Xerox Corp chopped its first-quarter earnings forecast by as much as 85 percent, as the slowdown in office equipment spending badly hurt revenue and thwarted its cost-cutting efforts.

Shares of Xerox, the world's top supplier of digital printer and document management services, fell 20 percent after its outlook made clear the toll that falling sales of equipment and printer-based supplies is taking on the company.

Standard and Poor's lowered its ratings outlook for Xerox to negative, and the cost to insure the company's debt rose.

In the first two months of the year, Xerox said, revenue dropped 18 percent from a year ago. To offset the declines, the company plans to take additional cost-cutting measures, among them freezing salaries and suspending its contributions to 401(k) plans for U.S. employees.

The Xerox warning comes on the heels of downbeat comments this week by two other household names, FedEx Corp and Nike Inc. These warnings suggest that many corporations are still in the thick of the recession and it could be some time before their earnings rebound.

Earlier this month, hopes about a recovery were lifted by optimistic comments by Bank of America Corp, JP Morgan Chase & Co and others in the hard-pressed banking sector.

With technology spending staggering, Xerox forecast first-quarter earnings of 3 to 5 cents per share, down from an earlier outlook of 16 to 20 cents. Analysts had looked for 17 cents per share, according to Reuters Estimates.

We expect that global economic weakness, reduced information technology spending, and highly competitive industry conditions will pressure Xerox's revenues, operating earnings, and leverage profile in fiscal 2009, Standard & Poor's credit analyst Lucy Patricola said in lowering the ratings outlook. S&P maintained its BBB long-term rating.


Spurred by solid profits and improved market share, the Norwalk, Connecticut-based company, whose rivals include Oce NV, Canon Inc and Ricoh Co Ltd, had rebounded from severe financial troubles earlier this decade.

However, efforts to boost revenue have been derailed by the recession. In recent months, some large clients have been hesitant about purchasing higher-end technology, analysts have said. Increased sales of lower-priced products have hurt Xerox's gross margins.

Shares of the company, down about 33 percent for the year prior to the announcement, dropped a further 20 percent to $4.25 in early trade before climbing part of the way back to $4.34, $1.00 lower on the day.

The cost to insure Xerox debt rose after the warning, with credit default swaps widening by 32 basis points to about 467 basis points, or $467,000 a year to insure $10 million of debt for five years.

Xerox sought to assuage concerns, saying it would cut total debt during the first quarter and would continue to do so throughout the year. It has a $2 billion line of credit and said it would tap credit markets only on an opportunistic basis.

Chief Executive Anne Mulcahy, who was an economic adviser to Barack Obama during the U.S. presidential transition, said Xerox should continue to increase market share, yet cautioned in a statement that enterprise spending on technology will continue to decline this year.

As a result, Xerox plans to cut $300 million in costs, on top of the $250 million in savings it previously planned. In a restructuring late last year, Xerox cut about 3,000 jobs.

It said the current cost savings plan would bank on reducing travel expenses, freezing salaries and promotions in 2009, temporarily suspending matching contributions to its U.S. 401(k) plans, cutting overtime pay and halting any new hiring. No additional job cuts are planned at the moment, a spokesman said.

We appreciate the company's continuous efforts to refine its cost structure and sales channel coverage but note the imaging and printing segment is one of the first to feel the brunt of macro-driven budget cuts, JP Morgan analyst Mark Moskowitz said in a research note.

Given the sharp decline in business activity during the first two months of 2009, as shown in Xerox's guidance revision, we believe similar pain will be felt by others.

(Reporting by Paul Thomasch; editing by Gerald E. McCormick and Derek Caney)