Xerox Reports Fourth-Quarter Earnings of 27 Cents Per Share

Earnings meet expectations, net income up 18 percent. Strong color sales, operational improvements.

* Total revenue down 2 percent on negative currency, product mix; up 1 percent constant currency
* Revenue from color up 17 percent
* Gross margins of 41.4 percent
* Operating cash flow of $631 million, $1.4 billion for full year
* Additional $500 million planned for share repurchase

STAMFORD, Conn., Jan. 25, 2006 -- Xerox Corporation (NYSE: XRX) announced today fourth-quarter 2005 earnings per share of 27 cents, reflecting an 18-percent increase in net income from fourth-quarter 2004. The company also announced plans to repurchase an additional $500 million of its common stock and said it expects to deliver full-year 2006 earnings at the high end of the company’s guidance.

“Our earnings performance in the fourth quarter met expectations with increased gross margins, lower costs and operational improvements,” said Anne M. Mulcahy, Xerox chairman and chief executive officer. "We delivered another quarter - and another year - of earnings growth. Our strong financial position, with full-year operating cash flow of $1.4 billion, gives us the flexibility to invest back in the business and enhance shareholder value through an expanded share repurchase plan.

“During the quarter, equipment sales were impacted by a more significant shift in product mix with stronger sales of lower-priced systems. At the same time, demand and install activity accelerated for key products like entry-level color production systems and office desktop multifunction devices,” added Mulcahy. "This increased activity fuels future post-sale revenue - the engine of growth for Xerox’s annuity-based business. We’re confident that the short-term impact on equipment sale revenue will deliver long-term gains in top-line growth.

“As important, our leadership in digital color printing continues to deliver strong results,” said Mulcahy. “Revenue from color grew 17 percent in the fourth quarter and color now represents 32 percent of our total revenue, up 5 points from last year.”

In the fourth quarter, the company’s equipment sales and total revenue of $4.3 billion were impacted by 3 points of currency, contributing to a 2-percent decline. On a constant currency basis, total revenue and equipment sales grew 1 percent. Post-sale and financing revenue, which represents about 70 percent of Xerox’s total revenue, declined 2 percent and was flat in constant currency.

Xerox’s production business provides commercial printers and document-intensive industries with high-speed digital technology and services that enables on-demand, personalized printing. Total production revenue declined 2 percent in the fourth quarter and grew 2 percent in constant currency. Installs of production monochrome systems increased 19 percent, reflecting the success of the Xerox 4100 light production system and growth in production publishing. Production color installs grew 58 percent driven by increased demand for the DocuColor™ 240/250 multifunction system and the Xerox iGen3™ Digital Production Press.

In Xerox’s office business, which provides technology and services for workgroups of any size, revenue declined 3 percent and was flat in constant currency. Installs of digital office monochrome systems were up 20 percent largely due to increased placements of Xerox WorkCentre™ desktop multifunction systems. In office color, installs of multifunction systems were up 53 percent driven by the success of the recently launched office version of the DocuColor 240/250 systems. Install activity in color printers was up 27 percent.

The company also cited continued improvement in its developing markets operations with significant growth in Eurasia and Central and Eastern Europe fueling total revenue growth of 11 percent in DMO.

Xerox’s focus on productivity improvements resulted in lower expenses and improved gross margins. Selling, administrative and general expenses decreased $37 million year over year and were 24.6 percent of revenue in the fourth quarter. Gross margins were 41.4 percent, a year-over-year increase of about half a point.

In the fourth quarter, Xerox generated operating cash flow of $631 million. The company ended the year with $1.6 billion in cash and short-term investments while also repurchasing $433 million of its common stock during the fourth quarter. Debt was down $2.8 billion year over year and declined by about $200 million from the third quarter of 2005.

Building on the company’s October 2005 announcement of a $500 million stock buyback program, Xerox now plans to use its healthy cash flow to repurchase an additional $500 million in its common stock over the next 6 months to 12 months, primarily through open-market purchases.

Xerox expects first-quarter 2006 earnings in the range of 20-23 cents per share. The company also reiterated its full-year 2006 guidance of $1.00-$1.07 per share. Mulcahy indicated that she now expects the company will deliver full-year earnings in the high end of this range.

Full-Year 2005 Results

* Net income of $978 million or 94 cents per share, an increase of 9 percent from full-year 2004.
* Equipment sale revenue of $4.5 billion, an increase of 1 percent from full-year 2004.
* Total revenue of $15.7 billion, which remains unchanged from 2004.
* Debt balance of $7.3 billion, a reduction of $2.8 billion from year-end 2004.
* Operating cash flow of $1.4 billion.
* Year-end cash and short-term investments balance of $1.6 billion.

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NOTE TO EDITORS: This release contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current beliefs and expectations, and are subject to a number of factors that may cause actual results to differ materially. Information concerning these factors is included in the company’s third quarter 2005 Form 10-Q filed with the SEC. The company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.

NON-GAAP FINANCIAL MEASURES
Constant Currency: To understand the trends in the business, Xerox believes that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies into U.S. dollars. Xerox refers to this adjusted growth as “constant currency.” Developing Market currencies are shown at actual exchange rates for both actual and constant growth rates since these countries generally have volatile currency and inflationary environments. The company’s operations in these countries have historically implemented pricing actions to recover the impact of inflation and devaluation. Management believes this measure gives investors an additional perspective of revenue trends. The currency impact can be determined as the difference between actual growth rates and constant currency growth rates.

Contact Information

Christa Carone

Media Contact

Xerox Corporation

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