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Xerox CEO Jacobson: Renewed Channel Focus, New MDS Pipeline Will Set Up Strong 2017 Finish

Weaker-than-expected equipment sales stung Xerox during the second quarter of its fiscal year 2017 but CEO Jeff Jacobson said the company's sales pipeline gives him confidence.

Xerox CEO Jeff Jacobson said that the company, which has historically relied on direct sales, intends to streamline its enterprise dealings and rely more on partners in SMB sales.

"For years, there've been a number of customers we've called on directly, that quite candidly we shouldn't," Jacobson said. "We're going to work with our resellers to have them call on them and do it more through telesales as we change our model, so that logo-hunters can focus on largest enterprise customers in the industry."

The Xerox CEO highlighted the company's channel expansion moves during its second quarter earnings call today. The document services company reported lower than expected revenues, but a quarterly profit of $166 million.

[Related: Xerox Launches MPS Accreditation Program With Eyes On 'Huge' SMB Growth]

As Xerox expands its presence in the SMB market, bringing more multi-brand channel partners aboard has become a priority, leading to the hiring of channel veteran Pete Peterson in April as Xerox's global channel strategy leader.

"Although the products are just coming out now and in Q3, as we're speaking to the channel partners to bring on the SMB expansion, [we're feeling good about] the reaction we're getting from the multi-branded resellers who are looking at these products and saying, 'We now understand that Xerox is very serious about going into the multi-brand channel,'" Xerox CEO Jeff Jacobson said. "They've seen the hires we've made."

During the quarter, Xerox launched a channel partner accreditation program around its managed print services (MPS) business, which falls within the company's managed document services (MDS) vertical, with the hopes of better serving prospective SMB clients and captures a huge market share opportunity.

Xerox revenues fell to $2.57 billion in the quarter ended June 30, down 8.1 percent from last year's second-quarter mark of $2.79 billion. That missed Seeking Alpha's revenue projection by $40 million.

Xerox, which launched 17 A3 products between late May and the end of June, said the timing of those new releases – many of which feature longer sales cycles – came too late to benefit second-quarter sales. Overall equipment revenue dropped 16 percent to $546 million year-over-year.

However, Xerox also pointed to an 180-day pipeline increase of 35 percent for its MDS business from the second to the third quarter 2017, as well as a 13 percent uptick in MDS renewal pipeline. That growth has leaders feeling assured that revenue will rise more sharply than normal in the fourth quarter – traditionally Xerox's strongest of the fiscal year – and allow the company to meet its full-year expectations.

Xerox CEO Jacobson called the company's equipment sales an anomaly during the company's earnings call. "When I look at the pipeline, it gives me good confidence," he said.

Net income for Xerox rose to $166 million, or $0.63 per diluted share, up 5.1 percent from $158 million, or $0.60 a share, in the year-ago quarter. On a non-GAAP basis, net income sunk to $227 million, or $0.87 per share, a decrease of 11.7 percent from last year's $257 million second quarter performance. That beat Seeking Alpha's earnings estimate of $0.80 per share.

Xerox's earnings per share numbers reflect a one-for-four reverse stock split that was executed on June 14.

Post sale revenue (maintenance, ink, paper, etc.) accounted for 79 percent of Xerox's total revenue for the quarter, which represented a 5.7 percent year-over-year decline but remained "consistent" with its first quarter 2017 mark, Xerox said.

Xerox, as part of its expansive ConnectKey-enabled product line launch, has made significant investments into the A4 print space. Those sales, the company said, feature a negative margin on the initial sale but become profitable over the life of the equipment, and as those benefits are received, it expects to continue investing in A4 during the back half of 2017.

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