By NEIL A. MARTIN | MORE ARTICLES BY AUTHOR
Ricoh isn't letting this slump get the better of it. Instead, the world's No. 1 copier maker is fine-tuning its business to emerge stronger than ever,.
ALTHOUGH HE'S ONLY BEEN AT RICOH'S HELM FOR two years, it must seem a lot longer to Shiro Kondo.
Besides the normal stress of competing against the likes of Canon, Konica Minolta and Xerox in the $28 billion global copier market, Kondo's tenure as president and CEO has coincided with a deep worldwide recession, the Japanese yen's rise against the dollar and euro, and a surge in costs of parts and materials used to make the company's products -- which also include printers, facsimile machines, computer peripherals, digital cameras and advanced electronic devices.
"The current business environment has been challenging, to say the least," sighs the 59-year-old Kondo, who was tapped for the top spot in April 2007.
The challenges were evident in Ricoh's fiscal 2009 figures for the year ended March 31. Sales slipped almost 6%, to ¥2.1 trillion (US$21 billion), while operating profits plummeted nearly 60%, to ¥74.5 billion. Earnings per share fell from ¥146 to ¥9. The consensus expects Ricoh to earn ¥31 a share in the 2010 fiscal year. During Kondo's tenure, Ricoh's ADRs (ticker: RICOY) have dropped from $111 to $63. (Each American depositary receipt represents five Japanese shares.) The stock also trades at around book value.
THE BAD NEWS IS CERTAINLY IN the stock, but some possible positives aren't. For the past decade, Ricoh has been transforming itself from a Japanese office-machine maker into a global technology solutions provider that gets most of its revenue from software and services like consulting. Today, the world's No. 1 copier maker generates half its revenue from hardware and half from software and services; 55% of those sales come from outside Japan.
As Kondo puts it, the problems of the last two years have "provided us with an opportunity to further refine our business model and focus on our global expansion."
In 2001, Ricoh bought U.S. office-products distributor Lanier Worldwide, and in 2006 added the European operations of Danka, now named Infotec, a major European supplier of toner cartridges and ink for copiers, printers and fax machines.
In 2007, Ricoh acquired a majority stake in IBM's American printing-systems unit, now called InfoPrint Solutions, which offers high-volume printing services to banks, insurance companies and other financial firms. Then in August of 2008, Ricoh purchased Ikon Office Solutions, a key distributor of copiers and printers for Ricoh's better-known rival, Canon.
"The IBM purchase provides Ricoh with a solid foothold from which to launch further products in the high-volume document market," says Kunihiko Kanno, an analyst who follows Ricoh for Credit Suisse in Tokyo. "Digital commercial printers are used to print big documents such as product manuals and direct mail quickly and in large volumes," he adds. "This is one of the fastest-growing segments of the office equipment market," he says.
Ricoh picked up "research and development, technology and skilled personnel from IBM that we could have never developed by ourselves," Kondo says. "This will be a profitable division once things pick up again." Because its clientele is mostly financial-services providers, InfoPrint hasn't turned a profit as yet. By 2012 analysts expect it could add ¥100 billion in revenue and kick in ¥2 to ¥3 per share in operating profits.
Ikon, which also hasn't delivered a profit to its new parent, holds even more promise. Ikon provides document- and business-processing services as an add-on to its conventional office-equipment lineup, Kondo says. The goal is to convert Canon customers to Ricoh products and introduce Ricoh clients to Ikon.
"We plan to assimilate their expertise, and turn Ikon's customer base of major global companies into our customer base," says Kondo. By 2012, analysts say Ikon should deliver ¥280 billion in revenues and ¥8 to¥9 yen per share in operating profit. Kondo says Ikon will be an important driver of Ricoh's push into business and consulting services.
The Bottom Line
After a prolonged battering, Ricoh shares look cheap, and two healthy acquisitions should help the company. The upside could be as much as 30% over the next year.The stock market doesn't fully understand the Ikon acquisition's significance says Credit Suisse analyst Kanno: "Kondo has very ambitious plans for Ikon, and the stock should benefit."
Ikon is among the factors that persuade analysts that the stock is worth a second look. Yoshikazu Higurashi, who follows the company for Deutsche Bank in Tokyo, rates the shares a Buy, with 12-month yen price target that translates into a dollar price of $84 for Ricoh's ADRs -- that's 30% upside, or more.
Kondo's confidence has helped him through a tough indoctrination as president and chief executive officer. He looks for Ricoh's revenues to grow about 3.3% this year and then 10% next year. That would give Ricoh about $24 billion in revenue, and about $1.7 billion in operating profits, above consensus estimates.
"You may find these targets a little too aggressive," Kondo told analysts last March, "but we are determined to do our best to achieve these goals." Investors certainly hope he succeeds.
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