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Imaging Index: A Financial Wrap-Up of this month's document technology market

31 May, 2005 By: Mike Dudek imageSource

Imaging Index: A Financial Wrap-Up of this month's document technology market

Each month we track changes in
stock values of major public players in the imaging industry. The following
chart depicts the change in value from September 30, 2004 to April 30, 2005.

What a substantial change from just a month ago. At March 31, 2005, the stock
value for this portfolio of companies had collectively appreciated by 5 percent
since September 30,2004. One short month later, the portfolio dropped by 8
percent and is now 3 percent lower than its value at September 30, 2004. This
substantial drop can be attributed to a combination of poor segment results for
several companies as well as an overall stock market decline.

It’s safe to say that things are getting ugly for Danka. Its stock value has
continued to slide and has now lost 67 percent of its market value from seven
months ago. IKON, Xerox and Lexmark also have little to celebrate. The companies
have all declined 13 percent from the prior month based on news summarized
below. Internal issues at IKON have not helped its stock. It has tumbled 28
percent since September 30, 2004.

Latest Industry Developments

IKON: The company has announced a review of its billing controls and
reserve practices for trade accounts receivable. During an analysis of aged
trade receivables conducted during the quarter and in connection with
Sarbanes-Oxley reporting, IKON identified deficiencies resulting from the
centralization of billing centers and migration to a new billing platform.

IKON’s preliminary review indicates that accounts receivable may be overstated
by as much as $45 million of the $376 million accounts receivable balance.
Management believes that the overstatement may be attributable to a cumulative
effect over multiple periods. The company has delayed filing its quarterly
financial statements.

Opinion: IKON has been
unsuccessfully attempting to re-engineer its company for the last 10 years. What
a case study. I was working at IKON when it embarked on its re-engineering
program in the mid-90s. I can still recall when IKON’s executive team was
assembled for the re-structuring project announcement.

The outside advisor explained to the wary IKON executives that, 18 months into
its 36 month program, the restructuring project would be terminated because it
would seem too chaotic. He further explained that rather than the re-structuring
project, things should be sped up. Some 10 years later, IKON cannot reconcile
its accounts receivable as it continues to migrate to the other platform. IKON’s
difficulties continue to provide outstanding opportunities for independents to
nab customers from them. Customers get very upset when they receive erroneous
bills, which provide ripe competitive takeaway opportunities.

Xerox: The company announced first quarter revenue of $3.8 billion, a
decline of 1 percent from the prior year. Equipment sales were flat and total
revenue declined 2 percent. Installs of digital office monochrome systems,
however, were up 17 percent, reflecting increased placements of Xerox WorkCentre
desktop multifunction products. In office color, activity was also strong with
installs of office color multifunction systems up 21 percent and office color
printing installs up 180 percent.

"Our profit performance in the first quarter met the high range of our
expectations through increased gross margins and operational improvements that
help ensure Xerox is cost-competitive in every area of our business," said an
optimistic Anne M. Mulcahy, Xerox’s chairwoman and chief executive officer.

"Xerox's industry-leading color technology and expertise in document-related
consulting services continued to be the key drivers of the company's growth
initiatives," she added. "Despite a quarter when market conditions slowed
overall equipment sales, we grew color revenue by 15 percent and delivered
another quarter of double-digit revenue from Xerox Global Services."

Canon: The news from Canon was better. It reported first quarter revenue
of $7.9 billion, representing a 5.7 percent increase over the prior year. Some
of the improvement could be credited to a report by the company that it had a
strong performance from color copiers and printers.

“The increase in net sales was due to strong sales of color copying machines and
color laser beam printers as demand for office color has increased,” said
Toshizo Tanaka, senior managing director and group executive for finance and
accounting. “Although a difficult environment is expected in the second quarter
and for the full year, we expect to exceed our sales and profit results of last
year and achieve our sixth consecutive year of sales and profit growth.”

Adobe: Adobe announced its intent to acquire Macromedia for $3.4 billion.
Macromedia is a leader in animation tools for creating Web graphics and
advertising. Adobe’s stock declined following the news due to concerns over
whether product overlap and anti-trust issues could erode revenue.

Lexmark: The company reported earnings below analyst expectations for the
first quarter and attributed poor results to its price war with HP. Lexmark’s
stock sunk to an 18-month low. The company indicated that printer prices
declined 15-20 percent in the first quarter. Canon and Dell apparently are also
participating in the price war.

Opinion: This price war
could actually result in more equipment unit placements, which could increase
the demand for related supplies and service.

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