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Where is IKON Headed?
October
2005 — IKON Office Solutions continues to restructure as it works to
bring its costs in line, most recently reducing the size of its
marketing department. The company has stated that its goal is to bring
its Sales, General & Administrative (SG&A) expenses into
alignment with competitors in the marketplace and to position itself
for improved earnings and revenue. A closer look at IKON’s performance
reveals:
* A steady decline in revenues from a high of $5.6 billion in September 1998 to its 2004 level of $4.6 billion.
* In that same period, IKON has gone from a high of nearly 43,000 employees to approximately 26,000 employees.
* While IKON’s gross profit margin was at 37.6% in 2001, it had
declined to 36.9% by the end of its fiscal year in September 2004.
* Both revenues and gross profit margins have continued to decline during the current fiscal year.
* In its third quarter earnings call, the company reported that total
revenues were $1.1 billion, down 4% year over year, primarily due to a
decrease in net sales and continued transition out of the captive
leasing business in North America. The company reported that targeted
revenues declined 1%. Gross profit dollars decreased by 8%.On a
positive note, IKON has significantly beefed up its professional
services offerings, particularly to serve mid-market customers, many of
whom do not have robust IT resources and look to vendors like IKON for
turnkey services. Targeted professional services had a strong third
quarter, up 15%, with improvements in all key metrics including systems
analyst utilization, document strategy assessments, and hardware
enablers. Additionally, the company reported record third quarter
placements of the IKON CPP 500, the IKON branded version of Konica
Minolta’s 50 ppm color printer. This product is now a top
revenue-producing color product for the company. In the U.S. office
color segment, IKON grew placements by 75%, and across all segments of
color, copy volumes were up 47% from the prior year.
IKON reports
that it is committed to reducing costs across the organization, and
that early 2005 expense actions are now delivering positive results,
with SG&A expenses down 7% year over year. At the same time,
average equipment sale prices continue to decline due to a combination
of new product introductions and lower price points, as well as
increased competition.
As part of its cost reduction commitment, in
March of this year, IKON exited its Business Document Services (BDS)
business unit and most of its operations in Mexico. BDS, at one time a
hub-and-spoke print production operation that consisted of 34 sites in
North America that was ultimately reduced to some 11 sites, represented
a $5 million after-tax loss for IKON. While on the surface, BDS
appeared to be a natural companion service to IKON’s on-site facilities
management business to accommodate overflow work and complex
production, the company had difficulty finding a way to make the
business profitable.
In addition, in July of 2005, IKON completed
the sale of its French subsidiary to NRG France S.A.S., a subsidiary of
NRG Group PLC. Stating that Europe was an important growth area, the
company indicated it would continue to serve pan-European customers
through an ongoing presence in Paris, as well as its 50 other locations
across Europe.
In February of 2005, a BusinessWeek article reported
that Steel Partners, a company that has a history of buying big stakes
in companies, pushing to maximize their value, and then putting them in
play, had acquired a 5.4% interest in IKON. SEC records reflect that
that stake was upped to 6.4% in March and now stands at about 10%. The
article states, “In its filing with the Securities & Exchange
Commission, Steel Partners explained that, with IKON so undervalued, it
may seek board seats, buy additional shares, and propose ways to boost
earnings.”
What does all of this mean for IKON’s future?
WhatTheyThink
interviewed Dan Murphy, Vice President of Investor Relations, and Mike
Kohlsdorf, Senior Vice President of IKON Enterprise Services and
Information Systems, to get their perspective on IKON’s cost reduction
initiatives, as well as prospects for growth. According to Murphy, “We
recently had a meeting with Steel Partners and shared with them
publicly available information about our progress and plans going
forward. As near as we can tell they are a very satisfied investor.
They are very supportive of the management team, the strategy and the
direction we are taking the company. We are comfortable with the
relationship we have with them.”
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