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Danka Reports 58% Earnings Increase in Q1

Press release from the issuing company

ST. PETERSBURG, Fla.--Aug. 4, 2004-- Danka Business Systems PLC today announced first-quarter results for the period ended June 30, 2004 that show operating earnings of $7.9 million, a 58% increase over the prior year first-quarter. The increase in operating earnings reflects a 170 basis point increase in gross margins and a 6% decrease in SG&A expenses over the prior year period. Although total revenue declined over the prior year, service revenue remained in a stabilized range for the fourth consecutive quarter. "Our renewed profit focus for fiscal year 2005 yielded success in the first quarter," commented Danka Chief Executive Officer Todd Mavis. "As the company continues to emerge from its turnaround, we have increased our focus on improving operating earnings. Strong gross margins and our cost reduction efforts were major drivers of the improved earnings performance this quarter. In addition, we are pleased with the continued retail service revenue stability. This is particularly encouraging as we continue to refine our strategy to leverage our services organization as a foundation for growth and profitability. Our strategy was again validated this quarter by the progress in our Danka @ the Desktop connected solutions and TechSource, multi-vendor services initiatives. Furthermore, we believe this strategy will also fuel demand for our equipment solutions." For the quarter: Total revenue was $310.3 million, a 7% decline from the year-ago quarter. This decrease was largely due to lower retail equipment and related sales, which were impacted by a continued focus on higher gross margins and profitability and the underperformance of certain geographic segments of our business. Adjusting for currency exchange, total revenue declined by 10% from the year ago quarter. Retail service revenue was $157.4 million, 5% lower than the year-ago period. On a sequential basis, retail service revenue declined by 2% and was essentially flat over the prior quarter when normalized for currency exchange. The digital portion of Danka's overall equipment base increased to 58%. Gross margins were 38%, an increase of 170 basis points from the year-ago period and the highest rate in eight quarters. The improvement was due to higher gross margin rates in both the equipment and service lines of business. SG&A expenses were $111.3 million (36% of revenue), $7.1 million, or 6% lower than the year-ago period. Adjusting for currency exchange, SG&A costs were 9%, or $10.3 million, lower than the year-ago period. Operating earnings were $7.9 million, 58% higher than the year-ago quarter and the highest in the last 6 quarters. Net earnings were $0.4 million, compared to a $0.8 million loss in the year-ago quarter. Because of the impact of dividends on participating shares, current quarter basic and diluted EPS was a loss of $.07 per share, compared to a loss of $.09 per share in the year-ago period. Cash usage for the quarter was $26.9 million, due in large part to the funding of the cost restructuring and the Company's bi-annual debt service payments, which occur in the first and third fiscal quarters. "In addition to the interest payments on our debt, we used $8.3 million in cash to fund operational cost savings which are part of our prior year cost restructuring plan," said Mark Wolfinger, Danka's Chief Financial Officer. "Notably, we are experiencing the benefits from our cost restructuring, and have realized almost all of the cost savings in our financial results. Moreover, a dedicated team of senior Danka executives is performing a comprehensive review of our business processes to identify additional cost savings opportunities. I am confident that as we begin implementing the recommendations of this team, we will further reduce our costs." "We are focused on building momentum as the fiscal year progresses," concluded Mavis. "Although the second quarter traditionally is our seasonally slowest period of the year, we believe our focus is on the right priorities, which include maintaining stability in our service business, improving our equipment sales execution, achieving cost reductions, generating positive free cash flow and leveraging our improved infrastructure to gain additional efficiencies and further improve customer satisfaction."