Ricoh announced consolidated financial results for the second quarter and first half of their FY2019 on Oct. 26. For 2Q FY2019 (the three months ended Sept. 30) total sales revenue was $4.5 billion*, down 1.8 percent when compared to the same time last year. First-half revenue (April 1 through Sept. 30) was reported to be $9 billion, decreasing 1.1 percent from 1H FY2018. While total revenues were down, operating profit for 2Q expanded 947 percent from the previous year, fueling a growth in 1H operating profit of 136 percent over the same six months of FY2018. Operating profit for 2Q was $292.7 million and, for 1H, $471.3 million.

Ricoh explained that if not for the impact of changes due to share transfers in the semiconductor and logistics business, total revenue for 1H FY2019 would have been flat. They emphasized a turnaround in office printing and expanded earnings in office services as reasons for the surge in operating profits. Also, significant profit impact came from the net progress Ricoh made with the structural reform measures they have put in place. During 1H FY2019, these measures contributed a net $198 million (42 percent) of the $471 million operating profit.

Free cash flow increased in the 1H FY2019 to $596 million, more than four times the cash flow of the same time period in FY2018. As a result, cash and cash equivalents increased by 26 percent to $1.84 billion compared to $1.46 billion in FY2018.

Based on the business results of 1H FY2019, Ricoh is now forecasting total annual revenues to be $18.3 billion, a decrease of 1.1 percent from FY2018. Operating profit forecast has been raised from initial FY2019 forecasts to $763 million compared to an operating loss of $1.08 billion experienced in FY2018.

Business segment performance

Ricoh’s Office Printing segment 2Q FY2019 revenue was $2.4 billion, down by 3.6 percent from the same time period the previous year. First-half FY2019 revenue for this segment was reported at $4.9 billion, reflecting a similar 3.7 percent decline over 1H FY2018. All regions reported revenue declines ranging from 0.7 percent to as high as 12.7 percent for 2Q, and 1.3 percent to 7.5 percent in the 1H totals. Ricoh noted these declines were “mainly in hardware and related supplies due to refining of business meetings based on the profit-oriented marketing strategy in accordance with 19th Mid-Term Management Plan.” Gross profit decreased, but because of the structural reforms, SG&A expenses decreased significantly. This resulted in operating profits of $245.4 million in 2Q and $518.8 million for 1H, increases of 40.1 percent and 12.9 percent respectively.  Overall year-over-year (YoY) MFP unit sales were down 5 percent (A3 down 7 percent, A4 flat) and printer unit sales were down 21 percent.

The Office Services segment showed an 8.6 percent increase in 2Q revenue to $1.16 billion and 1H revenue of $2.1 billion, for a 9.1 percent growth over FY2018. Ricoh attributed this growth to sales increases of business process solutions and IT services mainly in the Japanese region and the Americas. This resulted in operating profits of $36.4 million for 2Q and $56 million for 1H FY2019. These results were welcome since this segment exhibited operating losses for the same periods of FY2018.

Commercial Printing segment sales revenue decreased by 1.8 percent to $399 million in 2Q FY2019 when compared to the same period of FY2018. They were $784.1 million for the 1H, 4.5 percent lower than the corresponding period of FY2018. Ricoh explained that these revenue decreases were primarily in hardware because of where the commercial hardware products are in their product life cycles. Operating Profit for 2Q in this segment was 46.7 percent higher than FY2018 at $56.7 million due to sales of new products. This growth did not offset the decline of 1H operating profits by 2.3 percent to $101. 4 million.

Results in the other segments of Industrial Printing, Thermal Media, and Other showed 1H FY2019 revenue increases of 10.0 percent, 12.4 percent, and 9.7 percent respectively. While operating profit increased in the Other segment, this was attributed to a gain on sales of shares of

Ricoh Logistics System Co., Ltd. Thermal Media reported an operating profit of $15 million, 39.2 percent lower than 1H FY2018, and Industrial Printing compounded its 1H FY2018 loss of $8 million by a loss of $18 million for 1H FY2019.

Our take

Ricoh should be congratulated on achieving significant profit growth for the 1H of their FY2019. Their structural changes and cost/expense reduction strategies are delivering profitability on reduced sales revenue. The critical question is how sustainable this profit growth is if revenue declines in Office Printing and Commercial Printing continue. These two segments plus Office Services make up 79 percent of sales revenue and 83 percent of operating profit for Ricoh.

Commercial Printing should begin to see positive impacts as sales of new Pro C7200, C9200 and VC70000 models emerge from the sales process pipeline. The stakes are high as Ricoh needs to turn around this area, which has not seen revenue growth since the first quarter of FY2018.

Ricoh is admittedly concerned about how to maintain short-term profitability in the Office Printing business. That business has not shown growth for at least the past six quarters, and cost/expense reductions – structural reforms – can only go so far to produce a profit from declining sales revenue. A bright point may be Office Services, which is growing at 9.1 percent for the 1H FY2019. When combining Office Printing and Office Services sales, Office Services is already a little above 30 percent of that total revenue. However, there seem to be significant costs associated with this revenue, as it is only producing a 3 percent operating profit margin. Should these costs reflect one-time investments in infrastructure then this segment may provide the profit dollars (perhaps not the total revenue growth dollars) that are desired in the Office segment.

Ricoh embarked on an aggressive campaign in FY2018 to improve growth opportunity focusing on profitable sales through profitable sales practices, structural changes and enhancing their strengths. It appears some of this is paying off for them. The question is whether they can leverage these efforts for long-term sustainable, organic growth to meet their “Take Off” objective of the Ignite strategy in 2020.

*All $USD amounts based on foreign exchange of ¥110.34 = $1.00 as reported by Ricoh.