Last month, I wrote in ENX magazine that various hardware manufacturers were reporting that they got off to a slow start in the opening months of 2015. Most Japanese firms reported in May that things slowed in 2015 after having a good run in 2014. Many hardware firms in Japan have now lowered their guidance for the current fiscal year. The U.S. hardware manufacturers also reported demand has slackened over the past few months. Such a softening of the market is particularly painful for these companies because they lack the competitive advantage the weaker yen provides their Japanese rivals. U.S. firms have had to endure punishing market conditions for several years and they have lost market share as a result.
In the days before ENX went to press in early May, Epson, Fujifilm, and Ricoh had reported their numbers for the fiscal year, which ended for the firms on March 31 as it does for many companies in Japan. Of the three firms, two—Epson and Ricoh—said their business was off during the first three months of 2015. Since then, the remaining Japanese vendors also closed their books on the previous fiscal year and, once again, most of the companies indicated that this year was not looking good for them. Compared to the same three months in 2014, for example, Brother and Konica Minolta also reported softer sales this year. Likewise, following lackluster earnings calls in April from Lexmark and Xerox, Hewlett-Packard reported in May that its printer business has declined this year.
Don’t get me wrong; the hardware vendors had plenty of good news to share with their stakeholders. HP’s printer business, for example, continued to deliver operating margins in excess of 18 percent this year despite the fact that revenue from hardware has continued to drop year-on-year for the past several consecutive years. OKI also continues to prove it is executing on its turnaround plan and Konica Minolta says it will grow sales this year as it did last year. Despite these bright spots, however, I’m getting a whiff that the worldwide market for hardware and supplies is slipping into a funk, and the market may remain “funky” in the second half of the year.
Brother’s Mixed Bag
On May 7, Brother International reported that net sales were up for the fiscal year ending on March 31 and it enjoyed strong operating and net earnings. However, for the first three months of 2015, revenue was weaker than expected and as a result Brother missed its projected sales target for the year.
With annual revenue up just over 10 percent, Brother’s Printing and Solutions business, which includes printers, all-in-ones, fax devices and consumables as well as other products such as typewriters, performed well during its most recent fiscal year. Annual net sales grew to ¥474.3 billion, compared with ¥430.8 billion the year prior and the operating income ratio grew 300 basis points to 7.5 percent as operating income improved from ¥31.0 billion during the prior fiscal year to ¥35.7 billion during the fiscal year ending in March.
Looking specifically at communication and printing equipment, annual sales climbed to ¥421.8 billion from ¥384.1 billion during the year before. The firm said that it is investing to maintain its retail market share in developed markets as it increases sales in emerging economies. It also seeks to grow its OEM business and increase sales to SMB customers. Specifically, communication and printing equipment annual sales totaled ¥421.8 billion versus ¥384.1 billion during the year before.
Regionally, annual sales of Brother’s communication and printing equipment experienced double-digit gains in the Americas as well as in Asia and revenue hit ¥168.0 billion in the Americas and ¥69.4 billion in Asia, which represented gains of 11.7 percent and 19.8 percent, respectively. With sales up nearly 7 percent to ¥141.7 billion, Europe came in as Brother’s second largest market for communication and printing equipment after the Americas. Domestic sales were down almost 1 percent to ¥42.7 billion, making Japan Brother’s smallest market for printers during its last full fiscal year.
Although the company’s sales grew, the growth was not as great as Brother had predicted earlier in 2015. In February, the company said it anticipated net sales of ¥710 billion, but it managed only ¥707.2 billion. Looking ahead to fiscal 2015, which ends in March 2016, Brother is now guiding it will have net sales of ¥760.0 billion, operating income of ¥58.0 billion, and net income of ¥35.5 billion. Compared to the year ending on March 2015, Brother expects its sales to improve about 7.5 percent but profits are being squeezed as operating income essentially goes sideways and net income plunges 34.2 percent. Sales of communications and printing equipment are expected to grow to ¥450.6 billion, which if true would mark a gain of about 7.8 percent. However, in the year ahead, the company forecasts the operating income from its Printing and Solutions’ segment will decline 5.7 percent to ¥33.7 billion, which would result in the operating income ratio being compressed nearly a full point to 6.6 percent.
OKI’s Turnaround Looks Complete
The day after Brother reported its annual results, OKI Electric Industry Company did the same. On May 8, OKI reported it had net sales of ¥540.2 billion last year, up 11.8 percent from ¥483.1 billion in the year ending March 2014, and slightly more than the ¥535 billion revised projection issued with its first-half earnings in October 2014. OKI President Hideichi Kawasaki cited OKI’s solid financials for the strong performances of each business segment, specifically crediting stronger operating income to a sales volume increase in the Info-telecom business and product mix improvements in the firm’s printer business. OKI’s operating income was ¥32.4 billion up 19.2 percent from the prior year’s ¥27.2 billion and ¥2.4 billion greater than the firm’s projection of ¥30 billion. Net income of ¥33.1 billion was up 5.7 percent year-over-year from ¥27.4 billion, while net income per share was ¥40.3 billion, up 10.6 percent from 2014.
Net sales for OKI’s printers segment grew 3.6 percent year-over-year, climbing from ¥124.8 billion to ¥129.3 billion. Sales of color LED printers were nearly flat, going from ¥78.1 billion in 2014 to ¥78.8 billion and sales were also flat for dot-impact printers, which remained at ¥14 billion. Monochrome LED was the growth area for the printer segment, with sales increasing from ¥29.2 billion to ¥33 billion as OKI’s dealers scored some big orders. Operating income for the printers business increased from ¥5.1 billion to ¥6.7 billion, which OKI continues to attribute to the revamping of the business structure as well as improving the product mix.
OKI predicts net sales growth will continue during the current fiscal year, which ends in March 2016. Revenue is projected to increase ¥4.8 billion year-over-year to ¥545 billion but operating income is projected to decrease slightly, down ¥2.4 billion to ¥30 billion due to fixed costs including rising personnel expenses and depreciations in overseas manufacturing sites. Thanks to new products and strengthening sales-channel support, the firm is projecting annual net sales will grow to ¥140 billion in its printers business from ¥129.3 billion last year with ¥65 billion coming during first half, up from ¥61.6 billion in the first half of last year. The firm is projecting color LED net sales of ¥89 billion, a nearly 13 percent increase from this year’s sales and monochrome LED sales are expected to grow more modestly from ¥33 billion to ¥35 billion. Operating income is projected to increase to ¥7 billion.
OKI’s continued growth suggests that it has managed to turn itself around. The company as a whole was rocked in 2012 by the discovery of accounting irregularities at OKI Systems Ibérica S.A.U., which had misreported business results for over six years. The firm’s printer business also experienced years of declining sales and significant losses. In March 2013, OKI announced plans to revamp the business and slashed hundreds of jobs and eliminated certain suppliers as well as reduced the number of printer and software platforms it marketed. Initially, the improvement was largely seen not in terms of sales but rather operating profit. Thanks to the weakening yen, sales began to improve and strengthened last year. Although OKI expects to continue to grow its printer business this year, it seems to me that the growth can be attributed more to the company’s ability to make up lost ground rather than any growing strength in the current market.
Konica Minolta Chugs Along
One of the industry’s stronger performers over the past few years has been Konica Minolta and the firm’s winning trend continues as it managed to beat its own expectations during the fiscal year ending on March 31. For the full year, Konica Minolta’s net sales totaled ¥1.011 trillion versus ¥943.8 billion in the previous fiscal year. This 7.2 percent increase beat the company’s earlier net sales guidance of ¥1.01 trillion. With total operating and net incomes of ¥66.2 billion and ¥32.7 billion, respectively, Konica Minolta also exceeded its profitability forecast. Noting that sales climbed past ¥1 trillion for the first time in seven fiscal years, the firm credited its revenue growth to the performance of its main line of business, Business Technologies.
The Business Technologies unit is responsible for marketing Konica Minolta’s MFPs, copiers, printers, supplies, and related services and it had annual sales of ¥817.2 billion, up 10.5 percent from ¥739.9 billion in the year prior. Annual sales also exceeded Konica Minolta’s forecast for net sales of ¥810 billion. The group’s full-year operating income was ¥71.8 billion versus ¥66.6 billion in the previous fiscal year, an increase of 7.7 percent.
The office services business accounted for ¥604.2 billion of the Business Technologies segment’s full-year sales, up 7 percent from ¥567.1 billion in the year prior. Sales volumes of A3 color MFPs expanded year-over-year in all regions as sales of A4 color MFPs increased. The company reported that it has enjoyed a steady increase in contracts and sales of its Optimized Print Services (OPS) managed print services. It has also been successful in targeting small to medium-sized customers, particularly in the United States and Europe with hybrid-type sales that combine IT services and equipment and says it is now offering managed content services (MCS) for these customers. More sales of MCS should enable the company to secure new customers and grow print volumes. The company said its commercial and industrial printing business also delivered solid results and sales reached ¥213.1 billion, up 23 percent from ¥172.9 billion in the previous fiscal year thanks in part to the launch of the color bizhub PRESS line.
For the current year, Konica Minolta anticipates total annual sales of ¥1.1 trillion along with an operating income of ¥77.0 billion and a net income of ¥50 billion, which would mark year-over-year increases of 10 percent, 17 percent, and 23 percent, respectively. The Business Technologies segment is expected to deliver net sales of ¥890.0 billion and operating income of ¥84.0 billion. The company predicts that demand for its A3 color MFPs will continue to grow overseas and sales of production and industrial printing devices and services will improve and drive print volumes up.
HP Little Improved
The industry’s earning season effectively wrapped up on May 21 when one of its best-known firms, Hewlett-Packard, reported its mid-year results. As it has for 16 consecutive quarters, revenue from the printer group slipped during the firm’s second quarter, which ended on April 30, compared to Q2 FY14. The printer group is only one of HP’s six business units and all six reported declining revenue in Q2 FY15 on a year-over-year basis. Overall, the company had total revenue of $25.5 billion in Q2 FY 15, which represented a decline of 7 percent compared to Q2 FY14.
Revenue from HP’s printer business hardware and supplies also dropped 7 percent, falling from $5.8 billion during the second quarter of last year to just under $5.5 billion during the same period this year. Consumables sales dipped 5 percent on a year-over-year basis as the company struggles with its overly stuffed channel. Last year, HP’s Q2 consumables sales amounted to $3.9 billion but that fell to $3.7 billion during the same period this year. Although there was some margin erosion, HP’s printer business remains profitable with an operating margin of $996 million, which amounted to 18.3 percent of the unit’s total revenue.
Catherine Lesjak, HP’s CFO and executive vice president, explained that hardware revenue suffered in Q2 as the printer group’s “top line was pressured by a highly competitive market and aggressive pricing.” Dragged down by relentlessly sluggish demand for inkjet devices, hardware shipments fell 4 percent compared to Q2 FY14. Commercial unit shipments managed to climb 1 percent as shipments of consumer devices tumbled 6 percent. Most of the machines in HP’s Commercial category are LaserJet units along with higher-end devices such as Indigo production printers and HP’s high-speed inkjet digital presses. Most of the machines in HP’s Consumer category are SOHO inkjets.
While it appears the situation is improving, executives for the firm continue to report inventory levels of consumables are high as they have been for the past few quarters. Ms. Lesjak explained, “We exited the quarter with supplies channel inventory slightly above our desired range due to slowdown in sales in April. We expect to reduce channel inventory levels in the second half and will continue to closely monitor demand trends.” She said the firm is focused on “placing higher value hardware units with greater supplies attach.”
Worse before Getting Better?
I’m expecting that when earnings season rolls around again, companies will report that many markets worldwide have remained soft and business continues to slip. Regionally, there seems to be no lack of concerns. The European Union is jittery as everyone in the euro zone watches Greece to see what it will do when certain payments come due in June. In many countries like Spain, unemployment remains persistently high. Once seen as growth engines, the economies in various so-called BRIC (Brazil, Russia, India, and China) countries are sputtering. According to The Economist, Brazil’s Gross National Product (GNP) will slip 1.2 percent this year as Russia’s GNP drops a full 4.0 percent. Japanese companies will most likely remain disappointed in domestic sales as Japan’s economy grows an anemic 0.8 percent despite the government’s efforts to devalue the yen to spur growth.
With all that said, the demand for hardware and supplies in the United States ought to be okay this year. Although the SOHO market appears destined to continue its decline with no flattening in sight, indications are that office printing should not slip. Printing in the office is tied to employment and the U.S. Bureau for Labor and Statistics put the unemployment rate at 5.5 percent in May, down from 6.3 percent in May 2014. This was the fifth consecutive May the percentage has fallen on a year-on-year basis. Moreover, employment looks to be stable. A recent survey of 18,000 U.S. employers conducted by the human resource consulting firm ManpowerGroup indicated that 94 percent of employers plan to hire or keep their workforce levels steady in the near term.
At the end of June, the current quarter will close at many hardware manufacturers. I’ll be watching the results closely as they are released during the next earnings season, which will start in late July. It’s a safe bet that we’ll get some clarity on the market conditions for the rest of the year when the June numbers are released. Most likely things will slip more before they start to recover. Stay tuned!
