Canon Inc (CAJ) 2003 Q2 法說會逐字稿

All participants please stand by. The second quarter earnings release conference call will begin momentarily. Once again, all participants please continue to hold, the second quarter earnings release conference call will begin momentarily. Thank you for holding, and thank you for your patience. Good morning ladies and gentlemen and welcome to Imagistics International second quarter earnings release conference hosted by Marc Breslawsky, Chairman and Chief Executive Officer, and joined by Joseph Skrzypczak, Chief Financial Officer. Today's meeting will be tape-recorded, taping and re-broadcasting of this call is prohibited without expressed permission of Imagistics. After the initial remarks, there will be a question and answer session. During this meeting, Imagistic management will make comments that constitute forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements. Information concerning certain factors that could cause actual results to differ materially is included in the company's 2003 Form 10-K and other filings. The company does not intend to update any forward-looking statements made during this meeting.

At this time, I would like to the meeting over to Mr. Marc Breslawsky, Chairman and Chief Executive Officer. Mr. Breslawsky, you may begin.

Thank you, and good morning ladies and gentle men. Thanks for joining us for our second quarter earnings conference call today. I have with me this morning, Joseph Skrzypczak, our Chief Financial Officer, Nat Gifford (ph), our Vice President of Product Development and Marketing, and Tim Claus (ph), our Vice President of Corporate Communication and Investor Relations. I'll speak briefly about our second quarter results and the outlook, then Joe will cover some of the financial details. We'll then devote the rest of the time to addressing any questions that you might have. I'm going to assume that everybody received the announcement earlier this morning, and you have all of the financial schedules in front of you.

As you know, we recorded a 32% increase in earnings per share from last year's quarter, to 29 cents per diluted share from the 22 cents per share last year. We continue to demonstrate with each successive quarter, that our strategic plan is sound and that management is consistently able to execute that plan for the benefit of our shareholders. Our operating and financial performance is all the more noteworthy in light of the challenging economy in which we have operated, since our inception as a public company only six quarters ago. As a reminder, the fundamental basis of our revenue strategy is to grow the copier, printer and multifunctional revenues, by leveraging our strong fax presence in major accounts as well as further leveraging our growing reputation in this marketplace across all sales platforms. As a benchmark of this strategic focus, and our long-term success, we are thus very proud of the 8% growth in copier, printer and multifunctional revenues that we achieved this quarter. Also, it marks the sixth consecutive quarter in which we have increased year-to-year copier rental revenues; that is to say for each every full quarter, since the spin (ph). Our total revenues declined 2% in the quarter, primarily reflecting lower facsimile equipment in supply and demand. We are however, beginning to get some visibility of the crossover where copier revenue growth will exceed fax revenue declines. At the end of the quarter, copier represented 64% of our total revenue, versus about 56% in 2000. We remain very confident that our product line, coupled with our increased experience sales and service force, which we continue to empower with training and technology, will make major market in-roads.

We are especially proud of our latest accomplishment in product reputation, winning the Buyer's Lab "Most Outstanding Product Line of the Year" award. This is significant in that Buyer's Lab is a very reputable independent agency that looks at all copiers. Buyer's lab noted that every product of Imagistics that they evaluated, gave an excellent performance. In fact, every single Imagistics copier-based MFP (ph) won a pick of the year award in its own category. During our year-end conference call, we mentioned that we had launched thirteen new products during the last twelve months, as an integral part of our "best of breed" product sourcing strategy. We regard these prestigious awards as a validation of that strategy. Our products were cited for such characteristics as, multitasking capabilities, toning, simplicity in setting up and managing on the network and competitive pricing; all of which contributed to a significant increase in the copier/printer equipment revenue in the second quarter. Last quarter we noted our introduction of two new, next generation color MFP's. We have made significant in-roads in the copier market for color, as these new cost effective products gained market acceptance. In fact, our color revenues have more than doubled since last year, all be it, off of the relatively small base.

While we continue to drive sales, our strategy also includes further improvements in the margins on our revenue base. We've again significantly improved our rental gross margins over the previous year's period. For the second quarter, our gross rental margin of 66.7% represents a 3.3% points improvement over last year. We've accomplished these improvements despite the continued (Indiscernible) mix away from the higher margined fax business. This improved margin was the result, not only of lower product costs, but also of our disciplined pricing and negotiation of contract terms and conditions. We also continued to focus on running our administrative functions as efficiently as possible, while investing in the future, through prudent expenditures in sales, marketing and technological infrastructure. This includes our ERP project. We expect to complete phase two, which is the most difficult part of the project in the second half of this year and within budget. Despite a continuation of the lack luster economy, we have completed the first half of 2003 very successful and in excellent shape to achieve the second half goals. At this time we are revising our outlook for the full year 2003, to move it to $1.15 per share from our previous guidance of $1.10 per share. We also reiterate our expected growth in earnings per share to be in excess of 20% in '04. As we have continued to generate strong positive cash flow from operations in the second quarter, our balance sheet remains very strong. While maintaining our debt to capitalization ratio of 22%, we've bought back 368,000 shares of our stock during the second quarter, for a total value of $7.9m. Since the repurchase program started in March of last year, we've bought back 2.9 million shares for total value of $57m. We have now increased our current repurchase authorization to accommodate further open market purchases of an additional $20m.

To summarize our results, the second quarter earnings expansion was achieved through improvements in our sales and rental gross margins, somewhat lower FF&A expense and also a further reduction in our interest expense. We have a consistent, established customer base with a strong, dependable recurring revenue stream. In the second quarter, this recurring revenue stream, consisting of rentals, supplies and service revenues, represented 73% of our total revenues. Our healthy cash flow allows us to continue to make the necessary investments in rental assets to sustain (Technical Difficulties) levels of recurring revenue.

We are currently nearing the completion of our transition to a fully independent company. Our ERP system will soon replace our old Legacy system. Our relatively new brand is becoming familiar in the marketplace; we have made our sales (Technical Difficulties) organization more focused on the profitability of the company in our new state-of-the-art centralized distribution system is designed to meet the specific needs of our customers.

All of these expenditures may have affected earnings in the short-run but we believe that theses investments and others like them are key to our future success. The growing profitability we have thus far achieved in our brief history has been gained, not at the expense of the future but in full recognition of the challenges ahead. Our goals are to grow our copier, printer and multifunctional product market share and to further expand our profit margins. We believe that the resources we have spent on building out our infrastructure will allow us to (inaudible) navigate what we believe to be a very exciting and profitable (Indiscernible).

Now I'd like to turn it over to Joe for further comments on the results and the outlook, Joe.

Thank you Marc. Good Morning ladies and gentlemen. I would like to provide some further comments on our second quarter results. Let me first start off with revenue. Our total revenue for the second quarter declined 2% compared with the prior year. Total revenues from our copier product line increased 8%, while total revenue from our facsimile product line declined 15%. We are very pleased to deliver this healthy top line copier growth in a market that has remained rather sluggish. As Marc mentioned, we ended this quarter with copier product revenues representing 64% of our total revenues, while facsimile represented 36%. Two years ago, in the year 2000, the copier product line represented 56% of our total revenue; we're clearly becoming more of a copier -- a multifunctional business.

Total sales of equipment and supplies were essentially flat from last year. Copier sales increased 10% and fax sales were down 18%. The total sales reflects the industry wide decline in fax demand and a decline in fax supplies sales, partially offset by an improvement in our copier sales, particularly in our color market segment. Copier rental revenues grew 8% compared with the second quarter last year and continued their improving quarterly trend. This growth in copier rental revenues is a result of our continuing strategic focus on penetrating large national accounts as well as increased usage and placement of mid-level, digital black and white products. Copier rental revenues have now grown sequentially every full quarter since the spin-off, consistent with our strategic direction. Total rental revenues declined 5% from last year as the 8% growth in copier rental revenues was more than offset by a 13% decline in fax rental revenues, reflecting as expected, a smaller installed base, coupled with rental additions and renewals at lower prices than expiring contracts. It is again important to note that we will continue to grow our copier business as we have -- maintain our disciplined focus on simultaneously -- and profitability by refusing to take business that doesn't meet our criteria.

Our second quarter support services revenues from service contracts increased 3% from last year, reflecting a shift in the mix of our products towards the higher end and higher and higher copy counts. Lets talk about margins. Our disciplined focus on improving profit margins has resulted in improvements in our second quarter gross margins. Our second quarter sales gross margin improved 0.4 percentage points to 38.9%, primarily attributable to lower provisions for obsolete inventories, partially offset by an increase in the mix of our copier and multi-functional product sales, which generally have lower gross margins and facsimile sales.

We have made further progress on our objective of improving our rental gross margins despite an increase in the mix of copier rentals, which have a lower gross margin than fax rentals. Our rental gross margin of 66.7% improved 3.3 percentage points, compared with last year. For the sixth consecutive quarter we have improved our rental gross margins over the previous year's period. We have accomplished these improvements despite the shift in our mix away from the higher margin fax business. The improvement was primarily attributable to our lower product costs and disciplined pricing, again partially offset by the impact of our changing product mix.

Our selling, service and administrative expenses decreased $300,000 or less than 1% in the quarter and represented 50.4% of revenues compared with 49.8% last year. The decrease in absolute dollar terms was the result of lower compensation and employee benefit expenses and lower marketing expenses offset by higher information technology expenses as we continue to both operate our legacy systems and bring in our new ERP system up to full implementation. Our second quarter investment in ERP was approximately the same as in Q1, for $5m. As you may recall during the last conference call, I forecasted that there would be a lower capitalization rate on the product development cost going forward, as a greater percentage of the project cost will be for training and implementation. That has indeed happened. This quarter $3m was expensed and $2m was capitalized and last quarter, those amounts were approximately reversed. We are now approaching the completion of the second phase, the order-to-cash phase and we expect to go live with this phase during the second half of this year. Upon completion of this phase, we'll have separated our Information Technology Systems completely from Pitney Bowes. Once we go live with Phase 2, we will embark on the third and final phase of the project, which is geared more toward sales automation and call center management. We expect that the entire project will be complete during the first half of 2004.

We've also opened our world-class mega center in Columbus, Ohio earlier this year, on time and under budget. It includes automated conveyer systems and best-in-class software. As far as our balance sheet is concerned, and cash flows, while we continue to make investments in our rental asset base in our ERP project, we generated $33.9m of cash flow from operations in the second quarter and invested $11m in capital expenditures. During the second quarter, we continued to generate strong, positive cash flow from operations, including a reduction in working capital principally related to receivables. As Marc mentioned, we used some of this cash to re-purchase our shares. During the second quarter, we bought back another 368,000 shares for a total value of $8m. Our total program share repurchases since the stock program began now total (technical difficulty) shares for a total value of $57m and represents approximately 15% of our original shares outstanding at the time of the spin-off.

We ended the second quarter with a strong balance sheet, which included a cash balance of $42m, debt of $74m and a debt-to-total capitalization ratio of 22%. Basically our second quarter results were on track with our near-term as well as our long-term strategic direction. We have revised our outlook for the full year to $1.15 per diluted share compared with our previous guidance of $1.10 per share. Our financial model assumptions for this year include slightly lower revenues, an increase in our gross margin and a slight increase in our selling, service and administrative expense as a percent of revenue. Despite the challenging economy, we are confident that we'll continue to deliver solid earnings growth and provide significant growth in shareholder value.

Thank you Joe. Now I'd like to take your questions. May we have the first question please?

Thank you. We will now begin our question and answer session. If you would like to ask a question you will need to press star one on your touch-tone phone. You will receive acknowledgement that you have been placed in queue. If your question has been answered and you wish to be removed from the queue please press the pound sign. If you are using a speakerphone, please pick up your handset before pressing the numbers. Once again, if any question, please press star one on your touch-tone phone. Your first question comes from Shannon Cross from Cross Research, please go ahead.

Good morning.

Marc Breslawsky, Hi Shannon

Got a few questions for you. The first thing I guess is just sort of what are you seeing in terms of the pricing out there, I mean a number of your competitors have come in and said there's substantial price decreases coming in, you know, what are you hearing and also in terms of mix, you know, again some of the distributors had an issue with regard to mix IT customers purchasing a lower segment product?

Yes, okay to those questions. Pricing, number one, pricing is very complex, you have a base price, then you have a click count based on the usage price, ultimately the affected price is then based on the volume that goes through the machine. In our case, because I safely have changed the commission plan, put more controls in place, basic prices themselves are slightly down, we don't see the same decrease that some of our competitors reported okay. We see it slightly down. On the other hand, for us the volume is up. It's not down as some of our competitors reported significantly lower volume. We did not lower volume so effectively---effectively you could say as you look at that the price per click would be down, okay, per copy would be down but the price per copier, for us is not down. Do you understand that?

Mm hmm.

Okay.

But what do you ---why do you believe your volumes have been better in the face of, you know what others have seen?

I think we're placing them, probably doing more work in placing them in the right---with the right customers, basically the right products with the right products with the right customers. What we do---our sales process we will---our sales people visit a customer and they do a survey for the customer to determine what machines at which---at which customer. So, what we then do is put the right machine in place. We then try to place more and more connected machines. Now when I say connect machines, these machines go on the network. They're not only copiers, but they're copiers, printers, sometimes they own a fax and scanning capability. So they go on their network, and of course our job is to convince the customer that it's a lot less expensive, and it is a lot less expensive to print that copy on the --- our product, than it would be their local printer that they would have attached to their computer. So that gives us additional volumes also.

So, we've done a good job in that area so that our total volume is----our total copies are up pretty significantly on a year-to-year basis. So, again but the price, we say absolute price per copy, that would be slightly, slightly down, but that's being offset again by smarter placement on our part. As far as the mix is concerned, we've had a lot of---we're not going down we're going up with mix okay. So, and again, it's the focus of our sales organization. We have been spending so much time on training our sales organization, we have training every week in the branch, and we're training them not only on the products but we where to sell the products also. One of our earlier goals, one of our goals not only earlier but current goals, is to sell more up market. So, we again, probably different than most of our competitors in where we're selling. I think that's why when you put those together, it is why in fact our revenue, total revenue with copier is up about 8% for the quarter.

Okay. And a question for Joe in terms of working capital, obviously it was positive this quarter. You'd indicated, you know as we get further into, into I guess the second phase of ERP, that we may see a bit of use of cash there. Could you give us an idea of how to think of that going forward and you know, maybe particularly with regard to AR and AP.

Sure. We've made significant progress in bringing our DSO down, our overall DSO is at 45 days, compared to a year-end of 50 and a prior year-end of about 57 days. So we're very pleased with that. This being driven by just very strong collections, and so we've made tremendous progress and we've be able to generate strong cash from that improvement. I do believe however as we---we've been advised by those who have put in ARP projects many times in the consultants that we've engaged, that usually working capital takes a hit of some sort, when you first go live, usually due to learning curves, people getting familiar with the system. Sometimes new building practices that are fouled or customer net needs to get accustomed to or maybe adjust their purchase order that they may have outstanding with Imagistics. So, I do expect that we'll probably see some use of cash in the second half of this year, as we implement the Phase 2 of ERP

Okay great thanks.

Our next question comes from Herbert Hart from Flonase, please go ahead.

Good morning.

Marc Breslawsky, Joseph Skrzypczak: Morning. Hi Herb.

Question on your cash, I assume that whatever the return is, is less than what you're paying for the debt. And (Technical Difficulty) thought towards using some of this cash to payoff some of the debt?

We're going to be evaluating that Herb in the second half, right now we feel very comfortable with the debt levels we have, as you know they're very low. When we first spun off, we had a $150m of debt, we've now brought that down by just about half. We have a very healthy balance sheet with strong cash of $40m. We've been very active in buying back our stock. We like having the cash on our balance sheet, especially in these times that you know, kind of keep you powder dry to some degree but we'll take a look at that in the second half.

Okay, thank you.

You're welcome.

Our next question comes from Rob Brown from Craig-Hallum [ph] Capital. Please go ahead.

Morning.

Morning.

I'm wondering. In terms of your gross margin, you talk about it slightly expanding. Is that- where do you see that gross margin expansion coming from? Is it the rental side or do you see that that's about to be tapped out of this nice expansion in the equipment side? If you could give a little more background on that?

At ---we think we have opportunities in both areas on gross margin. Obviously we've made major improvements in gross margins but we're still- we obviously keep bringing out new products. Each new product typically, early on in a product life you get the best margins from the product. So we have a good pipeline of new products that we will continue to bring out. We think as long as we can keep doing that in a manner that is effective in terms of serviceability that our margins can improve.

Okay. Thank you and if you could just give a little- color has been strong recently. Do you see that--- the color copy market continuing with this strength into the year or is there some saturation point that can happen?

I think color will continue to grow nicely for us. What's happened on color is, the price point of our new products have come down pretty substantially from the previous generation ---from previous generation products and the features have gone up while the prices come down. So it seems to be a very hot market for us now. You know we believe we have a product advantage there in that marketplace, and we're just very pleased at this point in time with the progress. It still is a very small part of our total revenue, nevertheless I'd like it to be a larger part.

Okay. Thank you.

Our next question comes from Lloyd Weitman from Bernstein Investment. Please go ahead.

Good morning folks.

Marc Breslawsky, Joseph Skrzypczak: Good morning Lloyd. Hi Lloyd.

And Marc, for 5:45 in the morning you look all right.

Thank you. You saw---he's referring to CNBC. I was on CNBC this morning at 5:45 being interviewed and that looks pretty much when we brought our earnings out and thank you Lloyd.

All right. One thing, the tax rate looks somewhat high. Could you talk about that a bit and tell us what your expectation into the full year?

Yes. Let me take that one. The increase in the effective tax rate for the quarter was primarily due to increases in state income tax rates, and we would expect our effective tax rate to stabilize at this higher lever on a go-forward basis.

So are we talking about roughly 43% for the full year then?

Yes.

Okay and let's see, in terms of supplies in the quarter. Fax supplies were down which goes along with the decline in the fax business. What about copier supplies. Have you seen any improvement there?

Our volumes are up in copier, which would talk to the supplies. We don't break out supplies, but the volumes have been up so I think we inaudible the supply volume in copier, but it's not an item we really break out.

Okay. Let's see.

As Marc- we don't break out the actual percentages, but as you have seen with facsimile going down the supply sales have been going down, as copier has, equipment sales have gone up, so have our supplies associated with those copiers.

Essentially in lock step with the improvement or has it been slower, faster? Could you give us some idea?

It- almost in relationship. Almost in relationship for the second quarter.

Okay. Thanks. And let's see, the stock buyback, the increase to $78m, over what period of time would you expect to complete this authorization?

We have not put a time period behind that at this point in time. As you know we've completed the other authorizations fairly rapidly. I believe we had a little bit. I don't think in any case we announced the time frame.

We haven't given any time frame Lloyd and put it- I think you'd have to admit we haven't been spun off for two years yet, and we've purchased 15% of our original shares outstanding.

We have to stay under 20% by--- within two years of the spin off for tax reasons. So that's just one of the tax rules, I guess, which allow that spin to be tax free with Pitney Bowes. So that might not help exactly with the answer, but it really says that we can't pick up more than 5% over the year---over the year mid-year, but over the next six months.

Right the two-year anniversary is coming up.

Yeah in December.

Let's see and capital spending where do you see that number come in for the year and could you give us an idea as to how that breaks down between spending on rental assets and ERP and other?

Sure the last quarter we spent $11m in total capital expenditures, $7m was for rental assets, there was another $2m for ERP, and then another $2m for other. How that will pan out for the rest of the year is directly related on how successful we are in growing our copier rental base, because most of the expenditures that we make for rental assets are in the area of copiers and obviously that is part of our strategic focus.

Okay. All right thanks very much.

You're welcome.

Our next question comes form Margot Moore---I'm sorry Murtal (ph) from Snyder Capital.

Yes good morning, I have a couple of questions?

Morning.

Hi, the ERP spending in the second half is that going to still be about $5m per quarter and is that going to be you know what kind of division between capitalization and expense?

I think what you saw in the second quarter you'll see also in the third and fourth quarter.

Okay.

For similar up in total amount as well as the break out between what is capitalizing, what is expensive.

Okay and then in the first half of '04 we'll have---we'll still have ERP---

That's right.

funding?

We'll go into the phase three of the project again phase two allows us to divorce ourselves from the Pitney Bowes IT Systems and phase three is really enhancements that we would like to add on to our base local project.

Okay is that phase three spending? Is that less than the current settlement?

We don't have the same time pressure of getting off Pitney Bowes as you know there are benefits of getting off Pitney Bowes, financial benefits for us to get off because we are currently paying Pitney Bowes for those legacies without going through this implementation. At phase three we don't have the same type of pressure or economics, this is truly an investment to better improve our operational effectiveness and efficiencies.

Okay.

So we may not have the same pressure---time pressures to spend at that level.

Okay.

But we'll evaluate that as we get closer to phase three.

Okay so then starting in 2004, you don't have that extra payment to Pitney Bowes as well?

That's correct.

And did you ever---can you re-quantify that?

Well, what we've said publicly is that the cost to Pitney Bowes is at least $5m a year.

At least okay. Okay great. And then the CapEx then is I mean it's annual---so far it's like if you just multiply by two you'd get like $52m for the year. I know you said that depends on rentals, but I mean looks that may be lower than my original assumption of $60m, $65m, is that the case?

It all depends on how we do as far as growing our copier rental business

Right.

You know the other off set to that is how well we do in procuring our products. Don't forget the lower the product cost in acquiring these products that has an impact on it also. So there's a price component on how we purchase the product, coupled with how we grow our copier rental business.

Okay is DNA for the year going to be about $76m or so? Or is then (inaudible)?

Well we've been averaging a guess around $19m a quarter I ----

Right.

I'd assume that that's going to stay in track.

Okay great. And the amazing reduction in cost of rentals do you continue that in the second--- is that going to continue in the second half or is it going to continue at that same pace?

Margot the only guidance that we have given is that we will improve our margins throughout the year and we feel we can do that---we feel our revenue be down slightly from the prior year and SS&A expenses as a percent of revenue will be up slightly---

Okay.

And that's really the only guidance that we have given.

Okay and what are your ending shares now. I mean not the average shares but the ending shares for the quarter? Shares outstanding?

I think we have that on the page of it's six---

And that's the---

About $17m shares, just under $17m.

So that's---okay that might be a difference between average and---

Right average and what the actual purchases are.

Okay.

We---right. I mean if you just look at total shares on a basic basis---this basic basis, and not include options or restricted stock. We started off with about19.5m and we purchased 2.9m shares back.

Okay. (Inaudible) okay, all right thank you very much.

You're welcome.

Our next question comes from Charles Witner from Eagle Capital please go ahead.

Good morning. Congratulations, and I agree with that earlier comment on the 5:45 call.

I know you're up that time everyday.

Yeah, and maybe next time you can get up a little later. Also, if you could just comment a little bit on your prospects for add-on acquisitions?

You know we can't pre-announce any obviously, but it is something that is on the table for us. We are today in about 50 locations from a sales point of view. Form a service point of view we have about 350 locations. We need to expand where we are. One of our growth components is geographic expansion, not that I'm saying we're going go from 50 to 350 because we're not, but we're certainly going to go upwards from 50 U.S. locations. But one of the targets we've said we had was to grow our business, grow the total revenue of the company at about an 8% rate, that's one of our goals that we'll would get to, we believe within a few years. One of the components of that was geographic expansion, another component of that was market share, which I believe we have been capturing (indiscernible) with no official documents that show that other than that our revenue, in this market is growing more than our competitors in a market place that really has not been growing. The third component is international expansion going beyond the United States, and fourth it product line expansion. So geographic, you know we're working on it, but its hard to say when deals close. You know us well enough to know we're going to be very conservative in anything we acquire.

Okay, thank you.

You're welcome. Next question.

We have follow up from Shannon Cross with Cross Research. Please go ahead.

Our next question is from Margram (ph) Mardow (ph) from Snyder Capital. Please go ahead with your follow up.

Was the decline in fact more than you expected? And what part of that was price versus volume decline?

It's both, some of it just renewals okay. You know its good when we get a renewal, but the price goes down substantially, the volumes were slower in fact as they are (technical difficulty), supplies are slower in fact. We also had a negative-it was more than we anticipated it go down. Copy was actually more than we anticipated it would go up also, so, that's not a bad equation.

Okay. So overall it turns out okay. It just seemed like a pretty, you know, that rate had accelerated-

Yeah, the Fax rate, it did accelerate. Some of the-remember we have a portion of a business that goes up to Canada.

Yes.

That we sell Pitney Bowes. The Fax portion of that was down also more than normal, and that had an impact, we didn't anticipate that. So, again all and all we didn't anticipate being so strong in Copia (ph) either. And you know if we keep repeating this I'd be happy because, at this point in time Copia is becoming a much larger portion of the total. If Fax goes away a little faster and Copia comes on a little faster, that probably would be very good for us.

Okay. Now is there (technical difficulty) in Canada when your agreement with Pitney Bowes expires?

Yeah, there's an opportunity and we'd have to figure out how we enter the market place and-you know our intent would be if Pitney Bowes still wants to acquire products from us, that we would still give them that product, okay. So if we did that, and then if we decided to enter that market, which we haven't done exactly yet, okay, or, we don't know when we would do that, they would probably sell under the Pitney Bowes name brand (indiscernible). They're still selling the products now under the Pitney Bowes name brand, we'd sell under the Imagistics name brand.

Okay. There would be an opportunity for more margin there--?

Yeah, sure there's an opportunity, you know, any sales we have for Pitney Bowes are a very low margin, what we sell directly we have very, very good margins on.

Okay, great. Thank you very much.

You're very welcome.

And we have a follow up Shannon Cross from Cross Research. Please go ahead.

Hi, can you guys hear me now.

Yeah Shannon, we can

Great. Just wanted to follow up in terms of the Copy volume growth, to make sure I'm thinking about this correctly. If you look at your rentals, to say that they were up 8% and you had some pricing declines in terms of equipment, you know, can we assume that your copy volumes were somewhere in the low teens, on year-over-year basis?

Well, you know, we're not reporting Copy volume but it was, Copy volume is up more than the revenue is up. Well I guess it's easier to do that calculation if I said the basis dropped, but it would be difficult. Again, we don't start breaking out Copy volume every quarter, just to say Copy volume is running very positively.

Okay. And then, can we get some idea I know its small but just early indications of what you're seeing out of the customers that are purchasing your color equipment? You know, are they---I would assume the network rates are substantially higher, or I'd hope so for-

Yes, yes-

--as well as the volume and supplies usage, just any feedback you can give us on that.

Okay, Nat has more-Nat Gifford has more details, so I'm going to let him earn his money now and answer your question.

Yeah hi. The connectivity rate on color is almost 100%. Most people are using them for printing, and there is obviously some copying going on but there's lot of scanning going as well, because they have a full color scanner. So that is a market as Marc said which is growing very nicely for us. We're selling the color in combination with the black and white application, with the dual meter filing, and we're seeing some very nice copy volumes coming out of those machines. Off-course, you know, with the after-market revenue on color, is substantially higher than the black and white, so as we increase the mix of color, we're seeing a nice revenue boost from that leverage as well.

Okay. And I believe that one of the color products that’s moving well is a Sharp product. Do you anticipate expanding that relationship?

That’s actually not a color product. That’s a black and white digital product that’s in the segment 3, 35-45 page a minute range. That product is doing very well for us. I don’t want to preannounce any new products, so just say that the relationship we have with Sharp is very good.

Okay. And one last question. Do you feel that you’re product launches in the latter half will be stronger – not stronger from a quality standpoint, but more product launches in the latter half, versus the first half of the year, or how should we think about that?

We continue to upgrade our products. You know, we try to shoot for upgrades about every two years. So, we’re going to have quite a few products being launched in the end of the third quarter-beginning of the fourth quarter. But generally speaking, they’re fairly spaced-out over the course of the year.

Okay, great. Thanks.

Once again, if there are any questions, please press star, 1 on your touch-tone phone. And our next follow-up is from Lloyd Weitman, from Bernstein Investments. Please go ahead.

Thank you. With the talk about geographic expansion, I was wondering if you could give us some idea as to how things in the UK are going?

Well, you know, the fax market in the UK is similar to the fax market here, where volumes are slowing down. Copier, we launched at the beginning of the year and it’s starting out similar to the way it started out in the US, with a slow start as we’re hiring-up people, training people. The activities are going fine. But at this point, we have not had significant revenue there.

But is it going on plan, essentially?

I think we probably anticipated we’d sell a little more copier than we have. We’re moving copiers – copier/printer, but probably – We’re typically, when we launch something, maybe a little over-optimistic. Realistically, they are where they should be.

So, the total revenue in the UK was flat in the quarter.

Local revenue?

US. Down slightly in local.

Thank you.

Our next question comes from Stanley [Bogin], from Bernstein Investor. Please go ahead.

Hi, Mark.

Hi, Stan. Nice to hear from you again.

Yeah, I’ll call you later. And granted, I’m on the West Coast, so getting up at 2:45 – I mean, I came in from the disco a little bit earlier than that. So, next time, I hope that the record gets so good that they give you a real time, like 8:00 or something.

Anyway, the question is this; do you manufacture in China?

Yes.

And what would happen – there’s all this talk about the yuan being revalued upward. What sort of protection do you have on that?

We would have to literally go into renegotiations. That’s always been the case with us. We have – remember we did a lot of contracting in yen? We’re doing less and less and less in yen now. But when we did that, whenever there was a major movement in the price of currency, we’d go out and renegotiate. So, my feeling is here, that if that happened, we would be doing that anyway [inaudible].

Hello? Okay, thank you. And congratulations. Fabulous. A man of your word.

Thank you.

At this time I’m showing no further questions. Gentlemen, do we have any closing remarks?

Yes, if we have no further questions. I’d like to close by stating that our company looks forward to the future with quite a bit of confidence in our ability to generate significant value for our shareholders. We’re very pleased with the past results, but we feel, as we believe all our shareholders feel, that the future is where we’re all looking. So, we will continue to update you on the progress that we are making. And again, I want to thank you all for listening in. Have a good day.

Thank you ladies and gentlemen, this does conclude our second quarter earnings release conference call. You may all disconnect and thank you for participating.