Kentek Q4
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Kentek Q4
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(FOOL CONFERENCE CALL
SYNOPSIS)* By Debora Tidwell (MF Debit)
Kentek Information Systems, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KNTK)") else Response.Write("(NASDAQ: KNTK)") end if %> UNION CITY, Ca., August 15, 1996/FOOLWIRE/ --- Kentek reported their Q4 and FY 1996 results on August 6th. The revenues for Q4 were $18.2 million, almost $2 million above the revenues in Q4 last year. Quarter to quarter, the printer revenues were approximately the same. The growth came in the consumables and spare parts business. The net income, fully taxed and with the excess liquidation preference deducted from it, came in at $0.26 per share, compared to $0.00 for the previous year's Q4.
For the full year, they had revenues of $74.38 million, about $4 million higher than the previous year. The reason for that is that the OEM printers were up about $1 million over the previous year, primarily because of the K40 introduction. The increase in consumable sales both to their OEM partners and to Lexmark more than offset the decrease that they had from IBM printer sales. Net income after tax for the year was $1.24 (that's on a fully diluted, pro forma basis), compared to $0.41 in the previous year.
On the Balance Sheet, they have $26 million in cash. A lot of the cash came from the IPO and from the financial results they had throughout the year.
HIGHLIGHTS FROM Q4 AND THE YEAR
The 4th quarter and 1996 were great and the company said that they thoroughly enjoyed the year. It was marked by very strong margin improvements. They moved from 31.0% margin the previous fiscal year to 40.2% for FY 1996. This strong margin improvement was due to the completion of the move in the manufacturing of consumable supplies to Boulder and the consolidation among US vendors. It was also due to the growth in supplies sales because of the continuing increase in Kentek's installed base. Also the 40 ppm printers, with their much better margin structure, contributed strongly to that margin improvement.
FY 1996 also marked the launch of the beginning of development of the new KW series of printers and controllers. At present, they have one machine running in Boulder and 4 in Japan. All the engine and the electrophotographic designs look great and the concepts look as though they are right on the mark. They are a little bit late with the controller software, about 60 days off the mark at this point. Given the amount of development time left, they may be able to pull that back in, but they have a lot of work they need to do to find out. The engineering schedules show entering customer evaluations in September at this point.
THE HEWLETT-PACKARD ANNOUNCEMENT
Hewlett-Packard announced Monday, August 5th, that they intended to go forward with a 40 ppm Fujitsu engine designed to replace Kentek's 30 and 40 ppm printers in November. To size this in order of magnitude Kentek reiterated that Hewlett-Packard printer sales were 4% of Kentek's total sales last year and Kentek had HP planned at under 4% this year. The consumable supplies and spare parts portions of that business will go forward and that is the larger part of the sale, actually, than the printers. HP would move to an OEM "supplies only" basis and pay about 15% higher price, so Kentek could actually see an increase in consumable supply sales to HP this year. The volume, in terms of printers, was under 300 units to HP last year. It doesn't have a material effect on the manufacturing costs. They hate to lose a customer, but that's the right order of magnitude in which to view the situation.
Kentek also urged a little caution -- to see what happens. They pointed out that the Fujitsu group brought out a 30 ppm printer and Kentek believes that is what this unit is. The unit had to be brought back from the field -- about 200 units worth. It was cancelled by Genicom and rejected by Siemens. It's tough to dock one of these printers out and really make it work and Fujitsu has a bit of a shaky track record. Kentek saw a similar situation about 3 years ago in their IBM transition. Kentek wound up introducing a whole new generation of products -- the K30 -- and selling another 3,000 printers before IBM's people were able to move over to Hitachi. So, they think there is a lot yet to go on in the HP story.
The company was asked whether Hewlett-Packard had discussed the specific fundamental reasons why they would consider a Fujitsu machine instead of the Kentek engine. Kentek responded that it boils down to cost and who makes the margin. Kentek said that they guessed, specifically, HP wanted a $5,000 machine and asked for that about 1.5 years ago. Aware of Fujitsu's problems, Kentek elected not to come up with a $5,000 printer and bet that Fujitsu wouldn't either. Kentek indicated that they are not through with that bet yet and said that "we'll see how it plays out." One of the significant things in their business is where do the margins go. Xerox has attractively priced machines, but no margin for OEMs or resellers, and consequently sell direct. So the channel strategy is real important as is the product and the price.
They were asked how much of a surprise the HP announcement was. The company responded that HP showed the Fujitsu printer in a very preliminary state at an HP User show on Monday. Kentek views that as an announcement. HP put out their announcement the following day. That was when Kentek found out. Kentek said that, ordinarily in an OEM partnership you know well in advance. They knew three years in advance with IBM. In most of their OEM relationships they would know 9-12 months ahead of time. Late last week, HP was still talking about announcing new software features and driving, particularly the K40 sales forward at this user show, so it was a bit of a surprise to Kentek.
The company was asked what the comparison is between the cost per page for the printer HP had chosen versus the Kentek K40 printers. The company responded that The Hardcopy Observer reports the cost per page for the Fujitsu printer at 1.5 cents where the Kentek K40 printer is under a penny per page. So, at 1.5 times the cost per page, given that the cost per page is 85-90% of the cost of owning a printer could be a significant disadvantage in a production environment. Kentek didn't bring this issue up in their presentation because they are waiting to see the engine in more details before they take a firm stand, but that is what has been reported by a third party.
LOOKING AHEAD
Looking forward, they anticipate that they will be slightly below their earlier forecast for the first quarter of 1997 and, consequently, probably through the year -- partly as a result of the Hewlett-Packard transition and also they are a little concerned about softness in system sales that they read about among their other OEM customers such as NCR and Unisys. They don't see it materially off, but slightly off from their earlier forecasts.
They had a good meeting with Standard Register this week in Dayton Ohio. While they are not yet a signed customer under contract, they plan initial purchases of printers this month and have over 60 targeted installations.
Kentek is rolling out a Value Added Reseller focused sales drive to Mannesman Tally and Genicom, their primary channels into the VARs. They will run significant advertising and Kentek put up some sales incentive to go with the incentives they provided. Kentek hopes that will accelerate the VAR-based sales through the first half. They will run it through December 31, 1996.
They are talking with 3 significant OEM prospects. Two of them are currently Ricoh customers and need to transition from Ricoh as they are not going forward in printers. The third is one of the major office machine vendors whom they have been working with. They are optimistic about landing at least two of those three over the next 6 months.
The present plan is to meet with Oce, the former Siemens-Nixdorf printing group, September 6th in Munich. Hopefully that will go well and Kentek will finally get to expand that business in Europe.
The Board of Directors is scheduled to meet tomorrow to discuss and approve the dividend.
The company expects to spend roughly $9 million in capital expenditures in the next 12 months, $8 million of that will be on the tooling for the KW60. The other $1 million is basically their normal level of capital spending -- replacement tooling costs, a little bit of lease acquisitions, etc. In terms of R&D expenses going forward, for the year just ended it was 8% of sales or $6.2 million, and they think that will go to as high as 11% of sales for next year. Currently analysts models show sales forecasts for next year of roughly $76 million -- and they are not disputing those numbers at this point.
They were asked about progress on the property in Japan. The company indicated that they anticipate they will get an offer from Kokoyu, a Japanese office supply (filing cabinets, etc.) manufacturer and distributor. They believe they will see that in the next 4-6 weeks and they don't know what the price will be. In the last week, another person has come in and is expressing strong interest. They have not identified themselves, and are coming through the broker. Hopefully that will create a good situation for Kentek. If they have two candidates out there that want the property that is obviously better than one. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |