Hardcopy Industry Continues Down Rocky Road to Recovery

Looking over the recent results of various hardware vendors for the second half of 2013, it is clear that the industry is seeing new signs of life.  Many companies are reporting that sales are up modestly compared to last year along with profits, and those that did not experience an overall improvement were able to identify certain bright spots in the market that are providing growth.  Although the news is good, however, it is far from great and business at most companies remains well below from where it was before the recession.  I guess it is safe to say that we still have a ways to go to get back to the high-water mark set in 2008-2009.

But I don’t want to sound too gloomy.  As October came to a close, many printer and copier vendors reported that business was up at their respective companies during the three months that ended on September 30 compared to the same period last year, and some were predicting higher total revenue for the current fiscal year than last year.  This was especially true for Japanese companies as they continue to benefit from the declining yen.  While the performance of U.S. hardware vendors lags that of their Japanese rivals, certain market segments demonstrated decent growth for U.S. companies and that growth should last through the end of the year.

Weak Yen=Strong Growth

Japanese manufacturers can thank Prime Minister Shinzo Abe for many of the gains they are enjoying this year.  Since Mr. Abe’s election in November 2012, the yen has dropped from the 80 to the 100 level against the US dollar.  Working with the Bank of Japan, the prime minister has implemented the monetary and fiscal policies that have come to be known as “Abenomics,” which are designed to encourage private investment and end the doldrums the Japanese economy have suffered since the 1990s.   A weaker yen is a part of the Abe plan and while the currency did show some signs of strengthening during the summer, it appears the yen will remain weak into 2014, which is great news for Japanese vendors.

Three of Japan’s most troubled hardware vendors—Epson, Oki, and Ricoh—saw improvements during their most recent quarters.  Of the three, Ricoh’s recovery appears to be on the most solid footing. The company has been on a roll during 2013. Earlier this year, Ricoh said its business had improved during the quarter ending on June 30 and it managed to offer more good news to investors for the quarter ending in September.  While revenue from office imaging products grew almost 13 percent thanks to the weaker yen, not all of Ricoh’s growth is attributable to favorable currency exchange rates.  The company enjoyed year-over-year growth in total company sales and  in its production printing business sales on a constant currency basis. Ricoh raised its revenue forecast for the full year.

Epson says it is now delivering on the firm’s promise to revive its inkjet business.  In March, the company announced a new business plan that would put it back in the black and in the first quarter, which ended on June 30, Epson reported revenue growth and turned its operating and net losses into profits.  Epson’s net sales were up another 23 percent in the second quarter compared to the same quarter last year, and operating income grew a whopping thirteen-fold year-over-year.  For the first six months of the year, Epson saw dramatic improvement in net sales and in every income category.  Unit shipments of Epson’s inkjet printers declined worldwide, but held steady in certain key markets including North America.  Despite the overall decrease in inkjet printer shipments, net sales in this category increased due to the yen’s depreciation, improved model mix, and a rise in average selling prices.  The company recently raised its sales and profit forecast for the current year.

Like Epson, Oki also announced a turnaround strategy earlier this year.  And it appears the plan has begun to stem the printer business’ steep operating losses, while the depreciating yen has further helped the firm along.  During the first half of Oki’s fiscal year, which ran from April 1 through the end of September, net sales were up 6.5 percent compared to the first half of the previous fiscal year.  However, the improvement in revenue in the printer business does not actually mean that Oki is actually selling more printers.  Revenue is up mostly thanks to the favorable currency exchange.  Unit shipments of Oki’s core LED printers decreased during its most recent quarter, while the launch of new LED devices designed for the copier market progressed.  Nonetheless, Oki has raised its guidance for the year and anticipates higher sales as a result of sales of new copiers that were recently released along with new products for the professional markets.

Good News, Bad News

Although Konica Minolta reported that its net sales were up nearly 20 percent during its most recent quarter compared to last year, net income declined year-over-year because of the firm’s decision to withdraw from the HDD glass substrates market.  The firm is exiting the business due to declines in shipments and profits resulting from increasing storage capacity on HDDs, a decline in the notebook PC market, and the rise of new recording technologies.  The exit will come quickly, with Konica Minolta ending production this November and ceasing sales in December.

Sales soared, however, in Konica Minolta’s Business Technologies business segment, which is responsible for marketing MFPs, copiers, printers, supplies, and related services such as Konica Minolta’s Optimized Print Services (OPS).  Net sales jumped more than 30 percent from the year-ago period and operating income skyrocketed nearly 65 percent.  In addition to the weak yen, the firm says it has experienced strong sales of color MFPs and has benefited from recent merger-and-acquisition activity, particularly in the firm’s services business and its production printing business.  In constant currency, the group’s net sales increased 9 percent in the first half.

Konica Minolta adjusted its forecast to account for the strong performance of its Business Technologies Business and the weak yen, as well as to make allowances for exiting from the HDD glass substrates space.  The company revised upward its net sales and operating income projections for the current fiscal year, but lowered its outlook for net income.

Despite reporting top- and bottom-line growth in the third quarter, which ended on September 30, Canon appears to be feeling uncertain about overall 2013 economic conditions.  The firm has cut its forecast for the full fiscal year once again, after doing the same in July.  Canon’s woes are related more to its camera business than to printers and copiers, however.  The firm’s compact digital camera business has been hit hard by the adoption of smartphones.  Canon expected a rebound in demand for its higher-end interchangeable-lens digital cameras, but that rebound did not materialize outside of Japan and unit shipments of these high-end cameras were down 3 percent in the third quarter.

Net sales in Canon’s Office Business Unit, which sells office multifunction devices (MFDs), laser printers, laser MFPs, digital production printing systems, continuous-feed printers, wide-format printers (other than inkjet), and document solutions, were up over 20 percent and the group’s operating profit improved a robust 63.1 percent compared with the year-ago period.  Canon indicated that sales of its color office MFDs grew, and color copier volumes were up 9 percent year-over-year along with net sales, which were up nearly 17 percent.  Monochrome MFDs unit sales shrank 7 percent year-over-year, while net sales of monochrome copiers increased 15.8 percent.  Demand for laser printers grew and Canon said laser MFPs saw strong growth.  Color printer unit sales were up 31 percent and monochrome printer units grew 22 percent compared with the year prior.  Inkjet printer unit sales declined by 2 percent in the third quarter but increased 19.2 percent thanks to the weaker yen.

While sales of most printers and copiers were up, Canon is not as bullish about 2013 as it was back in January.  The firm raised its outlook after reporting its first-quarter results in April and then lowered its forecast when reporting second-quarter results, as economic conditions did not improve as much as the firm had hoped and its camera business continued to wither throughout the year.  After lowering its forecast once again in Q3, Canon said it expects only moderate growth for the worldwide economy due to the sluggish markets in Europe and the declining growth rates in emerging economies.  Canon now expects continued increased demand for MFDs, especially color devices, and laser printers in the fourth quarter, but it is not holding out high hopes for demand for digital cameras or inkjet printers.  The firm added that its consumer business might be adversely impacted by uncertain outlook for the year-end shopping season.

Not So Good At Home

News from the U.S about the quarter ending at the close of September was nowhere as upbeat as what we heard from Japan.  It appears that any momentum Xerox gained in the second quarter petered out in Q3 and, while Lexmark managed to beat Wall Street’s expectation, sales were down in the quarter.

In the third quarter, Xerox reported that 56 percent of its revenue came from the services business, which was up from 51 percent in 2012.  While total services revenue was up 3 percent, margins were flat at just under 10 percent.  CEO Ursula Burns said, “We have passed the tipping point in revenue, but still have work to do on margin.”  Total company equipment sales were up only 1 percent.  However, Xerox said this figure included a 1-percentage-point positive impact from currency exchange making hardware sales flat overall.  Sales of unbundled supplies and paper were down 4 percent because of lower “channel supplies inventories in the U.S. as well as moderately lower supplies demand,” according to the firm.  In the fourth quarter, Xerox expects document technology revenue to decline in the mid-single digits along with a lower operating margin and the firm anticipates “a bit more pressure in developing markets.”

Lexmark’s total revenue for the third quarter was down 3.1 percent but the decline was better than the 4-6 percent decline Lexmark forecasted at the end of its second quarter.  Profitability improved in the third quarter as Lexmark’s gross profit margin grew to 38.9 percent versus 35.7 percent one year ago and operating income margin reached 5.9 percent versus just 1.3 percent.

For the past couple of years, Lexmark has seen its hardware unit shipments drop.  In large part, this decline was due to the firm’s ailing inkjet business, which has since been jettisoned, but now it appears that the firm’s laser business is also declining.  Lexmark saw a 20 percent year-over-year decrease in laser hardware unit sales in the third quarter.  Unit shipments of large workgroup laser hardware declined less precipitously than those of small workgroup/ personal devices at -14 percent and -27 percent, respectively.

Presumably, the shift to higher end unit sales helped increase average unit revenue (AUR), which was up 21 percent in the third quarter.  Although the firm saw a 20 percent decrease in unit sales, laser hardware revenue declined a more modest 3 percent thanks to the improved AUR.  A 17 percent uptick in AUR for large workgroup products allowed the revenue in this category to actually increase 1 percent.  Meanwhile, AUR for small workgroup products increased a more modest 11 percent, and small workgroup hardware revenue declined 19 percent.

Looking ahead, Lexmark said it expects total revenue to decline 3 to 5 percent year-over-year in the fourth quarter, and its revenue excluding inkjet exit revenue, flat to up 2 percent.

All Eyes On HP

As we went to press, several companies including Brother and Sharp had yet to report, but I think the results we have indicates the overall trend for the year.  For the most part, the industry is experiencing some level of growth albeit the growth remains anemic in certain segments. Japanese firms ought to continue through the end of the year to see top- and bottom-line growth, as the yen remains depressed.  Of course, any growth could be threatened if vendors attempt to gain market share by slashing prices or if the Japanese government decides to raise the value of the yen.  Overall, the Japanese companies are doing better but more improvement is required.

It will be interesting to see Hewlett-Packard’s quarterly results, which should be out in mid-November.  The firm’s fiscal year runs from November 1 until October 31 so it will be reporting its full year results.  With its large market share and positions in so many segments, HP’s printer business acts as a proxy for the industry at large.  Its financial results for the year ought to be a harbinger of how the larger industry will do this year.  This is especially true for U.S. firms, which are not feeling the direct benefit of a weaker yen.  During the summer, HP reported that its hardware shipments were up but printer revenue was down along with operating margins.  I expect the results will be about the same for HP’s printer business in the last quarter—revenue flat or declining with little or no improvement to profitability. This would be in line with Lexmark and Xerox’s recent results.

So, it looks like the industry will continue to see some improvement but the gains are coming slowly, when they come at all.  Like I said at the beginning of this piece, we have a long way to get back to the high-water mark the industry experienced just before the recession.

Charles Brewer
About the Author
Mr. Brewer is the founder and president of Actionable Intelligence, the digital imaging industry’s leading market research firm. He was an editor for Inc. magazine and ComputerWorld during the 1990s, and more recently, the managing editor of The Hard Copy Supplies Journal. Mr. Brewer’s analysis is currently featured at his firm’s website, www.Action-Intell.com.