A Giant Is Born: Fujifilm Deal Allows Xerox To Make Inroads Into Asia-Pacific Print Market, Bolster Next-Gen R&D Efforts

Fujifilm's purchase of a 50.1 percent stake in Xerox will give the print giant and its channel partners access to a growing region and enhanced technical development capabilities, Xerox CEO Jeff Jacobson told Wall Street analysts Wednesday.

The $6.1 billion agreement combines Xerox with joint venture subsidiary Fuji Xerox to create an $18 billion industry powerhouse with at least $1.7 billion in cost savings delivered by 2022. Roughly $1.2 billion of those synergies are derived from the transaction, while another $450 million will come from a cost reduction program that is reportedly slashing 10,000 jobs at the existing Fuji Xerox entity.

By tightening its relationship with Fujifilm, which has owned 75 percent of Fuji Xerox since its creation in 1962, Jacobson said Xerox can now tap into a $36 billion Asia-Pacific market. Innovation will be another key element of the partnership, he added.

[Related: Fujifilm Buys Controlling Stake In Xerox, Creating An $18 Billion Printer Industry Behemoth ]

" We tended to have duplicative R&D. Now we can divide and conquer," Jacobson said. "We'll be able to take 6,500 engineers at this combined company, that have produced more than 1,500 patents a year, and accelerate innovation in the areas of industrial print, which is a $100 billion market that is untapped by us today."

Jacobson mentioned the analog packaging market, printing on objects, virtual reality, the Internet of Things, artificial intelligence, machine learning and voice activation for multifunction devices as areas of potential advancement that could give Xerox and its partners access to growing revenue.

The legacy Fuji Xerox currently employs around 46,000 workers, meaning the upcoming restructuring would eliminate more than 20 percent of its current staff. The business restructured its Australian and New Zealand subsidiaries last year in the wake of accounting issues that resulted in overstated revenue of $450 million over five years.

The Fuji Xerox accounting issue was previously raised by Darwin Deason, Xerox's third-largest individual shareholder. Deason and activist investor Carl Icahn, who together own more than 15 percent of Xerox, have publicly denounced the company's strategic direction under Jacobson in recent weeks and called for a change in leadership.

Jacobson said he has not spoken with top investors about the Fujifilm deal, but did address the matter on the fiscal fourth-quarter earnings call. "This transaction has been in the works for many months. We have not spoken on this issue. We don't know. We only know what we read at this point," he said.

The Fujifilm deal is expected to close in the second half of 2018, pending regulatory and shareholder approval. Up until that time, Jacobson said the two sides can "only do a lot of planning" with regard to their go-to-market strategies. However, he downplayed the potential complexity of the integration, pointing to the many years both sides have spent collaborating via Fuji Xerox.

"Hopefully, we'll hit the ground running upon the close," he said.

Xerox's stock was trading up more than 4 percent Wednesday morning, while Fujifilm's stock price tumbled roughly 8 percent on the Tokyo Stock Exchange.

The print giant reported an equipment sales increase of 4.3 percent to $682 million, which Jacobson said was Xerox's first instance of growth in that category since the second quarter of 2013. He cited strong customer reception to the vendor's new line of ConnectKey software-enabled devices and the addition of 65 dealers to the Xerox channel footprint.

CRN spoke with one partner who cheered the chance to sell more of the company's apps into the Asia-Pacific market.

Josh Justice, president of La Plata, Md.-based Just·Tech, said he was excited by the prospect of working with Fuji Xerox in Asia. Just·Tech is a two-time Xerox App Developer of the Year award winner with more than 26,000 apps installed on devices in the U.S, Canada and Europe.

"[We're] now partnered with an $18 billion company that has committed to future growth investments and the elimination of costs, which will make Xerox products even more competitive in this marketplace," Justice said. "Xerox and Xerox channel partners had a great 2017, and it's clear that Fujifilm sees an opportunity to grow even more together with Xerox and their partners."

Jacobson said he expects Xerox's multi-brand reseller expansion strategy to continue as part of Fuji Xerox, which itself hasn't traditionally focused on the multi-brand dealer space.

"That's an area they're going to explore, too. Which is part of the beauty or bringing these two companies together, comparing best practices," Jacobson said.

Xerox reported revenue of $2.75 billion for the fourth fiscal quarter ended Dec. 31, 2017, up 0.5 percent from last year's fourth-quarter mark of $2.73 billion. That beat Seeking Alpha's projections by $100 million. North American revenue declined 1.6 percent to $1.6 billion, while international revenue increased 4.8 percent to $1 billion.

Xerox saw a loss of $190 million for the quarter, or a diluted loss of 76 cents per share, compared with the year-ago quarter's $843 million loss performance, or a diluted loss of $3.30 per share. On a non-GAAP basis, Xerox reported net income of $274 million, or $1.04 per diluted share, which beat Seeking Alpha's projections by 8 cents.

For full-year fiscal 2017, Xerox saw revenue of $10.3 billion, down 4.7 percent year over year but in line with the company's guidance. Announced adjusted earnings per share of $3.48 beat Xerox's guidance range of $3.28 to $3.44.

Looking ahead to 2018, Xerox projects a revenue decline of 2 percent to 4 percent on a constant-currency basis, with anticipated margin expansion in the range of 13 percent to 14 percent.