Three years after introducing a new business strategy, Xerox is organized into traditional Print and Services, PARC Innovation, CareAR, and FITTLE. Each business pursues its markets, with PARC responsible for additive manufacturing. Yet it is the ~$200 million of Print & Services’ free cash flow that funds Xerox’s new businesses.
“Now & Next: Innovation That Works”
Last week, I attended Xerox’s industry and financial analyst event held at NASDAQ MarketSite. Vice-Chairman and CEO John Visentin and his senior management team discussed Xerox’s recent performance and plans for the next three years. “We delivered positive free cash flow in every quarter…That’s because of our maniacal focus,” noted Mr. Visentin. “As importantly, we continued to invest in our future.”
Figure 1. Xerox’s Four Strategies
Source: Xerox, February 23, 2022; ESG refers to Environmental, Social and Governance
As a result of its maniacal focus on free cash flow, Xerox has cut costs and streamlined its operations. Print & Services (which refers to traditional 2D printing and related services, not 3D printing) remains the company’s core offering. With 2022’s total projected revenue of approximately $7.1 billion, Print & Services $6.3 billion will account for 88.7% of Xerox’s revenue. Looking ahead, Print & Services will essentially account for 100% of the next three years’ free cash flow:
Figure 2. Xerox’s 3-Year Outlook
Source: Xerox, February 23, 2022
The Core Business Funds New Businesses
Xerox is beginning to move into other markets, leveraging the cash generated by 2D printing. In this regard, the company is not alone. Among other digital print technology providers, Canon, HP, and Ricoh are diversifying and moving away from a reliance on 2D print revenue.
And with good reason. Xerox expects “modest growth in Print & Services, driven by market share gains and investments in growth adjacencies.” Simply put, don’t look for significant investments that make 2D printers “better, faster, cheaper.” Xerox’s investments will focus on new inks and media, toxin-free materials, and security and digital services. The result is that by 2024 Xerox expects “Print & Services margin recovery as pandemic and supply chain disruptions wane, offset by a higher mix of IT services revenue.”
This year, Xerox expects to take approximately $200 million of the ~$525 million free cash flow generated by Print & Services to increase the cash investments in its new businesses (PARC, FITTLE and CareAR) 50% from FY21.
PARC and 3DP
Established in 1970, the Palo Alto Research Center drives innovation within Xerox and its customers. PARC developed numerous technological breakthroughs, including the graphical user interface, Ethernet, and laser printing. I spoke with Naresh Shanker, Xerox Chief Technology Officer and Head of PARC. 3D printing is one of the three areas of PARC’s focus, along with the Internet of Things (IoT) and clean technology.
Today’s PARC is “a venture studio that incubates and launches new businesses powered by disruptive research.” PARC focuses on significant, global-scale problems that drive innovation and foster new businesses. Mr. Shanker noted that PARC might have 120-150 possible projects under consideration, and these potential innovations are customer-led or developed by its researchers and scientists. The list would be whittled down to 12-15 possible projects with significant potential, from which two or three may be selected because of the nature of the real-world problems and potential for a significant global impact. PARC has created three businesses in the past three years: Eloque, Novity, and Elem Additive Solutions.
Figure 3. Elem Additive Solutions
Source: Xerox, February 23, 2022
From what I can determine, Xerox has signed about a dozen ElemX customers across several different vertical markets. Greg Morris, the Chief Technology Officer for one of its customers, Vertex Manufacturing, helped GE develop the famous 3D printed fuel nozzle for its LEAP jet engines before his companies were acquired and rolled into GE Additive. Customers with a diverse customer base like Vertex are important to Xerox. They bring extensive experience with metal 3DP and a wide range of end-users who will test and produce parts made with ElemX.
While ElemX currently produces parts from one aluminum alloy, the competition typically offers 3D printers that employ three to seven metals. However, the ability to print multiple materials is more theoretical than practical for many users due to the time required to completely clean and change over the 3D printer. Xerox will expand its offering with 6061 aluminum alloy by the end of the year, expanding the practical uses for ElemX prints.
Tali Rosman, Xerox Vice President and General Manager, 3D printing, unveiled the Digital Manufacturing Software at the event. From what I saw, the software will be more comprehensive than other additive manufacturing costing and pricing tools. The software will incorporate a comprehensive database of industrial 3D printers and their respective specifications, material capabilities, and performance metrics. Employing artificial intelligence techniques, the software will calculate the cost to produce a part and whether the part should be 3D printed in the first place and with what technology and material.
While the shorthand “Xerox” is what we all call the company, its formal name is Xerox Holdings Corporation. Undoubtedly, CEO Visentin is leading the company into a future funded by the free cash flow from its traditional print and services to stand up new businesses.
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