Feb 12, 2008
What Recession? Imaging Equipment Manufacturers Turn in Positive Q4 Numbers!
Ed Crowley, Founding Partner – Photizo Group
“Market research firm IDC lowered its forecasts for technology spending this year, saying the weakening U.S. economy will curb PC sales and other tech sectors.” Worrisome headlines such as this from the Wall Street Journal portray a gloomy outlook for the tech sector as the market slips into a recession. Given these headlines and other dire predictions from the news media one would think it is time to retrench and prepare for the worst, but are things really that bad?
Clearly, the overall economic outlook is challenging. Negative results from the housing and finance sector in addition to negative growth numbers indicate the US economy is slipping into a recession and one would expect decision makers to cut back on spending, including IT spending. However, does this mean that the imaging sector will go through a major downturn? Not necessarily.
The Photizo Group has long held a view that the while the imaging sector is not immune from recessionary pressures, it will fare better than many sectors in the economy, and better than the tech sector in general. Our assessment is based on the following unique dynamics of the imaging industry:
1. Imaging Products Have Recurring Revenue Streams: Almost all products in the imaging sector have recurring revenue streams from ink or toner. So even if the hardware sales stall, the recurring revenues from these supplies will continue to support profits. And in a converse bit of logic, profitability will actually improve in many cases when hardware sales stall simply due to the fact that supplies provide a much higher gross margin than hardware (a case in point is Lexmark’s latest quarterly results where they ‘blew out’ earnings expectations because they shipped far fewer inkjets than anyone imagined they would);
2. Even when times get bad, individuals, and companies will still print. Office workers will still print word documents and spreadsheets on distributed devices; companies will still print billing statements and invoices for customers on production printers, and, yes, even advertisers will still print the fliers in your local newspaper. All the toner and ink used to print these pages will drive profits in good times and bad; and,
3. The way we are using print is changing and as a result paper is no longer a storage medium. In the not too distant past, we would create a memo, distribute it, and then file it as a way to store information. Now we send out an electronic document, typically a PDF. When someone receives that electronic document, they will usually print it out on a distributed imaging device (printer or MFP), and if it is important, they will store it on their computer or server. After a brief period of usage (reviewing the document or perhaps taking it to a meeting for reference) they will discard the material. When the need comes up to refer to the document weeks or months later, they will often print it out again. This cycle may be repeated many times with a single electronic document. As a result, instead of printing the document once and then storing it for later reference, we print out the document and then destroy it, only to print it out again, repeating this cycle many times as we use paper for a ‘convenient’ method of review, versus a permanent method of storage. The end result is that we print more, not less, due to the convenience of digital documents.
For all of the above reasons, I believe the imaging industry is relative recession resistant. I use the word resistant instead of immune because any significant downturn in the economy will have an impact on the industry. Companies will delay large capital purchases which hurts anyone selling ‘high end’ hardware or software such as production printers or workflow management software. Companies will wait longer to refresh distributed fleets, delaying hardware sales for manufacturers of distributed imaging devices. However, due to our industry’s unique and highly profitable supplies annuity stream, imaging companies will fare better than most.
Recent earnings announcements support this theory. The following table lists a few of the bell weather imaging stocks who have recently announced earnings for 2007.
As you can see, this group of stocks has actually improved their operating income or earnings before interest and taxes (EBIT) by over 37% from the prior year. Even Lexmark, who struggled through-out the year, turned in a very strong fourth quarter with an increase in operating income from $103M in Q4 to $114M in Q4 of 2007.
Does this mean 2008 will be a tremendous growth year for the imaging industry overall – probably not. However, the industry will continue to be very profitable. In addition, there are still very good growth opportunities in specific segments of the market such as the emerging markets in Russia, India, and China, and in the growing demand for Managed Print Services.
While there will be challenges in 2008, we believe there will also be many opportunities! We will be watching these trends closely in this column in addition to providing in-depth analysis through our new service which is being offered in conjunction with OutputLinks and its Graphic Communications World business unit. This new service will provide in-depth analysis and on-going tracking of the imaging industry from a financial perspective, including covering over 100 companies who product devices, software, or provide printing services.