Xerox Remains a Firm in Perpetual Decline as Printing Revenue Dries Up Amid Digitization

Analyst

Malik Ahmed Khan

Xerox is the leader in print solutions, but we fear that this industry will remain in secular decline. As a company, Xerox specializes in enterprise print equipment, largely multifunction printers (printers that can print, copy, and scan) ranging from A3 to A4 paper sizes. We think the print industry is in a jam as the workplace becomes increasingly more digital. This trend was exacerbated by the COVID-19 pandemic, forcing many corporations to rethink their office and, by association, print needs. In our view, eroding switching costs for Xerox is reflected in its declining equipment market share as Canon and HP grew share. We think this secular decline as well as its competitive positioning is a key issue for Xerox because nearly all of Xerox’s offerings are dependent on one another. Only about low double digits of print supplies revenue are unbundled from other Xerox contracts, like equipment leases. 

Despite Xerox's print equipment’s overall declines, isolated offerings have changed for the better. Color printers are gaining more popularity due to the declines in color toner costs. Additionally, Xerox’s ConnectKey multifunction printers have bolstered sales in entry and mid-range equipment, as they seemingly offer more security via McAfee whitelisting technology and an interface that allows users to print from or scan to third-party apps, like Dropbox. These features are essential in the print industry; a 2021 report by Quocirca revealed that 85% of organizations have either implemented data loss prevention solutions or are planning to do so. However, these mild gains haven’t been enough to lead to equipment growth for Xerox, as its competitors offer similar solutions.

Post-sales revenue includes largely managed print services, or MPS--a service that brings efficiencies to how employers use their print/copy equipment. MPS has upheld the business through drastic equipment declines, but it’s an offering that we believe to be ultimately cannibalistic to equipment and supplies sales.

Business Strategy & Outlook

We believe Xerox has a no-moat rating as both its equipment and post-sales solutions do not create sustainable customer switching costs or significant intangible assets within the print industry market, which we think has a bleak and commoditized outlook. In turn, we do not foresee Xerox generating excess returns on capital for a durable period of time.

Xerox's business model hinges on large enterprises choosing to lease multifunction printers in order to keep up with ever-changing print quality, speed, and security. These contracts are typically three to five years long. But, no matter what the length of the lease is, the contract usually specifies a set amount of sides that can be printed in black and white and or color as well. If employers go over this amount, they pay a charge per additional side printed. Often bundled in the lease is a steady stream of supplies and services, with the option to select premium add-ons, like faster servicing. Once a lease is over, the employer may want new multifunction printers installed with the latest and greatest in technology and have no particular loyalty to Xerox thereafter. We believe that it is relatively hassle-free for enterprises to change equipment providers because equipment leases are often bundled with supplies and servicing. Additionally, there’s not much of a learning curve that an enterprise's facilities team needs to face in order to undergo with a switch in vendor. Because servicing and supplies are often included in a lease bundle, and multifunction printers can create servicing tickets or send requests automatically to a service team for repair or renewal of supplies, there’s very little processes enterprises need to learn or be involved in the upkeep of the rented equipment.

While we don't believe there are switching costs for equipment and servicing (post sales) in a leasing model, we also think this moat source is lacking even with equipment ownership, rather than a lease agreement. In this case, the enterprise would own Xerox’s print equipment and have a standalone servicing and supplies contract. The majority of third-party servicing and supplies companies are compatible with hardware from Xerox’s competitors--which would make it easy for customers to switch out of Xerox hardware even if in the midst of a servicing contract. On the flip side, if an enterprise had non-Xerox equipment but did have Xerox managed print services (MPS) (which is compatible with competitor multifunction printer equipment), we still think switching costs are lacking. 

MPS’ goal is to create print efficiencies through servicing and reducing print output. Concerning the former use case, one example of this smart servicing is that MFPs will automatically send a servicing ticket to the local Xerox supplier when toner is low, and the supplier will restock the enterprise toner accordingly. On the latter case, one example of reducing output is that the MPS tracks employee usage such that if an employee tends to print significantly more than the average employee, the service may send a notification to this user, suggesting they decrease their print output. While in a lease program, MPS can actually save Xerox money--it doesn't have to stock as much supplies or service equipment as often--it could affect the extent of the next lease entered into. For example, if the service reduced inefficiencies and, thus, use of equipment, some employers may opt for a smaller print/copy fleet after they have a better idea of their company’s print needs. So not only is this business cannibalistic (if used with Xerox hardware), but it also shows little switching costs. This is because while historical MPS data is helpful to create further efficiencies, it does not take much time for competitor MPS providers to see certain trends to act upon.

Besides services and equipment, Xerox has a few other smaller sources of revenue. In February 2019, Xerox announced new offerings in industry digital solutions, including Digital Patient, Digital Insurer, and Digital Citizen. These offerings serve mainly as documentation management solutions. For example, Digital Patient acts as a go-between between the scanner and electronic medical records. The software uploads hard copy materials from the scanner directly to the patient’s electronic medical record, or EMR--as opposed to an alternative, like emailing it to one’s self and then assigning it to the proper patient in the EMR system. The solutions are also a scanner/software go-between in other historically paperwork-heavy industries like insurance and government. While these niche solutions may be growth catalysts for Xerox--we think even these slow-moving industries will eventually become largely digital, significantly deteriorating the market for these solutions. Likely recognizing this fate, Xerox is banking on new revenue streams from digital print packaging and printed electronics. For example, the company is in the research phase concerning IoT sensors, such as ones that could detect hazardous gases in packaged foods. These developments are still in the early stages, and we think it will be a tough road to monetize these on a large scale--given digital print’s often niche use in short-run product lines. 

In terms of intangible assets, Xerox has been responsible for many crucial developments in the technology space from creating the first computer with a graphical interface (the Xerox Alto, which inspired the Apple Lisa and later Macintosh)--to the creation of the PDF file format (which Xerox reportedly refused to monetize, prompting the creation of Adobe by ex-employees). Xerox’s PARC facility is responsible for these R&D inventions as well as Xerox’s own printer/copier technology and contracted research. However, roughly half of the revenue comes from in-house Xerox projects, a third from government funding, and the rest from contracts with other companies, like Boeing, Honda, and Samsung. We don’t deny that in-house R&D is important just to keep up with printer tech, however, we think Xerox would do better by increasing its PARC headcount in order to cater to more enterprise commissions from the likes of Boeing, given the group's impressive track record.

None

Economic Moat

Xerox

Xerox Holdings Corp. is a workplace technology company, which builds and integrates software and hardware for enterprises. It delivers seamless, secure and sustainable experience for customers to manage information across digital and physical platforms. The company was founded on March 11, 2019, and is headquartered in Norwalk, CT.

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Xerox Holdings Corp. is a workplace technology company, which builds and integrates software and hardware for enterprises. It operates through the Print and Other, and Financing (FITTLE) segments. The company was founded on March 11, 2019, and is headquartered in Norwalk, CT.

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