Imaging Index29 Aug, 2005 By: Michael Dudek imageSource
Each month we track changes in
stock values of major public players in the imaging industry. After 10 months of
tracking stocks, HP has made substantial progress and leads the pack with a 31
percent increase. The technology giant is followed closely by EFI, which
experienced a 30 percent increase. Leading in the loss column is Danka, 46
percent; Lexmark, 25 percent; and IKON, 20 percent.
Danka: The company announced revenue of $300 million for the first
quarter, and an operating loss of $20 million. It also publicized two large
outsourcing arrangements: 1) a $70 million, five-year agreement in which MCI
will manage Danka’s core network services, WAN, LAN, IP services, servers,
desktops, and phone systems, as well as its network of ancillary technology
vendors and partners; and 2) its resources and payroll operations went to Gevity
Opinion: In both of these cases, it appears that Danka has outsourced
functions to companies that are also its customers. Although companies are not
really permitted such arrangements, it is common for companies to effectively
arrange a “quid-pro-quo,” a term used in financial circles to describe the
mutual agreement between two parties in which each party provides a good or
service in return for a good or service.
Outsourcing initiatives can enable a company to leverage an expert’s specialized
capability while the company focuses on core competencies; however, a fair
number of such arrangements result in lower quality and less service for a
IKON: The company announced revenue of $1.1 billion for the quarter, a
decline of 4 percent. Its earnings were $24.4 million (2.2 percent of revenue).
Meanwhile, Global Imaging announced record quarterly revenue of $246 million.
That is an increase of 16 percent from a year ago with earnings of $14.4 million
(5.9 percent of revenue).
Opinion: A comparison of IKON’s and Global’s earnings rate disproves that
bigger is always better. On less than a quarter of its revenue, Global exceeded
over 50 percent of IKON’s profits. We’ll keep our eyes on this most important
stat in future quarters.
Prior to its re-engineering initiative and transformation, some of IKON’s
operating businesses actually generated 18-20 percent operating income, which,
assuming a 40 percent tax rate, would translate into an 11-12 percent net income
rate. The entrepreneurs involved with these high performers always questioned
how corporate could squander all of their hard-earned profits. I wonder what
they would say today.
Lexmark: The company announced an additional $500 million stock
Opinion: This was done to stem the negative stock slide that originated
when HP went on the attack.
Canon: It announced quarterly revenue of $8.2 billion, an increase of 7.3
percent with earnings of $734 million. The Associated Press reported that Canon
indicated that the sale of machines such as printers remain strong although they
are suffering price drops and a shift in demand toward high-performance, but
Opinion: Copier dealers have enjoyed outstanding hardware margins for
many years—high enough to derive a reasonable profit after compensating a
dedicated sales team. Plus, those copier hardware sales also have related
aftermarket agreements comprised of high margin service and supplies.
Conversely, printer providers have experienced narrow hardware margins for
years. High margins were realized from supply sales, especially from
remanufactured cartridges. Printer service agreements were rare because printers
were always very reliable. However, in recent years, providers have been
actively bundling service with supplies.
What does the future hold as the copier and printer markets converge in the
middle? Will the machine become more reliable and will margins be commoditized?
Besides narrowing of hardware margins in certain circles, we have been
witnessing some rather substantial aftermarket price compression. In addition,
competition is rapidly increasing between copier and printer dealers.
In my opinion, in several years, it will be difficult to distinguish a copier
dealer from a printer dealer. As copier dealers are pursuing printer supply and
service revenue, printer dealers are seeking copier authorization, copier
placements and related aftermarket opportunities.
To maintain revenue and margins, you will need to take advantage of both the
copier and printer opportunities within you customer base, while continuing to
earn high margin business by providing outstanding customer service that
satisfies customers’ needs and solves their problems.
Mike Dudek, the “AcquisitionGuy.com” is the president and owner of Zygoquest
Group and the #1 authority on mergers and acquisitions in the office products,
document services and telephony industry. Mike has consummated over 300
transactions with aggregate revenues over $2 billion. Zygoquest Group provides
customized acquisition services to buyers and sellers, advising entrepreneurial
owners through the entire acquisition life cycle or specific transaction
aspects. Zygoquest assists entrepreneurs engaged in selling their companies or
contemplating future disposition to position their companies to maximize exit
value and minimize post sale risk. Contact Mike at 610.873.6555, email at firstname.lastname@example.org,
or visit www.zygoquest.com.