WHERE IS IKON HEADED ?

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Date: Tuesday October 18, 2005 11:40:00 am
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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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