Imaging Industry Wall Street Insider

Imaging Industry Operating Income - How Soft Really?

2009-06-09T14:42:00.000-07:00

The newest update of the Imaging Industry Margin Index Report from the Woodford Group spotlights a once unflappable industry finally experiencing the full impact of a turbulent economy. Although the results of the imaging industry trends are dramatically lower this quarter, the downturn is not surprising given the overall state of the economy.

Industry revenues took a major dive, but were surprisingly not the lowest on record. However, industry margins, taken together, were definitely the lowest ever, and yet some companies still managed to perform well. It’s a challenge to interpret these results, particularly on a macro level, as there are several overlapping factors and influences to take into consideration.

The first and most obvious of these is the belt-tightening that most companies experience in the face of a serious economic downturn. Both at channel and end user levels, restriction on purchasing is strictly enforced, as is tighter inventory control. Secondly, many imaging industry firms are opportunistically restructuring, which affects their bottom lines. The final and perhaps most significant influence on the imaging industry is the shift in usage patterns, specifically a reduction in overall print volumes. This is difficult to quantify because it is overshadowed by the other gating influences. Although all three radically affect revenue and margin, the third influence will likely have the most lasting impact on the industry as a whole.

On an individual company level, the IIMI report identifies some interesting developments, most notably with Ricoh who, for the first time, came in second on the revenue scale. By sustaining only a minimal sequential drop in a volatile economy, Ricoh was able to overtake competitors who traditionally have been strong industry performers, but who have suffered more drastic reductions in revenue. Ricoh has worked to build a broader business which addresses more attractive customer segments, a strategy which is clearly successful and profitable for them.

Other key players experienced shifts in both directions as well, illustrating just how diverse and dynamic the imaging industry remains. Despite ongoing internal costs for restructuring and external market pressures, the ever-resilient imaging industry continues to offer attractive and stable returns, especially as the economy begins to improve and new business opportunities emerge.

The twenty-first consecutive report in the quarterly series, the latest IIMI report provides the most recent data and analysis, highlighting key trends within the imaging industry as a whole, as well as individual strengths and weaknesses of 12 key industry players. Since 2004, the Woodford Group together with their partner, the Photizo Group, has tracked key revenue and profitability metrics of these companies, which represent more than 90 percent of the distributed imaging industry. The Imaging Industry Margin Index Report is available immediately. To purchase a copy as an individual report or as part of a quarterly subscription package, please contact the Woodford Group at www.woodford-group.com or call 1-845-987-6201.

Xerox - Timing the Transition

2009-06-09T14:35:00.000-07:00

This is a great opportunity for Xerox and Ursula Burns, though maybe not necessarily in that order. Ms. Burns is certainly competent and well prepared, but given the current economic situation and imaging industry flux, there is nothing that can be taken for granted. It remains to be seen whether she can continue the positive trajectory established for Xerox under the stewardship of Anne Mulcahy. The succession was widely expected, but nonetheless remarkable. Yet notwithstanding the human interest side of the story, the key point will be to deliver positive results, and the handover of the CEO job seems to be well timed to allow this.

Xerox has put together an impressive collection of technologies and offerings across the entire spectrum of the imaging market: desktop, departmental and centralized products and applications, from major accounts served by an established and highly competent direct sales force to small business customers served by a growing network of well supported channel partners, hardware, software, services, consulting, geographic reach, . . . From the supply side, things look very positive. Except for the economy, this is a great company to inherit. Yet with just limited improvement in that realm, prospects for Xerox will be looking up.

Anne Mulcahy could certainly have stayed on, but handing over now is a wise move. The current economic situation knocks down expectations, so there is plenty of upside. There will be a number of key management and strategic decisions coming up and Ms. Burns is ideally prepared and positioned to take these over quickly and seamlessly. As an added advantage, the momentum of the company and (soon?) the economy will contribute to an outlook for success.

While this seems to be a good move undertaken at a good time, the only concern we need to mention is that Ms. Burns may have too much of a hardware product focus at a time when visions, strategies and service-oriented products need to be at the forefront. She may in fact have all the necessary skills, but was not addressing these topics due to her current responsibilities and task-sharing arrangement with Ms. Mulcahy. We will soon see whether she will grow into these new key areas quickly and effectively.

VPRT - Putting the Pieces Together

2009-05-03T15:59:00.000-07:00

If you bought any given stock last November, where would you hope to be today with that investment? Most answers will be in the category of minimizing losses, or in some optimistic scenarios possibly treading water around the same level as when you bought in. So a company whose stock price in the same period has more than tripled rightly deserves giving some attention to the strategies which have delivered stable and positive results which have in turn supported the stock price in historically difficult times.

Vistaprint has at least three approaches which conspire for this success:

1) Focus on small and medium businesses: while a lot of companies see their future addressing the high end of the market, Vistaprint is unashamed about preferring clients in the SMB space, attracting and retaining millions of customers with small budgets and low average orders (just a touch over $30). Big wins with key accounts make the news, but they can also break your margins and such deals are difficult to repeat. If you establish a broad customer base and address them relentlessly with new offers and ideas (see following points), the business might be less spectacular but the results can be comparable - or even superior.

2) Master the art of web-based marketing: although nominally a web-to-print company like many others, Vistaprint demonstrates exceptional talent in developing, packaging, promoting and delivering products which are ideally suited for the medium of internet sales and support. You have to find, touch and attract a lot of prospects, as otherwise your business model, like many internet business concepts, is a load of hot air. But Vistaprint avoids the "bubble trap" by ensuring that there is substance as well as regular and highly relevant customer touches. Both the methods and the deliverables are ideally suited for web-based business, and the implementation is exemplary.

3) Support hard copy and electronic platforms equally: the core concept at Vistaprint appears to be hard copy print job submission and fulfillment. But Vistaprint defines their sweet spot as everything that makes sense for small business marketing and studiously avoids limitations based on HCO - hard copy only. They use their platform to offer other services such as internet and e-mail services. Not only are these additional and attractive revenue streams that can be extracted from the same customer base, but the cost of customer acquisition declines rapidly as they leverage existing communications, processes and customer relationships.

This last point is somehow astounding. At the most basic level, nothing they offer is genuinely new. But their knack for selecting components that belong together (especially from their chosen target group's perspective) is unique. Much larger companies in the imaging industry are evidently blinded to such opportunities by their focus on the hard copy (read: print supplies) business. This is indeed lucrative, but the extreme focus of efforts and expertise cause many companies to neglect key opportunities and allow others like Vistaprint to gain momentum.

Another observation, which is a corollary (but hardly less amazing), is that all components of the Vistaprint package are there for almost anybody to grab and go, but the Vistaprint selection, timing and execution is superb. They are doing a fantastic job of anticipating and leveraging opportunities, and the head start they have now established will be difficult to overcome. The product could always become a commodity, but it appears that they will achieve and maintain an advantage through their unique and prescient attention to providing key tools to improve their customers' business. Even in tough times, that basic message and strategy is a formula for success, and the market has been rewarding that approach for Vistaprint.

Lexmark - Stabilization or Decline?

2009-04-23T12:42:00.000-07:00

The recent Lexmark earnings call signaled some gradual but significant shifts in the market and in their own position in the industry. On the positive side (if you can call it that), the announced results did not precipitate any drastic market reactions. Also positive was a somewhat more satisfactory operating income number ($74.6M), the best result since the middle of last year.

But while the operating result was positive and better than the last two quarters, it was well below the average historic result, which had been typically well in the range of the three-digit millions. Also, their quarterly revenue ($944.1M) dipped below $1B for the first time in over 20 quarters.

Lexmark management defended the results as positive and healthy. Viewed as a product of the strategic shift away from unprofitable consumer business, that is correct in a limited sense. But the idea of that strategy was to compensate with healthy mid-range and corporate installations, and that hope has not come to pass.

The imaging industry is indeed healthy and can be enormously profitable, but only if you capture and maintain installations and drive ongoing output volumes. But with hardware sales declining 30%, you will not maintain your MIF (machines in field), and even improving print volumes will not deliver the level of revenue and margins required to drive future business. This development is certainly not (yet) a death spiral, but it is a serious warning sign.

One also has to wonder about certain cost allotments. Lexmark has only two main business divisions, the laser ("Printing Solutions and Services") and inkjet ("Imaging Solutions") product groups. We can debate the sense or nonsense of these naming conventions in another space. In a somewhat murky accounting exercise, the operating incomes for both divisions were reported as strong positives: $93M for PS&SD and $52M for ISD. But that total is then reduced by $71M for "other" operations. Since these "other" activities account for an amount greater than one of the major business divisions, it seems like it might have been better to allot those costs directly to the respective operating areas. But depending on how those activities/costs are are parsed out, these might limit (or even eliminate) that division's positive result.

Analysts are also learning to track these key drivers, especially print volume developments. Many of the questions addressed different aspects of that issue: inventory buildup in danger of going chronic, increased threats from third party supplies, reasons for weak supplies demand, cost implications from underutilized production facilities. These analysts know that this is what drives the future business, and they obviously feel the softness that Lexmark is now exposed to.

Invitation to Say . . . What?

2009-03-30T02:59:00.000-07:00

Lexmark held an investor / analyst day at the New York Stock Exchange recently and took the opportunity to say . . . nothing special. Considering the cost and effort of bringing this key audience together, and considering the exceptional circumstances in the economy and in the imaging industry, it was nearly breathtaking how little substantial or new was shared.

Any outlook for future revenue or earnings was studiously avoided, maybe for good reason. Xerox recently revised their Q1 outlook downward and was immediately rewarded with a stern round of agency downgrades and a thrashing in the stock market (although the stock price has since recovered). Such a severe reaction may not have expected , and Lexmark management, who previously may or may not have been prepared to make a similar statement, refused to be drawn on the topic.

Other statements? More cost cutting and restructuring, but that announcement is not necessarily newsworthy these days. The amount ($75M) is substantial, but one pointed question about how much of that actually benefits the bottom line remained unanswered.

Some statements were vague or even contradictory: core investments will include R&D, but no focus was provided for which product or business area will benefit, and overall R&D spending will be reduced. Even portfolio-challenged Kodak provided more guidance on where their core investments will be targeted, but they also ignited a discussion by revealing their direction. So maybe again Lexmark thought better of providing too much (any?) detail.

You Never Know . . .

2009-03-20T07:42:00.000-07:00

Today's headlines regarding Xerox:

"Xerox slashes earnings target on weak economy"

"S&P revises Xerox outlook to negative on lowered guidance"

"Xerox shares down 7% in early trading"

On the one side, this development should come as no surprise. Poor results will be punished, by ratings agencies and by the market. On the other side (and this could sound a bit bizarre), is there a hint of a "return to normalcy" in these headlines?

It was not that long ago that reduced or negative earnings hardly raised an eyebrow in the market. And now this reaction - why this time so severe? You never know . . . But the aberration was then, not now.

The market sensitivity to this announcement may catch Xerox management unprepared, as they might have expected a more casual overall response. They may have assumed a higher tolerance for further negative news, but obviously such developments were not baked into the current expectations.

This was most definitely not the case, so what is the issue? The markets will not be so forgiving, maybe because there is proof that some individual companies can indeed perform well through the difficult times. Or there is a stronger expectation that the leading companies in key sectors should now be able to deliver more acceptable results after market and internal adjustments.

So if the "market of expectations" has bottomed out, the results will have to follow a more positive curve, or those companies will suffer the consequences more severely than they have recently. The first quarter will be a key indicator for the future direction of the market.

New Report Details Industry Trends and Outlook

2009-03-09T03:28:00.000-07:00

Woodford Group publishes its Imaging Industry Margin Index Report on a quarterly basis. The newest edition, the twentieth in the series, is available now for purchase. This newest report, reflecting results up to Q4 2008, reveals a resilient industry with steady performance in spite of strong economic headwinds. Especially notable are the year's cumulative results, which are as strong as past years:

This cut of the data obviously includes the stronger quarters from earlier in the year, although by common agreement we were already in a recession then as well. This steady result is a product of the basic business dynamics: printing and imaging is vitally important to daily business life and delivers a solid, profitable annuity stream.

We do of course see strong differentiation in the individual quarters, and each company shows distinct trend lines on their own and relative to the industry as a whole. Not all will be equally prepared for the present and future challenges, but well-positioned imaging companies will survive better than leading companies in other sectors, and they will emerge from the current difficulties with new products and application areas to drive future growth.

For more information, or to order the report, please visit the Woodford Group website or click here.

The Mixed Bag of Imaging and Other Business Areas

2009-03-06T04:37:00.001-08:00

Here is an interesting illustration of the imaging industry relative to other IT sectors: taken from Epson's recent earnings call, we can see where they can earn the most - printing. The Information Equipment group is the printer business, and this distinct dynamic is visible in other companies with mixed product areas as well. Even HP, despite a slight disdain for the IPG group currently, shows a similar trend, especially when comparing their other hardware business ares. The obvious implication is that a stronger concentration on imaging products would be good for the overall business, which is indeed true as long as the right user and volume segments are targeted. But this is not an automatic recipe for success. Low end product focus does not deliver similar results, and as we know several companies are struggling to escape that segment. Which begs the question why Lexmark is evidently redoubling its efforts in the consumer channel, proudly announcing their renewed commitment to no less than six consumer-oriented stores. This is an expensive and questionable undertaking, while other segments show more promise for volume and profit.

Lexmark downgrade - are we/they to be concerned?

2009-03-04T13:39:00.000-08:00

From Marketwatch: Standard & Poor's said late Wednesday it downgraded the corporate credit and senior unsecured debt ratings on Lexmark International Inc. to BBB- from BBB. The outlook is stable. "The downgrade reflects our belief that total revenue and profitability will remain pressured as Lexmark works through a strategic business mix shift toward higher usage and more profitable product sales in its consumer segment," said Philip Schrank, an S&P credit analyst, in a statement.

Let's just look at the elements of this short statement:

Total revenue and profitability will remain pressured - that pressure will definitely remain, as the trend towards broader offerings leads to more exposure for those companies who focus on specific segments. If you are a pure-play company like Lexmark, you have to be ideally positioned to leverage your products and be investing to expand and reposition your technology base. The fulfillment of these prerequisites is questionable at best in this case.
Strategic business mix shift - it is fair to say that some shift has taken place, but only within the long-suffering inkjet business area, which has not changed the overall outcome significantly. A shift of more consequence would involve a seismic innovation effort to develop significant new products or a serious reconsideration of the long-term purpose and viability of the inkjet business area.
Higher usage and more profitable product sales in its consumer segment - this target, at least at the level of achieving acceptable unit placements, is practically a contradiction in terms. Kodak is attacking the same "high-volume consumer" space, promising 5-6 million placements annually within two years, others (most notably HP and Epson) are waiting with "shovel-ready" products and pricing models that can exploit the same space, and there is still the possibility that Memjet partners will be entering the market within a year. So that space, while never all that big, is going to be more crowded than ever.

Lexmark has a great technology base and product line-up, but the biggest questions remain: how to expand the overall product portfolio, and what to do ultimately with the ink jet business. Until those issues are resolved, their financial outlook will remain questionable.

Imaging Industry Operating Income - Holding Up?

2009-03-01T10:51:00.000-08:00

Continuing a tradition reaching back 20 quarters, Woodford Group will soon publish the newest update of our Imaging Industry Margin Index Report. This report reflects the performance history and trends of 12 major imaging industry companies representing well over 90% of the distributed output market, up to and including Q4 2008 results.

On Wednesday, 04. March, we will hold a free webinar to introduce the report. The webinar will take place at 11:00am EST. Click to here to register.

The Imaging Industry Margin Index Report examines the overall sector and key imaging companies from a number of perspectives:

1) Quarterly revenue and margin developments (value and percentages).

2) Annual cumulative revenue and margins (value and percentages).

3) The Imaging Industry Margin Index, a normalized and weighted value that helps to gauge industry performance.

4) Individual company shares of total industry revenues and operating margins.
5) A map of industry winners and losers on several axes, tracking relative q/q and y/y developments.

6) Summary of key current threat and opportunity factors.

But data will only take us so far: while the numbers obviously dictate where a company is mapped on each respective chart, our analysis helps understand the whole picture.

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 Wednesday, 04. March at 11:00am EST. To register, click here, or go to our website at http://www.woodford-group.com.

The Word is Out: Print Less, Save More

2009-02-24T16:53:00.000-08:00

The Wall Street Journal reported what some consider the next big imaging trend, what others consider a statement of the glaringly obvious: managed print service (MPS) offerings are becoming increasingly significant as part of the overall portfolio of most imaging companies.

Read the entire article here.

For decades, the imaging industry (especially the copier/MFP segment) thrived on the premise that hardware and print volume are the keys to success. Get and maintain the installs (the famous "MIF" - machines in field), and make sure they are well fed with toner. While the vendors hope to earn a bit if possible on the hardware, they want to ensure that they earn a lot on the consumables by encouraging their clients print / copy a lot. That was then, but a "new now" is emerging: the dual trends of economic pressures and increased capabilities for print output transparency are encouraging much better managed print fleets and workflows. Against all apparent logic, imaging companies are now encouraging their users to print less. Are these companies suicidal, or at the very least masochistic? Not at all, they are just seizing the trend and looking for a bigger piece of a smaller pie.

The imaging industry has historically done very well due to three trends:

1) Oversell capacity

2) Avoid transparency

3) Lock in the customer

Add special bonus business areas like color and high volume print production, and you have a stable and extremely attractive business model.

But now there are signs that this world will be changing:

- Economic pressures are forcing user organizations to take a closer look at printing costs, especially redundant printouts and color output.

- Improved analysis and management tools are now commonly available to allow a quick and easy view into actual printing patterns. Even the most simple utilities deliver impressive depth and detail.

- End user awareness is increasing as managed print services are launched and promoted by numerous vendors and their channel partners.

- Competitive pressures create a spiral of activity. Those vendors without a well developed MPS program will be at an increasing disadvantage as competitive offerings multiply.

Any trend to actively promote reduced printing seems self-destructive for imaging vendors. But the strategy does have an advantage in promoting an attractive approach to gain the attention of the customer. And if you win the comprehensive deal, you can actually end up with more print volume by channeling more prints to your models - a bigger piece of a smaller pie.

As a forward strategy, some vendors recognize and embrace this trend. Lexmark has introduced the shockingly direct phrase "Print Less, Save More" to express this sentiment. Coming from a printer company, that definitely attracts attention.

One point missing in the equation is the possibility of including third party consumables to lock in even more savings. OEMs will logically not support this approach, but dealers will not be so critical. Those dealers can reach cost-per-page values that are otherwise unattainable, which is as attractive an argument is strong enough to earn close consideration.

HP - Looking for the Balance

2009-02-19T05:47:00.000-08:00

Most readers will be aware of the results announced yesterday during the HP earnings call. Without going into the numbers that are well represented in the public domain, there are a few notes and comments to add to complete the picture. CEO Mark Hurd heaped praise on the services business area, which to their credit performed well relative to the other business areas and to the market in general. He even singled out services as the "other" attractive annuity business with healthy and steady margins.

Missing the chance for a balanced statement, the original annuity business (IPG) was not even praised faintly, but rather criticized for inadequate execution, especially inventory management. Hardware revenues were hit especially hard, but supplies compensated to a large extent, which is what is supposed to happen. Altogether, IPG operating profits of 18.5% exceeded those of every other business group.

That said, the supplies trend was similar to the rest of the imaging industry, namely disappointing. With hardware sales hurting with double-digit declines, the hoped/expected steadiness of the consumables revenue was soft and turned negative, albeit at a more modest single-digit rate. Despite price increases which raise unit ASPs and encourage forward buying in some contract models, IPG supplies revenue was still down 7%. The overall swing in supplies revenue (more than -15% Q/Q) is concerning and the exact causes still need to be clarified.

While Hurd has his point regarding execution and the necessity to improve the supply chain, it is also true that the IPG business model is still robust, especially at higher volumes. Without earning an explicit mention, one interesting datapoint we spotted was the impressive 25% increase in Indigo page volume. This growth is lower than other years but still an indication of the returns that can be achieved in other underserved segments. Which could beg the question what the company could do to take better advantage of those mid- and higher-volume opportunities. A statement or strategy in that direction would have been helpful.

Lyra Symposium - the Wide Open Field of Wide Format

2009-02-09T03:45:00.000-08:00

This will be the last comment from the Lyra Imaging Symposium (it was, after all, a week "or so" ago): while there are signs of maturity in many corners of the imaging industry, one area that is refreshingly fresh is the wide format space.

Rak Kumar, VP at EFI and General Manager of their VUTEk printing division, presented an excellent history of the wide format segment. And Dave Rocheleau from Lyra also provided a very good overview of recent segment developments and current business drivers. But in addition to the wealth of technology and historical information, the most crucial message participants could take away was that this product and business segment is still quite diverse and has yet to peak. A number of complementary / competing output technologies and formats, application areas and vendors are still in various stages of emergence, with hints of consolidation hanging heavy in the Rancho Mirage air.

There is no truly dominant technology, with at least three or possibly four in the active running to support various applications and price points. The output systems are unquestionably the result of considerable investment, and success is dependent on an intricate mix of hardware, ink formulations, media support, print controllers and of course the appropriate sales channels to get these beasts to market.

It is obvious that small companies will not be able to invest and succeed in all areas, but in such a fragmented market they can certainly survive (at least for now) by concentrating on selected markets and applications. More importantly, though, Symposium participants could sense the immense opportunities that larger mainstream companies perceive as they look for new, complementary and more profitable imaging market segments to pursue. Just as one example, EFI has started to find their way in this segment, and maybe just in time: in the past year, for the first time in their history, the controller product area did not deliver the majority of their revenue. It might not be quite so vital for other mainstream vendors to develop another leg for their business to stand on, but there is certainly plenty of money to be made. Other vendors of note are already dabbling in the wide format arena, and we can expect that the action and competition will only heat up in this area.

Kodak - Repercussions of a "Bipolar Disorder"

2009-02-08T11:59:00.000-08:00

Following the recent Kodak Investor Meeting, some confusion emerged regarding the future prospects of their electrophotographic product group (Nexpress and Digimaster). Much of the session's discussion revolved around what CEO Antonio Perez called "buckets" of activity, and depending on which bucket a product group was associated with you could sometimes infer what the fate of that product group would be. But sometimes not . . .

A small number of product groups (three, to be exact) will receive the highest level of management attention and resources to develop future business as members of the core investment bucket. The selected product groups are a somewhat eclectic mix: Enterprise Solutions (workflow applications), inkjet production systems (Stream technology) and consumer inkjet products.

Another bucket was cash generation, implying established and profitable product groups to be exploited, essentially cash cows to be milked with moderately low maintenance.

The electrophotographic group was not selected for either of these groups, each of which has more obvious implications for the respective business areas. Instead, the Nexpress and Digimaster products were placed in a dubious third bucket called transformation. This bucket contains a number of activity sub-buckets ranging from disposing of the business immediately to investigating the best way to generate short-term cash (sounds pretty similar) to repositioning the product group.

What repositioning means depends on what product group is under consideration as well as presumably who you ask and how various alternative strategies are playing out. This may include joint ventures, partnerships, licensing or niche strategies. Of course, if these partnership or other goals are not achieved, one would hardly have an alternative other than to consider disposing of the other product groups as well.

But Kodak management did not want to make that explicit statement for the electrophotographic products, instead emphasizing their business value and the anticipation that these product areas will be supported and expanded in the future. Noble, except for the fact that if they really stand by a product line, then (by their own definition) they would place it the core investment bucket. Which did not happen for Nexpress and Digimaster.

Lyra Symposium - the HP Inkjet Rant

2009-02-07T12:55:00.000-08:00

Another impression from the Lyra Imaging Symposium: HP is determined, obviously with their own best interests in mind, to promote what they view as the best hope for the future of the printing and imaging industry. While different technologies and product groups will logically be targeted at (hopefully) the most appropriate user groups, the pitch always depends on the product group association of the pitchmaster.

The topic in this case, ink jet technology, probably did not surprise too many participants. The partisanship of the presentation as well as the lack of strategic balance did, however, strike a number of attendees as notable. Glen Hopkins, VP/GM of Printing Technologies, was definitely focusing on "a bit" less than the full picture in his presentation describing the emerging battlefield for small and medium businesses.

Talking up inkjet and more than implicitly talking down laser, Hopkins addressed each of the perceived weaknesses of inkjet, obviously trying to make that technology more palatable to the general office user. Aside from the point that this particular audience is not really the group that needs to be persuaded, the lack of balance in the presentation revealed a hint of desperation in the strategy to move inkjet upmarket.

The discussion itself was right to the point, addressing the key historical problem areas of inkjet in the office: product reliability, image quality, speed, cost, and the infamous "laser bias." Notwithstanding the fact that inkjet speeds and feeds have definitely improved, along with numerous other key product metrics (along with parallel developments on the laser side), vendors do still have to deal with a well documented bias in the office for laser and against inkjet. Justified or not, it is a fact to deal with if you want to break that portion of the market open. And justified or not, the laser vendors will continue to leverage and exploit those prejudices to ensure that there is no quick shift of sentiments.

And in the final instance, the market, not the marketers, will decide. According to the presentation, inkjet technology is ready for mainstream business prime time. In the HP world, presumably they feel they can win either way on this emerging battlefied. But that thesis could have been formulated in a more strategically coherent fashion. And since there is nothing inevitable about this development, we will continue to track movements in this space closely.

Lyra Symposium - a Green Tipping Point?

2009-02-03T05:37:00.001-08:00

One of the most entertaining sessions at the Lyra Imaging Syposium was the podium discussion regarding environmental issues. We have heard a lot over the years about the "year of . . . (whatever)," and certainly one or several of these recent placeholders have included green themes. But the issue will not go away, and judging by the knowledge and supreme confidence displayed by the panelists, they are on a roll. These companies represent viable (and profitable) alternatives to the captive razor-and-blades model.

The imaging industry has a lot going in its favor. Due to the annuity factor, fast-developing technology components and overall pervasiveness of printing, the business model works and will continue to deliver healthy profits. But this green trend is worth watching especially now, and especially for those companies who are in (too?) deep with hard copy to the detriment of other software/workflow/services balancing efforts.

Points to watch for:

- Generational attitude and behavior shifts regarding printing

- Meshing of cost-saving and environmental factors

- Increased capabilities to deliver cost transparency and control

- Improvements in performance, availability and awareness of third party supplies offerings

- And, most importantly, how the OEMs and their partners are re-shaping their business to address and leverage these shifts to their favor.

Current earnings announcements are indicating downturns in print output and usage. While blaming the economy, even those companies with exemplary field data (eg, Xerox) admit that they do not really know how much of the change is due to new usage patterns. We will be tracking these developments closely.

Statistics, Damned Statistics, and . . .

2009-02-02T05:36:00.000-08:00

Lexmark: their earnings call was no more of a surprise than many others. Given their background and the state of the economy, it hardly comes as a shock (in fact, the announcement hardly raised an eyebrow) that their Q4 net earnings dropped to zero. While there are certainly variations to be expected, it seems that a lot of companies will follow the same pattern: revenue for the quarter and for the year will be off modestly, Q4 earnings will be abysmal, and full year earnings will be down substantially but still well in positive territory. Which is actually a testimonial to the resiliency of the industry and possibly even a sign of a (relatively) quick recovery.

It was slightly entertaining to hear their spin on cash generation. Lexmark management proudly stated that they generated more than $450M for the seventh year in a row. Well, congratulations and everybody always appreciates positive cash generation, especially in the magnitude of hundreds of millions of dollars. But why such an odd cut point? Well, because it works. You could look at the same figures and state (correctly) that this is the first time since 2001 that they produced less than $500M. So maybe we are actually witnessing a progressive decline that needs to be addressed?

The logic of reducing focus on consumer/ink jet products was obviously to concentrate on higher value product categories, either business ink jet (contradiction in terms?) or laser products. Ink jet hardware revenue did do the right thing (so to say) by dropping dramatically. Laser hardware did not respond enough to compensate, though, and delivered disappointing negative results. Supplies revenue was certainly bolstered by the shift in product mix (and some channel filling triggered by price increases), but overall the results were down in this category as well. Both of these results were definitely not part of the plan . . .

Bloggers' Row, Continued

2009-02-02T05:23:00.000-08:00

The Lyra Imaging Symposium 2009 was informative and entertaining as ever (who would have thought that a discussion on green themes could be a real highlight?!), but timing did turn into an issue with more than a handful of discussions and earnings calls happening simultaneously that pushed the promised blog coverage into the background.

Luckily, the others along "bloggers' row" covered the event in real time, and my intention is to add some observations and highlights this week as a follow up. Might even be a better approach to glean the best impressions and maximize value for readers, he muses with a slightly self-justifying tone . . .

Anyhow, heads up for a mixture of comments and quips from the Lyra event as well as the most recent earnings.

Busy Times!

2009-01-25T19:15:00.000-08:00

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!

Xerox - Points to Watch

2009-01-24T07:11:00.000-08:00

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.

Lexmark - the Next Round

2009-01-13T06:29:00.000-08:00

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. . .

Imaging Industry Operating Income - What's the Story?

2009-01-06T10:17:00.001-08:00

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.

Revenue:
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 www.woodford-group.com, or send a note to info@woodford-group.com.

We hope you can join us, see you there!

Smart Move, Smarter Strategies

2009-01-06T07:31:00.000-08:00

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!

Print is Dead. Long Live Print. (1)

2008-12-27T07:05:00.000-08:00

There is a basic assumption in the imaging industry that people and companies will always print, and that therefore the imaging industry is robust, recession-proof and has a bright future. We generally agree with this optimistic assessment and are great believers that while total print volume will gradually decline, a shift from static/analogue to variable/digital content will ensure that key print segments remain stable and may even grow.

Nonetheless, several recent articles have attracted our attention, all of which somehow bring this assumption into question. First, John Dvorak, the respected IT journalist, commented on the recent decision of PC Magazine to discontinue their print publication and provide only digital content: “The venerable PC Magazine going 100% digital coincides with the trend of media and information distribution doing the same, but further emphasizes the fact that the computer scene, in general, is not interesting enough to sustain a printed magazine.” This observation is astounding - you would never believe that the popular and ever-changing computer industry would run out of content (amount and interest level) to fill a regular publication. He goes on to make his case about the quirks of the PC industry that limit the newsworthy content and publications’ interest in reporting, but still the development is remarkable.

Secondly, Dan Costa in PC Magazine comments on the same decision but also extrapolates to more general social trends: “Trouble is, print publishing is hugely flawed. . . . Print media is simply behind the times by design. Print businesses aren't dead, but they do need to change. Printing should be reserved for archival information—artifacts you'll hold on to for years instead of hours or days.” This observation is also interesting, because we know from several sources that a great amount of corporate printing has a short term character, more as a temporary user interface (case in point: printing and re-printing e-mail and documents for review, sharing, taking notes, etc.) than as an archive. We can expect shifts in usage patterns in the office as well, driven either by economic pressures or by generational tendencies.

Lastly, we read in Media Life that the Detroit media landscape is about to shift radically and may signal similar changes in other metropolitan areas: “Detroit is one of the last major two-newspaper cities, and soon it will become the first to stop home delivery on all but a handful of days and shift some of its focus to the web, in a major overhaul that highlights just how dire things have become for the nation’s major metropolitan papers.” An animated (electronic) discussion ensued which debated the wisdom of both papers taking the same step, the questionable logic of trying to keep hard-copy versions going on some but not all days, and the public service aspect of supplying news and information to those citizens who do not have an internet connection.

Taking our basic digital/variable data sentiment to the extreme, it could conceivably be possible for these publishers to continue their print operations with highly targeted and individualized versions. Add value to justify, or even increase, the selling price and expand circulation: if your neighbor prefers sports in his newspaper and engineering applications in his PC Magazine, he can have that, and you can have the in-depth business and programming coverage that you prefer. The technology is there, but the production and delivery processes would need to be rebuilt. It is presumably easier to go electronic . . .

In fairness to Dan Costa, he did touch on this idea: “Big publishers will continue to scale back on their print operations, but there are millions of micropublishers out there with how-to books, cookbooks, memoirs, even love letters that they can now affordably publish and make available to the world.” Further: “Sure, you say, but those are books. What about magazines, you ask. I would argue that the difference between books and magazines is simply about the publishing schedule, at this point.”

The point is that the world of print will undergo drastic changes, but it is not (yet) possible to predict whether digital print will decline as a result. If millions of micropublishers take up the challenge and implement this approach effectively, OEMs can look forward to attractive business for a long time. But every imaging vendor will have to decide how to address this issue, and this will affect their prospects for future success as well. Stay tuned . . .

Kodak - a picture of desperation

2008-12-10T06:39:00.000-08:00

It is not news that Kodak is going through an identity (and financial) crisis of considerable proportions, but the news today highlights the point dramatically. Kodak today withdrew their guidance for second-half and full year outlooks and also announced drastic cost saving measures, including canceling 401(k) matching and executive pay raises.

Kodak management some time ago recognized that their core business has to change, or they will be changed (let's say "demolished") by external events. Other companies have encountered similar epiphanies, such as when Xerox stated that their established business was "fundamentally unsustainable" and then went to work methodically rebuild. Results speak for themselves. Also, when Konica Minolta decided to exit the camera business, it probably tore some people's hearts out. But it was the right thing to do, and while we can still question the judgement and strategies of present management, it would have been suicidal to stay in the camera business.

Now to Kodak, who also faced a similar juncture and decided to rebuild and go digital. Despite some heroic efforts to restructure the company and refocus the business, strategies and results have remained mixed. They did move quickly into the digital world, which is commendable, but how wise was it to keep such a strong focus on the consumer end of the business? Yes, there is (or was) the considerable value in the brand, but why try to leverage that in the low-end printer business? Maybe there was some belief that this would be the best place to transfer the consumer brand and build a new, digital annuity business. The days of film are gone, but here come the days of ink cartridges . . . The brand is far from dead, but we would not overrate its value in the present-day world of consumer electronics.

Regarding the value of the printing business, we have done some work in that area, building a series of bottom-up business models. Looking at individual product segments and revenue/profitability streams, you can construct a highly reliable model and work through variable future scenarios. The Kodak business model we have developed is a revelation to understand the dynamics and constraints within the company. Comparing the usage patterns and output volumes of the respective product segments, we can see the opportunities as well as the cost implications of those business areas.

It might be (just a bit) overstated to call Kodak desperate, but they clearly need to focus more precisely on their most profitable business areas. They have some promising products and technologies, for example in the Graphic Communications Group, though results have been spotty enough to make the case that focus and resources have been lacking to date. As Kodak further shifts priorities and resources, today's decision will almost certainly have ramifications for the Consumer Digital Imaging Group.

Who would have thought?

2008-12-10T05:02:00.000-08:00

The sign of a good index is when it acts and provides information like a microcosm of the real world. Select a good representative set of companies, avoid the messiness of identifying and tracking the long tail of the last x% of the entire universe. Consolidated, the group serves as a mirror and a magnifying glass for the selected industry. Individually, you can still track and compare the results, strengths and weaknesses of specific companies.

Woodford Group and our partners/predecessors Photizo Group have been tracking and analyzing the operating results of key companies in the imaging industry for 19 quarters now. These companies make up well over 90% of the industry, and one amazing discovery point is how stable this market is. Considering the range of technology breakthroughs and economic swings over the past 5 years, the Imaging Industry Margin Index demonstrates in numbers what we have stated previously: the imaging industry always seems to find a way to maintain earnings momentum.

The imaging industry as a whole is a bit unglamorous, not as attractive as many other tech products and trends. But in fact it delivers mission-critical products and services throughout the business and private worlds, in various and ever-changing forms. The annuity-based business model, accompanied by new applications and services, delivers consistent returns for those companies best equipped with the right focus on key success factors, namely product portfolios as well as execution and financial management skills.

The Imaging Industry Margin Index is in fact a lagging indicator, examining recent events to discern a trend. But considering the fact that a recession has been pronounced to be in effect since December 2007, the results are significant: the resilience of the imaging industry is evident. A modest dip is present and not surprising, but there is no dive. The index has dipped lower in other quarters, and the overall trend is stable and positive.

If we look into the index in more detail, there are naturally a few stinkers. But while a few companies definitely put a drag on the overall result, we see these as examples of internal misalignment as opposed to economy-related issues. We can return to the trio of success levers of product portfolio, execution and financial management: the poor results of those companies who were hurting can be traced to some (or all) of those factors. Economic pressure certainly serves to expose underlying weaknesses, and recent earnings calls were indicative of the true influences: as much as some companies tended to blame the external economic or market influences, other companies demonstrated their mastery of the key levers. Even in the context of the current economic difficulties, their results (and those of the industry as a whole) showed a surprising steadiness.

Who would have thought?

The One-Eyed Leading the Blind?

2008-11-28T11:09:00.001-08:00

Recent industry events such as the InfoTrends Office Document Strategies Conference and the Xerox Investor Conference have emphasized the importance and emerging prevalence of MPS (Managed Print Services) as a vital component of the vendors' future business models. Interestingly, while vendors and research analysts are more or less unanimous in their conclusion that MPS is a key development for the imaging business, they seem to be missing an obvious implication: the unavoidable reduction of and intensifying competition for hardware placements.

The mantra of a generation of copier and printer executives has been: "maintain your MIF." The hardware, the Machines In Field, are what directly drive the back end of the business, namely the services and consumables revenue. Without the machines to feed, the annuity-based business model is that much less attractive. And as we know from our industry financial models, even slight shifts in installed units, product mix, output volumes and margins will have significant influence on all the financials.

So what's new? This (and every other) market has always endured pretty aggressive competition. What's new is that MPS provides focus, transparency and accountability where (to the great benefit of the imaging companies) they were missing in the past. Companies will now identify and control print volumes and, most importantly, restructure their printing environments. They will establish target output volumes and device ratios to streamline and rationalize their document flows and costs. They will install fewer printers and MFPs and manage them much much more rigorously.

The typical reaction and strategy of any individual company is totally unamazing: develop attractive MPS offerings to win the business and gain a higher document share at each customer site by taking away installations from the competition. Take a bigger piece of a smaller pie. Maintain, or even expand, your MIF.

There is some truth to this approach at vendor level, and we can debate who will really win out. But a further, no less certain, implication is that total MIF numbers will decline. But here is where we see a disconnect: industry forecasts expect future hardware sales to be flat, possibly even rising slightly. Even if we saw a slight unit decline, that would still not match the trend indicated by the MPS developments. When these assumptions were challenged at the recent events, the responses got squishy: print rationalization can take many forms, and hardware installations will not actually be affected so much . . . Hmm.

Forecasting is far from exact and never pretty, especially in retrospect. But in light of these trends, the available forecasts do not match up and need revision. Follow those forecasts if you have to, but be wary of how good the sight and foresight is of those analysts showing the way. You may discover that the one-eyed leading the blind (no disrespect intended) is not as helpful as you might have expected.

Recession-proof? Only if you know how . . .

2008-11-20T09:05:00.000-08:00

Yesterday we joined the Xerox investor conference and by coincidence (?) HP also reported their quarterly / annual results on the same day. These companies are good illustrations of the capabilities of well-positioned companies to perform well even in a difficult economic environment.

Someone may argue that these companies can keep business and positive results rolling because of their size. But we would argue that HP and XRX are big because they are successful, not the other way around. In fact, a few years ago nobody would have given XRX any credit for being big. Their CEO, Anne Mulcahy, put it bluntly: a few years ago, they were suffering a business model crisis, and size was neither the cause nor the solution. What is driving their business now is a combination of revitalized execution, strong products, broad sales and service capabilities, and new additional offerings which leverage different aspects of the imaging equation.

In fact, we hear from other smaller companies (for example, dealers and solutions providers) who are doing just fine and are optimistic about their prospects in the current economic climate. The product offerings and sales approach may need to be adjusted, but the imaging industry always has an angle to offer. Buy new equipment, they earn; retain and keep using the old equipment, they earn; implement a print management program, optimize the fleet, even go electronic, amazingly they can still earn. Not all can exploit such opportunities equally, but the opportunities are definitely there.

At the same time, some less than stellar results are getting blamed on the economy, when the real cause can probably be found closer to home: missing offerings, neglected market segments or sales channels, or pure and simple execution discrepancies.

So while we wouldn't really want to say that the imaging industry is essentially recession-proof (but there you go), you can find some good opportunities even in the bad times.

And while we wouldn't really want to call some companies whiners for blaming the economy (but there you go), it would be prudent to take a closer look at any company's fundamentals and their chosen markets and strategies if this argument arises. We can think of a few choice examples . . .

Extending the Ecosystem

2008-11-15T08:39:00.000-08:00

We recently attended a key industry conference hosted by the research company InfoTrends, and it was interesting how often the phrase “ecosystem” came up. This was not related to the topic of saving or killing trees, although that is inherent in the discussion as well (save that item for a separate posting). This discussion was referring to the development of an imaging company’s offerings and support structures.

The simple fact is that the imaging space has grown exponentially in its diversity and complexity, and will continue to do so. The results: regardless of the results reported in financial statements and anticipated outlooks, if the portfolio and support capabilities of any company do not map to key future user expectations, they will suffer in the short or the long term. And it is worth stressing again: any company can benefit or suffer, depending on how well they are meeting or missing expectations for document imaging.

Not only because of the economic situation (but that too), customers are more than ever aware of the great potential now available to optimize and control their document flows and improve their output cost structures. Statements about saving users 30% sound like a stab and a stretch. In fact, they are well documented and are actually conservative estimates.

But to meet these expectations, you have to deploy a sophisticated range of hardware, software and consulting skills. Any company which is not covering all the topics and skill sets will be highly exposed, and that is the “ecosystem” that needs to be cultivated. To address this situation, there are just a few alternatives for vendors:

1) Build a strong internal portfolio through organic development or acquisitions.

2) Build a strong “virtual” portfolio through external partnerships.

3) Watch your business and key business opportunities shrink - rapidly.

We can see prominent examples in each category, and each of these have obvious challenges to deal with:

If you build our own portfolio, are you really expert enough in all of these diverse areas? Can you maintain, manage and deploy all that internal expertise?
If you collect partners, how do you coordinate and articulate your “virtual” offering and manage the necessary knowledge? We heard one vendor proudly state that they sell NO software, but are well positioned to sell embedded solutions. Noble (and maybe wise), but who knows and who says what your actual offering is? Case by case and in general?
If you address only some market and volume segments, are you prepared for dwindling opportunities and possible survivability issues?

Point 3) is basically a red herring. Obviously, there is little or no alternative to offering a more complete portfolio. Anybody expecting to thrive (or even survive) with a limited offering which addresses only part of the total market is seriously compromised. These companies will have to be searching for partnerships, or they will become prime takeover targets. We can think of a few in this category . . .

Graph Expo: Where's the Next Wave?

2008-11-06T12:40:00.000-08:00

Last week we visited Graph Expo, one of the premier exhibitions for the printing industry, especially for high end production-class systems. Although many business sectors report waning interest in major live exhibitions as regional and 'virtual' alternatives provide sufficient information and value to both vendors and users, this segment continues to attract healthy and even increasing participation. There are several understandable reasons for this ongoing interest in attending such events live: first, the systems in question involve investments of tens and often hundreds of thousands of dollars, and these decisions must be prepared with live demonstrations and expert discussions.

Second, the real judgement about the quality of the product, namely the final output, can not easily be represented in any way other than in a direct encounter. The exhibition was full of vendors working hard to demonstrate their products' benefits: huge systems with no exhaust piping (implying more environmentally-friendly workplaces), print output being trampled underfoot by design and not by accident (showing the durability of the print output and media), new applications, improved color, new speed and size formats, etc. All of these simply must be seen to be believed (and bought).

Also, the pace of product development and technology transition is increasing dramatically. Since there are not that many outlets to see a production system the size of a bus, you have to be there to get the picture. So Graph Expo (and related events such as DRUPA and IPEX) is and will remain a draw.

So we can report healthy participant rates and a number of significant new developments. Digital systems were of course everywhere, and the newly emerging "light production"and wide format inkjet systems are clearly active and increasingly competitive spaces. But those trends were already evident years ago. With all due respect to the massive development efforts and long timeframes required to bring such systems to market, the vendors who were showing these systems were not really on the cutting edge.

To anticipate key future trends, it is necessary to look closely for what is not (yet) so prevalent in the booths and show reports. In this vein, we noted a number of key developments that will further facilitate the transition from analogue to digital and empower print providers to match offset output quality in smaller print volumes and to profit in areas never before possible. For example, until recently, you needed a high end press to produce the most impactful documents with beautiful images and specially defined "spot" colors on coated/glossy media, with special visual and even tactile effects. Key developments shown at Graph Expo indicated how quickly this will become possible for smaller, highly targeted and even individualized print runs. These developments will affect (in both positive and negative directions) future business prospects of established vendors and open new opportunities for relative unknowns.

For those readers who missed the chance to visit live, feel free to contact Woodford Group to discuss how to get the full picture from this key event.

Sub-Prime . . . What?

2008-11-06T06:37:00.001-08:00

One of the most frequent questions we have dealt with in recent client discussions is how the credit squeeze is affecting the imaging business. The surprising answer is . . . not much! Of course, we need to put that statement into perspective. We have no intention to play down the seriousness of the present situation, as no corner of the economy is left untouched by the current crisis. But the impact is still less than one might expect when observing the "mainstream" events and commentaries.

Especially since some sectors of the imaging industry involve major investments, financing is often part of the business and a key facilitator for most vendors in the mid- to high end of the business. A digital press, a corporate installation of dozens or hundreds of systems, or even the purchase of a single midrange MFP will often be financed through a leasing arrangement. So how could it NOT be that the vendors are seriously affected?

On the one side, that corner of the financial world has been and has stayed notably conservative. Overall, credit checks for imaging equipment are thorough and the decision processes are (in retrospect, thankfully) stodgy. Credit requirements for potential customers have always been strict, sometimes to the point of frustration for the selling companies. Just like the imaging industry as a whole, their financial partners seem to have been maybe a bit boring on the surface, innovative only within limits but certainly profitable if their portfolio was well structured.

On the other side, the financing for imaging equipment has by definition been well securitized. The hardware is reasonably valued and, as a response to some "playful" calculations in past years, there is rarely any effort to leave any residual value on the books to lower payments. If monthly volumes are included, they also tend to be fairly estimated. One reason is that the contract partners typically have enough knowledge of historical usage levels to provide a good baseline. The other reason is that while lock-ins are good, overage, which is usually charged at a premium, is better. So the volumes tend to be realistic and often even a bit low.

With such a notoriously low tolerance for risk in this space, the market for sub-prime financing for imaging equipment, while theoretically possible, never emerged. If times had stayed good, maybe these players would have been tempted at some stage to get creative and find ways to loosen credit. But we are sure that those players are currently thankful that they stuck to the established credit parameters.

Imaging Industry Insights for the Financial Community

2008-11-05T07:53:00.000-08:00

Many analysts, especially those serving Wall Street, cover the printing and imaging industry because they have to. In the world of IT and beyond, other topics appear more attractive and interesting. Did they draw straws and lose?

The difference: at Woodford Group (and our partners Photizo Group), we cover the imaging markets because we want to. Quirky as it may sound, we like what we do! And by the way, there are excellent earnings opportunities to be found as we work together to discover attractive investments: companies, sectors and technologies, both in up as well as in down markets.

Our enthusiasm, combined with our collective century+ of high-level industry experience, ensure that we can provide Wall Street with fresh information and actionable insights. Try us out and enjoy the ride!