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Commentary & Analysis

FREE: Creo's Consumable Strategy Takes Hold with new Plate Manufacturing in the U.S.: Summary of Q2 Earnings Call

Creo,

By WhatTheyThink Staff
Published: May 11, 2004

Creo, Inc. (NASDAQ: CREO) announced second quarter revenues of $157.6 million, or an 11.4 % increase over the results from the second quarter of 2003. Second quarter earnings were $3.2 million over the same period last year. Second quarter earnings include $2 million in restructuring and severance expenses and a non-cash charge of $1 million for intangible asset amortization.

Topics of this summary:

  • Quarter Developments
  • Digital Media Strategy
  • Financial Performance Highlights
  • Guidance
  • Q & A

Quarter Developments

Creo President and CEO, Amos Michelson, began today's earnings call highlighting significant events of the quarter including:

  • In January, Creo signed a reselling agreement with Xerox for mid-range and entry-level production color digital presses for the U.S. and Canada. Sales training has been completed in the enterprise and commercial segments and the company has been adding additional sales and technical support. There is significant business currently in the pipeline and Creo expects the business to ramp up in the latter half of the year.
  • Creo completed the acquisition of a printing plate manufacturing facility in West Virginia. The acquisition more than doubled Creo's wholly owned plate capacity, added new plate technology and brought on new plate customers.
  • Creo raised net proceeds of $48.5 million in an offering of common shares
  • Creo established a relationship with one of the largest plate manufacturing facilities in China. The facility will produce the first domestically produced digital plate in the Chinese market and is expected to increase Creo's penetration into that market.

Digital Media Strategy

Creo remains on target in following its digital media strategy, according to Michelson. The acquisition of two facilities, introduction of a brand new plate, acquisition of two plates launched under the Creo brand, partnership with a Chinese facility and expanded global supply will serve to ensure Creo's leadership position in the field. One third of Creo's digital plate sales business is from existing customers and $100 million in new revenue expected from new customers.

Financial Performance Highlights

Consumable revenue was $17.5 million during the second quarter recording the most significant percentage gain at a 57.2% increase from the same period last year. The growth in consumables is not only from acquisitions but also from a growth in plate sales. Revenues by segment include the America's at 37.5%, EMEA at 38.7%, and Asia Pacific at 14.3% and OEM at 9.5%.

At the upcoming drupa show, Creo will display its line of existing products along with new products. More information on new products will be provided at the investor and analyst event at drupa on May 9th .

Guidance

Creo expects third quarter revenues in the range of $153-158 million, effectively flat over the second quarter. Gross margin is expected in the range of 43-44% and EPS between $0.01 - $0.05. Creo is predicting an overall 10% increase in revenues for the year and expects a 50% increase in consumable revenues.

Q & A

  1. Because of drupa, customers typically defer purchases creating a holdback effect. Revenues Creo may have seen in the third quarter will come through in the fourth quarter as a result. The company saw a small drop in business late in the second quarter. At drupa, Creo is prepared to take orders and ship new product.
  2. Customers attend drupa ready to buy product, however, there is typically a 6-week delay to solidify purchase orders.
  3. Drupa expenses will be in the third quarter financials and are estimated at $3 million.
  4. During the second quarter, the Veris proofer contributed $1 million in revenues with more than double that amount expected for the third quarter.
  5. Creo's attach rate is 20% worldwide across all market segments and all devices.
  6. Creo would like to see the production level for the Veris at 100 units.
  7. Creo officials were not able to identify specific regional margin pressures, as prices are variable. Officials only stated there is more pressure when switching customers as opposed to going to a new account.
  8. Creo is pleased with the progress of its partnership and ramp-up with Xerox. There has not been much revenue impact to date but expectations are for a revenue impact in the fourth quarter.
  9. The company is less focused on 4 or 8 page CTP plates as it is on overall sales opportunities. Sales are focused on pricing, color, B/W, high-impact printing, etc. and meeting the needs of the customers.
  10. For the remainder of the year, Creo sees growth in the market of small to midsize printers.
  11. Providing more granularity on the expected gross margin for the third quarter, Creo's expectation is for the middle of the 43%-44% range previously provided.
  12. Growth in the Chinese market is expected at a fast rate. The company is starting with a small base, as most machines are film. The market forecast for CTP growth in China is not large and estimated at 158 units in two years.
  13. Second quarter numbers include $100K in stock compensation costs and include only options that have been granted thus far. Similar levels should be expected for the remainder of the year.
  14. Approximately 50% of the consumables growth was generated from acquisitions.
  15. The per share impact of the $2 million in restructuring and severance was $0.03 to $0.04.

 

 

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