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Pitney Bowes and Xerox eye 2019 upswing

December 31, 2018

STAMFORD — Two of Connecticut’s corporate mainstays are attempting to transform themselves. Both their projects remain works in progress.

As they start 2019, Norwalk-based Xerox and Stamford’s Pitney Bowes continue to remake themselves by relying less on old-line technologies and shifting their focus to digital services. However, leadership turmoil and slumping earnings have complicated those efforts in recent years.

Turmoil at Xerox

Xerox spent the first half of 2018 embroiled in a fierce proxy war unleashed by billionaires Carl Icahn and Darwin Deason, after its board approved a $6.1 billion sale of the company to Japan-based Fujifilm Holdings.

Icahn and Deason appealed to fellow investors, arguing Fujifilm’s offer undervalued the company’s shares, and they could assemble a new board and management team that could put Xerox back on the road to growth.

After several weeks of brinksmanship, Xerox’s board relented under former chairman Bob Keegan. Icahn installed Keith Cozza, of Icahn Enterprises, as Keegan’s replacement, and Greenwich resident John Visentin as CEO.

Visentin worked previously for HP and IBM, two companies that forged new paths after personal computers were rendered commodities through intense competition. He later became CEO of Stamford-based Novitex, a spinoff of Pitney Bowes’ document-outsourcing operations.

With its $6.4 billion acquisition in 2010 of Affiliated Computer Services, Xerox, under former CEO Ursula Burns, attempted to follow the model of IBM by diversifying into services at the intersection of digital and print technologies. Those new areas included outsourced processing of electronic-toll payments and Medicaid claims on behalf of states.

But the Xerox board ended the experiment with the 2017 spinoff of its outsourced-services operations into a new company called Conduent. It relocated its headquarters to Florham Park, N.J.

With the Conduent separation, Jacobson had attempted to reinvigorate sales channels into Xerox’s traditional customer base, while unveiling new app-like technologies to control printers and other devices.

Still, many company observers have questioned how a new CEO would capitalize on any breakthroughs at Xerox’s research centers in Webster, N.Y. and Palo Alto, Calif. — at least to the degree it did with the copier a half-century ago.

“Not only did it prevent them from investing in their core businesses … but they were really focused on trying to make the outsourcing business profitable,” said Kevin McNeil, an analyst with credit-rating agency Fitch Ratings. “It does seem the research centers may have been neglected.”

At the same time, the firm has reduced its debt load. It trimmed its total liabilities by 5 percent on a year-over-year basis to $9.9 billion, with its assets valued at nearly $15.4 billion last September.

But, so far, those moves have not convinced credit-ratings agencies, whose assessments affect interest rates on corporate bond offerings.

Moody’s Investors Service recently downgraded debt owed by Xerox to junk-bond status, following an August downgrade by Fitch Ratings.

“Xerox’s core business has been in decline for several years and its recent product launches do not appear to be successfully turning (it) around,” McNeil said in an August report. “Xerox’s new CEO has not articulated a credible turnaround strategy. … Xerox is struggling to maintain its relative competitive (position).”

Rebound at Pitney

Pitney has struggled in the past few years with falling and stagnating earnings, as it has sought to diversify from its traditional business of mailing equipment and services.

Executives have largely attributed the lackluster results to major organizational changes.

In 2016, Pitney implemented a new U.S. enterprise-business platform — a move that disrupted short-term business, but one company officials said would eventually improve their operations.

The same year, Pitney also launched its Commerce Cloud system, which serves about 1 million small- and medium-sized businesses and 90 percent of Fortune 500 companies.

In 2018, Pitney officials considered selling the company, but improving returns persuaded them to keep the firm independent. Including the third quarter of 2018, Pitney has compiled five-straight quarters of year-over-year revenue growth.

The 2018 acquisition of parcel-logistics specialist Newgistics, for $475 million, has contributed significantly to the turnaround.

“In 2013, we were principally a mailing company — that had sustained Pitney for almost 100 years,” Pitney CEO and President Marc Lautenbach said in March. “We continue to be a mailing company. … But we’re more than that. We’re now a mailing and shipping company.”

Among other signs of improved financial health, the company returned more than $1 billion of capital to shareholders between 2013 and 2017, through dividends and stock buy-backs.

The company has also shed much of its debt. It paid off 25 percent between the start of 2012 and the end of 2016, equivalent to a total of $1.2 billion.

Its $361 million sale in 2018 of its Document Messaging Technologies business and an approximately $250 million bond payoff — funded by cash returned from overseas, after the 2017 U.S. tax reform — have further helped the firm to cut its liabilities.

The company’s credit is rated BBB- by Fitch Ratings, a lower-medium score that is still investment grade.

“One of the reasons we kept them at investment grade (credit rating) is because they’ve done a great job of not only returning money to shareholders, but also paying debt down,” Fitch Ratings analyst Jake Kranefuss said. “And they’ve been doing a lot to reduce costs.”

In January 2018, Pitney said it aimed to cut costs by $200 million during the next two years. Some 60 percent of the savings would be “people related.”

Company officials have declined to comment on whether the “people-related” reductions referred to layoffs.

Mixed outlook

In its first full quarter under Visentin, Xerox reported third-quarter profits of $89 million — half its level a year earlier. Sales were off 6 percent, totaling less than $2.4 billion.

Xerox shares were trading Monday at about $20, trailing their 52-week high of approximately $37.

Pitney fared better in the past three months. Third-quarter returns reached $833 million, up 14 percent from 2017. Profits totaled about $77 million, jumping 34 percent.

But investors still appear skeptical of the recent revival. Pitney shares were trading Monday around $6, lagging a 52-week high of about $15.

pschott@scni.com; 203-964-2236; twitter: @paulschott

Alex.Soule@scni.com; 203-842-2545; @casoulman

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