June 23, 2011 – By Liana B. Baker
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NEW YORK (Reuters) - Wielding a plastic toll road pass during a recent speech in a Manhattan restaurant, Xerox Chief Executive Ursula Burns was on a mission to prove her company is not just about copy machines anymore.
Burns, 52, who was raised in a New York housing project and started her career as an engineering intern at Xerox in 1980, has been charged with bringing a company synonymous with printers and copiers into the digital age. These days, she takes every opportunity to remind investors that half of Xerox Corp's <XRX.N> revenue comes from its services business.
At meetings and conferences, she recounts how Xerox manages the E-ZPass electronic tolling system in several states -- thus the stage prop -- advises the New York Mets on ticket sales and manages parking meters for the city of Indianapolis.
She has been spreading this message for the past year and a half, since the company tried to turn around its fortunes with the biggest takeover in its 105-year history. In September 2009, Xerox announced it would buy ACS for $6.4 billion, a move viewed as a gamble by Wall Street and that sank shares by more than 10 percent initially.
Shares are up since the deal closed but have slid this year, dropping 14 percent in 2011 and underperforming the broader stock market in a sign that investors have not fully embraced the company's glossy new look.
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Even Xerox executives acknowledge more work needs to be done in convincing investors that the company has turned a corner. As Luca Maestri, who took over as finance chief this year after leaving Nokia Siemens, put it, "investors are still on the fence" about the transformation.
They "want to see the story translate into numbers," Maestri said in a recent interview. "Revenue growth for us is a very important metric going forward and we need to show that we can grow revenue faster than we were doing in the past."
At first, the ACS deal resulted in a string of strong earnings reports for Xerox. In the second and third quarters of 2010, cost reductions stemming from the merger led the company to raise its outlook steadily for future earnings.
The streak ended in January. Xerox, based in Norwalk, Connecticut, reported better-than-expected results but failed to lift its 2011 outlook, raising concern that the transition to a services business will take longer than investors had hoped.
"Some of the more transformational stuff that was the genesis for this acquisition will take a little bit longer to play out," said Fayad Abbasi, a Neuberger Berman analyst. Neuberger Berman owns Xerox shares.
While Wall Street waits for the ACS deal to pay off, Xerox's copier and printer legacy business, along with production concerns over the earthquake in Japan, are weighing on shares, analysts said.
"Investors started saying, 'It's not going to be a momentum story for a while so I'm going to step away from the stock,'" said Brean Murray, Carret & Co analyst Ananda Baruah.
Burns, who became the first African-American woman to lead a Fortune 500 company when she succeeded Anne Mulcahy two years ago, knew that it would take a major effort to change Xerox's image.
She responded by greenlighting a multimillion-dollar marketing campaign -- its flashiest ever -- to help rebrand Xerox as a services company. Its TV commercials now feature Notre Dame athletics and Ducati motorbikes turning to Xerox to run their back offices, a far cry from its previous Super Bowl spots about color printing.
Executives within Xerox, regardless of criticism by investors that the transformation is moving too slowly, say that the Xerox-ACS deal is paying dividends when it comes to winning new business.
Lynn Blodgett, who is running the ACS division within Xerox, pointed to a recent pitch to manage the mailroom, transactions and data entry services for NADRO, a Mexican pharmaceutical company. A long shot to win the account, ACS had Xerox executives make calls in hopes NADRO would reconsider -- which it did.
"The Xerox brand name has been a real door-opener for us," Blodgett said.
Since the acquisition, "there is a renewed vibrancy in the company and a renewed energy level" among the 136,000 employees, said Jim Firestone, president of corporate operations at Xerox.
Even PARC, Xerox's research facility that famously made breakthroughs on the PC, while serving as inspiration to visionaries including Steve Jobs and Bill Gates, has seen its mandate shift since the ACS deal.
"We've taken a significant fraction of our research for Xerox and totally redirected it to align to the services that ACS has," said PARC Chief Executive Steve Hoover.
Yet Xerox executives insist the company is not about to stop making the ink, printers and copiers for which it is known.
Burns, a self-proclaimed science geek, brought more than just her E-ZPass when she took the stage at the Bryant Park Grill event. She also showed off a case of solid ink that leaves no trace of packaging of when it runs out.
Near the end of her talk, Burns said, "We are still a leader in printers, copiers, fax machines, multi-function devices, black and white, and color, but we wrap services around that."
(Reporting by Liana B. Baker, editing by Paul Thomasch and Matthew Lewis)