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October 10, 1999

Xerox Shares Plunge 25% in Wake of Q3 Warning

By CBR Staff Writer

Xerox Corp shares fell nearly 25% on Friday after the imaging and document management giant said that it expects to report essentially flat revenues for the third quarter and about a 10% to 12% decline in earnings per share from the $0.53 reported in the year-ago quarter. That translates into EPS of about $0.47 or $0.48, when analysts surveyed by First Call were expecting earnings of $0.58. The results will break a two-year streak for the company of meeting or beating expectations.

After the announcement, Xerox stock plunged $10.50 to close at $32.25 after trading as low as $30. It was the company’s biggest one-day price decline in roughly 20 years. Friday’s session saw 46.2 million shares change hands. Xerox shares have now shed almost half of their value this year, cutting the company’s market capitalization to $21.4bn.

The warning led many Wall Street analysts to downgrade their ratings on the company’s stock. Prudential cut its rating to accumulate from buy, CIBC dropped the stock to hold from strong buy an Goldman Sachs downgraded it from recommended to market performer. Meanwhile, Credit Suisse First Boston – responding to what it now sees as a cheap buy – raised its rating on Xerox to buy from hold, and set a $40 price target for the shares.

Xerox said that, overall, revenue was weaker than anticipated both in the US and Europe, particularly in September. It attributed the earnings shortfall to a combination of the weaker revenues with an unfavorable product mix and increased competition from the likes of Canon and Hewlett-Packard Co, all of which combined to hit operating margins hard.

Making matters worse, the company said the productivity of its sales force has continued to be affected by the ongoing realignment to an industry-oriented, rather than geographic, approach. The realignment, announced last January, was partly to blame for sluggish second-quarter sales, as well. Poor results in Brazil, mostly due to the effects of the currency devaluation and economic weakness, and at Fuji Xerox hurt the bottom line even further.

While the company said it was disappointed by the results, it maintains that its strategy of focusing on particular industries, using a broader array of distribution channels and offering an expanding product and services portfolio will prove fruitful over time. The company will announce full third-quarter results on October 18.

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