Xerox Corporation Third Quarter 2003 Earnings Presentation October 23, 2003 Anne Mulcahy Chairman & CEO Larry Zimmerman Senior Vice President & CFO 1
Disclosures During this meeting, Xerox executives will make forward-looking statements. Actual results could differ materially from those projected in such forward-looking statements. You can find information concerning certain factors that could cause actual results to differ materially in the Company s Second Quarter 2003 10-Q. The Company does not intend to update any forward-looking statements made during this meeting. 2
Anne Mulcahy Chairman & CEO, Xerox Corporation 3
Third Quarter Highlights Earnings of $0.11 Continued equipment sales growth Strong revenue growth in key investment areas - Continued install growth market share gains Disciplined cost and expense management $67 million operating cash flow including $604 million pension contribution - $2.3 billion cash on hand 4
($M) Revenue Trends 2002 2003 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Equipment Sales Revenue $ 876 $ 948 $ 900 $ 1,246 $ 898 $ 1,023 $ 948 Growth (17%) (13%) (9%) (2%) 3% 8% 5% Post Sale & Financing Revenue $ 2,982 $ 3,004 $ 2,893 $ 3,000 $ 2,859 $ 2,897 $ 2,784 Growth (8%) (6%) (6%) (4%) (4%) (4%) (4%) Total Revenue Revenue $ 3,858 $ 3,952 $ 3,793 $ 4,246 $ 3,757 $ 3,920 $ 3,732 Growth (10%) (8%) (6%) (3%) (3%) (1%) (2%) Equipment sales grew each quarter of 2003 with 5% growth in the third quarter Stable post sale trend Post Sale will be positively impacted by current equipment placements 5
Increasing Proportion of Revenue in Growth Areas Revenue % Growth 2002 2003 2002 2003 ($M) Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q1 Q2 Growth Areas Q3 Digital Office $ 1,499 $ 1,696 $ 1,554 $ 1,695 $ 1,611 5% 5% 8% 13% 8% Digital Production 902 1,107 930 985 939 (2%) 4% 4% 5% 3% Value Added Services 50 55 44 46 44 (19%) (6%) 1% (4%) (12%) Subtotal 2,451 2,858 2,528 2,726 2,594 2% 5% 6% 10% 6% Growth areas as a % of Total Revenue 65% 67% 67% 70% 69% Developing Markets 412 435 363 410 403 (15%) (17%) (19%) (11%) (2%) Light Lens / SOHO 566 506 462 413 378 (29%) (31%) (29%) (31%) (33%) Other 364 447 404 371 357 3% 14% 6% (9%) (1%) Total Revenue $ 3,793 $ 4,246 $ 3,757 $ 3,920 $ 3,732 (6%) (3%) (3%) (1%) (2%) Memo: Color Revenue $ 673 $ 818 $ 712 $ 814 $ 771 4% 10% 15% 19% 15% Color as a % of Total 18% 19% 19% 21% 21% 6
$(M) s 1,200 800 400 Production Segment Highlights 0 Total Revenue $1,065 $1,057 $163 $118 $902 $939 Q3 02 Q3 03 Total Production (1)% Light Lens (28)% Digital 4% 3Q 03 Install Growth B&W Publishing 14% Production Printing 1% Segment 6 4% Production Color 8% Third Quarter Highlights Revenue growth in investment areas - 4% growth in digital production revenue fueled by the success of our DocuColor series Accelerated install activity - DocuColor igen3 and 6060 drive color growth - DocuTech delivers double-digit growth 100 million in DocuColor igen3 printed pages; igen3 opens in 14 new markets New workflow joint development initiatives with Adobe, Creo and EFI - developing key production printing standards. Expanded portfolio of offerings - 2101 Digital Copier / Printer - DocuColor 5252 - DocuPrint 75MX 7
$(M) s Office Segment Highlights Total Revenue 2,000 Total Office --% 1,500 $1,844 $1,837 $345 $226 Light Lens (35)% Third Quarter Highlights Revenue growth in investment areas - 8% growth in digital production with strong growth in color multifunction 1,000 500 $1499 $1,611 Digital 8% Expanded line of digital systems fully launched - Competitive pricing drives demand from small and medium-sized office customers 0 Q3 02 Q3 03 3Q 03 Install Growth Office B&W Digital Copiers & MFD s 28% Segments 1 & 2 57% 21-90 ppm 4% Office Color Copiers / 49% MFD s (11-40 ppm) Color Printers 12% Content management services adds value to Xerox technology, enables big wins across global enterprises Breadth of Xerox s color offerings delivers install growth and share gains New products announced last month - Phaser 6250 color laser printer - Phaser 3450 b/w laser printer - WorkCentre PE 16 MFD - WorkCentre M24, color-capable copier/printer 8
$(M) s 500 250 DMO Segment Highlights Total Revenue $412 $403 $331 $295 Total Revenue (2)% Post Sale / Financing (11)% Third Quarter Highlights Equipment sale growth 33% Equipment install growth in office digital and production digital Post-sale revenue decline moderating 0 $81 $108 Q3 02 Q3 03 Equipment Sale 33% Technology transfer accelerating in Latin America Revenue Trend % Growth 2003 Q1 Q2 Q3 Transition to distributor model in small affiliates Equipment Sale Revenue 17% 39% 33% Post Sale & Financing Revenue (26%) (21%) (11%) Positioned for revenue growth Total Revenue (19%) (11%) (2%) 9
Larry Zimmerman Senior Vice President & CFO, Xerox Corporation 10
P&L and Balance Sheet Highlights Earnings of $0.11 continuing to meet our commitments Revenue in transition to growth - Equipment sales up 5% - Growth businesses up 6% Gross profit margin 41.1% - reflects third quarter seasonality SAG productivity Focusing on strategic cost competitiveness enabled by Lean Six Sigma Operating cash flow of $67 million - including $604 million pension contribution - Continued Accounts Receivable improvements Strong cash balance of $2.3 billion maintained 11
Total Revenue Transition Volume and revenue performance continue to confirm: - Growth where we invest - Significant progress in our transition to total growth Q3 Revenue Effect on $ % Growth Overall Growth Growth areas $ 2,594 6% 4 pts Light Lens & SOHO 378 (33%) (5) pts DMO & all other 760 (2%) (1) pts Total $ 3,732 (2%) (2) pts Revenue in transition - Growth areas now represent nearly 70% of the total - Light Lens & SOHO at 10% of total vs. 15% one year ago 19% 15% 11% By 2005, approximately 90 percent of our revenue will be in Growth businesses and DMO 59% 64% 70% 2001 2002 2003E Growth areas: - Digital Office - Digital Production - Value Added Services DMO Light Lens / SOHO Other 12
Earnings Third Quarter ($ millions except per share data) 2003 2002 2003 B/(W) 2002 Equipment Sale Revenue $ 948 $ 900 5% Post Sale / Financing 2,784 2,893 (4%) Total Revenue 3,732 3,793 (2%) Gross Margin 41.1% 42.0% (0.9) pts R&D % of Revenue 5.5% 6.0% 0.5 pts SAG % of Revenue 27.5% 27.0% (0.5) pts Other, Net $ 133 $ 103 $ (30) Effective Tax Rate 28.3% 43.8% 15.5 pts Net Income $ 117 $ 99 $ 18 Diluted EPS $ 0.11 $ 0.04 $ 0.07 13
Gross Margin 50% 40% 30% 20% 41.1% 42.5% 42.0% 43.9% 41.9% 42.4% ESOP 41.3* Q1 Q2 Q3 Q4 Q1 Q2 Q3 2002 2003 41.1% Manufacturing and Service productivity more than offset price declines Q2 2002 ESOP adjustment 0.7 pts. DocuColor igen3 engineering follow-through shifts from R&D 0.4 pts. * Excluding $28M, or 0.7 pts., favorable Q32002 ESOP Adjustment 14
Selling, Administrative & General Expenses $ millions 1,200 1,100 1,000 1,169 1,110 1,051* ESOP 1,023 1,134 1,089 1,018 1,028 Bad debt improvement Productivity improvements $38 million unfavorable currency 900 SAG as % of Revenue Q1 Q2 Q3 Q4 Q1 Q2 Q3 2002 2003 30.3 28.1 27.0 26.7 27.1 27.8 27.5 27.7* * Excluding $28M favorable Q32002 ESOP Expense Adjustment 15
($M) Cash Performance Q1 2003 Q2 2003 Q3 2003 YTD 2003 Net Income $ (65) $ 86 $ 117 $ 138 Depreciation / amortization 199 189 178 566 Finance receivables 183 162 200 545 Accounts receivable (25) 100 99 174 Inventory - 17 (82) (65) Pension Contribution (20) (32) (604) (656) Restructuring payments (180) (73) (46) (299) Other 67 233 205 505 Cash from Operations 159 682 67 908 Cash from Investing (94) (10) 39 (65) Cash from new finance receivable securitizations 813 329 467 1,609 Repayments of debt secured by finance receivables (459) (516) (602) (1,577) Revolver / term debt and other changes (266) (1,264) 2 (1,528) Cash from Financing 88 (1,451) (133) (1,496) Change in Cash $ 148 $ (756) $ (9) $ (617) Ending Cash $ 3,035 $ 2,279 $ 2,270 $ 2,270 16
Debt Maturities Total debt of $11.8 billion - $7.7 billion without Securitization 4-year financing arrangement concluded in U.K. - Long term agreements now in place in US, UK, France, and Canada $2.3 billion cash on hand Expect consistent $1.5 billion annual cash from operations Expected Debt Maturities ($B) Total Bonds / Secured by Bank Loan Finance Receivables Fourth Quarter 2003 $1.6 $1.1 $0.5 2004 3.8 2.1 1.7 2005 2.1 1.0 1.1 2006-2007 0.8 0.3 0.5 Thereafter 3.5 3.2 0.3 $11.8 $7.7 $4.1 17
Anne Mulcahy Chairman & CEO, Xerox Corporation 18
Summary Consistent, solid delivery on key metrics - Business model yielding improved results - Strong operating cash flow Marketplace momentum - Install Growth - Share Gains - Equipment Sales Growth - Services Driving Enterprise Wins 19
Backup 20