Issue #0537/1 - A roundup of the performance of major printer companies demonstrates that increased business spending on IT includes increased spend on printers. Most manufacturers are performing well but Lexmark is struggling.
Towards the end of October this year, analyst companies were releasing up-rated forecasts for PC shipments for the year, indicating that growth could be expected to be as high as 17%, signalling the potential for the printer market to benefit (see TCPglobal Issue #0533 - "Good prospects for printer sales").
We are now able to assess the financial results coming from the major companies for the third quarter of the year. Depending on the companies’ financial year, this quarter runs to the end of September or October and comment includes some information from fiscal first half results, periods ending September.
Overall, the printer industry does appear to be benefiting from the upturn in business IT spending. There are a couple of exceptions – and then there is the perceived failure at Dell! One of the major highlights in the news recently has been about Dell’s failure to perform to expectations (for previous comment, see TCPglobal Issue #0526 - "Financial markets disappointed at Dell, Hewlett-Packard’s Hurd ‘encouraged’").
has experienced the gathering of storm clouds over the last few months. Despite this, recent results show that, mostly, it is the financial sector’s expectations that are at fault not Dell’s performance. The one exception to this scenario is the UK where consumer activity ‘fell short of expectations’, fuelling speculation of redundancies. Although there is very little information regarding what is actually happening at Dell and the reasons for the shortfall, it is unlikely to be down to any failure of printer sales.
But, it has to be accepted that expectations for Dell are unrealistic based on a period of golden growth that took the company to the number one slot in many of its business areas. Once at number one, it is inevitable that growth rates will flatten off. However, Dell has to suffer the consequences of the unrealistic expectations not being met.
In reality, the company continues to make excellent progress including making serious headway in the global market. In Q3, Dell’s growth outside of its stronghold in the US averaged 20%. Even within the US, growth was 8%.
This underlines the nature of Dell’s growth potential. The company’s perceived problem is in high growth areas. In other words, the cost of growing the business, in an environment of aggressive pricing and promotions, is so high that operating income growth is static or negative while unit sales and revenue demonstrate healthy grow.
To emphasise the progress that Dell is still making good progress in the market: Software and Peripherals revenue grew by 25% in Q3 relative to the same period in the previous year; storage revenue grew by 35%; and Enhanced Services revenue grew by 36%.
Gross units sold increased by 15% overall, driving average revenue growth of 11% and providing record Earnings Per Share, which is up by 18% over last year.
Dell has declined to provide breakout information on the growth rates of printer units but available data suggests that this growth could be running as high as 80% to 90%.
Imaging and Printing revenues are certainly up by a massive 31% and consumables revenue has more than doubled as Dell succeeds with its installed base expansion. Around 46% of Imaging and Printing revenue is derived from supplies. While this ratio is lower than other manufacturers (typically achieving 50% to 60% of revenue), it is rising. In the previous quarter the ratio was quoted as being 42%. This indicates that Dell’s mechanisms are working well and sales costs per unit are reducing as the company settles into a routine and critical mass is achieved in the various market areas.
In terms of the effectiveness of the revenue, growth in Operating Income in the US is quoted as being 14%, giving an overall growth of 9%.
Undoubtedly, Dell needs to keep a close eye on its performance and pricing policies or it could well falter at the next hurdle.
indicates that for the first half of the financial year (ended September), sales growth generally outweighed the effects of price decline, driving an overall revenue growth of 0.2% for its Imaging and Information Equipment division.
This was most evident in the laser printer segment and also held true for inkjet All-in-One machines. Unfortunately, the decline in sales of single-function inkjet printers and general price degradation meant that revenue from inkjet products was ‘slightly reduced’ – but no figure is given. Europe demonstrated particularly disappointing performance in the inkjet segment for Epson.
That aside, by the time the financial year is ended, Epson is projecting that IIE division revenue growth for the full year will amount to 6%.
is in celebration mode again following news that it enjoys the number one position as leading IT company in Europe for 3rd quarter in a row.
Needless to say, the company is “very pleased with the quarter”, with revenue up 7% overall. Indeed, Hewlett-Packard continues to grow while most others global IT players level off (with IBM in actual decline this last quarter). Ironically, only Dell is succeeding in holding its own in the growth-stakes against Hewlett-Packard with its growth of 11%. Although this is a higher growth rate than Hewlett-Packard, it is on revenues that are only just over one-third of the size of Hewlett-Packard’s.
Certainly, Hewlett-Packard has been enjoying its share of the increase in business IT spending. It has seen its PC sales grow 13% in Q3 with consumer notebook sales up by an impressive 48% - sales of all notebooks grew by 42%. This has generated revenue growth of 1% on desktops and 23% on the increasingly popular notebook segment.
Mirroring the solid growth in the PC market, revenue growth within the Imaging and Printing Group has been strong at 4%, albeit lower than the 9% growth returned by the Personal Systems Group.
Unit sales within IPG increased by a healthy 8%, lead by 16% growth in sales of business hardware. Even consumer hardware sales were up by 6% though.
Unit Growth Rates
In the obvious high growth areas, Hewlett-Packard saw unit growth of Colour LaserJets exceeding the 40% mark and enterprise MFPs as high as 83%.
No doubt great satisfaction will be felt at the 43% increase in digital press page volume from the Indigo product line. As a major competitor to Xerox’s iGen3 platform, Indigo represents Hewlett-Packard’s opportunity to reach, and profit from, the huge colour page volumes in the production arena. This will be further enhanced in coming quarters by the completion on November 1st of the purchase of Scitex Vision, giving Hewlett-Packard further reach into the production printing markets with interests in packaging, textiles, super-wide format printing for graphic arts and ground-breaking developments in the field of short-run print for home furnishing.
Growth by Business Unit - Hewlett-Packard IPG
On top of this, supplies revenue is following a fairly stable trend, with a growth rate of 7% for Q4, accounting for 56% of IPG revenues against 26% for commercial hardware and 17% for consumer hardware.
Even here though, all is not entirely rosy. Having announced job cuts of around 14,500 just a few months ago, Hewlett-Packard has announced that a further 800 staff will be lost.
In addition, IPG’s Operating Profit is down substantially for the quarter. Although it has taken a serious knock on the previous year, it still represents more than 13% of revenue (down from nearly 17%), which is still the highest in the Hewlett-Packard group by nearly one-third.
shows a similar overall situation in its first half of the financial year (to September) to Hewlett-Packard, with revenue growth of 1.5% but operating profit that was substantially lower (down one-third) over the previous year.
Increased sales of laser printers and digital MFPs contributed to the revenue growth. The decline in operating profit is blamed on a combination of declining prices and the increasing cost of new product development.
Kyocera is confident that the full year will see a drop in operating profit that is only half the fall seen in the first half of the year.
stands out from the crowd as being a company in trouble. Whereas other manufacturers are all reporting substantial increases in unit sales, albeit resulting in relatively modest revenue growth, Lexmark has actually experienced a drop in its revenue of 4%.
Furthermore, the gross profit margin is down 5½ points to 29% and operating expenses have risen by 2 points to 23%. Looking at the year so far for Lexmark, revenue has grown by 2% but gross profit margin was down two points.
Although Paul Curlander, Lexmark chairman and chief executive officer, puts the poor performance down to the fact that Lexmark reduced hardware prices aggressively to “improve our hardware competitiveness and drive future sales of hardware and supplies”, this course of action smacks of desperation.
Lexmark is no newcomer to buying market share to capture high-profit supplies sales but at this time it is not clear that the company can afford to do that. With laser and inkjet hardware revenue down 10%, and corresponding supplies revenue up only 1%, there is little money available for such a strategy.
In the case of the hardware, the weakness has been blamed on “aggressive pricing, promotions and weak demand”, while the flat supplies segment has been blamed on “changes in channel inventory and ‘soft’ demand”.
‘Soft’ or ‘weak’ demand seems to characterise the overall Lexmark experience. All-in-all, one has to question whether Lexmark saw any growth in unit sales at all!
What makes this even more worrying is the fact that for the first half of the year, unit growth in the business segment is claimed to have been as high as 100% for photo AiOs and between 55% and 65% for each of business AiOs, laser AiOs and colour laser printers. Only mono laser growth was low but, even then, it was a positive figure – 16%. Apparently operating income also showed a slight increase on modest revenue growth.
By contrast, in the consumer segment, very modest revenue growth was accompanied by a severe drop in operating income of around one-quarter.
But, it is the lack of growth in the supplies market that must be the most worrying aspect for Lexmark. In conjunction with the “aggressive pricing and promotions” of the hardware element, it is very significant to note that supplies prices (business products) have been steadily increasing over the quarter and further increases are applied in November ("In desperation, Lexmark pushes business consumables prices even higher").
If Lexmark cannot sell its supplies at a profit, then there is no future. With Total Cost of Printing levels that are generally substantially higher than the competition already, there is a limit to how high the company can push its supplies prices.
Bizarrely, Lexmark has published figures that show the company taking 32.5% of the US inkjet printer market in 2004. What makes this bizarre is that the company has included both Lexmark branded sales and sales through Dell branded equipment and the Dell market share is 13.4% against Lexmark’s 19.1%. This means that 41% of Lexmark’s inkjet production is being sold by Dell!
Perhaps the solution to Lexmark’s problems is to allow a takeover by Dell? If Dell can achieve that high a market share within two years of entering the market, while Lexmark is struggling at under 20% after nearly 15 years in the market, Dell is clearly doing a better job!
claims to be ‘quite pleased with the quarter’. Revenue might have increased by only 1% over Q3 of last year but expectations were met and the company says that it is confident of building on the momentum through Q4.
Perhaps the most impressive financial detail to emerge is that, over the year, Xerox has cleared another $3bn of the debt that was crippling it just five short years ago. This is a sure indication of confidence by the management. Indeed, the company is now sitting on a cash and short-term investment pot of some $1.6bn and its remaining debts are down to $7.5bn.
Xerox’s Anne Mulcahy proudly declared to investors this week that “Revenue and gross profit from color pages are five times greater than black-and-white pages” - a factor that is common across the industry, not just to Xerox.
No wonder printer and copier manufacturers want to push companies and consumers towards colour! No wonder pricing on colour printers and MFPs is under pressure as vendors jockey for installed base.
Indeed, Mulcahy continues to say that, “With less than 7 percent of Xerox pages printed on color devices, the growth opportunity is huge. It’s a great business model, an attractive market, a competitive advantage – and it’s delivering solid returns”.
At 7%, this is not far short of double the level of colour pages two years ago, indicating that Xerox (as other manufacturers) is already capitalising on the growth potential but that there is still huge growth potential to be tapped. The competitive advantage to Xerox is that it stands alone in the industry in offering a range of high-end colour equipment second to none.
While Hewlett-Packard has its Indigo line for production colour printing and a range of office colour printers and MFPs, Xerox not only has its high speed, high volume iGen3 platform but also an extensive range of DocuColor production printers and its office-oriented colour MFPs and printers, including solid ink technology. This is a unique offering placing Xerox in an enviable position to profit from full service, annuity-based contracts.
For this reason, if for no other, as long as Xerox can manage the next phase from recovery to solid growth, Xerox is firmly back as a formidable hard copy provider in the business. There must be some concern though, that the company’s share value dropped by about 20% between the beginning of the year and mid-October but there are signs of a possible recovery occurring in late October and November.
Xerox has succeeded in increasing the flow of hardware installations – seeing an increase of 2% overall. This is perhaps an understatement of the impact of the growth on the company, bearing in mind the value of colour printing to Xerox.
Colour hardware sales were up by 31% over the previous year, bringing in an increase in revenue of 22%. This was largely at the high end, production end of the market.
However, even in the office environment Xerox has experienced encouraging growth in its colour activities. Revenues overall increased by only 2% but revenue from colour grew by 23%.
Mono MFP, Copier and Printer office hardware sales continue to grow, by 21% in Q3, but it is colour MFPs and Copiers where we see higher growth, 56%. But – a growth rate of 191% on colour printers shows where the focus really lies for customers.
Both of these sets of results, on hardware unit sales and revenue, imply that Xerox is loosening its grip on its mono markets – overall growth is low but colour growth is high – and is trying to encourage users to move to colour devices.
To emphasise this shift to colour, Xerox also indicates that the proportions of colour to mono is changing rapidly. The accompanying chart shows the percentage of the whole taken by colour devices and colour’s contribution to revenue.
Growth of Colour - Xerox
Success is also reported by Xerox in signings of new Print and Document Management contracts (up 20%), emphasising Xerox’s increasingly solid position, and intent, as a “… growing, annuity-based business that reflects the power of our innovation and insights into the document management market,” (Mulcahy). She added, “With more than 50 years of experience creating and leading our market, Xerox has developed unparalleled expertise in document management.”
This strength has been highlighted this week by the announcement that Xerox has signed a five-year contract with the University of California. Xerox expects the deal to include the purchase of 3,000 copiers and MFPs and to run to a multi-million Dollar value. With a total of 18 locations and nearly 375,000 staff and students together, the University of California is one of the largest state universities in the US.
Xerox expects this success to continue and has predicted that revenue growth will be in the order of 3% in 2006 – three times current growth levels.
In conclusion, with the exception of Lexmark, we can see that the printer industry has enjoyed healthy growth in unit sales in the third quarter of 2005 as business IT spending improves, even though pricing pressure is pushing hardware revenue growth remorselessly downwards. It is only because these companies maintain high prices on the consumables that they are able to show increasing revenues and come out with a profit.
Although we have seen some poor performance from the EMEA region, particularly in inkjet sales, the PC market in EMEA is now reckoned to be buying as many PCs as in the US. Again, this should have positive connotations for the printer industry.
One further factor that has come to light in the press recently, that also has the potential to benefit the printer industry, is that many workers long to work remotely. Technology developments will continue to make remote working easier and less costly than it has ever been and for every remote worker there probably needs to be a printer/AiO!
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