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Imaging Index

16 Dec, 2003 By: Mike Dudek imageSource

Imaging Index

of the most important ways for a dealership to gauge the health of the
copier/printer industry and assess future opportunities is by examining the
financial performance of top vendors and OEMs. With this in mind, imageSource
has teamed up with top industry financial executive and acquisition expert, Mike
Dudek, President of Zygoquest Group, to offer dealers the opportunity to look at
the industry from a value and financial perspective.

bring dealers up to speed, this first article will offer an overview of some of
the largest publicly traded companies with recaps of stock prices and operating
results. In addition, dealers will find a summary of key strategic initiatives
and developments, Dudek’s opinionated observations and fearless predictions
for the future. In each subsequent issue of imageSource, Dudek will track the
stocks affecting our industry; highlight and comment on developments of a
featured company; and offer practical tips and advise for non-financial
managers. Let’s begin by comparing stock performance over a one year period.
Each company will then be dissected and examined individually.





























Global Imaging














Hewlett Packard

















































Pitney Bowes








Danka Office Imaging

Results: Danka reported revenues of $334 million in the first
quarter of fiscal 2004 ending June 30, 2003, a decline of $13 million or 3.8%
from $347 million reported a year-ago. Excluding the impact of foreign currency
gains, total revenues declined 11.4%. Operating earnings were $5 million
compared to $15 million a year-ago. A net loss of $0.8 million compared to
earnings of $5.8 million a year-ago. Equipment revenue was off 2.4%; service
revenue decreased 7.4%; and, supply and rentals decreased 14.1%. Gross margins
decreased to 36.7% from 38.6%.

Opinion: Danka revenue continues to decline. Total annual revenues
will be less than the revenue acquired in a single acquisition a number of years
ago – the Kodak deal. Substantial loss of service and supply revenue is
indicative of deteriorating customer base and clicks. Danka has been focusing
extensively on internal operations, including their Oracle implementation,
cost-structure and re-financing issues, which may be distracting them from
sufficiently focusing externally on their customer needs and marketplace

Forecast: With annualized revenues of approximately $1.4 billion,
Danka remains a fairly large industry player, however independent dealers are
anxiously circling Danka’s customer base like sharks in a feeding frenzy.

IKON Office Solutions

Results: IKON reported $1.2 billion revenue in their fourth quarter
ending September 30, 2003, a decrease of 1.3%. Net income was $32.4 million, a
decline of 17.5% from $39.3 million a year ago. Gross margins declined to 29.2%
from 32.5%. Equipment revenue grew 5% representing IKON’s first quarter of
equipment revenue growth since the second quarter of fiscal 2001. IKON expects
fiscal 2004 revenue to grow by 1%. Revenue for the year ended September 30, 2003
was $4.7 billion, down from $4.9 billion a year ago. Net income of $116 million
was down from $150 million.

Opinion: It appears that IKON’s revenue is stabilizing. Equipment
growth should eventually result in improving aftermarket revenue attainment.
Like Danka, IKON has been too internally focused for years, ever since they
embarked on their re-engineering efforts in the late 1990’s. However, IKON
still has quality cash flow from operations; a substantial share of Canon’s
distribution network—a very valuable asset; a formidable sales and service
force; a high-quality national account program; and a huge base of mid-market
captive leasing customers.

Forecast: We will watch to determine whether new CEO Matthew Espe
refocuses IKON on customer and market opportunities, leveraging strategic
relationships including Canon and Hewlett Packard. Conversely, if IKON continues
to focus internally, struggling with integrating operations and implementing
Oracle, their customers will continue to flee back to independent dealers who
have capitalized at IKON’s expense in recent years.

Fearless Prediction: We expect IKON to further expand strategic
relationships with large industry players. IKON remains the largest independent
representing a potential takeover target by one of the large market cap players
seeking expansion of direct operations through either a defensive or offensive
move. If IKON were acquired by a manufacturer, the consequences to the dealer
community could be significant.

Global Imaging Systems

Results: Global announced revenue of $189 million for the quarter
ended September 30, 2003, an increase of 9% from a year ago. Operating income
increased 12% to $21 million, and net income increased 34% to $11.4 million. For
six months ended September 30, 2003, revenues increased 13% from last year.

Opinion:  Global has
completed over 60 acquisitions and continues on the trail, expecting to acquire
$60 to $100 million this fiscal year. Global’s philosophy, like IKON in their
formative years, is to entrust field operations with autonomy and local
decision-making. We will watch to determine how Global will avoid pitfalls
experienced by other mega dealers.

Forecast: To properly assess Global’s revenue growth performance,
you need to carefully define and distinguish internal from acquisition growth,
as this year’s acquisition growth effectively becomes next year’s internal
growth. Global is targeting 8% to 11% internal growth in subsequent periods. If
they accomplish this feat, they will be taking share from you and/or your


Results: Xerox reported revenue of $3.73 billion for the third
quarter ending September 30, 2003, a decline of 2% from 2002. Earnings were $117
million for an EPS of 11 cents, compared to $99 million last year. 
For the first nine months, Xerox reported revenue of $11.4 billion
compared to $11.6 billion last year. Equipment sales grew 5% in the third
quarter. Revenue from color increased 15%. Revenue from color comprises over 25%
of total revenue. Revenue from targeted growth areas—office digital,
production digital and value-added services—grew 6% year over year and
represents about 70% of company revenue.

Opinion:  Xerox
experienced revenue decline in the last several years and has implemented a
turn-around and cost-cutting program. One of Xerox’s greatest challenges
continues to be the magnitude of debt on their balance sheet compared to annual
cash flow performance. Debt exceeds $13 billion while EBITDA is approximately $1

Forecast: Independent dealers should take note of Xerox’s product
strategy. Xerox is successfully targeting higher-growth market opportunities.



Results: HP reported third quarter revenue of $17.35 billion for
third quarter ending July 31, 2003, an increase of 5% year-over-year. U.S.
revenue increased 1% while international revenue increased 8%. Earnings were
$297 million compared to a $2 billion loss in the prior year. For the last four
quarters, HP revenue totaled $71.8 billion. Imaging and Printing experienced
revenue growth of 10% year-over-year, outpacing most competitors. HP has
launched 158 digital imaging and entertainment products.

Opinion: HP continues to invest in strategic initiatives while
simultaneously streamlining their cost structure to right-size operations after
the Compaq merger. We expect HP to rapidly expand both direct and indirect
distribution. We also anticipate expect a services strategy directly targeting
mid-market customers.

Forecast: HP is a marketplace leader and a market cap giant—better
to partner with than compete.


Results: Canon reported revenue of $6.9 billion for the third
quarter ended September 30, 2003, an increase of 10.6% from a year ago. Net
income increased 27% to $658 million. For the first nine months, revenues were
$20.7 billion, an increase of 8.3%, with net income of $1.8 billion, an increase
of 38%.

Opinion:  Canon expects
sales growth to continue throughout the 4th quarter and into next year. Sales of
Canon’s networked digital multi-functional B&W copiers realized healthy
growth worldwide. Canon will benefit from any global economic recovery, as they
realize three-fourths of revenue from outside Japan.

Forecast: Canon’s growth is welcome news for their dealer channel,
including IKON which experienced revenue growth for the first time in several
years. We expect Canon to continue to expand their direct operations. Recent
acquisitions in the industry by other manufacturers will lead to both offensive
and defensive reactions by this industry leader.


Results: Lexmark announced revenue of $1.157 billion for the third
quarter ended Sept. 30, 2003, an increase of 11% year-to-year. Laser and inkjet
supplies revenue of $641 million was 55% of total revenue and up 13% from $568
million a year ago. Laser and inkjet printer revenue was $430 million in the
third quarter of 2003, an increase of 13% from $381 million a year earlier.
Operating income margin was 12.1% in the third quarter of 2003 versus 11.9% last
year. Revenue for the nine months ended Sept. 30, 2003 was $3.385 billion, an
increase of 7% versus $3.149 billion in the same period of 2002. Operating
income was $406 million versus $351 million a year earlier, an increase of 16%.
Net earnings per share on a diluted basis for the period were $2.29, up 21% over
the $1.89 per share recorded in the same period of 2002.

Opinion: Lexmark, for good reason, has expressed caution about
future aggressive price competition. As HP continues to stabilize operations
after digesting their 2002 Compaq merger, we expect HP to continue an aggressive
posture to re-capture share from Lexmark and others.

Forecast: We have been talking with many independent dealers who
complement their copier product offering with the HP printer line, including
high-margin revenue from related supplies. We have not (yet) identified many
dealers carrying the Lexmark line, perhaps an opportunity to increase their
indirect distribution channels.


Results: Ricoh reported revenues of 1.7 billion yen (equivalent to
$14.7 billion U.S. dollars, an increase of 4% over the prior year. Net income
increased 18% to $614 million.

Opinion: Ricoh had an outstanding 2003 and increased net sales for
the ninth consecutive year. Ricoh continues to emphasize their digital,
multi-functional and color product lines to grow.

Ricoh is one of the big three copier manufacturers, along with Canon and Xerox.
Ricoh has fairly substantial direct distribution resulting primarily from their
acquisitions of Lanier and Agfa. We expect Ricoh to acquire more direct
distribution in ensuing quarters.



Results: Oce announced that third quarter revenues of EUR653 million
declined by 11.8% compared to a year ago. Net income was down 40% to EUR12.7

Opinion: We are not impressed with Oce’s recent earnings results.

Forecast: We expect Oce to continue to struggle. Their October 2003
release refers to works council, trade unions and a social plan to work out
during the fourth quarter with a provision which should distract them from

Electronics For Imaging (EFI)

Results: EFI announced revenues for the quarter ended September 30,
2003 of $97.3 million compared to $92.7 million for 2002; and $271.7 million for
nine months compared to $259.5 in 2002. Quarterly net income was $13 million or
$0.24 per share, an increase of 259% compared to $3.6 million, or $0.07 per
fully diluted share, for 2002. For the nine months, net income increased 225% to
$26.3 million, or $0.48 per share, from $8.1 million, or $0.15 per share in
2002. EFI anticipates revenue of $104 million to $107 million in the 4th quarter
of 2003.

Opinion: We expect EFI to continue experiencing success as they
focus on software products for digital and color.

Forecast: EFI will surely excel if the economy improves. Like many
high-technology and software companies, EFI’s stock currently trades at a
multiple of revenue (most recently at 3.8x); consequently the ride could be more
volatile than for other blue chip industry players.


Results: Combined results for these two manufacturers are not yet
available. Two major announcements – first, the Konica and Minolta merged
effective October 1, 2003. Second, Konica/Minolta has announced a new alliance
with HP which is expanding into digital multi-functional copiers. Konica plans
to supply copier engines together with options and supply materials, which have
been customized to meet HP’s networking environment. The copier engine will be
integrated with HP’s original controller and software before being shipped to
the market.

Opinion: The success of this merger will depend on the amount of
work necessary to integrate their respective operations. Most such integrations
are rather messy and distractive.

Forecast: We expect Konica/Minolta to continue to leverage
themselves through major players such as HP and IKON. Their dealer community,
while not necessarily realizing immediate consequences, may see tighter margins
and less growth in the longer term associated with increased distribution

 - - -

Mike Dudek, the “Acquisition Guy”, is
the #1 authority on acquisitions in the office products industry. Mike has
consummated over 300 transactions with aggregate revenues in excess of $2
billion in the office products, document services, systems integration,
technology, communication services and other industries. Zygoquest Group
specializes in providing customized acquisition services to buyers and sellers.
Mike Dudek, a CPA and MBA, has 25 years of international experience in
acquisitions, operations, finance and accounting. Prior to founding Zygoquest,
Mike was the Vice-President – Finance and Acquisitions at IKON Office
Solutions. Zygoquest Group specializes in providing customized acquisition
services to buyers and sellers, advising entrepreneurial owners through the
entire acquisition life cycle or specific transaction aspects; from strategic
planning to identifying, valuing, negotiating, due diligence, financing,
contract prep, closing, assimilation and follow-up reviews. All services are
tailored to the client's engagement. Zygoquest assists entrepreneurs either
engaged in selling their company; contemplating future disposition; and/or,
seeking to position their company to maximize exit value and minimize post-sale
risk. You can contact Mike Dudek directly at (610) 873-6555; email him at mdudek@zygoquest.com;
or visit his website at www.zygoquest.com.




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