Software is one of the most common types of products where the cost of selling one versus 1,000 is fairly marginal. There is very little replication cost for software as opposed to manufacturing physical products. Offering services can fall in the middle if it requires employees, but can also be an automated service or access to a software.
These types of businesses come in many varieties, but when they first start transitioning or growing into this new kind of business, it can mean great things for the stock. With the potential for economic growth here in the U.S. and a resurgence in Europe, the idea that a company can sell more without incurring a subsequent higher cost is a tantalizing one. Nothing ever proves this simple or ideal, but it is definitely a start.
Why copy, when you can email?
I wonder if any children under the age of 13 can remember Xerox Corporation (NYSE:XRX), because even in the 90s, the push to call it photocopying was well underway. Now the idea of paper copies is headed into obsolescence and absurdity. Even government documents like taxes can be submitted online. Xerox Corporation (NYSE:XRX) has not slipped into the black hole with the clay cylinder and papyrus makers of old. It has moved strongly into services.
E-discovery is one of the most interesting services, which is expected to grow significantly over the next few years though Xerox Corporation (NYSE:XRX) is in enterprise e-discovery only. E-discovery is a part of the discovery process in legal proceedings and is becoming increasingly important as a part of pre-trial preparation.
The role of e-discovery will only expand, and this is a masterful stroke by Xerox Corporation (NYSE:XRX) if it wants to take multiple bites into the whole “big data” apple. E-discovery is part of that poorly defined concept, and anyone familiar with the U.S. legal system knows it involves vast amounts of money.
It is worth looking into the other services that Xerox Corporation (NYSE:XRX) is in and plans on entering, including digital document management and other printing services. The company is also entering the e-learning business. Services offer higher margins, and even if the top line doesn’t grow, better margins mean a fatter bottom line.
Xerox Corporation (NYSE:XRX) has a bit more debt than I would like to see, with $8.5 billion in debt versus $993 million in cash. The company sports almost a 2.5% dividend, which is small considering the company will largely remain outside the spotlight in the near-term. Consider that its three-year return is 18%, which is dismal given the last three years. Profit margins are hovering around 5%, and a key sign of success will be for this number to increase.
A subscription model offers consistency to Adobe Systems Incorporated (NASDAQ:ADBE)’s revenue. Instead of rolling out a new version, it has a consistent revenue stream and can release features as they are ready. At least that is what I would hope they do. The stability is not trivial. Imagine the share price impact if the company had to push back a release of the next version, and pushing expected revenue to the next year while replacing it with nothing.