Canon Inc (CAJ) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Imagistics International First Quarter Earnings Release conference, hosted by Marc Breslawsky, Chairman and Chief Executive Officer. Today’s meeting will be tape-recorded. Taping and rebroadcasting of this call are prohibited without expressed permission of Imagistics. After the initial remarks there will be a question-and-answer session.

During this meeting, Imagistics management will make comments that constitute forward-looking statements within the meaning of the Private Securities 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 intent to update any forward-looking statements made during this meeting. At this time I would like to turn the meeting over to Mr. Marc Breslawsky Chairman and Chief Executive Officer. Mr. Breslawsky you may begin.

Thank you, good morning ladies and gentleman, and thanks for joining us for our first quarter 2005 earnings conference call. Along with me this morning are Joe Skrzypczak our President and Chief Operating Officer, Nat Gifford our Vice President of Product development and Marketing; Tim Coyne, our Chief Financial Officer and Jim Magrone our Vice President of Corporate Communications and Investor Relations.

For our agenda today I will briefly review the highlights of our first quarter results and strategic progress. Following that Tim Coyne will discuss the financial details. Then we'll open the call for questions. I've assumed that you have all had the opportunity to read our earnings announcement along with the financial schedule released earlier this morning a copy of which is available at our investor site, www.igiinvestor.com where it can also be archived.

Today I'd like to emphasize five key massages, number one our facsimile product line revenue showed a rapid decline when compared to a very strong first quarter of 2004. We were disappointed in not being able to offset that decline and have taken actions to improve earnings going forward. Our Copier/MFP revenue continued to grow and outpace the slow growth or even the decline reported by some of our competitors. Next we expect continued improvement in our SS&A expenses and also our account receivable balance and we continue to expect that we will complete the ERP implementation later this year. Fourth we are aggressively launching new products with all -- with a particular focus on capturing the opportunities in the growing color market and finally fifth, we affirm our guidance that we previously have given for the year 2005.

Let's start with our results. For the first quarter of 2005 reported earnings per share was 13%, -- 13 cents at the 14 cents of previously announced charges for restructuring and severance and expensing of stock options. Normalizing but the restructuring and severance charges earnings were 25 cents per share after expensing stock options. This was below our expectations due to a greater than anticipated decline in fax revenue and we have taken actions to reduce expenses to offset the impact on future earnings. Our Copier/MFP revenue was up 6% for the quarter, Copier/MFP sales were up 8% and Copier/MFP rental revenue gained 5% for the quarter. Color products were key to our Copier/MFP growth. In the first quarter of 2005, facsimile revenue declined 28% compared with a very strong first quarter of 2004. As we reported last year the large sales of facsimile equipment occurred in the first quarter of 2004, and as a result that quarter was the only one since the spin-off to show a sequential increase in fax revenue.

Total overall revenue for the first quarter decreased 10% and was down 6% excluding sales to Pitney Bowes Canada. I remind you that sales to Pitney Bowes Canada which operates under a reseller agreement or at very low margins and the decline in sales to Pitney Bowes Canada has little impact on our profitability or free cash flow. Last year’s first quarter was the last one in which we received significant revenues from Pitney Bowes Canada. Our gross margins remain very healthy. In the first quarter excluding the effect of restructuring charges our sales gross margin was 43.5% to 2.8 percentage point increase over the first quarter of 2004, while our rental gross margin were 70.1% a slight decline compared with the prior year in reflecting the decline in higher margin facsimile revenue.

You should be aware that facsimile gross margins are greater than Copier gross margins by approximately 14 percentage points. Accordingly as we declined in fax revenue, -- as the decline continues in fax revenue and our product mix becomes more heavily skewed to the Copier/MFPs there is a resulting impact on the Company’s overall gross margins.

We are pleased with our progress in reducing sales, service and administrative expenses. Excluding the charges for restructuring and severance this year and restating first quarter 2004 for stock option expense SS&A expenses declined by 6% in the first quarter 2005, compared with prior year. We expect that SS&A expenses will continues to decline in 2005. We are also pleased that accounts receivables decreased 6% in this first quarter 2005, compared with the fourth quarter of 2004. And we expect further improvement this year as we continue to resolve the backlog of outstanding issues. We are in the final phases of our ERP implementation, and continue to expect that the implementation will be completed in 2005. As I mentioned earlier, we are not satisfied with our overall performance in the first quarter, and have taken cost reduction actions to offset the greater than anticipated decline in fax revenues, and correctly size the business.

On April 6, we announced a series of cost reduction actions some of which are sooner and deeper than the reductions in SS&A expenses originally planned in 2005. These cost reduction actions include discontinuing our Copier re-manufacturing product line and closing the national re-manufacturing center. The industry shift to digital technology has resulted in a marked decrease in the customer demand for unconnected and analog re-manufacturing copiers. And we can no longer justify offering this product. This action resulted in a restructuring charge of approximately $1.8 million, or 6 cents per share for the first quarter 2005 for employees’ termination benefit, and other exiting activities expenses.

In addition to the closing of the NRC, the company in total reduced staff by approximately a 100 employees in the first quarter of 2005, reductions were across the organizations including administration, sales, service, and headquarter staff. As a result, the company recorded a severance charge of approximately $1.8 million plus 6 cents a share in the first quarter of 2005. The company anticipates further reductions in staff in 2005 as it continues to benefit from efficiencies expected to be achieved in large part by the implementation and utilization of our ERP system. We believe that the cost reduction actions we have taken coupled with growth from Copier/MFPs, including new products scheduled to be launched this year position us for improved results as 2005 progresses.

Let’s take a few moments now to discuss our products, color products is a key driver of our Copier/MFP growth, looking at our products in segment three and four representing 31-69 page per minute market due to our introduction of color products and our success in selling them, our overall product mix is returning significantly more revenue per unit placement. Going forward, color capable units are expected to continue to boost our revenue and our Copier/MFP product line gross margins. Due to higher page volumes and more after market supplies. In the first quarter of 2005, our average revenue for color enabled Copier/MFPs with almost double that of monochrome. We launched the color capable CM3520 last October. And it’s already the most successful color MFP that Imagistics has ever introduced. We followed that with the launch of the CM3530 and the CM4530 color capable, multi-functional devices in early February of this year. The CM3530 and CM4530 are networked MFPs that offer high quality 35 and 45 page per minute black and white with 11 page per minute on-demand color. These MFPs have been well received in the short period that they have been out of the market -- on the market and we expect the demand to continue on these products.

While our install base of color copiers and MFPs is relatively small. In the first quarter of 2005 color-enabled Copier/MFP installed were up over 200% year-over-year, and gained more than 50% sequentially. In the first quarter of 2005, only 20% of our segment three and four placements were color-enabled units. To continue to participate in the growth of the color market, later this year we plan to offer additional color MFPs. We believe we will have the best work group color liner in the industry and are very excited about the potential. In early March, we launched two new monochrome MFPs, the FX2100 and the SX2100. These 21 page per minute MFPs include a full suite of event, functions and are ideal for customers looking to upgrade for multiple stand alone units to a compact space saving device without sacrificing reliability or functionality. [Greg], we are excited about the strength and potential of our product line, and believe we are well positioned to continue growth in our Copier/MFP revenues during the year.

Let’s now move on to our outlook. Some of you have asked why is with over 70% of our revenues being recurring, we are not able to better anticipate the revenue outlook for the first quarter of 2005. First while a significant portion of our returned revenue stream is rental, roughly half of the rentals are fax. We can't predict with certainty when a large customer might terminate or end a fax rental contract. And by doing that those who will accelerate the decline in any given quarter.

Secondly, Copier/MFP sales are very difficult to forecast for any particular period. Which can also skew year-over-year growth comparisons but have, but they do have average out over the course of the year. In the first quarter of 2005, we actually had a weak January and February, but March for us was a very good month. As I mentioned earlier, we are affirming our annual guidance for 2005 in this $1.61 to $1.66 range which represents an increase of 19% to 23% over the $1.35 per share that we earned in 2004 as restated for stock options expenses.

The 2005 guidance, as recently announced, is after expensing stock options and charges for restructuring and severance. Earnings are expected to be weighted to the later part of 2005 reflecting the timing of the impact of cost reduction actions offsetting the greater than anticipated decline in fax revenue.

The second question many of you have asked is, how do you get to your 2005 guidance range of $1.61 to $1.66 per share considering the first quarter was at effectively 25% when you exclude the restructuring and severance charges. Let me address that question.

Gross margins for the combined second, third and fourth quarters of 2005, is estimated to improve over the first quarter of 2005. The expected increase in gross profit is a result of anticipated growth in Copier/MFP revenue and the higher mix of color-capable product placements in a large part offset by a decline in fax revenue.

We're assuming that Copier/MFP revenue will continue the mid-single range digit growth experienced in 2005 first quarter. And facsimile revenue is expected to decline at an annual rate in the mid-to-high 20% range.

As many of you are aware, we always believe that our SS&A expenses were too high. As I mentioned, we have taken actions to reduce those expenses and you are beginning to see the benefit of those actions in our lower levels of SS&A expenses in the first quarter of 2005. We expect further declines in SS&A expenses from the first quarter 2005 run-rate exclusive of any future acquisitions, reflecting the cost reduction actions already implemented and identified. From a full year perspective and when comparing our latest forecast to last year’s result, we expect cost reductions in the full year 2005 to be at least $20 million exclusive of any future acquisitions. As such we are confident in our outlook to 2005 and beyond.

Going forward in 2006, we would expect that the facsimile would represent less than 20% of our total portfolio when we begin the year 2006. So it's again a smaller factor for us as well as Pitney Bowes Canada would be a much smaller factor in comparison.

At this time, what I would like to do is to turn the call over to Tim for his comments and then we will come back again for question-and-answers. Tim?

Thank you Marc, and good morning everyone. Let me provide some further comment on our first quarter results. Let's start with total revenue then move to our three business lines which we define as popular MFP, fax and Pitney Bowes Canada.

Total revenue for the Company in the first quarter 2005 decreased 10% to $142.1 million. Excluding low margin sales to PB Canada under a reseller agreement, total revenue was down 6% compared with the first quarter 2004. Total revenue from the Copier/MFP product line increased 6% in the first quarter 2005 to $103.8 million and Copier/MFP sales were particularly strong in March.

Copier/MFP revenue has shown growth for the 13 consecutive quarters since spin-off. The core Copier/MFP product line continues to be the dominant part of our revenue portfolio and in the first quarter 2005, it grew to approximately 74% of our total revenue. Copier/MFP sales increased 8% to $56.3 million in the first quarter 2005 reflecting growth of our product offerings including strong demand for color. Our Copier/MFP sales growth rate of 8% appears to be better than what others in the industry recently reported.

Our Copier/MFP rentals grew at a 5% rate in the first quarter 2005 to $27.6 million as a result of additional rental placement and growing page volumes. As we indicated in our last two quarterly conference calls, the rental growth rate continues to be impacted by the expiration of certain government contracts that could not be renewed as our current product offerings are manufactured in China and are not authorized under applicable U.S. government purchasing regulations. The affect of this government contract expiration was approximately $700,000 in lost Copier/MFP rental revenue in the first quarter 2005.

Support services revenue for Copier/MFP grew 2% to $19.9 million in the first quarter 2005.

Now let's turn to facsimile. Total facsimile revenue declined 28% to $36.2 million in the first quarter of 2005. As we previously announced, facsimile revenue declined faster than anticipated. In the first quarter of 2004, we recorded a $400,000 sale of facsimile equipment to a large customer as disclosed last year and a $400,000 spike in supplies revenue. Those items skewed the year-over-year percent decline when comparing the first quarter of 2005 to the prior year.

Looking at the sequential declines of fax revenue over the past few quarters and projecting that out going forward, we believe that a decline at an annual rate in the high-to-mid 20% range is reasonable to expect for the balance of 2005.

Facsimile sales were down 29% to $14.5 million in the first quarter 2005, reflecting lower equipment and supply sales, primarily due to the continuing industry-wide reduction in facsimile usage and the previously mentioned large sale of facsimile equipment in the first quarter 2004.

Rental revenue from the facsimile product line declined 29% to $20 million compared with the first quarter 2004. This reflects the decline of the rental installed base due in part to the impact of rental-to-sale conversions coupled with lower per unit pricing.

Our sales to Pitney Bowes Canada declined 79% to $2.1 million in the first quarter 2005. As we have stated in the past sales to Pitney Bowes Canada are at lower margins so the decline in revenue had no significant impact on profitability. Going forward the year-over-year declines in sales to PB Canada will subside, as the revenue from PB Canada was only $1 million to $2 million per quarter beginning in the second quarter of 2004. Recurring revenues consisting of rentals, supplies, sales and service revenue represented approximately 71% of our total revenues in the first quarter 2005. As previously announced the company recorded a restructuring charge of $1.8 million or 6 cents per share in the first quarter 2005. Of that 1.1 million is classified as cost of sale and 700,000 is classified as selling service and administrative expenses. We also recorded a severance charge of $1.8 million or 6 cents per share in the first quarter of 2005 and the entire amount is classified as selling, service and administrative expenses.

Now turning to gross margins; in the first quarter 2005 the sales gross margin was 41.9% up 1.2 percentage points compared with the first quarter of 2004. Excluding the $1.1 million inventory obsolescence charge included in the restructuring charge the sales gross margin was 43.5% and increased 2.8 percentage points compared to first quarter 2004. This gross margin improvement was primarily driven by a reduced level of sales to PB Canada as well as non restructuring -- lower non-restructuring inventory obsolescence charges and capturing most of the benefit of lower product costs. This increase was partially offset by the continuing shift in product mix from facsimile to Copier/MFP products.

A rental gross margin of 70.1% declined by 0.9 percentage points compared with the first quarter last year. That slightly lower rental gross margin was primarily the result of the continuing shift in product revenue mix from facsimile to Copier/MFP. As we noted in the earnings release facsimile gross margins are greater than those of Copier/MFP by approximately 14 percentage points. As the decline in facsimile revenue continues and our product mix becomes more heavily weighted to Copier/MFPs there is a resulting impact on the company’s overall gross margin.

Now let's move to selling service and administrative expenses and our ERP project costs. We are pleased that SS&A expenses continued to decline as planned. SS&A expenses were $80.8 million in the first quarter of 2005, down 3.3% compared with the first quarter of 2004. Excluding the $2.5 million of charges consisting of the aforementioned restructuring charges of $700,000 and severance charges of $1.8 million, SS&A expenses were down $5.3 million or 6% compared to the prior year. Prior year SS&A expenses have been restated to reflect the adoption of the new accounting rules for expensing stock option. Excluding the charges SS&A expenses in the first quarter 2005 were 55.1% of total revenue continuing its sequential decline from the peak of 57% of revenue in the third quarter of 2004. We continue to expect that SS&A expenses will decline in 2005.

As previously announced we do expect to take another severance charge of approximately $600,000 in the second quarter of 2005 as we continue to trim expenses. Expenditures for the ERP project were $2.2 million in the first quarter of 2005, down from 3.6 million in the fourth quarter 2004 and $5.5 million in the third quarter of 2004. Of the $2.2 million in ERP expenditures in the first quarter 2005, $1.3 million was capitalized and $900,000 was expensed.

As previously announced the company adopted SFAS 123R expensing stock options early and began expensing employee stock options effective January 1, 2005. Even though the SEC has extended the deadline for expensing stock options, due to the fact that we have only one option plan and the effect is not overly difficult to calculate, we decided to early adopt and get the issue behind us. The expensing of stock options reduced diluted earnings per share by approximately 2 cents in the first quarter of 2005, and 4 cents in the first quarter of 2004. It is expected to reduce full year 2005 EPS by 8 cents to 10 cents and full year 2004 EPS by 13 cents. Historical quarterly restated financial information is posted on our Investor website, www.igiinvestor.com.

Interest expense increased by 200,000 compared to the first quarter of 2004 due to higher levels of debt and higher interest rates. The effective income tax rate of 41.9% in the first quarter 2005 was down slightly from the prior year. We continue to be engaged in ERP clean up efforts with a particular focus on reducing the backlog of billing and collection issues. We are pleased that the accounts receivable balance continues to improve. Receivables were $99.7 million at March 31, 2005, down 6% from year-end 2004, marking the second quarter in a row to show a mid single digit sequential percent decline. We expect further improvement in our accounts receivable balance this year as we continue to resolve the backlog of outstanding issues. We continue to expect that we will complete the ERP implementation this year.

Looking at other balance sheet and cash flow items; at March 31, 2005 our cash balance was $13.4 million. We generated $6 million from operations this quarter compared with a $4.4 million use of cash in the same period last year. Traditionally, cash from operations is lowest in the first quarter as cash is used to pay annual incentives and other items accrued during the previous year.

During the quarter our inventory decreased $5.7 million from December 31, 2004 as the year-end balance had been built up in anticipation of new product introduction. Accounts payable and accrued liabilities decreased $23 million compared to year-end 2004 due to the normal payment of annual and long term incentives in the first quarter 2005 as well as inventory purchases in support of the new products introduced in February. We used the cash generated from operations defining as capital expenditures of $11.1 million including $9.4 million of additions to our rental asset base to continue building our recurring revenue stream in the Copier/MFP product line.

In addition, we also utilized $1.7 million to continue building our infrastructure with $1.3 million of that for our ERP system. As of March 31, 2005 total debt was $79.7 million, up $8.8 million compared to December 31, 2004. Debt-to-total capital utilization remains at a conservative 22% as of March 31, 2005. In the first quarter 2005, we repurchased 143,000 Imagistics shares at a total cost of $4.7 million. This is an increase of 47% in the number of shares repurchased, compared with the fourth quarter of 2004. Since the beginning of the stock buyback program in 2002, we have repurchased over 4 million shares or approximately 21% of the shares that were outstanding when Imagistics was spun off in December 2001. We plan to actively continue our share repurchase program. Now I'd like to turn the call back over to Mark.

Thanks a lot Tim. As I mentioned earlier we have in addition to Tim and myself, Joe Skrzypczak and Nat Gifford and we are all here to answer any questions you might have so why don’t we begin.

Thank you sir. We will now begin the question and answer session. If you have a question you will need to push "*" then the number 1 on your touchtone phone. You would hear an 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 "*" then the number 2. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again if there are any questions please press "*" then the number 1 on your touchtone phone. We will pause for just a moment to compile the Q&A roster. Herb Hart of [Monnet] is online with a question. You may proceed sir.

Good morning.

Good morning.

I have several questions, first is you indicated that business had picked up in March was much stronger than January and February. Can you give us any indication about April?

We don’t usually go into the stock -- with the quarters. So we are giving you something we have already reported in total but I don’t think we want to start talking about April at this point in time.

Okay second question is with the slowdown in Pitney of Canada, how are things going in terms of your own build up there?

Well this last quarter Herb, we acquired a small dealer in the western part of Canada. We are actively looking at other operations. Now we have basically three operations that we have acquired in Canada on a direct basis. And we will continue that practice.

Okay I noticed that there was a fair number of one time items in the fourth quarter as well. As you look back and net those out, do you find, I mean are you encouraged by the status now having taken the first quarter write downs as well?

Yeah, I think we are very encouraged. There are just a lot of good things happening. Again the sales of Copier were pretty decent although we’d like to see them even better. Sales of color look great at this point and we expect the margins because of the high volume would be great, would be very good, the balance sheet has improved dramatically. And if you take a look at the cash flow on a year-to-year basis quarter-to-quarter that was real -- that was very, very positive also. So what we needed to do, was get behind us the expense reductions which we have done, the biggest part of that is not over obviously we will continue to cut expenses but we have done a big part of expense reductions so, we are encouraged, ERP seems to be moving along. So, as we look forward we are encouraged, very encouraged by the opportunities we have, we still have to execute everything, there is no doubt about that but we are encouraged about the opportunities.

The last question is on your share buyback, which seems still a bit tepid, particularly given the fact that the stock is lower now or you had bought stock, I believe in the forties. Is there any chance that you might be purchasing a greater number of shares at these levels?

We are, while we delve into buying back we have $14 million I believe less in the approval that we have gotten from the board, and of course that was all we had ask for, was at $30 million. So, we have 14 less than that if we needed more, obviously we’d have to get board and bank approvals on that but we think it’s a good opportunity at this point also.

Okay. Thank you.

Thank you.

Our next question from David Manthey of Robert W. Baird.

Hi good morning.

Good morning.

I was wondering in terms of the guidance here and Marc I know you walked through a couple of the issues and why you are confident that you can get to that level but if you look at the gross margin from here and just looking at the full year for comparisons sake. If gross profit margin is flat year-to-year in 2005, from my calculations you'd still need something like $12 million in savings, cost savings from here to get to the targeted range and then if GP would happen to fall because of the mix hurts you this year that number would be even higher 15, 17 million and I guess I know the buckets of cost savings but I'm struggling with the sheer amount of that. I am just wondering if you could just walk us through and help us understand what are the line items specifically that you're going to take cost out of and how do you get to that level of magnitude?

Dave we'll not, -- we won't go through line-by-line in the expense area. What we have done is we've modeled out what we believe are reasonable growth expectations for our Copier/MFP to the mid single digit growth rate and with facsimile continuing to decline in the mid 20s to high 20 range and given the margins that we get off those products coupled with the cost reduction actions that we've already identified, we're able to model out to the guidance that we've given for the full year.

Just in general, if you look back even three years at first quarter revenue performance, it is in each of the years significantly lower than the balance of the year is than the average for the balance of the year by quarter. So, we believe again getting sales at the rate that revenues at the rate that we're targeting right now in bringing the expenses down on a year-to-year basis by $20 million, we'll achieve those numbers as we modeled it out.

Right, okay. And then in terms of the what you just mentioned about the first quarter being traditionally lighter, it seemed that gross margin had a similar effect the GP accelerated as we move through the year. I am wondering if there is any reason that would be if you talk about the seasonality of that and in terms of the March month specifically, it's interesting that you say that was strong particularly since a lot of people have been talking about weakness in March and I think some of that might have been allocated to the year-to-year change in the Easter holiday, so it's encouraging to hear that things are strengthening for you, and did you see any moderate negative around the Easter holiday?

I don’t think I would attribute it to the holiday I think our January and February were just slow months for us. I think sometimes in dealing with the direct sales force getting their new quotes they are getting -- they are understanding the comp plan for the upcoming year. I think sometimes it becomes a little bit of a diversion in the early part of the year in the January and February timeframe but, the business did come in March and we felt very good about that. But, I don’t think it was attributable to the Easter holiday slipping to be honest with you.

Okay. And then when you talked about the 14 percentage point delta between fax and MFP I think we can work through that. In terms of the related SS&A my sense would be if there’s a fixed component to that SS&A number, it would be better leveraged over MFP sales than it would be over fax and then second is there a difference in the comp structure that maybe in terms of the variability to sales people get paid more compensated more to sell fax or copiers or is there no difference?

Look, let's just clarify one thing first, so that we are real clear on it. We are a little bit different than our competitors in that we really have SS&A that stands exactly for what it stands for Sales, Service and Admin while many competitors have service in the gross margin lines so when we look at that line it combines a lot of fixed costs associated with service in addition to our sales organization which it is a combination of variable versus fixed. As far as the changes in the comp plan there haven’t been significant changes in the comp plan other than that we are now on the verge of rolling out our ERP system as you know we were paying people on estimated earnings at one point so we felt we are in some cases overpaying to some degree so we think that we basically have our arms around that which we need to implement for the rest of this year but, other than that not any real significant changes to the overall comp plan we still pay people on gross margin.

Okay it’s gross margin regardless of whether that comes from fax or MFP?

That's right.

Okay. Just a couple more here, in terms of Pitney Bowes Canada you talked about that as not having a significant impact on the profitability overall and I am wondering if that's because it’s a small percentage of the revenues or are you talking in terms of percentages? Is it that low a GP business that it actually would to a moderate extent help your gross margin?

Actually, the margins are very, very low and it’s really kind of a part of the original agreement we had with Pitney Bowes was that we would supply them with products for a period of time after the spin at very, very low margin. The way we look at it is it's totally incremental to us in that there is really not a lot of handling basically they give us their forecast for product, we combine it with our purchase orders going over to Japan we don’t -- it really inventory it and there’s basically a very small margin that Pitney Bowes Canada pays us for the basically the purchasing power that we provide them.

Again the key thing here is looking forward last year in the first quarter of Pitney Bowes Canada was $10 million even if you look at revenue. After that each quarter it was $1 million or $2 million somewhere in that ballpark from quarter-to-quarter to quarter which it was in the first quarter of this year also. As we go forward now in comparison this is something we won't have to explain anymore if the number should be fairly comparable now to the rest of 2005 to the rest of 2004. It has been something we have been explaining for three years.

Alright. Okay I'll jump back into queue. Thanks.

Thank you.

Thank you.

Margot Murtaugh of Snyder Capital is online with a question.

Thank you. I may have not heard this so I apologize if I’m repeating myself but the 20 million in savings that you're talking about. That’s an annualized rate you are not going to realize all of that in this year. Is that correct?

No that's this year.

That's this year?

Yes.

So it's the savings over we are saying SS&A for the year will be lower than last year by $20 million.

Okay that's impressive. Now can we get any better break out of that with what's coming from head count, what's coming from the --.

Well if you look at the bulk of our SS&A expenses a lot of it is headcount or ERP related. As you know we are winding down the ERP project, so we will see reductions there. In addition we have always felt that our admin staff that we had to build up over this initial period right after the spin off as we were implementing the ERP, as we become more proficient on the systems that those heads would eventually come out anyway, and this is exactly what we are doing we are executing to that plan and those heads are coming out. So you are seeing reductions in admin. We also had some reductions in service, as part of that, as we moved from an analogue base -- installed base of products and move to the more let’s say robust digital product line which is less service and labor intensive as the requirement for service individuals is reduced, and therefore you will see some reductions there also. So we are always cognizant also of sales teams that are not performing, and we actual reduced -- take some reductions there also if we don’t feel they are getting the productivity levels out of those and that’s kind of normal course of business. So it really crosses IT admin service for the most part.

Okay. I know you said you are going to take some other charges in the second quarter.

Well we previously announced that a part of our cost reduction actions that we were basically taking one time charges but some of them would be incurred and most of them will be incurred in the first quarter as you saw, but some of that would be incurred in the second quarter also --

Okay.

And that was part of our previously announced.

Okay, so you are laying of more people in the second quarter.

There will be further reductions, yes.

Okay, well that helps, but also on the accounts receivable where would you like to see those for the rest of the year, how they are going to. Can you give us some sense of how they may trend downward.

Well, rather than giving an absolute dollar amount I think it’s if you look at our DSO it’s significantly higher than I think most of our competitors. We need to address that and bring it down to a more comfortable level probably in the 50, somewhere in the 50-60 days range for Copier/MFP business and we are not there, so we have room for improvement there.

Okay where are you now. Where are you in that?

About 76, 70’s now.

Okay. So maybe over the course of this year you might get down to that level.

I am not going to give a timeframe but I think what we have always said is that we will show continuous improvement quarter-after-quarter, and it’s nice to see that at least we have been doing that and we have been generating cash out of there, so that is good.

Okay thanks a lot.

You are welcome Margot.

Ben Robertson of Daruma is on online with a question.

Hello.

Hi.

I guess one of things I wanted to ask about is the new products you said that which one is the most successful new product that you’ve ever had. Mark you had said that the --.

The 3520 that we came out with last October I believe.

Really that’s the CM3520.

That’s the most successful color product we have ever launched.

Okay, and how do you measure that what’s the, obviously unit sales.

We are at basically revenue unit sales margin, the whole time.

Can you add a little not no pun intended but color to that?

Well Ben I think you know when we launch these products through our sales force, they are always looking and asking what is being asked by their customer base. And I think this product we're seeing a very excited sales force with regards to this product in that. I think it satisfies number of the needs that our customers have been asking them for. In addition we think our pricing is right there, our sales force is excited about that, and the unit placements that we've initially put out there, we had a fast start on it, so that's always, those are all good indications.

Okay.

Though in the fact that 20% of the segment three/four volume fall into this category which is primarily this product for us is huge. We've never been near to that number in the past.

Okay. And how does that compare to the new copier that you introduced in the first quarter?

The couple that we -- we introduced a couple of them.

The first products that we introduced in the fourth quarter of last year is really for business color, for applications that are probably running more than 25% of their pages in color.

Okay, I am sorry. That was the CM35--?

That was the CM3520.

Okay, that was the fourth quarter?

That was fourth quarter. Then the two products we introduced in the first quarter are the CM3530 and the CM4530 are really for convenience color. They're printing color at 11 pages per minute.

Okay.

That's for the application where you have occasional need for color.

Okay.

The predominant application is still black and white monochrome.

Okay. So and the difference for the 3520 is that's primarily color only?

That’s – 25 pages a minute in color.

So it's more color.

22 pages a minute I'm sorry. It's much faster in terms of color, and so you are going to get a lot more volume driven through that product for color application.

So the application the sales application then is in the latter product that we just launched is you go to a customer who has a black and white machine is looking to upgrade, we have got this product that is black and white and by the way you can do some color on it too, and that is basically that how you would approach it from a sales prospective, versus the earlier product that we launched in the fourth quarter a more we have a color product for you. So we look at it as color enabled gives us a real strong foothold in the sales process to go to a black and white application, selling black and white but also give them this additional feature.

Key difference is price points.

Right.

Though you go in with a new machines, and as Joe said your target market is the black and white market because there's only a slight premium to the black and white product, and you have a high speed color product it's really not replacing a black and white product, it is the premium is significant higher so it’s totally different markets that these go after.

Okay, and when you say 20% of the segment 3-4 volume is the CM3520 does that mean of color sales or of all the others?

20% is of total sales in that segment.

And segment I mean that’s your sweet spot, right?

That is our sweet spot yes.

So when we look at the 8% growth in Copier/MFP product sales in the first quarter --

Totally driven by color.

So in that -- okay. And I guess so does that, so how does that really then to the decline in the growth rate of Copier/MFP product sales in the fourth quarter. You know it was only up 3% and now you are back up to 8% which looks like a recovery.

It's just hard to relate them. You know you get a decent sized order and it pops the percentage up. You know as I said earlier on, it's very -- if you look at one quarter by itself, it’s -- you can't forecast from one quarter.

Okay.

That's why when we look at a -- you know give a projection for the year, we are kind of giving where we would expect to be on average.

I guess there are some concerns in the fourth quarter that the whole industry looked weak, and now this looks better.

Right.

Is there -- have you seen anything you know in the industry that might have caused that is there --

I don't think that. We are definitely not looking at our competitors to determine where we are going to be. Our job is sales execution, we are out there in a big market, we are a small player in a big market, the better we execute, we try to target our competitor's products.

Yeah.

So, it really -- sure we are happier in a very strong marketplace, there is no doubt about that, but I don't think it says any -- I don't think you can look at our performance to say anything about the marketplace.

Okay. And then when you look at the support services, the sales -- the growth there was down, the rate was down to only 2% in the first quarter but, if you are seeing these very strong color sales that would mean I would assume that the – the cartridges for that would be -- you know you get more support service sales growth going forward.

Right. That's correct, that's correct.

We should actually see a pickup in the aftermarket in the supply and service area.

Color products have a very good aftermarket.

Yeah, okay. So that's kind of on the -- in the coming quarters?

Right, that’s right.

Yeah, alright. And then that 20 million that everybody is talking about, do we just take the 13 -- the 333 -- in the 2004 your SS&A was 333 million, do we subtract 20 from that and get kind of 313 for ‘05 as kind of a benchmark of what you think you can do on kind of a minimum?

Yes. I think you are on the right track.

Okay. Alright I think that's it, thanks.

Thank you.

We'll take our next question from [Lloyd Zeitman] of Bernstein Investment.

Hi folks, it's Lloyd Zeitman, how are you doing?

Hi Lloyd.

Let's see, I have a few questions. First of all, has anything happened to pricing discipline within your marketplace?

I don’t think we've seen major changes in pricing discipline.

Okay. And also I am looking at the gross margins statements that were made about gross margins, and a what I’m looking at here on your release, gross margins for Copier/MFP products and facsimile products are expected to remain at their respective current levels and then Marc I believe you said that you expected gross margins to be higher for the rest of the year than in the first quarter. Am I correct?

I was talking about gross profit dollars.

Okay.

Which we get through growth, okay.

Okay. So then now if gross margins for the respective products are going to hold at their current levels, then the gross profits let's say the gross margins for the company as a whole will be down because of the differential between fax and Copier/MFP, is that right?

Are you talking dollars or percentage?

I am looking at percentage.

We are looking at dollars and gross margin dollars, ultimately bottom line is done with dollars -- gross margin dollars we believe we will be going up in the second, third and fourth quarters from the first quarter which is again volume related driven, okay, more volume. The other factor is the fax itself is a smaller -- you know each quarter as we go in fax represents a smaller percentage of the total fax. I think at the end of the first quarter represented about 26% of the total.

The other thing I just want to mention Lloyd also is, and this was raised in just the previous question, that when -- the more color placements we have out there, the more service and supplies aftermarket we should achieve down the road which would also generate more margin dollars and have a higher margin percent also. So, I just want to throw that in there, as we change from analogue to digital to now color there is an opportunity there also.

Right, okay and just if I could stick with this gross margin question here, one more thing, when you look at the gross margin, are you comparing gross margins for the rest of the year to the gross margin in the first quarter including or excluding the charges?

Well obviously there was a $1.1 million charge in the first quarter, but we would not expect to have those charges in the subsequent quarters, if that answers your question. I want to make sure I understood you correctly.

Okay. That’s fine. Let's see, also looking at rentals, if we look at the rental revenues for copier and fax, there really wasn’t that much of a change in terms of the mix. Let’s say looking at sequential quarters, copier came in at 27.6 versus 28 and fax was at 20 versus 21.7. And then if we look at the gross margin on that, the gross margin declined I guess meaningfully on a quarter-to-quarter basis by about 200 basis points. Could you give us a little bit more on that what might have caused that and what can we expect to see going forward?

Again on that product-by-product segment we expect gross margins in the same area as they have been. So, you can do the math on the revenue growth on copier and the decline in facsimile to come up with an assessment on gross margin dollars.

Okay.

I think really the only difference we should have there Lloyd is really on mix between fax and Copier/MFP for the rental line.

Okay. The inventory obsolescence charge in the first quarter, was that all analog product, the $1.1 million charge?

No, Lloyd. Some of it had to do with some digital products that we had begun to re-manufacture but the lion's share of it was analog, there was this piece of digital in it though.

Okay, and let’s see the tax rate in the quarter at about 43% a little above that. Would you expect that rate to hold for the full year?

Well we would -- obviously we evaluate our tax rate quarter-after-quarter and we'll make the adjustments accordingly. But most of the time it’s fairly -- I mean if you look at our history it's been fairly stable.

Okay so I take that as a yes then?

Yeah we haven’t really forecast the tax rate but what we do is, we sit down every quarter when we actually go through it with our tax depot with Pricewaterhouse and determine what is the appropriate tax rate. Our history has been not any real strange fluctuations there.

Okay, thanks very much.

James Clement of Sidoti is online with a question.

Good morning gentlemen.

Good morning.

I did have a quick question, Marc just a point of clarification, when in the prepared remarks that you were making I think you were laying out some questions that investors had been asking you. You said I think you alluded to a pro forma number for this first quarter and then you referenced the 161 to 166 guidance range. I just want to make perfectly clear that the 161 to 166 guidance range in fact reflects the restructuring charges and the options and all that, correct?

Yeah that's correct. That is all included in the number.

And I guess a follow-up if I could, there is a sentence in your press release which I believe you alluded to in one way or another in your prepared remarks saying that you expect earnings to be weighted to the latter part of 2005, and I wanted to just sort of get a sense of, by just how much, because you have taken the restructuring, you have done some restructuring in the first quarter which I -- based on the way you described it you should theoretically be benefiting from that right now, correct?

We have totally stayed away from giving quarterly projections, maybe that's a good decision maybe it's a bad decision but it is something we have stayed away from and at this point we are giving no thought to doing those quarterly projections beyond what we have said.

Okay let me ask a sort of a different question; when you go back 2 years or so and you talked about the ERP system and the kind of efficiencies that you thought you could gain. When you issued your press release earlier last month, I guess that some folks interpreted the cost reduction measures as being in response to some of the weaker than expected results in your business but I guess the question that I would have is, I mean were these reductions going to be made eventually anyway and should investors actually take that announcement with some encouragement regarding how the ERP implementation has progressed?

I think the answer to that is yes, we are more efficient today, it is not just the ERP, because there is an example part of it is, service Joe talked about, our service people are more productive today, service is a big expense component for us and we were able and the products have come in probably more reliable than we thought they would have come in, ERP while still not operating perfectly is operating more efficiently than in the past. So we anticipate that, yes we did we just felt we weren't stripping as we take these costs out we are not stripping the company of vital weapons that’s required to be successful here.

Okay, alright. Thanks very much for your time.

You are welcome.

Our next question is from Shannon Cross of Cross Research.

Hi good morning everyone, it's Shannon Cross.

Hi Shannon.

Hi Shannon.

Can you give us an idea, I may have missed it, but in terms of organic growth during the quarter on the copier side because you have made a couple of acquisition, how should we think about that?

We have trouble thinking about that because what we do is we typically shift our bunches of sales, so as an example if we get a national account that might flow through a major office and we have the acquisition participate in that, who gets credit for the growth, it's less expensive for us to open up through a small acquisition than it is opening up an office in a city. So we have never been able to answer that nor do we believe it is a vital part of the business equation. If we do see good opportunities to get growth through opening up new locations whether it be through direct office or through a dealer, we will go get it that way.

So it's not a fair comparison, to look at the acquisitions you have made and then try to net back.

I don't believe it is. I don't believe we can even do that.

Pretty much all the acquisitions that we have done since the spin-off Shannon we have been in areas where we really did not participate and as Marc said we had an option to basically put a bunch of sales people in there and start from scratch or buy a very small dealer base, I think the last one we did, I think the annual revenues running $2.5 million of Canadian.

But we are not making these major acquisitions, we haven’t until to this point made any major acquisition.

And remember part of the strategy also is to look at locations where we don’t participate, where we don’t have any service present either but we may have some installed units because of our national accounts program and the services currently being performed by Pitney Bowes and this is another way of getting a direct presence there to eliminate the cost of having Pitney Bowes do it. We believe provide better service and to take care of our customer. So that's kind of in the acquisitions that we have done in the past.

I understand the strategy and I think that’s the correct one in terms of improving your services I’m just trying to get an idea of what the exact organic revenue growth is versus what's come in the acquisition. So I guess, moving along, with regard to your rental agreements or the contracts that you have signed with the couple of the states Pennsylvania and the -- is it Arkansas or Alabama.

Alabama.

Yeah I know it's one of the A states. I think you never remember which one. How are those coming along?

Great. I mean with the units there we are placing although, we are not quoting the exact number of units we have a dedicated sales reps focused on that and it's moving along very nicely.

And I’m just curious, when your dealing with State governments, I would assume they are less likely to take color or how is that working?

We will [inaudible] we will find out.

Initially they have been less likely to take color, that’s correct, if you look up at some of these state contracts whether they are ours or somebody else’s. Sometimes you don’t even see color machines on those state contracts. But it has-- states have not been a major driver to my knowledge of color. We also get on to other states also we just got on to another state contract but we are not exclusive like in Pennsylvania we were pretty exclusive there. In Alabama we were just one of the few players, but we have gotten on some other contracts also now which we had not been on but we are not exclusive on those. Most states do not have exclusives. But it has been a good part of our business.

Okay good and then just going back and I don’t want to beat assessing any horse to death, but I think we already have but I will try again. Just looking back it was, seems like mid-2003 was when you were sort of the levels you came in this quarter, if you net out the restructuring charge that was on a substantial higher revenue base. So I am just curious in what has changed since then that we can think about obviously, ERP has come into the expenses and gone out to some extent but what kind of longer term opportunity or run rate do you think we can ultimately get to?

We never give a target number Shannon as you know, but obviously we know that we are currently not operating as efficiently or effectively as we can be. We think there are pockets of areas that we can reduce in the administrative area. We have already talked about service a little bit as we move more and more towards connected digital and those units being less labor intensive, is opportunities to get more service productivity out there. So we believe that there is more room for us. What you should see in throughout 2005 exclusive of any type of acquisition activity, but you should see a continuous decline in SS&A.

Okay, yeah, I know, I am just trying to think of longer term, is it a run rate of 70 or 60 or where do we bottom out and then go forward in, I realize you are not going to give us a number but I was right?

Good try Shannon.

Okay, well thank you very much.

Okay.

Brian Alexander of Raymond James is on line with a question.

Yeah, just a couple of follow ups, I don’t know if you did answer this earlier but why was the service revenue, the copier service revenue only up 2%, if your equipment sales had been growing pretty strongly over the last few quarters and that should be driving I would imagine additional service revenue so, just try and understand why only 2%, but it does sound like that's going to accelerate going forward. Which leads to my next question, if service revenue on the copier side is going to accelerate but your overall copier revenue is going to stay in the mid single digit are we to assume that the equipment side is going to show decelerating growth and then I just have one follow up.

Let me just talk about the service first, I mean as far as service is concerned we did post only a modest gain there. You would think you would expect more, and one of the reasons for that is part of this ERP clean up as we have been dealing with customers on a, let’s say a build labor basis, or the timing of their service contract when that was keyed into the system that sort of thing. Many times what we do is we negotiate with them [at their rate] maybe we have -- we need to correct this or we offer a credit against that the accounts to satisfy that, and we did have credit activity in the service line and that’s what really dragged it down versus the growth that you normally have seen.

So, the overall forecast again is nothing but a forecast on copier. Okay so, if service is higher. You know if you say we're growing at the same rate then somebody else would be lower but it is just a forecast, it's not a precise number.

And then just kind of ball park to help me understand better about the impact of color. What is roughly the difference in the cost per page that you might charge for color versus a black and white and could you just walk us through the sort of the margin dynamics of you know a black and white versus a color machine, how much more profitable the color product is?

Typically, we're probably in the range now on color premium of about 8 to 10 times for color page, depends on the volumes that run and obviously, depends on the pricing that the customers have gotten, but on average it’s about right.

So about one--

We're trying to get black and white pricing on color machines to be fairly comparable to black and white pricing on monochrome machines. And then it is the mix of what the customer actually runs in terms of their jobs, has a lot to do with what the profitability on the deal is. So if they're running 5% color or 50% color it would have an impact on terms of the return to the company. We're not at this point disclosing any kinds of profitability on color or black and white in the after market.

Thank you, very helpful.

Our next question is a follow up from Ben Robertson of Daruma.

Yeah I just had a quick follow up on that. The CM3520, could you characterize the customers who is buying that? You know it's not something that we would use here necessarily so I am just kind of curious what kind of customers really interested in having a 28 page per minute color copier?

There's lots of different applications you see it in marketing departments, you see it in finance departments for reports, you see it used in sales applications for proposals, real estate for proposals, there are just numerous applications. Some companies are using it obviously a lot more intensive than others people that are doing PowerPoint presentations are using color to a great extent, Excel spreadsheet, [FoxPro] and word documents but again it depends on what the word document is in a newsletter, it’s going to be probably today very color intensive compared to an inter-office memo which is going not to be very color intensive. So it really goes application by application and function by function.

Okay. Thank you.

Mr. Breslawsky there are no further questions at this time. Do you have any closing remarks.

Yes thank you very much. Hopefully, we have answered the questions that are on your mind. If you do have any further questions you know where to reach us, you can call Jim and we are again very positive about our future. We are making what we believe are the right steps on a long term basis, strategically we are where we said we would be, fax seems to be going away a little faster than we thought it would be, where we are doing well, copier we continue to do well with margins. So, we are pleased with the long term direction of the company and hopefully as our shareholders you would all agree with that. Again thank you very much and again we look forward to hearing or seeing you. Thank you.

This concludes today's conference call. You may now disconnect.