"Xerox Profit Drops 35%" or "Margins up. Cash Up. Expenses Down." . . . It's all how you look at it.

The headline at What They Think is

"Xerox Profit Drops 35% .

It would have been more useful if it read "

Xerox Profit Drops 35% Compared to Q2 2008.

Less profit than Q2 2008 is hardly a surprise or an indication of what it looks like going forward. Later today there will be a conference call, but my bet is that almost everything I need to know is in the press release. The point is in the snippets below.

. . said Ursula M. Burns, Xerox chief executive officer ''Gross margin and cash are up; expenses are down – all key factors to our strong financial position that is serving us well during this tough economy."

And

Gross margin was 40.2 percent in the second quarter, an increase of one point from the prior year and up 1.3 points from the first quarter of this year. Second-quarter selling, administrative and general (SAG) expenses were down year over year by $157 million and SAG as a percent of revenue was 27.2 percent.

SAG at 27.2 percent is still much too high. WalMart has 16%+. Sometimes you make money in top line growth. The most sustainable way to make money is by using less resources to sell more stuff. That doesn't always mean firing people. There are many ways to take them off the books by helping them earn their living in other ways. And there are tons of no-longer-necessary numbers in SAG. 27.2 % is still way too high. But the mother ship seems to have turned around. SAG is starting to go down instead of going up or staying flat.

The real opportunity is that cutting SAG will do wonders for net margins. If you can make a profit at 27.2%, what happens when it goes to 22% on it's route to 16+%.

My not so humble suggestion is to look at all non salary SAG expenses with an eye to eliminating them.

1. Replace much of the advertising by using Xexox's in place printernet. Add QR codes and TinyPurls to connect to videos at YouTube. Replace space ads and TV buys with the implicat Xerox media network.

To be clear, more money to the creatives, less money for the media buys and overly expensive trade shows that we no longer need.

2. Consider transforming PARC into a University. The recent Apple + Yale model of complete course work on iTunes for free should work. The MIT model of complete course work posted on line is just another way to do it. Offer online and onsite graduate degrees, thereby turning PARC from a cost center to a leading edge innovation engine.

3. Align the objectives of the Xerox, the Foundation with Xerox, the company and PARC, the University. A common focus could be to reinvent education at the bottom of the pyramid everywhere on the planet.

Quarterly Profits and High Stakes tests are noisy metrics.
Business, like high school students, don't need final exams. Analysts and education administrators like the simplicity of a final exam. It makes their jobs easier. Everyone tends to do what is easiest for them to do. But business, like learning is a process. The appropriate metric are those that measure the process. Cash flow, gross margins, overhead in business.
Overhead, attendance and homework compliance in high schools.

The trick is to have them all going in the right direction. But that is only a necessary, but not a sufficient condition for success.

At the heart of business and education are people who have the time and the dna to focus on the task at hand. In business that's the customer. In education that is the student. The last necessary,but not sufficient condition, is an enterprise that can intervene in real time to know what's working and fix or eliminate what's not.

In education the stakes are much higher. Every day that education is broken is another day lost in a child's life. The problem is that every day counts. A child's daily experience makes it better or makes it worse. There is no third choice.

Sometimes you need a sales person and/or an engineer and/or a learning leader.
You always need engineers who understand sales and sales people who understand engineering. But the best in either education or business is a leader with engineering and customer focused dna. Regarding Xerox, Ursula has engineering dna and a track record that demonstrates the common sense of a business leader.

Scattered throughout all of our schools and businesses, there are people with love-to-learn dna fighting their way out of 20th century enterprises that do not allow them to be the learning leaders they are.

My hope for Xerox is that it's going to turn out to be just the right person in just the right place at just the right time. My hope for bottom of the pyramid high school education is that sooner, rather than later, those with love-to-learn dna will deepen their connections until a critical mass exists to scale the creation of the social capital that the world needs.

Go Xerox!
Go Education!

Full disclosure. Long on Xerox. Check out my IRA in the sidebar.
Note: on Feb 18, 2009 XRX was 6.06. Yesterday it closed at 7.73.