Sunday, January 25, 2009

Busy Times!

Not only is earnings season ramping up with no less than 10 announcements from key companies scheduled in the coming week, I will also be attending and speaking at the Lyra Imaging Symposium, one of the best industry events of its kind to understand current and future trends and developments in the imaging world.

It sounds like several commentators will be attending and providing their respective insights, so watch for updates from myself, Jim Lyons and others from "bloggers row."

Jim describes the event best: "The conference lineup is looking like a good one, btw. In addition to the usual Lyra stalwarts, industry speakers include Ron Potesky, Senior Vice President, Corporate Communications, Product/Solutions and Channel Marketing, Ricoh Americas Corporation; Willem Appelo, Corporate Senior Vice President and President, Global Business and Services Group, Xerox Corporation; Paul Preo, Director of Workgroup and Cutsheet Solutions, InfoPrint Solutions Company; Glen Hopkins, Vice President and General Manager, Printing and Technology Platforms, Hewlett-Packard Company; Rak Kumar, Vice President/General Manager, EFI's Rastek Business Unit; Allen Westerfield, President, Imaging Supplies Coalition; and Photizo Group's CEO, Ed Crowley, speaking about, what else, the Future of Managed Print Services."

If you cannot be there in person, drop in virtually by visiting the sites from bloggers row!

Saturday, January 24, 2009

Xerox - Points to Watch

Xerox held their earnings call on Friday, and if you follow the news and numbers you know their results: disappointing but "not quite" a disaster. As noted previously, they are definitely using the opportunity of the economic crisis to clear the decks and position the company for the next phase after the current difficulties subside.

Anne Mulcahy positioned herself, her management team and the whole company as professional, realistic about the situation and optimistic about their capabilities to come through the current difficulties stronger and well equipped for future growth. In general, the cautious optimism seems to be well founded, with a clear view for what their focus should be: expense reduction, cash/debt management and execution of their business model.

The good news is that overall the model works. There were, however, a few points of concern we should keep an eye on:
  • Product mix: altogether, Xerox has positioned their business portfolio well with relatively high-end products and a healthy and growing percentage of color installations. But due to their heritage as the dominant vendor in the high end, we need to track their mix especially closely. Almost every other competitor is edging into the production space from below, so all installs are net wins for them. Xerox, however, is often in a defensive position, trying to hold on to high-volume contracts and installations. They can (and must!) often adjust the deal to keep the customer, but that can mean dropping prices and/or replacing top of the line products with more modestly equipped models, essentially rightsizing the customer before the competition does. In the earnings call, Xerox management noted modest revenue growth in segment 3-5 installations products. That news may or may not be good: a segment 3 product will deliver something like 10K-20K monthly volume, but a segment 5 model can lock in 5 times the volume. And even that product delivers less value if it replaced a production unit. Depending on which end of the scale your installations are grouped, your annuity stream will look very different!
  • Color page growth: Xerox has rightly tracked the development of color installations closely for several years and has proudly reported healthy increases in key metrics. In Q4, however, the steady growth of color pages, while still positive, slowed noticeably. The quarterly figures may be an aberration, but we need to track these figures closely. Xerox has profited handsomely from the color boom. If that windfall is now starting to fade, they (and their competitors) will need to adjust their business model. Xerox is better positioned than most, but they will also not be immune to the situation.
  • Post-sales business: in difficult times, it is not so surprising that hardware sales dropped.  But an 8% reduction in post-sales revenue is indeed a concern. While the explanation concentrated mostly on channel inventory reductions, the phenomenon also begs the question whether user patterns are changing: economic pressures could also be influencing customer document strategies, implying a tighter management of overall print output. Xerox management acknowledged this possibility, but also admitted that they really do not know how much this is a factor currently. Inventory reductions would be a one-time event, but changed customer behavior would result in a more permanent change in post-sales revenue levels.
  • Future cash generation: the outlook for the coming year is for lower revenues but constant cash generation. Despite the confidence of the management team that this ambitious goal can be achieved with aggressive expense and working capital management, the general economic climate and the points mentioned above do raise some doubts. If the product mix shifts downmarket, and/or if the color growth slows, and/or customer usage patterns change, the model needs to be reconsidered and adjusted.
The next quarter will be vital to generate new business momentum and to prove or disprove how deep some of these trends really are.

Tuesday, January 13, 2009

Lexmark - the Next Round

Lexmark announced an earnings warning today ahead of its earnings call scheduled for January 27.  This is maybe not so surprising given the state of the industry and/or the state of the company, and it still is not clear which of these influences is playing a bigger role in today's announcement.

Overall quarterly revenue was is expected to be 17%  down year on year. It should not come as a shock that hardware sales are down and consumer hardware is way down, over 40% year on year. This was announced and anticipated, although maybe not quite at this level. What should be more concerning, though, is the fact that supplies revenues are down in spite of channel filling. The channel bought ahead substantially due to announced price increases, but even that "unnatural act" did not compensate enough to avoid a shortfall. This trend, combined with reduced hardware sales, bodes badly for future supplies sales trends and overall results. We also hear that the supplies sell-out was below expectations so far, implying that we can expect some further lag as the sell-off continues before we can hope for another uptick in supplies sales and additional benefits from price increases.

A couple of parting notes:
 - Much of the supplies shortfall is attributed to unexpected exchange rate movements, which is viewed with skepticism by many experts.  At the most benign level, why were they not able to anticipate currency effects better? More significantly, were there not possibly other influences in play? One explanation at least (!) as logical is that supplies sales are gradually declining as the hardware base contracts.
 - Q4 EPS will be around $0.19-$0.24, including increased restructuring costs of $0.52 and a tax credit of $0.30.  Full year EPS will be well below $3.00, the lowest level in years.  By the way, stock repurchases have reduced the number of shares outstanding by about 30% over the last few years, so it is not hard to figure where the EPS would be at historical levels.
 - While the anticipated results for Q4 are appropriately modest, Lexmark set aggressive EPS guidance for Q1 at $0.65-$0.75, despite anticipated revenue reductions in the mid- to high teens and a significant supplies inventory overhang. It is unclear at present how they expect to achieve this result without another one-time benefit coming from somewhere. Operations do not seem to support that level currently, though Lexmark is traditionally very good at finding a way to deliver relatively positive results. So the next round of "finding a way to deliver" begins. . .

Tuesday, January 6, 2009

Imaging Industry Operating Income - What's the Story?

As reported recently (see our previous entry from 10. December 2008), Woodford Group has published the newest quarterly update of our Imaging Industry Margin Index Report. This report reflects the Q3 2008 results of 12 major imaging industry companies representing well over 90% of the distributed output market.

On Thursday, 22. January, we will hold a free webinar to introduce the report. The webinar will take place at 11:00am EST.  Click here to register. Without giving away too much (hey, we're a business!), here are some interesting trends to share:

1) Cumulative revenue and margins (value and percentages) are not that bad, all things considered. Yes, there has been some negative influence from the economy, but also from mismanagement in some cases as well. But as mentioned, we see a dip more than a dive, and the cumulative numbers are a testament to a relatively stable industry.

Obviously, there is much more detail available to track and analyze quarterly developments, year-on-year comparisons and overall trends over the past 19 quarters.

2) We map industry winners and losers on several axes: company share of total industry revenue and company share of total industry operating margin (value as well as percentage). We can track these figures over the entire analysis period and also map them to specific comparison periods such as sequential quarters and year-over-year.

Operating Income (%):
We're not naming names today, but we can share the observation that companies populating specific quadrants vary depending on the category selected. Only a few companies are found consistently in the same quadrant across all categories. Further, while the data obviously dictates where each company is mapped, the analysis helps understand the whole picture. Some "winners" don't deserve the title, as we will be pleased to explain why.

Want to learn more? Buy the report. Or as a next step, join our upcoming webinar introducing the report in (a bit) more detail. The webinar will take place on Thursday, 22. January at 11:00am EST. To register, click here, go to our website at, or send a note to

We hope you can join us, see you there!

Smart Move, Smarter Strategies

Business Week just recently published an article about Samsung and their activities in the printer industry (click here to view the original article). While interesting, the author concentrated purely on the consumer side of the business, which misses other key developments.

Samsung has been positioning itself for some time to (finally) benefit from the lucrative printer/MFP industry. This article describes some of these efforts, but does not cover the entire depth of Samsung's strategy and activities. There is more to the story!

Years ago, Samsung was approaching the market exclusively from the low end, which for a newcomer is a perfect place to start, especially if you can hit attractive price points through your manufacturing base and cost structure. At the start, though, most competitors were not too concerned, as the products could not be cheap enough to be attractive due to quality issues. But obviously these concerns have largely been addressed over the years, and Samsung has emerged both as an OEM manufacturer and a vendor of own-branded products. The Apple cooperation is one example which demonstrates both their engineering and design capabilities, but they have also provided attractive and well-priced products in the (entry-level) mainstream as well. Over a year ago, Samsung already achieved a key milestone by offering a color laser printer below $100.  

In spite of their success in the OEM and consumer/SOHO markets, Samsung has developed their vision well beyond that space. They have acquired and developed more advanced technologies, recruited key R&D personnel and developed more sophisticated products. This strategy shows a clear intention to move upmarket, a wise decision which not all competitors, even those with more experience and ostensibly more insight, have followed.  As the accompanying diagram shows, there is certainly much more to the world of printing than what is visible in the consumer world. And as many other vendors have discovered (think Lexmark, Oki, Kodak and others), they have learned that the real money is made in other market segments which deliver higher output volumes, which really drive higher margins.

We have seen Samsung emerge over the past year or so with interesting new product categories, channel programs and sales approaches. They are appearing in places never expected in past years and we fully expect them to address the corporate printing space aggressively in the very near future.  Even if this is just a small part of their overall business, every OEM in the industry knows just how lucrative the market is. It is profitable enough that players with shockingly small market shares are able to stay in the game (for now) and continue to drive profitable business. Samsung appears to have recognized this fact and is now positioning their imaging business for further advances, moving well beyond the consumer space.

We at the Woodford Group (and the rest of the industry) will continue to watch with interest!