By WTT Contributing Columnist Gail Kailing November 13, 2002 -- ImageX, Inc. (NASDAQ: IMGX) is a company of interest to members of the Graphic Arts Industry for a number of reasons. The company has been a pioneer in the online print procurement market and successfully completed both an initial public offering and a secondary offering. And the evolution of ImageX portrays the online business and delivery models with all their challenges and successes. On Tuesday, November 5, ImageX underwent yet another "right-sizing" that reduced their headcount by 27 to 254. According to a number of sources, included in this round were the COO, the VP of Sales, the Director of Product Development, and the Director of Inside Sales. Company representatives would not comment officially on those included in the staff reduction process. Around 50 people remain in corporate functions, and the rest are spread across 4 print facilities and a print brokerage. At one time ImageX employed over 800 people. The next day, Wednesday, November 6, the company released their third quarter financial report that announced revenues of $7.9 million for the quarter with a net loss of $6.5 million. Although, the company sold their Extensis subsidiary just a couple of weeks short of the end of the quarter, generally accepted accounting principles (GAAP) require that for reporting purposes all Extensis revenue and expenses be "backed out" of the quarter’s report, and treated as if they didn’t exist. Q3 Financials The ImageX Q3 financial report cannot be directly compared with the previous two quarters with out dropping out the financial effect of the Extensis subsidiary (as the new report shows) or by adding back in the effect to the third quarter totals. By recalculating some of the results including revenues and costs from Extensis, some interesting facts come to light. The cash from the sale of the subsidiary was a gain of more than $9 million in cash and the company’s cash and cash equivalents now stand at about $14.8 million. More telling is the effect that the subsidiary had on profits and gross margins. In the first quarter of 2002, 25% of the revenues and 57.8% of the gross profits came from Extensis, and second quarter, 28% of revenues and 56.6% of gross profits came from the subsidiary. Without the benefit of Extensis, in Quarter 3 ImageX had a gross margin of 24.7% and gross profits of $1.9 million, as opposed to gross profits of $4.3 million and $4.9 million, in the first and second quarters, respectively. The CMS In late 2001, the company began researching and developing the ImageX Channel Marketing System (CMS), a Web-based solution targeted at companies with large sales distribution channels, and launched it unofficially in March, and officially in May 2002. However, as of November 5, staff related to CMS has been severely reduced. Most of the 27 people let go last week were those building, selling and supporting the CMS. The CMS was evolving into a fulfillment and distribution system with an emphasis on direct mail. Now, some of the technology more directed to Print-on-Demand will be incorporated into the ImageX Print System and the CMS customers will continue to be serviced and supported. In less than two quarters, the CMS effort was launched and scaled back. It’s hard to measure effectiveness of a new product and marketing program in such short time, when the anticipated sales cycle is from 6 to 18 months for enterprise solution sales. As part of the corporate effort to focus on the CMS and enterprise sales, Gary Tidd, veteran of Oracle and Captura was hired as vice president of sales and business development. The sales force underwent a "remodeling" and new sales staff with enterprise solutions experience, not print sales experience, were fielded. Through 2002, the company has had four sales executives. Dana Manciagli, long-time Vice President of Sales who left the company in January, Gary Tidd, Art Staple, and now Bob DeSantis, VP of Customer Management, who served as Director of Sales until 2001. At the same time, the company revamped their website a number of times to clarify their product offering and positioning. The company has clearly been experimenting and consciously changing their messaging. Has this confused the customer and prospect base? More, importantly, will ImageX be able to deliver a concise message and articulate a winning value proposition in the future? So who (or what) is ImageX now? According to Rich Begert, President and CEO, "We are who we’ve always been – a commercial print company with some very sophisticated technology." However true that might be, it has been a rather convoluted path that the company has followed. ImageX has struggling for a long time to clearly define themselves along a continuum ranging from a commercial printer to an enterprise software ASP. The common thread has always been the output – a printed product. ImageX’s 2001 Annual Report defines the company as: "… the technology market leader in providing online solutions for distributing, managing and producing printed materials. The Company provides Web-enabled printing services dedicated to streamlining the workflow process from design, production, delivery and management of branded communication materials. ImageX's branded service areas provide an Internet-based end-to-end solution to produce printed business communication materials for a variety of customers, focused primarily on medium and large corporations." CAP Ventures’ October Print Buyer Pulse Index indicated that 22.7% of print customers expect their print spending to increase over the next six months, down considerably from the previous four months: September (30.1%), August (34.5%), July (29.7%) and June (31.8%). Print customers clearly expect to spend less during the next six months than in the previous six months. Other indicators also illustrate a challenging outlook before things get better. In an industry suffering from overcapacity and under severe pricing pressure, ImageX will continue to be challenged to grow revenue and profits over the next several years.