Rumors Fly as Major OEMs Explore Strategic Alternatives

by Robert Palmer | 10/28/15

Following earnings announcements for hard copy vendors these days is very much like listening to a broken record. Currency fluctuations, market headwinds, softening demand, competitive pressures; these terms have become part and parcel when it comes to explaining the challenges facing most imaging OEMs today. The need to cut costs combined with an ongoing shift from paper to digital display has resulted in reduced spending on print in both the consumer and business sectors — and the pain is beginning to show.   

Vendors have and are responding in a variety of ways. Restructuring plans, massive layoffs, and turnaround strategies have become par for the course, and many of these programs have been significant in size and scope. In 2012, HP embarked on a five-year turnaround plan that resulted in massive layoffs and a complete restructuring aimed at strengthening the firm’s competitive position and bottom line. The big split between HP’s enterprise services business and the PC/printing business was announced shortly after, and has since been followed by yet another round of significant layoffs in various parts of the business.   

HP has been very active ahead of the split, which is expected to become official following the close of its current fiscal year ending this month. The firm is selling off its Helion public cloud services as well as its TippingPoint security appliance business unit. Meanwhile, Dion Weisler, CEO of the newly formed HP Inc. announced in September the formation of a 3D Printing business unit headed by Steve Nigro. HP is also making moves with its laser printing business, rolling out its JetIntelligence technology and introducing a totally revamped line of workgroup laser printers and MFPs.    

Alternative Options  

Organizational changes to reduce costs and streamline operations have become commonplace, but recent moves by two of the industry’s largest OEMs have raised some eyebrows. Along with Q3 Earnings, Lexmark and Xerox both made similar and rather ambiguous statements indicating a thorough review of existing strategies and business portfolios with an eye toward identifying alternative business opportunities. Translation: what can we do to drive growth and shareholder value in a market that is flat to declining?  

With its Q3 earnings release, Xerox reported total revenue of $4.4 billion, down 7 percent compared with $4.8 billion in the year-ago quarter. Revenue from the company’s Services business, which represented 57 percent of total revenue, declined 3 percent to $2.5 billion. Meanwhile, performance in Xerox’s traditional document business was even less impressive. Revenue from the Document Technology business declined 12 percent to $1.8 billion, compared with $2.0 billion in the year-ago quarter. Equipment revenue dipped 13 percent in the quarter, while annuity sales declined 12 percent, representing 70 percent of total segment revenue.   

Xerox also announced that its Board of Directors has authorized a review of the company’s business portfolio and capital allocation options. “Xerox’s Board of Directors and management team continually review the company’s strategy and consider a range of opportunities regarding our businesses and operations with the goal of maximizing value for shareholders,” said Ursula Burns, Xerox Chairman and Chief Executive Officer, in prepared remarks. “Although we already have taken steps to accelerate cost reductions and prioritize investments to drive improved productivity and higher margins, our Board determined that undertaking a comprehensive review of structural options for the company’s portfolio is the right decision at this time.”  

In a conference call with analysts, Burns declined to provide a timeline or any other specifics, except to say that selling the company as a whole is not currently on the table. She did stress, however, that Xerox would consider all other alternatives.  

For more on Xerox’s Q3 earnings, see press release here.   

Changes to Solid Ink Program  

BPO Research has learned of one significant change to Xerox’s hardware portfolio. After months of speculation regarding the future of its solid ink program, Xerox has confirmed that it is not likely to invest in adding new, higher speed A3-size solid ink models to its office product lineup. The firm says that existing laser and solid ink products are meeting customer needs in A3 segments. Xerox plans to sell the Xerox ColorQube 9300 series into Q1 of 2016 and support for A3-size solid ink devices will continue to 2022.   

Meanwhile, Xerox says it will continue to bring new A4-size solid ink products to market, as it did with the recent launch of the ColorQube 8580 and 8880 printers. The firm also notes that it plans to continue to market and sell A4 Solid Ink printers and MFPs for the foreseeable future. The change in product strategy does not necessarily reflect a lack of commitment to solid ink for the office-printing category. Indeed, entry-level A4 MFPs showed the strongest growth of any hardware category for Xerox in Q3, with placements climbing 94 percent year-over-year.   

Nevertheless, the fact that Xerox is backing off on solid ink in the A3 market is interesting. The technology offers several notable benefits compared to laser, such as tiered color pricing, low color operating costs, and significant advantages when it comes to reducing waste and environmental impact. Xerox solid ink technology seems to be making some headway with customers and the channel, but perhaps Xerox sees greater opportunity for disruption with an A4 platform.   

Lexmark Poised for Sale … Again?  

Lexmark also disclosed recently that its board is exploring strategic alternatives to enhance shareholder value. Unlike Xerox, Lexmark says that it is exploring all options, including a possible sale of the company. During a conference call with analysts, chairman and CEO Paul Rooke said that Lexmark’s current value does not necessarily reflect its intrinsic value. Rooke notes that Lexmark has built a $3.7 billion company with a strong enterprise software business and an annuity business that is 70 percent of total revenue. “We believe the value is there but it is not being reflected in the market place,” he explained.   

As a result, Lexmark’s board believes it is time to look at strategic alternatives to unlock the value that the company has created. Lexmark says it will consider a broad range of strategic options, including an outright sale of the company or spinning off portions of the business. Rooke stated that opportunities with both public and private entities would be considered.  

Lexmark’s announcement also coincided with its third-quarter earnings results. “Overall, it was a challenging quarter for Lexmark,” Rooke said, during the call with analysts. “We saw softer demand for both hardware and supplies in the quarter resulting from tighter customer print spending, longer sales cycles, and a more competitive environment — in addition to the impacts of currency and the ongoing exit of inkjet.”  

For Q3 2015, Lexmark reported total revenue of $868 million, down 6% compared with $921 million in the year-ago quarter. As is usually the case, Lexmark points to the strength of its Higher Value Solutions segment, which is comprised of its MPS and enterprise software businesses, as an indicator of continued success in its transformation to a solutions company. Higher Value Solutions revenue of $372 million grew 28 percent compared with the year-ago period, driven by MPS growth of 1 percent and Enterprise Software growth of 92 percent.   

Lexmark’s Enterprise Software business now represents approximately 43 percent of total revenue. The firm also notes that its MPS business has demonstrated 15 consecutive years of revenue growth, with a current run rate of approximately $800M. Likewise, the Enterprise Software segment is currently operating at a run rate of approximately $700M with expanding margin.   

Lexmark’s core laser business, however, continues to struggle. Revenues from the laser segment declined 13 percent in the quarter to $672 million. While MPS revenues grew 1 percent, non-MPS revenues dipped 18 percent to $465 million. Hardware revenues of $165 million declined 16 percent compared with the year-ago quarter, while supplies dropped 17 percent on revenue of $493 million. Lexmark says customers are holding on to older equipment longer and deferring new equipment purchases, leading to longer sales cycles and a more volatile competitive environment with more competitors chasing fewer deals.   

For more on Lexmark’s Q3 earnings, see press release here.

Our Take  

The fact that two high-profile printing companies are reviewing existing operations and exploring strategic business alternatives is not in and of itself all that earth-shattering. After all, is that not what the board of a public company is supposed to do? What is quite interesting, however, is that both Lexmark and Xerox chose to publicly announce these plans ahead of what could best be described as less-than-stellar quarterly earnings. There is little doubt that both companies are feeling pressure from their respective boards to show more positive results.   

This is not the first time that Lexmark’s name has been bantered about as a potential acquisition. Indeed, Lexmark has been positioned as a prime acquisition target at various times since it was initially spun out of IBM. Speculating on potential suitors for Lexmark among those companies already in the printing business is not as simple as it once was.   

Samsung and Dell are two names that always surfaced in the past. But Samsung has invested heavily in its own technology and printing still remains such a small part of its overall business. Acquiring Lexmark might help Samsung expand its product portfolio and footprint, but it would not really give it what it needs, which is greater penetration and access to office equipment dealers. Lexmark has grown its Business Solutions Dealer (BSD) business but it is still a small player and a secondary brand for the dealer channel.   

It is also very difficult to gauge Dell’s commitment to the printing business these days. Given its recent acquisition of EMC it would seem that a large printing acquisition would be low on Dell’s radar. Most of the Japanese OEMs are building out their own A4 strategies, and an acquisition by HP or Xerox seems unlikely. Interest from a private equity firm or some other technology company would be the more likely scenario — if indeed an outright sale were to happen.    

Xerox is another interesting case to consider. Xerox’s sales in 2015 are projected to decline for a fourth straight year. The firm has been successful at repositioning itself as a services business through several high-profile acquisitions. Yet, despite the divestiture of its ITO business and other efforts to improve margins, Xerox has been unable to drive enough profit through its services business to compensate for the waning technology segment, which has been declining for several years.  

Might Xerox take a page from HP’s book and split its services and technology businesses? That question was asked during the analyst conference call. Ursula Burns responded by stating that she continues to see value in having the two units linked together, but she admitted that is one of the issues that the Xerox board would need to evaluate and validate.   

One thing is certain, the overall printing market is under siege, and we are likely to see other OEMs faced with similar difficult decisions. Driving growth in a declining market is a difficult proposition. Vendors have been positioning MPS as a primary growth engine for years but that is clearly not a sustainable position—especially for those firms that also rely on non-MPS customers. It is interesting to see vendors positioning slight growth in MPS as a significant achievement, while virtually ignoring the fact that the core transactional printing business is tanking.   

Moving forward, it is likely that the number of printing vendors will continue to contract. Meanwhile, pursuit of alternative business strategies could become the norm in 2016.   

Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. As a market analyst and industry consultant, Palmer has more than 25 years experience in the imaging industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. Palmer is a popular speaker and he presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA). Contact him at robert@bpomedia.com.