Imaging & Document Market Directions and Vendor Strategies

Jeff Hayes
May 19, 2011

The big imaging and document technology & services vendors reported their quarterly financial results over the last few weeks. Several important themes emerged that include:

  • Low growth and cautious outlook
  • Short-term impact from the Japan earthquake
  • Significant impact from the weak US Dollar, strong Japanese Yen
  • Growth in emerging markets; flat or declining in developed markets
  • Technology refresh in commercial markets;  technology changes in consumer markets
  • Acquisitions continue as vendors seek to re-position and strengthen

Here is my perspective on these themes and the implications for vendor strategies.

Modest Growth and Cautious Outlook

Most of the vendors reported low single-digit year-over-year quarterly declines or increases in their recent fiscal quarter. For the Japanese vendors the declines are primarily due to foreign exchange (forex) and the earthquake. Without these factors, they likely would have posted modest increases.

Recent Quarterly Results

Headlines

Revenue YoY Change
HP $31.6B +3.9% Lowers guidance for 2H 2011.
Xerox $5.5B +16% +2% pro-forma (ACS).
Re-affirms 2011 guidance.
Kodak $1.9B —31% Sharply lower Intellectual Property fees (—$550M).
Pitney Bowes $1.3B —2% Re-affirms 2011 guidance (flat to +3%)
Canon ¥839B +11.1% Includes Oce.
Flat outlook for 2011.
Ricoh Â¥503B —7.1% —1.9% without forex.
+7.6% forecast for FY2012.
Konica Minolta Â¥203B —6.1% Significant forex impact.
+4% forecast for FY 2012.
Note: click on vendor to see presentation of recent quarterly results

Most of the vendors reported higher shipments of equipment and increases in their consumables business. However, these increases come on a relatively soft 2010 suggesting a modest rebound in 2011. Also, most of the vendors are either re-affirming or slightly reducing their guidance for the rest of year with median projected increases of 3%. The Japanese vendors have the highest outlook, but these forecasts appear to be slightly aided by assumptions of a weaker Yen and a rebound from the earthquake.

I expect vendors will continue to tightly manage expenses and focus on execution of existing plans with intense competition and minimal opportunity for price increases. In other words, business as usual.

Japan Earthquake — Epic Human Toll, Modest Economic Impact

The Great Japan Earthquake has mostly affected the Japanese domestic market with some supply chain disruptions on a vendor-by-vendor basis that are manifesting in the second half of 2011. While the human toll is epic, the broader economic impact appears to be relatively modest. Several vendors including HP, Canon and Ricoh have quantified the expected financial impact from the natural disaster. All of them expect to be fully operational or have alternative supply in place over the next 3 to 6 months.

Look for vendors to re-examine their supply chain and manufacturing footprint with an eye towards more regionalization and redundancy where the economics make sense.

Foreign Exchange Rates — The Tables May Turn

The US dollar has dropped from 92.7 to 80.7 (12%) against the Japanese Yen over the last 12 months. Likely factors include the rising US Federal government budget deficits, loose Federal Reserve monetary policy and a slow US economic recovery. US manufacturers (HP, Xerox) have generally benefited, while their Japanese counterparts (Canon, Ricoh, KonicaMinolta) have clearly suffered.

There appears to be a growing sentiment that the US Congress and Administration will “fix” the deficit, and recent minutes from the Federal Reserve suggest a gradual tightening of monetary policy. The US economy has shown steady growth over the last year, but is not generating the level of new jobs many economists had predicted. Meanwhile, the domestic Japan economy has slipped into recession with two consecutive quarters of negative growth — though the earthquake has clearly contributed to the contraction.

My sense is the US Dollar may be bottoming out and could actually strengthen over the next year. If this scenario develops, I expect the Japanese vendors will be very aggressive in trying to re-gain any lost share and leverage their lower cost base.

Developed vs. Emerging Markets — Going Where the Growth Is

A consistent theme has been the slow growth in the developed markets (North America, Western Europe, Japan) and high growth in the emerging markets. This trend was in place before the Great Recession, and has resumed during the recovery. Vendors with a strong presence in the Asia Pacific and Latin America regions (e.g. HP, Canon) are getting a nice lift, while vendors with limited presence in these markets (e.g. Kodak, PB) are not. In its most recent earnings report, HP noted a 10% increase in their AP business, 2% increase in the Americas, and -1% in EMEA.

Anticipate more distribution-related deals including partnering, authorizations and acquisitions in the emerging markets over the next 6 to 12 months.

Technology Refresh in Commercial Markets; Technology Change in Consumer Markets

Within the commercial markets (corporate, government, professional), there appears to be a decent technology refresh taking place. Many customers that delayed capital expenditures during the recession have been replacing PCs, laptops, servers, and printers (especially color) while moving forward on software upgrades, new IT initiatives and seriously evaluating new IT deployment models including “Insert Technology Category Here” as a Service — maybe we can call it ITCH as a Service?

The consumer market is much different. PC and netbook sales have cooled as consumers gravitate towards smartphones and tablets, while compact camera and printer shipments and supplies usage are generally flat. I believe consumer behavior around communication (Facebook, text), information (directories, news, product) and entertainment (music, books, television) is fundamentally changing.

As vendors continue to search for the next disruptive play that creates a new recurring revenue stream, expect to hear much more about “ITCH as a Service”, clouds, outsourcing, and tablets. The traditional gear will likely continue paying the bills (for a while), while the new initiatives provide the growth (hopefully).

Acquisitions — Steady Stream of Small Deals

While several high-profile deals by HP (3PAR for data storage services), Xerox (ACS for BPO/ITO), and Canon (Oce for production printing and distribution) over the last 12 months have received much of the news coverage, I believe many of the smaller deals provide important insights into vendor strategies.

Vendor Acquired Company Country Type Category
HP Vertica
ArcSight
Fortify Software
US
US
US
Software
Software
Software
Data analytics
Security mgmt.
Security
Xerox Midwest Business Solution
Premier Office Equipment
United Business Solutions
Georgia Duplicating
Concept Group
Credence Health
WaterWare
Spur Information
Unamic/HCN BV
TMS Health
ExcellerateHRO
US
US
US
US
UK
US
US
UK
Holland
US
US
Dealer
Dealer
Dealer
Dealer
Dealer
Software
Software
Software
Services
Services
Services
Office technology
Office technology
Office technology
Office technology
Office technology
Health care
Workflow
Transportation
Outsourcing
Customer care
Human resources
Pitney Bowes Portrait Software US Software Location intell.
Kodak Tokyo Ohka Kogyo Co. Japan Materials Chemicals
Canon Tereck Business Solutions US Dealer Office technology
Ricoh Print Solutions Group
Georg Kohl
Australia
Germany
Dealer
Services
Office technology
Outsourcing
Konica Minolta Techcare
Koneo
All Covered
US
Sweden
US
VAR
VAR
VAR
Managed IT
IT infrastructure
Managed IT

HP, Xerox and Pitney Bowes have been the most aggressive in moving into new markets and services through acquisitions. HP distills its strategy to being a provider of web-enabled devices and cloud-based services. Xerox views its Technology business as an enabler/differentiator for its Services business (vs. the other way). Pitney Bowes, which made over 30 acquisitions between 2001 and 2007, is transforming itself into a services, platform and software provider focused on customer communications.

Kodak remains focused on imaging technology, products and supplies with a growing reliance on inkjet as its source to replace lost film and legacy businesses.

The Japanese vendors have been focusing on strengthening their traditional business by extending and controlling distribution and moving into production print markets, though there is growing evidence of interest in IT/workflow services particularly from KonicaMinolta.

Given the limited growth prospects in traditional markets (e.g. cameras, print, copy) along with the amount of free cash flow generated by the vendors, I anticipate there will be a steady stream of distribution, software and services-related acquisitions over the next 12 to 18 months.

Conclusion

The information and consumer technology industries continue to go through significant transformation challenging every vendor to re-assess their strategy. Relying on traditional business models and organic growth from established markets will not provide the long-term earnings growth investors are seeking. Imaging and document technology vendors need to continue pushing outside of their “comfort zone” by taking calculated risks on new initiatives and making acquisitions that expand reach and/or product/service offering.

 

 

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