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Partners: Xerox Split Will Lead To Deeper Channel Focus

Xerox's planned split into two companies, one for products and one for services, could be a help to its channel partners, who hailed the solution provider's announcement Friday.

Xerox solution providers said the company's plan to split into two independent, publicly traded companies -- one focused on hardware, the other on business process outsourcing -- will drive more targeted investments in both companies and create a deeper focus on the channel.

"This is absolutely a good thing for the reseller community," said Steve Jenkins, president of Xerox partner Precision Document Solutions of Carrollton, Texas, likening it to the split last year of Hewlett-Packard into HP Inc. and Hewlett Packard Enterprise. "Both this split and the HP split are great for the reseller community."

"I think what this is going to do is give the hardware side of the business an increased focus," and make Xerox more competitive in the products marketplace, Jenkins said, adding that he also sees value for Xerox shareholders.

[Related: Xerox CEO: Split Was Board's Call, Not Icahn's]

Meanwhile, Joshua Justice, president of Southern Solutions, a Waldorf, Md.-based Xerox partner, said he believes the split will help partners. The split will allow focused support for Xerox business lines he works with, such as managed print and development of Xerox applications, all the way through to the top of the organization.

"I'm very positive about it," Justice said.

Justice said he has been happy with past support from Xerox, and expects the split will allow it to focus more on its channel partners.

"In terms of my business, I'm just looking forward to the increased attention on my business and the focus on a stronger partnership," Justice said.

Xerox on Friday confirmed that it will split into two companies, one focused on its hardware products, the other on its business process outsourcing business. The Wall Street Journal first reported the split Thursday.

"This will define the next chapter" of the company, Chairman and CEO Ursula Burns said Friday morning on the company's fourth-quarter earnings call, labeling the intended split as "bold steps."

"The benefits of separation outweigh the benefits of the current structure," she said, calling each of the two groups "strong businesses" that face "different market realities."

Xerox on Friday also said it has reached an agreement with activist investor Carl Icahn, who declared in November the purchase of a roughly 7 percent stake in the Norwalk, Conn.-based technology giant -- whose Global Services division ranks No. 7 on CRN's 2015 Solution Provider 500 list. Icahn will control three of nine seats on the board that will oversee the outsourcing company.

"I applaud and respect Ursula Burns for doing what she believes shareholders want," Icahn said via his Twitter account.

In a separate Xerox statement, Icahn added: "We strongly believe that an independent [Business Process Outsourcing] company with fresh, focused leadership and best-in-class corporate governance will greatly enhance shareholder value, and we are proud to be a part of that process."


’NEXT CHAPTER' FOR XEROX

Interviewed on CNBC earlier Friday, Burns said the board and management agreed earlier this month on the split. In spite of perceptions that Icahn -- who has bought large stakes in companies in order to force change -- forced Xerox's hand, Burns dispelled that notion, emphasizing that her board drove the decision. However, she told CNBC that she informed Icahn of the decision, which he apparently supported. "He had nothing to do with the initiation, the contemplation, the analysis or any discussion around the deal," she said. "We are happy that we are in agreement with it, but he did not drive it."

A committee of the current board will begin to look outside the company for a CEO of the business process outsourcing company and will allow a person selected by Icahn to observe and advise the committee during that process, the company said.

The BPO side, which is growing at an annual rate of more than 5 percent, "needs to be highly adaptive" as it responds to clients' "fast-growing needs," Burns said on the earnings call. She also said a split would allow each entity to be more focused in its hiring activities as they seek professionals with more targeted skill sets.

In a slide presentation that accompanied Friday's earnings call, Xerox underscored the growth potential in services, with the margin on its services business -- 9.4 percent -- having exceeded company expectations of 9 percent in the fourth quarter of 2015, while the margin on the products side -- 11.8 percent -- fell within expectations.

The document technology business generated about $11 billion in revenue in 2015, while the business process outsourcing business took in about $7 billion, according to the company. The latter has a "large base" of recurring revenue -- more than 90 percent -- with high renewal rates and a chance to expand its margins.

Responding to a question on the earnings call, Burns said the split would allow the BPO side to invest more in the automation of its services delivery infrastructure, such as cloud-based services, without having to compete with the products side for investment.

Xerox expects to complete the split by the end of this year, subject to conditions.

During its third-quarter earnings call in late October, Burns said the board of directors had approved a review of operations -- including its business portfolio and capital allocation -- in an attempt to grow sales. "We are looking into what we can do differently," Burns said, adding that the board was to look into many options, but selling the company was not one of them.

The split essentially undoes Xerox's 2010 purchase of Affiliated Computer Services for $5.6 billion, according to Ken Stewart, a print services market analyst with Photizo Group of Mauldin, S.C. While that purchase was not necessarily a bad decision, Stewart told CRN on Thursday, he said he thinks Xerox missed the mark on the execution of its services vision.

"I think the strategy was sound to begin with. I think the execution has been flawed since Day 1," he said.

But in her interview with CNBC on Friday, Burns said she did not believe it was a mistake to buy ACS. "Not at all," she said, calling it a "great" move that "actually helped strengthen the Xerox brand," boosting innovation on the services side. Going forward, Burns added, Xerox needs to "maintain" the value it got from the deal.


FOURTH-QUARTER EARNINGS UP, REVENUE DOWN

In its earnings report for the fourth quarter, which ended Dec. 31, Xerox reported a 43 percent jump in net income, to $285 million, or 32 cents per share, beating Wall Street expectations of 28 cents. But revenue fell about 8 percent, to $4.7 billion, because of a drop on the products side, as well as currency fluctuations. The services segment generated $2.6 billion in revenue, down 3 percent, but saw a 22 percent jump in bookings.

For the year, Xerox took in $18.2 billion in revenue, a drop of 7 percent. Adjusted operating income of $1.53 million, was down nearly 19 percent from 2014.

Sarah Kuranda and Jimmy Sheridan contributed to this story.

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