JP Morgan On Xerox

Completed 02 Jan 2017 08:10 PM EST
Disseminated 03 Jan 2017 12:15 AM EST
North America Equity Research

03 January 2017
Overweight
Xerox Corporation
Previous: Neutral
Still in Print: Assuming Coverage of New Xerox at

Overweight: Price Target $10.50
Price: $8.73
XRX, XRX US
Price Target: $10.50

Previous: $10.00
We are assuming coverage of XRX with an Overweight rating, taking advantage

of investor turnover as Conduent spins, which marks the start of a long turnaround
process. Next up, we should see several constructive developments: a major DT
product overhaul, expansion of the distribution channel, a tilt toward growth
categories, and ongoing execution of the $1.5bn productivity program. These
strategic initiatives may slow, but not reverse, secular revenue decline over the
next 5 years, in our view, but they should buoy margins, restore XRX to ~$900
million annual cash flow by 2019, support ~10% dividend growth, and a DDM
approach to valuation, which yields a 2017 year end price target of $10.50 and a
reason to buy XRX here instead of sitting idly by on the sidelines.
New Xerox, old category. Focus on Document Technologies and Document
Outsourcing growth segments representing ~40% of total revenue should offset
decline in the ~60% of sales that originate in mature printer markets, but the
300bp/annum mix-shift wont return Xerox to growth until 2023 we believe.
2017 could be pivotal. Under new leadership, with two quarters of y/y revenue
and margin improvement, the XRX turnaround has momentum ahead of the
largest ever product launch that should build on the 75% annuity business,
expand the channel, and shift XRX into growth categories in the $85bn TAM.
The $1.5 billion productivity program has traction that should yield significant
margin improvement, near term.
Alternative Energy, Applied and

Emerging Technologies
Paul Coster, CFA
(1-212) 622-6425
paul.coster@jpmorgan.com
Bloomberg JPMA COSTER <GO>
Paul J Chung
(1-212) 622-5552
paul.j.chung@jpmorgan.com
Mark Strouse, CFA

(1-212) 622-8244
mark.w.strouse@jpmorgan.com
Tien-tsin Huang, CFA

(1-212) 622-6632
tien-tsin.huang@jpmorgan.com
J.P. Morgan Securities LLC
Price Performance
11.5
$
10.5
9.5
8.5
Dec-15
Attractive cash-flow and dividend outlook. We expect restructuring costs

and pension contributions to weigh medium turn, but we see investment grade
capital structure as a bridge to a return to a $900mm FCF run-rate by 2019E.
This supports the dividend and share repurchase commitments, and in our view
are reasons to own this stock absent a near-term growth narrative.
AC
Mar-16
Jun-16
Sep-16
Dec-16
XRX share price ($)

S&P500 (rebased)
Abs
Rel
YTD
-17.6%
-27.7%
1m
-7.8%
-10.0%
3m
-13.1%
-16.7%
12m
-17.7%
-27.1%
We assume coverage of XRX stock at an Overweight rating. Trading at 9.1

times CY18 PF EPS, XRX is at a 45% discount to its peer group, justified by
the weak growth profile. On the other hand, strong FCF prospects shine a light
on the attractive ~3% 2017 dividend yield and prospects for 10%+ DPS growth.
Based on a DDM, our 2017 year-end PT is $10.50; we think theres a buying
opportunity here.
Xerox Corporation (XRX;XRX US)
FYE Dec
2015A
EPS - Recurring ($)
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
Bloomberg EPS FY ($)
Revenue FY ($ mn)
0.19
0.21
0.22
0.30
0.90
0.95
11,383
2016E
2016E
2017E
2017E
2018E
2018E
(Prev)
(Curr)
(Prev)
(Curr)
(Prev)
(Curr)
0.22A
0.30A
0.27A
0.33
1.12
17,335
0.20A
0.24A
0.23A
0.31
0.99
1.12
10,813
0.24
0.29
0.28
0.31
1.13
16,710
0.21
0.27
0.22
0.29
0.99
1.13
10,492
0.25
0.29
0.29
0.33
1.15
16,284
0.21
0.26
0.22
0.28
0.96
1.15
10,273
Company Data
Price ($)
Date Of Price
52-week Range ($)
Market Cap ($ bn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End Date
8.73
30-Dec-16
11.39-8.48
9.18
Dec
1,052
10.50
31-Dec-17
Source: Company data, Bloomberg, J.P. Morgan estimates. Note: Above EPS figures include FAS123R.
See page 16 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of AMANDA SMITH at JPMorgan Chase & Co. and clients of J.P. Morgan.
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Investment Thesis
Xerox occupies leading positions in large document technology and outsourcing
markets, some of which exhibit decent growth momentum.
Figure 1: Xerox occupies leadership positions in some growth markets
$ billions
Source: Company reports. Note that TAM excludes Fuji Xerox territories
Xerox commands about 10% share of the overall Document Technology and
Outsourcing market, with a broad portfolio of products and services, long-established
customer relationships, and with deep go-to-market resources. We note that about
75% of sales are annuity-like, repeat business governed by multi-year contracts.
Figure 2: Xerox company overview
Source: Company reports
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Focus on Document Technologies (DT) and Document Outsourcing (DO) growth

markets representing ~40% of total revenue should offset decline in the ~60% of
sales that originate in mature printer markets. The company targets about 300bp
mix-shift per annum owing to strategic focus on A4 MFPs, Managed Print Service
(MPS) solutions for Large Enterprises and SMBs, and workflow automation (WFA)
solutions.
Figure 3: Xerox strategy points to shift from mature to growthmarkets
The focus on growth markets should help slow, but not reverse, the ongoing decline
in y/y revenues. We dont expect Xerox to return to growth until 2023 and there
remains an ever-present risk of secular decline in printing documents and documentbased workflow owing to increased digitization and access to information via
screens. It is therefore difficult to get excited about a potential P/E re-rating based on
the growth outlook.
Figure 4: Revenue Growth and Mix, Long-Term Forecast
$ in billions
$12.00
$10.00
-2.0%
$8.00
-1.6%
-1.2%
-0.8%
-0.3%
0.1%
0.6%
1.0%
-1.0%
-2.0%
-3.0%
-4.0%
$4.00
$2.00
1.0%
0.0%
-3.2%
$6.00
2.0%
-5.0%
-5.9%
-6.0%
$0.00
-7.0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Growth Markets
Mature Markets
% growth y/y
Source: Company report, JPMorgan estimates
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Nonetheless, the company has made modest progress to slow the revenue decline and
eke out better operating margins. In early 2016, amid a slowdown in demand from
emerging markets, Xerox ramped up a cost-cutting and productivity program. The
firm introduced new products at drupa 2016 that may have spurred some interest in
high and mid-range color printers.
Figure 5: Xerox revenue trend in the last two years
% change, y/y, constant currency
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

0%
-3%
-3%
-3%
-4%
-5%
-5%
-5%
Doc Tech
-5%
DT + DO
-5%
-6%
-6%
-7%
-8%
-9%
-10%
-9%
Source: Company reports, JPMorgan
Xerox enters 2017 in what looks like a controlled revenue descent with positive
margin momentum, which is trending quite quickly toward the firms target 12.514.5% operating margin range.
Figure 6: Xerox operating margin trend in the last two years
15.0%
14.0%
13.0%
13.9%
13.1%
12.7% 12.5%
12.6%
13.1%
12.0%
11.0%
10.2%
10.0%
9.0%
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
Source: Company reports, JPMorgan
75% of the SMB market is

serviced by indirect challenge;
multi-brand dealers are a
strategic focus for Xerox in 2017
2017 could be pivotal with the company entering a turnaround strategy outlined at
the New Xerox analyst day event in December. The company is about to introduce
the largest ever product launch that should build on the 75% annuity business,
expand the channel, and shift XRX into growth categories in the $85bn TAM. The
new product line-up should help XRX gain share in the SMB channel, gain share of
the A4 MFP market, and expand leadership in high-end production color and
packaging. We believe XRX may enhance the go-to-market by tuck-in acquisitions
of distributors, replicating the successful 2007 acquisition of Global Imaging
Systems.
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
2017 should also yield margin benefit from the $1.5 billion productivity program that
attacks direct cost of service delivery, COGS and operating expenses. This
productivity program represents about 15% of the firms addressable cost base of $10
billion of which nearly 50% is direct cost of delivery. The firm is consolidating MPS
delivery and technical services, reducing manufacturing footprint, rationalizing the
supply chain, and eliminating management layers. We applaud these initiatives, but
caution against unrealistic expectations; much of the cost-containment will be offset
by price pressure and at risk from unfavorable currency fluctuations.
Figure 7: Xerox's transformation program points to $1.5bn of productivity gains
Annuity revenue includes

bundled supply and
maintenance contracts,
equipment rentals, unbundled
supplies and financing revenue
Aside from improved market focus, the legacy Xerox business is now wellpositioned to focus on cash-flow generation and to return capital to shareholders.
The firm, which is capital-light (~2% of revenue goes to Capex), has good visibility
into about 75% of revenues that drive cash-flow. XRX posted over $1.1 billion of
FCF in 2014, over $900 million in 2015 and regularly converts over 110% of net
income into FCF. That said, separation, restructuring and pension contributions will
compromise XRXs FCF through 2018.
XRX forecasts a return to normalized operating cash flow of over $900mn by 2019 and
targets over 50% of FCF being returned to investors as dividend and share repurchases.
In the interim, 2017 through 2018, the annuity-related FCF plus an investment grade
balance sheet makes us confident that the firms recently announced dividend of $0.25.
p.a. can be sustained and the firm can continue to deliver 10%+ DPS growth (15%
CAGR over the last four years). Absent growth, we think investors should focus on the
dividend yield and dividend growth as the basis for valuing the company.
Figure 8: Xerox analyst day performance expectations

5

03 January 2017
Paul Coster, CFA

(1-212) 622-6425
Financial Outlook
We look for XRX to generate 2016 PF EPS of $0.99 on sales of $10.8 billion.
We look for XRX to generate 2017 PF EPS of $0.99 on sales of $10.5 billion; we
forecast a 2017 DPS of $0.26.
forecast a 2018 DPS of $0.27. This is the basis for our DDM-based price target.
forecast a 2019 DPS of $0.29.
Revenue Outlook
We do not expect XRX to post revenue growth until 2023 owing to a high proportion
of revenues that are exposed to mature and declining end-markets. In particular, we
expect the annuity revenue within the DT segment, which is ~45% of current
revenue, to decline at an 8% CAGR. We expect modest growth to return by
approximately 2023, as growth in the DO segment should be enough to offset the
drag from the DT annuity business, in our view.
Table 1: Long-term revenue forecast by market
$ in billions
Growth Markets
Mature Markets
Total
% growth y/y
2015
$4.3
$7.3
2016
$4.2
$6.6
2017
$4.4
$6.1
2018
$4.6
$5.7
2019
$4.8
$5.3
2020
$5.1
$4.9
2021
$5.4
$4.5
2022
$5.6
$4.2
2023
$6.0
$3.9
2024
$6.3
$3.7
2025
$6.6
$3.4
% CAGR
5%
(7%)
$11.5
$10.8
-5.9%
$10.5
-3.2%
$10.3
-2.0%
$10.1
-1.6%
$10.0
-1.2%
$9.9
-0.8%
$9.9
-0.3%
$9.9
0.1%
$9.9
0.6%
$10.0
1.0%
(1%)
CAGR
'15-'23
-5.3%
Source: Company data, J.P. Morgan estimates.
Table 2: Long-term revenue forecast by segment

$ in millions
Document Technology
% Growth (y/y)
% of business
Equipment Sales
% Growth (y/y)
% of business
Annuity
% Growth (y/y)
% of business
Document Outsourcing
% Growth (y/y)
% of business
Other
% Growth (y/y)
% of business
Total Revenue
% Growth (y/y)
FY13A
FY14A
FY15A
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
8908
8358
-6.2%
66.3%
7365
-11.9%
64.7%
6800
-7.7%
62.9%
6365
-6.4%
60.7%
6010
-5.6%
58.5%
5688
-5.4%
56.4%
5413
-4.8%
54.2%
5162
-4.6%
52.1%
4948
-4.1%
50.1%
4752
-4.0%
48.1%
2482
-9.0%
19.7%
2179
-12.2%
19.1%
1962
-9.9%
18.1%
1962
0.0%
18.7%
1982
1.0%
19.3%
2002
1.0%
19.8%
2022
1.0%
20.3%
2042
1.0%
20.6%
2062
1.0%
20.9%
2083
1.0%
21.1%
-0.6%
5876
-4.9%
46.6%
5186
-11.7%
45.6%
4838
-6.7%
44.7%
4402
-9.0%
42.0%
4028
-8.5%
39.2%
3686
-8.5%
36.5%
3391
-8.0%
34.0%
3120
-8.0%
31.5%
2886
-7.5%
29.2%
2669
-7.5%
27.0%
-8.0%
3384
1.4%
26.9%
3265
-3.5%
28.7%
3275
0.3%
30.3%
3390
3.5%
32.3%
3525
4.0%
34.3%
3666
4.0%
36.3%
3831
4.5%
38.4%
4004
4.5%
40.4%
4184
4.5%
42.4%
4393
5.0%
44.4%
3.8%
860
-62.8%
6.8%
753
-12.4%
6.6%
738
-2.0%
6.8%
738
0.0%
7.0%
738
0.0%
7.2%
738
0.0%
7.3%
738
0.0%
7.4%
738
0.0%
7.5%
738
0.0%
7.5%
738
0.0%
7.5%
-0.3%
12602
-13.4%
11383
-9.7%
10813
-5.0%
10492
-3.0%
10273
-2.1%
10092
-1.8%
9982
-1.1%
9903
-0.8%
9870
-0.3%
9883
0.1%
-1.8%
61.2%
2727
18.7%
6181
42.5%
3337
22.9%
2311
15.9%
14556
Source: Company reports and J.P. Morgan estimates.
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Income Statement Forecast

GAAP operating margins are weighed down near-term owing to restructuring
initiatives which we forecast will result in ~$200mm in charges during FY17. On a
pro-forma basis, we look for modest operating leverage over the next several years as
the company realizes benefits from its restructuring initiative. That said, longer-term
margins are likely to grow with revenue owing to the mature stage of the business.
Table 3: Income Statement Forecast
$ in millions
Total Revenue
% Growth (y/y)
GAAP cost of revenues
% of Sales
PF items
Gross profit (GAAP)
Gross Margin
Gross profit (Pro forma)
Gross Margin
Research and development
% of Sales
Sales, general & administrative
% of Sales
Restructuring and asset impairment charges
Amortization of acquired intangible assets in Opex
Total GAAP operating expenses
Operating income (loss) (GAAP)
Operating Margin (GAAP)
PF Items
Operating income (loss) (Pro forma)
Operating Margin (pro forma)
EBITDA (PF)
EBITDA Margin
Non-financing interest expense, net
Other income/expenses
Income (loss) before income taxes (GAAP)
Provision for (benefit from) income taxes
PF Other income/expense
Income (loss) before income taxes (Pro-forma)
Provision for (benefit from) income taxes
GAAP Net Income before special items
GAAP Net Margin
PF Net Income before special items
Net Margin
Discontinued operations
Equity in unconsolidated affiliates
Minority interests
GAAP Net income
PF Net income
GAAP Diluted EPS
PF Diluted EPS
Weighted average shares outstanding - diluted
FY15A
11383
-9.7%
6805
59.8%
0
4,578
40.2%
4578
40.2%
511
4.5%
2860
25.1%
27
60
3458
1120
9.8%
88
1208
10.6%
1798
15.8%
79
(20)
1061
247
40
1109
250
814
7.2%
859
7.5%
0
135
-18
931
976
$0.86
$0.90
1081
FY16E
10813
-5.0%
6500
60.1%
111
4,313
39.9%
4424
40.9%
482
4.5%
2717
25.1%
297
44
3540
773
7.1%
368
1252
11.6%
1817
16.8%
72
2
698
145
0
1177
267
553
5.1%
911
8.4%
0
137
(11)
718
1037
$0.65
$0.99
1050
FY17E
10492
-3.0%
6243
59.5%
109
4,249
40.5%
4359
41.5%
476
4.5%
2652
25.3%
200
0
3328
921
8.8%
200
1231
11.7%
1794
17.1%
73
0
848
187
0
1157
255
662
6.3%
903
8.6%
0
156
(12)
962
1047
$0.76
$0.99
1059
FY18E
10273
-2.1%
6113
59.5%
115
4,161
40.5%
4275
41.6%
476
4.6%
2599
25.3%
0
0
3075
1086
10.6%
0
1200
11.7%
1759
17.1%
73
0
1012
223
0
1127
248
790
7.7%
879
8.6%
0
156
(12)
934
1023
$0.87
$0.96
1068
FY19E
10092
-1.8%
6005
59.5%
120
4,087
40.5%
4208
41.7%
476
4.7%
2528
25.0%
0
0
3004
1083
10.7%
0
1204
11.9%
1733
17.2%
73
0
1010
222
0
1130
249
788
7.8%
882
8.7%
0
156
(12)
932
1026
$0.87
$0.95
1076
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Cash Flows and Balance Sheet Forecast

XRX has ~$6bn of net debt, or approximately 3.4x TTM EBITDA, which we believe
is manageable owing to the firms solid cash flow generation. The company expects
~$400mm in annual pension payments in FY17 and FY18 owing to lump sum
payouts, weighing on FCF. Pension payments are expected to normalize around
$250mm in FY19. The company targets ~$900mm in annual free cash flow in FY19.
The company has ample liquidity with which to pay out the dividend and make
strategic acquisitions, in our view.
Table 4: Balance Sheet
$ in millions
Cash and cash equivalents
Accounts receivable, net
Finance receivables
Inventories
Other current assets
Total current assets
Property and equipment, net
Long-term finance receivables
Other assets, net
Total assets
Short-term debt
Accounts payable
Accrued expenses and other
Total current liabilities
Long-term debt
Other non-current liabilities
Total Liabilities
Total stockholders' equity
Total liabilities and stockholders' equity
FY15A
1228
1073
1315
942
249
4807
1211
2576
7151
15745
961
1350
174
2485
6345
2597
11427
4318
15745
FY16E
1364
1131
1422
1102
269
5288
1085
2457
7093
15923
2011
1277
278
3565
5320
2770
11655
4268
15923
FY17E
1610
1101
1448
1073
269
5501
814
2457
7093
15865
2011
1243
273
3526
5320
2770
11616
4249
15865
FY18E
1942
1080
1491
1052
269
5834
552
2457
7093
15936
2011
1219
262
3492
5320
2770
11582
4354
15936
FY19E
2184
1062
1542
1035
269
6093
503
2457
7093
16146
2011
1199
257
3467
5320
2770
11557
4588
16146
FY16E
553
565
(19)
154
(83)
(136)
(219)
0
816
(154)
(18)
(2)
(174)
79
(322)
0
0
(229)
(472)
9
179
662
FY17E
662
563
0
0
0
(400)
(6)
0
819
(172)
0
(120)
(292)
0
(281)
0
0
0
(281)
0
246
647
FY18E
790
558
0
0
0
(400)
(35)
0
913
(176)
0
(120)
(296)
0
(285)
0
0
0
(285)
0
332
737
FY19E
788
529
0
0
0
(240)
(42)
0
1035
(180)
0
(300)
(480)
0
(313)
0
0
0
(313)
0
242
855
Table 5: Cash Flow Statement

$ in millions
Net Profit (loss)
Depreciation and amortization
Gain on sale of investments
Restructuring charge
Payments for restructurings
Contribution to defined benefit pension plan
Change in working capital
Other assets and liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
Capital expenditures
Acquisitions
Other
NET CASH USED IN INVESTING ACTIVITIES
Net debt issuance (repayment)
Common stock dividend
Share repurchases
Securitization proceeds
Other
NET CASH PROVIDED BY FINANCING ACTIVITIES
Effect of exchange rate on cash
Change in cash and cash equivalents
Free Cash Flows
FY15A
814
590
(67)
27
(79)
(301)
(61)
0
923
(159)
(13)
166
(6)
(22)
(314)
(1302)
0
579
(1059)
(77)
(219)
764
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Dividend Forecast
Following the spin-off of Conduent, XRX targets a quarterly dividend per share of
$0.0625 ($0.26 annual), down from $0.0775 that was declared in October 2016.
Based on ~1,050m shares outstanding, the DPS implies a total annual dividend
payment of ~$275mm, a comfortable (perhaps conservative) payout from the
~$900mm FCF which is targeted post-restructuring. Following the reset in the April
2017 DPS, we expect DPS to grow at a ~9% annual rate.
Table 6: Dividend Forecast
$ in millions, except per share data
Dividend per share
% Growth (y/y)
Total Dividend Payment
Percentage of FCF
FY15A
$0.2725
11.2%
294
38.5%
FY16E
$0.3025
11.0%
318
48.0%
FY17E
$0.2649
-12.4%
281
43.4%
FY18E
$0.2667
0.7%
285
38.7%
FY19E
$0.2907
9.0%
313
36.6%
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Investment Thesis, Valuation and Risks

Xerox Corporation (Overweight; Price Target: $10.50)
Investment Thesis
Focus on Document Technologies (DT) and Document Outsourcing (DO) growth
markets representing ~40% of total revenue should offset decline in the ~60% of
sales that originate in mature printer markets. The company targets about 300bp
mix-shift per annum owing to strategic focus on A4 MFPs, Managed Print Service
(MPS) solutions for Large Enterprises and SMBs, and workflow automation (WFA)
solutions.
The focus on growth markets should help slow, but not reverse, the ongoing decline
in y/y revenues. We dont expect Xerox to return to growth until 2023 and there
remains an ever-present risk of secular decline in printing documents and documentbased workflow owing to increased digitization and access to information via
screens. It is therefore difficult to get excited about a potential P/E re-rating based on
the growth outlook.
Xerox enters 2017 in what looks like a controlled revenue descent with positive
margin momentum, which is trending quite quickly toward the firms target 12.514.5% operating margin range. 2017 could be pivotal with the company entering a
turnaround strategy outlined at the New Xerox analyst day event in December.
The company is about to introduce the largest ever product launch that should
build on the 75% annuity business, expand the channel, and shift XRX into growth
categories in the $85bn TAM. The new product line-up should help XRX gain share
in the SMB channel, gain share of the A4 MFP market, and expand leadership in
high-end production color and packaging. We believe XRX may enhance the go-tomarket by tuck-in acquisitions of distributors, replicating the successful 2007
acquisition of Global Imaging Systems.
2017 should also yield margin benefit from the $1.5 billion productivity program that
attacks direct cost of service delivery, COGS and operating expenses. This
productivity program represents about 15% of the firms addressable cost base of $10
billion of which nearly 50% is direct cost of delivery. The firm is consolidating MPS
delivery and technical services, reducing manufacturing footprint, rationalizing the
supply chain, and eliminating management layers. We applaud these initiatives, but
caution against unrealistic expectations; much of the cost-containment will be offset
by price pressure and at risk from unfavorable currency fluctuations.
The company forecasts a return to normalized operating cash flow of over $900
million by 2019 and targets over 50% of FCF being returned to investors as dividend
and share repurchases. In the interim, 2017 through 2018, the annuity-related FCF
plus an investment grade balance sheet makes us confident that the firms recently
announced dividend of $0.25. p.a. can be sustained and the firm can continue to
deliver 10%+ DPS growth (15% CAGR over the last four years). Absent growth, we
think investors should focus on the dividend yield and dividend growth as the basis
for valuing the company.
10
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Valuation
We believe the New Xerox, a mature company in a mature industry, should be
valued largely based on cash flow and dividend. The company is going through a 2 3 year turnaround that will understate FCF potential owing to separation,
restructuring and pension costs, so our initial focus will be on the dividend, in
particular the dividend growth potential implied by the return to normalized $900
million of FCF in 2019. In short, we believe a dividend discount model is the most
suitable valuation approach, absent growth and in the context of some uncertainty
regarding what normalized EPS and EBITDA should be in the next year or two.
Cost of equity This is a mature company in a mature industry, and the separation of
Conduent de-risks the business model slightly, arguably, since the cash-generating
Xerox business is no longer subsidizing the development of the BPO business
segment. XRX trades at an historical adjusted BETA of 1.175, implying an equity
cost of capital of ~10%. The firm's cost of debt is about 3%, and the firm has issued
a small amount of preferred equity at about 5% cost, meaning that at the current
57/43 equity to debt ratio, the implied weighted average cost of capital is about 7.1%
(Bloomberg). That said, for DDM purposes, we use the cost of equity as the
discount rate.
Dividend Discount Model
Our price target of $10.50 is based on a DDM using our estimated FY18 dividend
per share of $0.27. Our model assumes a cost of equity of 10.1% (source:
Bloomberg) and a long-term dividend growth CAGR of 7.6% (JPMe).
Table 7: Dividend Discount Model
$ per share
FY18E Dividend
Cost of Equity
Dividend Growth
Value per share
$0.27
10.1%
7.6%
$10.54
Source: Bloomberg, J.P. Morgan estimates.
XRX has typically traded with a dividend yield of between 1.5% and 3.5%, and at a
5-year mean dividend yield of about 2.4%. Rising interest rates could spur yields
higher, but we believe potential for long-term DPS growth mitigates the effect on
XRX stock and could justify the lower dividend yield, similar to that used in our
DDM model.
11

03 January 2017
Paul Coster, CFA

(1-212) 622-6425
Figure 9: XRX 10-Year Dividend Yield
Source: Bloomberg, JPMorgan
Trading Comparables
XRX trades at a significant discount to its peers on a P/E basis owing to near-term
revenue decline and the net debt balance. XRX valuation is closer to its peers on an
EV/revenue or EV/EBITDA basis. We believe there is room for the P/E multiple to
expand as cash flow improves and the net debt balance is reduced.
Figure 10: Trading Comps
Trading multiples for selected comparable companies

$ in millions, except per share data and as indicated
Name
JPM Rating
Analyst
HP Inc.
Acer Inc.
Lenovo Group
Zebra Technologies
Garmin
Apple
Electronics For Imaging
Brother Industries
Canon Inc.
Konica Minolta Inc
Mean
Median
Neutral
Hall
NC
N/A
Neutral
Hariharan
Overweight
Coster
Neutral
Coster
Overweight
Hall
NC
N/A
NC
N/A
Underweight Moriyama
Neutral
Moriyama
Price
(USD)
Mkt Cap
(USD)
EV
(USD)
P/E
CY17E
Xerox
Premium/Discount to Mean
Overweight
Coster
EV / Revenue
CY18E
CY17E
CY18E
EV / EBITDA
CY17E
CY18E
14.84
0.41
0.61
85.76
48.49
115.82
43.86
17.92
28.00
9.87
$25,309
$1,246
$6,733
$4,527
$9,138
$617,588
$2,051
$5,018
$37,678
$5,003
$25,857
$309
$6,831
$7,152
$6,696
$467,035
$1,903
$5,634
$39,670
$5,838
9.3x
35.5x
nm
13.5x
18.0x
12.5x
15.7x
na
21.2x
na
17.9x
15.7x
9.0x
32.7x
nm
12.1x
17.4x
11.6x
13.7x
na
20.1x
na
16.7x
13.7x
0.6x
0.0x
1.2x
2.0x
2.2x
2.0x
1.7x
na
1.4x
na
1.4x
1.5x
0.6x
0.0x
1.2x
1.9x
2.2x
1.9x
1.5x
na
1.3x
na
1.3x
1.4x
6.2x
3.1x
na
10.7x
9.9x
6.4x
9.8x
na
9.3x
na
7.9x
9.3x
na
3.0x
na
10.2x
9.7x
na
8.1x
na
9.3x
na
8.1x
9.3x
8.73
$8,850
$15,195
8.8x
-51%
9.1x
-45%
1.4x
4%
1.5x
10%
8.5x
7%
8.6x
7%
Source: Bloomberg, J.P. Morgan.
12
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Historical Trading Range

XRX stock appears to be trading close to trough level multiples for the last three
years. Solid execution of the firm's strategy could lead to a significant re-rating,
particularly in the context of high multiples across most of our coverage universe at
this time.
Figure 11: XRX Five Year Trading Multiples
Source: Bloomberg, JPMorgan. Note: next fiscal year multiples
Risks to Rating and Price Target

The turnaround strategy may fail to mitigate the effect of revenue decline, fail to
deliver margin expansion, with which FCF may not recover to the $900 million runrate in 2019 and the firm's ability to sustain dividend growth could be compromised.
The ongoing 3 5% decline in entry-level printers and A3 MFPs could worsen with
the ongoing secular trend spurred by ubiquitous availability of screens, digitization of
content, and the disruption brought to workflows from mobile and cloud-hosted
applications.
The competitive landscape could intensify. In document technology, Xerox's main
competitors are Canon, Hewlett Packard, Konika Minolta, Lexmark and Ricoh,
though new entrants are possible in China. Competition could weigh on pricing and
on gross margins.
Absent growth, the Xerox story may appeal to only a small subset of value and yield
investors, weighing on the multiple and on trading liquidity.
13
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
The U.S. Dollar could appreciate significantly against other currencies leading to
price action, margin pressure, and revenue and earnings short-falls, relative to
expectations.
14

03 January 2017
Paul Coster, CFA

(1-212) 622-6425
Xerox Corporation: Summary of Financials

Income Statement - Annual
FY14A FY15A FY16E FY17E FY18E Income Statement - Quarterly
Revenue
COGS
Gross profit
SG&A
Adj. EBITDA
D&A
Adj. EBIT
Net Interest
Adj. PBT
Tax
Minority Interest
Adj. Net Income
Reported EPS
Adj. EPS
DPS
Payout ratio
Shares outstanding
12,602 11,383 10,813 10,492 10,273 Revenue

(7,494) (6,805) (6,500) (6,243) (6,113) COGS
Gross profit
(3,129) (2,860) (2,717) (2,652) (2,599) SG&A
2,087 1,798 1,817 1,794 1,759 Adj. EBITDA
(811) (678) (1,044) (872) (673) D&A
1,448 1,208 1,252 1,231 1,200 Adj. EBIT
- Net Interest
1,240 1,109 1,177 1,157 1,127 Adj. PBT
(283) (247)
(145) (187) (223) Tax
Minority Interest
772
976 1,037 1,047 1,023 Adj. Net Income
0.63
0.86
0.65
0.76
0.87 Reported EPS
0.64
0.90
0.99
0.99
0.96 Adj. EPS
0.25
0.27
0.30
0.26
0.27 DPS
39.1% 31.6% 46.7% 34.8% 30.5%
Payout ratio
1,199 1,081 1,050 1,059 1,068 Shares outstanding
1Q16A 2Q16A 3Q16A 4Q16E

2,596A 2,772A 2,616A 2,829
(1,580)A (1,660)A (1,577)A (1,683)
(699)A
381A
(310)A
239A
227A
(19)A
(692)A
476A
(268)A
332A
311A
(48)A
(663)A
431A
(251)A
291A
268A
(13)A
(663)
529
(215)
390
371
(65)
210A
255A
246A
326
0.07A
0.15A
0.17A
0.25
0.20A
0.24A
0.23A
0.31
0.07A
0.08A
0.08A
0.08
97.8%A 51.3%A 45.3%A 30.7%
1,048A 1,046A 1,052A 1,054
Balance Sheet & Cash Flow Statement

Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Current assets
PP&E
LT investments
Other non current assets
Total assets
Short term borrowings
Payables
Other short term liabilities
Current liabilities
Long-term debt
Other long term liabilities
Total liabilities
Shareholders' equity
Minority interests
Total liabilities & equity
BVPS
y/y Growth
Net debt/(cash)
Cash flow from operating activities
o/w Depreciation & amortization
o/w Changes in working capital
Cash flow from investing activities
o/w Capital expenditure
as % of sales
Cash flow from financing activities
o/w Dividends paid
o/w Net debt issued/(repaid)
Net change in cash
Free cash flow to firm
y/y Growth
FY14A FY15A FY16E FY17E FY18E Ratio Analysis

1,252
1,277
934
2,049
5,512
1,357
1,228
1,073
942
1,564
4,807
1,211
1,364
1,131
1,102
1,691
5,288
1,085
1,610
1,101
1,073
1,717
5,501
814
9,835 9,727 9,550 9,550

16,704 15,745 15,923 15,865
1,159
961 2,011 2,011
1,342 1,350 1,277 1,243
0
174
278
273
2,501 2,485 3,565 3,526
6,271 6,345 5,320 5,320
2,285 2,597 2,770 2,770
11,057 11,427 11,655 11,616
5,647 4,318 4,268 4,249
16,704 15,745 15,923 15,865
6,178
6,078
5,967
5,721
1,554
923
816
819
639
590
565
563
323
(61)
(219)
(6)
(156)
(6)
(174) (292)
(192) (159)
(154) (172)
1.5%
1.4%
1.4% 1.6%
(1,501) (1,059)
(472) (281)
(301) (314)
(322) (281)
(121)
(22)
79
0
(184) (219)
179
246
1,362
764
662
647
(34.5%) (43.9%) (13.4%) (2.3%)
1,942
1,080
1,052
1,760
5,834
552
Gross margin
EBITDA margin
EBIT margin
Net profit margin
ROE
ROA
9,550 ROCE
15,936 SG&A/Sales
Net debt/equity
2,011
1,219 P/E (x)
262 P/BV (x)
3,492 EV/EBITDA (x)
5,320 Dividend Yield
2,770
11,582 Sales/Assets (x)
4,354 Interest cover (x)
- Operating leverage
15,936
Revenue y/y Growth
- EBITDA y/y Growth
5,389 Tax rate
Adj. Net Income y/y Growth
913 EPS y/y Growth
558 DPS y/y Growth
(35)
(296)
(176)
1.7%
(285)
(285)
0
332
737
13.9%
FY14A FY15A FY16E FY17E FY18E

16.6%
11.5%
6.1%
15.8%
10.6%
8.6%
16.8%
11.6%
9.6%
17.1% 17.1%
11.7% 11.7%
10.0% 10.0%
8.5% 19.6% 24.2% 24.6% 23.8%

3.4%
6.0%
6.5%
6.6% 6.4%
6.5%
7.6%
8.3%
8.3% 8.0%
24.8% 25.1% 25.1% 25.3% 25.3%
109.4% 140.8% 139.8% 134.6% 123.8%
13.6
7.4
2.8%
9.7
3.4
3.1%
8.8
3.3
3.5%
0.6
0.7
0.7
58.7% 171.3% (72.4%)
(41.2%) (9.7%)
(36.1%) (13.8%)
24.8% 22.5%
(44.5%) 26.4%
(41.0%) 40.2%
- 11.2%
8.8
3.2
3.0%
9.1
3.1
3.1%
0.7
0.6
57.0% 117.6%
(5.0%) (3.0%)
1.0% (1.3%)
22.7% 22.0%
6.2%
1.0%
9.4%
0.1%
11.0% (12.4%)
(2.1%)
(2.0%)
22.0%
(2.3%)
(3.0%)
0.7%

Note: $ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
15
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
securities issued by Xerox Corporation.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Xerox
Corporation within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Xerox Corporation.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment
banking clients: Xerox Corporation.
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entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Xerox Corporation.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and
the services provided were non-securities-related: Xerox Corporation.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services
from Xerox Corporation.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Xerox Corporation.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Xerox Corporation.
Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Xerox
Corporation.
J.P. Morgan Securities LLC and/or its affiliates is acting as financial advisor to XEROX CORPORATION in connection with the
spinoff announced on January 29, 2016. This research report and the information contained herein is not intended to provide voting
advice, serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other
action by a security holder.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
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Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-4770406 or e-mail research.disclosure.inquiries@jpmorgan.com.
16

03 January 2017
Paul Coster, CFA

(1-212) 622-6425
Date
Xerox Corporation (XRX, XRX US) Price Chart

36
N $13 N $11
N $6.5
27
N $12.5 N $12
N $8 N $7.5N $10 N $13.5

Price($)
UWN$12
$15
N $11
UWN$11
$14N $15N $12
UW $7 UW
UW
$8$7.5UW $8.5
UW $9
UWN$13
$14N $13 N $12
N $11N $10
18
0
Oct
06
Apr
08
Oct
09
Apr
11
Oct
12
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Dec 18, 2008.
Apr
14
Oct
15
Rating Share Price

($)
Price Target
($)
18-Dec-08 N
7.57
8.00
23-Mar-09 N
4.34
6.50
23-Jul-09
7.73
7.50
11-Feb-10 N
8.45
10.00
23-Apr-10
11.32
12.50
22-Jul-10
9.03
13.00
21-Oct-10
11.09
13.50
26-Jan-11
10.53
12.00
21-Apr-11
10.85
11.00
12-Oct-11
UW
7.43
7.00
28-Jun-12
UW
7.65
8.00
23-Oct-12
UW
7.03
7.50
25-Jul-13
UW
9.80
8.50
24-Jan-14
UW
11.76
9.00
23-Apr-14
UW
11.96
11.00
06-Jun-14
UW
12.85
12.00
23-Jul-14
UW
12.78
13.00
28-Jul-14
13.10
14.00
10-Sep-14 N
13.47
15.00
23-Oct-14
12.21
14.00
15-Jan-15
13.39
15.00
27-Apr-15
11.62
13.00
27-Jul-15
10.94
12.00
27-Oct-15
9.29
11.00
11-Jan-16
9.40
12.00
26-Apr-16
9.81
11.00
09-Dec-16 N
9.46
10.00
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Coster, Paul: 3D Systems Corporation (DDD), 8point3 Energy Partners LP (CAFD), Canadian Solar (CSIQ), Cree
(CREE), Diebold Nixdorf Inc (DBD), Fabrinet (FN), First Solar, Inc (FSLR), Flex Ltd (FLEX), Garmin Ltd. (GRMN), GoPro, Inc.
(GPRO), Logitech International (LOGI), MTS Systems Corp (MTSC), NCR Corporation (NCR), NICE Ltd (NICE), Ormat Technologies
(ORA), Plantronics Inc (PLT), Rambus Inc. (RMBS), Stratasys, Ltd. (SSYS), SunPower Corporation (SPWR), Synaptics Inc. (SYNA),
TPI Composites (TPIC), TTM Technologies (TTMI), TerraForm Global, Inc. (GLBL), TerraForm Power, Inc. (TERP), Trimble Inc
(TRMB), Veeco Instruments (VECO), Verint Systems, Inc. (VRNT), Zebra Technologies (ZBRA)
17
Paul Coster, CFA

(1-212) 622-6425

03 January 2017
J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2017
J.P. Morgan Global Equity Research Coverage

IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
43%
52%
43%
67%
Neutral
(hold)
45%
48%
50%
61%
Underweight
(sell)
12%
34%
7%
43%
*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
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Completed 02 Jan 2017 08:10 PM EST

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North America Equity Research

Still in Print: Assuming Coverage of New Xerox at

Price Target: $10.50

We are assuming coverage of XRX with an Overweight rating, taking advantage

Alternative Energy, Applied and

Mark Strouse, CFA

Tien-tsin Huang, CFA

Attractive cash-flow and dividend outlook. We expect restructuring costs

XRX share price ($)

We assume coverage of XRX stock at an Overweight rating. Trading at 9.1

See page 16 for analyst certification and important disclosures.

Paul Coster, CFA

North America Equity Research

Source: Company reports

Paul Coster, CFA

North America Equity Research

Focus on Document Technologies (DT) and Document Outsourcing (DO) growth

Source: Company reports

Source: Company report, JPMorgan estimates

Paul Coster, CFA

North America Equity Research

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Source: Company reports, JPMorgan

Source: Company reports, JPMorgan

75% of the SMB market is

Paul Coster, CFA

North America Equity Research

Source: Company reports

Annuity revenue includes

Source: Company reports

North America Equity Research

Paul Coster, CFA

Source: Company data, J.P. Morgan estimates.

Table 2: Long-term revenue forecast by segment

Source: Company reports and J.P. Morgan estimates.

Paul Coster, CFA

North America Equity Research

Income Statement Forecast

Source: Company reports and J.P. Morgan estimates.

Paul Coster, CFA

North America Equity Research

Cash Flows and Balance Sheet Forecast

Source: Company reports and J.P. Morgan estimates.

Table 5: Cash Flow Statement

Source: Company reports and J.P. Morgan estimates.

Paul Coster, CFA

North America Equity Research

Source: Company reports and J.P. Morgan estimates.

Paul Coster, CFA

North America Equity Research

Investment Thesis, Valuation and Risks

Paul Coster, CFA

North America Equity Research

Source: Bloomberg, J.P. Morgan estimates.

North America Equity Research

Paul Coster, CFA

Figure 9: XRX 10-Year Dividend Yield

Source: Bloomberg, JPMorgan

Trading multiples for selected comparable companies

Source: Bloomberg, J.P. Morgan.

Paul Coster, CFA