The Impact of the Economy on Digital Print Volume

Jim Hamilton
Apr 28, 2009

One of the major questions for our industry in the wake of the economic downturn is: “What impact does this have on the digital print volume?” A partial answer to that question came at Xerox’s financial analyst briefing on Friday (April 24, 2009). In discussing its first quarter 2009 numbers Xerox provided information on its post-sale revenues. This revenue is driven largely by supplies and service for digital print products, which, of course, would be impacted by a drop in print volume.

Three months ago when discussing its fourth quarter 2008 results, Xerox was not ready to admit the extent of print volume declines. The issue, Xerox said, was masked to some degree by the channel’s inventory of supplies. Maybe in these tough economic times users were choosing to stockpile fewer consumables and waiting longer to reorder. If a shift in inventory levels was happening, then print volumes might not be dropping. With another quarter under its belt Xerox acknowledges that print volumes indeed are down.

The main headline in regard to Xerox’s first quarter financial results is that there was an 18% drop in revenue from Q1 2008 to Q1 2009. Some of the impact of the drop was from currency exchange, but even accounting for that the drop was 12%. Post-sale revenue was down 14% (only 8% under constant currency). Xerox attributed this to lower supplies and paper revenue. Equipment revenue was down 30% (26% under constant currency).

Note: Details on all of these numbers can be found in Xerox’s first quarter financials presentation, which is on the investor section of the Xerox web site.

Xerox is comfortable stating that its number of machines in the field (MIF) is growing. (Xerox’s MIF definition is for devices with a service contract or one that is buying supplies or service.) Yet Xerox noted that even though its installed base grew, this was offset by page volume declines. Specifically, Xerox noted that between Q1 of 2008 and Q1 of 2009 its total digital installed base (or machines in field) grew 3% and that its color installed base grew 27%. For the same period its total digital pages dropped 4% while color pages grew 16%. This means that on a per-machine basis the volumes had to drop.

In Q1 of 2009, color revenue accounted for 42% of Xerox’s overall revenue. This figure has been on a steady rise since Q1 of 2007 when it was 37%. Color is also accounting for an increasing percent of Xerox’s post-sale revenue (up to 39% in Q1 of 2009). And, not surprisingly, Xerox’s color pages are also on the rise, though the rate of growth slowed in Q1 of 2009. Color pages now account for 19% of Xerox’s total pages.

From a production perspective, Xerox said that the declines in equipment revenue were driven by lower activity and that lower page volumes also impact post-sale revenue. In Q1 of 2009 production monochrome placements (installs) declined 29% compared to a 6% decline for production color. Declines were also evident in the office and Xerox’s developing markets organization (DMO). Xerox said that the DMO declines were focused more on low-end printers and A4-format devices rather than in production.

In the question and answer session Xerox said that its customers are holding onto products longer and that the page reductions are to be expected given the economic conditions, which drive less advertising, fewer financial deals, and fewer employees to print for (given the job losses across many industries). Overall there is less inventory in the channel. Xerox said that inventory is at an all-time low in its DMO regions and that they are down by a third in the United States and Western Europe. Xerox said that even when the economy rebounds it is not counting on a return to past inventory levels. These low revenue numbers indicate inventory management by partners as well as delayed buying decisions by customers. In addition, customers are holding onto products longer, which impacts equipment revenue.

Xerox’s post-sale revenue news confirms what we knew all along: that the struggling economy would hurt digital print volumes. There is, however, some positive news among the declines. Color placements and volumes continue to rise, albeit at a slower pace. As 2009 progresses, one key economic indicator that InfoTrends will monitor closely is Xerox’s post-sale revenue. When that begins to turn back up we’ll know that brighter days are ahead.

A couple of other interesting points came out of Xerox’s Q1 2009 investor call:

  • Xerox said that the move to outsourcing has not been dampened by the tough economic times
  • Xerox noted that demand for its iGen4 product remained strong. The company highlighted the placement of eight iGen4s to Bowne. Asked if the new iGen4 installs are new placements or replacements of existing iGen3, Xerox said that both population and installs were growing, meaning that there were some replacements but significant new product placement activity as well.
  • Xerox stated that it would soon have a breakthrough environmentally responsible solid inkjet product offering for everyday office color. Xerox said that the product would be launched in a measured way and that its impact would be more in 2010 than in 2009.

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