Annual Report 2007 - Financials

Our reportable segments are consistent with how we manage the business and view the markets we serve. Our reportable segments are Production, Office, DMO and Other. See Note 2 – Segment Reporting in the Consolidated Financial Statements for further discussion on our segment operating revenues and segment operating profit.

Revenue by segment for the years ended 2007, 2006 and 2005 were as follows:


	Year Ended December 31,
(in millions)	Production			Office			DMO			Other			Total
2007
Equipment sales	$	1,297		$	2,590		$	658		$	208		$	4,753
Post sale and other revenue		3,163			5,223			1,492			1,775			11,653
Finance income		311			491			5			15			822
Total Revenues	$	4,771		$	8,304		$	2,155		$	1,998		$	17,228
Segment Profit	$	448		$	973		$	134		$	33		$	1,588
Operating Margin		9.4	%		11.7	%		6.2	%		1.7	%		9.2	%

2006
Equipment sales	$	1,343		$	2,368		$	605		$	141		$	4,457
Post sale and other revenue		2,913			4,760			1,327			1,598			10,598
Finance income		323			497			6			14			840
Total Revenues	$	4,579		$	7,625		$	1,938		$	1,753		$	15,895
Segment Profit	$	403		$	832		$	124		$	31		$	1,390
Operating Margin		8.8	%		10.9	%		6.4	%		1.8	%		8.7	%

2005
Equipment sales	$	1,368		$	2,436		$	558		$	157		$	4,519
Post sale and other revenue		2,830			4,670			1,245			1,562			10,307
Finance income		342			512			9			12			875
Total Revenues	$	4,540		$	7,618		$	1,812		$	1,731		$	15,701
Segment Profit	$	427		$	819		$	64		$	151		$	1,461
Operating Margin		9.4	%		10.8	%		3.5	%		8.7	%		9.3	%

Revenue

2007 Production revenue of $4,771 million increased 4%, including a 4-percentage point benefit from currency, reflecting:

9% increase in post sale and other revenue, including a 5-percentage point benefit from currency, as growth from digital products more than offset declines in revenue from older light lens technology.
3% decrease in equipment sales revenue, including a 5-percentage point benefit from currency, reflecting growth in production color systems offset by declines in black-and-white production printing systems and light production and an increased proportion of equipment installed under operating lease contracts where revenue is recognized over-time in post sale.
6% growth in installs of production color products driven by DocuColor 242/252/260 family, Docucolor 5000 and iGen3 activity.
8% decline in installs of production black-and-white systems reflecting a decline in installs of high-volume and light production systems.

2006 Production revenue of $4,579 million increased 1%, including a 1-percentage point benefit from currency, reflecting:

3% increase in post sale and other revenue reflecting growth in color products which was partially offset by declines in revenue from high-end black-and-white digital products and older light lens technology.
2% decrease in equipment sales revenue, including a 1-percentage point benefit from currency, as price declines of less than 5% was partially offset by strong color install activity.
74% growth in installs of production color products largely driven by strong activity in the DocuColor 240/250, DocuColor 5000 and DocuColor 7000/8000, as well as an increase in iGen3 installs.
Installs of production black-and-white systems were flat year-over-year. This included 16% growth in installs of black-and-white light production systems, reflecting continued success of the 4110 light production system, which was more than offset by 21% declines in installs of high-end black-and-white systems.

Operating Profit

2007 Operating profit of $448 million increased $45 million from 2006. The increase is primarily the result of higher gross profit and lower R,D&E, partially offset by an increase in bad debt expense.

2006 Operating profit of $403 million declined $24 million from 2005. This decrease is a result of reduced gross margins impacted by product mix, price declines and an increase in bad debt expense, partially offset by a decrease in R,D&E spending and selling expenses.

Revenue

2007 Office revenue of $8,304 million increased 9%, including a 3-percentage point benefit from currency, reflecting:

10% increase in post sale and other revenue, reflecting the inclusion of GIS as well as growth from color multifunction devices and color printers.
9% increase in equipment sales revenue, reflecting the inclusion of GIS as well as color multifunction products install growth.
65% color multifunction device install growth led by strong demand for Xerox WorkCentre products.
5% increase in installs of black-and-white copiers and multifunction devices, including 4% growth in Segment 1&2 products (11-30 ppm) and 7% growth in Segment 3-5 products (31-90 ppm) that includes the 95 ppm device with an embedded controller.
10% decline in color printer installs due to lower OEM sales.

2006 Office revenue of $7,625 million was relatively flat year over year, including a negligible currency effect.

2% increase in post sale and other revenue, including a benefit from currency of 1-percentage point. Growth in revenue from color multifunction products, black-and-white and color printers, were partially offset by declines in black-and-white multifunction and older light lens technology.
3% decrease in equipment sales revenue, including a benefit from currency of 1-percentage point. Price declines of less than 10% more than offset the growth in office color multifunction and black-and-white products. In addition, an increased proportion of office equipment installed under operating lease contracts were recognized in post sale revenue.
35% increase in installs of office color multifunction systems.
8% increase in installs of black-and-white digital copiers and multifunction devices. Install growth was driven by 15% growth in Segments 3-5 devices (31-90 ppm) and 7% growth in Segments 1&2 devices (11-30 ppm).
5% decline in color printers as compared to 111% growth in the comparable 2005 periods. The decline reflects lower 2006 OEM sales.

Operating Profit

2007 Operating profit of $973 million increased $141 million from 2006. The increase was primarily due to the inclusion of GIS and higher gross profits partially offset by higher SAG expenses.

2006 Operating profit of $832 million increased $13 million from 2005, reflecting the reduction in SAG expenses partially offset by lower gross profit.

Revenue

2007 DMO revenue of $2,155 million increased 11% from 2006, reflecting:

Strong performance in Eurasia, Central and Eastern Europe and the Middle East.
12% increase in post sale and other revenue, driven primarily by increased supplies, document management services and paper revenue.
9% increase in equipment sales revenue, reflecting install growth in office multifunction devices, light production black-and-white and production color systems. DMO equipment sales consist of Office and Production products, including a large proportion of sales in Segment 1&2 office products.

2006 DMO revenue of $1,938 million increased 7% from 2005, reflecting:

7% increase in post sale and other revenue, driven primarily by growth in revenue from supplies, color products and services.
8% increase in equipment sales revenue, reflecting strong sales of Segments 1&2 devices, as well as install growth in light production black-and-white and production color systems.

Operating Profit

2007 Operating profit of $134 million increased $10 million from 2006 reflecting higher gross profit primarily from increased revenue, partially offset by an increase in SAG expenses.

2006 Operating profit of $124 million increased $60 million from 2005, reflecting higher gross profit and reduction in SAG expenses.

Revenue

2007 Other revenue of $1,998 million increased 14%, including a 3-percentage point benefit from currency, primarily reflecting the inclusion of GIS as well as increased paper and value-added services revenues. Paper comprised approximately 40% of Other segment revenue.

2006 Other revenue of $1,753 million increased 1% from 2005 reflecting:

11% decrease in equipment revenue driven by lower equipment component sales included in value-added services.
3% increase in post sale and other revenue from 2005, including a benefit from currency of 1-percentage point, due primarily to increased paper sales and value-added services. Paper comprised approximately two-thirds of the 2006 Other segment post sale and other revenue.

Operating Profit

2007 Operating profit of $33 million increased $2 million from 2006 reflecting higher revenue as well as lower currency exchange losses and litigation charges, partially offset by higher interest expense and lower gains on the sales of businesses and assets.

2006 Operating profit of $31 million decreased $120 million from 2005, reflecting:

The absence of the following items that occurred in 2005: $93 million gain related to the sale of Integic and the $57 million interest benefit from the finalization of the 1996-1998 Internal Revenue Service tax audit.
$13 million pre-tax write-off resulting from the termination of a previous credit facility.
Lower interest income of $12 million and increased non-financing interest expense of $8 million.

The above were partially offset by the following:

Increased paper profit due to increased sales and reduced SAG expenses resulting from organizational streamlining.
$44 million in gains on sale of assets.