Quarterly Reports — Print/Copy OEMs Cope With Worldwide COVID Megatrends

Two years in, it is apparent that the COVID-19 pandemic is already recognized as an inflection point in the worldwide economy, triggering the restructuring of numerous major industries and causing the imaging industry to reassess and revamp its annuity-based business model in real time. The latest quarterly financial results from industry OEMs Canon, Epson, Xerox, Konica Minolta, Ricoh and HP* have all been released the last few weeks, highlighting how these firms have been affected by the new hardcopy landscape.

Without exception, these OEMs all report that hardware demand is strong – stronger than expected for most, with many reporting a growing demand backlog that exceeds normal expectations or historical trends. Additionally, the OEMs’ backlog is building from unprecedented disruptions and uncertainty in customary parts and materials supply chains, which shut down or delayed manufacturing, as well as the shipments of finished product to worldwide sales and service subsidiaries.

If material shortages weren’t enough to manage, steep increases in oil prices are pushing up parts manufacturing costs – and prices – as well as boosting shipping and logistics costs significantly higher for sea freight, forcing the increased usage of air freight to avoid clogged and overloaded seaport docks. And the full or partial closure of many international borders disrupts the deliveries of new hardware and critical supplies like toner and related maintenance parts.

The result: a multi-dimensional supply and demand forecast nightmare in which meeting hardware production targets is problematic at best and practically impossible at worst. And the hardware OEMs can eventually produce, at inflated production costs, face an unprecedented, uncertain, and more expensive logistics fate.

Let’s take a look at the individual OEMs’ results.

Canon – Q3 FY2021

• Fourth consecutive quarter of sales and profit growth. Canon notes print volume is recovering
• Sales in Q3 rose by 9.8% YOY, or $7.569B — all four business units posted positive growth
• Operating and parts/materials expenses increased – however income soared 196% YOY to $448 million
• Q3 Printing sales were up 6.8% YOY to $4.171B, though suspended production caused a decline in printing hardware revenue
• Q3 Printing profits zoomed to $548 million, up 231% YOY, as service and consumables revenues were not impacted by supply shortages, and despite an $89 million jump in sales and development expenses.
• Overall outlook, factoring ongoing strong demand, maintains its FY projection of net sales of ¥3.6 trillion (about $32.7B, up 13.9% YOY). Lowered outlook for operating profit due to cost increases, though compensated for by other internal factors. Expects 2021FY income before taxes in line with previous projections at ¥298B/$2.7B, up 141% YOY. Canon expects double-digit profitability from both its Printing and Imaging units.
• In Printing for 2021FY, Canon expects net sales of ¥2.006T ($18.2B) an increase of 11% YOY, and operating income of ¥226B ($2.05B), an increase of 56.2% YOY. Canon says it has lowered Printing hardware sales projection due to supply shortages (-16% down YOY FY21, -13% YOY for Q3), though its consumable and service revenues have performed in line with previously announced plans.
• In the report Canon noted it plans to limit price cutting in Printing, reflecting the overall supply and demand environment. Our translation: the firm believes its hardware supply position is stronger relative to its competitors and plans to set prices accordingly.

Canon’s prior Q3 growth projections – compared to actual performance for Printing – appear to have been optimistic at the time they were made considering difficult overall market conditions and an uncertain supply chain outlook. However, to be fair, market conditions and worldwide supply chain uncertainties created by the pandemic are new and unpredictable, making projections, even short-term estimates, problematic. By the numbers, Canon appears to be weathering this storm fairly well, but YOY comparisons to 2020’s glum lot should be tempered.

[Business Performance (¥ at 110.1/1$USD, metrics do not include currency impacts]

Epson FY 1H Six Months FY2021

April 1 through September 30, 2021:

• Company revenues were ¥550,597 million, up 25.4% YOY. Net profits leapt to ¥36,507 million, up 754% YOY
• In the Printing Solutions Segment, revenue in the office and home printing business increased sharply, driven by high-capacity ink tank printer and ink cartridge printer sales. Epson says at-home print demand, which carried over since last FY, has outstripped production due to pandemic-related problems. Despite shortages and delays, Epson grew YOY unit shipments and raised selling prices. Consumable sales, pushed by ongoing home print demand, continued to increase, but at a lower YOY rate.
• Despite component and product shortages, revenue in commercial and industrial printing grew markedly YOY, powered by large-format inkjets, new products, and consumables demand in EU and the Americas. POS printer sales in Europe, the Americas, and China were up, as were printhead sales in China.
• Overall revenue in the printing solutions segment was ¥375.5 billion, up 24.9% YOY, and segment profit was ¥55.0 billion, up 41.9% YOY, overcoming higher manufacturing, transport, and parts prices

Epson FY Q2 (ending September 30, 2021) Printing Solutions Segment, ¥ millions

• Overall segment revenues of ¥183.2 up 16.9%
• Office and home printing IJP sales of ¥129.8 million up 7.5%
• Inkjet sales declined YOY compared to FY2020 spike
• Office shared printer revenue grew as MIF of high-capacity ink tank models in developed economies increased but SIDM declined
• Revenues from ink were up as MIF increased in Japan, EU, N. America, and China

Commercial and Industrial Printing sales and profits grew strongly following the launch of new products, especially in growth businesses such as corporate, signage, textiles, and labels.

Epson says overall, FY 2021 demand will remain strong, but unit sales will decline due to anticipated supply bottlenecks. Price increases as well as lower unit sales costs will boost FY profit outlook upward by ¥5 billion. FY company revenues are forecast to be ¥1,130B, down ¥20B, but overall FY net profits are estimated at ¥80B, up 7.1% from its 7/30/21 outlook.

It is noteworthy that Epson’s Commercial and Industrial Printing profits (¥9.6B) are now more than half that of its Office & home IJP profits (¥18.7B). As with HP, Epson is finding a swath of new markets and applications where it can leverage its inkjet printhead expertise in microfluidics to produce new, longer-term growth opportunities apart from the office/home printing sectors.

Kyocera 1H Six Months FY2022

April 1 through September 30, 2021

On November 1, Kyocera announced its 1H FY 2021 and Q2 results, which reported strong revenue growth of 25.9% over the prior 1H (and a new 1H high) and profit growth across its range of six business segments. Focusing on the performance of the Document Solutions Unit, which represents only about 20% of Kyocera’s overall sales, the unit’s 1H reported segment revenues of ¥175,248 million, up 26.9%. While the YOY growth was strong, it was of course compared to a weak 2020.

Further, the November 1 revised FY forecast for the Document Solutions Unit’s revenues was pared back from an April 27, 2021 forecast of ¥370,000 (millions) to ¥360,000 M, though still up a healthy 13.8% over 2021; the revenue decline was attributed mostly to the impact of supply chain disruptions. The November 1 FY Document Solutions Unit profit forecast was trimmed by over 20%, from ¥42,000 to ¥33,000 million.

Xerox Q3 2021 Results

October 26, 2021

Xerox’s Q3 results

In the earnings conference call, John Visentin, Vice Chairman/CEO noted that raw material and component shortages specifically limited the availability of certain of its products and supplies, particularly A3 devices. He said transportation constraints extended delivery times by weeks and drove unit shipping costs multiples higher than normal levels. Labor shortages further delayed delivery times. Visentin reported that these problems accounted for two-thirds of the year-over-year decline in this quarter’s gross margin and caused equipment revenue to fall short of expectations.

• Xerox reported overall revenues of $1.76 billion, down 1.6% YOY, with net income down 14.3%.
• Post-sales revenue of $1.4 billion was up 1.7% year-over-year (0.5% CC) as Q3 page volumes increased sequentially, but at a slower pace than expected. Post-sales revenue also includes unbundled supplies, which grew significantly due to rising page volumes.
• Q3 equipment sales declined to $387 million, down 7.6% YOY (8.4% CC) primarily due to supply chain issues: component shortages and logistic capacity constraints affected the America’s region more than EMEA. In EMEA, equipment sales grew YOY.
• Demand was strong in the quarter, boosting the firm’s backlog to $265 million, about 90% higher YOY and 20%+ higher than Q1 – and growing by $50 million alone in September.
• The backlog also has a larger proportion of high-margin A3 devices than previous periods, and post-sale revenue grew 1.7% YOY, but fell below company expectations
• Xerox is seeing improvements in page volumes and services and outsourcing revenues and expect workers to return, but expectations for a broader workplace return have been pushed from Q4 into 2022. This delay has caused the firm to lower revenue estimates for the FY to $7.1 billion (down $200 million) in actual currency from previous guidance, but it reaffirmed plans for free cash flow of at least $500 million and continuing to pay a dividend.
• Xerox’s IT Services business grew double digits in Q3 despite a YOY increase in the backlog of third-party equipment, and IT Services RPA offerings now have 500 internal (software) bots performing 4 million transactions per quarter. The firm deployed bots in support of its Lexmark Managed Services offerings for SMB clients and expanded its IT services footprint for SMBs by acquiring Vermont-based C2, an IT services business.

Looking forward, Xerox expects supply chain disruptions, and thus higher costs, will weigh on profitability in Q4 and into 1H 2022.

The company remains on track to achieve $375M gross cost savings in 2021

Konica Minolta 1H and Q2 FY 2021

In Q2, KM said despite a strong recovery in demand and a large order backlog (approx. ¥33 billion), company revenue increased only slightly, caused by delays in semiconductors and other materials, which hurt hardware sales and revenues in the office printing segment. In business units, hardware sales were affected by the semiconductor problems, decreasing revenues in office printing which were offset by revenue increases in Digital Workplace, Professional Print , Healthcare, and Industry (industrial performance materials and optical components, sensors, IoT, and inkjet components). The company also outlined significant problems producing toner for its various hardware models due to well publicized factory incidents, shortages which will affect the company’s overall FY 2021 and FY2022 performance.

1H FY 2021: April 1 through September 30, 2021

Company revenues showed a very healthy uptick in the 1H, up 16%, and dramatically trimmed the losses it experienced in a down FY2020.

Q2 FY 2021; ending September 30, 2021

For Q2, company revenues climbed only slightly – 2% — while operating losses also declined, but net profits erased gains made in Q1.

After some restructuring last year, Konica Minolta’s print hardware and supplies are part of two divisions. Office Print (OP) is housed within the Digital Workplace division, while the rest is in Production Print.

Print/Copy office hardware (OP) revenues plunged 29% YOY as component/materials supply lines and production  shortages satisfied only 70% of actual demand needs. Non-hard sales (such as toner) increased slightly (1%) as print volumes recovered somewhat when some employees returned to offices. By region, YOY revenue was down 29% in the U.S., down 24% in Europe, down 9% in China, and down 14% in Japan.

In both OP and PP, toner supply shortages were experienced because of incidents at KM toner factories, which shut the plants down. Toner production has resumed at one plant and, at the time of this writing, the other was expected to be online shortly. However, the downtime created a shortfall in toner production – which mandated that the company prioritize toner production supply and availability to satisfy the needs of existing KM customers. A direct blowback of this KM policy decision was the necessity of limiting toner production allocations for use in new hardware sales/installations; therefore limiting sales efforts and shipments/deliveries in various regions. In addition, logistics delays in getting product to North America drove unit sales down 17% YOY.

Demand for non-hard products recovered in Europe and the U.S. in Q2, particularly for medium- and large-scale printing client companies, and China continues to grow, driving revenue – up 15% YOY.

The toner production shortfall is expected to continue into 1H FY2022 and KM is downgrading its FY2022 outlook accordingly.

• Revenue target was lowered by ¥50 billion as delays in component procurement and constrained toner supplies drive lower H2 hardware sales, despite revenue improvements in 1H
• Operating profit: lowered by ¥24 billion as a result of lower revenues producing lower gross profits from a decline in revenue, mainly owing to hardware supply limits, despite profit progress in 1H

HP

HP reports financials on a different schedule than the rest, and had not reported at the time we did this analysis. They reported fiscal 2021 and fourth quarter results Nov. 23 – see their earnings press release here.

In October, HP held its first Investor Day since 2019. In that session, Tuan Tran, President — Imaging, Printing and Solutions, clearly acknowledged that life in the office is not going to go back to 2019, and that HP is reckoning with that outlook by re-engineering and re-making its printing business in a number of ways. Tran acknowledged that the changes HP has been making will affect its Supplies business, though he said HP had reversed the trajectory of toner share – implying that the firm has been/is recapturing pages in that sector. Tran then drew a chalk line for the future of HP’s Supplies business: “… we expect supplies to decline in the mid- to low-single digits, driven by a smaller home market and by our business model evolution.” This outlook fits into HP’s overall outlook for the print business. For 2021-2024, HP expects the overall business to grow at a 1% CAGR, with the office market growing at only .7% CAGR, home print business declining at -2% CAGR (so HP expects the COVID blip in home printing to subside), and Graphics (wide format and other machines) to grow at 4.1% CAGR.