For most companies in the hardcopy industry, 2015 was not a banner year. As a whole, hardware and supplies vendors grappled with persistent issues of overcapacity as print volumes fell. While the economy in the United States grew modestly last year, other regions were not as fortunate, and vendors recorded declining sales. Markets that once seemed to hold promise like Brazil and Russia struggled with recession, and they are expected to continue to do so this year. Even China’s economy has cooled and many fear it will cool even more in 2016.
Most OEMs had not reported their final numbers for 2015 as of this writing, but much of what I saw from last year indicates hardware vendors saw sales and earnings decline. Unfortunately, the news was particularly bad in the second half of the year suggesting that problems will linger into 2016. Sales were down along with unit shipments and profits at most printer and copier companies contracted. Neither the U.S. nor the Japanese firms appear upbeat about the current year.
The market for hardcopy equipment in the U.S. was perhaps the strongest in the world in 2015, but the domestic industry and the channels that support it felt the adverse impact of fierce global competition. Many companies were compelled to slash prices, which squeezed already slim margins. In what was clearly a buyer’s market, consumers started bargain hunting, which lead to further price reductions. Making matters even worse for U.S. companies doing business overseas, the dollar strengthened last year. This was especially difficult on the U.S.-based hardware vendors—Hewlett-Packard, Lexmark, and Xerox—because they had to compete against Japanese firms marketing products priced in the ever-weakening yen. But even Japanese hardware manufacturers showed signs of distress in 2015 as the year progressed.
I don’t want to sound too negative, however, especially for companies selling equipment in the U.S. Despite the jittery stock market, the U.S. economy continues to generate jobs albeit at a rather slow rate. Overall, hardcopy generation is inversely proportional to the unemployment rate so if more people are working, there’s more printing. The difficulties vendors continue to endure both here and abroad notwithstanding, the global hardcopy industry still generates tens of billions of dollars each year. People print trillions of pages annually, demonstrating their reliance on hardcopy—a reliance that is not going away even if the industry is in decline.
HP Reveals Tough Market Conditions
With a unique fiscal year that ends on October 31, Hewlett-Packard is the only hardware manufacturer that had reported its full-year FY 15 results and the firm’s performance—like most of its competitors—was not good. The slump that HP’s printer business has been in for nearly 5 years continued in 2015 and in November the company reported declining printer sales for 18th consecutive quarter.
For the year, total sales of HP’s printers and supplies dropped 9 percent to $21.2 billion in 2015 from $23.2 billion in fiscal 2014. Supplies sales fell 6 percent from $14.9 billion in FY 2014 to $14.0 billion last year and commercial hardware revenue was $5.4 billion, down 10 percent from over $5.9 billion. Consumer hardware revenue in FY 15 was only $1.9 billion, a drop of some 20 percent from $2.3 billion the year prior. Total printer hardware units for the year were down 7 percent on a 9 percent decline in commercial hardware units and a 6 percent decrease in consumer hardware units.
With its top-line results sagging, the profitability of HP’s printer business showed signs of pressure. Although the Printing business’s operating margin for fiscal 2015 stood at 18.2 percent—the same as in FY14—the full-year operating profit fell to $3.9 billion from $4.2 billion, a 9 percent decrease compared to the year prior.
Dion Weisler, president and CEO of the newly formed HP Inc., which now markets HP’s printers and PCs, indicated that the printer business suffered from currency fluctuations that “accelerated pricing pressures even more than we expected in certain profitable segments of the printing markets.” He added that the overall the printer market was also weaker than expected in the calendar third quarter thanks to economic woes in certain regions. Mr. Weisler pointed out that some of HP’s competitors in the printing business reported similarly bad news last year including its two U.S. rivals, Lexmark and Xerox, which each announced independently that they would reevaluate strategic options that could result in asset sales.
Mr. Weisler Didn’t Lie
Almost a month before HP reported its FY15 performance in November, Xerox and Lexmark had disclosed crummy Q3 FY15 results to their shareholders. With falling revenue in both its Services and Document Technology businesses, Xerox suffered its first quarterly net loss since 2010. For the third quarter of 2015, Xerox revenue totaled $4.3 billion, down 10 percent from $4.8 billion in the third quarter of 2014. The firm’s gross margin tumbled 9.4 percentage points to 22.8 percent compared 32.2 percent in Q3 FY14 while its operating margin slipped 900 basis points to 8.7 percent. For the quarter, Xerox had net loss from continuing operation of $31 million versus net income from continuing operations of $258 million in the third quarter of 2014. The firm projects total 2015 revenue to be down 3 percent, as Services sales decline 1 percent and Document technology generate 6 to 7 percent less revenue than 2014. For FY15, Xerox’s Services margin is expected to be approximately 8 percent, while the margin for its Document Technology business will be in 11 to 13 percent range.
As noted, Xerox is now contemplating an asset sale but we don’t have many details. Ms. Burns says that Xerox is “not currently considering the sale of the company but all other options are being considered.” Needless to say that we at Actionable Intelligence will be watching the firm closely this year.
Lexmark also had bad news for its investors. During the three-month period ending on September 30, total revenue dropped 7.3 percent to $851.1 million compared to $918.1 million the year prior. Lexmark had a Q3 operating loss of $21.6 million versus an operating profit of $54.5 million in the year-ago period and it failed to hit the guidance it gave in Q2 of revenue growth between +/- 1 percent. Overall laser hardware revenue plunged 16 percent year-over-year to $164 million in Q3 FY 15 as laser supplies revenue fell 13 percent to $461 million. Lexmark said it expects its total revenue to decline by 4 to 6 percent year-over-year during the fourth quarter and for the full fiscal year revenue will be off by 3 to 4 percent compared with fiscal 2014.
Just days before its earnings call, Lexmark told investors that its Board of Directors had “authorized the exploration of strategic alternatives to enhance shareholder value.” The Wall Street Journal reported the news on October 23 and suggested the company maybe loOKIng for a buyer. After releasing a spate of posts about various sale scenarios, the Kentucky-based market research firm Photizo Group report on December 23 that it had “received an unsolicited letter postmarked December 23, 2015 stating that ‘Paul Rooke, Jeri Isbell, the executive officers of Lexmark, and the Board of Directors are preparing to sell Lexmark to Konica Minolta…’” Although the report set chins wagging, no further word of a KM buyout had come during the opening week of 2016 and neither Lexmark nor Konica Minolta confirmed a sale is pending.
Japanese OEMs Struggle Too
Although revenue appeared to continue to grow at many Japanese firms last year, a look behind the numbers reveals the weakness that is now inherent in the current market. Much of the revenue growth that Japanese companies reported last year came from favorable currency exchange rates and sales would actually have declined if these rates had remained constant. Like the U.S. vendors, the Japanese are coping with the ill effects of regional economic downturns and price compression.
Take Canon, for example: Its total revenue increased for the second consecutive quarter during Q3 FY15, which ended on September 30. Nevertheless, when it reported Q3 earnings in October, Canon revised its full-year forecast downward, which was the third time Canon changed its FY15 guidance last year presumably because of ongoing market volatility. During the summer, when reporting Q2 results, Canon said it expected total net sales of ¥3.93 trillion for the year with an operating profit of ¥380.0 billion and net income ¥245.0 billion. When reporting its Q3 performance, however, Canon cut all three of these figures. Net sales for the year are now expected to total ¥3.82 trillion and operating profit and net income will be ¥365.0 billion and ¥225.0 billion, respectively. If Canon achieves these targets, it will mark a 2.5 percent year-over-year increase in net sales but only a 0.4 percent increase in operating profit, and a 11.7 percent decrease in net income compared to its fiscal 2014 results.
According to Canon, the economic recovery continues in the United States and in Western Europe, but a “rapid slowdown” in the Chinese and Southeast Asian economies adversely affected regional markets. Canon’s sales climbed 6.1 percent from ¥872.2 billion in the third quarter of 2014 to ¥925.8 billion in the third quarter of 2015. In addition to the continued favorable currency exchange rate, Canon also benefited from its acquisition of the network video surveillance company Axis AB and sales of semiconductor lithography equipment and flat-panel display lithography equipment. Flagging sales of office multifunction devices (MFDs), laser printers, and inkjet printers in China and Southeast Asia along with Canon’s ailing camera and lens business hampered the firm’s overall revenue, however. The company explained that demand for office MFDs and laser printers is expected to continue to grow in developed markets, but sales of these products in China and Southeast Asia “will likely face prolonged stagnation.” Inkjet printer sales are also expected to decline to weak demand in Asian markets.
Regardless of any regional weakness, overall sales of office equipment like MFDs, laser printers, laser MFPs, and Big Iron devices like digital production printing systems and continuous-feed printers rose 5.9 percent to ¥510.7 billion in Q3 FY15 up from ¥482.3 billion. The operating profit was ¥67.2 billion, a 16.2 percent increase from ¥57.9 billion last year and operating profit margin grew to 13.2 percent from 12.0 percent the year prior. But this growth owes much to the favorable exchange rate and weaker yen. While shipments of color copiers grew 13 percent, total copier unit shipments declined 1 percent year-over-year in Q3 as monochrome copier unit shipments fell 10 percent resulting primarily from weaker Asian markets. Overall copier net sales were up 5.0 percent compared the same period in 2014, but again the increase came from the favorable exchange rate. Canon said that in local currency copier sales were down 0.8 percent.
With its legendary relationship as HP’s supplier of LaserJet print engines, Canon’s printer business reflects the cool down in its U.S. partner’s printer business. Overall laser unit shipments at Canon were down 12 percent in Q3 as color unit shipments grew a modest 2 percent but monochrome unit shipments took a 15 percent nosedive. Net sale of Canon’s printers grew 4.7 percent in Q3 FY15 compared to 2014, but in local currency net sales were actually down 7.7 percent. Canon’s inkjet printer unit shipments were also down 8 percent year-over-year in Q3 and while inkjet printer revenue rose 1.7 percent due to the positive FOREX benefit. Inkjet revenue actually fell 4.2 percent in constant currency.
Canon’s Not Alone
Almost all of the Japanese hardware vendors that we follow at Actionable Intelligence lowered their guidance for the current fiscal year last October. With fiscal years ending on March 31, Brother, Epson, Konica Minolta, OKI, and Ricoh each recalibrated their expectations downward as they reached the mid-point of the year. In general, the companies blamed their lower outlooks on the malaise in emerging markets including those in Brazil, China, Russia, and Southeast Asia. Some companies such as Konica Minolta and OKI indicated that increased price competition in developed markets will also have an adverse affect on revenue growth during the current fiscal year.
Like the news that Lexmark and Xerox were interested in selling hard copy assets, we also heard some rumors that a leading Japanese manufacturer is considering putting its copier business on the block. In the closing days of 2015, The Japan Times reported that Toshiba Corporation, reeling from an accounting scandal that forced the resignations of the company’s top officers over the summer, is considering proposals to sell its office-equipment subsidiary, Toshiba Tec Corp. {TTEC}. The validity of the claims was challenged, however, in the U.S. Immediately after the news broke in Japan, Bill Melo, Chief Marketing Executive at Toshiba America Business Solutions was quoted in the Industry Analysts’ online newsletter as saying the news was “not associated in any way with TTEC or with Toshiba America Business Solutions.” I guess time will tell if Mr. Melo or The Japan Times is correct.
Fujifilm was the lone Japanese company that managed to buck the trend of making downward revisions. The company maintained the fiscal-year forecast that it provided when announcing its full-year results for the prior fiscal year in April 2015. The company expects modest gains in its revenue and net income, and forecasts its operating income will grow over 10 percent. Fujifilm’s Document Solutions business, which is operated by the Fuji Xerox Company, reported revenue growth of 3.9 percent for the first half of the year, as revenue climbed from ¥570.4 billion in the year-ago period to ¥592.6 billion in the six-month period ended September 2015. Contrary to what we expected, the firm reported revenue growth from operations in the Asia-Oceania region and export shipments to its U.S. partner Xerox.
Although revenue grew we did see some weakness in Fujifilm’s Document Solutions business. The group’s operating income, for example, fell from ¥49.7 billion during the first half of the previous fiscal year’s to ¥48.3 billion, a 2.7 percent decrease. The operating margin for the first half of the current fiscal year was 8.1 percent, compared with 8.6 percent during the year prior. Fujifilm also said the Document Solutions business was negatively impacted by increased costs for imports due to the appreciation of the U.S. dollar against the yen. Xerox’s poor performance also suggests that Fuji Xerox’s sales will slow as the Japanese firm’s U.S. partner orders fewer machines.
Remans Show Signs of Suffering
My company follows the third-party supplies industry closely on its website, www.Action-Intell.com, and we wrote a lot about the activities of various companies either in or aligned with the global aftermarket industry in 2015. Much of what we reported suggested the aftermarket is feeling many of the same pressures that dogged the business at the OEMs last year and both groups are trying to successfully cope with a shrinking market.
When the publicly-traded German remanufacturer Turbon AG reported its Q3 earnings to shareholders in October, the news was quite similar to what hardware vendor had reported. For the first nine month of FY 15, Turbon said its sales were flat relative to the year prior, which caused the firm to miss it earlier revenue projections. Earnings before interest and taxes (EBIT) were off 34 percent and stood at €5.4 million down from €8.2 million during the same period in 2014. In addition to reporting its earning, Turbon also said it had acquired all shares of the Austrian third-party supplies vendor Embatex AG. The acquisition is yet another sign that consumables companies serving Western markets continue to struggle to stay in business, a trend that’s been ongoing for more than 10 years.
We continued to see M&A activity on this side of the Atlantic last year, as well. In May, we learned that the Zhuhai, China chip maker Apex Microelectronics would acquire its long time rival Static Control Components, one of the remanufacturing industry’s largest suppliers of toners, drum, chips, and other components. The sale was another indication that the market is contracting. Reuters put Static Control’s price tag at $63.0 million, which seemed low for such a well-established company with a global brand and footprint. However, reports out of China at the time of the acquisition indicated that Static Control’s revenue had dipped below $200 million in 2014 and were presumably going to fall even lower last year. And Static Control was not the only aftermarket supplier forced to cope with declining revenue last year. Mitsubishi Kagaku Imaging Corporation (MKIC), which also runs the aftermarket parts supplier Future Graphics, announced company-wide restructuring in March, which resulted in staffing cuts. Later in 2015, MKIC announced it would stop manufacturing toner at its Chesapeake, VA plant in March of this year and move that production back to Japan.
Before China’s economy began to sputter and its stock exchanges contracted, it looked as if Chinese aftermarket companies might engage in a bit of a spending spree. Shortly after Apex announced its acquisition of Static Control, news broke that the Chinese OPC-drum manufacturer Suzhou Goldengreen Technologies (SGT) had acquired an undisclosed (but presumably significant) stake in Cartridge World. Business at the global franchiser of third-party supplies retail stores seems to have declined over the past decade. After bursting on to the scene in the late 1990s and early 2000s, Cartridge World enjoyed hyper-growth and it opened over 600 stores in the United States alone. About ten years ago, the firm’s growth slowed and then took a turn for the worst when banks stopped lending and investment capital for franchises dried up during the recession. Since SGT has become a major Cartridge World shareholder, the franchiser has changed its senior management team and indicated that it plans to grow again in the near term. Despite any bullish claims, there were no signs of material improvements at Cartridge World like new store openings or massive marketing campaigns in the U.S. last year. Maybe that will happen this year.
Not Much Relief in 2016
Reviewing the events and trends in the hardcopy industry last year leads me to believe that companies will not have it any easier this year. The U.S. will continue to be a bright spot in the global hardcopy industry and presumably markets in Europe will improve some this year too. But, I don’t expect emerging countries to recover much this year so OEMs will not be able to tap these markets for growth in 2016. The recession in Brazil and Russia are expected to continue and China is showing no sign of getting back to the strong GDP growth it once experienced not that long ago.
While I don’t predict there will be many big changes this year and I do expect there will be some discernable differences. Thanks to the improving economy in the U.S., the dollar will strengthen more. Economists are also beginning to see signs that the yen may begin to strengthen this year as well, which should be good news for the vendors. It seems at the very least prices will stabilize in 2016 if not begin to nudge upward. Regardless if the yen does or doesn’t strengthen, Japanese hardware vendors seem to have wrung as much benefit out of the weaker currency as they could. The performance I noted earlier indicates that lower prices have already put Japanese vendors in a bit of a bind so ongoing price cuts seem unlikely. In fact, we did note some price hikes in 2015 like those on inkjet supplies in the second half of last year by Canon and HP. I expect to see additional increases in consumables pricing this year as vendors look to improve profits.
Another way that OEMs are loOKIng for improve profitability is by eliminating as much infringing consumables as they can from the large established markets. The trend toward more infringement lawsuits being filed in various regions continued last year as it will in 2016 and there was OEM activity in the U.S. and in Europe as well as other regions. One new trend that emerged in the U.S. last year was an increase in seizures of imported infringing supplies from China. As 2015 drew to a close, the U.S. International Trade Commission (ITC) issued its 60th seizure-and-forfeiture order up from just a handful in 2014. OEMs will continue to look to the ITC to protect the U.S. market from infringing products going forward. Ridding the market of cheap infringing supplies is imperative if OEMs are to have any shot at improving their profitability next year.
As it has over the past few years, ongoing legal pressure on the enormous Chinese aftermarket industry will push companies in China to focus more on exporting to regions where patent-right protections are not enforced. Chinese firms have successfully penetrated many of these markets including those in India, South America, Russia, and others. While these markets are nowhere near the size as those in established economies, the growth potential is huge because many of these markets are still experiencing organic growth. Consumers in these regions are also more price sensitive than those in more established markets and they are drawn to the small price points associated with non-OEM products. Actionable Intelligence did a comprehensive study of the Chinese industry and found that despite less-than appealing market conditions worldwide, most third-party supplies vendors in China are doing well. I fully expect that to continue in 2016 regardless of the threat of OEM lawsuits.
In closing, I’d like to repeat that while conditions are not ideal, the hardcopy industry remains humungous. We expect the industry will remain quite active in 2016 and we’ll stay busy covering all the action.
