlement, Xerox must come to grips with pending investigations and civil litigation against company executives, along with the stigma of tainted practices in today’s era of corporate governance.
Shannon Cross, analyst at Merrill Lynch, recently pointed out that investors are giving more credence to the negative outlook of the scandal. The stock has hit bottom in recent weeks, falling as low as $4 for the first time in years. And "spending on office equipment and information technology was down 2% in the quarter against prior expectations of 3% growth," Cross continued.

In fact, as recently as last year, Xerox’s very survival hung on a thread. To stay afloat amidst a cash crisis, the company amassed a mountain of debt at high interest rates, and suffered five quarters of losses before the recent uptick.
Despite current profitability and an improvement in cash management, the company is still saddled with shrinking revenues (especially in office monochrome products); struggling sales in Latin America, Africa and elsewhere; and continued competition from its nemesis Canon and others. Xerox has also lost sales due to its departure from the SOHO market, where it had languished.

GE is acting as Xerox’s crutch for the company’s debt load by agreeing to secure billions in debt through financing the majority of Xerox’s lease receivables. This could be a shaky prospect if the receivables picture worsens or GE gets cold feet.

Canon Fodder
Canon poses perhaps the biggest threat to Xerox. As the world’s #1 copier company with a 30% market share, Canon is encroaching on the high-end enterprise-wide document and image management space. According to IDC, Canon’s share of the overall U.S. copier market increased from 13.3% in 1998 to more than 36% in unit sales last year, while Xerox declined from 38% to 14% in the same time period. "Canon in the past year or two is winning," quipped Angele Boyd, an IDC analyst.
Canon’s ability to improve technology while driving lower costs is attributed by some with pushing Xerox out of the low-end copier market. The same combination threatens Xerox at the commercial level, where Canon’s U.S. market share based on dollars in 70-plus page-per-minute digital copiers has risen from nothing to 23% in the last two years, according to IDC figures.

Whether or not Xerox will be able to fend off Canon in the long term, and the impact and opportunities for others in the wake of the battle, is still up for grabs.

Color Me Cautious
Key to Xerox’s sustained turnaround is its bet on the color market. CEO Anne Mulcahy bubbles at the early success of Xerox’s new line of color offerings: "We look much more at growing our business in areas like the transition to color in the document world," said Mulcahy recently. "In the production business, color is the highlight…we are really quite encouraged by the strong order flow on all recently launched color products," she stated in the past quarter’s earnings conference call.
The real picture is more complicated and competitive: "Xerox has built an early lead in color, but Heidelberg Digital LLC and Canon are catching up, and Xerox could lose share," said Merrill Lynch’s Cross. In addition, though sales of the company’s new iGen3 color Digital Production Press have been steady, they will not be enough to make a significant impact on Xerox revenues for several years due to the depressed commercial printer market, she stated.

Fresh Faces, Fewer Places
Along with more aggressive sales and marketing efforts, Xerox officials have repeatedly pointed to impending restructuring activities in the coming months to slash operating costs and sustain profitability. The moves undoubtedly will lead to further internal turmoil and increased doubts as to the services and support competencies of the company. "Are [you] running a risk, perhaps, of coming close to the edge of things like service problems, which years ago were significant problems that the company took a little too much, perhaps, out of the business?" questioned Peter Ausnit, Deutsche Banc analyst at the latest earnings call.

Xerox management has been a bit of a revolving door anyway, with many of the financial executives departing as a result of the accounting scandal, and the previous CEO Richard Tulman lasting just over a year while watching the company’s market capitalization fall by $1 billion.

Some say the ailing copier company needs to clean house even more. A recent color sales specialist with Xerox commented, "We are still full of old dogs that were promoted on tenure alone. We need to clean house even more and bring on some fresh faces in order to succeed." (This comment came a day after Xerox laid off another 1% of its work force less than two weeks ago.)

Copy That
Cutting to the chase, it’s clear that a healthy sales picture, not to mention bottom line profit, is not at all a sure thing at Xerox. The impact of an intense financial scandal, a troubled market for its core products, intense competition from multiple sources, and continued hemorrhaging of key resources at the company could spell a slippery slope for one of America’s most recognizable and historic brand names.