Service Offerings Grow as Hardware Markets Remain Depressed

by Charles Brewer

Hardware manufacturers have indicated that their equipment and consumables businesses remained lackluster early in 2012. Unfortunately, most printer and copier makers are sending signals that they do not expect things will turn around anytime soon. With only a few exceptions, the OEMs reported flagging sales and profits in the first quarter of the year, and revenue from hardware and consumables remains depressed. Services have become the one bright spot in the industry, however, and the space continues to see a lot of activity.

In late April and early May, printer manufacturers including Epson, Lexmark and OKI reported to shareholders that their hardware businesses have been down this year. Despite stronger sales of copiers and production machines, Canon’s consumer inkjet business was off, and its office laser printer business was down. As Hewlett-Packard’s technology supplier, Canon’s numbers reflect the fact that HP’s LaserJet business has been weak of late. As of this writing, HP had not yet reported is financial performance for this spring; however, when it reported earnings in February, HP indicated that its commercial business, which is based largely on LaserJet machines, was down, although not as much as its consumer business.

Brother’s printer business seemed to be bucking the trend. Its Printing and Solutions group managed to grow revenue to ¥86.1 billion during the first three months of 2012 from ¥84.4 billion during the same period last year. Profitability suffered, however, as Brother’s printer business sustained a ¥688 million operating loss in the fourth quarter of the firm’s current fiscal year versus an operating profit of nearly ¥1.8 billion the year before. For the year ending March 31, 2012, Brother reported a steady increase in laser printer sales for the small office/home office (SOHO) market and the small and medium-size business (SMB) market. Moreover, the firm said it experienced steady growth in demand for its supplies in all regions.

Copier vendors are also reporting declining hardware sales this year. As they’ve done for a while now, Japanese copier makers are coping with a stronger yen and weaker market conditions in 2012. Despite a fairly good showing at the start of the current year, at the end of April, Ricoh reported its first full-year loss in more than 50 years for the period between April 1, 2011, and March 31, 2012. While Ricoh said its color revenue increased, overall revenue was down as monochrome sales slumped. Toshiba doesn’t report the results of its copier business separately, but it said overall sales of its digital products, which includes copiers and MFPs, was off. Sharp reported that sales of its digital copiers increased last year but that operating profits were down. In the United States, Xerox reported at the end of April it experienced drooping equipment and consumables revenues in early 2012, although the company’s total revenue was up, thanks to services.

Konica Minolta reported stronger net hardware sales and better profits for last year as well as the opening months of 2012. On May 10, the firm said for the quarter ending on March 31, 2012, net sales were up 2.4 percent, climbing to ¥207.5 billion from ¥202.6 billion during the same period a year ago. Surging 44.9 percent, operating income hit ¥17.0 billion during the firm’s fourth quarter, but net income was roughly flat at ¥15.0 billion versus ¥15.1 billion during the same period in 2011. For the year, Konica Minolta said net sales for its Business Technologies group — which is responsible for sales of MFPs, production printing systems, consumables and managed print services (MPS) — totaled ¥547.5 billion, up 1.5 percent from the previous year, while the group’s operating income grew 5.4 percent year over year to ¥39.4 billion.

Seat belt light remains illuminated

Unfortunately, not only did hardware manufacturers report weak numbers for the opening months of 2012, many are warning they expect to continue to encounter turbulence in the market, at least for the next few months. While most forecast growth, they don’t expect it will come until the second half of the year. Of course, any indication of growth is encouraging, but there is a long time between now and autumn.

In general, things haven’t improved very much in the marketplace over the past couple of years. Although the industry saw some recovery during 2010, the markets didn’t strengthen much last year, and the past few months indicate that the same may hold true for 2012. The problems are all too familiar. Like we’ve heard since the opening months of 2009, the poor economy in established markets and resulting high unemployment rates continue to stymie demand for hardware. Fluctuating currency exchange rates continue to impact most hardware vendors’ top and bottom lines. Exchange rates remain volatile, and economies are sluggish, so it’s hard to be very bullish.

Canon told investors it will take “considerable time” for the global economy to fully recover, but it expects to see some modest growth for digital copiers and a recovery of its laser printer business in the second half of the year. With revenue declining between 7 to 9 percent compared to Q2 last year, Lexmark says it’s not expecting a very strong second quarter in 2012 but that things should be better in the fall. Epson says its revenue will be down almost 4 percent in the first half of its current fiscal year, but for the whole 2012 fiscal year, it expects revenue will grow 1.4 percent year over year to ¥890.0 billion. Predicting printer sales will climb 9.5 percent year over year in 2012 to ¥565.0 billion, Epson seems overly optimistic. Ricoh’s forecast is more modest, anticipating revenue will grow nearly 1 percent this year as the Americas enjoy some “moderate recovery” and the emerging markets see higher growth. Ricoh maintains, however, that growth is not a sure bet.

Brother and Konica Minolta appear to be the most sanguine firms in the industry about the rest of the year. According to Brother, its Printing and Solutions group plans to launch new high-end monochrome lasers and high-speed inkjet all-in-ones. Brother says its net sales will grow 6.6 percent from its 2011 levels to ¥530.0 billion this year, and net income is forecast to be up 17.8 percent year over year to ¥23.0 billion. The unit’s operating income, however, is expected to dip half a percentage point to ¥34.0 billion. Konica Minolta told investors demand for production devices will continue to grow, while emerging markets will drive office MFP revenue growth. Konica Minolta expects net sales to grow by 4 percent to ¥800 billion for the year ending March 2013 as operating income and net income climb 16 percent and 7 percent, respectively, to ¥48 billion and ¥22 billion.

More growth in services

As OEMs continue to struggle with weak markets, many have whipped up their services activities to a frenetic pace. Brother, which hasn’t done much in the services arena, announced on May 10 that it will launch a Web-based portal for cloud services. The firm says “Brother Online” will improve business efficiency for its customers and reduce costs as well as enhance the convenience of sharing and distributing information. Brother Online will also support Brother’s “OmniJoin” Web conferencing service, which supports online meetings and document sharing from remote locations. OKI has been busy promoting its previously released cloud-based Total Managed Print (TMP) solution. In April, the company announced that it has expanded TMP’s availability into the Canadian market.

So far, Xerox appears to have had the most success marketing services. As noted earlier, services allowed the company to grow its top line despite equipment sales slipping 2 percent to $811 million compared to the first quarter of last year. The company reported revenue growth and higher-than-anticipated earnings thanks primarily to Xerox’s growing Services business, which is comprised of Business Process Outsourcing, Document Outsourcing and Information Technology Outsourcing. Total revenue in the first quarter was $5.503 billion, up 1 percent from $5.465 billion in the year-ago period. Revenue from Services grew 9 percent year over year to account for 51 percent of Xerox’s first-quarter revenue.

Konica Minolta is looking to expand its services beyond those tethered strictly to machines and consumables that produce hard copy. The company continues to add firms to its All Covered division as part of its goal of expanding its IT services network in North America and Europe. On May 10, Konica Minolta announced that it signed an agreement to acquire FedEx Kinko’s Japan from U.S.-based FedEx Kinko’s International, Inc. FedEx Kinko’s Japan is a print services provider with 49 stores and 800 employees in Japan.

While most competitors have grown increasingly active in the services space, for the past few months Canon and Epson have remained rather quiet about their service offerings. Neither firm has announced a major services initiative yet, nor have they discussed any plans to launch some type of offering in the near future. Canon’s lack of activity is understandable. The firm has acquired a number of small channel partners, so presumably it’s growing the amount of break-fix and other equipment-based services it delivers. The firm must also have its hands full successfully integrating its Ocè acquisition. Epson’s apparent lack of interest in developing a services offering is more puzzling. Granted, the firm’s business is heavily weighted to the consumer space, but its competitors in the SOHO markets are releasing services (like Brother’s new portal mentioned earlier and HP’s Instant Ink program, which is essentially MPS for inkjet machines). So why not Epson?

Epson not withstanding, rest assured that OEMs will continue to add new services to their portfolios as we move through this year. Even when the markets recover — and, gentle reader, the markets will recover someday — OEMs will rely on services for growth. We may see a dead cat bounce when things improve, but as print volumes decline and hard copy grows even more commoditized, services will offer an exciting and viable avenue to sustainable growth. Services will also allow hardware manufacturers to move into new markets and beyond their devices. More to come!